SELECTED  CONSOLIDATED  FINANCIAL  DATA At or for the Fiscal  Year ended June 30
(Dollars in thousands, except per share data)
<TABLE>
<S>                                                     <C>        <C>        <C>        <C>        <C>
                                                         1999         1998       1997       1996       1995
                                                        --------   --------   --------   --------   --------
Selected Financial Condition Data:
Total assets                                            $206,932   $200,341   $182,560   $191,323   $155,716
Loans, net                                                63,436     47,631     45,507     39,557     41,060
Held-to-maturity securities                              119,122    135,446    126,450    129,200    105,421
Available-for-sale securities                             15,673      8,498      2,983      2,459      1,976
Cash and cash equivalents                                  4,157      4,626      4,158     17,320      4,681
Depositor accounts                                       148,693    139,858    132,418    128,304    130,933
Securities repurchase agreements and other borrowings     28,000     13,000        ---        ---        ---
Equity                                                    27,351     43,206     46,966     59,774     21,178

Selected Operating Data:
Interest and dividend income                            $ 13,299   $ 12,643   $ 12,309   $ 11,794   $ 10,722
Interest expense                                           6,967      6,034      5,431      5,401      4,785
                                                        --------   --------   --------   --------   --------
   Net interest income                                     6,332      6,609      6,878      6,393      5,937
Provision for loan losses                                     60         60        143         45        160
                                                        --------   --------   --------   --------   --------
   Net interest income after provision for loan            6,272      6,549      6,735      6,348      5,777
losses
Loan fees and service charges                                145        135        149        207        201
Other non-interest income                                    110         90         87        101         76
Non-interest expense (excluding special assessment)        3,806      3,474      3,318      2,807      2,490
SAIF special assessment (1)                                  ---        ---        884        ---        ---
                                                        --------   --------   --------   --------   --------
   Income before income tax expense and cumulative
       effect of change in accounting principle            2,721      3,300      2,769      3,849      3,564
Income tax expense (2)                                     1,198      1,446        957      1,628      1,640
Cumulative effect of change in accounting for
     postretirement health care benefits, net                ---        ---        ---       (59)        ---
                                                        --------   ========   ========   ========   ========
Net income (3)                                          $  1,523   $  1,854   $  1,812   $  2,162   $  1,924
                                                        ========   ========   ========   ========   ========
Earnings per share, from date of conversion (3) (4):
   Basic                                                $   0.71   $   0.68     $ 0.58     $ 0.36
   Diluted                                                  0.69       0.66       0.58       0.36
                                                        ========   ========   ========   ========
Selected Statistical Data:
Return on average assets (3)                                0.75%      0.98%      0.98%      1.23%      1.22%
Return on average equity (3)                                4.05       4.02       3.57       4.96       9.38
Net interest margin                                         3.15       3.55       3.76       3.66       3.82
Average interest rate spread                                2.39       2.52       2.57       2.57       3.32
Equity to total assets at end of period                    13.22      21.57      25.73      31.24      13.60
Efficiency ratio (5)                                       57.78      50.83      61.09      42.04      40.07
Non-interest expense to average assets (3)                  1.86       1.84       2.27       1.59       1.58
Non-performing loans to total loans, net                    1.78       3.13       4.40       3.17       5.10
Allowance for loan losses to non-performing loans          65.66      45.74      31.04      41.45      22.61
Non-performing assets to total assets                       0.55       0.79       1.22       0.65       1.35

Book value per share                                    $  14.49   $  14.92   $  14.71   $  14.58
Cash dividends per share                                    0.36       0.36       0.36       0.09
Dividend payout ratio                                      50.76%     54.69%     62.25%     26.86%
<FN>

(1)  Represents  the  Bank's  share  of a  special  assessment  imposed  on  all
     financial  institutions  with deposits  insured by the Savings  Association
     Insurance Fund ("SAIF"). After taxes, this assessment reduced net income by
     approximately  $520,000.  See  "Management's  Discussion  and  Analysis  of
     Financial  Condition  and Results of  Operations - Comparison  of Operating
     Results for the Fiscal Years Ended June 30, 1998 and 1997."
(2)  Income tax  expense  for fiscal  1997 has been  reduced by a tax benefit of
     $238,000  resulting  from a change in New York state tax law. See Note 7 to
     Consolidated Financial Statements.
(3)  Excluding the after-tax SAIF charge and the state tax benefit  described in
     notes (1) and (2),  net income for fiscal 1997 would have been  $2,094,000,
     resulting  in a return on  average  assets of  1.13%,  a return on  average
     equity  of 4.13%  and  basic  earnings  per  share of  $0.68.  The ratio of
     non-interest expense to average assets would have been 1.80%.
(4)  Earnings  per  share for 1996 is for the  six-month  period  following  the
     conversion from mutual to stock form on December 29, 1995.
(5)  The efficiency  ratio is computed by dividing  non-interest  expense by the
     sum of net interest  income and  non-interest  income (other than gains and
     losses on sales of securities  and real estate  owned).  Excluding the SAIF
     special  assessment,  the efficiency  ratio for fiscal 1997 would have been
     48.24%.
</FN>
</TABLE>

                                       1
<PAGE>


To Our Stockholders:

         In  1999,  we are  proud  to  celebrate  the  75th  anniversary  of our
subsidiary,  First  Federal  Savings Bank.  Since its  inception in 1924,  First
Federal  Savings Bank has emphasized  customer  service in serving  consumers in
northern  Westchester  County  and  Putnam  County.  Over the years the Bank has
changed and evolved along with the entire  financial  services  industry and the
changes continue.

         The  Bank's  growth  strategy  includes  opening  new brick and  mortar
branches or purchasing  existing branches from  consolidating  competitors.  The
Bank is interested in areas  contiguous to existing  branches where there exists
the potential of obtaining core deposits. In addition, the Bank will continue to
expand  its  product  selection  by  introducing  new  products,   such  as  the
introduction  of free checking in fiscal 1999.  This product enables the Bank to
collect  no  interest  cost  deposits  to invest  in  securities  and  originate
mortgages.  In May 1999, the Bank established a  tax-advantaged  subsidiary as a
real  estate  investment  trust  ("REIT")  to  hold  a  portion  of  the  Bank's
mortgage-related  assets. This strategy is expected to produce substantial state
tax savings and a lower  effective  tax rate for the Company in fiscal year 2000
and beyond.

         Peekskill Financial Corporation went public in December 1995 by issuing
4,099,750  common shares,  raising  capital of over $36.7 million and increasing
its  equity to assets  ratio to over  30.0%.  Since  that time the  Company  has
stressed  capital  management to more  effectively  and  profitably  utilize its
capital.  During fiscal 1999, the Company  repurchased  1,030,740 common shares,
including 800,040 shares purchased in the Company's  Modified Dutch Auction.  At
June 30, 1999,  treasury stock totaled 2,211,922 common shares,  almost 54.0% of
the shares issued in the Company's  public  offering.  This strategy reduced the
equity to assets  ratio from 31.24% at June 30, 1996 to 13.22% at June 30, 1999,
and also was accretive to earnings per share.

         Diluted  earnings  per  share  increased  to $0.69 for  fiscal  1999 as
compared to $0.66 for the previous  year.  Excluding the one-time costs incurred
in fiscal 1999 for the  establishment  of the REIT,  diluted  earnings per share
would have been $0.75, a 13.6% increase over fiscal 1998.

         Total assets  increased $6.6 million to $206.9 million at June 30, 1999
from $200.3 million at June 30, 1998. During fiscal 1999, the Company followed a
strategy of shifting funds from generally lower yielding securities  (decreasing
$9.1 million in fiscal  1999) to generally  higher  yielding  loans  (increasing
$15.8 million  during fiscal 1999),  by  originating  mortgages  using  security
principal  payments.  The Company  originated  $23.3  million in loans in fiscal
1999,  which was a record level and over twice the dollar amount of originations
in fiscal 1998. Changes in the Company's funding sources in fiscal 1999 included
a $15.0 million increase in borrowings and an $8.8 million increase in depositor
accounts,  partially offset by a $15.9 million decrease in stockholders' equity.
The decrease in stockholders' equity primarily reflects treasury stock purchases
of $16.8  million and dividends of $773,000,  partially  offset by net income of
$1.5  million.  Book value per share was  $14.49 at June 30,  1999 and $14.92 at
June 30, 1998.  The decrease was primarily  due to the dilutive  effect of stock
repurchases made in the Company's Modified Dutch Auction.

         All  of us at  Peekskill  Financial  Corporation  remain  committed  to
serving our community by offering competitively priced products with exceptional
customer  service.  We look  forward  to seeing  you at the  Annual  Meeting  of
Stockholders of Peekskill Financial Corporation,  to be held on October 20, 1999
at 3:30pm at our Peekskill, New York office.


Sincerely,


/s/ Eldorus Maynard
--------------------------
Eldorus Maynard
 Chairman of the Board and
 Chief Executive Officer

                                       2
<PAGE>


Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

General

   Peekskill Financial  Corporation (the "Holding Company" or, together with its
wholly-owned  subsidiary,  the "Company") was incorporated in September 1995 and
on December 29, 1995 became the holding  company for First Federal  Savings Bank
(the "Bank") upon the  completion of the conversion of the Bank from a federally
chartered  mutual savings bank to a federally  chartered stock savings bank (the
"Conversion").   Concurrent  with  the  Conversion,  the  Holding  Company  sold
4,099,750  shares of its common stock in a  subscription  offering at a price of
$10 per share (the "Stock Offering").

   The primary  market area of the Company,  with three  full-service  branches,
consists  of  northern  Westchester  County  and  Putnam  County.  The Bank is a
community-oriented  savings  institution  engaged principally in the business of
attracting  deposits from customers  within its market area and investing  those
funds in residential  mortgage loans and  mortgage-backed  and other securities.
The  financial  condition  and  operating  results of the Company are  primarily
dependent  upon the financial  condition and operating  results of the Bank. The
operating results of the Company depend primarily on its net interest income, or
the difference  between  interest income on earning assets  (primarily loans and
securities) and interest expense on deposits and borrowings.  Net income is also
affected  by  non-interest  income,  such  as loan  fees  and  service  charges;
non-interest  expense,  which includes  salaries and employee benefits and other
operating  expenses;  and Federal and state income taxes. The Holding  Company's
primary business activity has been limited to its ownership of the Bank.

   The Company's  results of operations  are  significantly  affected by general
economic and  competitive  conditions  (particularly  changes in market interest
rates),  government policies, and actions of regulatory agencies. Future changes
in  applicable  laws,  regulations  or  government  policies may have a material
impact on the Company.  Lending  activities are influenced by the demand for and
supply of housing,  competition  among lenders,  the level of interest rates and
the  availability  of funds.  Deposit flows and costs of funds are influenced by
prevailing  market  interest rates  (including  rates on non-deposit  investment
alternatives), account maturities, and the levels of personal income and savings
in the Company's market area.

Forward-Looking Statements

   The  Company has made,  and may  continue  to make,  various  forward-looking
statements  with respect to earnings,  credit  quality and other  financial  and
business  matters for periods  subsequent to June 30, 1999. The Company cautions
that these forward-looking statements are subject to numerous assumptions, risks
and  uncertainties,  and that  statements for subsequent  periods are subject to
greater uncertainty because of the increased likelihood of changes in underlying
factors  and   assumptions.   Actual  results  could  differ   materially   from
forward-looking statements.

   In addition to those  factors  previously  disclosed by the Company and those
factors  identified  elsewhere herein,  the following factors could cause actual
results  to differ  materially  from such  forward-looking  statements:  pricing
pressures on loan and deposit products; actions of competitors; changes in local
and national economic conditions; customer deposit disintermediation; changes in
customers'  acceptance of the

                                       3
<PAGE>

Company's  products  and  services;  the extent and  timing of  legislative  and
regulatory  actions  and  reforms;  and  Year  2000  related  costs  and  issues
substantially different from those now anticipated.

   The Company's  forward-looking  statements speak only as of the date on which
such statements are made. By making any forward-looking  statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated  events
or circumstances.

Liquidity

   Liquidity is defined as the ability to generate  sufficient cash flow to meet
all present and future funding commitments,  depositor withdrawals and operating
expenses.  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 Bank is required to maintain an
average  daily  balance of liquid  assets as a  percentage  of net  withdrawable
deposit accounts plus short-term  borrowings of at least 5.0%, as defined by the
regulations of the Office of Thrift  Supervision (the "OTS").  At June 30, 1999,
the Bank's liquidity ratio of 16.6% was in compliance with the OTS regulations.

   The Company's cash flows are classified according to their source:  operating
activities,  investing  activities  and  financing  activities.  Cash flows from
operating  activities  consist  primarily  of  interest  received  on loans  and
securities,  and payments for interest on deposits and operating expenses.  Cash
flows  from  investing   activities  include   disbursements  for  purchases  of
securities and loan originations,  as well as proceeds from principal  payments,
maturities and calls of securities and principal  collections on loans.  Changes
in depositor accounts,  proceeds and repayments of borrowings such as securities
repurchase  agreements  and Federal Home Loan Bank ("FHLB")  advances,  dividend
payments and capital stock  transactions  comprise the Company's  principal cash
flows from financing  activities.  While  maturities  and scheduled  payments on
loans and  securities  provide an  indication  of the  timing of the  receipt of
funds,  external factors such as changes in interest rates, economic conditions,
and competition  strongly influence mortgage prepayment rates and deposit flows,
reducing the predictability of the timing of these cash flows.

   For the  three-year  period ended June 30, 1999,  the average annual net cash
provided by operating activities was in excess of $2.3 million. Net cash used in
investing   activities  during  fiscal  1999  was  approximately  $7.6  million,
primarily  reflecting  net  disbursements  of $15.9  million to fund loan growth
partially offset by a net decrease of $8.3 million from securities transactions.

   An important  source of funds is the Company's core deposit base.  Management
believes that a substantial  portion of the Company's  total  deposits of $148.7
million at June 30, 1999 are core  deposits.  The deposit base increased by $8.8
million in fiscal 1999,  reflecting  the  Company's  increased  advertising  and
competitive rates for deposit products.  Core deposits are generally  considered
to be a highly stable  source of liquidity  due to the  long-term  relationships
with deposit  customers.  The Company also has the ability to borrow advances of
up to $51.7  million  from the  FHLB of New York at June 30,  1999.  Significant
financing  activities in fiscal 1999 also included  borrowing $15.0 million from
the FHLB;  disbursing  $18.2 million for treasury  stock  purchases,  and paying
$773,000  in  cash  dividends.  The  Holding  Company's  future  ability  to pay
dividends to stockholders or to repurchase  stock will be dependent  on

                                       4
<PAGE>

dividends  received  from the Bank,  which are  subject  to  certain  regulatory
restrictions and income tax  considerations.  See Notes 7 and 11 to Consolidated
Financial Statements.

   At June 30,  1999,  the  Company had  outstanding  loan  commitments  of $6.7
million and loans in process of $651,000.  Since certain origination commitments
may not be funded  and  loans in  process  may not be fully  drawn  upon,  these
amounts  do  not  necessarily  represent  future  cash  outlays.  The  Company's
liquidity  sources  described  above are  anticipated  to be  sufficient to fund
outstanding loan commitments and other obligations.

Capital

   The OTS has established regulations which require savings associations,  such
as the Bank, to meet minimum capital  requirements.  These requirements  include
tangible capital of 1.5% of total adjusted assets; core capital of 4.0% of total
adjusted assets  (effective  April 1, 1999);  and risk-based  capital of 8.0% of
risk-weighted assets. The Bank satisfied these minimum capital standards at June
30, 1999 with tangible and core capital  ratios of 13.4% and a total  risk-based
capital  ratio of 46.8%.  In  determining  the amount of  risk-weighted  assets,
savings  associations  must classify all assets,  and certain  off-balance sheet
items, into one of four  risk-weighted  categories.  The amount of risk-weighted
assets is determined by applying a specific percentage (ranging from 0% for cash
and obligations  issued by the United States  Government or its agencies to 100%
for  consumer  and  commercial  loans) to the  amounts in each  category.  These
capital  requirements,  which are  applicable  to the Bank only, do not consider
additional  capital  held at the Holding  Company  level,  and  require  certain
adjustments  to the  Bank's  total  equity to arrive at the  various  regulatory
capital amounts. See Note 11 to Consolidated  Financial Statements for a further
analysis of the Bank's actual and required regulatory capital.

   At the  time  of the  Conversion,  the  Bank  was  required  to  establish  a
liquidation  account equal to its capital as of June 30, 1995. This  liquidation
account is reduced to the extent that  eligible  account  holders  have  reduced
their qualifying  deposits.  In the unlikely event of a complete  liquidation of
the  Bank,  each  eligible   account  holder  will  be  entitled  to  receive  a
distribution from the liquidation  account. The Bank is not permitted to declare
or pay  dividends on its capital  stock,  or repurchase  any of its  outstanding
stock, if the effect thereof would cause its stockholder's  equity to be reduced
below the amount required for the liquidation  account or applicable  regulatory
capital requirements.

Qualitative and Quantitative Disclosures About Market Risk

   The  Company's  net  income is  dependent  on its net  interest  income.  Net
interest  income  is  susceptible  to  interest  rate  risk to the  degree  that
interest-bearing  liabilities  mature  or  reprice  on a  different  basis  than
interest-earning  assets.  When  interest-bearing  liabilities mature or reprice
more quickly  than  interest-earning  assets in a given  period,  a  significant
increase in market rates of interest could adversely affect net interest income.
Similarly,  when  interest-earning  assets  mature or reprice  more quickly than
interest-bearing liabilities,  falling interest rates could result in a decrease
in net interest income.

   In an attempt to manage its exposure to changes in interest rates, management
monitors  the   Company's   interest   rate  risk.   Since  1991,   management's
asset/liability  committee has met monthly to review the Company's interest rate
risk position and profitability,  and to recommend adjustments for consideration
by the  Board of  Directors.  Management  also  reviews  the  Bank's  securities
portfolio,  formulates investment

                                       5
<PAGE>

strategies, and oversees the timing and implementation of transactions to assure
attainment   of  the  Board's   objectives   in  the  most   effective   manner.
Notwithstanding  the Company's  interest rate risk  management  activities,  the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.

   In adjusting the Company's asset/liability position, the Board and management
attempt to manage the Company's  interest rate risk while enhancing net interest
margins.  At times,  depending  on the  general  level of  interest  rates,  the
relationship  between long and short-term  interest rates, market conditions and
competitive  factors,  the Board and  management  may  determine to increase the
Company's  interest  rate risk  position  somewhat in order to increase  its net
interest  margin.  The Company's  results of operations and net portfolio values
remain  vulnerable  to increases in interest  rates and to  fluctuations  in the
difference between long- and short-term interest rates.

   Consistent with the asset/liability  management  philosophy  described above,
the Company has taken several steps to manage its interest rate risk. First, the
Company has  structured  the  securities  portfolio  to shorten the lives of its
interest-earning  assets.  For a number  of years,  the  Company  has  purchased
mortgage-backed securities that have either short or medium terms to maturity or
adjustable interest rates. At June 30, 1999, the Company had securities of $19.7
million with  contractual  maturities of five years or less and  adjustable-rate
securities of $34.2  million.  The Company has received  average cash flows from
principal paydowns, maturities and calls of mortgage-backed and other securities
of $47.7 million  annually  over the past three fiscal  years.  The Company also
controls interest rate risk by emphasizing  non-certificate  depositor accounts.
The Board and  management  believe  that such  accounts  carry a lower cost than
certificate  accounts,  and that a material portion of such accounts may be more
resistant to changes in interest rates than are  certificate  accounts.  At June
30, 1999,  the Company had $51.5 million of regular  savings and club  accounts,
and $18.3 million of money market and NOW accounts,  representing 46.9% of total
depositor accounts.

   One approach used to quantify  interest rate risk is the net portfolio  value
("NPV") analysis.  In essence,  this analysis  calculates the difference between
the present  value of  liabilities  and the present value of expected cash flows
from assets and off-balance sheet contracts.  The following table sets forth, at
June 30, 1999,  an analysis of the Bank's  interest rate risk as measured by the
estimated  changes in NPV resulting from  instantaneous  and sustained  parallel
shifts in the yield curve (+ or - 300 basis points,  measured in 100 basis point
increments).
                                    Estimated Increase
   Change in       Estimated         (Decrease) in NPV
                                ----------------------------
 Interest Rates    NPV Amount      Amount        Percent
----------------- ------------- -------------- -------------
 (Basis Points)              (Dollars in thousands)

     +300          $23,536      $(13,578)          (37)%
     +200           28,407        (8,707)          (23)
     +100           33,025        (4,089)          (11)
      ---           37,114           ---           ---
     -100           40,233         3,119             8
     -200           42,529         5,415            15
     -300           45,098         7,984            22

                                       6
<PAGE>

   Certain  assumptions  utilized by the OTS in assessing the interest rate risk
of thrift  institutions were employed in preparing data for the Bank included in
the preceding table. These assumptions relate to interest rates, loan prepayment
rates,  deposit decay rates,  and the market values of certain  assets under the
various interest rate scenarios. It was also assumed that delinquency rates will
not change as a result of changes in  interest  rates  although  there can be no
assurance  that this  will be the case.  Even if  interest  rates  change in the
designated  amounts,  there  can be no  assurance  that the  Bank's  assets  and
liabilities  would  perform as set forth above.  In  addition,  a change in U.S.
Treasury rates in the designated amounts accompanied by a change in the shape of
the Treasury yield curve would cause significantly  different changes to the NPV
than indicated above.

   The Company does not currently engage in trading activities or use derivative
instruments to control  interest rate risk.  Even though such  activities may be
permitted  with the  approval of the Board of  Directors,  the Company  does not
intend to engage in such activities in the foreseeable future.

   Interest rate risk is the most significant market risk affecting the Company.
Other types of market  risk,  such as foreign  currency  exchange  rate risk and
commodity  price  risk,  do not  arise in the  normal  course  of the  Company's
business activities.


















                                       7
<PAGE>

Analysis of Net Interest Income

   The following  table sets forth the Company's  average  consolidated  balance
sheets, interest income and expense, average yields and costs, and certain other
information for the fiscal years ended June 30:
<TABLE>
<CAPTION>

                                                   1999                          1998                           1997
                                      ------------------------------ ------------------------------ ------------------------------
                                      Average              Average    Average             Average    Average             Average
                                      Balance(1) Interest Yield/Rate Balance(1) Interest Yield/Rate Balance(1) Interest Yield/Rate
                                      ---------- -------- ---------- ---------- -------- ---------- ---------- -------- ----------
                                                                        (Dollars in thousands)
<S>         <C>                        <C>       <C>         <C>      <C>       <C>         <C>      <C>       <C>         <C>
Interest-earning assets:
      Loans (2)                        $  53,463 $  4,152      7.77%  $  46,559 $  3,720      7.99%  $  42,956 $  3,402      7.92%
      Mortgage-backed securities (3)     118,532    7,397      6.24     120,993    7,709      6.37     116,546    7,440      6.38
      Other debt securities (3)           21,040    1,334      6.34      12,904      852      6.60      13,005      858      6.60
      Other interest-earning assets        8,306      416      5.01       5,474      362      6.61      10,346      609      5.89
                                       --------- --------             --------- --------             --------- --------
            Total interest-earning
            assets                       201,341   13,299      6.61     185,930   12,643      6.80     182,853   12,309      6.73
                                                 --------                       --------                       --------
Non interest-earning assets                2,810                          2,382                          1,863
                                       ---------                      ---------                      ---------
            Total assets               $ 204,151                      $ 188,312                      $ 184,716
                                       =========                      =========                      =========
Interest-bearing liabilities:
      Regular savings and club
      accounts                         $  50,480 $  1,403      2.78%  $  52,922 $  1,541      2.91%  $  56,300 $  1,696      3.01%
      Money market and NOW accounts       15,702      418      2.66      11,909      329      2.76      11,252      285      2.53
      Savings certificates                78,973    4,145      5.25      71,717    3,919      5.46      62,973    3,450      5.48
      Borrowings                          19,750    1,001      5.07       4,567      245      5.36         ---      ---       ---
                                       --------- --------             --------- --------             --------- --------
            Total interest-bearing
            liabilities                  164,905    6,967      4.22     141,115    6,034      4.28     130,525    5,431      4.16
                                                 --------                       --------                       --------
Non interest-bearing liabilities           1,632                          1,100                          3,495
                                       ---------                      ---------                      ---------
            Total liabilities            166,537                        142,215                        134,020
Stockholders' equity                      37,614                         46,097                         50,696
                                       ---------                      ---------                      ---------
            Total liabilities and
            stockholders' equity       $ 204,151                      $ 188,312                      $ 184,716
                                       =========                      =========                      =========
Net interest income                              $  6,332                       $  6,609                       $  6,878
                                                 ========                       ========                       ========
Interest rate spread                                           2.39%                          2.52%                          2.57%
Net interest margin (4)                                        3.15                           3.55                           3.76
Ratio of average interest-earning
  assets to average interest-bearing
  liabilities                               1.22                           1.32                           1.40
<FN>

(1)  Average  balances are calculated  using  end-of-month  balances,  producing
     results which are not materially different from average daily balances.
(2)  Balances  are net of deferred  loan fees and loans in process.  Non-accrual
     loans are included in the balances.
(3)  Balances   represent   amortized   cost.   Yields   are  not  stated  on  a
     tax-equivalent  basis,  as  the  Company  does  not  invest  in  tax-exempt
     securities.
(4)  Represents net interest  income  divided by average total  interest-earning
     assets.
</FN>
</TABLE>

   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").  The changes  attributable  to the combined  impact of
volume and rate have been allocated proportionately to the changes due to volume
and rate.
                                  Fiscal 1999 vs. 1998    Fiscal 1998 vs. 1997
                                ------------------------ ----------------------
                                   Increase (Decrease)     Increase (Decrease)
                                      Due to                 Due to
                                   -------------     Net  -------------   Net
                                   Volume   Rate   Change Volume   Rate  Change
                                   ------  -----   ------ ------  -----  ------
                                                    (In thousands)
Interest-earning assets:
 Loans                             $  533  $(101)  $ 432   $ 287  $  31  $ 318
 Mortgage-backed securities          (156)  (156)   (312)    284    (15)   269
 Other debt securities                514    (32)    482      (7)     1     (6)
 Other interest-earning assets        102    (48)     54    (311)    64   (247)
                                   ------  -----   -----   -----  -----  -----
    Total                             993   (337)    656     253     81    334
                                   ------  -----   -----   -----  -----  -----
Interest-bearing liabilities:
 Regular savings and club accounts    (69)   (69)   (138)    (99)   (56)  (155)
 Money market and NOW accounts        100    (11)     89      18     26     44
 Savings certificates                 371   (145)    226     478     (9)   469
 Borrowings                           769    (13)    756     245    ---    245
                                   ------  -----   -----   -----  -----  -----
    Total                           1,171   (238)    933     642    (39)   603
                                   ======  =====   =====   =====  =====  =====
Net change in net interest income  $ (178) $ (99)  $(277)  $(389) $ 120  $(269)
                                   ======  =====   =====   =====  =====  =====

                                       8
<PAGE>

Comparison of Financial Condition at June 30, 1999 and 1998

   Total assets  increased  $6.6 million from $200.3 million at June 30, 1998 to
$206.9 million at June 30, 1999. The increase primarily reflects a $15.8 million
increase  in net loans,  partially  offset by a $9.1  million  decrease in total
securities.  Funding  for the  Company's  asset  growth in  fiscal  1999 and its
treasury  share  repurchases  of $16.8  million was provided  primarily by $15.0
million of  additional  borrowings  and an $8.8  million  increase in  depositor
accounts.

   The  $15.8  million,  or 33.2%,  increase  in net  loans  primarily  reflects
originations  of $23.3  million,  partially  offset by $7.4 million of principal
paydowns.  The majority of the increase was in the Company's  one-to-four family
residential mortgage portfolio.  The decrease in securities consisted of a $16.3
million  decrease in  held-to-maturity  securities,  partially  offset by a $7.2
million  increase  in  available-for-sale  securities.  During  fiscal  1999 the
Company  supplemented  retail  deposit  growth by entering into $15.0 million of
additional   borrowings,   increasing  the  balance  of  securities   repurchase
agreements and other borrowings to $28.0 million,  or 13.5% of total assets,  at
June 30, 1999.

   Stockholders' equity decreased $15.9 million, or 36.7%, from $43.2 million at
June 30, 1998 to $27.4 million at June 30, 1999. The decrease primarily reflects
common stock  purchases of $16.8  million for the  treasury,  dividends  paid of
$773,000   and  a   $495,000   increase   in  the   net   unrealized   loss   on
available-for-sale  securities,  partially offset by net income of $1.5 million.
The ratio of stockholders'  equity to total assets decreased from 21.57% at June
30, 1998 to $13.22% at June 30,  1999.  The  Company's  tangible  book value per
share was $14.49 at June 30, 1999 as compared to $14.92 at June 30, 1998.

Comparison  of  Operating  Results for the Fiscal  Years Ended June 30, 1999 and
1998

   General. Net income for the fiscal year ended June 30, 1999 was $1.5 million,
or basic earnings per share ("EPS") of $0.71,  as compared to net income of $1.9
million,  or basic EPS of $0.68 for the fiscal year ended June 30, 1998. Diluted
EPS for fiscal 1999 and 1998 was $0.69 and $0.66,  respectively.  Net income for
fiscal  1999  was  affected  by a  charge  to  earnings  of  $214,000  ($125,000
after-tax)  for costs  incurred  to  establish a Real  Estate  Investment  Trust
("REIT") in the fourth quarter.  Excluding the REIT expenses,  basic and diluted
EPS would have been $0.77 and $0.75, respectively.

   Net Interest Income.  Net interest income decreased  $277,000,  or 4.2%, from
$6.6  million for the year ended June 30,  1998 to $6.3  million for the current
year.  The Company's  interest rate spread was 2.39% for fiscal 1999 as compared
to 2.52% for fiscal 1998. The net interest  margin  decreased 40 basis points to
3.15% for the year ended June 30, 1999.  The  components of net interest  income
are  interest  and  dividend  income,  which  increased  $656,000,  and interest
expense, which increased $933,000.

  Total  interest and dividend  income  increased  $656,000,  or 5.2%,  to $13.3
million for the year ended June 30,  1999 as  compared to $12.6  million for the
year ended June 30, 1998. The increase  primarily  reflects a $15.4 million,  or
8.3%,  increase in average  interest-earning  assets,  partially  offset by a 19
basis point decrease in the average yield on interest-earning  assets. The $15.4
million increase in average interest-earning assets is comprised of increases of
$6.9  million  in the  average  loan  portfolio,  $5.7  million  in the  average
securities  portfolio  and  $2.8  million  in  other  interest-earning   assets.
Management  intends to

                                       9
<PAGE>

continue  its  current  strategy of  increasing  the loan  portfolio  (primarily
residential  mortgage  loans),  as market  conditions  permit by introducing new
products and stimulating loan demand through advertising.

  The  $933,000  increase in total  interest  expense was caused  primarily by a
$23.8  million,  or 16.9%,  increase  in average  interest-bearing  liabilities,
partially  offset  by a 6 basis  point  decrease  in the  average  rate  paid on
interest-bearing   liabilities.   The   increase  in  average   interest-bearing
liabilities  is  comprised  of increases of $3.8 million in money market and NOW
accounts,  $7.3 million in savings certificates and $15.2 million in borrowings,
partially  offset  by a $2.4  million  decrease  in  regular  savings  and  club
accounts.  During  fiscal  1999,  the  Company  obtained  additional  borrowings
(securities  repurchase  agreements and FHLB  advances) of $15.0 million,  at an
average initial rate of 4.76%.

   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 probable loss inherent
in the  existing  loan  portfolio.  The  allowance  for loan losses  consists of
amounts  specifically  allocated  to  non-performing  loans  (if any) as well as
allowances  determined for each major loan  category.  Loan  categories  such as
single-family  residential  mortgages and consumer loans are generally evaluated
on an aggregate or "pool" basis by applying loss factors to the current balances
of the various loan  categories.  The loss factors are  determined by management
based on an evaluation of historical loss experience, delinquency trends, volume
and type of  lending  conducted,  and the  current  economic  conditions  in the
Company's  market area.  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 believes that it uses
the best  information  available to  determine  the  allowance  for loan losses,
unforeseen  market  conditions  could result in adjustments to the allowance for
loan losses,  and net income could be significantly  affected,  if circumstances
differ   substantially   from  the   assumptions   used  in  making   the  final
determination.

  The provision  for loan losses was $60,000 for both fiscal 1999 and 1998.  The
allowance for loan losses was $742,000 or 65.66% of non-performing loans at June
30,  1999,  compared to $682,000 or 45.74% of  non-performing  loans at June 30,
1998. The allowance  represented 1.17% of total loans at June 30, 1999, compared
to 1.43% a year  earlier.  The  Company  did not have  any loan  charge-offs  or
recoveries in fiscal 1999 and 1998.  Non-performing  loans at June 30, 1999 were
$1.1  million  as  compared  to $1.5  million  at June 30,  1998.  The  ratio of
non-performing  loans to net  loans was 1.78% at June 30,  1999 as  compared  to
3.13% at June 30, 1998. See "Asset Quality" for further information.

   Non-Interest  Income.  Non-interest  income increased $30,000 to $255,000 for
fiscal 1999 from  $225,000  for fiscal  1998.  Non-interest  income is primarily
comprised  of loan fees,  service  charges  and rental  income on the  Company's
office  properties.  The increase  reflects a $10,000  increase in loan fees and
service charges and a $20,000 increase in other non-interest income.

   Non-Interest Expense. Non-interest expense increased $332,000 to $3.8 million
for the year ended  June 30,  1999 from $3.5  million  for the prior  year.  The
increase is primarily  the result of  increases  of $50,000 in computer  service
fees, $248,000 in professional fees and $77,000 in other non-interest  expenses,
partially  offset  by a $74,000  decrease  in  compensation  and  benefits.  The
increase in computer  service fees is due to upgrades  being made by the Company
and the service  bureau in  preparation  for the Year 2000, as well as increased
charges based on volume growth.  The increase in professional  fees is primarily
due to

                                       10
<PAGE>

costs of  approximately  $214,000  incurred to establish  the REIT in the fourth
quarter of fiscal 1999,  as well as legal fees  incurred in  conjunction  with a
lawsuit  filed in January 1999.  The lawsuit,  purporting to be on behalf of the
Company's  shareholders,  was filed in response to the Company's decision not to
pursue an unsolicited  acquisition  offer. The lawsuit was dismissed in May 1999
and resulted in no payment by the Company to the plaintiff. The $74,000 decrease
in compensation and benefits  primarily reflects a $64,000 charge in fiscal 1998
for the full  vesting of certain  shares  under the  Company's  Recognition  and
Retention Plan ("RRP"), due to the death of one of the Company's Directors.

   Income Tax  Expense.  Income tax expense was $1.2  million and $1.4  million,
respectively,  for fiscal  years 1999 and 1998.  The  $248,000  decrease  in tax
expense primarily  reflects a $579,000 decrease in pre-tax income. The effective
tax rates for the  years  ended  June 30,  1999 and 1998 were  44.0% and  43.8%,
respectively.  The establishment of the REIT is expected to produce  substantial
state tax savings and a lower  effective tax rate for the Company in fiscal 2000
and beyond.  The Company  anticipates  that the amount of tax benefits  realized
within  approximately  the first year will match the after-tax costs incurred in
fiscal 1999 to establish the REIT.

Comparison  of  Operating  Results for the Fiscal  Years Ended June 30, 1998 and
1997

   General. Net income for the fiscal year ended June 30, 1998 was $1.9 million,
or basic EPS of $0.68,  as compared to net income of $1.8 million,  or basic EPS
of $0.58 for the  fiscal  year ended June 30,  1997.  Diluted  EPS was $0.66 and
$0.58,  respectively,  for fiscal  years 1998 and 1997.  Net income for the year
ended June 30, 1998 was affected by a charge to earnings of $64,000 ($37,000 net
of taxes) for the full vesting of certain shares under the Company's RRP, due to
the death of one of the Company's Directors.  Net income for the year ended June
30, 1997 was  affected by a one-time  charge to earnings  for a Federal  deposit
insurance special assessment of $884,000 ($520,000 net of taxes) and a credit to
earnings  for the  recognition  of a  $238,000  reduction  to New York State tax
expense due to a change in tax law.  Excluding  these  events,  net income would
have been $1.9  million  and $2.1  million for the years ended June 30, 1998 and
1997, respectively, and basic EPS would have been $0.70 and $0.68, respectively.

   Net Interest Income.  Net interest income decreased  $269,000,  or 3.9%, from
$6.9 million for the year ended June 30, 1997 to $6.6 million for the year ended
June 30, 1998. The  components of net interest  income are interest and dividend
income,  which  increased  $334,000,   and  interest  expense,  which  increased
$603,000.  The Company's interest rate spread decreased to 2.52% for fiscal 1998
from 2.57% for fiscal 1997. The net interest margin decreased 21 basis points to
3.55% for the year ended June 30, 1998,  reflecting  a $7.5 million  decrease in
average net earning assets.

   Total  interest and dividend  income  increased  $334,000,  or 2.7%, to $12.6
million  for  fiscal  1998 from $12.3  million  for fiscal  1997.  The  increase
primarily  reflects a $3.1 million increase in average  interest-earning  assets
and a 7 basis point  increase in the average yield on  interest-earning  assets.
The  overall  increase  in  average  interest-earning  assets  is  comprised  of
increases of $3.6 million in the average loan  portfolio and $4.3 million in the
average securities portfolio,  partially offset by a decrease of $4.9 million in
other  interest-earning  assets.  The change in mix of  interest-earning  assets
reflects the use of generally  lower yielding other  interest-earning  assets to
purchase shares of the Company's common stock for the treasury.

                                       11
<PAGE>

   The $603,000  increase in total interest expense was caused primarily by a 12
basis point  increase in the average rate paid on  interest-bearing  liabilities
and a $10.6 million increase in average interest-bearing liabilities. The higher
average  rate  in  fiscal  1998  reflects  a  continuing  shift  in  the  mix of
interest-bearing  deposits from  generally  lower rate savings and club accounts
(the average of which  decreased  $3.4 million  during fiscal 1998) to generally
higher rate savings  certificates  (the average of which  increased $8.7 million
during  fiscal  1998).  This  shift was  partially  offset  by a 10 basis  point
decrease in the average rate paid on regular  savings and club accounts.  During
fiscal 1998,  the Company  entered  into two  securities  repurchase  agreements
totaling  $13.0  million  at an  average  rate of 5.36%,  for which the  Company
recorded $245,000 of interest expense.

   Provision  for Loan  Losses.  The  provision  for loan  losses was $60,000 in
fiscal 1998 and $143,000 in fiscal 1997. The higher provision in fiscal 1997 was
due to the  establishment  of an $83,000  allowance  for loan  losses on certain
participation  loans.  The overall  allowance for loan losses was  $682,000,  or
45.74% of  non-performing  loans at June 30, 1998,  as compared to $622,000,  or
31.04% of  non-performing  loans at June 30, 1997.  The Company did not have any
charge-offs in fiscal 1998 as compared to $40,000 in fiscal 1997. Non-performing
loans at June 30, 1998 were $1.5  million  compared to $2.0  million at June 30,
1997. The ratio of non-performing  loans to net loans was 3.13% at June 30, 1998
compared to 4.40% at June 30, 1997. See "Asset Quality" for further information.

   Non-Interest  Income.  Non-interest  income decreased $11,000 to $225,000 for
fiscal 1998 from  $236,000  for fiscal  1997.  The  decrease  reflects a $14,000
decrease in loan fees and service charges, partially offset by a $3,000 increase
in other non-interest income.

   Non-Interest Expense. Non-interest expense decreased $728,000 to $3.5 million
for the year ended  June 30,  1998 from $4.2  million  for the prior  year.  The
decrease  is  primarily  the result of a $985,000  decrease  in Federal  deposit
insurance  costs,  partially  offset by a $155,000  increase in compensation and
benefits  expense and an $88,000  increase in occupancy  costs.  The decrease in
deposit  insurance  costs  reflects  the  absence in fiscal  1998 of the special
assessment  of $884,000  included in the fiscal  1997  amount,  as well as lower
ongoing  costs  subsequent  to   recapitalization  of  the  Savings  Association
Insurance Fund ("SAIF").  Under  legislation  enacted on September 30, 1996, the
Federal Deposit Insurance  Corporation  ("FDIC") imposed a special assessment on
all financial institutions with SAIF-assessable deposits in the amount necessary
to recapitalize the SAIF. Pursuant to such authority, the FDIC imposed a special
assessment of 65.7 basis points on each institution's  SAIF-assessable deposits.
The Company's  special SAIF assessment of $884,000 was charged to expense in the
first quarter of fiscal 1997. The increase in compensation  and benefits expense
in fiscal 1998  primarily  reflects (i) a $64,000 charge for the full vesting of
certain shares under the Company's RRP, due to the death of one of the Company's
Directors,  and (ii) a $53,000 increase in expense related to the Employee Stock
Ownership  Plan  ("ESOP")  due to increases in the  Company's  stock price.  The
increase in occupancy  costs  primarily  reflects costs  associated with the new
building completed in fiscal 1998 for the Bank's Mohegan Lake branch.

   Income Tax  Expense.  Income  tax  expense  was $1.4  million  and  $957,000,
respectively,  for  fiscal  years 1998 and 1997.  The  increase  in tax  expense
reflects  a  $531,000  increase  in  pre-tax  income,  as well as the  Company's
recognition  of a tax benefit of $238,000 in fiscal 1997 due to the reduction of
a deferred tax  liability  caused by an amendment to the New York State tax law.
As discussed  in Note 7 to  Consolidated  Financial  Statements,  the  amendment
changed the base-year for tax bad debt  reserves and  eliminated  the need for a
deferred  tax  liability  previously  recognized  for  reserves in excess of the
base-year amount. The

                                       12
<PAGE>

effective  tax rates for the years  ended June 30,  1998 and 1997 were 43.8% and
34.6%,  respectively.  Excluding the one-time benefit of $238,000, the effective
tax rate for fiscal 1997 would have been 43.2%.

Asset Quality

   The following table sets forth information regarding non-performing loans and
real  estate  owned  at  the  dates  indicated.  There  were  no  troubled  debt
restructurings at the dates set forth below.

                                                       At June 30,
                                           -----------------------------------
                                            1999   1998   1997    1996   1995
                                           ------ ------ ------- ------ ------
                                                   (Dollars in thousands)
Non-accrual (impaired) loans:
 Participation interests in TASCO Loans    $  316 $  876 $ 1,074 $  --- $  ---
 One-to-four family mortgage loans            382
                                                     245     ---    ---    ---
                                           ------ ------ ------- ------ ------
     Total non-accrual loans                  698  1,121   1,074    ---    ---
Accruing loans past due more than 90 days:
 One-to-four family mortgage loans            432    370     930  1,252  2,096
                                           ------ ------ ------- ------ ------
     Total non-performing loans             1,130  1,491   2,004  1,252  2,096
 Real estate owned                            ---     94     220    ---    ---
                                           ====== ====== ======= ====== ======
     Total non-performing assets           $1,130 $1,585 $ 2,224 $1,252 $2,096
                                           ====== ====== ======= ====== ======

Ratios:
 Allowance for loan losses to:
    Non-performing loans                    65.66% 45.74%  31.04% 41.45% 22.61%
    Total loans, net                         1.17   1.43    1.37   1.31   1.15
 Non-performing loans to total loans, net    1.78   3.13    4.40   3.17   5.10
 Non-performing assets to total assets       0.55   0.79    1.22   0.65   1.35

   Non-performing loans are those loans past due for more than 90 days, or for a
shorter  period if  management  determines  the ability of the  borrower to make
contractual payments is in doubt. When a borrower is more than 90 days past due,
management  evaluates the loan,  the  underlying  collateral  and the borrower's
credit  history to determine  whether to place the loan on  non-accrual  status.
Management  and  the  Board  of  Directors  perform  a  monthly  review  of  all
non-performing  loans.  The  actions  taken  by  the  Company  with  respect  to
delinquencies (workout,  settlement or foreclosure) vary depending on the nature
of the loan,  length of delinquency and the borrower's past credit history.  The
classification  of a loan as non-performing  does not necessarily  indicate that
the  principal  and  interest  ultimately  will  be  uncollectible.   Historical
experience indicates that a portion of non-performing  assets will eventually be
recovered.

   At June 30, 1999,  non-performing  assets  totaled $1.1 million,  or 0.55% of
total assets,  compared to $1.6 million,  or 0.79% of total assets,  at June 30,
1998. The $455,000 decrease reflects  decreases of $560,000 in non-accrual TASCO
Loans and  $94,000 in real  estate  owned,  partially  offset by an  increase of
$199,000 in  non-performing  one-to-four  family mortgage loans. As discussed in
Note 3 to Consolidated  Financial Statements,  the TASCO Loans are participation
interests in loans  originated by Thrift  Association  Service  Corporation  for
which  the  FDIC,  as  servicer  of these  loans,  disputed  its  obligation  to
pass-through certain principal and interest payments whether or not such amounts
are collected from the borrowers.  The FDIC suspended making payments  beginning
in 1996, but resumed making certain payments in 1997 and has continued to do so.
The Company's  participation  interests in the TASCO Loans totaled  $643,000 and
$876,000 at June 30, 1999 and 1998,  respectively.  The decrease  during  fiscal
1999 reflects current year principal payments,  as well as principal  reductions
from the reclassification of $143,000 in interest

                                       13

<PAGE>

payments  deferred in fiscal 1998 and 1997.  Based on the present payment status
of the loans underlying the participation  interests,  management has classified
participation  interests of $316,000 as  non-performing  at June 30,  1999.  All
participation interests were classified as non-performing at June 30, 1998.

   The  allowance for loan losses as a percentage  of  non-performing  loans was
65.66% at June 30,  1999  compared to 45.74% at June 30, 1998 and 31.04% at June
30,  1997.  As a  percentage  of total  loans,  the  allowance  for loan  losses
decreased to 1.17% at June 30, 1999 compared to 1.43% at June 30, 1998 and 1.37%
at June 30, 1997.

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

                                          Year ended June 30,
                               ----------------------------------------
                               1999     1998    1997      1996     1995
                               ----     ----    ----      ----     ----
                                        (Dollars in thousands)

Balance at beginning of year   $682     $622    $519      $474     $336
Provision for loan losses        60       60     143        45      160
Charge-offs                     ---      ---     (40)      ---      (22)
                               ====     ====    ====      ====     ====
Balance at end of year         $742     $682    $622      $519     $474
                               ====     ====    ====      ====     ====

Impact of Inflation

   The consolidated financial statements and related notes 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 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 do the effects of general  levels of inflation.
Interest  rates do not  necessarily  move in the same  direction  or to the same
extent as the prices of goods and services.


Impact of Year 2000 Issue

   Like other  financial  institutions,  the Company relies on computers for the
daily conduct of its business,  all its  transaction  processing and for general
data  processing.  The "Year 2000 Issue" arose  because many  existing  computer
programs  use  only the last two  digits  to refer to a year.  Therefore,  these
computer  programs  may not  properly  recognize  a year that  begins  with "20"
instead of the familiar "19",  causing the programs to fail or create  erroneous
results.

   The Company has  initiated  formal  communications  with all its  significant
suppliers 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
data processing for its core banking  applications is performed by a third party
vendor. These core applications are the Company's  mission-critical  systems for
purposes of its Year 2000 plan. At this time, the vendor has asserted that it is
Year 2000 compliant and the Company, in conjunction with other customers of this
vendor,  has tested the  remediated  system.  The testing of the Company's  data
processing vendor is complete and no significant problems were encountered.  The
Company currently

                                       14
<PAGE>

believes that, with  modifications  to existing  software and conversions to new
software,  the Year 2000  Issue  will be  mitigated  without  causing a material
adverse impact on its operations.

   Contingency plans have been developed for all  mission-critical  areas of the
Company's  operations.  The  contingency  plan for the Company's data processing
function  involves  the  manual  processing  of  transactions  by the  Company's
employees. Contingency plans for the other mission-critical areas involve having
secondary providers ready if problems with primary providers are encountered.

   The Company  utilizes both internal and external  resources to reprogram,  or
replace,  and test all software for Year 2000  modifications.  Related costs are
expensed as incurred,  except for costs incurred in the purchase of new software
or hardware,  which are  capitalized.  At June 30, 1999,  the  cumulative  costs
incurred to address  the Year 2000 Issue  amounted  to  approximately  $160,000.
Costs incurred to date are primarily related to computer hardware purchases, and
management  does not expect that  additional  costs to be incurred in connection
with the Year 2000 Issue will have a material impact on the Company's  financial
condition or results of  operations.  Since  substantially  all of the Company's
loans are  residential  mortgages,  the ability of the  Company's  borrowers  to
become Year 2000 compliant is not a significant concern.

   The estimated costs and timetable for 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 with respect to 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.  In addition, 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 a
material adverse effect on the Company.






                                       15

<PAGE>

Management's Report

   Management  is  responsible   for  the   preparation  and  integrity  of  the
consolidated  financial  statements and the other information  presented in this
annual  report.  The  consolidated  financial  statements  have been prepared in
conformity   with   generally   accepted   accounting   principles  and  reflect
management's  judgments  and  estimates  with  respect  to  certain  events  and
transactions.

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

   The Board of Directors  meets  periodically  with Company  management and the
independent  auditors,  KPMG LLP,  to review  matters  related to the quality of
financial reporting,  internal control, and the nature, extent and result of the
audit efforts.

   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 the Company's internal control to the extent they
consider necessary to determine the nature,  timing and extent of their auditing
procedures.


Eldorus Maynard                                        William J. LaCalamito
Chairman and Chief Executive Officer                   President


Independent Auditors' Report

The Board of Directors and Stockholders
Peekskill Financial Corporation:

   We have audited the  accompanying  consolidated  balance  sheets of Peekskill
Financial  Corporation  and  subsidiary  as of June 30,  1999 and 1998,  and the
related consolidated  statements of income, changes in stockholders' equity, and
cash flows for each of the years in the  three-year  period ended June 30, 1999.
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  aspects,  the financial  position of Peekskill
Financial  Corporation  and  subsidiary  as of June 30,  1999 and 1998,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended June 30, 1999 in  conformity  with  generally  accepted
accounting principles.


Stamford, Connecticut
July 27, 1999

                                       16
<PAGE>

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
                                                             June 30,
                                                     -------------------------
                                                        1999           1998
                                                     ----------     ----------
Assets
Cash and due from banks                              $      957     $    2,616
Interest-bearing deposits                                 3,200          2,010
Securities (note 2):
  Held-to-maturity, at amortized cost
    (fair value of $118,675 in 1999
     and $136,883 in 1998)                              119,122        135,446
  Available-for-sale, at fair value
    (amortized cost of $16,500 in
     1999 and $8,500 in 1998)                            15,673          8,498
                                                     ----------     ----------
     Total securities                                   134,795        143,944
Loans, net of allowance for loan losses
  of $742 in 1999 and $682 in 1998 (note 3)              63,436         47,631
Federal Home Loan Bank stock, at cost                     1,463          1,463
Accrued interest receivable                               1,094          1,050
Office properties and equipment, net (note 4)             1,114          1,043
Deferred income taxes, net (note 7)                         814            362
Real estate owned                                           ---             94
Other assets                                                 59            128
                                                     ----------     ----------
            Total assets                             $  206,932     $  200,341
                                                     ==========     ==========
Liabilities and Stockholders' Equity
Liabilities:
 Depositor accounts (note 5)                         $  148,693     $  139,858
 Securities repurchase agreements
   and other borrowings (note 6)                         28,000         13,000
 Mortgage escrow deposits                                 1,692          1,759
 Other liabilities (note 6)                               1,196          2,518
                                                     ----------     ----------
    Total liabilities                                   179,581        157,135
                                                     ----------     ----------
Commitments and contingencies (note 12)

Stockholders' equity (notes 8 and 11):
  Preferred stock (par value $0.01 per
    share; 100,000 shares authorized; none
    issued or outstanding)                                  ---            ---
  Common stock (par value $0.01 per share;
    4,900,000 shares authorized;
    4,099,750 shares issued)                                 41             41
  Additional paid-in capital                             40,305         40,181
  Unallocated common stock held by
    employee stock ownership plan ("ESOP")               (2,706)        (2,870)
  Unamortized awards of common stock
    under recognition and retention plan ("RRP")           (771)          (922)
  Treasury stock, at cost (2,211,922
    shares in 1999 and 1,204,181 shares in 1998)        (34,204)       (17,730)
  Retained earnings                                      25,183         24,508
  Accumulated other comprehensive loss (note 10)           (497)            (2)
                                                     ----------     ----------
     Total stockholders' equity                          27,351         43,206
                                                     ==========     ==========
        Total liabilities and stockholders' equity   $  206,932     $  200,341
                                                     ==========     ==========

See accompanying notes to consolidated financial statements.

                                       17
<PAGE>


CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
                                                     Year ended June 30,
                                                -------------------------
                                                  1999     1998     1997
                                                -------  -------  -------
Interest and dividend income:
      Loans                                     $ 4,152  $ 3,720  $ 3,402
      Securities                                  8,731    8,561    8,298
      Interest-bearing deposits and other           416      362      609
                                                -------  -------  -------
         Total interest and dividend income      13,299   12,643   12,309
                                                -------  -------  -------

Interest expense:
      Depositor accounts (note 5)                 5,966    5,789    5,431
      Securities repurchase agreements              993      245      ---
      Federal Home Loan Bank advances                 8      ---      ---
                                                -------  -------  -------
         Total interest expense                   6,967    6,034    5,431
                                                -------  -------  -------

         Net interest income                      6,332    6,609    6,878
Provision for loan losses (note 3)                   60       60      143
                                                -------  -------  -------
         Net interest income after
           provision for loan losses              6,272    6,549    6,735
                                                -------  -------  -------

Non-interest income:
      Loan fees and service charges                 145      135      149
      Other                                         110       90       87
                                                -------  -------  -------
         Total non-interest income                  255      225      236
                                                -------  -------  -------

Non-interest expense:
      Compensation and benefits (note 8)          1,810    1,884    1,729
      Occupancy costs                               451      429      341
      Computer service fees                         232      182      180
      Professional fees                             411      163      140
      Safekeeping and custodial services            107       98       94
      Federal deposit insurance costs,
         including a special assessment of
         $884 in 1997 (note 5)                       84       84    1,069
      Other                                         711      634      649
                                                -------  -------  -------
         Total non-interest expense               3,806    3,474    4,202
                                                -------  -------  -------
         Income before income tax expense         2,721    3,300    2,769
Income tax expense (note 7)                       1,198    1,446      957
                                                -------  -------  -------
         Net income                             $ 1,523  $ 1,854  $ 1,812
                                                =======  =======  =======

Earnings per share (note 9):
      Basic                                     $  0.71  $  0.68  $  0.58
      Diluted                                      0.69     0.66     0.58
                                                =======  =======  =======

See accompanying notes to consolidated financial statements.

                                       18
<PAGE>

CONSOLIDATED   STATEMENTS  OF  CHANGES  IN  STOCKHOLDERS'   EQUITY
(Dollars  in thousands, except share data)
<TABLE>
<CAPTION>

                                                   Unallocated Unamortized
                                                     Common     Awards of                       Accumulated
                                          Additional  Stock      Common                            Other        Total
                                 Common    Paid-in     Held      Stock      Treasury   Retained Comprehensive Stockholders'
                                  Stock    Capital    By ESOP   Under RRP    Stock     Earnings     Loss        Equity
                                 -------   -------   --------    -------    --------    -------    -------    -------
<S>                              <C>       <C>       <C>         <C>        <C>         <C>        <C>        <C>
 Balance at June 30, 1996        $    41   $39,972   $ (3,198)   $   ---    $    ---    $22,984    $   (25)   $59,774
 Net income                          ---       ---        ---        ---         ---      1,812        ---      1,812
 Other comprehensive income
    (note 10)                        ---       ---        ---        ---         ---        ---         15         15
                                                                                                              -------
    Total comprehensive income                                                                                  1,827
 Dividends paid ($0.36 per
  share)                             ---       ---        ---        ---         ---     (1,128)       ---     (1,128)
 Purchase of 859,929
  treasury shares                    ---       ---        ---        ---     (11,985)       ---        ---    (11,985)
 Purchase of 163,990
  shares to fund the RRP:
    Awarded to participants
       (117,290 shares)              ---       ---        ---     (1,400)        ---        ---        ---     (1,400)
    Treasury stock
       available for
       future awards
       (46,700 shares)               ---       ---        ---        ---        (558)       ---        ---       (558)
 Amortization of RRP awards          ---       ---        ---        212         ---        ---        ---        212
 ESOP shares allocated
  (16,399 shares)                    ---        60        164        ---         ---        ---        ---        224
                                 -------   -------   --------    -------    --------    -------    -------    -------
Balance at June 30, 1997              41    40,032     (3,034)    (1,188)    (12,543)    23,668        (10)    46,966
 Net income                          ---       ---        ---        ---         ---      1,854        ---      1,854
 Other comprehensive income
    (note 10)                        ---       ---        ---        ---         ---        ---          8          8
                                                                                                              -------
    Total comprehensive income                                                                                  1,862
 Dividends paid
    ($0.36 per share)                ---       ---        ---        ---         ---     (1,014)       ---     (1,014)
 Purchase of 297,552
    treasury shares                  ---       ---        ---        ---      (5,187)       ---        ---     (5,187)
 Amortization of RRP awards          ---       ---        ---        266         ---        ---        ---        266
 Tax benefit from vesting of
    RRP awards                       ---        36        ---        ---         ---        ---        ---         36
 ESOP shares allocated
    (16,399 shares)                  ---       113        164        ---         ---        ---        ---        277
                                 -------   -------   --------    -------    --------    -------    -------    -------
 Balance at June 30, 1998             41    40,181     (2,870)      (922)    (17,730)    24,508         (2)    43,206
    Net income                       ---       ---        ---        ---         ---      1,523        ---      1,523
    Other comprehensive loss
    (note 10)                        ---       ---        ---        ---         ---        ---       (495)      (495)
                                                                                                              -------
    Total comprehensive income                                                                                  1,028
 Dividends paid ($0.36 per
  share)                             ---       ---        ---        ---          ---      (773)       ---       (773)
 Purchase of 1,030,740
  treasury shares                    ---       ---        ---        ---      (16,822)      ---        ---    (16,822)
 RRP award (2,500 shares)
                                     ---        14        ---        (44)          30       ---        ---        ---
 Exercise of stock options
  (20,499 treasury shares)           ---       ---        ---        ---          318       (75)       ---        243
 Amortization of RRP awards
                                     ---       ---        ---        195          ---       ---        ---        195
 Tax benefit from vesting of
   RRP awards
                                     ---        36        ---        ---          ---       ---        ---         36
 ESOP shares allocated
   (16,399 shares)                   ---        74        164        ---          ---       ---        ---        238
                                 -------   -------   --------    -------    --------    -------    -------    -------
 Balance at June 30, 1999        $    41   $40,305   $ (2,706)   $  (771)   $(34,204)   $25,183    $  (497)   $27,351
                                 =======   =======   ========    =======    ========    =======    =======    =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       19
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
                                                          Year ended June 30,
                                                      -------------------------
                                                        1999    1998     1997
                                                      ------- -------- --------
Cash flows from operating activities:
 Net income                                           $ 1,523 $  1,854 $  1,812
 Adjustments to  reconcile  net income to
      net cash  provided by  operating activities:
   Provision for loan losses                               60       60      143
   Depreciation and amortization expense                  101       96       66
   ESOP and RRP expense                                   433      543      436
   Net amortization and accretion of deferred
      fees, discounts and premiums                         59      (61)    (122)
   Net (increase) decrease in accrued
      interest receivable                                 (44)      14       47
   Net decrease in other assets                            69       43        2
   Deferred tax benefit                                  (146)     (58)    (384)
   Net increase in other liabilities                       24      434       90
   Other adjustments, net                                  (1)      (1)      10
                                                      ------- -------- --------
   Net cash provided by operating activities            2,078    2,924    2,100
                                                      ------- -------- --------
Cash flows from investing activities:
 Purchases of securities:
   Held-to-maturity                                   (45,826) (52,950) (18,422)
   Available-for-sale                                 (17,500) (11,100)  (1,000)
 Proceeds from principal payments, maturities
 and calls of securities:
   Held-to-maturity                                    62,155   44,046   21,232
   Available-for-sale                                   9,500    5,100    1,000
 Disbursements for loan originations,
   net of principal collections                       (15,865)  (2,431)  (6,261)
 Purchase of Federal Home Loan Bank stock                 ---      ---     (144)
 Proceeds from sales of real estate owned                  94      373      ---
 Purchases of office properties and equipment            (171)    (899)    (122)
                                                      ------- -------- --------
   Net cash used in investing activities               (7,613) (17,861)  (3,717)
                                                      ------- -------- --------
Cash flows from financing activities:
  Net increase in depositor accounts                    8,835    7,440    4,114
  Proceeds from securities repurchase
    agreements and other borrowings                    15,000   13,000      ---
  Repayments of Federal Home Loan Bank advances           ---      ---     (500)
  Net decrease in mortgage escrow deposits                (67)    (184)     (88)
  Treasury stock purchases                            (18,172)  (3,837) (12,543)
  Purchase of shares to fund current-year
    RRP awards                                            ---      ---   (1,400)
  Proceeds from issuance of common stock                  243      ---      ---
  Dividends paid                                         (773)  (1,014)  (1,128)
                                                      ------- -------- --------
   Net cash provided by (used in) financing
     activities                                         5,066   15,405  (11,545)
                                                      ------- -------- --------
Net (decrease) increase in cash and cash equivalents     (469)     468  (13,162)
Cash and cash equivalents at beginning of year          4,626    4,158   17,320
                                                      ------- -------- --------
Cash and cash equivalents at end of year              $ 4,157 $  4,626 $  4,158
                                                      ======= ======== ========
Supplemental information:
  Interest paid                                       $ 6,940 $  5,918 $  5,468
  Income taxes paid                                     1,346    1,390    1,105
  (Decrease) increase in liability for
      treasury stock purchased, not yet settled        (1,350)   1,350      ---
  (Decrease) increase in liability for securities
      purchased, not yet settled                          ---     (499)     499
  Mortgage loans transferred to real estate owned         ---      247      220
                                                      ======= ======== ========

See accompanying notes to consolidated financial statements.

                                       20
<PAGE>

Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

Peekskill  Financial  Corporation (the "Holding  Company") is a savings and loan
holding company which owns all of the outstanding  common stock of First Federal
Savings Bank (the "Bank"),  formerly First Federal Savings and Loan  Association
of  Peekskill.  The Holding  Company and the Bank are  collectively  referred to
herein as "the  Company." The Bank operates  three  full-service  branches,  and
serves northern Westchester County and Putnam County as its primary market area.
The Bank is a community-oriented  savings institution engaged principally in the
business of attracting  deposits from customers in its market area and investing
those  funds  in  residential  mortgage  loans  and  mortgage-backed  and  other
securities.  The Bank is a federally  chartered stock savings bank with deposits
insured  up to  applicable  limits by the  Savings  Association  Insurance  Fund
("SAIF") of the Federal Deposit  Insurance  Corporation.  The Company's  primary
regulator is the Office of Thrift Supervision ("OTS").

Basis of Presentation

The  consolidated  financial  statements  include  the  accounts  of the Holding
Company, the Bank and First Federal REIT, Inc. (a wholly-owned subsidiary of the
Bank formed in May 1999 as a real estate  investment  trust to hold a portion of
the Company's  mortgage-related  assets). All significant  intercompany accounts
and transactions have been eliminated in consolidation.

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.
Actual  results could differ  significantly  from those  estimates.  Significant
estimates  that  are  particularly  susceptible  to  near-term  change  are  the
allowance for loan losses and deferred income taxes, which are discussed below.

For purposes of reporting cash flows,  cash and cash equivalents  represent cash
and due from banks and interest-bearing deposits.

Securities

Statement of Financial  Accounting  Standards ("SFAS") No. 115,  "Accounting for
Certain Investments in Debt and Equity Securities",  requires the classification
of individual  securities as held-to-maturity,  trading, or  available-for-sale.
SFAS No. 115 limits the  held-to-maturity  category 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.  Management  determines  the  appropriate
classification of the Company's securities at the time of purchase.

                                       21
<PAGE>

Notes to Consolidated Financial Statements (continued)

Held-to-maturity  securities are carried at amortized  cost.  Available-for-sale
securities are carried at fair value,  with unrealized gains and losses excluded
from  earnings  and reported on a  net-of-tax  basis as a separate  component of
stockholders'  equity  (accumulated  other  comprehensive  income or loss).  The
Company  has  no  trading  securities.   Federal  Home  Loan  Bank  stock  is  a
non-marketable  security held in accordance with certain regulatory requirements
and, accordingly, is carried at cost.

Premiums and discounts on debt  securities are amortized to interest income on a
level-yield basis over the expected term of the security. Purchases and sales of
securities are recorded on the trade date. Realized gains and losses on sales of
securities are determined based on the amortized cost of the specific securities
sold.  Unrealized  losses 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 increased by provisions for loan losses charged
to  income.  Losses on loans  (including  impaired  loans)  are  charged  to the
allowance  for loan  losses  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.  Management  estimates  the allowance for loan losses
based on an  evaluation of the Company's  past loan loss  experience,  known and
inherent risks in the portfolio,  estimated value of underlying collateral,  and
current economic conditions.  In management's  judgment,  the allowance for loan
losses is adequate to absorb probable losses in the existing portfolio.

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

In accordance  with SFAS No. 114,  "Accounting  by Creditors for Impairment of a
Loan," 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. The Company  applies SFAS No. 114 to
loans (including  participation  interests) that are individually  evaluated for
collectibility.  The  standard  generally  does  not  apply  to  smaller-balance
homogeneous  loans (such as individual  one-to-four  family mortgage loans) that
are  collectively  evaluated for impairment.  Under SFAS No. 114,  creditors are
permitted to measure  impaired  loans based on (i) the present value of expected
future cash flows  discounted at the loan's  effective  interest 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 an impaired  loan's  recorded  investment,  an  impairment  loss is
recognized as part of the allowance for loan losses.

Interest and Fees on Loans

Interest income is accrued monthly on outstanding loan principal balances unless
management  considers  collection  to  be  uncertain.  Interest  collections  on
non-accrual loans are either deferred or reported as

                                       22
<PAGE>

interest  income,  depending on  management's  judgment as to the  likelihood of
further collections. Loans are returned to accrual status when collectibility is
no longer considered uncertain.

Loan origination  fees and certain direct loan  origination  costs are deferred,
and the net fee or cost is recognized as an adjustment to interest  income using
the  level-yield  method  over the  contractual  term of the related  loan.  Net
deferred fees and costs  applicable to prepaid loans are  recognized in interest
income at the time of prepayment.

Office Properties and Equipment

Office   properties   and  equipment  are  carried  at  cost  less   accumulated
depreciation and amortization.  Depreciation is computed using the straight-line
method  over  the  estimated  useful  lives  of the  related  assets.  Leasehold
improvements  are amortized using the  straight-line  method over the shorter of
the lease term or the  estimated  useful  life of the  improvement.  Repairs and
maintenance,  as well as renewals  and  replacements  of a routine  nature,  are
charged  to  expense  as  incurred.   Costs  of  significant   improvements  are
capitalized.

Real Estate Owned

Property acquired through  foreclosure is initially  recorded at fair value less
estimated sales costs, with any resulting writedown charged to the allowance for
loan  losses.  Thereafter,  an  allowance  for  losses on real  estate  owned is
established  for any further  declines in fair value less estimated sales costs.
Fair  value  estimates  are  based on  recent  appraisals  and  other  available
information.

Securities Repurchase Agreements

In  securities  repurchase  agreements,  the Company  transfers  securities to a
counterparty  under an agreement to  repurchase  the  identical  securities at a
fixed  price in the  future.  These  agreements  are  accounted  for as  secured
financing transactions provided the Company maintains effective control over the
transferred  securities  and meets the other  criteria  for such  accounting  as
specified in SFAS No. 125,  "Accounting for Transfers and Servicing of Financial
Assets  and   Extinguishments  of  Liabilities."  Since  all  of  the  Company's
agreements are accounted for as secured financings, the transaction proceeds are
recorded as borrowed funds and the underlying  securities continue to be carried
in the Company's securities portfolio.

Income Taxes

Income  taxes  are  accounted   for  under  the  asset  and  liability   method.
Accordingly,  deferred taxes are recognized for the estimated future tax effects
attributable to "temporary  differences" and tax loss  carryforwards.  Temporary
differences are differences between the financial statement carrying amounts and
the tax bases of  existing  assets  and  liabilities.  Deferred  tax  assets and
liabilities  are measured  using  enacted tax rates  expected to apply to future
taxable income. The effect on deferred tax assets and liabilities of a change in
tax laws or rates is  recognized  in  income  tax  expense  in the  period  that
includes the enactment date of the change.

                                       23
<PAGE>

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 a 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.

Treasury Stock

Treasury  stock  is  carried  at  cost  and is  presented  as a  deduction  from
stockholders'  equity.  Purchases  of treasury  shares are recorded on the trade
date.

Pension Plans

The Company  maintains a  non-contributory  defined  benefit  pension plan which
covers substantially all employees. Pension costs are funded on a current basis.
Costs  for  this  plan,  as  well as  supplemental  retirement  agreements,  are
accounted  for in  accordance  with  SFAS No.  87,  "Employers'  Accounting  for
Pensions."

Stock-Based Compensation Plans

Compensation  expense is recognized for the Company's  employee stock  ownership
plan  ("ESOP")  equal to the fair value of shares  committed  to be released for
allocation to participant  accounts.  Any  difference  between the fair value at
that time and the ESOP's  original  acquisition  cost is charged or  credited to
stockholders' equity (additional paid-in capital).  The cost of unallocated ESOP
shares (shares not yet committed to be released) is deducted from  stockholders'
equity.

The Company  accounts for its stock option plan in  accordance  with  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 (measured on the
grant date) as compensation expense over the vesting period. Alternatively, SFAS
No.  123 allows  entities  to apply the  provisions  of APB  Opinion  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.  The Company
has elected to apply the  provisions of APB Opinion No. 25 and provide these pro
forma disclosures.

The Company's  recognition  and retention  plan ("RRP") is also accounted for in
accordance  with APB  Opinion  No. 25.  The fair  value of the  shares  awarded,
measured at the grant date, is recognized as unearned  compensation (a deduction
from stockholders'  equity) and amortized to compensation  expense as the shares
become vested.

                                       24
<PAGE>

Earnings Per Share

In accordance with SFAS No. 128, "Earnings per Share," the Company has presented
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  number  of  common  shares  outstanding  for the  period.  Shares
outstanding for this purpose exclude  unallocated ESOP shares that have not been
committed to be released to  participants.  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.

Segment Information

During  fiscal  1999,  the  Company  adopted  SFAS No. 131,  "Disclosures  about
Segments of an Enterprise and Related Information." SFAS No. 131 requires public
companies   to  report   certain   financial   information   about   significant
revenue-producing  segments  of the  business  for  which  such  information  is
available  and  utilized  by  the  chief  operating  decision  maker.   Specific
information to be reported for individual  operating segments includes a measure
of profit and loss,  certain revenue and expense items,  and total assets.  As a
community-oriented  financial  institution,  substantially  all of the Company's
operations  involve  the  delivery of loan and  deposit  products to  customers.
Management  makes  operating  decisions  and  assesses  performance  based on an
ongoing  review of these  community  banking  operations,  which  constitute the
Company's only operating segment for financial reporting.


                                       25
<PAGE>


2.  Securities

A summary of the Company's securities follows:
<TABLE>
<CAPTION>

                                                                Gross Unrealized
                                                     Amortized  ----------------  Fair
                                                       Cost     Gains     Losses  Value
                                                     --------   -----   -------- --------
                                                                 (In thousands)
<S>                                                  <C>       <C>      <C>       <C>
June 30, 1999
Held-to-Maturity Securities
Mortgage-backed securities:
     Pass-through securities:
        Freddie Mac                                  $ 27,642  $  406   $  (182)  $ 27,866
        Ginnie Mae                                     31,403     437        (4)    31,836
        Fannie Mae                                      9,269      27      (164)     9,132
     Collateralized mortgage obligations               42,389      25      (673)    41,741
                                                     --------  ------   -------   --------
                                                      110,703     895    (1,023)   110,575
U.S. Government Agency and other debt securities        8,419     ---      (319)     8,100
                                                     --------  ------   -------   --------
             Total                                   $119,122  $  895   $(1,342)  $118,675
                                                     ========  ======   =======   ========
Available-for-Sale Securities
U.S. Government Agency and other debt securities     $ 16,500  $  ---   $  (827)  $ 15,673
                                                     ========  ======   =======   ========

June 30, 1998
Held-to-Maturity Securities
Mortgage-backed securities:
     Pass-through securities:
        Freddie Mac                                  $ 43,258  $  684    $ (136)  $ 43,806
        Ginnie Mae                                     40,767     625       ---     41,392
        Fannie Mae                                      7,370      62        (3)     7,429
     Collateralized mortgage obligations               36,065     213       (11)    36,267
                                                     --------  ------   -------   --------
                                                      127,460   1,584      (150)   128,894
U.S. Government Agency and other debt securities        7,986      21       (18)     7,989
                                                     --------  ------   -------   --------
             Total                                   $135,446  $1,605   $  (168)  $136,883
                                                     ========  ======   =======   ========
Available-for-Sale Securities
U.S. Government Agency and other debt securities     $  8,500  $    5   $    (7)  $  8,498
                                                     ========  ======   =======   ========
</TABLE>

The amortized  cost of securities  at June 30, 1999  consisted of  approximately
$101.4  million of fixed-rate  securities  and $34.2 million of  adjustable-rate
securities  ($98.8 million and $45.1 million,  respectively,  at June 30, 1998).
Substantially all collateralized  mortgage obligations at June 30, 1999 and 1998
were Freddie Mac, Fannie Mae and Ginnie Mae securities.

The Company did not sell any securities during fiscal years 1999, 1998 and 1997.

                                       26
<PAGE>


The  following  is a  summary  of the  amortized  cost  and  fair  value of debt
securities,   other  than  mortgage-backed  securities,  by  remaining  term  to
contractual  maturity as of June 30,  1999.  Actual  maturities  may differ from
these  amounts  because  certain  issuers have the right to call or prepay their
obligations.
                                     Held-to-Maturity   Available-for-Sale
                                     -----------------  ------------------
                                     Amortized  Fair    Amortized   Fair
                                       Cost     Value     Cost      Value
                                     -------  --------  --------  --------
                                                  (In thousands)

More than one year to five years     $   500  $   495   $    ---  $    ---
More than five years to ten years      1,500    1,448      7,500     7,218
More than ten years                    6,419    6,157      9,000     8,455
                                     -------  --------  --------  --------
        Total                        $ 8,419  $ 8,100   $ 16,500  $ 15,673
                                     =======  ========  ========  ========
3.  Loans

Loans at June 30 consist of the following:
                                             1999       1998
                                          ---------   --------
                                              (In thousands)
Mortgage loans:
      One-to-four family                  $ 59,802    $ 46,271
      Multi-family                             619         674
      Commercial                             2,389         507
      Construction                           1,709         676
      Construction loans in process           (651)       (112)
                                          --------    --------
                                            63,868      48,016
                                          --------    --------
Other loans:
      Passbook loans and other                 465         460
      Student loans                             77          63
                                          --------    --------
                                               542         523
                                          --------    --------

           Total loans                      64,410      48,539
Allowance for loan losses                     (742)       (682)
Net deferred loan origination fees            (232)       (226)
                                          --------    --------
           Total loans, net               $ 63,436    $ 47,631
                                          ========    ========

Total loans (net of construction  loans in process)  consisted of  approximately
$63.8 million of fixed-rate loans and $643,000 of adjustable-rate  loans at June
30,  1999  ($47.7  million  and  $876,000,  respectively,  at  June  30,  1998).
One-to-four  family mortgage loans include home equity loans of $1.7 million and
$1.9 million at June 30, 1999 and 1998, respectively.

The  Company   primarily   originates   mortgage   loans   secured  by  existing
single-family  residential properties.  The Company also originates multi-family
and commercial real estate loans, and construction  loans. A substantial portion
of the loan portfolio is secured by real estate  properties  located in northern
Westchester  County and Putnam  County,  New York.  The ability of the Company's
borrowers to make principal and interest payments is dependent upon, among other
things,  the level of  overall  economic  activity  and the real  estate  market
conditions prevailing within the Company's concentrated lending area.

                                       27
<PAGE>


Activity in the allowance for loan losses is summarized as follows for the years
ended June 30:
                                        1999       1998        1997
                                      -------    -------    --------
                                              (In thousands)

Balance at beginning of year          $   682    $   622    $    519
Provision for losses                       60         60         143
Charge-offs                               ---        ---         (40)
                                      -------    -------    --------
Balance at end of year                $   742    $   682    $    622
                                      =======    =======    ========

The Company's non-performing loans at June 30 are summarized as follows:

                                                     1999      1998
                                                   -------   -------
                                                     (In thousands)
Non-accrual loans:
      Participation interests (1)                  $   316   $   876
      One-to-four family mortgage loans                382       245
                                                   -------   -------
          Total non-accrual loans                      698     1,121

Accruing one-to-four family mortgage
      loans past due more than 90 days                 432       370
                                                   =======   =======
          Total non-performing loans               $ 1,130   $ 1,491
                                                   =======   =======

(1) Amounts represent the Company's recorded investment in impaired loans within
    the scope of SFAS No.  114.  A related  impairment  allowance  of $83,000 is
    included  in the  allowance  for loan losses at both June 30, 1999 and 1998.
    The average recorded investment in impaired loans was $835,000, $965,000 and
    $1.1 million in fiscal 1999, 1998 and 1997, respectively.

Included in the Company's loan portfolio are certain participation  interests in
loans originated by Thrift Association  Service  Corporation ("TASCO Loans") for
which the FDIC,  as a  servicer  of these  loans,  disputed  its  obligation  to
pass-through certain principal and interest payments whether or not such amounts
are collected from the borrowers. The FDIC suspended payments beginning in 1996,
but resumed  making  certain  payments in 1997 and has  continued to do so. As a
result,  interest payments of $44,000 received in fiscal 1999 were recognized as
income on a cash basis.  Foregone  interest  income was  approximately  $22,000,
$76,000 and $74,000 in fiscal 1999, 1998 and 1997, respectively. Interest income
for  fiscal  1997 was also  reduced  by the  reversal  of  $67,000  in  interest
previously received on the TASCO Loans.

The Company's  participation  interests in the TASCO Loans totaled  $643,000 and
$876,000 at June 30, 1999 and 1998,  respectively.  The decrease  during  fiscal
1999 reflects current year principal payments,  as well as principal  reductions
from the  reclassification  of $143,000 in interest  payments deferred in fiscal
1998 and 1997.  Based on the present payment status of the loans  underlying the
participation  interests,  management has classified  participation interests of
$316,000 as non-performing  at June 30, 1999. All  participation  interests were
classified as non-performing at June 30, 1998.

                                       28
<PAGE>


4.  Office Properties and Equipment

A summary of office properties and equipment at June 30 follows:

                                                        1999     1998
                                                     --------  --------
                                                        (In thousands)

Land                                                 $     55  $     55
Buildings                                               1,472     1,452
Furniture, fixtures and equipment                         488       456
Leasehold improvements                                    164       157
                                                     --------  --------
                                                        2,179     2,120
Less accumulated depreciation and amortization        (1,065)   (1,077)
                                                     --------  --------
       Office properties and equipment, net          $  1,114  $  1,043
                                                     ========  ========
5.  Depositor Accounts

Depositor accounts at June 30 are summarized below:

                                            1999               1998
                                      ----------------  ------------------
                                               Average             Average
                                        Amount   Rate     Amount     Rate
                                      --------- ------  --------- --------
                                              (Dollars in thousands)

Money market demand and NOW           $  18,264  2.80%  $  13,196    2.85%
Regular savings                          50,759  2.75      50,928    2.75
Club                                        751  2.75         710    2.75
                                      ---------         ---------
                                         69,774  2.76      64,834    2.77
                                      ---------         ---------
Savings certificates by remaining
  period to maturity:
    Under one year                       65,425  5.16      58,118    5.53
    One year to under three years         9,393  5.49      11,889    6.43
    Three years and over                  4,101  5.89       5,017    6.25
                                      ---------         ---------
                                         78,919  5.24      75,024    5.72
                                      ---------         ---------
        Total                         $ 148,693  4.08%  $ 139,858    4.35%
                                      =========         =========

Savings certificates issued in denominations greater than $100,000 totaled $12.3
million and $10.1 million at June 30, 1999 and 1998, respectively.

The  following is a summary of interest  expense on  depositor  accounts for the
years ended June 30:

                                        1999            1998            1997
                                    ------------     -----------    -----------
                                                  (In thousands)

Money market demand and NOW              $   418         $   329        $   285
Regular savings and club                   1,403           1,541          1,696
Savings certificates                       4,145           3,919          3,450
                                         =======         =======        =======
       Total                             $ 5,966         $ 5,789        $ 5,431
                                         =======         =======        =======

                                       29
<PAGE>

The Deposit  Insurance  Funds Act of 1996 (the "Funds Act") was enacted into law
on September  30, 1996.  Among other things,  the Funds Act required  depository
institutions to pay a one-time special  assessment of 65.7 basis points on their
SAIF-assessable  deposits held on March 31, 1995, in order to  recapitalize  the
SAIF to the level required by law. The Bank's special assessment of $884,000 was
accrued as a charge to non-interest  expense for the quarter ended September 30,
1996. The assessment was paid in November 1996.

6.       Securities Repurchase Agreements and Other Borrowings

The  following  is a  summary  of  borrowings  from the  Federal  Home Loan Bank
("FHLB") of New York at June 30:

                                                        1999          1998
                                                     ---------     ----------
                                                       (Dollars in thousands)
Securities repurchase agreements:

 Final maturity in June 2005,
    callable quarterly at the FHLB's
    option beginning in June 1999,
    and bearing interest at 5.20%                     $  3,000   $   3,000

 Final maturity in December 2008,
    callable quarterly at the FHLB's
    option beginning in November
    2000, and bearing interest at 4.56%                  5,000         ---

 Final maturity in December 2008,
    callable quarterly at the FHLB's
    option beginning in November 2001,
    and bearing interest at 4.72%                        5,000         ---

 Final maturity in January 2008,
    callable quarterly at the FHLB's
    option beginning in January 2003,
    and bearing interest at 5.42%                       10,000      10,000
                                                      --------   ---------
                                                        23,000      13,000
Other borrowings:
 FHLB advance  maturing in June 2000
    and  bearing  interest at an
    initial rate of 4.985% at June 30,
    1999, adjusting thereafter to
    three-month Libor minus 14 basis points              5,000         ---
                                                      ========   =========
 Total securities repurchase agreements
    and other borrowings                              $ 28,000   $  13,000
                                                      ========   =========
 Weighted average interest rate at June 30                5.04%       5.37%
                                                      ========   =========

Securities  repurchase  agreements  were  collateralized  by securities  with an
amortized  cost of $26.0  million and a fair value of $24.8  million at June 30,
1999.  During the years  ended June 30, 1999 and 1998,  the  average  borrowings
under  securities  repurchase  agreements  were $19.5  million and $4.6 million,
respectively,  and the maximum borrowings under securities repurchase agreements
were $23.0 million and $13.0 million, respectively. The Company did not have any
borrowings  during the year ended June 30,  1997.  Accrued  interest  payable of
$139,000 and $110,000 on borrowings is included in other liabilities at June 30,
1999 and 1998, respectively.

The Bank may  borrow  funds  from the  FHLB of New York  subject  to an  overall
limitation of 25% of total assets or $51.7  million at June 30, 1999  (excluding
securities repurchase  agreements).  Funds may be borrowed through a combination
of FHLB  advances  and  overnight  borrowings  under a line of credit.  The FHLB
advance at June 30, 1999 was collateralized by securities with an amortized cost
and fair  value of $7.1  million.  FHLB  borrowings  may also be  secured by the
Bank's  investment  in FHLB  stock and by a  blanket  security  agreement  which
requires  maintenance  of specified  levels of  qualifying  assets  (principally
securities and residential mortgage loans) not otherwise pledged.

                                       30
<PAGE>


7.  Income Taxes

Income tax  expense  for the years  ended  June 30  consisted  of the  following
components:

                             1999           1998           1997
                          -----------    -----------    ------------
                                       (In thousands)
Federal:
      Current                 $  983        $ 1,086           $ 972
      Deferred                  (118)           (39)             31
                          ----------    -----------    ------------
                                 865          1,047           1,003
                          ----------    -----------    ------------
State:
      Current                    361            418             369
      Deferred                   (28)           (19)           (415)
                          ----------    -----------    ------------
                                 333            399             (46)
                          ----------    -----------    ------------
Total:
      Current                  1,344          1,504           1,341
      Deferred                  (146)           (58)           (384)
                          ----------    -----------    ------------
                             $ 1,198        $ 1,446           $ 957
                          ==========    ===========    ============

Total  income tax  expense  differs  from the amounts  computed by applying  the
applicable  statutory  Federal  income tax rate of 34% to income  before  income
taxes.  A  reconciliation  of tax expense at the statutory rate to the Company's
actual tax expense follows for the years ended June 30:

                                                  1999        1998        1997
                                                ---------   --------    -------
                                                      (In thousands)

Tax at Federal statutory rate                       $ 925     $1,122      $ 941
State taxes, net of Federal tax benefit               220        263        (30)
Other, net                                             53         61         46
                                                ---------   --------    -------
Actual income tax expense                          $1,198     $1,446      $ 957
                                                =========   ========    =======

The tax effects of temporary differences and tax carryforwards that give rise to
the Company's deferred tax assets and liabilities at June 30 are as follows:

                                                            1999    1998
                                                           -----    -----
                                                           (In thousands)
Deferred tax assets:
      Allowance for loan losses                            $ 274    $ 279
      Unrealized loss on available-for-sale securities       330      ---
      Loan origination fees                                   86       93
      Other deductible temporary differences                 355      259
      Capital loss carryforward                              ---       19
                                                           -----    -----
           Total gross deferred tax assets                 1,045      650
      Less valuation allowance                               ---      (19)
                                                           -----
                                                                    -----
           Deferred tax assets, net                        1,045      631
                                                           -----    -----
Deferred tax liabilities:
      Federal tax bad debt reserve
         in excess of base-year amount                      (231)    (268)
      Other taxable temporary differences                    ---       (1)
                                                           -----    -----
                                                                    -----
           Total gross deferred tax liabilities             (231)    (269)
                                                           -----    -----
           Net deferred tax asset                          $ 814    $ 362
                                                           =====    =====
                                       31
<PAGE>

Based on the Company's  historical  and  anticipated  future  pre-tax  earnings,
management  believes  that it is more  likely  than not that the  Company's  net
deferred tax assets will be realized.

As a thrift  institution,  the Bank is  subject  to  special  provisions  in the
Federal  and New  York  state  tax laws  regarding  its  allowable  tax bad debt
deductions and related tax bad debt reserves. These deductions historically were
determined  using  methods  based on loss  experience or a percentage of taxable
income. Tax bad debt reserves represent 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.  Deferred tax  liabilities are recognized with
respect to such excess reserves,  as well as any portion of the base-year amount
that 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 the first  quarter  of fiscal  1997.  The  Federal
amendments  eliminated  the  percentage-of-taxable-income  method  for tax years
beginning  after  December 31, 1995 and imposed a requirement  to recapture into
taxable  income (over a six-year  period) the bad debt reserves in excess of the
base-year  amounts.  The Company has  recognized a deferred tax  liability  with
respect to excess Federal  reserves that have not yet been  recaptured.  The New
York State  amendments  redesignated the state bad debt reserve as the base-year
amount  and  permit  future  additions  to  the  base-year   reserve  using  the
percentage-of-taxable-income  method.  These changes effectively  eliminated the
excess New York state  reserve for which the Company had  recognized  a deferred
tax liability.  Accordingly,  the Company  reduced its deferred tax liability by
$238,000,  with a  corresponding  reduction in income tax expense,  in the first
quarter of fiscal 1997.

At June 30, 1999, the Bank's  base-year  Federal and state tax bad debt reserves
were $4.5 million and $8.6 million, respectively.  Deferred tax liabilities have
not been  recognized  with  respect to these  reserves,  since the Bank does not
expect that these amounts will become taxable in the foreseeable  future.  Under
the tax laws as amended,  events that would result in taxation of these reserves
include (i) redemptions of the Bank's stock,  (ii)  distributions to the Holding
Company in excess of the Bank's accumulated  earnings and profits calculated for
Federal  income tax purposes,  as discussed in note 11, and (iii) failure of the
Bank to  maintain a  specified  qualifying  assets  ratio or meet  other  thrift
definition  tests for New York state tax purposes.  At June 30, 1999, the Bank's
unrecognized  deferred  tax  liabilities  with  respect to the Federal and state
base-year reserves totaled approximately $2.1 million.

8.  Employee Benefit and Stock Compensation Plans

Pension Benefits

All eligible  employees  are  included in a  non-contributory,  defined  benefit
pension  plan.  Benefits are based on credited  service and final  earnings,  as
defined.  The  Company's  policy  is to fund the  consulting  actuary's  maximum
recommended   contribution,   which  includes  the   amortization   of  unfunded
liabilities over 30 years from their date of establishment.

                                       32
<PAGE>

The following is a summary of changes in the plan's projected benefit obligation
and the fair value of plan assets,  together with a reconciliation of the plan's
funded  status to the  accrued  pension  costs  recognized  in the  consolidated
balance sheets at June 30:

                                                        1999          1998
                                                     -----------    ----------
                                                          (In thousands)
Change in benefit obligations:
      Beginning of year                              $    2,629   $   2,225
      Service cost                                           91          66
      Interest cost                                         181         175
      Actuarial loss                                         29         241
      Benefits paid                                        (111)        (78)
                                                     ----------   ---------
      End of year                                         2,819       2,629
                                                     ----------   ---------

Change in fair value of plan assets:
      Beginning of year                                   2,149       1,987
      Actual return on plan assets                          125         129
      Employer contributions                                162         111
      Benefits paid                                        (111)        (78)
                                                     ----------   ---------
      End of year                                         2,325       2,149
                                                     ----------   ---------

Funded status at end of year                               (494)       (480)
Unrecognized net actuarial loss                             300         204
Unrecognized prior service cost                              17          24
Unrecognized net transition obligation                       41          55
                                                     ----------   ---------

      Accrued pension cost                           $     (136)    $  (197)
                                                     ==========   =========

The  components  of net pension  expense are as follows for the years ended June
30:

                                                  1999    1998    1997
                                                ------  ------   ------
                                                       (In thousands)

Service cost (benefits earned during the year)  $   91  $   66   $   58
Interest cost on projected benefit obligation      181     175      155
Expected return on plan assets                    (190)   (177)    (146)
Amortization of prior service cost and net
  transition obligation                             21      21       21
                                                ------  ------   ------
      Net pension expense                       $  103  $   86   $   88
                                                ======  ======   ======

The  discount  rate and rate of increase in future  compensation  levels used in
determining the actuarial present value of the projected benefit obligation were
7.0%  and  5.0%,  respectively,  at June  30,  1999 and  1998  (8.0%  and  6.0%,
respectively,  at June 30, 1997). The expected  long-term rate of return on plan
assets was 9.0% for each year.

The  Company  entered  into  non-qualified   Supplemental  Executive  Retirement
Agreements  with  certain  executives  during  fiscal 1996 to provide  them with
supplemental  retirement  benefits in addition to the  benefits  provided by the
pension plan.  The expense  related to these  agreements  amounted to $84,000 in
fiscal 1999,  and $36,000 in both fiscal 1998 and 1997.  The  projected  benefit
obligation was approximately  $428,000 at June 30, 1999 and $322,000 at June 30,
1998, all of which is unfunded.  These amounts were determined  using a discount
rate of 7.0% and a projected salary increase rate of 5.0%.

                                       33
<PAGE>

Other Benefits

Substantially  all  employees who retired prior to October 19, 1995 are eligible
for postretirement health care (medical and dental) benefits if they met certain
age and length of service requirements.  The periodic expense for these benefits
was insignificant in fiscal 1999, 1998 and 1997.

The Company also maintains a Savings and Investment  Plan for the benefit of its
employees.  This  401(k)  plan was  frozen in  December  1995.  Since that time,
employees have not been permitted to make salary reduction  contributions to the
plan. The Company may allow salary reduction  contributions  in the future,  but
without an employer matching contribution.

Employee Stock Ownership Plan

The Company  established an ESOP for eligible  employees in connection  with its
initial public offering in December 1995. The ESOP borrowed  approximately  $3.3
million from the Holding  Company and used the funds to purchase  327,980 shares
of the  Holding  Company's  common  stock sold in the  offering.  The Bank makes
semi-annual  contributions  to the ESOP equal to the debt  service  requirements
less all dividends  received by the ESOP on  unallocated  shares.  The ESOP uses
these  contributions  and  dividends to repay  principal  and interest  over the
20-year term of the loan.

Shares  purchased by the ESOP are held in a suspense account by the plan trustee
for allocation to participants on June 30 of each year. Shares released from the
suspense  account are allocated to  participants  on the basis of their relative
compensation.  Participants  become  vested  in the  shares  allocated  to their
respective accounts over a period not to exceed five years. Any forfeited shares
are allocated to other participants in the same proportion as contributions.

Expense  recognized  in fiscal  1999,  1998 and 1997 with  respect to  allocated
shares amounted to $238,000, $277,000 and $224,000,  respectively,  based on the
average fair value of the Holding  Company's  common  stock for each  period.  A
cumulative  total of 57,397 shares have been allocated to  participants  through
June 30, 1999.  The cost of the 270,583 shares which have not yet been allocated
to  participant  accounts  ($2.7  million  at June 30,  1999) is  deducted  from
stockholders'  equity.  The fair value of these  shares was  approximately  $3.6
million at that date.

Stock Option Plan

On July 3, 1996,  stockholders approved The Peekskill Financial Corporation 1996
Stock Option Plan ("Stock  Option Plan").  Under the Stock Option Plan,  409,975
shares of  authorized  but  unissued  Holding  Company  stock are  reserved  for
issuance  upon  option  exercises.  Options  may be either  non-qualified  stock
options or incentive stock options.  Each option entitles the holder to purchase
one share of common stock at an exercise price equal to the fair market value of
the stock on the grant date.  Options have a ten-year term and vest ratably over
five years.

Effective  July 3, 1996,  initial option grants were made under the Stock Option
Plan for 296,984 shares at an exercise price of $11.875 per share. During fiscal
1999,  additional options were granted for 10,000 shares at an exercise price of
$17.75  per  share  and  options  were  exercised  for  20,499  shares.  Options

                                       34
<PAGE>

outstanding at June 30, 1999 totaled  286,485,  with a weighted average exercise
price of $12.08 per share and a weighted average remaining term of approximately
7.0 years.  A total of 110,596  options were  exercisable at June 30, 1999, at a
weighted  average  exercise  price of  $11.875  per share.  There  were  102,991
reserved shares available for future option grants at June 30, 1999.

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 options,  no  compensation  expense is
recognized  with  respect to options  granted or vested.  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.  The  estimated  per-share  fair value of options  granted  was $3.18 in
fiscal  1997  and  $4.32 in  fiscal  1999,  estimated  using  the  Black-Scholes
option-pricing model with assumptions  approximately as follows:  dividend yield
of 2.75%;  expected volatility rate of 20%; risk-free interest rates of 6.26% in
fiscal 1997 and 5.25% in fiscal 1999; and expected  option life of 8 years.  Had
the Company applied the fair-value-based method to the options granted, it would
have  reported net income,  basic  earnings  per share and diluted  earnings per
share of $1.4  million,  $0.66 and $0.64,  respectively,  in fiscal  1999;  $1.7
million, $0.64 and $0.61, respectively,  in fiscal 1998; and $1.7 million, $0.55
and $0.54, respectively, in fiscal 1997.

Recognition and Retention Plan

On July 3, 1996,  stockholders also approved The Peekskill Financial Corporation
1996  Recognition  and Retention  Plan  ("RRP").  The purpose of this plan is to
provide  officers and  non-employee  directors of the Company with a proprietary
interest  in the  Company in a manner  designed to  encourage  their  retention.
Awards granted under this plan vest ratably over the respective  vesting periods
from the date of grant.  On July 16, 1996, the Company  completed the funding of
the RRP by purchasing 163,990 shares of common stock in the open market for $2.0
million.  RRP awards under this plan totaled 117,290 in fiscal 1997 and 2,500 in
fiscal 1999,  with the remaining  44,200  purchased  shares included in treasury
stock at June 30, 1999 and available for future awards. Unearned compensation of
$1.4  million  was  recorded  with  respect  to the shares  awarded.  Subsequent
amortization,  which is included  in  compensation  and  benefits  expense,  was
$195,000 in fiscal 1999, $266,000 in fiscal 1998 and $212,000 in fiscal 1997.

9.  Earnings per Share

The  following is an analysis of the number of shares  utilized in the Company's
EPS  calculations for the years ended June 30, 1999, 1998 and 1997. For purposes
of computing basic EPS, net income applicable to common stock equaled net income
for each of the years presented.

                                                    1999        1998       1997
                                                  --------    -------    -------
                                                            (In thousands)
Weighted average common shares outstanding
    for computation of basic EPS (1)                 2,144      2,714      3,101
Common-equivalent shares due to the dilutive
    effect of stock  options  and RRP  awards (2)       54        111         48
                                                  --------    -------    -------

Weighted average common shares for
    computation of diluted EPS                       2,198      2,825      3,149
                                                  ========    =======    =======

(1)  Excludes unvested RRP awards and unallocated ESOP shares that have not been
     committed to be released.
(2)  Computed using the treasury stock method.

                                       35
<PAGE>

10.  Comprehensive Income

The Company has adopted SFAS No. 130,  "Reporting  Comprehensive  Income," which
establishes standards for the reporting and display of comprehensive income (and
its components) in financial statements. Comprehensive income represents the sum
of net  income  and items of "other  comprehensive  income"  which are  reported
directly in  stockholders'  equity,  such as the change during the period in the
after-tax  net  unrealized  gain or loss on  securities  available-for-sale.  In
accordance with SFAS No. 130, the Company has reported its comprehensive  income
for fiscal  1999,  1998 and 1997 in the  consolidated  statements  of changes in
stockholders' equity.

The Company's other comprehensive income or loss, which is attributable to gains
and losses on  securities  available-for-sale,  is summarized as follows for the
years ended June 30:

                                       1999        1998       1997
                                      -------      -----     ------
                                             (In thousands)
Net unrealized  holding (loss)
gain arising during the  year          $ (825)     $  14       $ 25

Related income tax effect                 330         (6)       (10)
                                      -------      -----     ------

Other comprehensive (loss) income      $ (495)     $   8       $ 15
                                      =======      =====     ======

The  Company's  accumulated  other  comprehensive  loss,  which is  included  in
stockholders' equity, represents the after-tax net unrealized loss on securities
available-for-sale   of  $497,000   and  $2,000  at  June  30,  1999  and  1998,
respectively.

11.  Regulatory Matters

Regulatory Capital Requirements

OTS  regulations  require  savings  institutions  to maintain a minimum ratio of
tangible  capital to total  adjusted  assets of 1.5%; a minimum  ratio of Tier I
(core) capital to total adjusted assets of 4.0% (effective April 1, 1999); and a
minimum ratio of total (core and supplementary)  capital to risk-weighted assets
of 8.0%.

Under its prompt  corrective  action  regulations,  the OTS is  required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an  undercapitalized  institution.  Such actions  could have a direct
material  effect on the  institution's  financial  statements.  The  regulations
establish a framework for the  classification of savings  institutions into five
categories:   well  capitalized,   adequately   capitalized,   undercapitalized,
significantly undercapitalized,  and critically undercapitalized.  Generally, an
institution  is considered  well  capitalized  if it has a Tier I (core) capital
ratio of at least 5.0%; a Tier I 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 classifications are also
subject to  qualitative  judgments  by the OTS about  capital  components,  risk
weightings and other factors.  These capital requirements,  which are applicable
to the Bank only,  do not  consider  additional  capital at the Holding  Company
level.

                                       36
<PAGE>


Management believes that, as of June 30, 1999 and 1998, the Bank met all capital
adequacy  requirements  to which it is  subject.  Further,  the most  recent OTS
notification  categorized the Bank as a  well-capitalized  institution under the
prompt  corrective action  regulations.  There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.

The following is a summary of the Bank's actual capital amounts and ratios as of
June 30, 1999 and 1998, compared to the OTS requirements for classification as a
well-capitalized institution and for minimum capital adequacy:

                                           Classification as    Minimum Capital
                           Bank Actual      Well Capitalized       Adequacy
                        -----------------  -----------------   ----------------
                         Amount     Ratio   Amount     Ratio    Amount    Ratio
                        -------     -----  -------    ------   -------    -----
                                               (Dollars in thousands)
June 30, 1999
Tangible capital        $27,652     13.4%      N/A      N/A     $3,107     1.5%
Tier I (core) capital    27,652     13.4   $10,358      5.0%     8,287     4.0
Risk-based capital:
      Tier I             27,652     45.6     3,640      6.0        N/A     N/A
      Total              28,394     46.8     6,067     10.0      4,854     8.0


June 30, 1998
Tangible capital        $43,493     21.8%      N/A      N/A     $2,992     1.5%
Tier I (core) capital    43,493     21.8   $ 9,975      5.0%     5,985     3.0
Risk-based capital:
      Tier I             43,493     87.4     2,986      6.0        N/A     N/A
      Total              44,116     88.6     4,977     10.0      3,982     8.0

Liquidation Account

In accordance with regulatory  requirements,  the Bank established a liquidation
account  at the time of its  conversion  to stock  form,  in the amount of $21.2
million  representing its total equity at June 30, 1995. The liquidation account
is  maintained  for the benefit of  eligible  account  holders  who  continue to
maintain their accounts at the Bank. The liquidation account is reduced annually
to the extent that  eligible  account  holders  have  reduced  their  qualifying
deposits as of each anniversary date.  Subsequent  increases will not restore an
eligible account holder's interest in the liquidation  account.  In the unlikely
event of a complete  liquidation of the Bank, each eligible  account holder will
be entitled to receive a distribution from the liquidation  account in an amount
proportionate  to the current  adjusted  qualifying  balances for accounts  then
held.

Capital Distributions

Under OTS regulations which became effective April 1, 1999, savings associations
such as the Bank  generally  may declare  annual cash  dividends up to an amount
equal to net  income  of the  current  year plus  retained  net  income  for the
preceeding  two years.  Dividends in excess of such amount require OTS approval.
The Bank paid $17.5 million and $3.0 million of dividends to the Holding Company
during fiscal 1999 and 1998,  respectively.  No dividends  were paid by the Bank
during fiscal 1997.

                                       37
<PAGE>


As  discussed  in note 7,  distributions  by the Bank to the Holding  Company in
excess of the Bank's accumulated earnings and profits (as calculated for Federal
income  tax  purposes)  would  result in  taxation  of the  Bank's  tax bad debt
reserves.  All  dividends  paid to date by the Bank to the Holding  Company have
been paid from the Bank's current and  accumulated  earnings and profits.  Since
the Bank intends to limit  future  dividend  payments to amounts  which will not
result in the recapture of tax bad debt reserves, the amount of additional funds
which may be  available  for  dividend  payments  to the  Holding  Company  will
generally  be  limited  to the  amount of the  Bank's  current  and  accumulated
earnings and profits.  At June 30, 1999, the Bank had approximately $3.4 million
in  current  and  accumulated  earnings  and  profits  from  which it could  pay
dividends  without  causing  the  recapture  of any  portion of its tax bad debt
reserves.

Unlike  the  Bank,  the  Holding  Company  is  not  subject  to  OTS  regulatory
restrictions  on the  payment of  dividends  to its  stockholders.  The  Holding
Company is subject, however, to Delaware law which generally limits dividends to
an amount  equal to the excess of the net  assets of the  Holding  Company  (the
amount by which  total  assets  exceed  total  liabilities)  over its  statutory
capital,  or if there is no such  excess,  to its net  profits  for the  current
and/or immediately preceding fiscal year.

Treasury share  purchases in fiscal 1999 include  800,040 shares  purchased in a
Modified Dutch Auction Tender Offer,  which was completed on February 2, 1999 at
a total cost of $13.4 million or an average of $16.75 per share.

12.  Commitments and Contingencies

Off-Balance Sheet Financial Instruments

The Company's financial  instruments with off-balance sheet risk were limited to
fixed-rate mortgage loan origination  commitments with total contractual amounts
of $6.7  million  and $6.6  million  at June 30,  1999 and  1998,  respectively.
Substantially  all of these commitments carry fixed interest rates and have been
issued to customers within the Company's  primary lending area described in note
3. These  instruments  involve elements of credit risk and interest rate risk in
addition to the amounts  recognized  in the  consolidated  balance  sheets.  The
contractual amounts represent the Company's maximum potential exposure to credit
loss, but do not necessarily  represent future cash  requirements  since certain
commitments  may expire without being funded.  Loan  commitments  generally have
fixed expiration dates or other termination clauses and may require payment of a
fee by the customer.  Commitments  are subject to the Company's  credit approval
process, including a case-by-case evaluation of the customer's  creditworthiness
and related collateral requirements.

Lease Commitments

At June 30, 1999, the Company was obligated under two non-cancellable  operating
leases for office space.  These leases contain  escalation clauses providing for
increased  rentals and renewal options.  Rent expense under operating leases was
approximately  $109,000,  $97,000 and $60,000 for the years ended June 30, 1999,
1998 and 1997,  respectively.  The future minimum lease payments under operating
leases at June 30, 1999 were  $99,000  annually  for fiscal  years 2000  through
2002; $90,000 for fiscal 2003; $77,000 for fiscal 2004; and an aggregate of $1.1
million for later years.

                                       38
<PAGE>



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.

13.  Fair Value of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments," requires
disclosures with respect to financial instruments for which it is practicable to
estimate fair value, whether or not such financial instruments are recognized on
the balance sheet.  Fair value is defined by 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 sale or liquidation.

Quoted  market  prices are used to  estimate  fair  value 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.  Estimates developed using these methods are
highly 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 at a certain point in time, they are susceptible to material  near-term
changes.  Fair values  disclosed 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.









                                       39
<PAGE>


The  following  is a summary  of the  carrying  amounts  and fair  values of the
Company's  financial assets and liabilities  (none of which are held for trading
purposes) at June 30:


                                      1999                         1998
                               ------------------------   ----------------------
                               Carrying     Estimated     Carrying    Estimated
                               Amount       Fair Value     Amount     Fair Value
                               --------      --------     ---------   ----------
                                                  (In thousands)
Financial assets:
 Cash and due from banks       $    957      $    957     $   2,616     $  2,616
 Interest-bearing deposits        3,200         3,200         2,010        2,010
 Securities                     134,795       134,348       143,944      145,381
 Loans                           63,436        63,180        47,631       48,230
 FHLB stock                       1,463         1,463         1,463        1,463
 Accrued interest receivable      1,094         1,094         1,050        1,050

Financial liabilities:
 Savings certificates            78,919        78,812        75,024       75,386
 Other deposit accounts          69,774        69,774        64,834       64,834
 Securities repurchase
   agreements and other
   borrowings                    28,000        26,476        13,000       12,315
 Accrued interest payable           139           139           110          110

The following  paragraphs  describe the valuation methods used by the Company to
estimate the fair values of its financial instruments:

Securities
The fair values of securities were based on market prices or securities dealers'
estimated prices.

Loans
Fair  values were  estimated  by  portfolio,  for loans with  similar  financial
characteristics.  Loans were  segregated  by type,  such as  one-to-four  family
residential,  multi-family  residential,  commercial and other loans.  Each loan
category was further segmented into fixed and adjustable-rate categories, and by
performing and non-performing  categories.  The fair values for performing loans
were estimated by discounting the expected cash flows using 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 estimated
cash flows discounted at rates commensurate with the credit risk involved.

Deposit Liabilities
The  fair  value of  savings  certificates  represents  contractual  cash  flows
discounted  using  interest  rates  currently  offered on accounts  with similar
characteristics and remaining  maturities.  In accordance with SFAS No. 107, the
fair values of other deposit  accounts (those with no stated  maturity,  such as
savings  accounts) are equal to the carrying  amounts  payable on demand.  These
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  unrecognized  value
separate from the deposit balances.

                                       40
<PAGE>


Borrowings

Fair value  represents  contractual cash flows discounted using current interest
rates available for borrowings with similar characteristics and remaining terms.

Other Financial Instruments

The other  financial  assets and  liabilities  shown in the preceding table have
fair values  which  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 described in note 12 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 June 30, 1999 and 1998, the fair
values of these commitments approximated the related carrying amounts which were
not significant.

14.  Recent Accounting Standard

SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities,"
requires  entities to recognize all  derivatives as either assets or liabilities
in the balance sheet at fair value. If certain  conditions are met, a derivative
may be  specifically  designated as a fair value hedge, a cash flow hedge,  or a
foreign currency hedge. A specific accounting  treatment applies to each type of
hedge. Entities may reclassify securities from the held-to-maturity  category to
the  available-for-sale  category  at the  time of  adopting  SFAS No.  133.  As
recently  amended,  SFAS No. 133 is effective for fiscal years  beginning  after
June 15, 2000,  although  early adoption is permitted as of the beginning of any
fiscal quarter prior to that time. The Company has not selected an adoption date
or decided whether it will reclassify securities between categories. The Company
does not presently engage in derivatives and hedging  activities  covered by the
new standard and,  accordingly,  the related  provisions of SFAS No. 133 are not
expected to affect the Company's consolidated financial statements.


                                       41
<PAGE>


15.  Parent Company Condensed Financial Information

Set  forth  below  are the  condensed  balance  sheets  of  Peekskill  Financial
Corporation as of June 30, 1999 and 1998, and the related  condensed  statements
of income and cash flows for the years ended June 30, 1999, 1998 and 1997:

                                                    June 30,
                                           -------------------------
                                               1999          1998
                                           -------------- ----------
Condensed Balance Sheets                           (In thousands)

  Assets:
      Cash                                    $    8        $   39
      Interest-bearing deposits                  400           810
      Investment in subsidiary                27,016        43,491
      Other assets                                53           345
                                            --------      --------
           Total                            $ 27,477      $ 44,685
                                            ========      ========
  Liabilities and Stockholders' Equity:
      Liabilities                            $   126      $  1,479
      Stockholders' equity                    27,351        43,206
                                            --------      --------
           Total                            $ 27,477      $ 44,685
                                            ========      ========


                                                  Year ended June 30,
                                          -------------------------------
                                            1999        1998       1997
                                          --------    -------     -------
Condensed Statements of Income                     (In thousands)

Dividends received from subsidiary        $ 17,500    $ 3,000     $   ---
Interest income                                241        271         611
Non-interest expense                          (195)      (127)       (187)
                                          --------    -------     -------
    Income before income tax expense
      and effect of subsidiary earnings     17,546      3,144         424

Income tax expense                             (42)       (87)       (195)
                                          --------    -------     -------
    Income before effect of subsidiary
      earnings                              17,504      3,057         229
Effect of subsidiary earnings:
    Excess of dividends over current
      earnings of subsidiary               (15,981)    (1,203)        ---
    Equity in undistributed earnings
      of subsidiary                            ---        ---       1,583
                                          --------    -------     -------
      Net income                          $  1,523    $ 1,854     $ 1,812
                                          ========    =======     =======



                                       42

<PAGE>

<TABLE>
<CAPTION>


                                                                                   Year ended June 30,
                                                                            ---------------------------------
                                                                              1999         1998        1997
                                                                            ---------    -------     --------
Condensed Statements of Cash Flows                                                   (In thousands)
<S>                                                                         <C>         <C>         <C>
Cash flows from operating activities:
      Net income                                                            $   1,523    $ 1,854      $ 1,812
      Adjustments to reconcile net income to net cash provided by
         operating activities:
            Excess of dividends over current earnings of subsidiary            15,981      1,203          ---
            Equity in undistributed earnings of subsidiary                        ---        ---       (1,583)
            Other adjustments, net                                                757        291          461
                                                                            ---------    -------     --------
                Net cash provided by operating activities                      18,261      3,348          690
                                                                            ---------    -------     --------

Cash flows from financing activities:

      Treasury stock purchases                                                (18,172)    (3,837)     (12,543)
      Purchase of shares to fund current-year RRP awards                          ---        ---       (1,400)
      Proceeds from issuance of common stock                                      243        ---          ---
      Dividends paid                                                             (773)    (1,014)      (1,128)
                                                                            ---------    -------     --------
                Net cash used in financing activities                         (18,702)    (4,851)     (15,071)
                                                                            ---------    -------     --------

Net decrease in cash and cash equivalents                                        (441)    (1,503)     (14,381)
Cash and cash equivalents at beginning of year                                    849      2,352       16,733
                                                                            =========    =======     ========
Cash and cash equivalents at end of year                                    $     408    $   849     $  2,352
                                                                            =========    =======     ========
Supplemental information:
      (Decrease) increase in liability for treasury
      stock purchased, not yet settled                                      $  (1,350)   $ 1,350     $    ---
                                                                            =========    =======     ========

</TABLE>



                                       43
<PAGE>

16.  Selected Quarterly Financial Data (Unaudited)

Summarized quarterly financial data for fiscal 1999 and 1998 is shown below:

                                                    Three Months Ended
                                      ------------------------------------------
                                      September 30 December 31 March 3   June 30
                                      ------------ ----------- -------   -------
                                           (In thousands, except per share data)
Fiscal 1999
Interest and dividend income             $ 3,355    $ 3,370    $ 3,326   $ 3,248
Interest expense                           1,695      1,730      1,760     1,782
                                         -------    -------    -------   -------
     Net interest income                   1,660      1,640      1,566     1,466
Provision for loan losses                     15         15         15        15
Non-interest income                           63         69         61        62
Non-interest expense                         885        900        916     1,105
                                         -------    -------    -------   -------
     Income before income tax expense        823        794        696       408
Income tax expense                           367        350        301       180
                                         -------    -------    -------   -------
     Net income                          $   456    $   444    $   395   $   228
                                         =======    =======    =======   =======
     Earnings per share:
          Basic                          $  0.18    $  0.18    $  0.20   $  0.14
          Diluted                           0.18       0.18       0.19      0.14
                                         =======    =======    =======   =======

Fiscal 1998
Interest and dividend income             $ 3,095    $ 3,059    $ 3,220   $ 3,269
Interest expense                           1,446      1,430      1,540     1,618
                                         -------    -------    -------   -------
     Net interest income                   1,649      1,629      1,680     1,651
Provision for loan losses                     15         15         15        15
Non-interest income                           57         55         54        59
Non-interest expense                         826        852        936       860
                                         -------    -------    -------   -------
     Income before income tax expense        865        817        783       835
Income tax expense                           370        356        346       374
                                         -------    -------    -------   -------
     Net income                          $   495    $   461    $   437   $   461
                                         =======    =======    =======   =======
     Earnings per share:
          Basic                          $  0.18    $  0.17    $  0.16   $  0.18
          Diluted                           0.17       0.16       0.16      0.17
                                         =======    =======    =======   =======

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<PAGE>


Corporate Information
Directors
Eldorus Maynard, Chairman of the Board
Dominick Bertoline
Edward H. Dwyer
Robert E. Flower
William J. LaCalamito
John A. McGurty, Jr.

Officers
Eldorus Maynard
Chairman of the Board and Chief Executive Officer

William J. LaCalamito
President and Chief Operating Officer

Scott D. Nogles
Vice President of Finance

Corporate Offices
Peekskill Financial Corporation
1019 Park Street
Peekskill, NY  10566
(914) 737-2777

Annual Meeting
The annual meeting of stockholders will be held on October 20, 1999 at 3:30 p.m.
at the Company's offices at 1019 Park Street, Peekskill, New York.

Annual Report on Form 10-K
For the 1999 fiscal year,  Peekskill  Financial  Corporation will file an Annual
Report on Form 10-K with the  Securities and Exchange  Commission.  Stockholders
wishing a copy may obtain one by writing to:
     William J. LaCalamito
     Secretary
     Peekskill Financial Corporation
     1019 Park Street
     Peekskill, NY  10566

Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ  07016

Independent Auditors
KPMG LLP
3001 Summer Street
Stamford, CT  06905

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<PAGE>


General Counsel
Carl Olson
1019 Park Street
Peekskill, NY  10566

Special Counsel
Silver, Freedman & Taff, LLP
1100 New York Avenue, NW
Washington, DC  20005

Common Stock
The common  stock of  Peekskill  Financial  Corporation  is traded on the NASDAQ
Stock Market under the symbol "PEEK." The approximate number of stockholders was
1,336 at June 30, 1999.

The cash dividends declared by the Company, and the high and low sales prices of
the Company's common stock in the Over-the-Counter market of the NASDAQ National
Market System, were as follows for the quarters indicated:

                                       Closing Sales Prices
                       Cash        ----------------------------
                     Dividends                           End of
   Quarter ended     Declared       High       Low       Period
   -------------     ---------     --------  -------    -------

   June 30, 1999     $ 0.09        $13.875   $12.375    $13.250
  March 31, 1999       0.09         16.875    13.250     13.500
 December 31, 1998     0.09         17.250    12.000     15.938
September 30, 1998     0.09         18.125    13.875     14.250

   June 30, 1998     $ 0.09        $18.063   $16.625    $17.875
  March 31, 1998       0.09         17.750    16.000     17.375
 December 31, 1997     0.09         18.250    16.500     16.750
September 30, 1997     0.09         18.250    15.125     16.750

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

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