<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
  [Fee Required]

For the fiscal year ended December 31, 1997

                                       or

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
  [No Fee Required]

For the transition period from           to

                         Commission File Number 0-15025

                             PROGRESSIVE BANK, INC.

             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                  NEW YORK                                      14-1682661
       (State or other jurisdiction of                       (I.R.S. Employer
       incorporation or organization)                       Identification No.)
</TABLE>

                    1301 ROUTE 52, FISHKILL, NEW YORK 12524

              (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code (914) 897-7400

          Securities registered pursuant to Section 12(g) of the Act:
                         COMMON STOCK, PAR VALUE $1.00

                                (Title of class)

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes /X/ No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  / /

    As of March 24, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $169,567,772.

    As of March 24, 1998, 3,855,781 shares of registrant's common stock were
outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                             PROGRESSIVE BANK, INC.

                      ANNUAL REPORT FOR 1997 ON FORM 10-K

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                            ---------
<S>         <C>                                                                                             <C>
                                                        PART I
Item 1.     Business......................................................................................       2-18
Item 2.     Properties....................................................................................         18
Item 3.     Legal Proceedings.............................................................................         19
Item 4.     Submission of Matters to a Vote of Security Holders...........................................         19

                                                       PART II
Item 5.     Market for Registrant's Common Equity and Related Shareholder Matters.........................         19
Item 6.     Selected Financial Data.......................................................................      20-21
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations.........      22-36
Item 7a.    Quantitative and Qualitative Disclosures about Market Risk....................................         37
Item 8.     Financial Statements and Supplementary Data...................................................      37-71
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........         72

                                                       PART III
Item 10.    Directors and Executive Officers of the Registrant............................................         72
Item 11.    Executive Compensation........................................................................         72
Item 12.    Security Ownership of Certain Beneficial Owners and Management................................         72
Item 13.    Certain Relationships and Related Transactions................................................         72

                                                       PART IV
Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................      73-74

            SIGNATURES....................................................................................         75
</TABLE>

                      DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<CAPTION>
                       DOCUMENTS                                 PART OF FORM 10-K INTO WHICH INCORPORATED
--------------------------------------------------------  --------------------------------------------------------
<S>                                                       <C>
Portions of the Proxy Statement for                       Part III
  Annual Meeting of Shareholders
</TABLE>
<PAGE>
                                     PART I

ITEM 1. BUSINESS

GENERAL

    Progressive Bank, Inc. ("Progressive," or, together with its wholly owned
subsidiary, the "Company") is a bank holding company that was organized under
the laws of the State of New York on April 18, 1986 for the purpose of acquiring
all of the issued and outstanding shares of Pawling Savings Bank ("Pawling")
under a Plan of Reorganization. The reorganization was completed on October 17,
1986.

    Pawling, a New York state-chartered stock savings bank, was organized in
1870 as a mutual savings bank and converted to stock form in 1984. Pawling
currently conducts business through a network of 17 full service branch
locations in seven southern tier counties of New York State: Dutchess, Sullivan,
Orange, Putnam, Ulster, Rockland and Westchester. In 1993, the Company began
originating loans in the Connecticut counties of Fairfield, Hartford, New Haven
and Litchfield. In addition, originations of one-to-four family mortgage loans
were expanded in 1995 to include the New York counties of Nassau and Suffolk.
Pawling provides a full range of community banking services to meet the needs of
the communities it serves. Pawling is engaged principally in the business of
attracting retail deposits from the general public and the business community
and investing those funds in residential and commercial mortgages, consumer
loans and securities. In April 1996, Pawling completed the acquisition of two
branch offices in Rockland County, New York and assumed deposit liabilities of
approximately $152.8 million.

    On December 16, 1997, Progressive entered into an agreement to merge with
and into Hudson Chartered Bancorp, Inc. ("Hudson Chartered") and form a bank
holding company to be named Premier National Bancorp, Inc. (the "Continuing
Corporation"). In addition, Pawling agreed to merge with and into First National
Bank of the Hudson Valley ("Hudson Valley"), a wholly-owned subsidiary of Hudson
Chartered, under the national bank charter of Hudson Valley and the name Premier
National Bank. The separate existences of Progressive and Pawling will cease
upon consummation of these mergers. Under the terms of the merger agreement,
each outstanding share of Progressive common stock will be converted into 1.82
shares of Continuing Corporation common stock and cash in lieu of any fractional
share. Consummation of the merger is subject to satisfaction of a number of
conditions, including approval of the merger agreement by the stockholders of
each of Progressive and Hudson Chartered; receipt of all required regulatory
approvals, consents or waivers; and the ability to account for the merger as a
pooling-of-interests. See note 2 to the consolidated financial statements for a
further discussion of the proposed merger.

    The Company had net income of $8.6 million, or basic earnings per share of
$2.26 and diluted earnings per share of $2.20, for the year ended December 31,
1997. Total assets at December 31, 1997 were $883.5 million. At December 31,
1997, the Company employed 265 people on a full-time equivalent basis.

    The executive offices of both Progressive and Pawling are located at 1301
Route 52, Fishkill, New York 12524. The telephone number is (914) 897-7400.

COMPETITION

    The Company faces significant competition for both the loans it makes and
the deposits it accepts. The Company's market area has a high density of
financial institutions, many of which are branches of significantly larger
non-local institutions which have greater financial resources than the Company,
and all of which are competitors of the Company to varying degrees. The Company
and its competitors are significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.

                                       2
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
    The Company's competition for loans comes principally from savings banks,
credit unions, savings and loan associations, commercial banks, mortgage banking
companies and insurance companies. The Company competes successfully for loans
primarily by emphasizing the quality of its loan services and by charging loan
fees and interest rates that are generally competitive in its market area. Its
most direct competition for deposits has historically come from savings banks,
credit unions, savings and loan associations and commercial banks. Additionally,
the Company faces competition for deposits from money market funds, stock and
bond mutual funds, brokerage companies and insurance companies. Competition may
eventually increase as a result of recent legislation lifting the restrictions
on interstate operations of financial institutions. The anticipated impact of
such legislation on the Company is not expected to be significant. The Company
competes for deposits by offering a variety of customer services and deposit
accounts at generally competitive interest rates.

    Management considers the Company's reputation for financial strength,
customer service and its community bank orientation as its major competitive
advantage in attracting customers in its market area.

POTENTIAL IMPACT OF CHANGES IN INTEREST RATES

    The Company's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest and dividend income on earning assets, such as
loans and securities, and its interest expense on interest-bearing liabilities,
such as deposits and other borrowings. When the amount of interest-earning
assets differs from the amount of interest-bearing liabilities expected to
mature or reprice in a given period, a significant change in market rates of
interest may affect net interest income. The Company manages its interest rate
risk primarily by structuring its balance sheet to emphasize holding adjustable
rate loans and short-term mortgage-backed securities in its portfolio and
maintaining a large base of core deposits. See further discussion under
"Interest Rate Risk Management" beginning on page 33 of this report.

REGULATION AND SUPERVISION

    CAPITAL REQUIREMENTS

    As a registered bank holding company under the Bank Holding Company Act of
1956, as amended ("BHCA"), Progressive is subject to regulation and supervision
by the Federal Reserve Board ("FRB"). Accordingly, its activities are subject to
certain limitations, and transactions between Pawling and Progressive are
subject to certain restrictions. The FRB applies various guidelines in assessing
the adequacy of capital in examining and supervising a bank holding company and
in analyzing applications to the FRB.

    Pawling, as a New York state-chartered stock savings bank, is subject to
regulation and supervision by the New York State Banking Department as its
chartering agency and by the Federal Deposit Insurance Corporation ("FDIC") as
its deposit insurer. Pawling derives its lending, investment and other powers
from the applicable provisions of New York law and the regulations of the New
York State Banking Board, subject to limitation or modification under applicable
federal law and regulations of such agencies as the FDIC or FRB. FDIC
regulations require insured banks, such as Pawling, to maintain minimum levels
of capital. The FDIC regulations follow, in substance, the leverage and
risk-based capital guidelines adopted by the FRB for bank holding companies.

    At December 31, 1997, Progressive and Pawling met all capital adequacy
requirements to which they are subject. For a further discussion and comparison
of actual capital to the minimum regulatory requirements, see "Capital"
beginning on page 32 of this report.

                                       3
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT

    On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") became law. The provisions of FDICIA strengthen federal
supervision and examination of insured depository institutions; require prompt
regulatory action when a depository institution experiences financial
difficulties; mandate the establishment of a risk-based deposit insurance
assessment system; and require imposition of numerous additional safety and
soundness standards.

    FDICIA established a system of prompt corrective action applicable to
undercapitalized institutions. The system is based on capital levels that are
used to define five categories of banks-well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. Under this system, the banking regulators are required to take
certain supervisory actions with respect to undercapitalized institutions. The
severity of these actions depends upon the institution's degree of under
capitalization. Generally, subject to a narrow exception, FDICIA requires the
banking regulators to appoint a receiver or conservator for an institution that
is critically undercapitalized within 90 days after being considered critically
undercapitalized. Well-capitalized institutions are defined as those with a
leverage capital ratio over 5.0%, a Tier 1 risk-based capital ratio over 6.0%,
and a total risk-based capital ratio over 10.0%. Pawling met the definition of a
well-capitalized institution at December 31, 1997 with leverage, Tier 1
risk-based and total risk-based capital ratios of 7.4%, 13.4% and 14.7%,
respectively.

    FDICIA also placed restrictions on investments by and activities of insured
state banks such as Pawling. State banks and their subsidiaries may not engage
in activities that are not permissible for national banks or their subsidiaries
unless the FDIC determines that the activity would pose no significant risk to
the deposit insurance fund and the bank is in compliance with, and continues to
comply with, applicable federal capital standards. While national banks are not
permitted to invest in equity securities, FDICIA contained a limited exception
permitting the continued investment by certain state-chartered banks in equity
securities listed on national securities exchanges and in shares of companies
registered under the Investment Company Act of 1940. FDICIA requires, however,
that such equity investments in the future not exceed 100% of a bank's Tier 1
capital; moreover, FDICIA allows the FDIC to further limit the amount of such
equity security investments, based upon an institution's capital position and
overall financial condition. The limitation imposed by FDICIA has not affected
Pawling, since its investment in such equity securities represents less than 1%
of Tier 1 capital.

    As required by FDICIA, each federal banking agency has adopted uniform
regulations prescribing standards for extensions of credit secured by real
estate or made for the purpose of financing the construction of improvements on
real estate. The FDIC regulations require each bank to establish and maintain
written internal real estate lending standards that are consistent with safe and
sound banking practices and that are appropriate to the size of the institution
and the nature and scope of its real estate lending activities. Pawling's policy
is consistent with the applicable FDIC guidelines, which include loan-to-value
ratio limits for various types of real estate loans. Institutions are permitted
to make a limited number of loans that do not conform to these loan-to-value
limits, provided the exceptions are reviewed and justified appropriately.
Implementation of these new real estate lending standards has not had a
significant effect on the Company's lending activities.

    FDICIA imposed additional reporting requirements on depository institutions
with total assets of more than $500.0 million, such as Pawling. Among other
things, management is required to prepare an annual report that contains
assessments of (1) the effectiveness as of year end of the institution's
internal control over financial reporting and (2) the institution's compliance
during the year with certain designated safety and soundness laws and
regulations (those applicable to insider transactions and dividend limitations).
The institution is also required to engage an independent public accountant to
attest to management's assertion concerning internal control over financial
reporting. Institutions affected by these

                                       4
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
requirements must also have an audit committee composed entirely of independent
outside directors. Pawling has been subject to, and has complied with, these
reporting requirements since their effective date.

    In accordance with FDICIA, insured institutions have been subject to a
risk-based system for assessing federal deposit insurance premiums since January
1, 1993. The risk-based assessment is based on the institution's placement by
the FDIC into one of nine categories using a two-step process that considers the
institution's capital ratios and overall risk profile. The risk-based premiums
currently range from an annual rate of 0.00% to 0.27% of assessable deposits.
Effective January 1, 1997, institutions insured by the Bank Insurance Fund
("BIF") of the FDIC, such as Pawling, are also required to pay an assessment
related to the cost of Financing Corporation ("FICO") bonds, in accordance with
the Deposit Insurance Funds Act of 1996. The initial FICO annual assessment rate
is approximately 0.013% of deposits for all BIF-insured institutions, and is not
tied to the FDIC risk-based insurance premium rates.

FEDERAL RESERVE SYSTEM REGULATIONS

    FRB regulations require Pawling to maintain reserves against its transaction
accounts. These regulations generally require that depository institutions
maintain a reserve of 3.0% against transaction accounts totaling $49.3 million
or less (except that $4.4 million of transaction account balances are exempt
from the reserve requirement) plus 10% of that portion of total transaction
accounts in excess of $49.3 million. These amounts and percentages are subject
to adjustment by the FRB. At December 31, 1997, Pawling had aggregate reserves
(in the form of deposits with the Federal Reserve and cash on hand) of $2.2
million to meet those requirements.

    Pursuant to the BHCA, the FRB has power to regulate the activities of bank
holding companies such as Progressive. The FRB generally prohibits bank holding
companies and their subsidiaries from engaging in activities other than banking,
managing banks, or controlling banks, or activities which are "so closely
related to banking as to be a proper incident thereto." By regulations and
rulings, the FRB has defined certain activities as being "so closely related to
banking as to be proper incident thereto," and has exempted certain other
activities from the general prohibition against nonbanking activities.
Permissible activities include servicing activities rendered on behalf of the
holding company and its subsidiaries; ownership of voting securities of a
company that, in the aggregate, represent less than 5.0% of outstanding shares
of any class of voting securities of a company; acting as investment or
financial advisor within certain limitations; and providing securities brokerage
services.

    Bank holding companies are required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10.0% or more of their consolidated retained earnings. The
FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe or unsound practice or would violate any
law, regulation, FRB order, or any condition imposed by, or written agreement
with, the FRB. See also note 13 to the consolidated financial statements
regarding dividend restrictions.

FEDERAL HOME LOAN BANK SYSTEM

    Pawling is a member of the Federal Home Loan Bank of New York ("FHLBNY")
which is one of twelve regional Federal Home Loan Banks. As a member of the
FHLBNY, Pawling is required to acquire and hold shares of capital stock in the
FHLBNY in an amount at least equal to the greater of (i) 1.0% of the aggregate
principal amount of the institution's unpaid residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, (ii)
0.3% of its assets or (iii) one-twentieth

                                       5
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
of outstanding FHLBNY advances. At December 31, 1997, Pawling held stock in the
FHLBNY in the amount of $5.0 million, which satisfied this requirement.

    The FHLBNY provides a credit facility for member institutions. It makes
advances to members in accordance with the policies and procedures established
by the Board of Directors of the FHLBNY. Advances from the FHLBNY are secured by
stock in the FHLBNY and certain types of mortgage loans and other assets. The
maximum amount of credit which the FHLBNY will advance, for purposes other than
meeting withdrawals, fluctuates from time to time in accordance with changes in
policies of the FHLBNY. Interest rates charged on advances vary depending on the
purpose of the borrowing, maturity period of the advances, and the cost of funds
to the FHLBNY.

OTHER ASPECTS OF FEDERAL AND STATE LAW

    Pawling is also subject to various federal and state statutory and
regulatory provisions covering, among other things, security procedures,
currency reporting, insider and affiliated party transactions, management
interlocks, community reinvestment, electronic funds transfers and funds
availability.

LENDING ACTIVITIES

    GENERAL

    The Company offers a variety of loan products to serve both consumer and
commercial borrowers within its primary market area of Dutchess, Sullivan,
Orange, Putnam, Ulster, Rockland and Westchester counties in New York. Since
1993, the Company has originated one-to-four family mortgage and commercial
mortgage loans on properties in Connecticut, primarily the counties of Fairfield
and Litchfield. One-to-four family mortgage loans are also originated on
properties in the New York counties of Nassau and Suffolk.

    The Company's mortgage lending activities include loans secured by
one-to-four family homes, multi-family properties with five or more units, and
commercial properties. Loans are made on existing properties and, to a lesser
extent, on properties under construction. The Company satisfies a variety of
consumer credit needs by providing home equity lines of credit, home improvement
loans, automobile loans, mobile home loans, personal loans, credit cards,
student loans and unsecured lines of credit. Commercial loan products include
secured and unsecured lines of credit, revolving credit, installment loans and
term loans.

    The Company's lending activities are conducted based on written underwriting
standards and loan origination procedures prescribed by management. Detailed
loan applications are obtained to assist in determining the borrower's ability
to repay. Additional information is obtained through credit reports, financial
statements and confirmations. The Company accepts loan applications at all of
its branch locations and its commercial loan centers. Applications are obtained
through the Company's mortgage origination staff and third-party mortgage
brokers. Residential mortgage, consumer and commercial loans are all serviced at
the Administrative Headquarters in Fishkill.

    One-to-four family residential mortgage loans up to $1.5 million may be
approved by a combination of certain senior lending officers. Commercial real
estate loans up to $750,000 may be approved by a combination of two commercial
loan officers. Commercial real estate loans up to $1.5 million must be approved
by certain senior lending officers. Pawling's Board of Directors approves
residential and commercial mortgage loans in excess of $1.5 million and loans
which cause the total loans granted to any one borrower to exceed $1.5 million.
Unsecured loans in excess of $500,000 must also be approved by Pawling's Board
of Directors.

                                       6
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
LOAN PORTFOLIO COMPOSITION

    At December 31, 1997, the Company's net loans of $564.5 million represented
63.9% of total assets. The percentage distribution of the portfolio was as
follows: 72.1% in residential mortgage loans (principally one-to-four family
residential loans); 13.4% in commercial mortgage loans; 1.7% in construction and
land loans; and 12.8% in other loans (principally automobile financing and
mobile home loans). Of the total mortgage loan portfolio, $460.3 million, or
92.1%, represent loans for which the Company holds a first lien position.

    The following is a summary of the loan portfolio at December 31:
<TABLE>
<CAPTION>
                                                         1997                   1996                    1995
                                                 --------------------  ----------------------  ----------------------
                                                  AMOUNT        %        AMOUNT         %        AMOUNT         %
                                                 ---------  ---------  -----------  ---------  -----------  ---------
<S>                                              <C>        <C>        <C>          <C>        <C>          <C>
                                                                        (DOLLARS IN THOUSANDS)
Mortgage loans:
  Residential properties:
    One-to-four family.........................  $ 385,140       67.2     401,026        67.8     370,591        68.6
    Multi-family...............................     28,280        4.9      28,138         4.8      25,354         4.7
  Commercial properties........................     76,551       13.4      81,117        13.7      73,851        13.7
  Construction and land........................      9,735        1.7       8,871         1.5      10,773         2.0
                                                 ---------  ---------  -----------  ---------  -----------  ---------
    Total mortgage loans.......................    499,706       87.2     519,152        87.8     480,569        89.0
                                                 ---------  ---------  -----------  ---------  -----------  ---------
Other loans:
  Automobile financing.........................     25,399        4.4      26,121         4.4      21,936         4.1
  Mobile home..................................     25,899        4.5      26,185         4.4      22,885         4.2
  Business installment.........................     14,213        2.5      11,392         1.9       6,284         1.2
  Consumer installment.........................      2,053        0.4       2,798         0.5       2,621         0.5
  Other........................................      5,599        1.0       5,973         1.0       5,397         1.0
                                                 ---------  ---------  -----------  ---------  -----------  ---------
    Total other loans..........................     73,163       12.8      72,469        12.2      59,123        11.0
                                                 ---------  ---------  -----------  ---------  -----------  ---------
    Total loans................................    572,869      100.0     591,621       100.0     539,692       100.0
Allowance for loan losses......................     (9,801)                (9,231)                 (8,033)
Net deferred loan origination costs (fees).....      1,445                  1,164                      55
                                                 ---------  ---------  -----------  ---------  -----------  ---------
    Total loans, net...........................  $ 564,513                583,554                 531,714
                                                 ---------  ---------  -----------  ---------  -----------  ---------
                                                 ---------  ---------  -----------  ---------  -----------  ---------
Mortgage loans by type of interest rate:
    Fixed......................................  $ 140,222       28.1     158,417        30.5     182,013        37.9
    Adjustable.................................    359,484       71.9     360,735        69.5     298,556        62.1
                                                 ---------  ---------  -----------  ---------  -----------  ---------
    Total mortgage loans.......................  $ 499,706      100.0     519,152       100.0     480,569       100.0
                                                 ---------  ---------  -----------  ---------  -----------  ---------
                                                 ---------  ---------  -----------  ---------  -----------  ---------

<CAPTION>
                                                       1994                   1993
                                               --------------------  ----------------------
                                                AMOUNT        %        AMOUNT         %
                                               ---------  ---------  -----------  ---------
<S>                                              <C>      <C>        <C>          <C>

Mortgage loans:
  Residential properties:
    One-to-four family......................... 322,477        66.7     290,728        65.0
    Multi-family...............................  23,651         4.9      19,196         4.3
  Commercial properties........................  66,410        13.7      78,049        17.5
  Construction and land........................  12,859         2.7       9,449         2.1
                                               ---------  ---------  -----------  ---------
    Total mortgage loans....................... 425,397        88.0     397,422        88.9
                                               ---------  ---------  -----------  ---------
Other loans:
  Automobile financing.........................  25,146         5.2      19,993         4.4
  Mobile home..................................  20,425         4.2      17,347         3.9
  Business installment.........................   4,277         0.9       3,981         0.9
  Consumer installment.........................   3,067         0.6       3,566         0.8
  Other........................................   5,005         1.1       4,702         1.1
                                               ---------  ---------  -----------  ---------
    Total other loans..........................  57,920        12.0      49,589        11.1
                                               ---------  ---------  -----------  ---------
    Total loans................................ 483,317       100.0     447,011       100.0
Allowance for loan losses......................  (9,402 )               (13,920)
Net deferred loan origination costs (fees).....    (836 )                (2,019)
                                               ---------  ---------  -----------  ---------
    Total loans, net........................... 473,079                 431,072
                                               ---------  ---------  -----------  ---------
                                               ---------  ---------  -----------  ---------
Mortgage loans by type of interest rate:
    Fixed...................................... 202,027        47.5     264,666        66.6
    Adjustable................................. 223,370        52.5     132,756        33.4
                                               ---------  ---------  -----------  ---------
    Total mortgage loans....................... 425,397       100.0     397,422       100.0
                                               ---------  ---------  -----------  ---------
                                               ---------  ---------  -----------  ---------
</TABLE>

                                       7
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
    The following table sets forth the contractual maturity or period to
repricing of the loan portfolio at December 31, 1997. The table does not include
estimated prepayments but does include scheduled repayments of principal. Loans
that have adjustable rates are shown as being due in the period in which the
interest rates are next subject to change or the scheduled maturity, whichever
is earlier. Management believes that the actual period to repricing will be
shorter than indicated in the table as a result of prepayments, although
prepayments tend to be highly dependent on interest rate levels.

<TABLE>
<CAPTION>
                                                                         ONE TO     THREE TO     FIVE TO
                                                            LESS THAN     THREE       FIVE         TEN      OVER TEN
                                                             ONE YEAR     YEARS       YEARS       YEARS       YEARS       TOTAL
                                                            ----------  ---------  -----------  ---------  -----------  ---------
<S>                                                         <C>         <C>        <C>          <C>        <C>          <C>
                                                                                       (IN THOUSANDS)
Mortgage loans:
  Residential.............................................  $  228,747     75,149      24,233      29,261      56,030     413,420
  Commercial..............................................      34,143     13,937      17,652       8,792       2,027      76,551
  Construction and land...................................       6,628      2,186         666         146         109       9,735
                                                            ----------  ---------  -----------  ---------  -----------  ---------
    Total mortgage loans..................................     269,518     91,272      42,551      38,199      58,166     499,706
Other loans...............................................      27,279     17,576       9,826       8,053      10,429      73,163
                                                            ----------  ---------  -----------  ---------  -----------  ---------
    Total loans...........................................  $  296,797    108,848      52,377      46,252      68,595     572,869
                                                            ----------  ---------  -----------  ---------  -----------  ---------
                                                            ----------  ---------  -----------  ---------  -----------  ---------
</TABLE>

    The following table sets forth, by type of interest rate, the dollar volumes
of all loans contractually due in, and with a period to repricing of, more than
one year at December 31, 1997.

<TABLE>
<CAPTION>
                                                                                         FLOATING OR
                                                                        PREDETERMINED    ADJUSTABLE
                                                                            RATES           RATES         TOTAL
                                                                        -------------  ---------------  ---------
<S>                                                                     <C>            <C>              <C>
                                                                                     (IN THOUSANDS)
Mortgage loans:
  Residential.........................................................   $    97,246         87,427       184,673
  Commercial..........................................................        13,651         28,757        42,408
  Construction and land...............................................         2,103          1,004         3,107
                                                                        -------------       -------     ---------
    Total mortgage loans..............................................       113,000        117,188       230,188
Other loans...........................................................        45,870             14        45,884
                                                                        -------------       -------     ---------
Total loans...........................................................   $   158,870        117,202       276,072
                                                                        -------------       -------     ---------
                                                                        -------------       -------     ---------
</TABLE>

RESIDENTIAL MORTGAGE LENDING

    The Company, through its retail mortgage origination staff and its wholesale
loan correspondents, actively solicits residential mortgage loan applications
from new and existing customers, builders and real estate brokers. All loans are
then underwritten and serviced at the Fishkill Administrative Headquarters.
Traditionally, it was Pawling's policy to only make loans secured by properties
located within its primary New York service area. Beginning in 1993, the Company
expanded this policy to include additional markets in New York State and
Connecticut.

    The Company's commitments to originate residential mortgage loans are
generally made for periods of up to 60 days from the date of approval. Longer
commitment periods can be negotiated for special programs. Borrowers are offered
the option to lock in the rate at the time of application or to lock in the rate
in effect up to five days prior to the closing, depending on the mortgage
program selected. Outstanding residential mortgage loan commitments, including
construction loans on pre-sold homes and unadvanced home equity lines of credit,
totaled $58.9 million at December 31, 1997.

                                       8
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
    The Company's loan-to-value policy, for owner occupied one-to-four family
residences, is generally to lend up to 95% of the sales price or appraised
value, whichever is less. Private mortgage insurance is generally required on
mortgages with loan-to-value ratios above 80%. Acceptable loan-to-value ratios
decrease for larger loans. The actual loan-to-value ratios and amounts are
determined by secondary market investor guidelines and market conditions. On
non-owner occupied residential properties, the Company generally makes loans of
up to 75% of the sales price or appraised value, whichever is less. These loans
are amortized with principal and interest due on a monthly basis. Residential
mortgage loans are underwritten and approved to be held in the Company's own
loan portfolio or to be sold to investors in the secondary market. Typically,
the Company holds in its portfolio adjustable rate and short-term balloon
mortgages which have a contractual maturity of up to 30 years.

    As a result of selling mortgage loans in the secondary market while
retaining the related servicing rights, the Company serviced $51.7 million in
primarily fixed-rate mortgage loans for investors at December 31, 1997, for
which the Company is paid a servicing fee. The Company is an approved seller/
servicer for Fannie Mae and an approved seller to the State of New York Mortgage
Agency ("SONYMA"), and also participates in selected private secondary market
programs.

COMMERCIAL AND CONSTRUCTION MORTGAGE LENDING

    Commercial mortgage loans originated directly by the Company generally
require a primary and secondary source of repayment, a net cash flow of at least
1.2 times debt service payments, and a loan-to-value ratio not greater than 70%.

    The Company's construction mortgage loans are primarily originated for
one-to-four family owner occupied residences, multi-family properties and, to a
lesser extent, owner occupied commercial properties. Construction loans on
pre-sold homes, which are classified in the Company's one-to-four family
residential mortgage portfolio, totaled $40.6 million at December 31, 1997,
while other construction and land loans totaled $9.7 million. Loan-to-value
ratios vary by property type with residential construction not exceeding 80% and
multi-family and commercial construction not exceeding 70%. In most cases, the
Company continues as the permanent mortgage lender after construction is
completed. Construction loans originated are usually for an initial term of 12
months after which the loan may be converted into a permanent loan providing for
principal and interest payments. Disbursements are made during the construction
period based on the percentage of work completed as determined by qualified
inspectors.

    Commercial and construction mortgage loans may reduce interest rate risk in
a rising rate environment, due generally to their shorter terms and variable
interest rates, but may require a greater level of ongoing service and
management due to a broader range of risks as compared to other residential
mortgage lending. Specifically, the payment experience on loans secured by
income producing properties is dependent on the successful management of these
properties and may be subject to a greater extent to adverse conditions in the
real estate market or the general economy. Construction loans involve additional
risks since loan funds are advanced based upon the security of the property
under construction and are otherwise subject to uncertainties in estimating
construction costs and other unpredictable contingencies that may make it
difficult to evaluate accurately the total loan funds required to complete the
project.

                                       9
<PAGE>
    MORTGAGE LENDING ACTIVITY

    The following is a summary of activity in the Company's mortgage loan
portfolio for the years ended December 31. The table includes residential
mortgage activity, as well as commercial and construction lending activity.

<TABLE>
<CAPTION>
                                                               1997       1996       1995       1994       1993
                                                            ----------  ---------  ---------  ---------  ---------
<S>                                                         <C>         <C>        <C>        <C>        <C>
                                                                                (IN THOUSANDS)
Mortgage loans at beginning of year.......................  $  519,152    480,569    425,397    397,422    346,870
Loans originated..........................................     146,529    183,873    143,877    165,946    150,995
Loan prepayments..........................................    (104,199)   (75,725)   (40,415)   (47,639)   (41,868)
Other payments............................................     (46,444)   (49,844)   (33,736)   (33,268)   (38,380)
Loans sold................................................     (11,755)   (11,446)   (12,259)   (49,942)   (11,535)
Charge-offs...............................................      (1,535)    (1,286)    (2,135)    (5,925)    (3,194)
Other activity, net (including transfers to other real
  estate).................................................      (2,042)    (6,989)      (160)    (1,197)    (5,466)
                                                            ----------  ---------  ---------  ---------  ---------
Mortgage loans at end of year.............................  $  499,706    519,152    480,569    425,397    397,422
                                                            ----------  ---------  ---------  ---------  ---------
                                                            ----------  ---------  ---------  ---------  ---------
</TABLE>

    CONSUMER LENDING

    In recent years, the Company has increased its emphasis on the origination
of consumer loans. These loans generally have shorter terms and higher rates of
interest. The Company offers a variety of consumer loans, including personal
loans, credit cards, home equity lines of credit, fixed rate home equity loans,
home improvement loans, mobile home loans, passbook or certificate account
loans, automobile loans and student loans. The Company ceased originating
indirect automobile loans effective October 1997.

    Consumer loans generally involve more risk of collectibility than
residential mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. As a result, consumer loan
collections are more dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by job loss, personal bankruptcy and
adverse economic conditions.

    BUSINESS LENDING

    The Company offers a variety of commercial loan products to businesses
including installment and time notes, lines of credit, revolving credit and term
loans. The Company promotes commercial loan products within its defined market
area to companies with sales of typically less than $10.0 million per year.
Commercial loans are underwritten based on the cash flow and financial condition
of the borrowing business and applicable collateral. Repayment of these loans is
generally guaranteed by the majority owners of the businesses in question and
may be further collateralized by assets of those individual guarantors.

    LOAN INTEREST RATES AND FEES

    The interest rates charged by the Company on its loans are primarily
determined through the use of financial modeling to ensure appropriate returns,
as well as consideration of: competitive rates being offered in its market area;
the availability of lendable funds; the Company's cost of funds; the demand for
loans and portfolio concentration considerations. The Company's average interest
rate earned on its loan portfolio was 8.95% for the year ended December 31,
1997, as compared to 8.84% for the year ended December 31, 1996.

    In addition to the contractual rates of interest earned on loans, the
Company receives fees related to new and existing loans which include late
charges, loan modification fees, prepayment penalties and fees associated with
the sale of credit life and disability insurance. The Company also receives
origination and

                                       10
<PAGE>
servicing fees as a result of sales of mortgage loans originated and serviced
for others. In addition, Progressive generates settlement fees by providing loan
related services to Pawling's borrowers. Income realized from these activities
varies with the volume and type of loans made.

    Loan origination fees and certain direct origination costs are deferred and
subsequently recognized in interest income, using the level yield method, over
the contractual loan term. Amortization ceases when loans are placed on
non-accrual status and resumes when loans are returned to accrual status.

    ASSET QUALITY

    Management continually reviews delinquent loans to assess problem situations
and to quickly and efficiently remedy these problems whenever possible. The
Company's collection department contacts the borrower when a loan becomes
delinquent. When a payment is not made within 15 days of the due date, a late
notice is generated and a late charge is assessed. After 60 days of delinquency,
a notice is sent warning the borrower that foreclosure proceedings may commence.
If the delinquency has not been cured within a reasonable period of time, the
Company, when collateral is available, institutes appropriate action to
foreclose the property or repossess the assets. If the Company is the successful
bidder at the foreclosure sale, the property is recorded as "other real estate."
When the property is acquired, it is recorded at fair value less the estimated
costs to dispose of the property. All costs incurred in maintaining the property
from the date of acquisition are expensed.

    The Loan Review Committee of Pawling meets at least monthly or more
frequently as deemed necessary to review: all real estate loans of $250,000 and
over which are more than 30 days delinquent; all delinquent construction loans;
other mortgage loans and consumer loans which are 90 days or more delinquent;
all other real estate properties; all loans in the process of foreclosure; and
all other classified loans. The results of this analysis are reported to the
Board of Directors on a monthly basis.

    The provision for loan losses is a charge against income which increases the
allowance for loan losses. The adequacy of the allowance for loan losses is
evaluated periodically and is determined based on management's judgment
concerning the amount of risk and potential for loss inherent in the portfolio.
Management's judgment is based upon a number of factors including a review of
non-performing and other classified loans, the value of collateral for such
loans, historical loss experience, changes in the nature and volume of the loan
portfolio, and current economic conditions. When doubt exists in the view of
management as to the collectibility of the remaining balance of a loan, the
Company will charge-off that portion deemed to be uncollectible. While
management uses the best information available in establishing the allowance for
loan losses, future adjustments may be necessary based on, among other things,
changes in economic and real estate market conditions and in the credit risk
inherent in the loan portfolio.

                                       11
<PAGE>
    Activity in the allowance for loan losses for the years ended December 31 is
summarized as follows:

<TABLE>
<CAPTION>
                                                                      1997       1996       1995       1994       1993
                                                                    ---------  ---------  ---------  ---------  ---------
<S>                                                                 <C>        <C>        <C>        <C>        <C>
                                                                                   (DOLLARS IN THOUSANDS)
Balance at beginning of year......................................  $   9,231      8,033      9,402     13,920     15,161
Provision charged to operations...................................      1,975      2,300        600      1,500      2,000
Loans charged-off:
  Mortgage loans:
    Residential...................................................     (1,161)      (954)      (376)    (1,259)      (812)
    Commercial....................................................       (292)      (332)      (593)    (4,391)    (1,078)
    Construction and land.........................................        (82)    --         (1,166)      (275)    (1,304)
  Other loans:
    Consumer......................................................       (404)      (267)      (219)      (235)      (257)
    Commercial....................................................     --             (5)       (30)       (57)       (28)
                                                                    ---------  ---------  ---------  ---------  ---------
      Total charge-offs (1).......................................     (1,939)    (1,558)    (2,384)    (6,217)    (3,479)
                                                                    ---------  ---------  ---------  ---------  ---------
Recoveries:
  Mortgage loans:
    Residential...................................................        130         54         84         12         48
    Commercial....................................................        107        106         80         28        110
    Construction and land.........................................        200        217        189         37         10
  Other loans:
    Consumer......................................................         80         50         56         71         49
    Commercial....................................................         17         29          6         51         21
                                                                    ---------  ---------  ---------  ---------  ---------
      Total recoveries............................................        534        456        415        199        238
                                                                    ---------  ---------  ---------  ---------  ---------
Net charge-offs...................................................     (1,405)    (1,102)    (1,969)    (6,018)    (3,241)
                                                                    ---------  ---------  ---------  ---------  ---------
Balance at end of year............................................  $   9,801      9,231      8,033      9,402     13,920
                                                                    ---------  ---------  ---------  ---------  ---------
                                                                    ---------  ---------  ---------  ---------  ---------
Ratio of net charge-offs to average loans outstanding during the
  year............................................................       0.24%      0.20%      0.38%      1.29%      0.79%
                                                                    ---------  ---------  ---------  ---------  ---------
                                                                    ---------  ---------  ---------  ---------  ---------
</TABLE>

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

(1) Includes $3.9 million in 1994 applicable to bulk sales of non-performing
    mortgage loans and other mortgage loans with relatively high credit risk.

    The following table sets forth the allocation of the Company's allowance for
loan losses by category of loans at December 31 for each of the past five years.
The amount allocated to any category should not be interpreted as being
restricted to loans in that category, as the entire allowance is available to
absorb charge-offs in any category. In addition, the amount allocated to each
category is not an indication of expected future charge-offs in that category.
The allowance for loan losses consists of allocations for estimated losses on
individual non-performing and other classified loans in the Company's portfolio,
as well as a portion based on the Company's past loss experience, overall risk
characteristics, and management's assessment of current economic and real estate
market conditions.

<TABLE>
<CAPTION>
                                                                         1997       1996       1995       1994       1993
                                                                       ---------  ---------  ---------  ---------  ---------
<S>                                                                    <C>        <C>        <C>        <C>        <C>
                                                                                          (IN THOUSANDS)
Mortgage loans:
  Residential........................................................  $   5,302      4,639      1,678      3,706      4,354
  Commercial and other...............................................      2,673      2,953      5,448      4,870      8,662
Other loans..........................................................      1,826      1,639        907        826        904
                                                                       ---------  ---------  ---------  ---------  ---------
  Total allowance for loan losses....................................  $   9,801      9,231      8,033      9,402     13,920
                                                                       ---------  ---------  ---------  ---------  ---------
                                                                       ---------  ---------  ---------  ---------  ---------
</TABLE>

                                       12
<PAGE>
    See "Asset Quality" beginning on page 29 for further information concerning
the Company's asset quality, including a table summarizing non-performing assets
and other information for each of the past five years.

SECURITIES

    The Company has authority to invest in a variety of debt securities rated AA
or better and in limited amounts of equity securities. Securities purchased by
the Company conform to the statutory requirements of the New York State Banking
Law, the rules and regulations of the FDIC and the FRB's policy on investments.
The Company can invest in securities such as United States Treasury obligations,
securities of various government agencies, mortgage-backed securities, corporate
obligations, municipal obligations, and a limited amount of preferred and common
stock.

    Management recommends and implements the Company's investment policy,
subject to approval by the Board of Directors. The implementation of the policy
is monitored and reviewed by the Board of Directors at its regularly scheduled
meetings.

    Securities are classified as held to maturity securities, trading
securities, or available for sale securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Securities held to maturity are
limited to debt securities for which the entity has the positive intent and
ability to hold to maturity. Trading securities are debt and equity securities
that are bought principally for the purpose of selling them in the near term.
All other debt and equity securities are classified as available for sale. At
December 31, 1997, the carrying values of securities available for sale totaled
$110.1 million and securities held to maturity totaled $131.3 million.

    Held to maturity securities are carried at amortized cost under SFAS No.
115. Available for sale debt securities and marketable equity securities are
carried at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity (net of taxes).
Non-marketable equity securities (principally FHLBNY stock) are included in
securities available for sale at cost, as there is no readily available market
value. The Company has no trading securities.

    The following table summarizes the amortized cost and fair value of the
Company's securities as of December 31:
<TABLE>
<CAPTION>
                                                                1997                    1996                    1995
                                                        ---------------------  ----------------------  ----------------------
<S>                                                     <C>         <C>        <C>          <C>        <C>          <C>
                                                        AMORTIZED     FAIR      AMORTIZED     FAIR      AMORTIZED     FAIR
                                                           COST       VALUE       COST        VALUE       COST        VALUE
                                                        ----------  ---------  -----------  ---------  -----------  ---------

<CAPTION>
                                                                                   (IN THOUSANDS)
<S>                                                     <C>         <C>        <C>          <C>        <C>          <C>
Securities available for sale:
  Debt securities:
    United States Treasury and agencies...............  $   72,520     72,646      86,860      86,883      47,458      47,863
    Mortgage-backed securities........................      30,157     31,136      41,640      42,885      43,462      44,835
    Corporate and other...............................       1,095      1,125       3,190       3,242       9,704       9,904
                                                        ----------  ---------  -----------  ---------  -----------  ---------
      Total debt securities...........................     103,772    104,907     131,690     133,010     100,624     102,602
Equity securities.....................................       5,127      5,157       4,786       4,782       4,351       4,299
                                                        ----------  ---------  -----------  ---------  -----------  ---------
      Total securities available for sale.............     108,899    110,064     136,476     137,792     104,975     106,901
Securities held to maturity:
  Mortgage-backed securities..........................     131,299    131,660      72,614      72,315      40,148      40,386
                                                        ----------  ---------  -----------  ---------  -----------  ---------
      Total securities................................  $  240,198    241,724     209,090     210,107     145,123     147,287
                                                        ----------  ---------  -----------  ---------  -----------  ---------
                                                        ----------  ---------  -----------  ---------  -----------  ---------
</TABLE>

    Mortgage-backed securities represent participating interests in pools of
first mortgage loans originated and serviced by the issuers of the securities.
The Company principally purchases adjustable rate

                                       13
<PAGE>
securities (which generally are classified as available for sale) and five- and
seven-year balloon payment securities and seasoned 15 year mortgage-backed
securities (which generally are classified as held to maturity). Balloon payment
securities, which have an expected average life of approximately two to four
years, generally provide for principal amortization based on a thirty-year
amortization schedule, with a balloon payment of the remaining principal at the
end of a five- or seven-year period.

    The following table summarizes the amortized cost and fair value of the
Company's mortgage-backed securities at December 31:
<TABLE>
<CAPTION>
                                                                 1997                    1996                    1995
                                                         ---------------------  ----------------------  ----------------------
<S>                                                      <C>         <C>        <C>          <C>        <C>          <C>
                                                         AMORTIZED     FAIR      AMORTIZED     FAIR      AMORTIZED     FAIR
                                                            COST       VALUE       COST        VALUE       COST        VALUE
                                                         ----------  ---------  -----------  ---------  -----------  ---------

<CAPTION>
                                                                                    (IN THOUSANDS)
<S>                                                      <C>         <C>        <C>          <C>        <C>          <C>
Available for sale:
  Fannie Mae certificates..............................  $   18,140     18,573      25,591      26,288      26,335      27,053
  Freddie Mac certificates.............................      12,017     12,563      16,049      16,597      17,127      17,782
                                                         ----------  ---------  -----------  ---------  -----------  ---------
    Total available for sale...........................      30,157     31,136      41,640      42,885      43,462      44,835
                                                         ----------  ---------  -----------  ---------  -----------  ---------
Held to maturity:
    Fannie Mae certificates............................      73,185     73,465      41,202      40,938      18,232      18,328
    Freddie Mac certificates...........................      58,114     58,195      31,412      31,377      21,916      22,058
                                                         ----------  ---------  -----------  ---------  -----------  ---------
      Total held to maturity...........................     131,299    131,660      72,614      72,315      40,148      40,386
                                                         ----------  ---------  -----------  ---------  -----------  ---------
      Total mortgage-backed securities.................  $  161,456    162,796     114,254     115,200      83,610      85,221
                                                         ----------  ---------  -----------  ---------  -----------  ---------
                                                         ----------  ---------  -----------  ---------  -----------  ---------
</TABLE>

    The following table sets forth the amortized cost and weighted average
yields of the Company's debt securities at December 31, 1997, by type of
security and by remaining term to maturity. With respect to mortgage-backed
securities, the table is based on contractual maturities and does not include
estimated prepayments or scheduled repayments of principal. Management believes
that the actual maturities will be substantially shorter than indicated as a
result of prepayments and scheduled repayments, although prepayments tend to be
highly dependent on interest rate levels.

<TABLE>
<CAPTION>
                                                                       AFTER ONE   AFTER FIVE
                                                                       YEAR BUT     YEARS BUT
                                                            WITHIN      WITHIN       WITHIN        AFTER
                                                           ONE YEAR   FIVE YEARS    TEN YEARS    TEN YEARS     TOTAL
                                                           ---------  -----------  -----------  -----------  ---------
<S>                                                        <C>        <C>          <C>          <C>          <C>
                                                                       (DOLLARS IN THOUSANDS)
Mortgage-backed securities:
Fannie Mae certificates..................................  $     265      14,018       44,820       32,222      91,325
Freddie Mac certificates.................................      4,078      12,199       26,869       26,985      70,131
                                                           ---------  -----------  -----------  -----------  ---------
Total....................................................  $   4,343      26,217       71,689       59,207     161,456
                                                           ---------  -----------  -----------  -----------  ---------
Weighted average yield...................................       6.14%       7.09%        6.95%        7.35%       7.10%
                                                           ---------  -----------  -----------  -----------  ---------
                                                           ---------  -----------  -----------  -----------  ---------
Other debt securities:
U.S. Treasury and agencies...............................  $  15,758      56,762       --           --          72,520
Corporate and other......................................        746         349       --           --           1,095
                                                           ---------  -----------  -----------  -----------  ---------
Total....................................................  $  16,504      57,111       --           --          73,615
Weighted average yield...................................       5.81%       6.31%      --           --            6.20%
                                                           ---------  -----------  -----------  -----------  ---------
                                                           ---------  -----------  -----------  -----------  ---------
</TABLE>

DEPOSITS

    Deposits are the Company's principal source of funds. The Company attracts
deposits from the general public and small businesses by offering a variety of
deposit accounts at competitive rates. The

                                       14
<PAGE>
Company's deposit accounts include passbook and statement savings accounts,
personal and commercial checking accounts, money market accounts, NOW accounts,
savings certificate accounts ("time deposits") and club accounts. The Company
also offers tax deferred retirement savings accounts and savings certificate
accounts of $100,000 or more ("jumbo certificates"). At December 31, 1997, the
Company had $55.5 million in jumbo certificates, compared to $52.6 million at
December 31, 1996 and $50.3 million at December 31, 1995. The Company does not
solicit or accept brokered deposits.

    At December 31, 1997, the dollar amount of jumbo certificates by remaining
maturity dates and the weighted average interest rates were as follows:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED
MATURITY                                                             AMOUNT     AVERAGE RATE
------------------------------------------------------------------  ---------  ---------------
<S>                                                                 <C>        <C>
                                                                      (DOLLARS IN THOUSANDS)
Under 90 days.....................................................  $  14,730          5.62%
90 to 179 days....................................................      8,915          5.40
180 days to 1 year................................................     11,814          5.48
1 to 2 years......................................................      9,159          5.78
2 to 3 years......................................................      1,491          5.97
3 to 5 years......................................................      8,607          6.15
Over 5 years......................................................        758          6.02
                                                                    ---------           ---
Total.............................................................  $  55,474          5.68%
                                                                    ---------           ---
                                                                    ---------           ---
</TABLE>

    Deposit inflows and outflows are generally dependent on market conditions,
interest rates, the general economic environment in the Company's market area
and other competitive factors. The variety of accounts offered by the Company
has enabled it to be more competitive in obtaining funds and to respond with
more flexibility to changes in the interest rate environment. Management's
policy is to review deposit interest rates at least weekly and to adjust
appropriately based on the treasury yield curve, the need for funds, competition
and the effect on the net interest margin.

    Fixed rate, fixed term certificate of deposit accounts are a significant
source of funds for the Company. At December 31, 1997, certificate accounts
amounted to $337.5 million or 46.2% of total interest-bearing deposits, compared
to $372.7 million or 50.6% at December 31, 1996 and $347.5 million or 57.4% at
December 31, 1995. Certificates offered by the Company have maturities of 32
days or more, impose a minimum balance requirement of $1,000, and pay interest
compounded on a daily basis.

    Savings deposits amounted to $148.6 million or 20.3% of the Company's total
interest-bearing deposits at December 31, 1997, compared to $169.4 million or
23.0% at December 31, 1996 and $154.4 million or 25.5% at December 31, 1995.
Savings deposits primarily consist of passbook savings accounts and statement
savings accounts. Passbook and other savings accounts amounted to $99.1 million
or 13.6% of the Company's total interest-bearing deposits at December 31, 1997,
compared to $115.6 million or 15.7% at December 31, 1996 and $104.1 million or
17.2% at December 31, 1995. Passbook savings offered by the Company credit
interest monthly, compounded on a daily basis, to accounts with a minimum
average daily balance of $100. In 1994, the Company introduced a tiered
statement savings account. The first tier has a minimum balance of $500 and
earns interest if the account maintains a minimum average balance of $500 for
the month. The second tier has a minimum balance of $25,000 and earns interest
at a higher rate if the account maintains a minimum average balance of $25,000
for the month. There is a service charge incurred if the daily average balance
falls below $500. Interest on all statement savings accounts is compounded daily
and credited monthly. Statement savings accounts amounted to $49.5 million or
6.8% of the Company's total interest-bearing deposits at December 31, 1997,
compared to $53.8 million or 7.3% at December 31, 1996 and $50.4 million or 8.3%
at December 31, 1995.

    The Company offers negotiable order of withdrawal ("NOW") accounts with
unlimited check writing privileges. The minimum initial deposit required is
$1,000. There is a service charge incurred if the daily

                                       15
<PAGE>
average balance for the month falls below $1,000. Interest is compounded daily
and credited at the end of the month, at the current rate determined by the
Company, on accounts that have maintained a minimum average balance of $1,000.
NOW accounts amounted to $19.5 million or 2.7% of the Company's total
interest-bearing deposits at December 31, 1997, compared to $24.8 million or
3.4% at December 31, 1996 and $22.8 million or 3.8% at December 31, 1995.

    The Company also offers a tiered money market account with limited check
writing privileges. The first tier has a minimum balance of $2,500 and earns
interest at the Company's money market rate if the account maintains a minimum
average balance of $2,500 for the month. The second tier has a minimum balance
of $25,000 and earns interest at a higher money market rate if the account
maintains a minimum average balance of $25,000 for the month. There is a service
charge incurred if the daily average balance falls below $2,500. Interest on all
money market accounts is compounded daily and credited monthly. Money market
accounts amounted to $225.3 million or 30.8% of the Company's total
interest-bearing deposits at December 31, 1997, compared to $169.7 million or
23.0% at December 31, 1996 and $80.3 million or 13.3% at December 31, 1995.

    In 1995, the Company introduced its first relationship banking product,
Premier Banking(SM). Premier Banking requires a minimum average balance of
$1,500 in a noninterest-bearing checking account and offers higher rates on
certain money market and certificate of deposit accounts, as well as reduced
rates on a home equity line of credit. In addition, various other services are
free, including traveler's cheques, official checks and money orders. The
deposit balances discussed above include Premier Banking accounts totaling
$260.3 million at December 31, 1997, compared to $156.3 million at December 31,
1996 and $58.1 million at December 31, 1995.

    The following table presents the Company's interest-bearing deposits and
related weighted average interest rates at December 31:
<TABLE>
<CAPTION>
                                                                   1997                   1996                   1995
                                                           ---------------------  ---------------------  ---------------------
<S>                                                        <C>         <C>        <C>         <C>        <C>         <C>
                                                             AMOUNT      RATE       AMOUNT      RATE       AMOUNT      RATE
                                                           ----------  ---------  ----------  ---------  ----------  ---------

<CAPTION>
                                                                                 (DOLLARS IN THOUSANDS)
<S>                                                        <C>         <C>        <C>         <C>        <C>         <C>
NOW accounts.............................................  $   19,475       1.73% $   24,829       1.76% $   22,814       1.99%
Savings accounts.........................................     148,592       3.53     169,358       3.47     154,425       3.54
Money market accounts....................................     225,295       5.15     169,665       5.02      80,347       5.26
                                                           ----------        ---  ----------        ---  ----------        ---
                                                              393,362       4.37     363,852       4.08     257,586       3.94
                                                           ----------        ---  ----------        ---  ----------        ---
Time deposits by remaining contractual term:
  One year or less.......................................     259,708       5.33     282,498       5.22     270,992       5.63
  One to two years.......................................      43,730       5.64      56,404       5.70      42,027       5.88
  Two to three years.....................................       9,733       5.89      11,291       5.79      10,810       5.62
  Three to five years....................................      21,735       6.15      17,132       6.06      10,443       5.99
  Over five years........................................       2,547       5.92       5,402       6.52      13,198       6.29
                                                           ----------        ---  ----------        ---  ----------        ---
                                                              337,453       5.45     372,727       5.37     347,470       5.70
                                                           ----------        ---  ----------        ---  ----------        ---
Total interest-bearing deposits..........................  $  730,815       4.87% $  736,579       4.73% $  605,056       4.95%
                                                           ----------        ---  ----------        ---  ----------        ---
                                                           ----------        ---  ----------        ---  ----------        ---
</TABLE>

    The Company also offers noninterest-bearing demand deposit accounts which
include personal and business checking. Personal checking and business checking
requires a minimum initial deposit of $10 and $100, respectively. Demand
deposits amounted to $67.8 million at December 31, 1997 compared to $57.6
million at December 31, 1996 and $52.0 million at December 31, 1995.

    Management believes the variety of deposit accounts offered by the Company
allows it to compete for funds effectively. However, these sources of funds
generally are interest rate sensitive and therefore can be more costly in a high
interest rate environment. Although the Company will continue to carefully
monitor

                                       16
<PAGE>
deposit flows, the ability of the Company to control deposit flows will continue
to be significantly affected by the general market rate environment and economic
conditions.

OTHER SOURCES OF FUNDS

    Additional sources of funds are interest and principal payments on loans and
securities, and positive cash flows generated from operations. Interest and
principal payments on loans are a relatively stable source of funds, while
deposit inflows and outflows are significantly influenced by general market
interest rates, economic conditions and competitive factors. Pawling is a member
of the FHLBNY and, at December 31, 1997, had immediate access to additional
liquidity in the form of borrowings from the FHLBNY of up to $99.3 million. The
Company also has access to the discount window of the Federal Reserve Bank.
There were no borrowings from these sources in 1997, 1996 and 1995, other than
short-term purchases of federal funds from the FHLBNY during 1996.

INCOME TAXES

    With certain exceptions, the Company is generally taxed in the same manner
as other corporations. Progressive and Pawling file a consolidated federal
income tax return on a calendar year basis, eliminating intercompany
transactions in the computation of consolidated taxable income.

    Under applicable provisions of the Internal Revenue Code of 1986 (the
"Code") as amended, Pawling, as a savings institution, has benefited from
provisions of the Code permitting it to take deductions for reasonable annual
additions to tax bad debt reserves. There have been historically two methods
available to Pawling for computation of the bad debt deduction: the "experience"
method and the "percentage of taxable income" method. Certain amendments to the
federal and New York State tax laws regarding bad debt deductions were enacted
in July and August of 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 bad debt reserves in excess of the base-year amounts.
Pawling previously established, and will continue to maintain, a deferred tax
liability with respect to such excess federal reserves. The New York State
amendments redesignate all of Pawling's state bad debt reserves as the base-year
amount and also provide for future additions to the base-year reserve using the
percentage of taxable income method.

    Under the federal tax legislation, Pawling's base-year federal tax bad debt
reserves of $8.8 million (accumulated prior to 1988) are "frozen" and subject to
current recapture only in very limited circumstances. Generally, recapture of
all or a portion of the base-year reserves will be required if Pawling pays a
dividend in excess of the greater of its current or accumulated earnings and
profits, redeems any of its stock, or is liquidated. In accordance with SFAS No.
109, Pawling has not established a deferred tax liability for its base-year
federal tax bad debt reserves, as management does not anticipate engaging in any
transactions that would cause such reserves to be recaptured. Under the present
federal tax laws, consummation of the proposed merger with Hudson Valley will
not result in recapture of Pawling's federal base-year reserves. The
unrecognized deferred tax liability was approximately $3.0 million at December
31, 1997.

    The New York State legislation preserves the use of the percentage of
taxable income bad debt deduction equal to 32.0% of Pawling's New York State
taxable income, which is comparable to the deduction permitted under the prior
state tax law. The legislation also provides for a floating base year, which
allows Pawling to switch from the percentage of taxable income method to the
experience method without recapture of any reserve. Pawling's base-year state
tax bad debt reserves were approximately $27.5 million at December 31, 1997.

    Generally, New York State tax law has requirements similar to the
aforementioned federal requirements regarding the recapture of base-year tax bad
debt reserves. One notable exception is that, after the 1996 legislation, New
York continues to require that Pawling maintain its thrift institution charter
and hold

                                       17
<PAGE>
at least 60.0% of its assets in specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations). Management expects that Pawling will continue to meet
these requirements up to the time of the proposed merger with Hudson Valley.
Accordingly, in accordance with SFAS No. 109, the related state deferred tax
liability of approximately $1.9 million (net of federal tax effect) has not been
recognized. Consummation of the proposed merger of Pawling into Hudson Valley,
however, would result in the recapture of Pawling's state base-year reserve and
the recognition of the resulting tax liability as a charge to income tax expense
in the financial statements of the combined company.

ITEM 2. PROPERTIES

    The Company presently has a network of 18 branch offices located in
Dutchess, Sullivan, Orange, Putnam, Ulster, Rockland and Westchester counties.
Ten of these buildings are owned and 8 are leased. The Company is planning to
open the Somers Financial Resource Center during the second quarter of 1998. The
Company also owns its Administrative Headquarters and leases two loan
origination offices. Facilities are generally leased for a period of 5 to 20
years with renewal options. The termination of any short-term lease would not
have a material adverse effect on the operations of the Company.

    The following are the locations of the Company's offices:

<TABLE>
<CAPTION>
<S>                            <C>                            <C>
Administrative                 Pawling Branch(1)              North Salem Branch(2)
Headquarters(1)                Route 22                       Cors. Route 116 & 124
1301 Route 52                  Pawling, New York              North Salem, New York
Fishkill, New York

Ellenville Branch(1)           Liberty Branch(1)              Fishkill Branch(1)
80 North Main Street           Route 52                       Route 9
Ellenville, New York           Liberty, New York              Fishkill, New York

Village Branch(1)              Millbrook Branch(2)            Newburgh Branch(1)
11 West Main Street            Cors. Route 44 & 82            200 Stony Brook Court
Pawling, New York              Millbrook, New York            Newburgh, New York

Dover Plains Branch(2)         Monticello Branch(1)           Red Hook Branch(2)21 South
Route 22                       Route 42                       Broadway
Dover Plains, New York         Monticello, New York           Red Hook, New York

Brewster Branch(3)             Roscoe Branch(1)               Harriman Loan Center(2)
Route 22                       13 Broad Street                Triangle Plaza--Suite 19
Brewster, New York             Roscoe, New York               Harriman, New York

LaGrange Branch(3)             Poughkeepsie Branch(2)         White Plains Loan Center(2)
Route 55                       4 Jefferson Place              70 West Red Oak Lane
LaGrange, New York             Poughkeepsie, New York         White Plains, New York

Chestnut Ridge Branch(1)       Wesley Hills Branch(2)         Mount Kisco Financial
770 Chestnut Ridge Road        455 Route 306                  Center(2)
Chestnut Ridge, New York       Wesley Hills, New York         251 E. Main Street
                                                              Mount Kisco, New York 10549

Somers Financial Center(2)
Somers Town Centre
Somers, New York
</TABLE>

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

(1) Owned

(2) Leased

(3) Building owned/land leased

                                       18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

    The Company is not a party to any legal proceedings which may have a
material adverse effect on its financial condition or results of operations.

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

    During the fourth quarter of 1997, there were no matters submitted to a vote
of shareholders of Progressive.

                               EXECUTIVE OFFICERS

    Peter Van Kleeck Age: 63

    Mr. Van Kleeck is President and CEO of both Progressive Bank, Inc. and
Pawling Savings Bank.

    Robert A. Gabrielsen Age: 39

    Mr. Gabrielsen is Executive Vice President and Chief Financial Officer of
Pawling Savings Bank and Treasurer of Progressive Bank, Inc.

    Robert Apple Age: 42

    Mr. Apple serves as Legal Counsel for both Pawling Savings Bank and
Progressive Bank, Inc. He is Vice President of Progressive Bank, Inc. and has
been employed by Progressive Bank, Inc. since 1990.

                                    PART II

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

    COMMON STOCK

    The common stock of Progressive Bank, Inc. is traded on the Nasdaq National
Market System under the symbol PSBK. The approximate number of registered
shareholders was 1,010 at December 31, 1997.

    The high and low sales prices of the Company's common stock as listed on the
Nasdaq National Market System for each quarterly period during the past two
years were as follows:
<TABLE>
<CAPTION>
                                    1997                                        HIGH        LOW
----------------------------------------------------------------------------  ---------  ---------
<S>                                                                           <C>        <C>
First Quarter...............................................................  $   25.25      22.75
Second Quarter..............................................................      31.50      23.38
Third Quarter...............................................................      38.00      27.00
Fourth Quarter..............................................................      39.75      32.63

<CAPTION>

                                    1996                                        HIGH        LOW
----------------------------------------------------------------------------  ---------  ---------
<S>                                                                           <C>        <C>
First Quarter...............................................................  $   19.67      17.17
Second Quarter..............................................................      20.17      17.50
Third Quarter...............................................................      21.33      18.50
Fourth Quarter..............................................................      24.00      20.67
</TABLE>

    These quotations represent prices between dealers and do not include retail
markup, markdown or commission. They do not necessarily represent actual
transactions.

    A quarterly cash dividend of $0.17 per common share was paid in each quarter
of 1997. Quarterly cash dividends of $0.13 per common share were declared and
paid in each quarter of 1996.

    The 1996 high and low sales prices and the 1996 quarterly dividends give
retroactive effect to the three-for-two stock split completed in December 1996.

                                       19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                            AT OR FOR THE YEAR ENDED DECEMBER 31,
                                                                    -----------------------------------------------------
<S>                                                                 <C>        <C>        <C>        <C>        <C>
                                                                      1997       1996       1995       1994       1993
                                                                    ---------  ---------  ---------  ---------  ---------

<CAPTION>
                                                                        (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                 <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA
  Total assets....................................................  $ 883,494    875,180    743,214    696,292    633,917
  Loans, net......................................................    564,513    583,554    531,714    473,079    431,072
  Securities, net.................................................    241,363    210,406    147,049    127,680    152,431
  Deposits........................................................    798,593    794,201    657,012    624,329    562,093
  Shareholders' equity............................................     78,479     72,542     68,658     65,940     63,821

OPERATIONS DATA
  Interest and dividend income....................................  $  68,755     65,848     55,501     50,247     50,281
  Interest expense................................................     34,743     33,849     27,692     21,177     21,237
                                                                    ---------  ---------  ---------  ---------  ---------
    Net interest income...........................................     34,012     31,999     27,809     29,070     29,044
  Provision for loan losses.......................................      1,975      2,300        600      1,500      2,000
                                                                    ---------  ---------  ---------  ---------  ---------
    Net interest income after provision for loan losses...........     32,037     29,699     27,209     27,570     27,044
  Other income(1).................................................      3,646      3,349      3,306        156      3,110
  Other expense(2)................................................     21,456     21,374     19,279     20,684     21,819
                                                                    ---------  ---------  ---------  ---------  ---------
    Income before income taxes and cumulative effect of changes
      in accounting principles....................................     14,227     11,674     11,236      7,042      8,335
  Income tax expense (benefit)(3).................................      5,595      2,353      4,450       (628)       911
                                                                    ---------  ---------  ---------  ---------  ---------
    Income before cumulative effect of changes
      in accounting principles....................................      8,632      9,321      6,786      7,670      7,424
  Cumulative effect of changes in accounting principles(4)........     --         --         --         --           (363)
                                                                    ---------  ---------  ---------  ---------  ---------
  Net income......................................................  $   8,632      9,321      6,786      7,670      7,061
                                                                    ---------  ---------  ---------  ---------  ---------
                                                                    ---------  ---------  ---------  ---------  ---------

PER COMMON SHARE DATA(5)
  Earnings per share:(6)
    Basic.........................................................  $    2.26       2.38       1.67       1.78       1.61
    Diluted.......................................................       2.20       2.35       1.65       1.76       1.59
  Dividends declared(7)...........................................       0.68       0.53       0.43       0.25       0.10
  Book value......................................................      20.48      18.97      17.42      16.00      14.48

PERFORMANCE RATIOS
  Return on average assets(8).....................................       0.98%      1.09%      0.95%      1.15%      1.12%
  Return on average equity(8).....................................      11.46      13.11      10.04      11.65      11.63
  Net interest rate spread........................................       3.46       3.39       3.46       3.96       4.23
  Net interest margin.............................................       4.05       3.95       4.09       4.51       4.77

CAPITAL AND OTHER RATIOS
  Leverage capital ratio(9).......................................       7.98%      7.20%      9.08%      9.50%     10.07%
  Total risk-based capital ratio(9)...............................      15.79      14.78      17.30      18.41      17.66
  Shareholders' equity to total assets............................       8.88       8.29       9.24       9.47      10.07
  Ratio of non-performing loans to total loans(10)................       1.03       0.81       1.07       1.53       2.59
  Ratio of non-performing assets to total assets..................       0.74       0.81       0.83       1.39       3.03
  Ratio of allowance for loan losses to non-performing loans......     165.50     192.35     139.39     127.12     120.28
</TABLE>

                                       20
<PAGE>
------------------------

 (1) The 1994 amount includes net losses of $2.5 million on sales of loans and
     available for sale securities.

 (2) The 1995 amount includes a provision for losses of $1.0 million and the
     1996 amount reflects a credit of $1.0 million related to the Company's
     claim against Nationar. See note 9 to the consolidated financial
     statements.

 (3) The 1996 amount reflects a benefit of $2.4 million related to the
     settlement of audits of certain prior years' tax returns. The 1994 and 1993
     amounts reflect benefits of $3.5 million and $2.6 million, respectively,
     for reductions in the valuation allowance for deferred tax assets. See note
     10 to the consolidated financial statements.

 (4) Represents the net effect of changes in accounting for income taxes and
     postretirement benefits, effective January 1, 1993.

 (5) The additional common shares issued in the 1996 stock split are reflected
     in each years' per share data on a retroactive basis. Earnings per share
     amounts for all periods also reflect the adoption of Statement of Financial
     Accounting Standards No. 128. See notes 1 and 11 to the consolidated
     financial statements.

 (6) The 1993 basic and diluted earnings per share were $1.69 and $1.68,
     respectively, before the cumulative effect of changes in accounting
     principles.

 (7) The dividend payout ratio (dividends paid as a percentage of net income)
     was 30.13% for 1997, 22.40% for 1996, 26.02% for 1995, 14.15% for 1994 and
     6.23% for 1993.

 (8) Ratios are based on net income. For 1993, excluding the cumulative effect
     of accounting changes, the return on average assets was 1.17% and the
     return on average equity was 12.23%.

 (9) Represent Progressive's consolidated capital ratios.

(10) Non-performing loans include non-accrual loans and loans greater than 90
     days past due and still accruing.

                                       21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

GENERAL

    The financial condition and operating results of the Company are primarily
dependent upon the financial condition and operating results of Pawling. The
Company is engaged principally in the business of attracting retail deposits
from the general public and the business community and investing those funds in
residential and commercial mortgages, consumer loans and securities.

    The operating results of the Company depend primarily on its net interest
income after provision for loan losses. Net interest income is the difference
between interest and dividend income on earning assets, primarily loans and
securities, and interest expense on deposits and other borrowings. Net income of
the Company is also affected by other income, which includes service fees and
net gain (loss) on securities and loans; other expense, which includes salaries
and employee benefits and other operating expenses; and federal and state income
taxes.

FINANCIAL CONDITION

    Total assets of the Company were $883.5 million at December 31, 1997 as
compared to $875.2 million at December 31, 1996, an increase of $8.3 million or
1.0%.

    Total securities increased by $31.0 million consisting of a $58.7 million
increase in securities held to maturity partially offset by a $27.7 million
decrease in securities available for sale. The increase in securities held to
maturity primarily reflects $87.0 million in purchases of fixed rate seven-year
balloon and fifteen-year mortgage-backed securities, partially offset by
principal paydowns of $28.1 million. The decrease in securities available for
sale primarily reflects maturities, calls, and principal paydowns of $86.6
million, partially offset by $59.1 million in purchases of U.S. government
agency debt securities and U.S. Treasury notes.

    Net loans totaled $564.5 million at December 31, 1997, compared to $583.6
million at December 31, 1996, a decrease of $19.0 million or 3.3%. The decrease
primarily reflects increased competitive pressures and high levels of
prepayments in 1997. The residential mortgage segment of the loan portfolio
decreased $15.7 million or 3.7% (including secondary market loan sales of $11.8
million) from $429.2 million at December 31, 1996 to $413.4 million at December
31, 1997. The commercial mortgage segment of the loan portfolio decreased $4.6
million or 5.6%, from $81.1 million at December 31, 1996 to $76.6 million at
December 31, 1997. The construction mortgage segment of the loan portfolio
increased $864,000 or 9.7% from $8.9 million at December 31, 1996 to $9.7
million at December 31, 1997. Other loans increased $694,000 or 1.0% during 1997
from $72.5 million to $73.2 million.

    The $4.4 million increase in deposits during 1997 was primarily attributable
to increases of $55.6 million in money market accounts and $10.2 million in
demand deposits, partially offset by decreases of $35.3 million in time
deposits, $20.8 million in savings accounts and $5.4 million in NOW accounts.
The increases in money market accounts and demand deposits were primarily due to
selective marketing and aggressive pricing of these deposit products.

    Shareholders' equity at December 31, 1997 was $78.5 million, an increase of
$5.9 million or 8.2% from December 31, 1996. This increase primarily reflects
net income of $8.6 million, partially offset by cash dividends of $2.6 million.
Shareholders' equity, as a percent of total assets, was 8.88% at December 31,
1997 compared to 8.29% at December 31, 1996. Book value per share increased to
$20.48 at December 31, 1997 from $18.97 at December 31, 1996.

                                       22
<PAGE>
ANALYSIS OF NET INTEREST INCOME

    The following table shows the Company's average consolidated balances,
interest income and expense, and average rates for the years ended December 31:
<TABLE>
<CAPTION>
                                                   1997                                 1996                           1995
                                    -----------------------------------  -----------------------------------  ----------------------
                                     AVERAGE                  AVERAGE     AVERAGE                  AVERAGE     AVERAGE
                                     BALANCE    INTEREST       RATE       BALANCE    INTEREST       RATE       BALANCE    INTEREST
                                    ---------  -----------  -----------  ---------  -----------  -----------  ---------  -----------
<S>                                 <C>        <C>          <C>          <C>        <C>          <C>          <C>        <C>
                                                                         (DOLLARS IN THOUSANDS)
Interest-earning assets:
  Mortgage loans(1)...............  $ 514,604      45,553         8.85%  $ 492,595      42,811         8.69%  $ 453,243      39,123
  Other loans(1)..................     74,065       7,159         9.67      66,585       6,594         9.90      58,623       5,683
  Mortgage-backed securities(2)...    134,450       9,033         6.72     107,858       7,380         6.84      81,088       5,124
  U.S. Treasury and agencies,
    corporate and other
    securities(2, 3)..............     87,149       5,459         6.26     112,067       7,121         6.35      51,185       3,513
  Federal funds sold and
    other(4)......................     28,603       1,551         5.42      30,218       1,942         6.43      35,182       2,058
                                    ---------  -----------         ---   ---------  -----------         ---   ---------  -----------
    Total interest-earning
      assets......................    838,871      68,755         8.20%    809,323      65,848         8.14%    679,321      55,501
Non-interest-earning assets.......     45,344                               44,861                               32,898
                                    ---------                            ---------                            ---------
    Total assets..................  $ 884,215                            $ 854,184                            $ 712,219
                                    ---------                            ---------                            ---------
                                    ---------                            ---------                            ---------
Interest-bearing liabilities:
  Time deposits...................  $ 353,085      18,983         5.38%  $ 380,845      20,773         5.45%  $ 336,781      18,456
  Other deposits(5)...............    379,627      15,760         4.15     330,374      13,025         3.94     251,471       9,236
  Other borrowings................     --          --           --             927          51         5.50      --          --
                                    ---------  -----------         ---   ---------  -----------         ---   ---------  -----------
Total interest-bearing
  liabilities.....................    732,712      34,743         4.74%    712,146      33,849         4.75%    588,252      27,692
Non-interest-bearing
  liabilities.....................     76,157                               70,966                               56,350
                                    ---------                            ---------                            ---------
    Total liabilities.............    808,869                              783,112                              644,602
Shareholders' equity..............     75,346                               71,072                               67,617
                                    ---------                            ---------                            ---------
    Total liabilities and
      shareholders' equity........  $ 884,215                            $ 854,184                            $ 712,219
                                    ---------                            ---------                            ---------
                                    ---------                            ---------                            ---------
Net earning balance...............  $ 106,159                            $  97,177                            $  91,069
                                    ---------                            ---------                            ---------
                                    ---------                            ---------                            ---------
Net interest income...............                 34,012                               31,999                               27,809
                                               -----------                          -----------                          -----------
                                               -----------                          -----------                          -----------
Interest rate spread(6,8).........                                3.46%                                3.39%
Net yield on interest-earning
  assets (margin)(7,8)............                                4.05%                                3.95%

<CAPTION>

                                      AVERAGE
                                       RATE
                                    -----------
<S>                                 <C>

Interest-earning assets:
  Mortgage loans(1)...............        8.63%
  Other loans(1)..................        9.69
  Mortgage-backed securities(2)...        6.32
  U.S. Treasury and agencies,
    corporate and other
    securities(2, 3)..............        6.86
  Federal funds sold and
    other(4)......................        5.85
                                           ---
    Total interest-earning
      assets......................        8.17%
Non-interest-earning assets.......

    Total assets..................

Interest-bearing liabilities:
  Time deposits...................        5.48%
  Other deposits(5)...............        3.67
  Other borrowings................      --
                                           ---
Total interest-bearing
  liabilities.....................        4.71%
Non-interest-bearing
  liabilities.....................

    Total liabilities.............
Shareholders' equity..............

    Total liabilities and
      shareholders' equity........

Net earning balance...............

Net interest income...............

Interest rate spread(6,8).........        3.46%
Net yield on interest-earning
  assets (margin)(7,8)............        4.09%
</TABLE>

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

(1) Interest income on loans does not include interest on non-accrual loans;
    however, such loans have been included in the calculation of the average
    balances outstanding.

(2) Average balances have been calculated based on amortized cost.

(3) Yields on tax-exempt obligations have not been computed on a tax-equivalent
    basis, as the effect thereof is not material.

(4) Other interest income in 1996 includes interest of $420,000 related to
    income tax refunds received during the year.

(5) Includes NOW accounts, passbook and statement savings accounts, and money
    market accounts.

(6) Represents average rate on total interest-earning assets less average rate
    on total interest-bearing liabilities.

(7) Represents net interest income divided by total average interest-earning
    assets.

(8) Excluding the interest income on tax refund, the interest rate spread for
    the year ended December 31, 1996 was 3.33% and the net interest margin was
    3.90%.

                                       23
<PAGE>
    The following table sets forth, for the years indicated, an analysis of
changes in interest and dividend income, interest expense and net interest
income resulting from changes in average balances ("volume") and changes in
average rates ("rate"). Changes attributable to the combined effect of volume
and rate have been allocated proportionately.
<TABLE>
<CAPTION>
                                                      1997 COMPARED TO 1996             1996 COMPARED TO 1995
                                                       INCREASE (DECREASE)               INCREASE (DECREASE)
                                                 -------------------------------  ---------------------------------
<S>                                              <C>        <C>        <C>        <C>          <C>        <C>
                                                  VOLUME      RATE        NET       VOLUME       RATE        NET
                                                 ---------  ---------  ---------  -----------  ---------  ---------

<CAPTION>
                                                                (IN THOUSANDS)
<S>                                              <C>        <C>        <C>        <C>          <C>        <C>
Change in interest and dividend income:
  Mortgage loans...............................  $   1,938        804      2,742       3,418         270      3,688
  Other loans..................................        726       (161)       565         787         124        911
  Mortgage-backed securities...................      1,789       (136)     1,653       1,804         452      2,256
  U.S. Treasury and agencies, corporate
    and other securities.......................     (1,562)      (100)    (1,662)      3,887        (279)     3,608
  Federal funds sold and other.................       (100)      (291)      (391)       (307)        191       (116)
                                                 ---------        ---  ---------       -----   ---------  ---------
    Total change in interest and dividend
      income...................................      2,791        116      2,907       9,589         758     10,347
                                                 ---------        ---  ---------       -----   ---------  ---------
Change in interest expense:
  Time deposits................................     (1,496)      (294)    (1,790)      2,403         (86)     2,317
  Other deposits...............................      2,018        717      2,735       3,071         718      3,789
  Other borrowings.............................        (51)    --            (51)         51      --             51
                                                 ---------        ---  ---------       -----   ---------  ---------
    Total change in interest expense...........        471        423        894       5,525         632      6,157
                                                 ---------        ---  ---------       -----   ---------  ---------
Change in net interest income..................  $   2,320       (307)     2,013       4,064         126      4,190
                                                 ---------        ---  ---------       -----   ---------  ---------
                                                 ---------        ---  ---------       -----   ---------  ---------
</TABLE>

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

GENERAL

    The Company's net income for 1997 was $8.6 million or basic earnings per
share of $2.26 and diluted earnings per share of $2.20, as compared to net
income for 1996 of $9.3 million or basic earnings per share of $2.38 and diluted
earnings per share of $2.35. The $689,000 or 7.4% decrease in net income was
primarily the result of a $3.2 million increase in income tax expense, partially
offset by a $2.0 million increase in net interest income.

NET INTEREST INCOME

    Net interest income increased $2.0 million, or 6.3%, to $34.0 million for
1997 compared to $32.0 million for 1996. The increase in net interest income for
1997 was primarily due to an increase in interest on loans, partially offset by
an increase in interest expense on deposits. The Company's interest rate spread
widened by 7 basis points in 1997, compared to 1996, primarily reflecting an
increase in the average yield on interest-earning assets. The Company's net
interest margin also widened by 10 basis points in the current period, primarily
as a result of the change in the interest rate spread. The 1996 net interest
margin and interest rate spread were lower than 1997 due to the temporary
investment of the 1996 branch acquisition proceeds into securities until the
funds were reinvested into higher yielding loans. The increase in the spread and
the margin in 1997, compared to 1996, would have been greater without the impact
of the interest on income tax refund recognized in 1996 as described in note 8
to the table on page 23.

    Interest on loans increased by $3.3 million, or 6.7%, primarily reflecting
increases in the volume of outstanding loans. Average mortgage and other loans
increased by $29.5 million during 1997.

                                       24
<PAGE>
    Interest on mortgage-backed securities increased $1.7 million, or 22.4%,
primarily due to an increase in the average balance outstanding due to
additional security purchases, partially offset by the decrease in the average
yield.

    Interest and dividends on U.S. Treasury and agencies, corporate and other
securities decreased by $1.7 million, primarily reflecting a lower average
balance outstanding due to maturities and calls.

    Other interest income decreased $391,000, primarily reflecting interest
income of $420,000 received in 1996 associated with refunds of certain prior
years' federal income taxes.

    The increase in interest expense of $894,000 was due primarily to a $2.7
million increase in interest expense on other deposits, partially offset by a
$1.8 million decrease in interest on time deposits. Interest expense on other
deposits increased primarily due to a $49.3 million increase in the average
balance of other deposits, primarily due to the increase in money market
accounts. Interest expense on time deposits decreased primarily due to a $27.8
million decrease in the average balance of time deposits.

PROVISION FOR LOAN LOSSES

    The provision for loan losses is a charge against income which increases the
allowance for loan losses. The adequacy of the allowance for loan losses is
evaluated periodically and is determined based on management's judgment
concerning the amount of risk and potential for loss inherent in the portfolio.
Management's judgment is based upon a number of factors including a review of
non-performing and other classified loans, the value of collateral for such
loans, historical loss experience, changes in the nature and volume of the loan
portfolio, and current economic conditions.

    The provision for loan losses was $2.0 million in 1997 as compared to $2.3
million in 1996. The allowance for loan losses represented 1.71% of total loans
at December 31, 1997 compared to 1.56% a year earlier. Non-performing loans were
$5.9 million, or 1.03% of total loans, at December 31, 1997 compared to $4.8
million, or 0.81% of total loans, at December 31, 1996.

    In determining the allowance for loan losses, management also considers the
level of slow paying loans, or loans where the borrower is contractually past
due 30 to 89 days or more, but has not yet been placed on non-accrual status. At
December 31, 1997, slow paying loans amounted to $4.6 million as compared to
$6.3 million at December 31, 1996.

    Loan loss provisions in future periods will continue to depend on trends in
the credit quality of the Company's loan portfolio, loan mix and the level of
loan charge-offs which, in turn, will depend in part on the economic and real
estate market conditions prevailing within the Company's lending region. If
general economic conditions or real estate values deteriorate, the level of
delinquencies, non-performing loans and charge-offs may increase and higher
provisions for loan losses may be necessary.

OTHER INCOME

    Sources of other income include deposit and other service fees, net gain
(loss) on securities available for sale, net gain on sales of mortgage loans,
and other non-interest income. Other income for 1997 increased by $297,000, or
8.9%, compared to 1996.

    Deposit service fees, the largest component of other income, decreased by
$164,000, or 6.8%, to $2.2 million for 1997 from $2.4 million for 1996. Other
service fees totaled $796,000 for 1997 compared to $660,000 for 1996. The
increase in other service fees primarily reflects increased ATM service charges
collected in 1997 due to a policy change implemented in mid-1996, partially
offset by decreased VISA merchant income due to the outsourcing of the Company's
merchant program in 1996.

    Net gain on securities available for sale was $15,000 for 1997 compared to a
net realized loss of $199,000 for 1996. The net gain in 1997 reflects the gain
on a security called prior to maturity. The net loss

                                       25
<PAGE>
in 1996 primarily reflects the net realized loss on the sale of U.S. Treasury
securities. There have been no sales of securities classified as held to
maturity.

    Net gain on sales of mortgage loans was $277,000 for 1997 compared to
$161,000 for 1996. Sales of mortgage loans in both years reflect the Company's
current practice of selling substantially all newly originated fixed rate
mortgage loans.

OTHER EXPENSE

    Other expense consists of general and administrative expenses incurred in
managing the core business of the Company and the net costs associated with
managing and selling other real estate properties. Other expense increased by
$82,000, or 0.4%, to $21.5 million for 1997 from $21.4 million for 1996. This
reflects increases of $532,000 in other non-interest expense and $398,000 in the
amortization of intangible assets, partially offset by a $772,000 decrease in
the net cost of real estate and a $324,000 decrease in occupancy and equipment
expense.

    Salaries and employee benefits, the largest component of other expense,
increased by $248,000, or 2.3%, to $10.8 million for 1997 compared to $10.6
million for 1996. The increase primarily reflects normal merit and promotional
salary increases.

    Occupancy and equipment expense decreased $324,000, or 10.7%, to $2.7
million for 1997 from $3.0 million for 1996, primarily due to a decrease in
depreciation expense. Depreciation expense for 1996 includes depreciation of
branch automation equipment that became fully depreciated in December 1996.

    The net cost of other real estate decreased $772,000 to $21,000 for 1997
from $793,000 for the previous year. The investment in other real estate
properties (before the allowance for losses) decreased to $1.1 million at
December 31, 1997 from $2.9 million at December 31, 1996. The lower costs in
1997 reflect a $525,000 decrease in the provision for losses on other real
estate as a result of the decrease in the other real estate owned portfolio and
management's assessment of the adequacy of the allowance for other real estate
losses. The decrease in the net cost of other real estate also reflects a
$385,000 increase in gains on sales of properties, partially offset by a
$138,000 increase in net holding costs.

    Amortization of intangible assets totaled $1.4 million for 1997, compared to
$1.0 million for 1996, primarily reflecting the amortization of the branch
purchase premium for a full year in 1997 compared to approximately eight months
in 1996.

    Other non-interest expense increased $532,000, or 8.9%, to $6.5 million for
1997 from $6.0 million for 1996. The increase primarily reflects a $1.0 million
earnings credit recognized in 1996 for the settlement of the Company's Nationar
claim, partially offset by a $542,000 decrease in foreclosure and collection
expense in 1997 compared to 1996. Foreclosure and collection expense was higher
in 1996 due to higher real estate taxes and other expenses on delinquent loans.
Other non-interest expense for 1997 also reflects merger-related expenses of
$286,000.

INCOME TAX EXPENSE

    Income tax expense for 1997 was $5.6 million or 39.3% of pre-tax income. For
the year ended December 31, 1996, the Company recognized income tax expense of
$2.4 million consisting of a provision of $4.8 million, or 41.1% of pre-tax
income, less a federal benefit of $1.5 million and a state benefit of $941,000
relating to 1996 settlements with the tax authorities of audits of certain prior
years' tax returns.

    The Company's net deferred tax assets were $5.9 million at December 31,
1997, compared to $6.1 million at December 31, 1996. Based on recent historical
and anticipated future pre-tax earnings, management believes it is more likely
than not that the Company will realize its net deferred tax assets.

                                       26
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

GENERAL

    The Company's net income for 1996 was $9.3 million or basic earnings per
share of $2.38 and diluted earnings per share of $2.35, as compared to net
income for 1995 of $6.8 million or basic earnings per share of $1.67 and diluted
earnings per share of $1.65. The $2.5 million or 37.4% increase in net income
was primarily the result of a $4.2 million increase in net interest income and a
$2.1 million decrease in income tax expense, partially offset by increases of
$2.1 million in other expense and $1.7 million in the provision for loan losses.

NET INTEREST INCOME

    Net interest income increased $4.2 million, or 15.1%, to $32.0 million for
1996 compared to $27.8 million for 1995. The components of net interest income
are interest and dividend income, which increased $10.3 million or 18.6%, and
interest expense on deposits and other borrowings, which increased $6.2 million
or 22.2%. The Company's interest rate spread narrowed by 7 basis points from
3.46% in 1995 to 3.39% in 1996, attributable to a 4 basis point increase in the
cost of interest-bearing liabilities and a 3 basis point decrease in the average
yield on interest-earning assets. The Company's net interest margin also
narrowed in 1996, declining 14 basis points to 3.95% from 4.09% in 1995,
primarily a result of the change in interest rate spread. The reductions in net
interest margin and spread were primarily due to the temporary investment of net
proceeds received in the acquisition of branches. The majority of these proceeds
were temporarily placed into investment securities until the funds could be
reinvested into higher yielding loans. Without the impact of interest on income
tax refunds, as described in note 8 to the table on page 23, the spread and
margin would have narrowed by an additional 6 and 5 basis points, respectively,
compared to 1995.

    Interest on loans increased $4.6 million, or 10.3%, primarily reflecting
increases in the volume of outstanding loans. Average mortgage and other loans
increased by $47.3 million during 1996.

    Interest on mortgage-backed securities increased $2.3 million, or 44.0%, due
to an increase of $26.8 million in the average balance outstanding and an
increase of 52 basis points in the average yield earned on the portfolio. The
higher yield was attributable to 1996 purchases of securities and upward
adjustments on adjustable rate mortgage-backed securities.

    Interest and dividends on U.S. Treasury and agencies, corporate and other
securities increased by $3.6 million, primarily reflecting a $60.9 million
increase in the average balance outstanding, primarily due to purchases of U.S.
Treasury and agency securities partially offset by maturities and calls. The
average portfolio yield declined by 51 basis points, primarily reflecting a
decrease in the yield on government agency securities as a result of calls and
maturities of higher yielding securities.

    Interest on federal funds sold and other interest income decreased $116,000
primarily reflecting the lower average yield on federal funds sold and a $5.0
million decrease in the average balance outstanding during the year. The
decrease in interest on federal funds sold was substantially offset by $420,000
of interest income associated with refunds of certain prior years' federal
income taxes.

    The $6.2 million increase in interest expense was primarily due to a $123.0
million increase in average interest-bearing deposits due to the acquisition of
two branches during April 1996. Management's policy is to review deposit
interest rates at least weekly and to adjust appropriately based on general
market conditions, the need for funds, competition and the effect on the net
interest margin.

PROVISION FOR LOAN LOSSES

    The provision for loan losses was $2.3 million in 1996, an increase of $1.7
million compared to the provision of $600,000 in 1995. The higher provision was
made to increase the allowance for loan losses in

                                       27
<PAGE>
line with the Company's loan growth and changes in portfolio mix. The allowance
for loan losses represented 1.56% of total loans at December 31, 1996 compared
to 1.49% a year earlier. The allowance increased by $1.2 million in 1996 (after
net charge-offs of $1.1 million) to $9.2 million at year end, while total loans
increased by $51.9 million, or 9.6%, during the year. The portfolio growth
included a net increase of $21.5 million, or 12.7%, in categories other than
one-to-four family residential mortgage loans.

    Non-performing loans decreased to $4.8 million, or 0.81% of total loans, at
December 31, 1996 from $5.8 million, or 1.07% of total loans, at December 31,
1995. The ratio of the allowance for loan losses to non-performing loans
increased to 192.35% at December 31, 1996 from 139.39% a year earlier.

    In determining the allowance for loan losses, management also considers the
level of slow paying loans, or loans where the borrower is contractually past
due 30 to 89 days or more, but has not yet been placed on non-accrual status. At
December 31, 1996, slow paying loans amounted to $6.3 million as compared to
$3.4 million at December 31, 1995.

OTHER INCOME

    Total other income remained relatively unchanged at $3.3 million for both
1996 and 1995.

    Deposit service fees, the largest component of other income, increased by
$315,000, or 15.1%, to $2.4 million for 1996 from $2.1 million for 1995. This
was primarily the result of an increase in retail checking account fees due to
the acquisition of branches during the second quarter of 1996. Other service
fees totaled $660,000 for 1996 compared to $620,000 for 1995.

    Net loss on securities available for sale was $199,000 for 1996 compared to
a net gain of $349,000 for 1995. The net loss in 1996 primarily reflects the net
realized loss on the sale of U.S. Treasury securities, while the net gain in
1995 primarily reflects the gain of $538,000 on the sale of equity securities in
the fourth quarter. There have been no sales of securities classified as held to
maturity.

    Net gain on sales of loans was $161,000 for 1996 compared to $67,000 for
1995. Sales of mortgage loans in both years reflect the Company's current
practice of selling substantially all newly originated fixed rate mortgage loans
with 20 and 30 year terms.

OTHER EXPENSE

    Total other expense increased by $2.1 million, or 10.9%, to $21.4 million
for 1996 from $19.3 million for 1995. This reflects amortization of intangible
assets in 1996, as well as increases in salaries and employee benefits expense,
net cost of other real estate, and occupancy and equipment expense. These
factors were partially offset by a decrease in other non-interest expense.

    Salaries and employee benefits, the largest component of other expense,
increased by $1.5 million, or 16.8%, to $10.6 million for 1996 from $9.1 million
for 1995. The increase primarily reflects additional expense due to the
acquisition of branches, as well as the hiring of additional staff and normal
merit and promotional salary increases.

    Occupancy and equipment expense increased $690,000, or 29.3%, to $3.0
million for 1996 from $2.4 million for 1995, primarily due to the acquisition of
branches as well as other increases in depreciation, maintenance, and equipment
rental and repair expenses.

    The net cost of other real estate increased $438,000 to $793,000 for 1996
from $355,000 for the previous year. The investment in other real estate
properties (before the allowance for losses) increased to $2.9 million at
December 31, 1996 from $608,000 at December 31, 1995. The higher costs in 1996
reflect a $200,000 increase in the provision for losses on other real estate as
a result of the increase in the other real estate owned portfolio and
management's assessment of the adequacy of the allowance for other real estate
losses. The increase in the net cost of other real estate also includes a
$134,000 increase in net holding costs, reflecting the larger portfolio of
properties in the current year.

                                       28
<PAGE>
    Amortization of intangible assets totaled $1.0 million for 1996, primarily
reflecting the amortization of the purchase premium as a result of the
acquisition of branches.

    Other non-interest expense decreased $1.6 million, or 20.7%, to $6.0 million
for 1996 from $7.5 million for 1995. The decrease in other non-interest expense
was primarily attributable to adjustments related to the Company's claim against
Nationar, a check-clearing and trust company which was seized by the New York
State Superintendent of Banks in February 1995. At that time, the Company had
approximately $3.6 million in federal funds sold and other deposits invested
with Nationar. Based on management's concerns about the probability of fully
collecting this balance, a provision for losses of $1.0 million was recognized
in other non-interest expense for 1995. In June and December 1996, the Company
received cash distributions which fully satisfied its claim and, accordingly,
the valuation allowance was reversed in the fourth quarter of 1996 as a credit
to other non-interest expense. See note 9 to the consolidated financial
statements for additional information.

    Excluding the effect of the Nationar adjustments, other non-interest expense
increased by $445,000 in 1996 compared to 1995, primarily reflecting increases
in professional and outside service fees, foreclosure and collection expense,
and other operating costs, partially offset by a decrease in FDIC insurance
expense. Professional and outside service fees increased by $359,000, primarily
due to increased ATM fees due to additional ATM's in service in 1996 as well as
increased loan processing fees as a result of increased lending activity.
Foreclosure and collection expense increased by $340,000, primarily reflecting
additional real estate taxes and other expenses on delinquent loans. Accruals
for real estate taxes were made in 1996 in response to new procedures adopted by
certain local municipalities which accelerated the foreclosure process when real
estate taxes are delinquent. FDIC deposit insurance and related costs decreased
by $719,000 in 1996 compared to 1995, as a result of a further reduction in
premium rates effective January 1, 1996.

INCOME TAX EXPENSE

    Income tax expense of $2.4 million in 1996 consisted of a provision of $4.8
million, or 41.1% of pre-tax income, less a federal benefit of $1.5 million and
a state benefit of $941,000 relating to 1996 settlements with the tax
authorities of audits of certain prior years' tax returns. For 1995, the Company
recognized income tax expense of $4.5 million or 39.6% of pre-tax income. The
valuation allowance applicable to the Company's federal deferred tax asset was
reduced by $174,000 in 1995 primarily due to the utilization of capital loss
carryforwards during the year.

ASSET QUALITY

    Non-performing assets are principally comprised of non-performing loans
(non-accrual loans and loans greater than 90 days past due and still accruing)
and other real estate properties. The Company's policy is to place a loan on
non-accrual status with respect to interest income recognition when collection
of the interest is uncertain. Generally, this occurs when principal or interest
payments are 90 days or more past due, although interest accruals may continue
in limited situations when loans are adequately secured and in the process of
collection. The classification of a loan as non-accruing does not necessarily
indicate that the principal and interest ultimately will be uncollectible. The
Company's historical experience indicates that a portion of assets so classified
will eventually be recovered. All non-performing loans are in various stages of
workout, settlement or foreclosure. Other real estate includes properties
acquired through foreclosure or deed in lieu of foreclosure.

    At December 31, 1997, non-performing assets totaled $6.5 million, or 0.74%
of total assets, compared to $7.1 million, or 0.81% of total assets, at December
31, 1996. The $541,000 or 7.7% decrease in non-performing assets in 1997
consisted of a $1.7 million decrease in other real estate properties, partially
offset by a $1.1 million increase in non-performing loans. The decrease in other
real estate consists primarily of a decrease in commercial properties of $1.5
million (before the allowance for losses). The

                                       29
<PAGE>
increase in non-performing loans was primarily attributable to a $1.5 million
increase in non-accrual construction and land loans.

    The following table sets forth information with respect to non-performing
assets, the allowance for loan losses, and certain asset quality ratios at or
for the years ended December 31:

<TABLE>
<CAPTION>
                                                 1997       1996       1995       1994       1993
                                               ---------  ---------  ---------  ---------  ---------
<S>                                            <C>        <C>        <C>        <C>        <C>
                                                              (DOLLARS IN THOUSANDS)
Non-performing loans:
  Mortgage loans:
    Residential properties...................  $   3,556      3,769      2,559      1,636      4,020
    Commercial properties....................        568        714      2,591      3,009      5,457
    Construction and land....................      1,722        215        593      2,736      2,028
                                               ---------  ---------  ---------  ---------  ---------
                                                   5,846      4,698      5,743      7,381     11,505
  Other loans................................         76        101         20         15         68
                                               ---------  ---------  ---------  ---------  ---------
    Total non-performing loans(1)............      5,922      4,799      5,763      7,396     11,573
Other real estate, net.......................        606      2,270        405      2,265      7,609
                                               ---------  ---------  ---------  ---------  ---------
  Total non-performing assets................  $   6,528      7,069      6,168      9,661     19,182
                                               ---------  ---------  ---------  ---------  ---------
                                               ---------  ---------  ---------  ---------  ---------
Allowance for loan losses
at end of year...............................  $   9,801      9,231      8,033      9,402     13,920
                                               ---------  ---------  ---------  ---------  ---------
                                               ---------  ---------  ---------  ---------  ---------
Ratios:
  Allowance for loan losses to:
    Non-performing loans.....................     165.50%    192.35%    139.39%    127.12%    120.28%
    Total loans..............................       1.71       1.56       1.49       1.95       3.11
  Non-performing loans to total loans........       1.03       0.81       1.07       1.53       2.59
  Non-performing assets to total assets......       0.74       0.81       0.83       1.39       3.03
  Net charge-offs to average loans...........       0.24       0.20       0.38       1.29       0.79
                                               ---------  ---------  ---------  ---------  ---------
                                               ---------  ---------  ---------  ---------  ---------
</TABLE>

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

(1) Includes loans on non-accrual status of $5.8 million, $4.6 million, $5.6
    million, $7.3 million and $11.5 million at December 31, 1997, 1996, 1995,
    1994 and 1993, respectively. The remaining balance consists of loans greater
    than 90 days past due and still accruing. The Company generally stops
    accruing interest on loans that are delinquent over 90 days.

    The loan portfolio may also include certain restructured loans that are
current in accordance with modified payment terms and, accordingly, are not
included in the preceding table. These restructured loans are loans for which
concessions, including reduction of interest rates to below-market levels or
deferral of payments, have been granted due to the borrowers' financial
condition. There were no restructured loans at December 31, 1997, compared to
$571,000 and $1.5 million at December 31, 1996 and 1995, respectively.

    If interest payments on non-accrual and restructured loans at December 31
had been made during the respective years in accordance with the original
contractual loan terms, additional interest income of approximately $516,000,
$509,000 and $489,000 would have been recognized in 1997, 1996 and 1995,
respectively.

    At December 31, 1997, management has also identified approximately $1.6
million in potential problem loans which represent loans having more than normal
credit risk. Although these loans are currently performing at December 31, 1997,
management believes that if economic conditions deteriorate in the Company's
lending area, some of these loans could become non-performing in the future.

                                       30
<PAGE>
    The allowance for loan losses as a percentage of non-performing loans at
year end decreased to 165.50% in 1997, compared to 192.35% in 1996 and 139.39%
in 1995. As a percentage of total loans at year end, the allowance for loan
losses was 1.71% in 1997, compared to 1.56% in 1996 and 1.49% in 1995.

    The Company's recorded investment in impaired loans consisted of non-accrual
commercial mortgage and construction loans totaling $2.3 million at December 31,
1997 and $929,000 at December 31, 1996. Total impaired loans at December 31,
1997 consist of (i) loans of $55,000 for which there was an allowance for loan
impairment of $11,000 determined in accordance with SFAS No. 114 and (ii) loans
of $2.2 million for which such an allowance was not required due to the adequacy
of related collateral values and prior charge-offs. The average recorded
investment in total impaired loans was $1.5 million, $2.2 million and $5.1
million for 1997, 1996 and 1995, respectively. Interest income on impaired loans
is recognized on a cash basis and was not significant for any of these periods.

LIQUIDITY

    Liquidity is defined as the ability to generate sufficient cash flow to meet
all present and future funding commitments. Management monitors the Company's
liquidity position on a daily basis and evaluates its ability to meet depositor
withdrawals and to make new loans and investments as opportunities arise. The
Asset/Liability Management Committee, consisting of members of senior
management, is responsible for setting general guidelines to ensure maintenance
of prudent levels of liquidity. The mix of liquid assets and various deposit
products, at any given time, reflects management's view of the most efficient
use of these sources of funds.

    The Company's cash flows are classified according to their source -
operating activities, investing activities, and financing activities. For 1997,
net cash of $11.2 million was provided by operating activities. Net cash of
$11.8 million was used in investing activities, which primarily consisted of
disbursements for security purchases and loan originations, partially offset by
loan principal collections, proceeds from payments, maturities and calls of
securities and proceeds from sales of loans. Net cash provided by financing
activities was $1.8 million, which consisted primarily of a net increase in
deposits less cash dividends paid. Further details concerning the Company's cash
flows are provided in the "Consolidated Statements of Cash Flows."

    Liquid assets are provided by short-term investments, proceeds from
maturities of securities and principal collections on loans. One measure used by
the Company to assess its liquidity position is the primary liquidity ratio
(defined as the ratio of cash and due from banks, federal funds sold and
securities maturing within one year to total assets). At December 31, 1997, the
Company had a primary liquidity ratio of 7.17% as compared to 7.84% at December
31, 1996.

    An important source of funds is Pawling's core deposit base. Management
believes that a substantial portion of Pawling's deposits of $798.6 million at
December 31, 1997 are core deposits. Core deposits are generally considered to
be a highly stable source of liquidity due to the long-term relationships with
deposit customers. Pawling recognizes the importance of maintaining and
enhancing its reputation in the consumer and commercial markets to enable
effective gathering and retention of core deposits. The Company has not utilized
brokered deposits as a source of funds. See "Deposits" beginning on page 14 of
this report for additional information concerning Pawling's deposit products and
the associated balances.

    In addition to the funding sources discussed above, the Company has the
ability to borrow funds from several sources such as the FHLBNY and the Federal
Reserve Bank. See "Other Sources of Funds" on page 17 of this report.

    At December 31, 1997, Pawling had outstanding loan commitments and
unadvanced customer lines of credit totaling $98.9 million. These commitments do
not necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully drawn
upon. The sources of liquidity discussed above are deemed by management to be
sufficient to fund outstanding loan commitments and to meet the Company's other
obligations.

                                       31
<PAGE>
CAPITAL

    Progressive, as a bank holding company, is subject to regulation and
supervision by the FRB which applies various guidelines in assessing the
adequacy of capital and in analyzing applications to the FRB. Under the current
leverage capital guidelines of the FRB, most bank holding companies must
maintain consolidated Tier 1 capital of 4.0% of total assets. Tier 1 capital
consists of common shareholders' equity, noncumulative perpetual preferred stock
and minority interests in consolidated subsidiaries, less substantially all
intangible assets, identified losses and investments in certain subsidiaries.

    The FRB has also adopted a set of risk-based capital adequacy guidelines,
which require bank holding companies to maintain capital according to the risk
profile of their asset portfolios and certain off-balance sheet items. The
guidelines set forth a system for calculating risk-weighted assets by assigning
assets (and credit-equivalent amounts for certain off-balance sheet items) to
one of four broad risk-weight categories. The amount of risk-weighted assets is
determined by applying a specific percentage (0%, 20%, 50% or 100%, depending on
the level of credit risk) to the amounts assigned to each category. As a
percentage of risk-weighted assets, a minimum ratio of 4.0% must be maintained
for Tier 1 capital and 8.0% for total capital.

    At December 31, 1997, Progressive's consolidated capital ratios exceeded the
FRB's minimum regulatory capital requirements as follows:
<TABLE>
<CAPTION>
                                                                             RISK-BASED CAPITAL
                                                             --------------------------------------------------
<S>                                <C>          <C>          <C>          <C>          <C>          <C>
                                       LEVERAGE CAPITAL               TIER 1                    TOTAL
                                   ------------------------  ------------------------  ------------------------

<CAPTION>
                                    AMOUNT(1)      RATIO      AMOUNT(1)      RATIO      AMOUNT(1)      RATIO
                                   -----------     -----     -----------     -----     -----------     -----
                                                              (DOLLARS IN THOUSANDS)
<S>                                <C>          <C>          <C>          <C>          <C>          <C>
Actual...........................   $  70,469          8.0%   $  70,469         14.5%   $  76,577         15.8%
Minimum requirement..............      35,342          4.0       19,399          4.0       38,797          8.0
                                                        --
                                   -----------               -----------         ---   -----------         ---
Excess...........................   $  35,127          4.0%   $  51,070         10.5%   $  37,780          7.8%
                                                        --
                                                        --
                                   -----------               -----------         ---   -----------         ---
                                   -----------               -----------         ---   -----------         ---
</TABLE>

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

(1) For all capital amounts, actual capital excludes the Company's after-tax net
    unrealized gain of $681,000 on securities available for sale and intangible
    assets of $7.3 million. For total risk-based capital, actual capital
    includes approximately $6.1 million of the allowance for loan losses.

    Pawling, as a New York state-chartered stock savings bank, is subject to
regulation and supervision by the New York State Banking Department as its
chartering agency and by the FDIC as its deposit insurer. FDIC regulations
require insured banks, such as Pawling, to maintain minimum levels of capital.
The FDIC regulations follow, in substance, the leverage and risk-based capital
requirements adopted by the FRB for bank holding companies.

    At December 31, 1997, Pawling's capital ratios exceeded the FDIC's minimum
regulatory capital requirements as follows:
<TABLE>
<CAPTION>
                                                                             RISK-BASED CAPITAL
                                                             --------------------------------------------------
<S>                                <C>          <C>          <C>          <C>          <C>          <C>
                                       LEVERAGE CAPITAL               TIER 1                    TOTAL
                                   ------------------------  ------------------------  ------------------------

<CAPTION>
                                    AMOUNT(1)      RATIO      AMOUNT(1)      RATIO      AMOUNT(1)      RATIO
                                   -----------     -----     -----------     -----     -----------     -----
                                                              (DOLLARS IN THOUSANDS)
<S>                                <C>          <C>          <C>          <C>          <C>          <C>
Actual...........................   $  64,769          7.4%   $  64,769         13.4%   $  70,863         14.7%
Minimum requirement..............      35,110          4.0       19,352          4.0       38,703          8.0
                                                        --
                                   -----------               -----------         ---   -----------         ---
Excess...........................   $  29,659          3.4%   $  45,417          9.4%   $  32,160          6.7%
                                                        --
                                                        --
                                   -----------               -----------         ---   -----------         ---
                                   -----------               -----------         ---   -----------         ---
</TABLE>

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

(1) For all capital amounts, actual capital excludes Pawling's after-tax net
    unrealized gain of $672,000 on securities available for sale and intangible
    assets of $7.3 million. For total risk-based capital, actual capital
    includes approximately $6.1 million of the allowance for loan losses.

                                       32
<PAGE>
    During 1994, the Company announced two plans to repurchase in each case up
to 5% of Progressive's outstanding common stock, to be used for general
corporate purposes. The first repurchase was completed in November 1994 and
consisted of 220,500 shares at a total cost of $3.1 million or $14.14 per share.
The second repurchase plan was completed in September 1995 and consisted of
210,000 shares at a total cost of $3.3 million or $15.89 per share. A third
repurchase plan, which was announced in October 1995, and completed in July
1996, consisted of 202,500 shares at a total cost of $3.9 million or $19.19 per
share. On October 21, 1996, the Company announced a fourth plan to repurchase
195,000 shares, or approximately 5% of outstanding stock. A total of 89,250
shares were purchased under the fourth plan, at a cost of $2.1 million or $23.03
per share, prior to the Company's recision of this plan in connection with the
proposed merger. The number of shares and the per share cost of each repurchase
program have been restated to reflect the 1996 three-for-two stock split.

INTEREST RATE RISK MANAGEMENT

    As the business of the Company and the composition of its balance sheet
consists principally of interest-earning assets (such as loans and securities)
which are primarily funded by interest-bearing deposits, the main component of
market risk for the Company is interest rate risk. Interest rate risk can be
defined as the exposure of the Company's net interest income to adverse
movements in interest rates. Other types of market risk, such as foreign
currency exchange risk and commodity price risk, do not arise in the normal
course of the Company's activities.

    The Company's net interest income is an important component of its operating
results. The stability of net interest income in changing interest rate
environments depends on the Company's ability to manage effectively the interest
rate sensitivity and maturity of its assets and liabilities. The Company's
Asset/ Liability Management Committee develops and implements risk management
strategies, and uses various risk measurement tools to evaluate the impact of
changes in interest rates on the Company's asset/liability structure and net
interest income.

    The Company's asset/liability management goal is to maintain an acceptable
level of interest rate risk to produce relatively stable net interest income in
changing interest rate environments. Interest rate risk is managed primarily by
structuring the Company's balance sheet to emphasize holding adjustable rate
loans and mortgage-backed securities, and maintaining a large base of core
deposits. Management's plan to shorten the maturities of the Company's
interest-sensitive assets includes: the further use of adjustable rate lending
products; the sale of substantially all newly originated 20 and 30 year fixed
rate mortgages; shortening the average maturity of the securities portfolio
through the redeployment of maturing investments into adjustable rate securities
and debt securities with maturities of no more than five years; and maintaining
an appropriate balance between securities held to maturity and securities
available for sale to provide management with flexibility to restructure the
portfolio when conditions warrant. As economic conditions change, management
will modify the plan as necessary. To date, the Company has not used synthetic
hedging instruments such as interest rate futures, swaps or options in managing
its interest rate risk.

    To emphasize the retention of assets with a shorter duration, the Company's
asset/liability policy allows newly originated adjustable rate and biweekly
payment mortgage loans to be held in its portfolio, while newly originated fixed
rate mortgage loans are sold in the secondary market. At December 31, 1997,
$359.5 million or 71.9% of the mortgage loan portfolio had adjustable rates,
compared to $360.7 million or 69.5% at December 31, 1996 and $298.6 million or
62.1% at December 31, 1995. Despite the benefits of adjustable rate loans to an
institution's interest rate risk management, they may pose potential additional
credit risks, because when interest rates rise the underlying payments by the
borrower rise, increasing the potential for default.

    One measure of the Company's interest rate sensitivity is its interest
sensitivity gap, or the difference between interest-earning assets and
interest-bearing liabilities scheduled to mature or reprice within a

                                       33
<PAGE>
specified time frame. Shorter gaps are a measure of exposure to changes in
interest rates for shorter intervals and longer gaps measure sensitivity over a
longer interval. At December 31, 1997, the Company had a one-year gap of -6.76%
of total assets; that is, it had an excess of interest-bearing liabilities over
interest-earning assets maturing or repricing within one year. A negative gap
may enhance earnings in periods of declining interest rates in that, during such
periods, the interest expense paid on liabilities may decrease more rapidly than
the interest income earned on assets. Conversely, in a rising interest rate
environment, a negative gap may decrease earnings as the increase in interest
expense paid on liabilities may be greater than the increase in interest income
earned on assets. While a negative gap indicates the amount of interest-bearing
liabilities which may reprice before interest-earning assets, it does not
indicate the extent to which they will reprice. Therefore, at times, a negative
gap may not produce higher margins in a declining rate environment, and
conversely a positive gap may not produce higher margins in a rising rate
environment.

    The following table summarizes the Company's interest rate sensitive assets
and liabilities at December 31, 1997 according to the time periods in which they
are expected to reprice, and the resulting gap for each time period. Prepayments
and scheduled payments have been estimated for the loan portfolio based on the
Company's historical experience. Certain fixed rate loans are callable at any
time at the Company's option. The majority of these loans are immediately
callable and therefore are included in the "Within One Year" time period.
Adjustable rate mortgage loans are assumed to reprice at the earlier of
scheduled maturity or the contractual interest rate adjustment date. Non-accrual
loans are included in the table at their original maturities. Savings account
repricings are based on the Company's historical repricing experience and
management's belief that these accounts are not highly sensitive to changes in
interest rates.

<TABLE>
<CAPTION>
                                              WITHIN ONE   ONE TO FIVE  OVER FIVE
                                                 YEAR         YEARS       YEARS       TOTAL
                                              -----------  -----------  ----------  ----------
<S>                                           <C>          <C>          <C>         <C>
                                                           (DOLLARS IN THOUSANDS)
Interest-earning assets:
  Mortgage loans:
    Fixed rate..............................  $   100,685      34,578        4,959     140,222
    Adjustable rate.........................      242,296     111,187        6,001     359,484
Other loans.................................       27,843      28,421       16,899      73,163
Mortgage-backed securities..................       46,209      77,790       38,436     162,435
U.S. Treasury and agencies,
  corporate and other securities............       16,566      57,205       --          73,771
Federal funds sold..........................       32,900      --           --          32,900
                                              -----------  -----------  ----------  ----------
        Total interest-earning assets.......      466,499     309,181       66,295     841,975
                                              -----------  -----------  ----------  ----------
                                              -----------  -----------  ----------  ----------

Interest-bearing liabilities:
  Savings accounts..........................       21,726      28,970       97,896     148,592
  NOW accounts..............................       19,475      --           --          19,475
  Money market accounts.....................      225,295      --           --         225,295
  Time deposits.............................      259,707      75,199        2,547     337,453
                                              -----------  -----------  ----------  ----------
        Total interest-bearing
        liabilities.........................      526,203     104,169      100,443     730,815
                                              -----------  -----------  ----------  ----------
                                              -----------  -----------  ----------  ----------
(Deficiency) excess of interest-earning
  assets compared to
  interest-bearing liabilities..............  ($  59,704)     205,012     (34,148)
(Deficiency) excess
  as a percent of total assets..............      (6.76%)      23.20%      (3.87%)
Cumulative (deficiency) excess as a percent
  of total assets...........................      (6.76%)      16.44%       12.57%
</TABLE>

                                       34
<PAGE>
    Due to the limitations inherent in the gap analysis, management augments the
asset/liability management process by using simulation analysis. Simulation
analysis quantitatively measures the Company's sensitivity to interest rate risk
by estimating the impact on net interest income of hypothetical changes in the
balance sheet structure and/or interest rate environment. Management uses
computer simulations to project changes in net interest income under multiple
rate environments, based on assumptions regarding balance sheet mix, growth,
prepayments and estimated pricing levels. Although the Company's exposure to
interest rate risk as calculated by the simulation model may not be fully
representative of the actual risk in a higher or lower rate environment, the
simulation results are a useful tool in gauging the general direction and
magnitude of changes in net interest income which could occur. At the extremes,
rate changes are modeled to occur in monthly increments of 25 basis points for
eight months (total of 200 basis points up or down), with rates held constant
thereafter. At December 31, 1997, based on this assumed gradual rate change, the
Company's net interest income would change by less than 3% in both the year of
the rate changes and in the following year, as compared to base-case net
interest income computed in a flat-rate scenario based on existing rates.

IMPACT OF INFLATION

    The consolidated financial statements and related consolidated financial
information presented in this annual report have been prepared in conformity
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.

IMPACT OF YEAR 2000 ISSUE

    The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send customer
statements, or engage in similar normal business activities.

    Although the Company's principal operating software is supplied by
nationally recognized vendors, the Company has determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Company also has several "P.C." based software systems which will require
modification or replacement. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 issue can be successfully mitigated. However, if such modifications and
conversions are not made, or not completed timely, the Year 2000 issue could
have a material impact on the operations of the Company.

    The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issue. The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of a third
party's Year 2000 issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company.

                                       35
<PAGE>
    The Company will utilize both internal and external resources to reprogram,
or replace, and test all software for Year 2000 modifications. The Company plans
to complete the Year 2000 project not later than December 31, 1998. The total
remaining cost of the Year 2000 project is being funded through operating cash
flows, and will be expensed as incurred over the next two years, except in the
case of the purchase of any new software required, which will be capitalized.
The total external resources required is not expected to have a material effect
on the results of operations. To date, costs incurred and expensed relate to the
dedication of internal resources employed in the assessment of and development
of the Company's Year 2000 compliance remediation plan, as well as the testing
of many of the hardware and software owned or licensed for its personal
computers. Costs incurred to date are not material.

    The estimated resources required of the project and the date on which the
Company plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors in respect of both the Company and its suppliers
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this field, the ability to locate
and correct all relevant computer codes, testing complications and similar
uncertainties.

REPORT OF MANAGEMENT

    The consolidated financial statements of Progressive Bank, Inc. and
subsidiary, included herein, are the responsibility of and have been prepared by
management in conformity with generally accepted accounting principles. These
consolidated financial statements necessarily include some amounts that are
based on best judgments and estimates. Other financial information included in
this report is consistent with that in the consolidated financial statements.

    Management is responsible for maintaining a system of internal accounting
control. The purpose of the system is to provide reasonable assurance that
transactions are recorded in accordance with management's authorization, that
assets are safeguarded against loss or unauthorized use, and that underlying
financial records support the preparation of financial statements. The system
includes written policies and procedures, selection of qualified personnel,
appropriate segregation of responsibilities, and the ongoing internal audit
function.

    The independent auditors conduct an annual audit of the Company's
consolidated financial statements to enable them to express an opinion as to the
fair presentation of the statements. In connection with the audit, the
independent auditors consider internal control, to the extent they consider
necessary to determine the nature, timing and extent of their auditing
procedures. The independent auditors also prepare recommendations regarding
internal controls and other accounting and financial related matters. The
implementation of these recommendations by management is monitored directly by
the Audit Committee of the Board of Directors.

<TABLE>
<S>                                        <C>
          /s/ PETER VAN KLEECK                       /s/ ROBERT GABRIELSEN
----------------------------------------   ----------------------------------------
            Peter Van Kleeck                           Robert Gabrielsen
            PRESIDENT AND CEO                              TREASURER
</TABLE>

                                       36
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The information required by this item is included under "Interest Rate Risk
Management" beginning on page 33 of this report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                             PAGE
                                                                                                           ---------
<S>                                                                                                        <C>
Independent Auditors' Report.............................................................................         38
Consolidated Balance Sheets at December 31, 1997 and 1996................................................         39
Consolidated Statements of Income for the Years Ended December 31,
  1997, 1996 and 1995....................................................................................         40
Consolidated Statements of Shareholders' Equity for the Years
  Ended December 31, 1997, 1996 and 1995.................................................................         41
Consolidated Statements of Cash Flows for the Years Ended December 31,
  1997, 1996 and 1995....................................................................................         42
Notes to Consolidated Financial Statements...............................................................      43-71
</TABLE>

                                       37
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Progressive Bank, Inc.:

    We have audited the consolidated financial statements of Progressive Bank,
Inc. and subsidiary (the "Company") as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Progressive
Bank, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.

/s/ KPMG PEAT MARWICK LLP
Stamford, Connecticut
February 2, 1998

                                       38
<PAGE>
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            DECEMBER 31,
                                                                                        ---------------------
                                                                                           1997       1996
                                                                                        ----------  ---------
<S>                                                                                     <C>         <C>
                                                                                        (IN THOUSANDS, EXCEPT
                                                                                        SHARES AND PER SHARE
                                                                                              AMOUNTS)
ASSETS
  Cash and due from banks (note 11)...................................................  $   13,886     15,070
  Federal funds sold..................................................................      32,900     30,500
  Securities (note 3):
    Available for sale, at fair value.................................................     110,064    137,792
    Held to maturity, at amortized cost (fair value of $131,660 in 1997
      and $72,315 in 1996)............................................................     131,299     72,614
                                                                                        ----------  ---------
      Total securities................................................................     241,363    210,406
                                                                                        ----------  ---------
  Loans, net (note 4):
    Mortgage loans....................................................................     497,900    517,077
    Other loans.......................................................................      76,414     75,708
    Allowance for loan losses.........................................................      (9,801)    (9,231)
                                                                                        ----------  ---------
      Total loans, net................................................................     564,513    583,554
                                                                                        ----------  ---------
  Accrued interest receivable.........................................................       5,677      6,068
  Other real estate, net (note 5).....................................................         606      2,270
  Premises and equipment, net (note 6)................................................       9,726     10,323
  Deferred income taxes, net (note 10)................................................       5,857      6,134
  Intangible assets (notes 4 and 7)...................................................       7,375      8,755
  Other assets (note 13)..............................................................       1,591      2,100
                                                                                        ----------  ---------
      Total assets....................................................................  $  883,494    875,180
                                                                                        ----------  ---------
                                                                                        ----------  ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
  Liabilities:
    Savings and time deposits (note 7)................................................  $  730,815    736,579
    Demand deposits...................................................................      67,778     57,622
    Accrued expenses and other liabilities (note 13)..................................       6,422      8,437
                                                                                        ----------  ---------
      Total liabilities...............................................................     805,015    802,638
                                                                                        ----------  ---------
  Commitments and contingencies (note 14)

  Shareholders' equity (notes 11 and 12):
    Preferred stock ($1.00 par value; 5,000,000 shares authorized; none issued).......      --         --
    Common stock ($1.00 par value; 15,000,000 shares authorized;
      4,427,999 shares issued)........................................................       4,428      4,428
    Paid-in capital...................................................................      25,879     25,879
    Retained earnings.................................................................      57,883     51,882
    Treasury stock, at cost (596,190 shares in 1997 and 603,315 shares in 1996).......     (10,392)   (10,416)
    Net unrealized gain on securities available for sale, net of taxes (note 3).......         681        769
                                                                                        ----------  ---------
      Total shareholders' equity......................................................      78,479     72,542
                                                                                        ----------  ---------
      Total liabilities and shareholders' equity......................................  $  883,494    875,180
                                                                                        ----------  ---------
                                                                                        ----------  ---------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       39
<PAGE>
                       CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                  FOR THE YEARS ENDED DECEMBER
                                                                                               31,
                                                                                 -------------------------------
                                                                                   1997       1996       1995
                                                                                 ---------  ---------  ---------
<S>                                                                              <C>        <C>        <C>
                                                                                      (IN THOUSANDS, EXCEPT
                                                                                       PER SHARE AMOUNTS)
Interest and dividend income:
  Mortgage loans...............................................................  $  45,553     42,811     39,123
  Other loans..................................................................      7,159      6,594      5,683
  Securities...................................................................     14,492     14,501      8,637
  Federal funds sold and other.................................................      1,551      1,942      2,058
                                                                                 ---------  ---------  ---------
    Total interest and dividend income.........................................     68,755     65,848     55,501
                                                                                 ---------  ---------  ---------
Interest expense:
  Deposits.....................................................................     34,743     33,798     27,692
  Other borrowings.............................................................         --         51         --
                                                                                 ---------  ---------  ---------
    Total interest expense.....................................................     34,743     33,849     27,692
                                                                                 ---------  ---------  ---------
    Net interest income........................................................     34,012     31,999     27,809
Provision for loan losses (note 4).............................................      1,975      2,300        600
                                                                                 ---------  ---------  ---------
    Net interest income after provision for loan losses........................     32,037     29,699     27,209
                                                                                 ---------  ---------  ---------
Other income:
  Deposit service fees.........................................................      2,235      2,399      2,084
  Other service fees...........................................................        796        660        620
  Net gain (loss) on securities available for sale (note 3)....................         15       (199)       349
  Net gain on sales of mortgage loans (note 4).................................        277        161         67
  Other non-interest income....................................................        323        328        186
                                                                                 ---------  ---------  ---------
    Total other income.........................................................      3,646      3,349      3,306
                                                                                 ---------  ---------  ---------
    Net interest and other income..............................................     35,683     33,048     30,515
                                                                                 ---------  ---------  ---------
Other expense:
  Salaries and employee benefits (note 13).....................................     10,819     10,571      9,052
  Occupancy and equipment......................................................      2,718      3,042      2,352
  Net cost of other real estate (note 5).......................................         21        793        355
  Amortization of intangible assets............................................      1,401      1,003     --
  Other non-interest expense (note 9)..........................................      6,497      5,965      7,520
                                                                                 ---------  ---------  ---------
    Total other expense........................................................     21,456     21,374     19,279
                                                                                 ---------  ---------  ---------
    Income before income tax expense...........................................     14,227     11,674     11,236
Income tax expense (note 10)...................................................      5,595      2,353      4,450
                                                                                 ---------  ---------  ---------
    Net income.................................................................  $   8,632      9,321      6,786
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
Earnings per common share (note 11):
    Basic......................................................................  $    2.26       2.38       1.67
    Diluted....................................................................       2.20       2.35       1.65
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       40
<PAGE>
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                 COMMON STOCK                                                NET
                                            ----------------------                                       UNREALIZED
                                              SHARES                 PAID-IN    RETAINED    TREASURY   GAIN (LOSS) ON
                                            OUTSTANDING   AMOUNT     CAPITAL    EARNINGS      STOCK      SECURITIES       TOTAL
                                            -----------  ---------  ---------  -----------  ---------  ---------------  ---------
<S>                                         <C>          <C>        <C>        <C>          <C>        <C>              <C>
                                                             (IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
Balance at December 31, 1994..............   4,120,364   $   4,428     25,879      40,165      (4,310)         (222)       65,940
Net income................................                  --         --           6,786      --            --             6,786
Cash dividends declared
  ($0.43 per share).......................                  --         --          (1,766)     --            --            (1,766)
Stock options exercised...................      41,077      --         --            (305)        593        --               288
Purchases of treasury stock...............    (219,000)     --         --          --          (3,938)       --            (3,938)
Change in net unrealized gain (loss) on
  securities available for sale, net of
  taxes...................................                  --         --          --          --             1,348         1,348
                                            -----------  ---------  ---------  -----------  ---------         -----     ---------
Balance at December 31, 1995..............   3,942,441       4,428     25,879      44,880      (7,655)        1,126        68,658
Net income................................                  --         --           9,321      --            --             9,321
Cash dividends declared
  ($0.53 per share).......................                  --         --          (2,088)     --            --            (2,088)
Stock options exercised...................      64,493      --         --            (231)      1,028        --               797
Purchases of treasury stock...............    (182,250)     --         --          --          (3,789)       --            (3,789)
Change in net unrealized gain (loss) on
  securities available for sale, net of
  taxes...................................                  --         --          --          --              (357)         (357)
                                            -----------  ---------  ---------  -----------  ---------         -----     ---------
Balance at December 31, 1996..............   3,824,684       4,428     25,879      51,882     (10,416)          769        72,542
Net income................................                  --         --           8,632      --            --             8,632
Cash dividends declared
  ($0.68 per share).......................                  --         --          (2,601)     --            --            (2,601)
Stock options exercised...................      22,125      --         --             (30)        386        --               356
Purchases of treasury stock...............     (15,000)     --         --          --            (362)       --              (362)
Change in net unrealized gain (loss) on
  securities available for sale, net of
  taxes...................................                  --         --          --          --               (88)          (88)
                                            -----------  ---------  ---------  -----------  ---------         -----     ---------
Balance at December 31, 1997..............   3,831,809       4,428     25,879      57,883     (10,392)          681        78,479
                                            -----------  ---------  ---------  -----------  ---------         -----     ---------
                                            -----------  ---------  ---------  -----------  ---------         -----     ---------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       41
<PAGE>
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        FOR THE YEARS ENDED DECEMBER
                                                                                                     31,
                                                                                       -------------------------------
                                                                                         1997       1996       1995
                                                                                       ---------  ---------  ---------
<S>                                                                                    <C>        <C>        <C>
                                                                                               (IN THOUSANDS)
Operating activities:
  Net income.........................................................................  $   8,632      9,321      6,786
  Adjustments to reconcile net income to net cash provided by operating activities:
    Provision for loan losses........................................................      1,975      2,300        600
    Provision for losses on other real estate........................................     --            525        325
    Depreciation expense.............................................................        900      1,146        850
    Net (gain) loss on securities and mortgage loans.................................       (292)        38       (416)
    Amortization of net premiums (discounts) on securities...........................        273        (98)        37
    Amortization of net deferred loan origination fees...............................        (63)      (412)      (494)
    Net decrease (increase) in accrued interest receivable...........................        391     (1,039)      (821)
    Gain on sales of premises and equipment..........................................       (186)    --         --
    Gain on sales of other real estate...............................................       (627)      (242)      (346)
    Amortization of intangible assets................................................      1,401      1,003     --
    Net change in income tax assets and liabilities..................................        429     (1,798)     3,941
    Other, net.......................................................................     (1,608)     2,809     (2,398)
                                                                                       ---------  ---------  ---------
      Net cash provided by operating activities......................................     11,225     13,553      8,064
                                                                                       ---------  ---------  ---------
Investing activities:
  Purchases of securities:
    Securities available for sale....................................................    (59,059)  (141,232)   (28,787)
    Securities held to maturity......................................................    (87,044)   (46,441)   (14,208)
  Proceeds from principal payments, maturities and calls of securities:
    Securities available for sale....................................................     86,648     97,111     18,529
    Securities held to maturity......................................................     28,092     13,837     12,949
  Proceeds from sales of securities available for sale...............................     --          5,953      1,459
  Net receipts (disbursements) for loan originations and principal collections.......      4,116    (68,590)   (71,057)
  Proceeds from sales of mortgage loans..............................................     12,032     11,607     12,326
  Purchases of premises and equipment................................................       (767)    (1,796)    (2,432)
  Proceeds from sales of premises and equipment......................................        650     --         --
  Proceeds from sales of other real estate...........................................      3,538      1,288      2,029
                                                                                       ---------  ---------  ---------
      Net cash used in investing activities..........................................    (11,794)  (128,263)   (69,192)
                                                                                       ---------  ---------  ---------
    Financing activities:
  Net increase (decrease) in deposits, exclusive of acquisition......................      4,392    (15,563)    32,683
  Increase in deposits from acquisition of branches, net of premium paid.............     --        143,030     --
  Cash dividends paid on common stock................................................     (2,601)    (2,088)    (1,766)
  Net proceeds on exercises of stock options.........................................        356        797        288
  Purchases of treasury stock........................................................       (362)    (3,789)    (3,938)
                                                                                       ---------  ---------  ---------
      Net cash provided by financing activities......................................      1,785    122,387     27,267
                                                                                       ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents.................................      1,216      7,677    (33,861)
Cash and cash equivalents at beginning of year.......................................     45,570     37,893     71,754
                                                                                       ---------  ---------  ---------
Cash and cash equivalents at end of year.............................................  $  46,786     45,570     37,893
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
Supplemental data:
  Interest paid......................................................................  $  36,799     33,793     27,461
  Income taxes paid, net of refunds received.........................................      5,104      3,992        508
  Loans transferred to other real estate.............................................      1,913      3,983      1,215
  Loans originated to finance sales of other real estate.............................        676        431      1,308
  Securities transferred from held to maturity to available for sale (note 3)........     --         --         44,891
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       42
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

    Progressive Bank, Inc. ("Progressive") is a bank holding company whose sole
subsidiary is Pawling Savings Bank ("Pawling"). Collectively, these entities are
referred to herein as the "Company." Pawling is a New York state-chartered stock
savings bank providing a full range of community banking services to its
customers. The Company is engaged principally in the business of attracting
retail deposits from the general public and the business community and investing
those funds in residential and commercial mortgages, consumer loans and
securities. Pawling's market area consists of the seven southern tier counties
of New York State, north of New York City. Progressive and Pawling are subject
to the regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory authorities. Deposits are insured up to
applicable limits by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC").

    The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
Material estimates that are particularly susceptible to near-term change include
the allowances for losses on loans and other real estate, and the valuation
allowance for deferred tax assets. The Company's accounting policies with
respect to these estimates are discussed below.

    The consolidated financial statements include the accounts of Progressive
and Pawling. All significant intercompany accounts and transactions are
eliminated in consolidation.

    For purposes of reporting cash flows, cash equivalents are defined as
federal funds sold and other highly liquid instruments with an original term of
three months or less.

    All 1996 and 1995 share and per share data have been adjusted to give
retroactive effect to the three-for-two stock split which was completed in
December 1996 and resulted in the issuance of 1,476,025 additional common
shares.

    Reclassifications are made when necessary to conform prior year amounts to
the current year's presentation.

SECURITIES

    Securities are classified as held to maturity securities, trading
securities, or available for sale securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Securities held to maturity are
limited to debt securities for which the entity has the positive intent and
ability to hold to maturity. Trading securities are debt and equity securities
that are bought principally for the purpose of selling them in the near term.
All other debt and equity securities are classified as available for sale.

    Held to maturity securities are carried at amortized cost. Available for
sale debt securities and marketable equity securities are carried at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity (net of taxes). Non-marketable equity
securities (principally Federal Home Loan Bank stock) are included in securities
available for sale at cost, as there is no readily available market value. The
Company has no trading securities.

    Premiums and discounts on debt securities are recognized as adjustments to
interest income. Realized gains and losses on sales of securities are determined
using the specific identification method. Unrealized

                                       43
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
losses on held to maturity and available for sale securities are charged to
earnings when the decline in fair value of a security is judged to be other than
temporary.

ALLOWANCE FOR LOAN LOSSES

    The allowance for loan losses is maintained at a level deemed adequate by
management based on an evaluation of the known and inherent risks in the
portfolio, past loan loss experience, estimated value of underlying collateral
and current economic conditions. The allowance is increased by provisions for
loan losses charged to operations. Loan losses are charged to the allowance when
all or a portion of a loan is deemed to be uncollectible. Recoveries of loans
previously charged off are credited to the allowance when realized.

    In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118, a loan is considered to be impaired when,
based on current information and events, it is probable that the Company will be
unable to collect all principal and interest contractually due. SFAS No. 114
permits creditors to measure impaired loans based on (i) the present value of
expected future cash flows discounted at the loan's effective rate, (ii) the
loan's observable market price or (iii) the fair value of the collateral if the
loan is collateral dependent. If the approach used results in a measurement that
is less than the impaired loan's recorded investment, an impairment loss is
recognized as part of the allowance for loan losses. Substantially all of the
Company's impaired loans are collateral-dependent loans measured based on the
fair value of the collateral.

    Establishing the allowance for loan losses involves significant management
judgments utilizing the best information available at the time. Those judgements
are subject to further review by various sources, including the Company's
regulators. Adjustments to the allowance may be necessary in the future 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.

INTEREST AND FEES ON LOANS

    Interest income is accrued monthly on outstanding loan principal balances
unless management considers collection to be uncertain (generally, when
principal or interest payments are 90 days or more past due). When loans are
placed on non-accrual status, previously accrued but unpaid interest is reversed
by charging interest income of the current period. Loans are returned to accrual
status when collectibility is no longer considered uncertain.

    Loan origination fees and certain direct loan origination costs are
deferred. The net fee or cost is amortized to interest income, using the level
yield method, over the contractual loan term. Amortization ceases when loans are
placed on non-accrual status and resumes when loans are returned to accrual
status.

OTHER REAL ESTATE

    Other real estate consists of properties acquired through foreclosure or
deed in lieu of foreclosure. A property is initially recorded at fair value less
costs to sell, and any resulting write-down of the recorded investment in the
loan is charged to the allowance for loan losses. Thereafter, an allowance for
losses on other real estate is established for any further declines in estimated
fair value less costs to sell. Fair value estimates are based on recent
appraisals and other available information. Holding costs on properties ready
for sale are included in current operations, while costs that improve such
properties are capitalized.

                                       44
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gains on sales of other real estate are credited to income and losses are
charged against the allowance for losses on other real estate.

PREMISES AND EQUIPMENT

    Land is carried at cost. Buildings, furniture and equipment are carried at
cost less accumulated depreciation. Depreciation expense is computed on a
straight-line basis over the estimated useful lives of the related assets.
Maintenance and repair costs are charged to operating expenses as incurred,
while costs of significant improvements are capitalized.

INCOME TAXES

    In accordance with the asset and liability method required by SFAS No. 109,
deferred taxes are recognized for the estimated future tax effects attributable
to "temporary differences" between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. A deferred tax liability is
recognized for all temporary differences that will result in future taxable
income. A deferred tax asset is recognized for all temporary differences that
will result in future tax deductions and for all unused tax loss carryforwards,
subject to reduction of the asset by a valuation allowance in certain
circumstances. This valuation allowance is recognized 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 asset will not be realized. The
valuation allowance is subject to ongoing adjustment based on changes in
circumstances that affect management's judgment about the realizability of the
deferred tax asset. Adjustments to increase or decrease the valuation allowance
are charged or credited, respectively, to income tax expense.

    Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which 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.

BRANCH PURCHASE PREMIUM

    The purchase premium that resulted from the 1996 acquisition of branches has
been capitalized as an intangible asset. The premium is being amortized on a
straight-line basis over seven years (the estimated average remaining life of
the acquired customer base). The unamortized premium is reviewed for impairment
if events or changes in circumstances indicate that the carrying amount may not
be fully recoverable.

MORTGAGE SERVICING RIGHTS

    Servicing rights applicable to mortgage loans sold on or after January 1,
1997 are accounted for in accordance with SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Although SFAS No. 125 superseded SFAS No. 122, which the Company prospectively
adopted as of January 1, 1996, it did not substantially change the accounting
treatment for mortgage servicing rights. Under both standards, mortgage
servicing rights are recognized as an asset when loans are sold with servicing
retained, by allocating the cost of an originated mortgage loan between the loan
and the servicing right based on estimated relative fair values. The cost
allocated to the servicing right is capitalized as a separate asset and
amortized in proportion to, and over the period of, estimated net servicing
income. Asset recognition of servicing rights on sales of originated loans was
not permitted under

                                       45
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
previous accounting standards. Capitalized mortgage servicing rights are
assessed for impairment based on the fair value of those rights, and any
impairment loss is recognized through a valuation allowance.

STOCK OPTION PLANS

    The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, compensation expense is recognized
only if the exercise price of the option is less than the fair value of the
underlying stock at the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to recognize the fair value of all
stock-based awards on the date of grant as compensation expense over the vesting
period. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma disclosures of net income and
earnings per share as if the fair-value-based method defined in SFAS No. 123 had
been applied to stock option grants made in 1995 and later years. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosures required by SFAS No. 123.

POSTRETIREMENT BENEFITS

    The Company accounts for the cost of certain postretirement benefits in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions." The cost of these postretirement benefits is recognized on
an accrual basis as such benefits are earned by active and retired employees.

EARNINGS PER COMMON SHARE

    The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
entities with complex capital structures to present both basic earnings per
share ("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
(such as stock options) were exercised or converted into common stock or
resulted in the issuance of common stock that would then share in the earnings
of the entity. Diluted EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period, plus
common-equivalent shares computed using the treasury stock method. In accordance
with SFAS No. 128, the Company has restated all prior period EPS data to conform
to the new requirements.

2. PROPOSED MERGER AND RELATED MATTERS

    On December 16, 1997, Progressive entered into an agreement to merge with
and into Hudson Chartered Bancorp, Inc. ("Hudson Chartered") and form a bank
holding company to be named Premier National Bancorp, Inc. (the "Continuing
Corporation"). In addition, Pawling agreed to merge with and into First National
Bank of the Hudson Valley ("Hudson Valley"), a wholly-owned subsidiary of Hudson
Chartered, under the national bank charter of Hudson Valley and the name Premier
National Bank. The separate existences of Progressive and Pawling will cease
upon consummation of these mergers. Under the terms of the merger agreement,
each outstanding share of Progressive common stock will be converted into 1.82
shares of Continuing Corporation common stock and cash in lieu of any fractional
share. Consummation of the merger is subject to satisfaction of a number of
conditions, including approval of the merger agreement by the stockholders of
each of Progressive and Hudson Chartered; receipt of all

                                       46
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. PROPOSED MERGER AND RELATED MATTERS (CONTINUED)
required regulatory approvals, consents or waivers; and the ability to account
for the merger as a pooling-of-interests.

    In connection with the merger agreement, Progressive and Hudson Chartered
executed stock option agreements pursuant to which (i) Progressive has an option
to purchase up to 1,415,250 unissued shares of Hudson Chartered's common stock
at $21.75 per share and (ii) Hudson Chartered has an option to purchase up to
766,300 unissued shares of Progressive's common stock at $36.63 per share. The
shares issuable upon exercise of each option represent approximately 16.7% of
the number of common shares of the issuer that would be outstanding after
exercise of the option. The options are exercisable only upon the occurrence of
certain events that could jeopardize consummation of the proposed merger.

    In October 1997, Progressive adopted a stockholder rights plan and entered
into a related stockholder rights agreement (collectively, the "Rights Plan"),
pursuant to which Progressive has issued one "Right" for each outstanding share
of its common stock. Under the Rights Plan, upon the occurrence of certain
events generally associated with an acquisition or potential acquisition of
Progressive, the Rights would become exercisable and transferable, and the
holders of the Rights would become entitled to purchase stock of either
Progressive or the acquiror at, in effect, a bargain price. The Rights would not
become exercisable in a transaction approved by Progressive's Board of
Directors, such as the proposed merger with Hudson Chartered. The Rights will
extinguish upon consummation of the proposed merger and the conversion of
Progressive's common stock into Continuing Corporation common stock.

    See notes 10 and 12, respectively, for discussions of the impact of the
proposed merger on Pawling's thrift tax bad debt reserves and Progressive's
stock option plans.

                                       47
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SECURITIES

    A summary of the Company's securities at December 31 follows:
<TABLE>
<CAPTION>
                                                     GROSS        GROSS
                                       AMORTIZED  UNREALIZED   UNREALIZED     FAIR
1997                                     COST        GAINS       LOSSES       VALUE
                                       ---------  -----------  -----------  ---------
<S>                                    <C>        <C>          <C>          <C>
                                                       (IN THOUSANDS)
Securities available for sale:
  Debt securities:
    United States Treasury and
      agencies.......................  $  72,520         166          (40)     72,646
    Mortgage-backed securities.......     30,157       1,051          (72)     31,136
    Corporate and other..............      1,095          30       --           1,125
                                       ---------       -----          ---   ---------
      Total debt securities..........    103,772       1,247         (112)    104,907
  Equity securities..................      5,127          30       --           5,157
                                       ---------       -----          ---   ---------
        Total securities available
        for sale.....................    108,899       1,277         (112)    110,064
Securities held to maturity:
    Mortgage-backed securities.......    131,299         628         (267)    131,660
                                       ---------       -----          ---   ---------
        Total securities.............  $ 240,198       1,905         (379)    241,724
                                       ---------       -----          ---   ---------
                                       ---------       -----          ---   ---------

<CAPTION>
1996
<S>                                    <C>        <C>          <C>          <C>

Securities available for sale:
  Debt securities:
    United States Treasury and
      agencies.......................  $  86,860         132         (109)     86,883
    Mortgage-backed securities.......     41,640       1,335          (90)     42,885
    Corporate and other..............      3,190          52       --           3,242
                                       ---------       -----          ---   ---------
      Total debt securities..........    131,690       1,519         (199)    133,010
  Equity securities..................      4,786          22          (26)      4,782
                                       ---------       -----          ---   ---------
        Total securities available
        for sale.....................    136,476       1,541         (225)    137,792
Securities held to maturity:
    Mortgage-backed securities.......     72,614         194         (493)     72,315
                                       ---------       -----          ---   ---------
        Total securities.............  $ 209,090       1,735         (718)    210,107
                                       ---------       -----          ---   ---------
                                       ---------       -----          ---   ---------
</TABLE>

    The Company's mortgage-backed securities are pass-through securities
guaranteed by Freddie Mac and Fannie Mae. Mortgage-backed securities held to
maturity are principally five- and seven-year balloon payment and seasoned 15
year securities. Mortgage-backed securities available for sale are adjustable
rate securities.

    Equity securities at December 31, 1997 and 1996 include Federal Home Loan
Bank stock with a cost basis of $5.0 million and $4.4 million, respectively.

                                       48
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SECURITIES (CONTINUED)
    The following is a summary of the amortized cost and fair value of debt
securities available for sale (other than mortgage-backed securities) at
December 31, 1997, by remaining term to contractual maturity. Actual maturities
may differ from contractual maturities because certain issuers have the right to
call or prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                            AMORTIZED     FAIR
REMAINING CONTRACTUAL TERM                                                    COST        VALUE
-------------------------------------------------------------------------  -----------  ---------
<S>                                                                        <C>          <C>
                                                                               (IN THOUSANDS)
One year or less.........................................................   $  16,504      16,566
More than one year to five years.........................................      57,111      57,205
                                                                           -----------  ---------
    Total................................................................   $  73,615      73,771
                                                                           -----------  ---------
                                                                           -----------  ---------
</TABLE>

    The net gain (loss) on securities available for sale, attributable to sales
and calls, consisted of gross realized gains of $15,000 in 1997; gross realized
losses of $199,000 in 1996; and gross realized gains of $379,000 and gross
realized losses of $30,000 in 1995.

    Changes in unrealized holding gains and losses on securities available for
sale resulted in pre-tax (decreases) increases in shareholders' equity of
($151,000), ($610,000) and $2.3 million during 1997, 1996 and 1995,
respectively.

    In November 1995, the Financial Accounting Standards Board (the "FASB")
issued a special report which provided a one-time opportunity to reassess the
appropriateness of security classifications under SFAS No. 115, prior to
year-end 1995. Reclassifications from the held to maturity category allowed by
this one-time opportunity would not call into question the intent to hold other
debt securities to maturity. In accordance with the special report, on November
30, 1995, the Company made a one-time transfer of adjustable rate
mortgage-backed securities with an amortized cost of $44.9 million and a fair
value of $46.3 million, to the available for sale portfolio from the held to
maturity portfolio. The transfer was made primarily to enhance liquidity and
provide greater flexibility in managing the Company's securities.

                                       49
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. LOANS

    Loans at December 31 consist of the following:

<TABLE>
<CAPTION>
                                                                            1997       1996
                                                                         ----------  ---------
<S>                                                                      <C>         <C>
                                                                            (IN THOUSANDS)
Mortgage loans:
  Residential properties:
    One-to-four family dwellings.......................................  $  385,140    401,026
    Five or more dwelling units........................................      28,280     28,138
  Commercial properties................................................      76,551     81,117
  Construction and land................................................       9,735      8,871
  Net deferred origination fees........................................      (1,806)    (2,075)
                                                                         ----------  ---------
                                                                            497,900    517,077
                                                                         ----------  ---------
Other loans:
  Automobile financing.................................................      25,399     26,121
  Mobile home..........................................................      25,899     26,185
  Business installment.................................................      14,213     11,392
  Consumer installment.................................................       2,053      2,798
  Other................................................................       5,599      5,973
  Net deferred origination costs.......................................       3,251      3,239
                                                                         ----------  ---------
                                                                             76,414     75,708
                                                                         ----------  ---------
      Total loans......................................................     574,314    592,785
Allowance for loan losses..............................................      (9,801)    (9,231)
                                                                         ----------  ---------
      Total loans, net.................................................  $  564,513    583,554
                                                                         ----------  ---------
                                                                         ----------  ---------
</TABLE>

    Mortgage loans consist of adjustable rate loans of $359.5 million and fixed
rate loans of $140.2 million at December 31, 1997 ($360.7 million and $158.4
million, respectively, at December 31, 1996). Residential mortgage loans include
construction loans on pre-sold homes of $40.6 million and home equity loans of
$39.4 million at December 31, 1997 ($47.2 million and $38.6 million,
respectively, at December 31, 1996).

    The Company originates loans primarily in the New York counties of Dutchess,
Sullivan, Orange, Putnam, Ulster, Westchester, Rockland, Suffolk and Nassau.
Since 1993, the Company has also originated loans in the Connecticut counties of
Fairfield, Hartford, New Haven and Litchfield. The ability of borrowers to make
principal and interest payments in the future will depend upon, among other
things, the level of overall economic activity and the real estate market
conditions prevailing within the Company's lending region.

                                       50
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. LOANS (CONTINUED)
    The following loans were on non-accrual status at December 31:

<TABLE>
<CAPTION>
                                                                       1997       1996       1995
                                                                     ---------  ---------  ---------
<S>                                                                  <C>        <C>        <C>
                                                                             (IN THOUSANDS)
Mortgage loans:
  Residential properties...........................................  $   3,556      3,656      2,407
  Commercial properties............................................        568        714      2,591
  Construction and land............................................      1,722        215        593
                                                                     ---------  ---------  ---------
    Total..........................................................  $   5,846      4,585      5,591
                                                                     ---------  ---------  ---------
                                                                     ---------  ---------  ---------
</TABLE>

    The preceding table does not include restructured loans that are current in
accordance with their modified payment terms. These are loans for which
concessions, including reduction of interest rates to below-market levels or
deferral of payments, have been granted due to the borrowers' financial
condition. There were no restructured loans at December 31, 1997, compared to
$571,000 and $1.5 million at December 31, 1996 and 1995, respectively.

    If interest payments on non-accrual and restructured loans at December 31
had been made during the respective years in accordance with the original
contractual loan terms, additional interest income of approximately $516,000,
$509,000 and $489,000 would have been recognized in 1997, 1996 and 1995,
respectively.

    SFAS No. 114 applies to loans that are individually evaluated for
collectibility in accordance with the Company's ongoing loan review procedures
(principally commercial mortgage and construction loans). The Company's total
recorded investment in impaired loans consisted of non-accrual commercial
mortgage and construction loans of $2.3 million and $929,000 at December 31,
1997 and 1996, respectively. These totals include loans of $2.2 million in 1997
and $430,000 in 1996, for which an allowance for loan impairment was not
required under SFAS No. 114 due to the adequacy of related collateral values and
prior charge-offs. The remaining impaired loans of $55,000 in 1997 and $499,000
in 1996 had allowances for loan impairment measured under SFAS No. 114 of
$11,000 and $89,000, respectively, which were included in the overall allowance
for loan losses. The average recorded investment in total impaired loans was
$1.5 million for 1997, $2.2 million for 1996 and $5.1 million for 1995. Interest
income on impaired loans is recognized on a cash basis and was not significant
for 1997, 1996 and 1995.

                                       51
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. LOANS (CONTINUED)
    Activity in the allowance for loan losses for the years ended December 31 is
summarized as follows:

<TABLE>
<CAPTION>
                                                                     1997       1996       1995
                                                                   ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
                                                                           (IN THOUSANDS)
Balance at beginning of year.....................................  $   9,231      8,033      9,402
Provision charged to operations..................................      1,975      2,300        600
Loans charged-off:
  Mortgage loans:
    Residential..................................................     (1,161)      (954)      (376)
    Commercial...................................................       (292)      (332)      (593)
    Construction and land........................................        (82)    --         (1,166)
  Other loans:
    Consumer.....................................................       (404)      (267)      (219)
    Commercial...................................................     --             (5)       (30)
                                                                   ---------  ---------  ---------
      Total charge-offs..........................................     (1,939)    (1,558)    (2,384)
                                                                   ---------  ---------  ---------
Recoveries:
  Mortgage loans:
    Residential..................................................        130         54         84
    Commercial...................................................        107        106         80
    Construction and land........................................        200        217        189
  Other loans:
    Consumer.....................................................         80         50         56
    Commercial...................................................         17         29          6
                                                                   ---------  ---------  ---------
      Total recoveries...........................................        534        456        415
                                                                   ---------  ---------  ---------
Net charge-offs..................................................     (1,405)    (1,102)    (1,969)
                                                                   ---------  ---------  ---------
Balance at end of year...........................................  $   9,801      9,231      8,033
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>

    Substantially all newly originated fixed rate mortgage loans with 20 and 30
year terms are sold without recourse in the secondary market. The net realized
gain on these sales was $277,000, $161,000 and $67,000 in 1997, 1996 and 1995,
respectively. There were no loans held for sale at December 31, 1997. At
December 31, 1996, mortgage loans held for sale had a cost basis of $1.2 million
which approximated fair value.

    The Company generally retains the servicing rights on mortgage loans sold.
The principal balances of loans serviced for others, which are not included in
the consolidated balance sheets, were $51.7 million, $55.2 million and $58.0
million at December 31, 1997, 1996 and 1995, respectively. At December 31, 1997
and 1996, intangible assets included $51,000 and $37,000, respectively, for the
unamortized cost of mortgage servicing assets recognized on loans sold (with
servicing retained) since January 1, 1996 in accordance with SFAS Nos. 122 and
125. The fair value of these servicing rights approximated their carrying value
at both December 31, 1997 and 1996.

                                       52
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. OTHER REAL ESTATE

    Other real estate consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                                                1997       1996
                                                                              ---------  ---------
<S>                                                                           <C>        <C>
                                                                                 (IN THOUSANDS)
Residential properties......................................................  $     687        900
Commercial properties.......................................................         94      1,564
Construction and land.......................................................        289        477
                                                                              ---------  ---------
                                                                                  1,070      2,941
Allowance for losses........................................................       (464)      (671)
                                                                              ---------  ---------
    Total other real estate, net............................................  $     606      2,270
                                                                              ---------  ---------
                                                                              ---------  ---------
</TABLE>

    Activity in the allowance for losses is summarized as follows for the years
ended December 31:

<TABLE>
<CAPTION>
                                                                           1997        1996        1995
                                                                         ---------     -----     ---------
<S>                                                                      <C>        <C>          <C>
                                                                                  (IN THOUSANDS)
Balance at beginning of year...........................................  $     671         203         471
Provision charged to net cost of other real estate.....................     --             525         325
Charge-offs for realized losses........................................       (207)        (57)       (593)
                                                                         ---------         ---         ---
Balance at end of year.................................................  $     464         671         203
                                                                         ---------         ---         ---
                                                                         ---------         ---         ---
</TABLE>

    The components of the net cost of other real estate were as follows for the
years ended December 31:

<TABLE>
<CAPTION>
                                                                          1997       1996       1995
                                                                        ---------  ---------  ---------
<S>                                                                     <C>        <C>        <C>
                                                                                (IN THOUSANDS)
Provision for losses..................................................  $  --            525        325
Net holding costs.....................................................        648        510        376
Gain on sales of properties...........................................       (627)      (242)      (346)
                                                                        ---------        ---        ---
    Net cost of other real estate.....................................  $      21        793        355
                                                                        ---------        ---        ---
                                                                        ---------        ---        ---
</TABLE>

6. PREMISES AND EQUIPMENT

    Premises and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                                               1997       1996
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
                                                                                (IN THOUSANDS)
Land.......................................................................  $   1,760      1,839
Buildings..................................................................      8,874      9,726
Furniture and equipment....................................................      8,055      7,463
                                                                             ---------  ---------
                                                                                18,689     19,028
Less accumulated depreciation..............................................      8,963      8,705
                                                                             ---------  ---------
    Total premises and equipment, net......................................  $   9,726     10,323
                                                                             ---------  ---------
                                                                             ---------  ---------
</TABLE>

                                       53
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. SAVINGS AND TIME DEPOSITS

    The following is an analysis of savings and time deposits at December 31:

<TABLE>
<CAPTION>
                                                            1997                   1996
                                           ---------------------------------------
                                                                        ---------------------------
                                                          WEIGHTED                     WEIGHTED
                                             AMOUNT     AVERAGE RATE      AMOUNT     AVERAGE RATE
                                           ----------  ---------------  ----------  ---------------
<S>                                        <C>         <C>              <C>         <C>
                                                         (DOLLARS IN THOUSANDS)
NOW accounts.............................  $   19,475          1.73%    $   24,829          1.76%
Savings accounts.........................     148,592          3.53        169,358          3.47
Money market accounts....................     225,295          5.15        169,665          5.02
Time deposits............................     337,453          5.45        372,727          5.37
                                           ----------           ---     ----------           ---
    Total savings and time deposits......  $  730,815          4.87%    $  736,579          4.73%
                                           ----------           ---     ----------           ---
                                           ----------           ---     ----------           ---
</TABLE>

    The following is a summary of time deposits by remaining contractual term at
December 31:
<TABLE>
<CAPTION>
                                                      1997                         1996
                                           ---------------------------  ---------------------------
<S>                                        <C>         <C>              <C>         <C>
                                                          WEIGHTED                     WEIGHTED
REMAINING CONTRACTUAL TERM                   AMOUNT     AVERAGE RATE      AMOUNT     AVERAGE RATE
-----------------------------------------  ----------  ---------------  ----------  ---------------

<CAPTION>
                                                         (DOLLARS IN THOUSANDS)
<S>                                        <C>         <C>              <C>         <C>
Six months or less.......................  $  165,764          5.30%    $  193,415          5.23%
More than six months to one year.........      93,944          5.39         89,083          5.20
More than one year to two years..........      43,730          5.64         56,404          5.70
More than two years to three years.......       9,733          5.89         11,291          5.79
More than three years to five years......      21,735          6.15         17,132          6.06
More than five years.....................       2,547          5.92          5,402          6.52
                                           ----------           ---     ----------           ---
    Total time deposits..................  $  337,453          5.45%    $  372,727          5.37%
                                           ----------           ---     ----------           ---
                                           ----------           ---     ----------           ---
</TABLE>

    Time deposits issued in amounts of $100,000 or more amounted to $55.5
million and $52.6 million at December 31, 1997 and 1996, respectively. Interest
expense on time deposits over $100,000 amounted to $3.0 million, $2.9 million
and $2.7 million in 1997, 1996 and 1995, respectively.

    In April 1996, Pawling completed the acquisition of two branch offices
located in Rockland County, New York and assumed deposit liabilities of
approximately $152.8 million. Assets recorded in the acquisition were
principally cash and a deposit purchase premium. The unamortized purchase
premium of $7.3 million and $8.7 million at December 31, 1997 and 1996,
respectively, is included in intangible assets in the consolidated balance
sheets.

8. BORROWINGS

    From time to time, the Company purchases federal funds. These borrowings
generally mature within one to four days of the transaction date. During 1996,
the maximum balance outstanding as of any month end was $17.9 million, and the
average balance was $927,000 with a weighted average interest rate of 5.50%.
There were no such borrowings outstanding at December 31, 1996 or at any time
during 1997 and 1995.

    Pawling is a member of the Federal Home Loan Bank of New York ("FHLBNY")
and, at December 31, 1997, had immediate access to additional liquidity in the
form of secured borrowings from the FHLBNY of up to $99.3 million. The Company
also has access to the discount window of the Federal Reserve Bank. There were
no borrowings from these sources during 1997, 1996 and 1995.

                                       54
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. OTHER NON-INTEREST EXPENSE

    The components of other non-interest expense for the years ended December 31
are as follows:

<TABLE>
<CAPTION>
                                                                      1997       1996       1995
                                                                    ---------  ---------  ---------
<S>                                                                 <C>        <C>        <C>
                                                                            (IN THOUSANDS)
Professional and outside service fees.............................  $   2,239      1,912      1,553
Printing, postage, telephone and office supplies..................      1,361      1,606      1,283
(Credit) provision for losses on Nationar claim...................     --         (1,000)     1,000
Advertising.......................................................        903        849        868
Data processing...................................................        872        753        612
Foreclosure and collection expense................................        209        751        411
FDIC deposit insurance and related costs..........................        100          2        721
Other.............................................................        813      1,092      1,072
                                                                    ---------  ---------  ---------
    Total.........................................................  $   6,497      5,965      7,520
                                                                    ---------  ---------  ---------
                                                                    ---------  ---------  ---------
</TABLE>

    In February 1995, the Superintendent of Banks for the State of New York (the
"Superintendent") seized Nationar, a check-clearing and trust company, freezing
all of Nationar's assets. The Company used Nationar for federal funds
transactions, as well as certain custodial and investment services. The Company
had $3.6 million in federal funds sold and other deposits invested with Nationar
at the time of seizure. Based on the Superintendent's preliminary indications
that Nationar's assets may be inadequate to fully satisfy creditor claims and a
report noting a deficit in Nationar's net shareholders' equity, management, as
advised by legal counsel, believed that there was reasonable likelihood that the
Company would not recover all of its investments in federal funds and other
deposits at Nationar at December 31, 1995. As a result, the Company established
a valuation allowance of $1.0 million in 1995 through a charge to other
non-interest expense. In June and December 1996, the Company received cash
distributions which fully satisfied its $3.6 million claim and, accordingly, the
valuation allowance was reversed in the fourth quarter of 1996 by a credit to
other non-interest expense.

                                       55
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES

    The components of income tax expense are as follows for the years ended
December 31:

<TABLE>
<CAPTION>
                                                                       1997       1996       1995
                                                                     ---------  ---------  ---------
<S>                                                                  <C>        <C>        <C>
                                                                             (IN THOUSANDS)
Current:
  Federal..........................................................  $   4,216      2,579      3,191
  State............................................................      1,039        432      1,109
                                                                     ---------  ---------  ---------
                                                                         5,255      3,011      4,300
                                                                     ---------  ---------  ---------
Deferred:
  Federal..........................................................        238       (500)       243
  State............................................................        102       (158)        81
  Reduction in the valuation allowance for
    deferred tax assets............................................     --         --           (174)
                                                                     ---------  ---------  ---------
                                                                           340       (658)       150
                                                                     ---------  ---------  ---------
    Total income tax expense.......................................  $   5,595      2,353      4,450
                                                                     ---------  ---------  ---------
                                                                     ---------  ---------  ---------
</TABLE>

    The following is a reconciliation of the expected income tax expense
(computed at the statutory federal tax rate) and the actual income tax expense
for the years ended December 31:

<TABLE>
<CAPTION>
                                                                      1997       1996       1995
                                                                    ---------  ---------  ---------
<S>                                                                 <C>        <C>        <C>
                                                                            (IN THOUSANDS)
  Income tax at statutory federal rate............................  $   4,837      3,969      3,820
  Increase (decrease) in income tax expense resulting from:
    State income taxes, net of federal tax effect.................        753        802        804
    Favorable resolution of prior years' tax examinations.........     --         (2,441)    --
    Reduction in the valuation allowance for deferred tax
      assets......................................................     --         --           (174)
    Other.........................................................          5         23     --
                                                                    ---------  ---------  ---------
      Actual income tax expense...................................  $   5,595      2,353      4,450
                                                                    ---------  ---------  ---------
                                                                    ---------  ---------  ---------
</TABLE>

    Federal and state tax benefits of $1.5 million and $941,000, respectively,
were recognized in 1996 upon settlement with the tax authorities of audits of
certain prior years' tax returns.

    The valuation allowance applicable to the Company's federal deferred tax
asset was reduced by $174,000 in 1995 primarily due to the utilization of
capital loss carryforwards during the year.

                                       56
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES (CONTINUED)
    The tax effects of temporary differences that give rise to the Company's
deferred tax assets and liabilities at December 31 are as follows:

<TABLE>
<CAPTION>
                                                                                1997       1996
                                                                              ---------  ---------
<S>                                                                           <C>        <C>
                                                                                 (IN THOUSANDS)
Deferred tax assets:
  Allowance for loan losses.................................................  $   4,037      3,803
  Net deferred loan origination fees........................................        800        916
  Accrued postretirement benefits...........................................        914        923
  Intangible assets.........................................................        529        221
  Accrued interest payable..................................................         52        899
  Other deductible temporary differences....................................        600        486
                                                                              ---------  ---------
Total gross deferred tax assets.............................................      6,932      7,248
Less valuation allowance....................................................        (88)       (88)
                                                                              ---------  ---------
Deferred tax assets, net of valuation allowance.............................      6,844      7,160
Deferred tax liabilities for taxable temporary differences..................       (503)      (479)
                                                                              ---------  ---------
Net deferred tax assets.....................................................      6,341      6,681
Net deferred tax liability associated with net unrealized gain
  on securities available for sale..........................................       (484)      (547)
                                                                              ---------  ---------
Total net deferred tax assets...............................................  $   5,857      6,134
                                                                              ---------  ---------
                                                                              ---------  ---------
</TABLE>

    Based on recent historical and anticipated future pre-tax earnings,
management believes it is more likely than not that the Company will realize its
net deferred tax assets.

    As a thrift institution, Pawling 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 equal to the excess of
allowable deductions over actual bad debt losses and other reserve reductions.
These 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 which is expected to become taxable
(or "recaptured") in the foreseeable future.

    Certain amendments to the federal and New York State tax laws regarding bad
debt deductions were enacted in July and August 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 bad debt reserves in excess of
the base-year amounts. Pawling previously established, and will continue to
maintain, a deferred tax liability with the respect to such excess federal
reserves. The New York State amendments redesignate all of Pawling's state bad
debt reserves as the base-year amount and also provide for future additions to
the base-year reserve using the percentage of taxable income method.

    In accordance with SFAS No. 109, the Company has not recognized deferred tax
liabilities with respect to Pawling's federal and state base-year tax bad debt
reserves of $8.8 million and $27.5 million, respectively. The unrecognized
deferred tax liabilities at December 31, 1997 with respect to the federal and
state base-year reserves were $3.0 million and $1.9 million, respectively. Under
the tax laws as amended, events that would result in taxation of these reserves
include (i) redemptions of Pawling's stock or certain

                                       57
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES (CONTINUED)
excess distributions to Progressive and (ii) failure of Pawling to maintain a
specified qualifying assets ratio or meet other thrift definition tests for New
York State tax purposes. The Company does not expect that any such events will
occur prior to the proposed merger discussed in note 2. Consummation of the
proposed merger of Pawling into Hudson Valley, however, would result in the
recapture of Pawling's state base-year reserve and the recognition of the
resulting tax liability as a charge to income tax expense in the financial
statements of the combined company. Under the present tax laws, however,
Pawling's federal base-year reserve would not be subject to recapture upon
consummation of the proposed merger.

11. STOCKHOLDERS' EQUITY

EARNINGS PER COMMON SHARE

    As discussed in note 1, the Company has adopted SFAS No. 128 and restated
its EPS data for all periods to present basic EPS and diluted EPS in accordance
with the new requirements. The number of common and common-equivalent shares
used in the EPS computations have been restated to give retroactive effect to
the 1996 stock split.

    The table below summarizes the number of shares used in the Company's EPS
calculations for the years ended December 31, 1997, 1996 and 1995. For purposes
of computing basic EPS, net income applicable to common stock equaled net income
for each of these periods.

<TABLE>
<CAPTION>
                                                                         1997       1996       1995
                                                                       ---------  ---------  ---------
<S>                                                                    <C>        <C>        <C>
                                                                               (IN THOUSANDS)
Weighted average common shares outstanding
  for computation of basic EPS.......................................      3,824      3,916      4,070
Common-equivalent shares due to the dilutive
  effect of stock options, computed using the
  treasury stock method..............................................         99         51         46
                                                                       ---------  ---------  ---------
Weighted average common shares
  for computation or diluted EPS.....................................      3,923      3,967      4,116
                                                                       ---------  ---------  ---------
                                                                       ---------  ---------  ---------
</TABLE>

REGULATORY CAPITAL REQUIREMENTS

    FDIC regulations require banks to maintain a minimum leverage ratio of Tier
1 capital to total adjusted assets of 4.0%, and minimum ratios of Tier 1 capital
and total capital to risk-weighted assets of 4.0% and 8.0%, respectively. The
FRB has adopted similar requirements for the consolidated capital of bank
holding companies.

    Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized bank. Such actions could have a direct material
effect on a bank's financial statements. The regulations establish a framework
for the classification of banks into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. Generally, a bank is considered well capitalized if
it has a Tier 1 capital ratio of at least 5.0%; a Tier 1 risk-based capital
ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.

    The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and

                                       58
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. STOCKHOLDERS' EQUITY (CONTINUED)
classifications are also subject to qualitative judgments by the regulators
about capital components, risk weightings and other factors.

    Management believes that, as of December 31, 1997 and 1996, Pawling and
Progressive met all capital adequacy requirements to which they are subject.
Further, the most recent FDIC notification categorized Pawling as a well
capitalized institution under the prompt corrective action regulations. There
have been no conditions or events since the notification that management
believes have changed Pawling's capital classification.

    The following is a summary of actual capital amounts and ratios as of
December 31, 1997 and 1996 for Pawling and Progressive (consolidated), compared
to the requirements for minimum capital adequacy and for classification as well
capitalized:
<TABLE>
<CAPTION>
                                                                           REGULATORY REQUIREMENTS
                                                                ----------------------------------------------
<S>                                     <C>        <C>          <C>        <C>          <C>        <C>
                                                                   MINIMUM CAPITAL        CLASSIFICATION AS
                                                ACTUAL                 ADEQUACY            WELL CAPITALIZED
                                        ----------------------  ----------------------  ----------------------

<CAPTION>
                                         AMOUNT       RATIO      AMOUNT       RATIO      AMOUNT       RATIO
                                        ---------     -----     ---------     -----     ---------     -----
                                                                (DOLLARS IN THOUSANDS)
<S>                                     <C>        <C>          <C>        <C>          <C>        <C>
DECEMBER 31, 1997
PAWLING:
Leverage capital......................  $  64,769         7.4%  $  35,110         4.0%  $  43,887         5.0%
Risk-based capital:
  Tier 1..............................     64,769        13.4      19,352         4.0      29,027         6.0
  Total...............................     70,863        14.7      38,703         8.0      48,379        10.0
PROGRESSIVE (CONSOLIDATED):
Leverage capital......................  $  70,469         8.0%  $  35,342         4.0%
Risk-based capital:
  Tier 1..............................     70,469        14.5      19,399         4.0
  Total...............................     76,577        15.8      38,797         8.0

DECEMBER 31, 1996
PAWLING:
Leverage capital......................  $  57,095         6.6%  $  34,779         4.0%  $  43,473         5.0%
Risk-based capital:
  Tier 1..............................     57,095        12.3      18,603         4.0      27,904         6.0
  Total...............................     62,951        13.5      37,205         8.0      46,507        10.0
PROGRESSIVE (CONSOLIDATED):
Leverage capital......................  $  63,047         7.2%  $  35,013         4.0%
Risk-based capital:
  Tier 1..............................     63,047        13.5      18,646         4.0
  Total...............................     68,916        14.8      37,292         8.0
</TABLE>

                                       59
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. STOCKHOLDERS' EQUITY (CONTINUED)
DIVIDEND RESTRICTIONS

    Dividend payments by Progressive must be within certain guidelines of the
FRB which provide, among other things, that dividends generally should be paid
only from current earnings. Pawling's ability to pay dividends to Progressive is
also subject to various restrictions. Under New York State Banking Law,
dividends may be declared and paid only from Pawling's net profits, as defined.
The approval of the Superintendent of Banks of the State of New York is required
if the total of all dividends declared in any calendar year will exceed the net
profit for the year plus the retained net profits of the preceding two years. At
December 31, 1997, Pawling had $12.5 million in retained net profits which were
available for dividend payments.

RESERVE REQUIREMENTS

    Pawling is required to maintain reserves (primarily in the form of cash on
hand and Federal Reserve Bank balances) with respect to certain types of deposit
liabilities. Reserves maintained at December 31, 1997 and 1996 were $2.2 million
and $3.8 million, respectively.

12. STOCK OPTION PLANS

    The Company has established stock option plans for its employees and
directors. Under the plans, the option exercise price may not be less than the
fair market value of the common stock at the date of the grant. Options granted
pursuant to the employees' plan are generally exercisable any time within ten
years of the date of grant. Unexercised options generally expire 90 days after
termination of an employee's continuous employment by the Company, except in
connection with severance arrangements which provide employees up to nine months
to exercise the options. Options granted pursuant to the directors' non-
qualified stock option plans have ten-year terms, and vest and become fully
exercisable six months after the date of grant.

    At December 31, 1997, shares available for future option grants totaled
336,341 for the employees' plan and 47,100 for the directors' plans. In January
1998, options for an additional 56,750 shares were granted under the employees'
plan at an exercise price of $35.25. In connection with the proposed merger
described in note 2, each of Progressive's stock options outstanding at the
merger date will be automatically converted into an option to purchase shares of
Continuing Corporation common stock, with the number of shares and exercise
price adjusted based on the exchange ratio of 1.82.

                                       60
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. STOCK OPTION PLANS (CONTINUED)
    The following is a summary of activity in the plans for 1995, 1996 and 1997.
All share and per share data has been adjusted to reflect the 1996 stock split
(see note 1).

<TABLE>
<CAPTION>
                                           EMPLOYEES' PLAN               DIRECTORS' PLANS
                                     ----------------------------  ----------------------------
<S>                                  <C>        <C>                <C>        <C>
                                                WEIGHTED AVERAGE              WEIGHTED AVERAGE
                                      SHARES     EXERCISE PRICE     SHARES     EXERCISE PRICE
                                     ---------  -----------------  ---------  -----------------
Outstanding at
  December 31, 1994................     64,965      $    9.11        128,100      $    9.43
  Granted..........................    109,749          16.72         --             --
  Exercised........................    (29,227)          6.20        (11,850)          9.03
  Forfeited........................     (1,200)          2.83         --             --
                                     ---------         ------      ---------         ------
Outstanding at
  December 31, 1995................    144,287          15.54        116,250           9.47
  Granted..........................     75,300          18.26         10,800          17.17
  Exercised........................    (41,243)         14.20        (23,250)          9.06
  Forfeited........................    (16,140)         16.74         --             --
                                     ---------         ------      ---------         ------
Outstanding at
  December 31, 1996................    162,204          16.96        103,800          10.37
  Granted..........................     56,875          23.68         --             --
  Exercised........................    (17,775)         17.65         (4,350)          9.76
  Forfeited........................     (1,500)         17.54         --             --
                                     ---------         ------      ---------         ------
Outstanding at
  December 31, 1997................    199,804      $   18.80         99,450      $   10.39
                                     ---------         ------      ---------         ------
                                     ---------         ------      ---------         ------
Exercisable at December 31:
  1995.............................     97,787      $   14.77        116,250      $    9.47
  1996.............................    142,704          16.93        103,800          10.37
  1997.............................    199,804          18.80         99,450          10.39
</TABLE>

    The following is a summary of additional information concerning options
outstanding and exercisable at December 31, 1997, for the employees' plan and
directors' plans on a combined basis:

<TABLE>
<CAPTION>
                                          WEIGHTED AVERAGE
                              ----------------------------------------
<S>                <C>        <C>                        <C>
                                                           EXERCISE
EXERCISE PRICE      NUMBER     REMAINING LIFE (YEARS)        PRICE
-----------------  ---------  -------------------------  -------------
$     7.00            33,600                4.5            $    7.00
      11.00           50,250                6.0                11.00
   11.83 to 12.83     15,454                5.8                12.32
      15.75           22,700                7.1                15.75
   17.17 to 17.75    108,225                7.9                17.41
   19.33 to 20.33     16,000                8.6                19.58
      23.25           50,525                9.1                23.25
      33.00            2,500                9.7                33.00
-----------------                            --
                   ---------                                  ------
$  7.00 to $33.00    299,254                7.3            $   16.01
-----------------                            --
-----------------                            --
                   ---------                                  ------
                   ---------                                  ------
</TABLE>

    All options have been granted at exercise prices equal to the fair value of
the common stock at the grant dates. Therefore, in accordance with the
provisions of APB Opinion No. 25 related to fixed stock

                                       61
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. STOCK OPTION PLANS (CONTINUED)
options, no compensation expense is recognized with respect to options granted
or exercised. Under the alternative fair-value-based method defined in SFAS No.
123, the fair value of all fixed stock options on the grant date would be
recognized as expense over the vesting period (if any). The estimated weighted
average fair values of options granted in 1997, 1996 and 1995 were $5.95, $4.78
and $4.93, respectively. These fair values were estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 3.0%; expected volatility rate of 23.6% in 1997,
25.0% in 1996 and 26.4% in 1995; risk-free interest rate of 6.45% in 1997, 5.95%
in 1996 and 6.89% in 1995; and expected option lives of 5.4 years in 1997, 6.0
years in 1996 and 6.2 years in 1995.

    The following is a comparison of the Company's net income and earnings per
share, as reported for the years 1997, 1996 and 1995, to the pro forma amounts
assuming application of the fair-value-based method of SFAS No. 123 to options
granted after January 1, 1995:

<TABLE>
<CAPTION>
                                                                       1997       1996       1995
                                                                     ---------  ---------  ---------
<S>                                                                  <C>        <C>        <C>
                                                                     (IN THOUSANDS, EXCEPT PER SHARE
                                                                                AMOUNTS)
Net income:
  As reported......................................................  $   8,632      9,321      6,786
  Pro forma........................................................      8,309      8,879      6,446

Earnings per common share:
Basic:
  As reported......................................................  $    2.26       2.38       1.67
  Pro forma........................................................       2.17       2.27       1.58
Diluted:
  As reported......................................................       2.20       2.35       1.65
  Pro forma........................................................       2.12       2.24       1.57
</TABLE>

13. EMPLOYEE BENEFITS

RETIREMENT PLANS

    The Company's retirement plan covers substantially all employees who meet
certain age and length of service requirements. Prior to October 1, 1997, the
plan was a defined benefit plan providing for benefits based on the employees'
years of accredited service and their average annual three years' earnings, as
defined by the plan. Plan benefits were funded through Company contributions at
least equal to the amounts required by law. Effective October 1, 1997, the
defined benefit plan was amended and restated as a cash balance plan. The annual
service credit under the cash balance plan equals 5% of annual compensation (8%
for those employees who were 50 years of age or older with at least 10 years of
service as of September 30, 1997).

                                       62
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. EMPLOYEE BENEFITS (CONTINUED)
    The following is a reconciliation of the funded status of the plan at
December 31, 1997 and 1996. The 1997 information was measured based on the
restated provisions of the cash balance plan.

<TABLE>
<CAPTION>
                                                                                1997       1996
                                                                              ---------  ---------
<S>                                                                           <C>        <C>
                                                                                 (IN THOUSANDS)
Actuarial present value of benefit obligations:
  Accumulated benefit obligation--vested....................................  $   6,268      5,352
  Accumulated benefit obligation--nonvested.................................        106        313
                                                                              ---------  ---------
                                                                                  6,374      5,665
  Effect of projected future compensation levels............................        686      1,255
                                                                              ---------  ---------
Projected benefit obligation for service rendered to date...................      7,060      6,920
Plan assets, at fair value (primarily investments in mutual funds)..........     10,133      8,643
                                                                              ---------  ---------
Plan assets in excess of projected benefit obligation.......................      3,073      1,723
Unrecognized net gain from past experience different from
  that assumed and effect of changes in assumptions.........................     (1,950)      (975)
Unrecognized prior service cost.............................................       (567)      (143)
Unrecognized net transition obligation......................................         13         21
                                                                              ---------  ---------
  Prepaid pension expense (included in other assets)........................  $     569        626
                                                                              ---------  ---------
                                                                              ---------  ---------
</TABLE>

    The components of net pension expense are as follows for the years ended
December 31:

<TABLE>
<CAPTION>
                                                                  1997       1996       1995
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
                                                                        (IN THOUSANDS)
Service cost--benefits earned during the year.................  $     263        271        241
Interest cost on projected benefit obligation.................        508        489        460
Actual return on plan assets..................................     (1,870)    (1,082)    (1,279)
Net amortization and deferral.................................      1,155        472        766
                                                                ---------  ---------  ---------
  Net pension expense.........................................  $      56        150        188
                                                                ---------  ---------  ---------
                                                                ---------  ---------  ---------
</TABLE>

    A discount rate of 7.25% and a rate of increase in future compensation
levels of 5.0% were used in determining the actuarial present value of the
projected benefit obligation at December 31, 1997 (7.75% and 5.5%, respectively,
at December 31, 1996, and 7.50% and 5.5%, respectively, at December 31, 1995).
The expected long-term rate of return on plan assets was 8.0% for each year.

    The Company also has an unfunded supplemental executive retirement plan
providing for benefits that offset the reduction in benefits under the Company's
retirement plan due to certain limitations imposed under the federal income tax
laws. The accumulated benefit obligation for the supplemental plan was $153,000
at December 31, 1997.

    The Company also maintains a non-qualified, unfunded retirement and
severance plan for members of the Board of Directors. Under this plan, each
member leaving the Board after at least five years of service is entitled to a
benefit consisting of the annual retainer fee at the time of departure
multiplied by the director's number of years of service, up to 15 years. The
annual cost of this plan was $80,000 for 1997, $85,000 for 1996 and $95,000 for
1995. The accumulated benefit obligation was $415,000 at December 31, 1997.

                                       63
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. EMPLOYEE BENEFITS (CONTINUED)
OTHER POSTRETIREMENT BENEFITS

    The Company also provides certain postretirement health care benefits.
Substantially all Company employees become eligible for postretirement benefits
if they meet certain age and length of service requirements. The Company accrues
the cost of these benefits as they are earned by active employees.

    The actuarial and recorded liabilities for postretirement benefits, none of
which have been funded, were as follows at December 31:

<TABLE>
<CAPTION>
                                                                                1997       1996
                                                                              ---------  ---------
<S>                                                                           <C>        <C>
                                                                                 (IN THOUSANDS)
Accumulated postretirement obligations:
  Retirees..................................................................  $     850        613
  Fully eligible employees..................................................        383        138
  Other active participants.................................................        159        613
                                                                              ---------  ---------
    Total accumulated postretirement benefit obligation.....................      1,392      1,364
Unrecognized gain from the effect of changes in assumptions
  and plan amendments.......................................................        461        459
Unrecognized prior service cost.............................................        366        408
                                                                              ---------  ---------
    Accrued postretirement benefit cost (included in other liabilities).....  $   2,219      2,231
                                                                              ---------  ---------
                                                                              ---------  ---------
</TABLE>

    The components of net postretirement benefits expense are as follows for the
years ended December 31:

<TABLE>
<CAPTION>
                                                                             1997        1996         1995
                                                                           ---------     -----        -----
<S>                                                                        <C>        <C>          <C>
                                                                                     (IN THOUSANDS)
Service cost--benefits earned during the year............................  $      26          58           48
Interest cost on accumulated benefit obligation..........................         96         100           91
Net amortization and deferral............................................        (69)        (60)         (72)
                                                                                                           --
                                                                                 ---         ---
    Net postretirement benefits expense..................................  $      53          98           67
                                                                                                           --
                                                                                                           --
                                                                                 ---         ---
                                                                                 ---         ---
</TABLE>

    The accumulated postretirement benefit obligation was determined using
discount rates of 7.25%, 7.75% and 7.50% at December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997, the assumed rate of increase in future
health care costs was 7.5% for 1998, gradually decreasing to 5.0% in the year
2006 and remaining at that level thereafter. Increasing the assumed health care
cost trend rate by 1.0% in each future year would increase the accumulated
benefit obligation as of December 31, 1997 by $146,000 and the aggregate of the
service and interest cost by $11,000 for the year then ended.

401(K) SAVINGS PLAN

    The Company also maintains a defined contribution plan under Section 401(k)
of the Internal Revenue Code, pursuant to which eligible employees may elect to
contribute up to 8.0% of their compensation. The Company makes contributions
equal to 50% of the first 5.0% of a participant's contribution for non-highly
compensated employees, and 50% of the first 3.0% for highly-compensated
employees. Voluntary and matching contributions are invested, in accordance with
the participant's direction, in one or a number of investment options including
a fund consisting of shares of Progressive's common stock. Employee
contributions vest immediately, while employer contributions vest ratably over a
five-year period beginning after the first year of participation. Savings plan
expense amounted to $111,000 in 1997, $117,000 in 1996 and $92,000 in 1995.

                                       64
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. COMMITMENTS AND CONTINGENCIES

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

    The Company's lending-related financial instruments with off-balance sheet
risk consist of loan origination commitments, unadvanced lines of credit and
standby letters of credit. These instruments involve various degrees of credit
risk, interest rate risk and liquidity risk. The Company's maximum potential
exposure to credit loss is represented by the contractual amounts of the
instruments, assuming that they are fully funded, the borrower defaults and any
collateral proves to be worthless. The Company does not utilize off-balance
sheet financial instruments for trading purposes.

    The contractual amounts of these financial instruments at December 31 were
as follows:

<TABLE>
<CAPTION>
                                                                             1997       1996
                                                                           ---------  ---------
<S>                                                                        <C>        <C>
                                                                              (IN THOUSANDS)
Commitments and unadvanced lines of credit:
  Mortgage loans:
    Residential..........................................................  $  58,941     65,225
    Commercial and other.................................................     26,910     16,146
  Other loans............................................................     13,040     11,784
                                                                           ---------  ---------
      Total..............................................................  $  98,891     93,155
                                                                           ---------  ---------
                                                                           ---------  ---------
Standby letters of credit................................................  $     543        311
                                                                           ---------  ---------
                                                                           ---------  ---------
</TABLE>

    Commitments to originate loans and unadvanced lines of credit are comprised
of $67.4 million for adjustable rate loans and $31.5 million for fixed rate
loans at December 31, 1997 ($80.0 million and $13.2 million, respectively, at
December 31, 1996).

    The contractual amounts of these financial instruments do not necessarily
represent future cash requirements since certain of these instruments may expire
without being funded and others may not be fully drawn upon. Loan origination
commitments are contractual agreements to lend to customers within specified
time periods at interest rates and other terms based on market conditions
existing on the commitment or closing date. Management evaluates each customer's
creditworthiness on a case-by-case basis. Standby letters of credit are issued
on behalf of customers in connection with contracts between the customer and
third parties. Under a standby letter of credit, the Company assures that a
third party will receive specified funds if a customer fails to meet his
contractual obligation.

    At December 31, 1997, there were no mortgage loans held for sale. At
December 31, 1996, the Company had mortgage loans held for sale of $1.2 million
which approximated their fair value. For mortgage loans which are to be sold
into the secondary market, the Company generally enters into commitments to sell
loans to third parties at the time that rate-lock agreements are entered into
with the potential borrowers. At December 31, 1997 and 1996, the Company had
commitments to sell loans to third parties amounting to $5.2 million and $2.3
million, respectively.

                                       65
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASE COMMITMENTS

    At December 31, 1997, the Company was obligated under a number of
non-cancelable operating leases for office space. Certain leases contain renewal
options and provide for increased rentals based principally on increases in the
average Consumer Price Index. Rent expense under operating leases was
approximately $469,000, $433,000 and $387,000 for 1997, 1996 and 1995,
respectively. The future minimum lease payments under operating leases at
December 31, 1997 were $409,000 for 1998, $341,000 for 1999, $282,000 for 2000,
$216,000 for 2001, $162,000 for 2002, and a total of $909,000 for later years.

LEGAL PROCEEDINGS

    In the normal course of business, the Company is involved in various
outstanding legal proceedings. Management has discussed the nature of these
proceedings with legal counsel. In the opinion of management, the financial
position of the Company will not be affected materially as a result of the
outcome of such legal proceedings.

15. FAIR VALUES OF FINANCIAL INSTRUMENTS

    SFAS No. 107 requires disclosures about the fair value of financial
instruments for which it is practicable to estimate fair value. The definition
of a financial instrument includes many of the assets and liabilities recognized
in the Company's consolidated balance sheets, as well as certain off-balance
sheet items.

    Fair value is defined in SFAS No. 107 as the amount at which a financial
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Quoted market prices are used to
estimate fair values when those prices are available. However, active markets do
not exist for many types of financial instruments. Consequently, fair values for
these instruments must be estimated by management using techniques such as
discounted cash flow analysis and comparison to similar instruments. These
estimates are subjective and require judgments regarding significant matters
such as the amount and timing of future cash flows and the selection of discount
rates that appropriately reflect market and credit risks. Changes in these
judgments often have a material effect on the fair value estimates. Since these
estimates are made as of a specific point in time, they are susceptible to
material near-term changes. Fair values estimated in accordance with SFAS No.
107 do not reflect any premium or discount that could result from the sale of a
large volume of a particular financial instrument, nor do they reflect possible
tax ramifications or transaction costs.

    Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business or the value of non-financial assets and liabilities such as
premises and equipment. In addition, there are significant intangible assets
that are not included in these fair value estimates, such as the value of "core
deposits" and the Company's branch network. Accordingly, the fair values
disclosed below do not represent management's estimate of the underlying value
of the Company.

                                       66
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
    The following is a summary of the carrying amounts and estimated fair values
of the Company's financial assets and liabilities (none of which are held for
trading purposes) at December 31:
<TABLE>
<CAPTION>
                                                                   1997                    1996
                                                          ----------------------  ----------------------
<S>                                                       <C>          <C>        <C>          <C>
                                                           CARRYING      FAIR      CARRYING      FAIR
                                                            AMOUNT       VALUE      AMOUNT       VALUE
                                                          -----------  ---------  -----------  ---------

<CAPTION>
                                                                           (IN MILLIONS)
<S>                                                       <C>          <C>        <C>          <C>
Financial assets:
  Cash and due from banks...............................   $    13.9        13.9        15.1        15.1
  Federal funds sold....................................        32.9        32.9        30.5        30.5
  Securities............................................       241.4       241.7       210.4       210.1
  Loans.................................................       564.5       567.3       583.6       583.0
  Accrued interest receivable...........................         5.7         5.7         6.1         6.1

Financial liabilities:
  Demand, NOW, savings and
    money market deposits...............................       461.1       461.1       421.5       421.5
  Time deposits.........................................       337.5       337.5       372.7       372.7
  Accrued interest payable..............................         0.1         0.1         2.2         2.2
</TABLE>

    The following paragraphs describe the valuation methods used by the Company
to estimate fair values.

SECURITIES

    The fair values of securities were based on market prices or dealer quotes.

LOANS

    For valuation purposes, the loan portfolio was segregated into its
significant categories such as residential mortgages, commercial mortgages and
consumer loans. These categories were further analyzed, where appropriate, based
on significant financial characteristics such as type of interest rate (fixed or
adjustable) and payment status (performing or non-performing). Fair values were
estimated for each component using a valuation method selected by management.

    The fair values of performing residential mortgage and consumer installment
loans were estimated based on current secondary market prices or current
interest rates for similar loans, adjusted judgmentally for differences in loan
characteristics. The fair values of performing commercial mortgage and
construction loans were estimated by discounting the anticipated cash flows from
the respective portfolios. Estimates of the timing and amount of these cash
flows considered factors such as future loan prepayments and credit losses. The
discount rates reflect estimated current market rates for loans with similar
terms to borrowers of similar credit quality.

    The fair values of non-performing loans were based on management's analysis
of available market information, recent collateral appraisals and other
borrower-specific information.

DEPOSIT LIABILITIES

    In accordance with SFAS No. 107, the fair values of deposit liabilities with
no stated maturity (demand, NOW, savings and money market accounts) are equal to
the carrying amounts payable on

                                       67
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
demand. The fair values of time deposits represent the greater of the
contractual cash flows discounted using interest rates currently offered on
deposits with similar characteristics and remaining maturities, or the amount at
which depositors could settle their accounts.

    As required by SFAS No. 107, these estimated fair values do not include the
value of core deposit relationships which comprise a significant portion of the
Company's deposit base. Management believes that the Company's core deposit
relationships provide a relatively stable, low-cost funding source which has a
substantial intangible value separate from the deposit balances.

OTHER FINANCIAL INSTRUMENTS

    The other financial assets and liabilities shown in the preceding table have
fair values that approximate the respective carrying amounts because the
instruments are payable on demand or have short-term maturities and present
relatively low credit risk and interest rate risk.

    Fair values of the loan origination commitments, unadvanced lines of credit
and standby letters of credit described in note 14 were estimated based on an
analysis of the interest rates and fees currently charged to enter into similar
transactions, considering the remaining terms of the instruments and the
creditworthiness of the potential borrowers. At December 31, 1997 and 1996, the
fair values of these financial instruments were not significant.

16. RECENT ACCOUNTING STANDARDS

    In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income (and its components) in financial statements. The standard
does not, however, specify when to recognize or how to measure items that make
up comprehensive income. Comprehensive income represents net income and certain
amounts reported directly in shareholders' equity, such as the net unrealized
gain or loss on securities available for sale. While SFAS No. 130 does not
require a specific reporting format, it does require that an enterprise display
an amount representing total comprehensive income for the period. As required by
SFAS No. 130, the Company will adopt these reporting requirements in 1998.

    In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Among other things, SFAS no. 131
requires public companies to report (i) certain financial and descriptive
information about its reportable operating segments (as defined) and (ii)
certain enterprise-wide financial information about products and services,
geographical areas and major customers. The required segment financial
disclosures include a measure of profit or loss, certain specific revenue and
expense items, and total assets. SFAS No. 131 is effective for the Company's
annual financial statements for periods beginning after December 15, 1997.
Management does not expect that this Statement will significantly affect the
Company's reporting requirements.

                                       68
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION

    The following are the condensed balance sheets of Progressive at December
31, 1997 and 1996, and its condensed statements of income and cash flows for
1997, 1996 and 1995:

<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS                                                     1997       1996
-------------------------------------------------------------------------  ---------  ---------
<S>                                                                        <C>        <C>
                                                                              (IN THOUSANDS)
Assets:
  Cash and due from banks................................................  $      54        134
  Federal funds sold.....................................................      3,800      5,200
  Securities available for sale, at fair value...........................      2,263      1,120
  Investment in Pawling..................................................     72,770     66,609
  Other assets...........................................................        370        271
                                                                           ---------  ---------
    Total assets.........................................................  $  79,257     73,334
                                                                           ---------  ---------
                                                                           ---------  ---------
Liabilities and shareholders' equity:
  Accrued expenses and other liabilities.................................  $     778        792
  Shareholders' equity...................................................     78,479     72,542
                                                                           ---------  ---------
    Total liabilities and shareholders' equity...........................  $  79,257     73,334
                                                                           ---------  ---------
                                                                           ---------  ---------
</TABLE>

<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME                                         1997       1996       1995
-------------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                  <C>        <C>        <C>
                                                                             (IN THOUSANDS)
Operating income:
  Dividends received from Pawling..................................  $   2,601      4,298      5,652
  Interest and other dividends.....................................        319        225        193
  Management and service fees......................................        318        315        418
  Loss on securities...............................................     --         --            (22)
                                                                     ---------  ---------  ---------
                                                                         3,238      4,838      6,241
                                                                     ---------  ---------  ---------
Operating expense:
  Salaries and employee benefits...................................        333        316        407
  Other............................................................        780       (603)     1,511
                                                                     ---------  ---------  ---------
                                                                         1,113       (287)     1,918
                                                                     ---------  ---------  ---------
Income before income taxes.........................................      2,125      5,125      4,323
Income tax (benefit) expense.......................................       (227)       158       (549)
                                                                     ---------  ---------  ---------
Income before equity in undistributed income of Pawling............      2,352      4,967      4,872
Equity in undistributed income of Pawling..........................      6,280      4,354      1,914
                                                                     ---------  ---------  ---------
    Net income.....................................................  $   8,632      9,321      6,786
                                                                     ---------  ---------  ---------
                                                                     ---------  ---------  ---------
</TABLE>

                                       69
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS                                   1997       1996       1995
-----------------------------------------------------------------  ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
                                                                           (IN THOUSANDS)
Operating activities:
  Net income.....................................................  $   8,632      9,321      6,786
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Equity in undistributed income of Pawling....................     (6,280)    (4,354)    (1,914)
    Other, net...................................................       (131)     2,782     (2,917)
                                                                   ---------  ---------  ---------
      Net cash provided by operating activities..................      2,221      7,749      1,955
                                                                   ---------  ---------  ---------
Investing activities:
  Purchases of securities........................................     (1,494)
  Proceeds from maturities of securities.........................        400        250        303
  Proceeds from sales of securities..............................     --         --          1,801
                                                                   ---------  ---------  ---------
      Net cash (used in) provided by investing activities........     (1,094)       250      2,104
                                                                   ---------  ---------  ---------
Financing activities:
  Cash dividends paid on common stock............................     (2,601)    (2,088)    (1,766)
  Net proceeds on exercises of stock options.....................        356        797        288
  Purchases of treasury stock....................................       (362)    (3,789)    (3,938)
                                                                   ---------  ---------  ---------
      Net cash used in financing activities......................     (2,607)    (5,080)    (5,416)
                                                                   ---------  ---------  ---------
Net (decrease) increase in cash and cash equivalents.............     (1,480)     2,919     (1,357)
Cash and cash equivalents at beginning of year...................      5,334      2,415      3,772
                                                                   ---------  ---------  ---------
Cash and cash equivalents at end of year.........................  $   3,854      5,334      2,415
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>

                                       70
<PAGE>
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

    Quarterly unaudited financial information follows:

<TABLE>
<CAPTION>
                                                           FIRST      SECOND        THIRD       FOURTH
                                                          QUARTER     QUARTER      QUARTER      QUARTER      YEAR
                                                         ---------  -----------  -----------  -----------  ---------
<S>                                                      <C>        <C>          <C>          <C>          <C>
                                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
-------------------------------------------------------
Interest and dividend income...........................  $  16,979      17,266       17,270       17,240      68,755
Interest expense.......................................      8,567       8,605        8,767        8,804      34,743
                                                         ---------  -----------  -----------  -----------  ---------
Net interest income....................................      8,412       8,661        8,503        8,436      34,012
Provision for loan losses..............................        600         500          500          375       1,975
Other income...........................................        920         912          902          912       3,646
Other expense..........................................      5,265       5,386        5,277        5,528      21,456
                                                         ---------  -----------  -----------  -----------  ---------
Income before income taxes.............................      3,467       3,687        3,628        3,445      14,227
Income tax expense.....................................      1,364       1,475        1,433        1,323       5,595
                                                         ---------  -----------  -----------  -----------  ---------
Net income.............................................  $   2,103       2,212        2,195        2,122       8,632
                                                         ---------  -----------  -----------  -----------  ---------
                                                         ---------  -----------  -----------  -----------  ---------
Earnings per common share(1):
  Basic................................................  $    0.55        0.58         0.57         0.55        2.26
  Diluted..............................................       0.54        0.57         0.56         0.54        2.20

1996
-------------------------------------------------------
Interest and dividend income...........................  $  14,684      17,095       17,031       17,038      65,848
Interest expense.......................................      7,373       8,783        8,956        8,737      33,849
                                                         ---------  -----------  -----------  -----------  ---------
Net interest income....................................      7,311       8,312        8,075        8,301      31,999
Provision for loan losses..............................        300         600          600          800       2,300
Other income(2)........................................        906         679          897          867       3,349
Other expense(3).......................................      4,638       5,970        5,653        5,113      21,374
                                                         ---------  -----------  -----------  -----------  ---------
Income before income taxes.............................      3,279       2,421        2,719        3,255      11,674
Income tax expense (benefit)(4)........................      1,357        (513)         174        1,335       2,353
                                                         ---------  -----------  -----------  -----------  ---------
Net income.............................................  $   1,922       2,934        2,545        1,920       9,321
                                                         ---------  -----------  -----------  -----------  ---------
                                                         ---------  -----------  -----------  -----------  ---------
Earnings per common share(1):
  Basic................................................  $    0.49        0.74         0.65         0.50        2.38
  Diluted..............................................       0.48        0.74         0.64         0.49        2.35
</TABLE>

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

(1) Per share amounts for all periods have been restated to reflect the adoption
    of SFAS No. 128 and the additional shares issued in the 1996 stock split.
    See notes 1 and 11.

(2) The second quarter amount is net of losses of $194,000 on sales of
    securities available for sale.

(3) The fourth quarter amount is net of a credit of $1.0 million related to the
    Nationar claim. See note 9.

(4) The second and third quarter amounts reflect tax benefits of $1.5 million
    and $941,000, respectively, related to settlements with the tax authorities.
    See note 10.

                                       71
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

    None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The following information included in the Proxy Statement is incorporated
herein by reference: "PROPOSAL I-- ELECTION OF DIRECTORS--General" and
"--Committees of the Board of Directors" and "SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE."

ITEM 11. EXECUTIVE COMPENSATION

    The following information included in the Proxy Statement is incorporated
herein by reference: "PROPOSAL I--ELECTION OF DIRECTORS--Compensation Committee
Report on Executive Compensation," "--Comparative Stock Performance Graph,"
"--Executive Compensation," and "--Supplemental Executive Retirement Plan," and
"--Director Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The following information included in the Proxy Statement is incorporated
herein by reference: "VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF" and
"PROPOSAL I-- ELECTION OF DIRECTORS--Security Ownership of Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The following information included in the Proxy Statement is incorporated
herein by reference: "PROPOSAL I--ELECTION OF DIRECTORS--Transactions With
Management."

                                       72
<PAGE>
                                    PART IV

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

<TABLE>
<S>        <C>        <C>
(a)        (1)        The following are filed as part of this Annual Report on Form 10-K:

                      (A) Independent Auditors' Report;

                      (B) Consolidated Balance Sheets at December 31, 1997 and 1996;

                      (C) Consolidated Statements of Income for the Years Ended December 31, 1997, 1996
                      and 1995;

                      (D) Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
                      1997, 1996 and 1995;

                      (E) Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
                      1996 and 1995; and

                      (F) Notes to Consolidated Financial Statements;

           (2) Schedules have been omitted as they are not applicable.

           (3) Exhibits
</TABLE>

<TABLE>
<CAPTION>
DESIGNATION    DESCRIPTION
-------------  -----------------------------------------------------------------------------------------------------
<C>            <S>

        2.1    Agreement and Plan of Reorganization and related Plan of Merger dated as of December 16, 1997
               (Schedules omitted. The Company agrees to supplementally furnish a copy of any omitted schedules to
               the Commission upon request.) (Incorporated by reference to Exhibit 2.1 to the Current Report on Form
               8-K filed on December 23, 1997 (hereinafter the "December 23, 1997 Form 8-K")).

        3.1    Certificate of Incorporation of Progressive Bank, Inc. (incorporated by reference to Exhibit 3.1 to
               the September 30, 1997 Form 10-Q, of Progressive Bank, Inc. filed on November 14, 1997 (hereinafter
               "September 30, 1997 Form 10-Q").

        3.2    By-laws of Progressive Bank, Inc. (incorporated by reference to Exhibit 3.2 to the September 30, 1997
               Form 10-Q).

          4    Specimen Stock Certificate (incorporated by reference to Exhibit 2(a) to the Registration Statement
               on Form 8-A, No. 0-15025, of Progressive Bank, Inc. filed October 1, 1986).

        4.2    Form of Rights Agreement (including form of Rights Certificate attached as Exhibit A and form of
               Certificate of Designations, Relative Rights, Preferences and Limitations of Series A Junior
               Participating Preferred Stock attached as Exhibit B (incorporated by reference to Exhibit 4 to the
               registrant's Registration Statement on Form 8-A filed on October 28, 1997) and amendment to the
               Rights Agreement.

       10.2    Progressive Bank, Inc. Amended and Restated Incentive Stock Option Plan (incorporated by reference to
               Exhibit 10.2 to the Annual Report on Form 10-K, No. 0-15025, of Progressive Bank, Inc., filed March
               22, 1988 (hereinafter "1987 Form 10-K").

       10.4    Employment Agreement by and between Progressive Bank, Inc. and each of the members of its Board of
               Directors (incorporated by reference to Exhibit 10.5 to the 1987 Form 10-K).

       10.5    Indemnification Agreement by and between Progressive Bank, Inc. and each of the members of the Board
               of Directors (incorporated by reference to Exhibit 10.5 to the 1987 Form 10-K).
</TABLE>

                                       73
<PAGE>
<TABLE>
<CAPTION>
DESIGNATION    DESCRIPTION
-------------  -----------------------------------------------------------------------------------------------------
<C>            <S>
       10.9    Progressive Bank, Inc. 1993 Non-Qualified Stock Option Plan--Directors (incorporated by reference to
               Exhibit 10.9 to the Annual Report on Form 10-K, No. 0-15025, of Progressive Bank, Inc. filed March
               23, 1995).

      10.10    Employment Agreement by and between Progressive Bank, Inc., Pawling Savings Bank, and Peter Van
               Kleeck (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K, No. 0-15025, of
               Progressive Bank, Inc. filed March 26, 1997 (hereinafter "1996 Form 10-K").

      10.11    Progressive Bank, Inc. Noncontributory Retirement and Severance Plan for Certain Members of the Board
               of Directors (incorporated by reference to Exhibit 10.11 to the 1996 Form 10-K).

      10.12    Severance Agreements by and between Progressive Bank, Inc., Pawling Savings Bank and Robert
               Gabrielsen (incorporated by reference to Exhibit 10.11 to the 1996 Form 10-K).

      10.13    Stock Option Agreement dated December 16, 1997, between the Company (as the issuer) and Hudson
               Chartered (as the grantee) (incorporated by reference to Exhibit 10.1 to the December 23, 1997 Form
               8-K).

      10.14    Stock Option Agreement dated December 16, 1997, between Hudson Chartered (as the issuer) and the
               Company (as the grantee) (incorporated by reference to Exhibit 10.2 to the December 23, 1997 Form
               8-K).

      10.15    Form of letter agreement between the Company directors and Hudson Chartered (incorporated by
               reference to Exhibit 10.3 to the December 23, 1997 Form 8-K).

      10.16    Form of letter agreement between the Hudson Chartered directors and the Company (incorporated by
               reference to Exhibit 10.4 to the December 23, 1997 Form 8-K).

      10.17    Progressive Bank, Inc. Deferred Compensation Plan, as amended and restated.

      10.18    The Pawling Savings Bank Supplemental Retirement Plan.

         21    Subsidiaries of the registrant.

         23    Consent of KPMG Peat Marwick LLP.

         27    Financial Data Schedule.
</TABLE>

(b) Reports on Form 8-K.

    On October 28, 1997, Progressive filed an 8-K Report announcing the adoption
of a Shareholder Rights Plan. On December 23, 1997, Progressive filed an 8-K
Report announcing the proposed merger with Hudson Chartered.

                                       74
<PAGE>
                                   SIGNATURES

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

                                PROGRESSIVE BANK, INC.
                                     (Registrant)

                                By:             /s/ PETER VAN KLEECK
                                     -----------------------------------------
                                                  Peter Van Kleeck
                                        PRESIDENT & CHIEF EXECUTIVE OFFICER

Date: March 10, 1998

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

          SIGNATURE                        TITLE                    DATE
------------------------------  ---------------------------  -------------------
        /s/ PETER VAN KLEECK    President & Chief Executive
------------------------------  Officer (Principal             March 10, 1998
        Peter Van Kleeck        Executive Officer)

                                Treasurer (Principal
        /s/ ROBERT GABRIELSEN   Financial Officer &
------------------------------  Principal Accounting           March 10, 1998
        Robert Gabrielsen       Officer)

        /s/ ELIZABETH P. ALLEN  Director
------------------------------                                 March 10, 1998
        Elizabeth P. Allen

        /s/ THOMAS C.           Director & Chairman of the
APOSPOROS                       Board
------------------------------                                 March 10, 1998
        Thomas C. Aposporos

        /s/ GEORGE M. COULTER   Director
------------------------------                                 March 10, 1998
        George M. Coulter

        /s/ RICHARD T. HAZZARD  Director
------------------------------                                 March 10, 1998
        Richard T. Hazzard

        /s/ RICHARD NOVIK       Director
------------------------------                                 March 10, 1998
        Richard Novik

        /s/ JOHN J. PAGE        Director
------------------------------                                 March 10, 1998
        John J. Page

        /s/ ARCHIBALD A. SMITH  Director
------------------------------                                 March 10, 1998
        Archibald A. Smith

        /s/ ROGER W. SMITH      Director
------------------------------                                 March 10, 1998
        Roger W. Smith

        /s/ DAVID A. SWINDEN    Director
------------------------------                                 March 10, 1998
        David A. Swinden

                                       75