<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


FORM 10-K

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934
                  For the fiscal year ended June 30, 2000

                                       OR

[_]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934 For the transition period from to

                         Commission file number 0-24040

                        PENNFED FINANCIAL SERVICES, INC.
             (Exact name of registrant as specified in its charter)


          Delaware                                    22-3297339
(State or other jurisdiction of                    (I.R.S. Employer
incorporation or organization)                     Identification No.)


622 Eagle Rock Avenue, West Orange, New Jersey          07052-2989
  (Address of principal executive offices)              (Zip Code)


Registrant's telephone number, including area code:        (973) 669-7366

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

          Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share
                          Common Stock Purchase Rights
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
requirements for the past 90 days. YES X     NO___

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

         The aggregate  market value of the voting stock held by  non-affiliates
of the  registrant,  computed by reference to the closing price of such stock on
the Nasdaq  National  Market as of  September  8, 2000,  was  $96,446,000.  (The
exclusion from such amount of the market value of the shares owned by any person
shall  not be deemed  an  admission  by the  registrant  that such  person is an
affiliate of the registrant.)

         As of September 8, 2000,  there were issued and  outstanding  8,122,313
shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III of Form 10-K - Portions of the Proxy  Statement for 2000 Annual Meeting
of Stockholders.

                                       5
<PAGE>

                                     PART I

Item 1. Business

General

PennFed  Financial  Services,  Inc.  ("PennFed" and with its  subsidiaries,  the
"Company"), a Delaware corporation,  was organized in March 1994 for the purpose
of becoming the savings and loan holding  company for Penn Federal  Savings Bank
("Penn Federal" or the "Bank") in connection  with the Bank's  conversion from a
federally  chartered mutual savings bank to a federally  chartered stock savings
bank (the "Conversion").  PennFed owns all of the outstanding stock of the Bank.
All references to the Company,  unless  otherwise  indicated,  prior to July 14,
1994  refer  to the Bank  and its  subsidiaries  on a  consolidated  basis.  The
Company's  common  stock is traded on the  Nasdaq  National  Market  Tier of the
Nasdaq Stock Market under the symbol "PFSB."

PennFed and the Bank are subject to  comprehensive  regulation,  examination and
supervision  by the Office of Thrift  Supervision,  Department  of the  Treasury
("OTS") and by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a
member of the  Federal  Home Loan Bank  ("FHLB")  System  and its  deposits  are
insured up to applicable limits by the FDIC.

The  Company  has been,  and  intends to  continue  to be, a  community-oriented
financial institution offering a variety of financial services to meet the needs
of the  communities it serves.  The Company  attracts  deposits from the general
public and uses such  deposits,  together with  borrowings  and other funds,  to
originate and purchase one- to four-family residential mortgage loans, and, to a
lesser extent, to originate commercial and multi-family real estate and consumer
loans. See "Originations,  Purchases, Sales and Servicing of Loans." The Company
also  invests  in  mortgage-backed  securities  secured  by one- to  four-family
residential mortgages,  U.S. government agency obligations and other permissible
investments.

The Company offers a variety of deposit accounts having a wide range of interest
rates and terms, which generally include savings, money market, and a variety of
checking  accounts,  as well as  certificate  accounts.  The  Company  generally
solicits deposits in its primary market areas.

At June 30, 2000, the Company had total assets of $1.7 billion, deposits of $1.1
billion,  borrowings  of  $476.6  million  and  stockholders'  equity  of $114.0
million.

At June 30, 2000,  the  Company's  gross loan  portfolio  totaled $1.3  billion,
including $1.1 billion of one- to four-family  residential first mortgage loans,
$86.3 million of commercial and multi-family real estate loans and $97.6 million
of consumer  loans.  In addition,  on that date the Company had $87.6 million of
mortgage-backed securities and $325.3 million of other investment securities and
FHLB of New York stock.

At June 30, 2000, the vast majority of the Company's  first and second  mortgage
loans (excluding mortgage-backed  securities) were secured by properties located
in New Jersey.  Of the loans  secured by  properties  outside  New  Jersey,  the
majority are one- to four-family loans. See "Originations,  Purchases, Sales and
Servicing of Loans." The Company's  revenues are derived primarily from interest
on loans,  mortgage-backed  securities and investments,  and income from service
charges.

Penn  Federal,  through its  wholly-owned  subsidiary,  Penn  Savings  Insurance
Agency, Inc., offers insurance and uninsured non-deposit  investment products to
its customers. See "Subsidiary Activities."

In October  1997,  Penn Federal  formed Ferry  Development  Holding  Company,  a
Delaware operating subsidiary, to hold and manage its investment portfolio.

The administrative  offices of the Company are located at 622 Eagle Rock Avenue,
West Orange, New Jersey 07052-2989,  and the telephone number at that address is
(973) 669-7366.

                                       6

<PAGE>

Forward-Looking Statements

When  used in this  Form  10-K and in future  filings  by the  Company  with the
Securities and Exchange  Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications,  and in oral statements made with
the approval of an  authorized  executive  officer,  the words or phrases  "will
likely   result,"  "are  expected  to,"  "will   continue,"  "is   anticipated,"
"estimate,"   "project"  or  similar   expressions   are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform Act of 1995. Such statements are subject to certain risks and
uncertainties,  including, among other things, changes in economic conditions in
the  Company's  market  area,  changes  in  policies  by  regulatory   agencies,
fluctuations in interest rates and demand for loans in the Company's market area
and  competition  that could  cause  actual  results to differ  materially  from
historical  earnings and those presently  anticipated or projected.  The Company
wishes  to  caution   readers   not  to  place   undue   reliance  on  any  such
forward-looking  statements,  which speak only as of the date made.  The Company
wishes  to advise  readers  that the  factors  listed  above  could  affect  the
Company's financial performance and could cause the Company's actual results for
future periods to differ  materially  from any opinions or statements  expressed
with respect to future periods in any current statements.

The Company does not undertake - and  specifically  declines any obligation - to
publicly  release  the  result  of  any  revisions  which  may  be  made  to any
forward-looking  statements to reflect events or circumstances after the date of
such  statements or to reflect the occurrence of  anticipated  or  unanticipated
events.

Market Area

The Company's primary market areas are comprised of the Ironbound section of the
City of Newark and surrounding urban communities, the suburban Essex County area
and selected areas of central/southern New Jersey, which are serviced through 21
full service  offices.  Penn Federal was organized in the  Ironbound  section of
Newark in 1941 and the home  office of the Bank  remains  there.  The  Ironbound
section  of the City of Newark  and  immediately  adjacent  communities  of East
Newark and  Harrison  are  primarily  urban blue  collar  areas with two or more
family dwellings and some manufacturing and industry.  Deposits at Bank branches
in these areas  comprise 35% of total Bank  deposits.  The suburban Essex County
area consists of communities with predominantly  single family homes and a white
collar commuter  population.  Suburban Essex County is the Bank's largest market
area,  accounting for approximately 39% of total Bank deposits at June 30, 2000.
Penn  Federal's  central/southern  New Jersey  branches  are located in selected
areas of Middlesex,  Monmouth and northern Ocean counties.  The central/southern
region branches,  with 26% of total Bank deposits,  serve retirement populations
and expanding townhouse,  multi-family and single family home developments.  The
Bank also purchases one- to four-family  residential loans secured by properties
located  primarily  in New  Jersey.  See  "Originations,  Purchases,  Sales  and
Servicing of Loans."

Lending Activities

General.  The Company  primarily  originates and purchases  fixed and adjustable
rate, one- to four-family  first mortgage loans. The Company's general policy is
to originate  and purchase such loans with  maturities  between 10 and 30 years.
The Company  underwrites  mortgage loans  generally using Freddie Mac and Fannie
Mae  guidelines,  although  loan  amounts may exceed  agency  limits.  See "Loan
Portfolio Composition" and "One- to Four-Family Residential Mortgage Lending."

The Company also originates  commercial and  multi-family  real estate loans and
consumer  loans.  Such loans  generally  reprice more  frequently,  have shorter
maturities,  and/or have higher  yields  than fixed  rate,  one- to  four-family
mortgage loans.

Residential and consumer loan  applications  may be approved by various officers
up to $1.25 million and $1.0 million, respectively.  Commercial and multi-family
real estate loan  applications are initially  considered and approved at various
levels of authority,  depending on the amount of the loan.  All  commercial  and
multi-family  real  estate  loans and  relationships  $750,000  and over must be
approved by the Executive  Loan  Committee  which  consists of the President and
certain  executive and senior  officers.  The approval of the Company's Board of
Directors is required for all loans and relationships above $1.25 million.

                                       7
<PAGE>

The  aggregate  amount of loans  that the  Company  is  permitted  to make under
applicable federal regulations to any one borrower,  including related entities,
or the  aggregate  amount that the Company  could have  invested in any one real
estate project is generally the greater of 15% of unimpaired capital and surplus
or $500,000.  See  "Regulation-Federal  Regulation of Savings  Associations." At
June 30, 2000,  the maximum  amount which the Company could have lent to any one
borrower and the borrower's  related entities was  approximately  $20.6 million.
The Company's  current  policy is to limit such loans to a maximum of 50% of the
general  regulatory limit or $5.0 million,  whichever is less. At June 30, 2000,
the Company's  largest group of loans to one borrower (and any related entities)
consisted of five commercial real estate loans aggregating $4.3 million. Four of
these loans, aggregating $3.2 million, are secured by multi-family properties in
Essex  County.  The fifth  loan,  for $1.1  million,  represents  the  Company's
participation in a loan for a senior  assisted-living  complex in Morris County.
At June 30,  2000,  there  was a total of 22 loans or  lender  relationships  in
excess of $1.0 million,  for a total amount of $38.8 million.  At that date, all
of these loans were  performing in accordance  with their  respective  repayment
terms.

Loan Portfolio  Composition.  The following  table sets forth the composition of
the Company's loan portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                              June 30,
                            --------------------------------------------------------------------------------------------------------
                                   2000                   1999                 1998                 1997                 1996
                            --------------------------------------------------------------------------------------------------------
                            Amount       Percent    Amount    Percent     Amount   Percent    Amount     Percent   Amount    Percent
                            --------------------------------------------------------------------------------------------------------
                                                                       (Dollars in thousands)

First mortgage loans:
<S>                         <C>          <C>      <C>          <C>      <C>         <C>      <C>         <C>       <C>        <C>
One- to four-family(1)      $1,070,048   85.34%   $ 915,244    86.15%   $ 971,668   89.01%   $831,843    89.55%    $565,924   86.68%
Commercial and multi-family     86,257    6.88       74,613     7.02       65,833    6.03      56,811     6.12       52,014    7.97
                            --------------------------------------------------------------------------------------------------------
  Total first mortgage
   loans                     1,156,305   92.22      989,857    93.17    1,037,501   95.04     888,654    95.67      617,938   94.65
                            --------------------------------------------------------------------------------------------------------
Other loans:
Consumer loans:
Second mortgages                45,659    3.64       37,243     3.50       27,232    2.49      23,665     2.55       23,912    3.66
Home equity lines of credit     46,394    3.70       31,754     2.99       23,538    2.16      14,040     1.51        8,955    1.37
Other                            5,534    0.44        3,575     0.34        3,331    0.31       2,512     0.27        2,117    0.32
                            --------------------------------------------------------------------------------------------------------
  Total consumer loans          97,587    7.78       72,572     6.83       54,101    4.96      40,217     4.33       34,984    5.35
                            --------------------------------------------------------------------------------------------------------
  Total loans                1,253,892  100.00%   1,062,429   100.00%   1,091,602  100.00%    928,871   100.00%     652,922  100.00%
                                        ======                ======               ======               ======               ======

Add/(less):
Unamortized premiums,
 deferred loan fees,
 and other, net                  9,339                7,391                 7,026               5,202                 2,279
                            --------------------------------------------------------------------------------------------------------
Allowance for loan losses       (3,983)              (3,209)               (2,776)             (2,622)               (2,630)
                            ========================================================================================================
 Total loans receivable,
  net                       $1,259,248           $1,066,611            $1,095,852            $931,451              $652,571
</TABLE>

--------------
(1) One-to four-family loans include loans held for sale of $5,180,000, $565,000
and $88,000 at June 30, 1999, 1998 and 1996,  respectively.  There were no loans
held for sale at June 30, 2000 and 1997.

Loan Maturity. The following schedule sets forth the contractual maturity of the
Company's loan portfolio as of June 30, 2000.  Loans that have adjustable  rates
are shown as amortizing to final  maturity  rather than when the interest  rates
are next  subject  to  change.  Loans with  balloon  payments  are also shown as
amortizing  to final  maturity  (i.e.,  when the  balloon  payment is due).  All
balances  are shown on a gross basis and,  thus,  include no premium or discount
adjustments.  Savings account loans and overdraft checking balances, included in
consumer loans, which have no stated final maturity,  are reported as due within
one year.  The table does not reflect the  effects of  possible  prepayments  or
scheduled principal amortization.

                                       8

<PAGE>

<TABLE>
<CAPTION>
                                           After One   After Three  After Five  After Ten
                                One Year    Through      Through     Through     Through       After
                                or Less   Three Years  Five Years   Ten Years  Twenty Years  Twenty Years    Total
                               -------------------------------------------------------------------------------------
                                                                  (In thousands)
First mortgage loans:
<S>                             <C>        <C>          <C>         <C>         <C>           <C>         <C>
One- to four-family             $1,345     $1,803       $ 5,147     $ 73,012    $218,430      $770,311    $1,070,048
Commercial and multi-family      2,916      3,264         2,094       23,684      52,515         1,784        86,257
                                ------------------------------------------------------------------------------------

  Total first mortgage loans     4,261      5,067         7,241       96,696     270,945       772,095     1,156,305

Consumer loans                   3,374      1,764         8,172       14,890      69,387          --          97,587
                                ------------------------------------------------------------------------------------
  Total loans, gross            $7,635     $6,831       $15,413     $111,586    $340,332      $772,095    $1,253,892
                                ====================================================================================
</TABLE>


Loans due after June 30, 2001,  which have fixed interest rates amount to $703.1
million, while those with adjustable rates amount to $543.1 million, detailed as
follows:

                                             Due After June 30, 2001
                                   --------------------------------------------
                                     Fixed        Adjustable           Total
                                   --------------------------------------------
                                                (In thousands)

First mortgage loans:
One- to four-family                $644,098       $424,605          $1,068,703
Commercial and multi-family          11,216         72,125              83,341
                                   --------------------------------------------
  Total first mortgage loans        655,314        496,730           1,152,044

Consumer loans                       47,819         46,394              94,213
                                   --------------------------------------------
  Total loans, gross               $703,133       $543,124          $1,246,257
                                   ============================================

One- to  Four-Family  Residential  Mortgage  Lending.  At  June  30,  2000,  the
Company's one- to four-family  residential  mortgage loans totaled $1.1 billion,
or approximately  85.3% of the Company's gross loan portfolio.  Residential loan
originations  are  generated  by  the  Company's  in-house  originations  staff,
marketing efforts, present customers,  walk-in customers and referrals from real
estate agents,  mortgage  brokers and builders.  The Company focuses its lending
efforts  primarily on the  origination  of loans  secured by first  mortgages on
owner-occupied,  one- to  four-family  residences.  During the fiscal year ended
June 30,  2000,  the Company  originated  $172.2  million of real  estate  loans
secured by one- to  four-family  residential  real estate of which $96.1 million
were  adjustable  rate  loans.  Substantially  all  of  the  Company's  one-  to
four-family  residential mortgage originations are secured by properties located
in the State of New Jersey.

For the majority of fiscal 2000, the Company had two correspondent relationships
with  other  institutions  through  which it  purchased  $98.2  million of newly
originated  adjustable rate and $7.8 million of newly originated fixed rate one-
to four-family  residential  first  mortgages.  In late fiscal 2000, the Company
entered into a third  correspondent  relationship to purchase loans from another
New Jersey  institution.  Purchased  loans are secured by  properties  primarily
located  in  New  Jersey,  with  a  limited  amount  secured  by  properties  in
Pennsylvania,  Massachusetts  and  Connecticut.  Loans are  underwritten  by the
correspondent institutions using the Company's guidelines and a portion of those
loans are  re-underwritten  by the Bank on a test basis. All loans purchased are
supported  by  customary   representations   and  warranties   provided  by  the
correspondent institutions. See "Originations, Purchases, Sales and Servicing of
Loans."

The Company currently originates one- to four-family  residential mortgage loans
with terms of up to 30 years in amounts up to 95% of the appraised  value of the
property.  The Company  generally  requires that private  mortgage  insurance be
obtained in an amount sufficient to reduce the Company's exposure to 80% or less
of the  loan-to-value  level.  Interest rates charged on loans are competitively
priced according to market conditions.

In underwriting  one- to four-family  residential real estate loans, the Company
evaluates the borrower's  ability to make monthly payments,  past credit history
and the value of the property securing the loan. Properties securing real estate
loans made by the Company are appraised by  independent  appraisers  approved by
the Board of Directors. The Company requires borrowers to obtain title insurance
and fire and property insurance (including flood insurance, if necessary) in the
amount of the loan or the replacement cost, whichever is less. Real estate loans
originated and purchased by the Company  contain a "due on sale" clause allowing
the Company to declare  the unpaid  principal  balance due and payable  upon the
sale of the property.

                                        9

<PAGE>

Commercial  and  Multi-Family  Real  Estate  Lending.  The  Company  engages  in
commercial and multi-family  real estate lending  primarily in its market areas.
At June 30, 2000, the Company had $86.3 million of commercial  and  multi-family
real estate loans which  represented 6.9% of the Company's gross loan portfolio.
This  amount  includes  $694,000 of lines of credit  secured by non-real  estate
business  assets.  During  fiscal  2000,  the  Company  introduced  an  Accounts
Receivable  Financing  Program for small and mid-sized  businesses.  At June 30,
2000,  the  commercial  and  multi-family  real estate loan  portfolio  included
$120,000 of these loans.  At June 30, 2000,  the average per loan balance of the
Company's   commercial  and  multi-family  real  estate  loans  outstanding  was
$287,000.  As of June 30, 2000  approximately 83% of the loans in the commercial
and multi-family real estate loan portfolio were adjustable rate loans.

The Company's  commercial and multi-family real estate loan portfolio is secured
primarily by apartment buildings,  mixed-use buildings,  small office buildings,
restaurants,  warehouses and strip shopping centers. Commercial and multi-family
real estate  loans  typically  have terms that do not exceed 15 years and have a
variety of rate adjustment  features and other terms.  Generally,  the loans are
made in amounts up to 75% of the  appraised  value of the  property.  Adjustable
rate commercial and multi-family real estate loans normally provide for a margin
over various U.S.  Treasury  securities  adjusted to a constant  maturity,  with
periodic  adjustments,  or are tied to the Prime  Rate as  reported  in  theWall
Street Journal.  In underwriting  these loans,  the Company analyzes the current
financial condition of the borrower, the borrower's credit history, the value of
the property  securing the loan, and the reliability and  predictability  of the
cash flow  generated by the  property  securing  the loan.  The Company  usually
requires personal guarantees of individuals who are principals of the borrowers.
Appraisals on properties securing commercial real estate loans originated by the
Company  are  performed  by  independent  appraisers  approved  by the  Board of
Directors.

Commercial and multi-family  real estate loans generally  present a higher level
of risk than loans secured by one- to four-family residences.  This greater risk
is due to several  factors,  including the  concentration in a limited number of
loans  and   borrowers,   the  effect  of   general   economic   conditions   on
income-producing  properties  and the increased  difficulty  of  evaluating  and
monitoring these types of loans. Furthermore,  the repayment of loans secured by
commercial  and  multi-family  real  estate  is  typically  dependent  upon  the
successful  operation of the related real estate project.  If the cash flow from
the  project is reduced  (e.g.,  if leases are not  obtained  or  renewed,  or a
bankruptcy  court  modifies a lease term, or a major tenant is unable to fulfill
its  lease  obligations),  the  borrower's  ability  to  repay  the  loan may be
impaired.

Consumer  Lending.  The  Company  offers a variety  of secured  consumer  loans,
including home equity lines of credit, second mortgages,  automobile loans, boat
loans and loans secured by savings  deposits.  In addition,  the Company  offers
unsecured overdraft checking  protection.  At June 30, 2000, the Company's total
consumer loan portfolio was $97.6 million,  or 7.8% of its gross loan portfolio,
of which  approximately  51% were fixed rate loans and 49% were  adjustable rate
loans. The Company currently originates  substantially all of its consumer loans
in its primary market areas.

The Company  originates  adjustable  rate home equity  lines of credit and fixed
rate second mortgage loans generally up to $250,000. Home equity lines of credit
and second  mortgage loans  together with loans secured by all prior liens,  are
generally  limited to 75% of the  appraised  value of the property  securing the
loan. The Company also offers 100% equity  financing up to $100,000,  with these
loans  re-underwritten and insured through a mortgage insurance company.  Second
mortgage  loans  have a maximum  term of up to 20 years.  Home  equity  lines of
credit  may have  varying  terms up to 20 years.  These  loans are  underwritten
utilizing criteria similar to the Company's first mortgage loans. As of June 30,
2000,  second  mortgage loans and home equity lines of credit  amounted to $92.1
million or 94.3% of the Company's consumer loan portfolio.

Consumer loan terms vary according to the type and value of  collateral,  length
of contract and  creditworthiness  of the borrower.  The underwriting  standards
employed  by  the  Company  for  consumer  loans  include  an   application,   a
determination  of  the  applicant's  payment  history  on  other  debts  and  an
assessment of the applicant's ability to meet existing  obligations and payments
on the proposed loan.  Although  creditworthiness  of the applicant is a primary
consideration,  the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.

Consumer loans may entail greater  credit risk than  residential  first mortgage
loans,  particularly  in the case of consumer loans which are secured by rapidly
depreciable   assets,  such  as  automobiles  and  boats.  In  such  cases,  any
repossessed  collateral  from a  defaulted  consumer  loan  may not  provide  an
adequate source of repayment of the outstanding  loan balance as a result of the
greater likelihood of damage, loss or depreciation.  In addition,  consumer loan
collections are dependent on the borrower's continuing financial stability,  and
thus are more likely to be affected

                                       10

<PAGE>

by adverse  personal  circumstances.  Furthermore,  the  application  of various
federal and state laws,  including bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans.

Originations, Purchases, Sales and Servicing of Loans

For the fiscal year ended June 30, 2000, the Company  originated  $267.9 million
of loans, compared to $371.0 million and $340.2 million in fiscal 1999 and 1998,
respectively,  due principally to reduced  refinancing  activity in fiscal 2000.
Mortgage loan originations are handled by employees of the Company.

During  the  fiscal  years  ended  June 30,  2000,  1999 and 1998,  the  Company
purchased $106.0 million, $31.2 million and $89.9 million of one- to four-family
first mortgage loans,  respectively,  through  correspondent  relationships with
other institutions. The purchased loans primarily represent adjustable rate and,
to a lesser extent,  fixed rate first mortgages secured by properties  primarily
located  throughout New Jersey.  A limited amount of loans secured by properties
located in Pennsylvania, Massachusetts and Connecticut have been purchased.

From time to time,  the Company has engaged in loan sale  strategies  -- selling
loans to Freddie Mac and other secondary market purchasers.  Due to the majority
of one- to four-family  residential  mortgage loan production  being  adjustable
rate and due to the higher interest rate environment  during the year ended June
30,  2000,  loan sale  activity was reduced  significantly  from the fiscal 1999
levels,  as the majority of production  was retained in portfolio.  For the year
ended June 30, 2000, the Company sold loans totaling $5.5 million. During fiscal
1999,  PennFed  actively  employed a strategy  of selling  one - to  four-family
mortgage  loans.  This  strategy  served to mitigate the effects of low interest
rates and a flat yield curve. For the year ended June 30, 1999, the Company sold
$150.5  million  of  low-coupon,  longer  duration  one - to  four-family  first
mortgage loans to Freddie Mac and other secondary market purchasers. The Company
sold loans in aggregate  amounts of $76.2 million during the year ended June 30,
1998.

The level of loan sale  activity  will  continue to be  evaluated  with  primary
consideration given to interest rate risk, long-term profitability and liquidity
objectives.

When loans are sold, the Company may retain the responsibility for servicing the
loans or may sub-service the loans for a short term period. The Company receives
a fee for performing  these  services.  The Company  serviced for others one- to
four-family  mortgage loans with an aggregate  outstanding  principal balance of
$108.5  million,  $116.2 million and $110.9 million at June 30, 2000,  1999, and
1998, respectively.

The following  table sets forth the activity in the Company's loan portfolio for
the years indicated.

<TABLE>
<CAPTION>
                                                                    Year ended June 30,
                                                 -----------------------------------------------------
                                                     2000                  1999               1998
                                                 -----------------------------------------------------
                                                                      (In thousands)

<S>                                              <C>                    <C>                 <C>
Net loans receivable at beginning of year        $1,066,611             $1,095,852          $  931,451

Plus:
   Loans originated:
     One- to four-family                            172,201                295,522             283,666
     Commercial and multi-family real estate         30,364                 22,938              18,901
     Consumer                                        65,325                 52,560              37,595
                                                 -----------------------------------------------------
Total loans originated                              267,890                371,020             340,162
                                                 -----------------------------------------------------

   One- to four-family loans purchased              106,049                 31,220              89,910
                                                 -----------------------------------------------------

        Total loans originated and purchased        373,939                402,240             430,072

Less:
   One- to four-family loans sold                     5,532                150,474              76,196
   Loan principal payments and other, net           175,388                280,575             187,360
   Loans transferred to real estate owned               382                    432               2,115
                                                 -----------------------------------------------------
Net loans receivable at end of year              $1,259,248             $1,066,611          $1,095,852
                                                 =====================================================
</TABLE>


                                       11


<PAGE>


Non-Performing and Classified Assets

Generally,  when a borrower  fails to make a required  payment on a real  estate
secured loan or other secured loan the Company institutes  collection procedures
by mailing a delinquency  notice. The customer is contacted again, by telephone,
if the delinquency is not promptly cured. In many cases, delinquencies are cured
promptly; however, if a loan secured by real estate or other collateral has been
delinquent  for more than 60 days,  a letter of notice of intention to foreclose
is sent and the  customer is requested  to make  arrangements  to bring the loan
current. At 90 days past due, unless  satisfactory  arrangements have been made,
immediate repossession  commences or foreclosure procedures are instituted.  For
unsecured loans, the collection procedures are similar; however, at 90 days past
due, a specific  reserve or  charge-off  is  recommended  and,  subsequently,  a
lawsuit is filed, if necessary, to obtain a judgement.

At June 30, 2000, the Company's loans  delinquent 60 to 89 days totaled $406,000
of which  $391,000  were one- to  four-family  mortgage  loans and $15,000  were
consumer loans.

The  table  below  sets  forth  the   Company's   amounts  and   categories   of
non-performing  assets and restructured  loans.  Loans are placed on non-accrual
status when the collection of principal or interest becomes delinquent more than
90 days.  There  are no loans  delinquent  more  than 90 days  which  are  still
accruing.  Real estate owned  represents  assets acquired in settlement of loans
and is shown net of valuation allowances.  Restructured loans are all performing
in accordance with modified terms and are, therefore, considered performing.
<TABLE>
<CAPTION>
                                                                At June 30,
                                          -------------------------------------------------
                                          2000       1999       1998        1997       1996
                                          -------------------------------------------------
                                                        (Dollars in thousands)
<S>                                       <C>        <C>        <C>       <C>        <C>
Non-accruing loans:
One- to four-family . . . . . . . . . . . $2,152     $2,937     $2,575    $3,567     $4,009
Commercial and multi-family . . . . . .       95         46        414     1,053        913
Consumer . . . . . . . . . . . . . . . .     468        687        753       865      1,264
                                          -------------------------------------------------
Total non-accruing loans . . . . . . . . . 2,715      3,670      3,742     5,485      6,186

Real estate owned, net . . . . . . . . .     334        936      1,643       884      1,083
                                          -------------------------------------------------
Total non-performing assets . . . . . . .  3,049      4,606      5,385     6,369      7,269

Restructured loans . . . . . . . . . . .      --         --      1,415     1,451      2,340
                                          -------------------------------------------------
Total risk elements . . . . . . . . . . . $3,049     $4,606     $6,800    $7,820     $9,609
                                          =================================================
Non-accruing loans as a percentage
of total loans . . . . . . . . . . . . .    0.21%      0.34%      0.34%     0.59%      0.95%
                                            ===============================================
Non-performing assets as a percentage
of total assets . . . . . . . . . . . . .   0.18%      0.30%      0.35%     0.48%      0.67%
                                            ===============================================
Total risk elements as a percentage
of total  assets . . . . . . . . . . . . .  0.18%      0.30%      0.44%     0.59%      0.88%
                                            ===============================================
</TABLE>


For the year ended June 30, 2000,  gross  interest  income which would have been
recorded  had the  non-accruing  loans  been  current in  accordance  with their
original  terms  amounted  to  $97,000,  none of which was  included in interest
income during this period.

Non-Performing Assets.  Non-accruing loans at June 30, 2000 were comprised of 29
one-  to  four-family  loans   aggregating  $2.2  million,   17  consumer  loans
aggregating  $468,000  and two  commercial  and  multi-family  real estate loans
totaling $95,000.

Real estate owned at June 30, 2000 included five one - to four-family properties
totaling $334,000, the largest of which had a net book value of $141,000.

Restructured   Loans.   In  the  normal  course  of  business  the  Company  has
restructured the terms of certain loans. No loans have been restructured  within
the last four fiscal  years.  Any loan that has been  restructured  continues to
perform in accordance with the restructured terms.


                                       12
<PAGE>


Other Loans of Concern.  As of June 30,  2000,  there were $1.0 million of other
loans not included in the table or discussed above where known information about
the possible credit problems of borrowers caused management to have doubts as to
the ability of the  borrower to comply with  present  loan  repayment  terms and
which may result in disclosure of such loans in the future.

Included  in other  loans of  concern  at June  30,  2000 are five  loans to one
borrower and one loan to a related party totaling  $862,000 acquired in the 1989
acquisition of First Federal Savings and Loan Association of Montclair. The five
loans  consist of one  commercial  real estate loan of  $426,000,  three one- to
four-family loans totaling $110,000 and a $70,000 line of credit.  The loan to a
related  party  consists of a commercial  real estate loan of  $256,000.  All of
these loans are secured by  properties  located in New Jersey.  All of the loans
were performing in accordance with their respective repayment terms. The Company
continues to monitor these loans due to their periodic delinquencies.

All of the  other  loans of  concern  have  been  considered  by  management  in
conjunction with the analysis of the adequacy of the allowance for loan losses.

Classified Assets.  Federal  regulations provide for the classification of loans
and other assets such as debt and equity securities  considered by the OTS to be
of lesser quality as "substandard," "doubtful" or "loss." An asset is considered
"substandard"  if it is  inadequately  protected  by the  current  net worth and
paying  capacity  of  the  obligor  or  of  the  collateral   pledged,  if  any.
"Substandard"  assets include those characterized by the "distinct  possibility"
that the savings  institution  will sustain "some loss" if the  deficiencies are
not  corrected.  Assets  classified  as  "doubtful"  have all of the  weaknesses
inherent in those classified  "substandard," with the added  characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently  existing  facts,  conditions  and values,  "highly  questionable  and
improbable."  Assets  classified as "loss" are those considered  "uncollectible"
and of such little value that the  establishment  of a specific  loss reserve is
warranted.

When a savings  institution  classifies  problem assets as either substandard or
doubtful,  it may  establish  general  allowances  for loan  losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities.  When a savings institution  classifies problem assets as "loss," it
is required to either establish a specific reserve equal to 100% of that portion
of the asset so classified or to charge-off such amount.

In  connection  with the  filing  of its  periodic  reports  with the OTS and in
accordance with its  classification of assets policy, the Bank regularly reviews
the  assets  in  its   portfolio  to  determine   whether  any  assets   require
classification  in  accordance  with  applicable  regulations.  On the  basis of
management's  review  of its  assets at June 30,  2000,  the  Bank's  classified
assets,  including  real estate owned,  totaled $4.1 million,  with $3.9 million
classified  as  substandard  and $182,000  classified  as loss. At June 30, 2000
total classified assets represented 3.57% of the Company's  stockholders' equity
and 0.24% of the Company's total assets.

Allowance for Loan Losses. The allowance for loan losses is established  through
a  provision  for loan  losses  based  on  management's  evaluation  of the risk
inherent in its loan  portfolio and changes in the nature and volume of its loan
activity.  Such  evaluation,  which  includes  a review of loans for which  full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral,  economic  conditions,  historical loan loss  experience,  and other
factors  that  warrant  recognition  in  providing  for an  adequate  loan  loss
allowance.

Real estate properties acquired through foreclosure are recorded at the lower of
cost or estimated fair value less costs to dispose of such  properties.  If fair
value at the date of  foreclosure is lower than the balance of the related loan,
the difference  will be charged-off to the allowance for loan losses at the time
of transfer.  Valuations are periodically updated by management and if the value
declines, a specific provision for losses on real estate owned is established by
a charge to operations.

Although  management  believes  that it uses the best  information  available to
determine  the  allowances,   unforeseen   market  conditions  could  result  in
adjustments and net earnings could be  significantly  affected if  circumstances
differ   substantially   from  the   assumptions   used  in  making   the  final
determination.  Future additions to the Company's  allowances will be the result
of periodic loan,  property and collateral  reviews and thus cannot be predicted
in


                                       13
<PAGE>

advance. In addition,  federal regulatory  agencies,  as an integral part of the
examination  process,  periodically  review  the  Company's  allowance  for loan
losses.  Such  agencies  may  require  the  Company to record  additions  to the
allowance level based upon their assessment of the information available to them
at the time of examination.

The following  table sets forth an analysis of the Company's  allowance for loan
losses at, and for, the dates indicated.
<TABLE>
<CAPTION>

                                                             Year ended June 30,
                                         --------------------------------------------------------
                                         2000         1999       1998         1997         1996
                                         --------------------------------------------------------
                                                             (Dollars in thousands)

<S>                                       <C>        <C>        <C>         <C>          <C>
Balance at beginning of year . . . .      $3,209     $2,776     $2,622      $2,630       $2,860
Charge-offs:
One- to four-family . . . . . . . . . .     (105)       (60)      (306)       (392)        (195)
Commercial and multi-family . . . . .         --       (165)       (44)       (147)        (508)
Consumer . . . . . . . . . . . . . . . .     (18)      (171)       (96)       (146)        (238)
                                         --------------------------------------------------------
                                            (123)      (396)      (446)       (685)        (941)
                                         --------------------------------------------------------

Recoveries:
One- to four-family . . . . . . . . . .       37         --         --          --           --
Commercial and multi-family . . . . .         --         49         --          --          101
Consumer . . . . . . . . . . . . . . . .      --         --         --          42           --
                                         --------------------------------------------------------
                                              37         49         --          42          101
                                         --------------------------------------------------------
Net charge-offs . . . . . . . . . . . .      (86)      (347)      (446)       (643)        (840)
Additions charged to operations . . . . .    860        780        600         635          610
                                         --------------------------------------------------------
Balance at end of year . . . . . . . . .  $3,983     $3,209     $2,776      $2,622       $2,630
                                         ========================================================
Ratio of net charge-offs during the
year to average loans outstanding
during the year . . . . . . . . . . . .     0.01%      0.03%      0.04%       0.08%        0.16%
                                         ========================================================
Ratio of allowance for loan losses
to total loans at end of year . . . . .     0.32%      0.30%      0.25%       0.28%        0.40%
                                         ========================================================
Ratio of allowance for loan losses to
non-accruing loans at end of year . .     146.70%     87.44%     74.18%      47.80%       42.52%
                                         ========================================================
</TABLE>

                                       14

<PAGE>

The  distribution  of the  Company's  allowance  for loan  losses  at the  dates
indicated is summarized in the following table.
<TABLE>
<CAPTION>


                                                                   June 30,
                            -------------------------------------------------------------------------------------------
                                    2000             1999             1998             1997               1996
                            -------------------------------------------------------------------------------------------
                                      Percent          Percent           Percent           Percent           Percent of
                                      of               of                of                of                of
                                      Loans in         Loans in          Loans in          Loans in          Loans in
                                      Each             Each              Each              Each              Each
                                      Category         Category          Category          Category          Category
                                      to Total         to Total          to Total          to Total          to Total
                            Amount    Loans    Amount  Loans    Amount   Loans    Amount   Loans    Amount   Loans
                            ------------------------------------------------------------------------------------------
                                                                  (Dollars in thousands)
<S>                         <C>       <C>      <C>       <C>     <C>       <C>     <C>      <C>     <C>       <C>
One- to four-family. . .    $2,244    85.34%   $1,797    86.15%  $1,502    89.01%  $1,463   89.55%  $1,290    86.68%

Commercial and
 multi-family real estate    1,051     6.88       855     7.02      740     6.03      654    6.12      782     7.97


Consumer   . . . . . . .       688     7.78       557     6.83      534     4.96      505    4.33      558     5.35
                            ------------------------------------------------------------------------------------------

Total      . . . . . . .    $3,983   100.00%   $3,209   100.00%  $2,776   100.00%  $2,622  100.00%  $2,630   100.00%
                            ===========================================================================================
</TABLE>

Investment Activities

The Bank must  maintain  minimum  levels of  investments  that qualify as liquid
assets under OTS regulations.  Liquidity may increase or decrease depending upon
the  availability of funds and comparative  yields on investments in relation to
the return on loans.  Historically,  the Bank has  maintained  its liquid assets
above the minimum  requirements  imposed by the OTS  regulations  and at a level
believed adequate to meet requirements of normal daily activities,  repayment of
maturing debt and potential  deposit  outflows.  As of June 30, 2000, the Bank's
liquidity  ratio  (liquid  assets as a percentage  of net  withdrawable  deposit
accounts and current borrowings) was 8.71%. See "Regulation-Liquidity."

At June 30, 2000, the Company had a securities portfolio consisting  principally
of U.S. government agency securities,  including mortgage-backed securities. All
investment  securitities and mortgage-backed  securities were classified as held
to maturity at June 30, 2000,  as the Company has a positive  intent and ability
to hold  these  securities  to  maturity.  These  investments  carry a low  risk
weighting  for  OTS  risk-based   capital   purposes,   generally   satisfy  OTS
liquid-asset  requirements and are generally of relatively  short duration.  See
"Regulation-Regulatory Capital Requirements" and "Regulation-Liquidity."

Investment  Securities.  At June 30, 2000, the Company's  investment  securities
(including a $22.3 million  investment in FHLB of New York stock) totaled $325.3
million,  or 18.8% of its total assets.  It is the Company's  general  policy to
purchase U.S.  government  securities and federal agency  obligations  and other
investment  grade  securities  in  accordance  with  its  strategic  objectives,
including,  but not limited to, liquidity,  growth, yield and interest rate risk
management and to provide  collateral for  borrowings.  In prior years,  PennFed
invested in certain  non-investment  grade trust  preferred  securities of other
financial  institutions.  At June 30, 2000,  PennFed held $11.0  million of such
non-investment grade securities. In addition,  investment securities at June 30,
2000 included $17.5 million of investment grade trust preferred securities.

OTS regulations  restrict investments in corporate debt and equity securities by
the Bank.  See  "Regulation-Federal  Regulation of Savings  Associations"  for a
discussion of additional restrictions on the Company's investment activities.

                                       15
<PAGE>


The following  table  indicates the  composition  of the  investment  securities
portfolio,  excluding FHLB of New York stock,  based on the final  maturities of
each investment.
<TABLE>
<CAPTION>


                                                                           June 30, 2000
                                               ----------------------------------------------------------------------
                                                    After           After
                                                 One Year      Five Years        After             Total
                                                  Through         Through          Ten           Investment
                                               Five Years       Ten Years        Years           Securities
                                               ----------------------------------------   ---------------------------
                                               Book Value      Book Value   Book Value    Book Value     Market Value
                                               ----------------------------------------------------------------------
                                                                      (Dollars in thousands)
<S>                                                 <C>         <C>         <C>            <C>             <C>
U.S. government
   agency obligations . . . . . . . . . . .         $--         $10,000     $264,532       $274,532        $254,066
Obligations of states and
   political subdivisions . . . . . . . . .          30              --           --             30              32
Trust preferred
   securities      . . . . . . . . . . . . ..        --              --       28,464         28,464          24,545
                                               ----------------------------------------------------------------------
Total investment
   securities      . . . . . . . . . . . . ..       $30         $10,000     $292,996       $303,026        $278,643
                                               ======================================================================
Weighted average yield at
   year end        . . . . . . . . . . . . ..     10.38%          6.77%         7.07%          7.06%             --
                                               ======================================================================
</TABLE>


The majority of the securities in the  investment  portfolio have call features.
At June 30, 2000, the assumed weighted average life of the investment  portfolio
was 4.2 years.

The Company's  investment  securities portfolio at June 30, 2000 did not contain
securities of any issuer or tax-exempt  securities  with an aggregate book value
in excess of 10% of the Company's retained  earnings,  excluding those issued by
the U.S. government or its agencies.

Mortgage-Backed Securities. At June 30, 2000, mortgage-backed securities totaled
$87.6 million, or 5.1% of the Company's total assets, of which approximately 23%
consisted of adjustable rate securities.  The Company has invested  primarily in
government agency  securities,  principally those of Ginnie Mae, Freddie Mac and
Fannie Mae.

The following table indicates the composition of the mortgage-backed  securities
portfolio, excluding unamortized premiums, based on the final maturities of each
security.
<TABLE>
<CAPTION>
                                                                     June 30,  2000
                                     ------------------------------------------------------------------------------------
                                                       After         After
                                            One     One Year    Five Years         After                Total
                                        Year or      Through       Through           Ten           Mortgage-backed
                                           Less   Five Years     Ten Years         Years              Securities
                                     ----------------------------------------------------   -----------------------------
                                     Book Value   Book Value    Book Value    Book Value    Book Value      Market Value
                                     ----------------------------------------------------   -----------------------------
                                                                   (Dollars in thousands)

<S>                                      <C>         <C>          <C>          <C>            <C>              <C>
Ginnie Mae ......................        $   --      $   116      $   580      $   662        $ 1,358          $ 1,392
Freddie Mac .....................         7,121        3,540       14,158       23,940         48,759           48,507
Fannie Mae ......................         3,193          652       10,802       22,550         37,197           36,886
Collateralized Mortgage
   Obligations/REMICs ...........            --           --           --           79             79               76
                                     ------------------------------------------------------------------------------------
   Total mortgage-backed
   securities ...................       $10,314      $ 4,308      $25,540      $47,231        $87,393          $86,861
                                     ====================================================================================
Weighted average yield at
   year end .....................          6.40%        7.59%        7.11%        7.20%          7.10%
                                     ====================================================================================
</TABLE>


The  Ginnie  Mae,   Freddie  Mac  and  Fannie  Mae   certificates  are  modified
pass-through  mortgage-backed  securities that represent  undivided interests in
underlying   pools  of  fixed  rate,  or  certain  types  of  adjustable   rate,
single-family


                                       16

<PAGE>

residential  mortgages  issued by these  government-sponsored  entities.  Ginnie
Mae's  guarantee to the  certificate  holder of timely payments of principal and
interest is backed by the full faith and credit of the U.S. government.  Freddie
Mac and Fannie Mae provide the certificate holder a guarantee of timely payments
of interest  and  scheduled  principal  payments,  whether or not they have been
collected.

The following table sets forth the Company's mortgage-backed securities purchase
and repayment activities for the years indicated.

<TABLE>
<CAPTION>

                                                            Year ended June 30,
                                                      ----------------------------------
                                                        2000          1999       1998
                                                      ----------------------------------
                                                                (In thousands)
<S>                                                   <C>          <C>          <C>
Mortgage-backed securities, net:
   At beginning of year ..........................    $127,983     $204,452     $288,539
   Securities purchased ..........................         220           34           --
   Less:
     Principal repayments ........................      40,522       76,206       83,775
     Amortization of premiums ....................         120          297          312
                                                      ----------------------------------
At end of year ...................................    $ 87,561     $127,983     $204,452
                                                      ==================================
</TABLE>

The following table sets forth the  composition of the Company's  investment and
mortgage-backed securities portfolios at the dates indicated.

<TABLE>
<CAPTION>
                                                                              June 30,
                                     ----------------------------------------------------------------------------------------
                                                   2000                         1999                        1998
                                     ----------------------------------------------------------------------------------------
                                                          Percent                        Percent                      Percent
                                                         of Total                       of Total                      of Total
                                        Book      Market   Book      Book      Market      Book     Book      Market   Book
                                       Value      Value    Value     Value     Value      Value     Value     Value    Value
                                     ----------------------------------------------------------------------------------------
                                                                     (Dollars in thousands )
<S>                                   <C>        <C>        <C>      <C>        <C>        <C>     <C>       <C>       <C>
Investment securities:
   U.S. government
      agency obligations .  . . .     $274,532   $254,066   84.39%   $264,538   $254,243   85.36%  $166,969  $166,985   86.35%
   Obligations of states and
      political subdivisions  . .           30         32    0.01          40         45    0.01        140       147    0.07
   Trust preferred securities . .       28,464     24,545    8.75      28,704     27,592    9.27     11,201    11,611    5.79
                                      ----------------------------------------------------------------------------------------
   Total investment
      securities . . . . . . .  .      303,026    278,643   93.15     293,282    281,880   94.64    178,310   178,743   92.21
   FHLB of New York stock . . . .       22,295     22,295    6.85      16,623     16,623    5.36     15,065    15,065    7.79
                                      ----------------------------------------------------------------------------------------
   Total investment securities
      and FHLB of New York stock      $325,321   $300,938  100.00%   $309,905   $298,503  100.00%  $193,375  $193,808  100.00%
                                      ========================================================================================

Weighted average life of
      investment securities excluding
      FHLB of NewYork stock . . . .            4.2 years                    3.4 years            0.9 years

Mortgage-backed securities:

   Ginnie Mae . . . . . . . . . .      $ 1,358    $ 1,392    1.55%   $  2,071   $  2,162    1.62%  $  3,005   $ 3,195    1.47%
   Freddie Mac . . . . . . . . .        48,759     48,507   55.69      74,622     75,119   58.31    123,444   125,931   60.38
   Fannie Mae . . . . . . . . . .       37,197     36,886   42.48      50,899     51,233   39.77     77,019    78,601   37.67
   Collateralized Mortgage
   Obligations/REMICs . . . . . .           79         76    0.09         103        103    0.08        400       401    0.19
                                      ----------------------------------------------------------------------------------------
                                        87,393     86,861   99.81     127,695    128,617   99.78    203,868   208,128   99.71%
     Unamortized premiums, net . .         168         --    0.19         288         --    0.22        584        --    0.29
                                      ----------------------------------------------------------------------------------------
      Total mortgage-backed
      securities                      $ 87,561    $86,861  100.00%   $127,983   $128,617  100.00%  $204,452  $208,128  100.00%
                                      ========================================================================================
</TABLE>

                                       17
<PAGE>

Sources of Funds

General.  The Company's  sources of funds are deposits,  borrowings,  payment of
principal  and  interest  on  loans  and  mortgage-backed  securities,  interest
received on and  maturities or calls of other  investment  securities  and funds
provided from operations.

Deposits.  The Company offers a variety of deposit  accounts having a wide range
of interest rates and terms. The Company's  deposits  consist of savings,  money
market and demand deposit accounts,  as well as certificate  accounts  currently
ranging in terms up to 60 months.  The Company solicits deposits  primarily from
its  market  areas and relies  primarily  on product  mix,  competitive  pricing
policies,  advertising,  customer service and customer  relationships to attract
and  retain  deposits.  The  Company  also  solicits  short term  deposits  from
municipalities in its market areas. As of June 30, 2000, certificates of deposit
from municipalities totaled $53.2 million.

The  variety of deposit  accounts  offered by the  Company  has allowed it to be
competitive  in obtaining  funds and to respond with  flexibility  to changes in
consumer demand.  The Company endeavors to manage the pricing of its deposits in
keeping  with  its  asset/liability  management,   liquidity  and  profitability
objectives.  In this regard,  the Company has from  time-to-time  paid  slightly
higher rates than its competitors to attract  certificates of deposit.  Based on
its experience,  the Company believes that its savings,  money market and demand
deposit accounts are relatively stable sources of deposits. However, the ability
of the Company to attract  and  maintain  certificates  of deposit and the rates
paid on these deposits has been and will continue to be  significantly  affected
by market conditions, including general economic conditions, changes in interest
rates and competition. There were no brokered deposits at June 30, 2000. At June
30,  1999,  the Company  had $1.0  million of  brokered  deposits.  See Item 8 -
Financial Statements - Note I -Deposits - of the Notes to Consolidated Financial
Statements.

The  following  table sets forth the  deposit  flows of the  Company  during the
periods indicated.


                                               Year ended June 30,
                                  ---------------------------------------------
                                      2000           1999               1998
                                  ---------------------------------------------
                                             (Dollars in thousands)

Opening balance . . . . . . . . .$ 1,063,600     $ 1,028,100       $   918,160
Net deposits (withdrawals) ......    (24,630)         (5,555)           68,152
Interest credited ...............     41,380          41,055            41,788
                                 ---------------------------------------------
Ending balance ..................$ 1,080,350     $ 1,063,600       $ 1,028,100%
                                 =============================================
Net increase ....................$    16,750     $    35,500       $   109,940
                                 =============================================
Percent increase ................       1.57%           3.45%            11.97%
                                 =============================================

The  following  table  indicates  the amount of the  Company's  certificates  of
deposit by time remaining until maturity as of June 30, 2000.
<TABLE>
<CAPTION>

                                                                      Maturity
                                              ----------------------------------------------------------
                                                          Over        Over          Over
                                              3 Months    3 to 6      6 to 12       12
                                              or Less     Months      Months        Months       Total
                                              ----------------------------------------------------------
                                                                      (In thousands)
<S>                                           <C>         <C>         <C>           <C>          <C>
Certificates of deposit less
  than $100,000 . . . . . . .  . . . . . .    $190,403    $128,099    $130,728      $202,792     $652,022
Certificates of deposit of $100,000 or more .   83,200      18,768      16,536        29,651      148,155
                                              -----------------------------------------------------------
Total certificates of deposit. . . . . . . .  $273,603    $146,867    $147,264      $232,443     $800,177
                                              ===========================================================
</TABLE>

Borrowings.  Although  deposits are the Company's  primary source of funds,  the
Company's  policy has been to  utilize  borrowings  when they are a less  costly
source of funds,  when the  Company  desires  additional  capacity  to fund loan
demand or to extend the life of its liabilities.

The Company's  borrowings  historically have consisted of advances from the FHLB
of New York, and to a lesser extent, reverse repurchase agreements.  FHLB of New
York advances can be obtained  pursuant to several  different  credit  programs,
each of which has its own interest rate and range of maturities.

                                       18
<PAGE>

The following table sets forth the maximum  month-end  balance,  average balance
and weighted  average cost of FHLB of New York advances and other borrowings for
the periods indicated.
<TABLE>
<CAPTION>
                                                                              Year ended June 30,
                                                                     ------------------------------------
                                                                      2000            1999         1998
                                                                     ------------------------------------
                                                                                (In thousands)

<S>                                                                  <C>           <C>           <C>
Maximum balance for the year ended:
 FHLB of New York advances .....................................     $364,465      $289,465      $240,465
                                                                     ====================================
 Other borrowings:
   Overnight repricing lines of credit .........................     $ 80,200      $ 54,700      $ 50,000
   FHLB of New York one-month overnight repricing
     line of credit ............................................       30,000        10,000        35,000
   Reverse repurchase agreements callable or maturing
     within one year ...........................................        9,563        39,925        49,925
   Reverse repurchase agreements maturing after one year .......       49,275        49,275        29,875
                                                                     ------------------------------------
Total other borrowings .........................................     $169,038      $153,900      $164,800
                                                                     ====================================
Average balance for the year ended:
 FHLB of New York advances .....................................     $322,754      $266,906      $218,568
                                                                     ====================================
 Other borrowings:
   Overnight repricing lines of credit .........................     $ 30,393      $ 21,254      $ 24,620
   FHLB of New York one-month overnight repricing
    line of credit .............................................        5,706         1,221         4,401
   Reverse repurchase agreements callable or maturing
     within one year ...........................................        5,353        10,824        23,091
   Reverse repurchase agreements maturing after one year .......       39,601        40,215        21,487
                                                                     ------------------------------------
     Total other borrowings ....................................     $ 81,053      $ 73,514      $ 73,599
                                                                     ====================================
Balance at June 30:
 FHLB of New York advances .....................................     $364,465      $244,465      $230,465
                                                                     ====================================
 Other borrowings:
   Overnight repricing lines of credit .........................     $ 72,900      $ 29,900      $ 41,700
   FHLB of New York one-month overnight repricing
    line of credit .............................................           --            --        10,000
   Reverse repurchase agreements callable or maturing
    within one year ............................................       19,875        19,563        49,925
   Reverse repurchase agreements maturing after one year .......       19,400        39,275        29,875
                                                                     ------------------------------------
    Total other borrowings .....................................     $112,175      $ 88,738      $131,500
                                                                     ====================================
Weighted average cost of funds for the year ended:
 FHLB of New York advances .....................................         6.07%         6.01%         6.13%
 Other borrowings:
   Overnight repricing lines of credit .........................         6.00%         5.20%         5.75%
   FHLB of New York one-month overnight repricing
    line of credit .............................................         5.96%         5.42%         5.85%
   Reverse repurchase agreements callable or maturing
    within one year ............................................         5.69%         5.58%         5.59%
   Reverse repurchase agreements maturing after one year .......         6.02%         5.74%         6.06%

Weighted average cost of funds at June 30:
 FHLB of New York advances .....................................         6.13%         5.93%         6.06%
 Other borrowings:
   Overnight repricing lines of credit .........................         7.23%         5.98%         6.25%
   FHLB of New York one-month overnight repricing
    line of credit .............................................           --            --          6.13%
   Reverse repurchase agreements callable or maturing
    within one year ............................................         5.77%         5.01%         5.35%
   Reverse repurchase agreements maturing after one year .......         6.10%         5.93%         5.93%
</TABLE>

                                       19
<PAGE>

Trust Preferred Securities.During fiscal 1998, the Company formed a wholly-owned
trust subsidiary,  PennFed Capital Trust I (the "Trust").  Effective October 21,
1997,  the  Trust  sold  $34.5  million  of  8.90%  cumulative  trust  preferred
securities  to the public which are reflected on the  Consolidated  Statement of
Financial Condition as Guaranteed Preferred Beneficial Interest in the Company's
Junior  Subordinated  Debentures (the "Trust Preferred  securities").  The Trust
used the proceeds  from the sale of the Trust  Preferred  securities to purchase
8.90% junior subordinated  deferrable interest debentures issued by PennFed. The
Company used the proceeds from the junior  subordinated  debentures  for general
corporate purposes,  including a $20 million capital contribution to the Bank to
support growth.

Subsidiary Activities

As a federally chartered savings  association,  Penn Federal is permitted by OTS
regulations to invest up to 2% of its assets,  or $34.6 million at June 30,2000,
in the stock of, or loans to, service corporation subsidiaries. As of such date,
the net book value of Penn Federal's  investment in its service  corporation was
$3,000. In addition to investments in service corporations, federal associations
are permitted to invest an unlimited  amount in operating  subsidiaries  engaged
solely in activities which a federal  association may engage in directly.  As of
June 30, 2000,  the Bank's  investment  in its operating  subsidiary  was $441.5
million.

Penn Federal currently has a single service corporation,  which is known as Penn
Savings Insurance  Agency,  Inc.  ("PSIA").  PSIA offers insurance and uninsured
non-deposit  investment  products to the Company's  customers and members of the
general   public  through  a  program  known   asInvestment   Services  at  Penn
Federal.Securities  are offered  through Liberty  Securities  Corp.  ("LSC"),  a
registered  broker  dealer,  member NASD and SIPC.  Annuities  and insurance are
offered through IFS Agencies, Inc., a licensed insurance agency. Neither LSC nor
IFS Agencies, Inc. is affiliated with the Bank. The Bank's relationship with LSC
and IFS Agencies, Inc. gives customers convenient access to financial consulting
/ advisory services and related non-deposit  investment products,  such as fixed
and variable  annuities  and mutual  funds.  In addition,  securities  brokerage
services  are  available  through  Liberty  Securities  Corp.  Life,  health and
disability  insurance are also  available  through IFS Agencies,  Inc. To a much
lesser extent, PSIA also offers homeowners insurance to Bank customers.

Penn Federal also has a Delaware operating subsidiary, Ferry Development Holding
Company,  that holds and manages an investment  portfolio for the benefit of the
Bank.

Competition

The Company faces strong competition,  both in originating real estate and other
loans and in attracting  deposits.  Competition in originating real estate loans
comes  primarily from commercial  banks,  other savings  associations,  mortgage
banking  companies and credit unions making loans secured by real estate located
in New Jersey.  Commercial  banks,  credit unions and finance  companies provide
vigorous  competition in consumer lending.  The Company competes for real estate
and other loans  principally on the basis of the quality of services it provides
to borrowers, interest rates and loan fees it charges, and the types of products
offered.

The Company  attracts  substantially  all of its deposits  through its branches,
primarily from the  communities  in which those offices are located;  therefore,
competition  for those deposits is principally  from commercial  banks,  savings
associations, credit unions and brokerage houses. The Company competes for these
deposits by offering a variety of deposit accounts at competitive rates, quality
customer   service,   convenient   business  hours  and  branch  locations  with
interbranch deposit and withdrawal privileges.

                                       20

<PAGE>


                               R E G U L A T I O N

General

Penn Federal is a federally chartered savings bank, and accordingly, the Bank is
subject to comprehensive  federal  regulation and oversight by the OTS extending
to all its  operations.  Penn  Federal  is a member  of the FHLB of New York and
certain of its activities are subject to regulation by the Board of Governors of
the Federal Reserve System ("Federal  Reserve  Board").  As the savings and loan
holding company of Penn Federal,  PennFed is also subject to federal  regulation
and  oversight  by the  OTS.  The Bank is a member  of the  Savings  Association
Insurance Fund ("SAIF") and the deposits of Penn Federal are insured by the FDIC
up to applicable  limits.  As a result,  the FDIC has regulatory and examination
authority over the Bank. For purposes of the "Regulation" discussion,  the terms
"savings bank," "savings  association"  and "savings  institution"  apply to the
Bank.

Certain of these regulatory requirements and restrictions are discussed below or
elsewhere in this document.

Federal Regulation of Savings Associations by the OTS

The OTS has extensive authority over the operations of savings associations.  As
part of this authority,  Penn Federal is required to file periodic  reports with
the OTS and is subject to periodic examinations by the OTS. The last regular OTS
examination of the Bank was as of December 1999.

All savings associations are subject to a semi-annual OTS assessment, based upon
the savings  association's total assets and supervisory  evaluation.  The Bank's
OTS assessment for the fiscal year ended June 30,2000 was $260,000.

The OTS, as well as the other federal banking agencies, has developed guidelines
establishing safety and soundness standards on matters such as loan underwriting
and documentation,  internal controls and audit systems, asset quality,  earning
standards,  interest  rate risk  exposure and  compensation  and other  employee
benefits.

Insurance of Accounts and Regulation by the FDIC

Penn Federal's  deposits are insured by the SAIF,  which is  administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC. As insurer,  the
FDIC  imposes   deposit   insurance   premiums  and  is  authorized  to  conduct
examinations of and to require reporting by FDIC-insured institutions.  The last
FDIC  examination of the Bank was as of May 1992. The FDIC may also prohibit any
FDIC-insured  institution  from engaging in any activity the FDIC  determines by
regulation or order to pose a serious risk to the deposit  insurance  funds. The
FDIC also has the  authority to initiate  enforcement  actions  against  savings
associations,  after giving the OTS an opportunity to take such action,  and may
terminate the savings  association's deposit insurance if it determines that the
savings  association has engaged or is engaging in unsafe or unsound  practices,
or is in an unsafe or unsound condition.

Regulatory Capital Requirements

Federally insured savings  associations,  such as Penn Federal,  are required to
maintain a minimum level of regulatory capital.  The OTS has established capital
standards,  including a tangible capital requirement,  a leverage ratio (or core
capital)  requirement and a risk-based  capital  requirement  applicable to such
savings associations.  These capital requirements must be generally as stringent
as the  comparable  capital  requirements  for national  banks.  The OTS is also
authorized  to impose  capital  requirements  in excess  of these  standards  on
individual associations on a case-by-case basis.

The capital  regulations  require  tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation).  Tangible  capital  generally  includes
common  stockholders'  equity and retained earnings,  and certain  noncumulative
perpetual  preferred  stock.  In addition,  all  intangible  assets,  other than
certain amounts of mortgage  servicing rights,  must be deducted from assets and
capital for calculating compliance with the requirements.  At June 30,2000, Penn
Federal had $9.0 million of  intangible  assets other than  qualifying  mortgage
servicing rights.

At June 30, 2000, Penn Federal had tangible capital of $133.4 million,  or 7.76%
of adjusted total assets, which was approx-

                                       21
<PAGE>


imately $107.6  million above the minimum  requirement of 1.5% of adjusted total
assets in effect on that date.

The capital standards also require core capital equal to at least 3% of adjusted
total assets and 4% of  risk-weighted  assets (as defined  below).  Core capital
generally  consists of tangible capital plus certain intangible assets up to 25%
of  adjusted  total  assets.  At June 30,  2000,  Penn  Federal did not have any
intangibles  which  were  subject  to these  tests.  As a result  of the  prompt
corrective action provisions  discussed below,  however,  a savings  association
must maintain a ratio of core capital to adjusted total assets of at least 4% to
be considered adequately capitalized unless its supervisory condition is such to
allow it to maintain a 3% ratio.

At June 30, 2000, Penn Federal had core capital of $133.4  million,  or 7.76% of
adjusted total assets,  which was approximately $64.6 million above the 4% ratio
required to be considered adequately capitalized.

The OTS risk-based  capital  requirement  requires savings  associations to have
total capital of at least 8% of risk-weighted  assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of selected  items,  such as certain  permanent  and  maturing  capital
instruments  that do not  qualify as core  capital and  allowances  for loan and
lease  losses up to a maximum of 1.25% of  risk-weighted  assets.  Supplementary
capital may be used to satisfy the risk-based  requirement only to the extent of
core capital. At June 30,2000,  the Bank had no capital instruments that qualify
as supplementary  capital.  The Bank had $3.8 million of allowances for loan and
lease  losses at June 30,  2000,  all of which  was  included  as  supplementary
capital since it was less than 1.25% of risk-weighted assets.

In determining the amount of risk-weighted assets, all assets, including certain
off-balance  sheet items,  are  multiplied by a risk weight,  ranging from 0% to
100%, based on the risk inherent in the type of assets. For example, the OTS has
assigned  a risk  weight of 50% for  prudently  underwritten  permanent  one- to
four-family  first  lien  mortgage  loans not more than 90 days  delinquent  and
having a loan to value ratio of not more than 80% at origination  unless insured
to such ratio by an insurer approved by Freddie Mac and Fannie Mae.

On June 30,2000,  Penn Federal had total  risk-based  capital of $137.2  million
(including  $133.4  million  in core  capital  and  $3.8  million  in  allowable
supplementary  capital) and  risk-weighted  assets of $884.9 million  (including
$33.2 million in converted  off-balance  sheet assets) resulting in a risk-based
capital ratio of 15.50% of risk-weighted  assets.  This amount was $66.4 million
above the 8% requirement in effect on that date.

The OTS and the FDIC are authorized and, under certain  circumstances  required,
to take certain  actions against  savings  associations  that fail to meet their
capital  requirements.  The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based  capital
ratio or an 8% risk-based  capital ratio).  Any such  association  must submit a
capital  restoration  plan and,  until such plan is approved by the OTS, may not
increase its assets,  acquire another institution,  establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional  restrictions,  discussed below, that are
applicable to significantly undercapitalized associations.

Any  savings  association  that  fails to  comply  with its  capital  plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less  than 3% or a  risk-based  capital  ratio of less  than 6%) must be made
subject to one or more  additional  mandated  specified  actions  and  operating
restrictions, which may cover all aspects of its operations and include a forced
divestiture,  merger or acquisition  of the  association.  An  association  that
becomes  "critically  undercapi-talized"  (i.e.,  a ratio of tangible  equity to
total assets of 2% or less) is subject to further mandatory  restrictions on its
activities  in addition to those  applicable to  significantly  undercapitalized
associations.

Any  undercapitalized  association  is also  subject to  actions by the  general
enforcement  authority of the OTS and the FDIC,  including the  appointment of a
conservator  or a  receiver.  The  OTS  is  also  authorized  to  reclassify  an
association into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.

The  imposition by the OTS or the FDIC of any of these  measures on Penn Federal
may have a substantial adverse effect on the Bank's operations and profitability
and on the market value of PennFed's common stock.

                                       22

<PAGE>

Limitations on Dividends and Other Capital Distributions

OTS regulations impose various restrictions or requirements on associations with
respect  to their  ability  to pay  dividends  or make  other  distributions  of
capital.  OTS regulations  prohibit an association  from declaring or paying any
dividends or from repurchasing any of its stock if, as a result,  the regulatory
capital of the  association  would be reduced  below the  association's  minimum
capital requirements or the amount required to be maintained for the liquidation
account established in connection with the Conversion.

Generally,  associations may make capital distributions during any calendar year
equal to 100% of net income for the  year-to-date  plus  retained net income for
the two previous  years without OTS  approval.  The Bank is required to give the
OTS 30 days notice  prior to declaring  any  dividend on its stock.  The OTS may
object to the  distribution  during  that  30-day  period  based on  safety  and
soundness concerns. See "Regulatory Capital Requirements."

Liquidity

All savings  associations,  including Penn Federal,  are required to maintain an
average daily balance of liquid assets equal to a certain  percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less.  This liquid asset ratio  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At June 30, 2000,  the minimum liquid asset
ratio was 4%.  Penalties may be imposed upon  associations for violations of the
liquid asset ratio requirement.  At June 30,2000, Penn Federal was in compliance
with the requirement, with a liquidity ratio of 8.71%.

Qualified Thrift Lender Test

All  savings  associations,  including  Penn  Federal,  are  required  to meet a
qualified  thrift  lender  ("QTL") test to avoid certain  restrictions  on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly  average  for nine out of every 12  months  on a  rolling  basis.  As an
alternative,  the savings  association  may  maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as
amended  (the  "Code").  Under  either test,  such assets  primarily  consist of
residential housing related loans and investments. At June 30,2000, the Bank met
the QTL test and has always met the test since its effective date.

Any  savings  association  that  fails to meet the QTL test  must  convert  to a
national bank charter,  unless it requalifies as a QTL and thereafter  remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  Until such an association  has  requalified or converted to a national
bank, its new  investments  and activities are limited to those  permissible for
both a savings  association  and a national  bank, and it is limited to national
bank branching rights in its home state.

In addition,  the association is immediately  ineligible to receive any new FHLB
of New York  borrowings  and is subject to  national  bank limits for payment of
dividends.  If such  association  has not requalified or converted to a national
bank  within  three  years  after  the  failure,  it must  divest  itself of all
investments  and cease all  activities not  permissible  for a national bank. In
addition,  it must repay promptly any outstanding  FHLB of New York  borrowings,
which may result in prepayment penalties.  If any association that fails the QTL
test is controlled by a holding company, then within one year after the failure,
the holding  company must register as a bank holding  company and become subject
to all restrictions on bank holding companies. See "Holding Company Regulation."

Community Reinvestment Act

Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has
a continuing and affirmative  obligation  consistent with safe and sound banking
practices to help meet the credit needs of its entire  community,  including low
and moderate income  neighborhoods.  The CRA does not establish specific lending
requirements  or  programs  for  financial  institutions  nor  does it  limit an
institution's  discretion  to develop the types of products and services that it
believes are best suited to its particular  community,  consistent with CRA. The
CRA requires the OTS, in connection  with the  examination  of Penn Federal,  to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the estab-

                                       23
<PAGE>


lishment of a branch, by Penn Federal.  An unsatisfactory  rating may be used as
the basis for the denial of an application by the OTS.

Due to the heightened attention being given to the CRA in recent years, the Bank
may be required to devote  additional  funds for  investment  and lending in its
local   communities.   CRA   compliance   ratings   given  by  the  OTS  include
"outstanding,"  "needs improvement" and  "unsatisfactory." The Bank was examined
for CRA compliance in February 1999 and received a rating of "outstanding."

Transactions with Affiliates

Generally,  transactions  between a savings  association or its subsidiaries and
its  affiliates  are required to be on terms as favorable to the  association as
transactions with  non-affiliates.  In addition,  certain of these transactions,
such as loans to affiliates, are restricted to a percentage of the association's
capital.  Affiliates  of Penn Federal  include  PennFed and any company which is
under common control with the Bank. In addition,  a savings  association may not
lend to any affiliate  engaged in activities not  permissible for a bank holding
company  or  acquire  the   securities  of  most   affiliates.   Penn  Federal's
subsidiaries are not deemed affiliates;  however,  the OTS has the discretion to
treat  subsidiaries  of savings  associations  as affiliates  on a  case-by-case
basis.

Certain  transactions with directors,  officers or controlling  persons are also
subject to conflict of interest  regulations enforced by the OTS. These conflict
of interest  regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as loans made to unaffiliated individuals.

Federal Securities Law

The  common  stock of PennFed is  registered  with the SEC under the  Securities
Exchange Act of 1934, as amended (the "Exchange Act"). PennFed is subject to the
information,   proxy  solicitation,   insider  trading  restrictions  and  other
requirements  of the  Exchange  Act and the  rules  and  regulations  of the SEC
thereunder.

PennFed stock held by persons who are affiliates  (generally executive officers,
directors  and  principal  stockholders)  of PennFed  may not be resold  without
registration  or unless such stock is sold in  accordance  with  certain  resale
restrictions.   If  PennFed   meets   specified   current   public   information
requirements,  each affiliate of PennFed may sell in the public market,  without
registration, a limited number of shares in any three-month period.

Federal Home Loan Bank System

Penn  Federal is a member of the FHLB of New York,  which is one of 12  regional
FHLBs that provides loans and correspondent  services to its members.  Each FHLB
serves as a reserve or central bank for its members within its assigned  region.
It is funded  primarily  from  proceeds  derived  from the sale of  consolidated
obligations of the FHLB System.  It makes loans to members  (i.e.,  advances) in
accordance with policies and procedures established by the board of directors of
the FHLB,  which are subject to the  oversight  of the Federal  Housing  Finance
Board.  All  borrowings  from the  FHLB are  required  to be  fully  secured  by
sufficient collateral as determined by the FHLB.

As a member, Penn Federal is required to purchase and maintain stock in the FHLB
of New York.  At June  30,2000,  the Bank had $22.3  million in FHLB of New York
stock,  which was in  compliance  with this  requirement.  In past  years,  Penn
Federal has received  substantial  dividends on its FHLB of New York stock. Over
the past five fiscal years such dividends have averaged 6.85%.

For the year ended June 30,2000,  the Company recorded $1.3 million in dividends
from the FHLB of New York resulting in a 6.81% yield.

Federal and State Taxation

In  addition  to  the  regular  income  tax,  corporations,   including  savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds

                                       24
<PAGE>


the  corporation's  regular income tax. Net operating  losses can offset no more
than 90% of alternative minimum taxable income.

PennFed  files  consolidated  federal  income tax returns  with the Bank and its
subsidiaries.

To the extent a savings  association makes  "non-dividend  distributions,"  such
distributions  will be considered to have been made from the  association's  tax
bad  debt  reserves  (including  the  base  year  reserve)  and  then  from  the
association's  supplemental  reserve for losses on loans, to the extent thereof,
and an amount based on the amount  distributed  (but not in excess of the amount
of such reserves)  will be included in the  association's  income.  Non-dividend
distributions  include  distributions in excess of the association's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock,  and  distributions in partial or complete
liquidation.  Dividends  paid out of the  association's  current or  accumulated
earnings and profits will not be so included in the association's income.

The amount of additional taxable income created from a non-dividend distribution
is an amount that, when reduced by the tax attributable to the income,  is equal
to the  amount  of the  distribution.  Thus,  if the Bank  makes a  non-dividend
distribution to the Company,  approximately one and one-half times the amount of
such  distribution  (but not in excess of the amount of such reserves)  would be
includable  in income for federal  income tax  purposes,  assuming a 35% federal
corporate tax rate.  The Bank does not intend to pay dividends that would result
in a recapture of any portion of its tax bad debt reserves.

The Bank and its  consolidated  subsidiary  have been  audited  by the  Internal
Revenue Service ("IRS") with respect to consolidated  federal income tax returns
through  December 31, 1991.  There were no material  adjustments made to taxable
income as  originally  reported to the IRS. In the  opinion of  management,  any
examination  of still  open  returns  (including  returns  of  subsidiaries  and
predecessors  of, or  entities  merged  into,  PennFed)  would  not  result in a
deficiency which could have a material adverse effect on the financial condition
of the Company and its consolidated subsidiaries.

New Jersey Taxation.  The Bank is taxed under the New Jersey Savings Institution
Tax Act. The tax is an annual  privilege  tax imposed at a rate of 3% on the net
income of the Bank as reported  for federal  income tax  purposes,  with certain
modifications.  PennFed is taxed under the New Jersey  Corporation  Business Tax
Act (the "Act"),  and if it meets certain tests,  will be taxed as an investment
company at an effective annual rate for the taxable year ending June 30, 2000 of
2.25% of New Jersey  taxable income (as defined in the Act). If it fails to meet
such  tests,  it will be taxed at an  annual  rate of 9% of New  Jersey  taxable
income.  It is anticipated that PennFed will be taxed as an investment  company.
Penn Savings  Insurance Agency is taxed under the Act at a rate of 9% on its New
Jersey taxable income.

Delaware Taxation. PennFed, as a Delaware holding company, and Ferry Development
Holding  Company  ("FDHC"),  a Delaware  investment  company,  are  exempt  from
Delaware  corporate  income tax, but are required to file an annual  report with
and pay an  annual  fee to the  State  of  Delaware.  PennFed  and FDHC are also
subject  to an annual  franchise  tax  imposed  by the State of  Delaware.  As a
Delaware  business trust,  PennFed Capital Trust I is not required to pay income
or franchise taxes to the State of Delaware.

                                       25
<PAGE>


EXECUTIVE OFFICERS

The  executive  officers of PennFed are elected  annually  and hold office until
their  respective  successors  have been  elected and  qualified or until death,
resignation  or removal by the Board of  Directors.  The  executive  officers of
PennFed  are as  follows:  Joseph L.  LaMonica,  President  and Chief  Executive
Officer;  Lucy T. Tinker,  Senior  Executive Vice President and Chief  Operating
Officer; Patrick D. McTernan,  Senior Executive Vice President,  General Counsel
and  Secretary;  and Jeffrey J.  Carfora,  Executive  Vice  President  and Chief
Financial Officer. Executive officers of PennFed do not receive any remuneration
in their capacity as PennFed executive officers.

The following table sets forth certain  information as of June 30,2000 regarding
the executive officers of the Bank who are not also directors.

<TABLE>
<CAPTION>
<S>                           <C>      <C>
Name                          Age      Positions Held with the Bank
---------------------------------------------------------------------------------------------------
Lucy T. Tinker . . . . . . .  60       Senior Executive Vice President and Chief Operating Officer

Jeffrey J. Carfora . . . . .  42       Executive Vice President and Chief Financial Officer

Barbara A. Flannery . . . . . 44       Executive Vice President and Retail Banking Group Executive

James M. O'Brien . . . . . .  48       Executive Vice President and Lending Group Executive
</TABLE>


Officers  are  elected  annually  by the Board of  Directors  of the  Bank.  The
business  experience of each executive officer who is not also a director is set
forth below.

Lucy T. Tinker - Ms. Tinker is responsible for the daily operations of the Bank.
Ms.  Tinker also  assists  President  LaMonica in the  development  of corporate
policies and goals. Ms. Tinker joined Penn Federal in 1989 as Vice President and
Treasurer.  In 1990,  she was appointed  Senior Vice President and Finance Group
Executive.  She was  appointed  Executive  Vice  President  and Chief  Operating
Officer in 1993 and named Senior Executive Vice President in 1999.

Jeffrey J. Carfora - Mr. Carfora is responsible for the financial affairs of the
Bank,  which  include  financial and tax  accounting  and  reporting,  strategic
planning,  budgeting,  treasury operations and asset/liability  management.  Mr.
Carfora joined Penn Federal in 1993 as Senior Vice President and Chief Financial
Officer and was appointed Executive Vice President in 1999.

Barbara A. Flannery - Ms. Flannery is responsible for the retail branch network.
Ms.  Flannery has served Penn Federal in various  capacities  since  joining the
Bank in 1980,  including the  management of product  development,  marketing and
various aspects of branch activities.  She was named Executive Vice President in
1999.

James M. O'Brien - Mr.  O'Brien joined the Bank in November 1998. Mr. O'Brien is
responsible  for  the  Bank's  lending  operations  which  include   commercial,
residential and consumer lending, collections, servicing and quality control. He
was named Executive Vice President in 1999.  Prior to joining Penn Federal,  Mr.
O'Brien was with Monarch Bank, Fleet Mortgage and Citizen's First National Bank.

Employees

At June 30, 2000, the Company and its subsidiaries had a total of 266 employees,
including 44 part-time employees. The Company's employees are not represented by
any collective bargaining group.

Item 2.  Properties

The Company conducts its business at its headquarters, operations center and the
Bank's branch offices  located in its primary  market areas.  The total net book
value of the Company's  premises and  equipment  (including  land,  building and
leasehold  improvements  and furniture and  equipment) at June 30,2000 was $20.1
million.

The  Company  believes  that its  current  facilities  are  adequate to meet the
present  and  foreseeable  needs of the  Company,  subject  to  possible  future
expansion.

                                       26

<PAGE>

Item 3.  Legal Proceedings

The Company is involved  from time to time as  plaintiff or defendant in various
legal actions  arising in the normal course of its business.  While the ultimate
outcome of these  proceedings  cannot be  predicted  with  certainty,  it is the
opinion of  management  at the present  time,  after  consultation  with counsel
representing  the  Company  in the  proceedings,  that the  resolution  of these
proceedings  should not have a  material  effect on the  Company's  consolidated
financial position or results of operations.

In  1987,  the New  Jersey  Department  of  Environmental  Protection  ("NJDEP")
conducted an environment  contamination  investigation of the Orange Road branch
site of  First  Federal  Savings  and  Loan  Association  of  Montclair  ("First
Federal"). Prior to the acquisition by First Federal, the location was used as a
gasoline  service  station.  On August 16, 1989,  the NJDEP issued a "no further
action"  letter to First  Federal  with regard to this site.  The Bank  acquired
First  Federal  effective  September 11, 1989.  Notwithstanding  the earlier "no
further  action" letter,  on June 25, 1997, the NJDEP issued a letter  demanding
that Penn  Federal  Savings  Bank  develop a remedial  action  work plan for the
Orange Road branch site as a result of an  investigation  conducted on behalf of
an adjacent  property  owner.  The Bank  disputed the NJDEP  position  that Penn
Federal Savings Bank was a responsible  party. On July 1, 1998, the NJDEP issued
a letter  determining  that Penn Federal Savings Bank, Mobil Oil Corporation and
the former gasoline  service station owner were all responsible  parties for the
clean up at the subject site.  Responsible  parties may ultimately  have full or
partial  obligation  for  the  cost  of  remediation.   As  of  this  date,  the
apportionment of the remediation costs to the Bank, if any, is not determinable.
The  Bank  continues  to  vigorously  contest  this  determination  and to  seek
contribution or indemnification from the other named responsible parties.

Item 4.  Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders,  through the solicitation
of proxies or otherwise, during the quarter ended June 30, 2000.

                                    PART II

Item 5. Market for the  Registrant's  Common Stock and Related  Security  Holder
Matters

The  Company's  common  stock trades on the Nasdaq  National  Market tier of the
Nasdaq Stock Market  under the symbol  "PFSB." At September 8, 2000,  there were
approximately  525  stockholders  of record for the Company's  common stock (not
including  the number of persons or entities  holding stock in nominee or street
name through various brokerage firms).

Market Information

The following  table sets forth the high and low closing sales prices per common
share for the periods indicated.

<TABLE>
<CAPTION>

                                      Fiscal 2000 Closing Price       Fiscal 1999 Closing Price
                                     ---------------------------     -----------------------------
                                        High          Low               High            Low
                                     ---------------------------     -----------------------------
<S>                                  <C>           <C>               <C>             <C>
Quarter Ended:
September 30, 1999 and 1998. . . . .  $17.6250      $14.0000          $16.8750        $10.8750
December 31, 1999 and 1998 . . . . .   16.0000       12.8438           14.2500         10.2500
March 31, 2000 and 1999 . . . . . .    14.1250       10.6250           16.0000         12.7500
June 30, 2000 and 1999   . . . . . .   14.1250       11.5000           15.7500         14.0000
</TABLE>


The  closing  price of a common  share was $14.13 at June 30,  2000  compared to
$15.75 at June 30, 1999.

For the second quarter of fiscal 1999, the Company  increased the quarterly cash
dividend on its common stock to $0.04 per share compared to $0.035 per share for
all prior quarters  since divided  payments were initiated in the second quarter
of fiscal 1997.

                                       27

<PAGE>

Item 6.  Selected Financial Data

The  following  selected  consolidated  financial  data of the  Company  and its
subsidiaries  is qualified in its entirety by, and should be read in conjunction
with, the consolidated financial statements,  including notes thereto,  included
elsewhere in this document.

<TABLE>
<CAPTION>
                                                                                    At June 30,
                                                       ---------------------------------------------------------------------
                                                         2000           1999           1998            1997          1996
                                                       ---------------------------------------------------------------------
                                                                     (In thousands, except per share amounts)
<S>                                                   <C>            <C>            <C>            <C>            <C>
Selected Financial Condition Data:
Total assets ....................................     $1,729,219     $1,558,763     $1,551,938     $1,321,751     $1,086,524
Loans receivable, net ...........................      1,259,248      1,066,611      1,095,852        931,451        652,571
Investment securities ...........................        303,026        293,282        178,310         35,290         21,288
Mortgage-backed securities ......................         87,561        127,983        204,452        288,539        346,068
Deposits ........................................      1,080,350      1,063,600      1,028,100        918,160        836,416
Total borrowings ................................        476,640        333,203        361,965        288,215        146,700
Trust Preferred securities, net .................         32,805         32,743         32,681             --             --
Stockholders' equity ............................        113,981        107,500        103,703         97,270         90,564

Book value per common share .....................          14.37          13.03          11.87          10.92          10.25
Tangible book value per common share ............          13.24          11.68          10.33           9.13           8.17

</TABLE>
<TABLE>
<CAPTION>


                                                                                    At June 30,
                                                       ---------------------------------------------------------------------
                                                         2000           1999           1998            1997 (1)        1996
                                                       ---------------------------------------------------------------------
                                                                     (In thousands, except per share amounts)
<S>                                                     <C>           <C>           <C>            <C>             <C>
Selected Operating Data:

Total interest and dividend income ..................   $ 111,763     $ 105,557     $ 100,805      $  85,401       $  68,123
Total interest expense ..............................      74,333        71,918        68,043         53,073          39,121
                                                        --------------------------------------------------------------------
Net interest and dividend income ....................      37,430        33,639        32,762         32,328          29,002
Provision for loan losses ...........................         860           780           600            635             610
                                                        --------------------------------------------------------------------
Net interest income after provision for
 loan losses ........................................      36,570        32,859        32,162         31,693          28,392
                                                        --------------------------------------------------------------------
Service charges .....................................       2,172         2,113         1,974          1,666           1,602
Net gain (loss) from real estate operations .........         114            31          (156)          (181)            104
Net gain on sales of loans ..........................          36           860           528             --              --
Net gain on sales of investment securities ..........          --            --            --             --              94
Other non-interest income ...........................         625           542           321            298             402
                                                        --------------------------------------------------------------------
Total non-interest income ...........................       2,947         3,546         2,667          1,783           2,202
                                                        --------------------------------------------------------------------
Total non-interest expenses .........................      19,596        18,644        17,389         22,385(1)       17,642
                                                        --------------------------------------------------------------------
Income before taxes .................................      19,921        17,761        17,440         11,091          12,952
Income tax expense ..................................       7,051         6,304         6,242          4,205           5,111
                                                        --------------------------------------------------------------------
Net income ..........................................   $  12,870     $  11,457     $  11,198      $   6,886(1)    $   7,841
                                                        ====================================================================
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . .     $    1.58     $    1.36     $    1.25      $    0.77(1)    $    0.80
                                                        ====================================================================
Diluted . . . . . . . . . . . . . . . . . . . . . .     $    1.50     $    1.29     $    1.16      $    0.73(1)    $    0.77
                                                        ====================================================================

</TABLE>

-------------------------------
(1)  Fiscal  1997  includes  the  effect  of a  one-time  SAIF  recapitalization
     assessment of  approximately  $ 4.8 million,  or $3.1 million net of taxes.
     Excluding this non-recurring assessment,  total non-interest expenses would
     have been $17.6  million,  net income would have been $9.9  million,  basic
     earnings  per share  would have been $1.12 and diluted  earnings  per share
     would have been $1.05.

                                       28


<PAGE>

<TABLE>
<CAPTION>

                                                                               At and for the year ended June 30,
                                                            -------------------------------------------------------------------
Selected Financial Ratios and Other Data:                   2000           1999           1998            1997(1)         1996
                                                            -------------------------------------------------------------------
<S>                                                          <C>            <C>            <C>            <C>           <C>
Performance Ratios:
Return on average assets (ratio of net income to
  average total assets) ................................       0.79%          0.74%          0.78%          0.58%(1)        0.82%
Return on average stockholders' equity (ratio of
  net income to average stockholders' equity) ..........      11.61          11.03          10.96           7.42(1)         8.36
Net interest rate spread during the year ..............        2.12           2.01           2.12           2.58            2.96
Net interest margin (net interest and dividend
  income to average interest-earning assets) ...........       2.37           2.24           2.38           2.83            3.22
Ratio of average interest-earning assets to average
  deposits, borrowings and Trust Preferred securities ..     105.29         104.82         105.20         105.30          105.87
Ratio of earnings to fixed charges(2):
  Excluding interest on deposits .......................       1.72x          1.76x          1.88x          1.86x           3.35x
  Including interest on deposits .......................       1.27x          1.25x          1.26x          1.21x           1.33x
Ratio of non-interest expense to average total assets .        1.20%          1.20%          1.22%          1.87%(1)        1.84%
Efficiency ratio (non-interest expense, excluding
  amortization of intangibles, to net interest and
  dividend income and non-interest income excluding
  gains on sales and real estate operations) ...........      43.44          44.86          42.65          57.95(1)        48.53
Dividend payout ratio .................................       10.13          11.40          11.20          13.64              --

Asset Quality Ratios:
Non-accruing loans to total loans at end of year .......       0.21           0.34           0.34           0.59            0.95
Allowance for loan losses to non-accruing loans
  at end of year .......................................     146.70          87.44          74.18          47.80           42.52
Allowance for loan losses to total loans at end of year        0.32           0.30           0.25           0.28            0.40
Non-performing assets to total assets at end of year ..        0.18           0.30           0.35           0.48            0.67
Ratio of net charge-offs during the year to average
  loans outstanding during the year ....................       0.01           0.03           0.04           0.08            0.16

Capital Ratios:
Stockholders' equity to total assets at end of year ...        6.59           6.90           6.68           7.36            8.34
Average stockholders' equity to average total assets ..        6.78           6.67           7.14           7.76            9.80

Tangible capital to tangible assets at end of year(3) .        7.76           7.88           7.09           5.61            5.92
Core capital to adjusted tangible assets at end of
  year(3) ..............................................       7.76           7.88           7.11           5.64            5.97
Risk-based capital to risk-weighted assets at end of
  year(3) ..............................................      15.50          16.29          15.16          12.22           13.47

Other Data:
Number of branch offices at end of year ...............          20             20             18             17              17
Number of deposit accounts at end of year .............      88,300         88,200         87,500         85,400          81,700
Cash  dividends  declared  per common share ...........     $ 0.160        $ 0.155        $ 0.140        $ 0.105              --

</TABLE>

(1) Fiscal 1997 results  include the effect of a one-time SAIF  recapitalization
    assessment  of  approximately  $4.8  million,  or $3.1 million net of taxes.
    Excluding  this non-  recurring  assessment,  return on average assets would
    have been  0.83%,  return on average  stockholders'  equity  would have been
    10.70%, the ratio of non-interest expense to average total assets would have
    been 1.47% and the efficiency ratio would have been 43.92%.

(2) The ratio of earnings  to fixed  charges  excluding  interest on deposits is
    calculated by dividing  income before taxes and  extraordinary  items before
    interest on borrowings  by interest on  borrowings  on a pretax  basis.  The
    ratio of  earnings  to fixed  charges  including  interest  on  deposits  is
    calculated by dividing  income before income taxes and  extraordinary  items
    before  interest on deposits  and  borrowings  by interest on deposits  plus
    interest on borrowings on a pretax basis.

(3) Represents regulatory capital ratios for the Bank.

                                       29
<PAGE>


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

In July 1994,  PennFed became the savings and loan holding  company of the Bank.
Currently,  the results of operations of the Company are primarily  those of the
Bank and its subsidiaries and the Trust.

The  Company's  results of operations  are  dependent  primarily on net interest
income,  which  is the  difference  between  the  income  earned  on  its  loan,
securities  and investment  portfolios and its cost of funds,  consisting of the
interest  paid on deposits and  borrowings.  General  economic  and  competitive
conditions,  particularly  changes in interest  rates,  government  policies and
actions of  regulatory  authorities,  also  significantly  affect the  Company's
results  of  operations.  Future  changes in  applicable  laws,  regulations  or
government policies may also have a material impact on the Company.

Management Strategy

Management's primary goal will continue to be improved earnings,  while managing
risks, including liquidity and interest rate risks, so as to enhance stockholder
value,  while  fostering  and  maintaining  customer  confidence.  The Company's
current  strategies  focus  on:  (i)  emphasizing  lending  secured  by  one- to
four-family  residential  first  mortgages,  (ii)  increasing the commercial and
multi-family and consumer loan portfolios, (iii) maintaining asset quality, (iv)
increasing  core  deposit  balances,  (v)  managing  the  Company's  exposure to
interest rate risk,  (vi) improving  non-interest  income and (vii)  controlling
non-interest expenses.

Emphasizing Lending Secured by One- to Four-Family  Residential First Mortgages.
The Company  will  continue to emphasize  production  (through  origination  and
purchase) of  traditional  one- to  four-family  first mortgage loans secured by
properties located primarily in New Jersey. The Company produced $278.3 million,
$326.7  million  and $373.6  million in one- to  four-family  mortgage  loans in
fiscal 2000, 1999 and 1998, respectively. The Company's interest income has been
derived  primarily from one- to four-family  mortgage loans on residential  real
estate which totaled $1.1 billion or 85.3% of the Company's gross loan portfolio
at June 30, 2000.  During  fiscal 1999,  in an effort to mitigate the effects of
low interest rates and a flat yield curve, the Company sold approximately $150.5
million of low-coupon,  longer duration one- to four-family  mortgage loans. Due
to a majority of one- to four-family  residential mortgage loan production being
adjustable rate and due to the higher interest rate environment  during the year
ended June 30,  2000,  loan sale  activity  was reduced  significantly  from the
fiscal 1999 levels, as the majority of production was retained in portfolio. For
the year ended June 30, 2000, the Company sold loans totaling $5.5 million.  The
level of such activity will continue to be evaluated with primary  consideration
given  to  interest  rate  risk  and  long-term   profitability   and  liquidity
objectives.  In early fiscal 2001, the Company engaged in loan sales activity in
an effort to provide  liquidity,  manage interest rate risk and to help mitigate
the effects of the flat yield curve.

Increasing the  Commercial and  Multi-Family  and Consumer Loan  Portfolios.  In
addition to one- to four-family  residential first mortgage lending, the Company
will continue its emphasis on increasing  the commercial  and  multi-family  and
consumer loan porfolios as a percentage of total loans.  Such loans reprice more
frequently,  have  shorter  maturities,  and/or have higher  yields than one- to
four-family  first mortgage loans. The Company  originated $95.7 million,  $75.5
million and $56.5 million of commercial and  multi-family  and consumer loans in
fiscal 2000,  1999 and 1998,  respectively.  As of June 30, 2000,  1999 and 1998
commercial and  multi-family  and consumer loans  represented  14.7%,  13.9% and
11.0%, respectively, of the total gross loan portfolio.

Maintaining Asset Quality.  The Company's loan portfolio  consists  primarily of
one- to  four-family  mortgages,  which  are  considered  to have less risk than
commercial and multi-family real estate or consumer loans.

The  Company's  non-performing  assets  consist of  non-accruing  loans and real
estate owned. The Company focuses on strong  underwriting and collection efforts
and  aggressive  marketing of real estate  owned  properties.  In addition,  the
Company  has  occasionally  restructured  loans in order to return the loan to a
performing status. As a result,  non-performing  assets as a percentage of total
assets was 0.18% at June 30, 2000.

Increasing  Core Deposit  Balances.  The  Company's  primary  source of funds is
deposits.  The Company will  continue to emphasize  growth in lower costing core
deposits,   primarily  checking  deposits.  Checking  deposits  increased  $17.4
million, or 18.1%, in fiscal 2000 and $16.9 million, or 21.34%, in fiscal 1999.

                                       30

<PAGE>


Managing  the  Company's  Exposure  to  Interest  Rate Risk.  The Company has an
asset/liability  committee  that  meets no less than  weekly  to price  loan and
deposit  products and monthly to develop,  implement and review  strategies  and
policies to manage  interest rate risk. The Company has endeavored to manage its
interest  rate risk  through  the pricing  and  diversification  of its loan and
deposit  products,  including  the  focus on the  production  of first  mortgage
products with adjustable rate features and/or with shorter terms to maturity, as
well as the origination of commercial and multi-family  real estate and consumer
loans which generally have shorter  expected average lives or reprice at shorter
intervals than one- to four-family  residential  first  mortgage  products.  The
Company  has also  engaged in one-to  four-family  mortgage  loan sales  whereby
longer duration conventional loans have been sold.  Furthermore,  as part of its
interest rate risk strategy,  the Company has emphasized  checking  products and
utilized intermediate/longer-term  borrowings and has at select times emphasized
longer term  certificates of deposit.  See "Interest Rate Sensitivity  Analysis"
and "Asset/Liability Strategy."

Improving  Non-Interest  Income.  The  Company  has and  will  continue  to seek
additional  ways of improving  non-interest  income.  Total service  charges and
other  non-interest  income,  excluding  the net gain on sales of loans and real
estate  operations,  reflected a  $142,000,  or 5.3%,  increase  for fiscal 2000
compared to fiscal 1999,  due to growth in checking  accounts and earnings  from
the  Bank'sInvestment  Services  at Penn  Federal  program.  The  program  gives
customers  convenient  access  to  financial  consulting/advisory  services  and
related uninsured non-deposit  investment and insurance products at local branch
offices through a non-affiliated entity.

Controlling   Non-Interest   Expenses.   Non-interest   expenses  are  carefully
monitored,  which includes  ongoing reviews of staffing  levels,  facilities and
operations. The Company's ratio of non-interest expenses to average total assets
was 1.20% for the year ended June 30, 2000.

Interest Rate Sensitivity Analysis

Interest Rate Gap. The interest rate risk inherent in assets and liabilities may
be determined by analyzing the extent to which such assets and  liabilities  are
"interest  rate  sensitive"  and by measuring  an  institution's  interest  rate
sensitivity  "gap." An asset or liability is said to be interest rate  sensitive
within a defined time period if it matures or reprices  within that period.  The
difference or mismatch between the amount of interest-earning assets maturing or
repricing within a defined period and the amount of interest-bearing liabilities
maturing or  repricing  within the same period is defined as the  interest  rate
sensitivity  gap. An  institution  is  considered  to have a negative gap if the
amount of interest-bearing  liabilities maturing or repricing within a specified
time period exceeds the amount of interest-earning  assets maturing or repricing
within the same period. If more  interest-earning  assets than  interest-bearing
liabilities mature or reprice within a specified period, then the institution is
considered  to have a  positive  gap.  Accordingly,  in a rising  interest  rate
environment,  in an  institution  with a  negative  gap,  the  cost of its  rate
sensitive  liabilities would  theoretically rise at a faster pace than the yield
on its rate sensitive assets, thereby diminishing future net interest income. In
a falling interest rate environment, a negative gap would indicate that the cost
of rate sensitive  liabilities  would decline at a faster pace than the yield on
rate sensitive assets and improve net interest income. For an institution with a
positive gap, the reverse would be expected.

In an attempt to manage its  exposure to changes in interest  rates,  management
closely  monitors  the  Company's  exposure  to interest  rate risk.  Management
maintains  an  asset/liability  committee  consisting  of  the  Chief  Executive
Officer,  the Chief Operating Officer,  the Chief Financial Officer, the Lending
Group  Executive,  the Retail  Banking  Group  Executive,  the Treasurer and the
Customer  Support/Operations Group Executive,  which meets regularly and reviews
the  Company's  interest  rate  risk  position  and  makes  recommendations  for
adjusting this position.  In addition,  the Board reviews on a monthly basis the
Company's asset/liability  position,  including simulations of the effect on the
Company's   capital  and  earnings  of  various   interest  rate  scenarios  and
operational strategies.

The  following  table  provides   information  about  the  Company's  derivative
financial  instruments  and other  financial  instruments  that are sensitive to
changes in interest rates, including interest rate swaps. Except for the effects
of prepayments and scheduled principal  amortization on mortgage related assets,
the table presents  principal cash flows and related  weighted  average interest
rates by the  earlier of term to  repricing  or  contractual  term to  maturity.
Callable  government  agency securities are assumed to be called within one year
if their stated  interest  rates are at or above current  market  rates.  If the
stated  interest rate is below current market rates,  these callable  securities
are  assumed to be called at an  estimated  average  life of  approximately  4.0
years. For interest rate swaps, the table

                                       31
<PAGE>


presents  notional  amounts and weighted  average interest rates by call date or
contractual maturity date.

Residential  fixed  and  adjustable  rate  loans  are  assumed  to  prepay at an
annualized  rate between 8% and 12%.  Commercial  and  multi-family  real estate
loans are  assumed  to prepay at an  annualized  rate  between  5% and 37% while
consumer loans are assumed to prepay at a 34% rate.  Fixed and  adjustable  rate
mortgage-backed  securities have annual payment  assumptions ranging from 15% to
60%.  Demand  loans and loans which have no  repayment  schedule or stated final
maturity,  are  assumed to be due within six  months.  Loan and  mortgage-backed
securities  balances  are net of  non-performing  loans and are not adjusted for
unearned discounts, premiums, and deferred loan fees.

The Company  assumes that savings  account  balances decay  gradually over time.
Based on historical information,  12% of such balances roll-off within one year;
10% roll-off in the second year; 8% roll-off in the third year;  and 5% roll-off
each year  thereafter.  At June 30,  2000,  $101.1  million,  or 66%, of savings
accounts roll-off after five years. Transaction accounts, excluding money market
accounts,  are assumed to roll-off after five years.  Money market  accounts are
assumed to be variable accounts and are reported as repricing within six months.
No roll-off rate is applied to certificates of deposit.  Fixed maturity deposits
reprice at maturity.

                                       32
<PAGE>
<TABLE>
<CAPTION>


                                                                             Maturing or Repricing
                                       ---------------------------------------------------------------------------------------------
                                                                              Year ended June 30,
                                       ---------------------------------------------------------------------------------------------
                                            2001      2002        2003         2004       2005    Thereafter     Total   Fair Value
                                       ---------------------------------------------------------------------------------------------
                                                                              (Dollars in thousands)
<S>                                    <C>         <C>         <C>          <C>         <C>        <C>        <C>         <C>
Fixed rate mortgage loans including
 one- to four-family and commercial
 and multi-family . . . . . . . . . .  $  78,127   $ 79,005    $  73,223    $ 67,600    $ 63,090   $297,349   $  658,394  $  635,889
 Average interest rate . . . . . . . .      7.26%      7.25%        7.24%       7.24%       7.25%      7.30%        7.27%

Adjustable rate mortgage loans
 including
 one- to four-family and commercial
 and multi-family . . . . . . . . . .   $139,106   $ 84,584    $  87,984    $ 68,276    $ 77,280   $ 38,434   $  495,664  $  480,092
 Average interest rate . . . . . . . .      7.69%      7.41%        7.40%       7.41%       7.47%      8.13%        7.55%

Consumer loans including
 demand loans . . . . . . . . . . . .  $  68,202   $ 12,422    $   8,407    $  5,775    $  2,313   $     --   $   97,119  $   96,291
 Average interest rate . . . . . . . .      8.37%      7.78%        7.78%       7.78%       7.78%      0.00%        8.20%

Investment securities and other . . .  $  22,325    $ 2,000   $  274,532    $     --    $     --   $ 26,464   $  325,321  $  300,938
 Average interest rate . . . . . . . .      6.75%      8.72%        6.87%       0.00%       0.00%      8.15%        6.98%

Mortgage-backed securities . . . . .   $  39,872   $ 15,572    $  11,365    $  8,902    $  7,354   $  4,328   $   87,393     $86,861
 Average interest rate . . . . . . . .      7.22%      6.92%        7.03%       7.00%       7.00%      7.01%        7.09%

 Total interest-earning assets . . . .  $347,632   $193,583    $ 455,511    $150,553    $150,037   $366,575   $1,663,891  $1,600,071
                                       =============================================================================================
Savings deposits . . . . . . . . . .   $  18,444   $ 13,524   $    9,736    $  5,600    $  5,320   $101,055   $  153,679  $  153,679
 Average interest rate . . . . . . . .      1.50%      1.50%        1.50%       1.50%       1.50%      1.50%        1.50%

Money market and demand deposits
 (transaction accounts) . . . . . . .  $  11,099  $      --    $      --    $     --    $     --   $113,349   $  124,448  $  124,448
 Average interest rate . . . . . . . .      2.05%     0.00%         0.00%       0.00%       0.00%      0.94%        1.04%

Certificates of deposit . . . . . . .   $567,734   $123,271    $  54,168    $  4,825    $ 50,097   $     82   $  800,177  $  798,985
 Average interest rate . . . . . . . .      5.64%     6.16%         6.20%       5.35%       6.20%      5.42%        5.79%

FHLB of New York advances . . . . . .  $  50,000  $  70,000    $ 135,000    $ 19,000    $ 90,000   $    465   $  364,465  $  353,736
 Average interest rate . . . . . . . .     6.26%       6.06%        6.08%       5.15%       6.36%      7.39%        6.12%

Other borrowings . . . . . . . . . .   $  92,775  $  19,400    $      --    $     --    $     --   $     --   $  112,175  $  111,939
 Average interest rate . . . . . . . .     6.45%       6.10%        0.00%       0.00%       0.00%      0.00%        6.39%

Trust Preferred securities . . . . .   $      --  $      --    $      --    $     --    $     --   $ 32,805   $   32,805  $   29,843
 Average interest rate . . . . . . . .      0.00%      0.00%        0.00%       0.00%       0.00%      8.90%        8.90%

Total deposits, borrowings and
 Trust Preferred securities . . . . .   $740,052   $226,195     $198,904    $ 29,425    $145,417   $247,756   $1,587,749  $1,489,939

Interest rate swaps
(pay fixed, receive floating) . . . .  ($ 10,000)  $ 10,000    $      --    $     --    $     --   $     --   $       --  $      264
 Average pay rate . . . . . . . . . .       6.23%      4.99%          --          --          --         --         5.61%         --
 Average receive rate . . . . . . . .       6.77%        --           --          --          --         --         6.77%         --

Total deposits, borrowings and Trust
 Preferred securities including the
 effects of interest rate swaps . . .   $730,052   $236,195    $ 198,904    $ 29,425    $145,417   $247,756   $1,587,749  $1,490,203
                                       =============================================================================================
Interest earning assets less deposits,
 borrowings and Trust Preferred
 securities (interest-rate sensitivity
 gap) . . . . . . . . . . . . . . . .  ($382,420)  ($42,612)   $ 256,607    $121,128    $  4,620   $118,819   $   76,142
                                       =============================================================================================
Cumulative interest-rate sensitivity
 gap . . . . . . . . . . . . . . . . . ($382,420) ($425,032)  ($ 168,425)  ($ 47,297)  ($42,677)   $ 76,142
                                       ======================================================================
Cumulative interest-rate sensitivity
 gap as a percentage of total assets
 at June 30, 2000 . . . . . . . . . .    (22.12%)    (24.58%)      (9.74%)     (2.74%)     (2.47%)     4.40%
                                       ======================================================================
Cumulative interest-rate sensitivity
 gap as a percentage of total interest-
 earning assets at June 30, 2000 . . .    (22.98%)   (25.54%)     (10.12%)     (2.84%)     (2.56%)     4.58%
                                       ======================================================================
Cumulative interest-earning assets as
 a percentage of cumulative deposits,
 borrowings and Trust Preferred
 securities at June 30, 2000 . . . . .     47.62%     56.01%       85.54%      96.04%    96.82%    104.80%
                                       ======================================================================
</TABLE>

                                       33
<PAGE>

At June 30, 2000, the Company's total  deposits,  borrowings and Trust Preferred
securities   maturing  or   repricing   within  one  year   exceeded  its  total
interest-earning assets maturing or repricing within one year by $382.4 million,
representing  a one year negative gap of 22.12% of total  assets,  compared to a
one  year  negative  gap of  13.61%  of  total  assets  at June  30,  1999.  See
"Asset/Liability  Strategy."  The Company's  negative gap position  widened from
June 30, 1999 due in part to a decline in  prepayments  and a rise in short-term
funding  balances.  Asset cash  flows  lengthened  as  mortgage  rates  steadily
increased  and  refinancing  activity  slowed  significantly.  To  mitigate  the
negative  impact such activity had on interest rate risk, the Company focused on
increasing  balances of adjustable  rate one- to four-family  loans,  as well as
fixed and variable rate consumer loan  products,  whose  repayment and repricing
characteristics  are typically  faster than their fixed rate one- to four-family
counterparts.  Funding challenges surrounding the year 2000 concerns resulted in
a slight increase in short-term  deposits,  but efforts to increase core deposit
balances and  medium-term  funding also proved  successful  throughout the year.
Interest  rate swaps,  designed to  synthetically  lengthen  the  maturities  of
short-term deposits,  were reduced to $30 million in notional amount at June 30,
2000 from $150 million in notional amount at June 30, 1999 due to $40 million of
maturities  and $80  million of early  terminations.  This  decline in the hedge
portfolio resulted in a deterioration of the Company's negative gap position.

In evaluating the Company's exposure to interest rate risk, certain  limitations
inherent  in the method of analysis  presented  in the  foregoing  table must be
considered.  For  example,  although  certain  assets and  liabilities  may have
similar maturities or periods to repricing,  they may react in different degrees
to changes in market interest  rates.  Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates,  while  interest  rates on other  types may lag behind  changes in market
rates.  Additionally,  certain assets,  such as adjustable rate mortgages,  have
features which restrict changes in interest rates in the short-term and over the
life of the  asset.  Further,  in the  event  of a  change  in  interest  rates,
prepayment  and early  withdrawal  levels may deviate  significantly  from those
assumed in  calculating  the table.  Finally,  the ability of many  borrowers to
service their debt may decrease in the event of an interest rate  increase.  The
Company  considers all of these  factors in monitoring  its exposure to interest
rate risk.

Net Portfolio Value.  The Company's  interest rate sensitivity is also regularly
monitored by management  through selected  interest rate risk ("IRR")  measures,
including an IRR "Exposure Measure" or "Post-Shock" NPV ratio and a "Sensitivity
Measure." A low Post-Shock NPV ratio indicates  greater exposure to IRR. Greater
exposure can result from a low initial NPV ratio or high  sensitivity to changes
in interest rates.  The  Sensitivity  Measure is the change in the NPV ratio, in
basis points, caused by a 2% increase or decrease in rates, whichever produces a
larger decline. At least quarterly, and generally monthly, management models the
change in net portfolio value ("NPV") over a variety of interest rate scenarios.
NPV is the present  value of expected  cash flows from assets,  liabilities  and
off-balance  sheet  contracts.  A NPV ratio,  in any interest rate scenario,  is
defined as the NPV in that rate  scenario  divided by the market value of assets
in the same scenario.

As of June 30,  2000,  the Bank's  internally  generated  initial  NPV ratio was
10.16%.  Following a 2% increase in interest  rates,  the Bank's  Post-Shock NPV
ratio was 7.38%. The change in the NPV ratio, or the Bank's Sensitivity  Measure
was 2.78%.  Though NPV is "measured" on an  unconsolidated  basis for regulatory
purposes,  it is managed  on a  consolidated  basis.  As of June 30,  2000,  the
Company's  internally  generated  initial NPV ratio was 10.41%,  the  Post-Shock
ratio was 7.56%, and the Sensitivity  Measure was 2.85%.  Variances  between the
Bank's and the  Company's  NPV ratios are  attributable  to balance  sheet items
which are  adjusted  during  consolidation,  such as  investments,  intercompany
borrowings and capital.

Internally  generated NPV  measurements  are based on simulations  which utilize
institution  specific assumptions and, as such, generally result in lower levels
of presumed  interest  rate risk (i.e.,  higher  Post-Shock  NPV ratio and lower
Sensitivity Measure) than OTS measurements indicate.

The OTS measures the Bank's (unconsolidated) IRR on a quarterly basis using data
from the  quarterly  Thrift  Financial  Reports  filed by the Bank with the OTS,
coupled with  non-institution  specific  assumptions which are based on national
averages.  As of June 30, 2000, the Bank's initial NPV ratio, as measured by the
OTS,  was  6.97%,  the  Bank's  Post-Shock  ratio was 3.62% and the  Sensitivity
Measure was 3.35%.

In addition to monitoring NPV and gap,  management also monitors the duration of
assets and  liabilities  and the effects on net interest  income  resulting from
parallel and non-parallel increases or decreases in rates.

                                       34
<PAGE>


At June 30, 2000,  based on its  internally  generated  simulation  models,  the
Company's  consolidated net interest income projected for one year forward would
decrease  17.6%  from  the base  case,  or  current  market,  as a result  of an
immediate and sustained 2% increase in interest rates.

Asset/Liability Strategy

The  primary  elements of the  Company's  asset/liability  strategy  include the
following:

1. The Company has focused on  shortening  the average  life and duration of its
portfolio of one- to four-family mortgage loans by promoting one year adjustable
rate products, with initial fixed rate terms of 3, 5 and 7 years, 15 and 30 year
bi-weekly mortgages and fixed rate products with terms of 10, 15 and 20 years.

2. The Company has emphasized the origination of variable rate home equity lines
of credit and fixed rate second  mortgage  loans as well as  variable  and fixed
rate commercial and multi-family real estate loans having maturities or terms to
repricing  significantly  shorter than one- to four-family  residential mortgage
loans.

3. The Company has periodically  sold a portion of its one- to four-family whole
mortgage  loan  portfolio in an effort to shorten the average life and duration,
as well as to mitigate prepayment risk and reduce borrowings.  The level of such
activity  will  continue to be  evaluated  with primary  consideration  given to
interest rate risk and long-term profitability and liquidity objectives.

4. The Company has emphasized the  lengthening of maturities of its  liabilities
through  its pricing of  longer-term  certificates  of deposit and by  utilizing
intermediate- and longer-term borrowings, subject to market conditions.

5.  The  Company  has  focused  on   developing   and   strengthening   customer
relationships  in an effort to improve earnings and funding  stability.  Several
products offering pricing incentives and/or special features have been developed
to reward customers with multiple accounts (such as bi-weekly mortgages and Penn
Preferred checking).

6. The Company has also emphasized growth in core deposit accounts, particularly
checking  accounts,  as such funds are lower cost  alternatives,  are relatively
stable and, thus,  have a longer duration and assist in  strengthening  customer
relationships.

During fiscal 2000,  each of the  strategies  noted above was employed to manage
the Company's  sensitivity to changes in interest rates.  Higher market rates of
interest,  slower  prepayment  speeds,  and a flat Treasury  curve resulted in a
$154.8 million increase in one- to four-family first mortgage loans between June
30, 1999 and June 30, 2000.  Adjustable rate one- to four-family loans accounted
for $136.5  million or 88% of the increase.  Consumer  loan  balances  increased
$25.0  million;  $14.6 million in prime-based  home equity lines of credit,  the
remainder  principally  in fixed rate  second  mortgages  and other  products of
shorter duration than one- to four-family residential mortgages.  Commercial and
multi-family real estate loan balances grew $11.6 million during the fiscal year
with $9.7 million of the growth in adjustable  rate products.  Due to a majority
of one- to four-family  residential  mortgage loan production  being  adjustable
rate and due to the higher interest rate environment  during the year ended June
30,  2000,  loan sale  activity was reduced  significantly  from the fiscal 1999
levels,  as the majority of production  was retained in portfolio.  The level of
such activity will continue to be evaluated with primary  consideration given to
interest rate risk and long-term  profitability  and  liquidity  objectives.  In
early fiscal 2001,  the Company  engaged in loan sales  activity in an effort to
provide liquidity, manage interest rate risk and help to mitigate the effects of
the flat yield curve.

At June 30, 2000,  medium and long-term  certificates of deposits with remaining
maturities  greater  than one year  totaled  $232.4  million  compared to $170.6
million at June 30, 1999. The lengthening of certificates of deposit  maturities
was  complemented  by a $17.4  million  increase in checking  account  balances,
offset by $12.5 million  decline in savings and money market  account  balances.
Furthermore,  wholesale  borrowings with remaining  maturities  greater than one
year  stood at  $333.9  million  at June 30,  2000,  reflecting  growth of $70.1
million when compared to June 30, 1999.  Short-term retail and wholesale funding
balances with remaining maturities less than one year grew $19.7 million between
June 30, 1999 and June 30, 2000.

Generally,  the investment policy of the Company is to invest funds not utilized
in its lending activities or required for other corporate purposes among various
categories   of   investments   and   maturities   based   upon  the   Company's
asset/liability   management  policies.   Investments   generally  include  U.S.
government agency securities and mortgage-backed securities.

                                       35
<PAGE>


The Company's  cost of funds  responds more rapidly to changes in interest rates
than  its  yield on  earning  assets  due to the  shorter  terms of its  funding
portfolios. Consequently, the results of operations are influenced by the levels
of short-term  interest  rates.  The Company offers a range of maturities on its
deposit products at competitive  rates and monitors the maturities on an ongoing
basis.

Additionally,  the Company emphasizes and promotes its savings, money market and
demand deposit  accounts,  and  certificates of deposit with varying  maturities
through five years, principally within its primary market areas. The balances of
savings,   money  market  and  demand  deposit   accounts,   which   represented
approximately  25.7%  of  total  deposits  at  June  30,  2000,  tend to be less
susceptible  to rapid  changes in interest  rates than  certificates  of deposit
balances.

Management will continue to monitor and employ such strategies, as necessary, in
conjunction with its overall strategic objectives.

                                       36

<PAGE>

Analysis  of Net  Interest  Income.  The  following  table  sets  forth  certain
information  relating to the  Company's  consolidated  statements  of  financial
condition and the consolidated statements of income for the years ended June 30,
2000, 1999 and 1998 and reflects the average yield on assets and average cost of
liabilities  for the periods  indicated.  Such yields and costs are derived from
average  daily  balances.  The  average  balance  of loans  receivable  includes
non-accruing  loans.  The yields  and costs  include  fees which are  considered
adjustments to yields.
<TABLE>
<CAPTION>
                                                                            Year ended June 30,
                                        --------------------------------------------------------------------------------------------
                                                  2000                                 1999                         1998
                                        --------------------------------------------------------------------------------------------
                                          Average     Interest             Average    Interest           Average   Interest
                                        Outstanding   Earned/   Yield/   Outstanding   Earned/  Yield/ Outstanding  Earned/  Yield/
                                          Balance      Paid      Rate      Balance      Paid     Rate    Balance     Paid     Rate
                                        --------------------------------------------------------------------------------------------
                                                                             (Dollars in thousands)
<S>                                       <C>        <C>          <C>    <C>          <C>         <C>    <C>       <C>        <C>
Interest-earning assets:
 One- to four-family mortgage
  loans . . . . . . . . . . . . . . .     $ 988,454  $  69,085    6.99%  $  970,924   $ 67,785    6.98%  $ 889,169 $ 64,852   7.29%
Commercial and multi-family real
  estate loans . . . . . . . . . . .         79,604      6,788    8.53       68,528      5,922     .64      58,196    5,235   9.00
Consumer loans . . . . . . . . . .           83,187      6,153    7.40       63,627      4,581    7.20      45,794    3,735   8.16
                                          ---------     ------            ---------  ---------           ---------  -------
  Total loans receivable . . . . . .      1,151,245     82,026    7.12    1,103,079     78,288    7.10     993,159   73,822   7.43

Federal funds sold . . . . . . . .              307         17    5.54        1,379         68    4.93         346       18   5.20
Investment securities and other . .         323,190     22,547    6.98      234,576     16,318    6.96     134,239    9,814   7.31
Mortgage-backed securities . . . .          105,913      7,173    6.77      161,702     10,883    6.73     248,812   17,151   6.89
                                          ---------     ------            ---------  ---------           ---------  -------
  Total interest-earning assets . . .     1,580,655  $ 111,763    7.07    1,500,736   $105,557    7.03   1,376,556 $100,805   7.32
                                                     =========
Non-interest earning assets . . . .          55,857                          57,450                         54,614
                                         ----------                      ----------                     ----------
  Total assets . . . . . . . . . . .     $1,636,512                      $1,558,186                     $1,431,170
                                         ==========                      ==========                     ==========

Deposits, borrowings and Trust
 Preferred securities:
Money market and demand
   deposits . . . . . . . . . . . . .     $ 115,827  $   1,329    1.15%  $  102,425 $    1,188    1.16%  $  84,958  $ 1,049   1.23%
Savings deposits . . . . . . . . .          161,845      2,645    1.63      163,636      2,879    1.76     166,243    3,638   2.19
Certificates of deposit . . . . . .         786,949     42,784    5.44      792,507     44,581    5.63     742,341   43,513   5.86
                                          ---------     ------            ---------  ---------           ---------  -------
  Total deposits . . . . . . . . . .      1,064,621     46,758    4.39    1,058,568     48,648    4.60     993,542   48,200   4.85

FHLB of New York advances . . . .           322,754     19,591    6.07      266,906     16,052    6.01     218,568   13,403   6.13
Other borrowings . . . . . . . . .           81,053      4,852    5.99       73,514      4,086    5.56      73,599    4,266   5.80
                                          ---------     ------            ---------  ---------           ---------  -------
  Total deposits and borrowings .         1,468,428     71,201    4.85    1,398,988     68,786    4.92   1,285,709   65,869   5.12
Trust Preferred securities . . . .           32,774      3,132    9.56       32,712      3,132    9.57      22,748    2,174   9.56
                                          ---------     ------            ---------  ---------           ---------  -------
  Total deposits, borrowings
   and Trust Preferred securities .       1,501,202  $  74,333    4.95    1,431,700  $  71,918    5.02   1,308,457 $ 68,043   5.20
                                                     =========                       =========                     ========
Other liabilities . . . . . . . . .          24,417                          22,619                         20,576
                                             ------                          ------                         ------

  Total liabilities . . . . . . . . .     1,525,619                       1,454,319                      1,329,033

Stockholders' equity . . . . . . .          110,893                         103,867                        102,137
                                            -------                         -------                        -------
  Total liabilities and
  stockholders' equity . . . . . . .     $1,636,512                      $1,558,186                     $1,431,170
                                         ==========                      ==========                     ==========
Net interest income and net interest
  rate spread . . . . . . . . . . . .                $ 37,430     2.12%               $ 33,639    2.01%            $ 32,762   2.12%
                                                     ========     ====                ========    ====             ========   ====

Net interest-earning assets and
  interest margin . . . . . . . . . .    $   79,453               2.37%  $   69,036               2.24% $   68,099            2.38%
                                         ==========               ====   ==========               ====  ==========            ====

Ratio of interest-earning assets to
  deposits, borrowings and
  Trust Preferred securities . . . .                            105.29%                         104.82%                     105.20%
                                                                ======                          ======                      ======

</TABLE>

                                       37
<PAGE>


Rate/Volume  Analysis.  The following table presents the extent to which changes
in  interest  rates and  changes  in the volume of  interest-earning  assets and
interest-bearing  liabilities  have affected the Company's  interest  income and
interest expense during the periods  indicated.  Information is provided in each
category with respect to (1) changes  attributable to changes in volume (changes
in volume multiplied by prior rate), (2) changes attributable to changes in rate
(changes  in rate  multiplied  by prior  volume),  (3) changes  attributable  to
changes in rate/volume (changes in rate multiplied by changes in volume) and (4)
the net change.

<TABLE>
<CAPTION>
                                                                          Year ended June 30,
                                             ----------------------------------------------------------------------------
                                                      2000 vs. 1999                          1999 vs. 1998
                                             -------------------------------------  -------------------------------------
                                                   Increase (Decrease)                     Increase (Decrease)
                                                         Due to                                  Due to
                                             -------------------------------------  -------------------------------------
                                                                           Total                                 Total
                                                                 Rate/   Increase                      Rate/   Increase
                                             Volume       Rate   Volume  (Decrease) Volume     Rate    Volume (Decrease)
                                             ----------------------------------------------------------------------------
                                                                          (In thousands)
<S>                                          <C>         <C>      <C>      <C>      <C>      <C>        <C>       <C>
Interest-earning assets:
 One- to four-family
  mortgage loans . . . . . . . . . . . .     $1,224      $  75    $   1    $1,300   $5,963   $ (2,775)  $(255)    $2,933
 Commercial and multi-family
  real estate loans . . . . . . . . . . .       957        (77)     (14)      866      929       (206)    (36)       687
 Consumer loans . . . . . . . . . . . . .     1,409        124       39     1,572    1,455       (438)   (171)       846
                                             ----------------------------------------------------------------------------
  Total loans receivable . . . . . . . . .    3,590        122       26     3,738    8,347     (3,419)   (462)     4,466
 Federal funds sold . . . . . . . . . . .       (53)         8       (6)      (51)      54         (1)     (3)        50
 Investment securities and other . . . . .    6,164         47       18     6,229    7,336       (476)   (356)     6,504
 Mortgage-backed securities . . . . . . .    (3,755)        68      (23)   (3,710)  (6,005)      (405)    142     (6,268)
                                             ----------------------------------------------------------------------------
  Total interest-earning assets . . . . . .  $5,946     $  245     $ 15    $6,206   $9,732   $ (4,301)  $(679)    $4,752
                                             ============================================================================


Deposits, borrowings and Trust Preferred
 securities:
 Money market and demand
  deposits . . . . . . . . . . . . . . . .   $  155     $  (12)   $  (2)  $   141    $ 216   $    (64) $  (13)    $  139
 Savings deposits . . . . . . . . . . . .       (31)      (205)       2      (234)     (57)      (713)     11       (759)
 Certificates of deposit . . . . . . . .       (313)    (1,495)      11    (1,797)   2,941     (1,754)   (119)     1,068
                                             ----------------------------------------------------------------------------
  Total deposits . . . . . . . . . . . . .     (189)    (1,712)      11    (1,890)   3,100     (2,531)   (121)       448
 FHLB of New York advances . . . . . . .      3,359        149       31     3,539    2,964       (258)    (57)     2,649
 Other borrowings . . . . . . . . . . . .       419        315       32       766       (5)      (175)     --       (180)
                                             ----------------------------------------------------------------------------
  Total deposits and borrowings               3,589     (1,248)      74     2,415    6,059     (2,964)   (178)     2,917
 Trust Preferred securities . . . . . . .         6         (6)      --        --      952          4       2        958
                                             ----------------------------------------------------------------------------
  Total deposits, borrowings
   and Trust Preferred securities . . . .    $3,595    $(1,254)    $ 74    $2,415   $7,011   $ (2,960)  $(176)    $3,875
                                             ============================================================================
 Net change in net interest income           $2,351    $ 1,499     $(59)   $3,791   $2,721   $ (1,341)  $(503)    $  877
                                             ============================================================================
</TABLE>


                                       38
<PAGE>


Financial Condition

Comparison of Financial Condition at June 30, 2000 and June 30, 1999

Total assets  increased  $170.5  million to $1.729 billion at June 30, 2000 from
total assets of $1.559  billion at June 30, 1999. The increase was primarily due
to the originations and purchases of loans, primarily adjustable rate, offset by
principal payments on loans and mortgage-backed securities.

Deposits  increased $16.8 million to $1.080 billion at June 30, 2000 from $1.064
billion at June 30, 1999. The Company's focus on lower costing deposits resulted
in a $17.4  million,  or 18.1%,  increase in demand  accounts.  FHLB of New York
advances and other  borrowings  increased  $143.4 million from $333.2 million at
June 30, 1999, reflecting growth primarily in medium-term borrowings.

Non-performing assets at June 30, 2000 totaled $3.0 million,  representing 0.18%
of total assets, compared to $4.6 million, or 0.30% of total assets, at June 30,
1999.  Non-accruing  loans  totaled $2.7 million,  with a ratio of  non-accruing
loans to total loans of 0.21% at June 30, 2000 as compared to $3.7  million,  or
0.34% of total loans,  at June 30, 1999. Real estate owned decreased to $334,000
at June 30, 2000 from $936,000 at June 30, 1999.

Stockholders'  equity at June 30, 2000 totaled $114.0 million compared to $107.5
million  at June 30,  1999.  The  increase  primarily  reflects  the net  income
recorded for the year ended June 30, 2000, partially offset by the repurchase of
492,000 shares of the Company's  outstanding stock at an average market price of
$14.09 per share and the declaration of dividends.

Results of Operations

Comparison  of Operating  Results for the Years Ended June 30, 2000 and June 30,
1999

General. For the year ended June 30, 2000 net income was $12.9 million, or $1.50
per diluted  share,  as compared  to net income of $11.5  million,  or $1.29 per
diluted share for the prior year.

Interest and Dividend  Income.  Interest and dividend  income for the year ended
June 30, 2000 increased to $111.8 million from $105.6 million for the year ended
June 30, 1999.  The increase in fiscal 2000 was  primarily due to an increase in
average  interest-earning  assets,  when  compared  to the prior  year.  Average
interest-earning  assets  were  $1.581  billion for the year ended June 30, 2000
compared to $1.501  billion for the prior year.  In addition,  the average yield
earned on interest-earning assets increased slightly to 7.07% for the year ended
June 30, 2000 from 7.03% for the year ended June 30, 1999.

Interest income on residential  one- to four-family  mortgage loans for the year
ended June 30, 2000 increased $1.3 million,  or 1.9%, when compared to the prior
year.  The  increase  in  interest  income on  residential  one- to  four-family
mortgage  loans  was due to a $17.5  million  increase  in the  average  balance
outstanding  to $988.5  million  for the year ended June 30,  2000  compared  to
$970.9  million  for the  prior  year.  The  average  yield  earned on this loan
portfolio  increased  one basis  point to 6.99% for the year ended June 30, 2000
from 6.98% for the prior year.

For the year ended June 30, 2000, interest income on commercial and multi-family
real estate  loans  increased  $866,000  when  compared  to the prior year.  The
increase in  interest  income on the  commercial  and  multi-family  real estate
portfolio  was  attributable  to an  increase  of $11.1  million in the  average
outstanding balance for fiscal 2000, when compared to the prior year. The growth
in the portfolio  was partially  offset by a decline in the average yield earned
on commercial and multi-family real estate loans. The average yield decreased to
8.53% for the year ended June 30, 2000, compared to 8.64% for the prior year.

Growth in consumer  loans  contributed  to an  increase  of $1.6  million in the
interest  income earned on this loan portfolio for the year ended June 30, 2000,
compared to the prior year. Also  contributing to an increase in interest income
on consumer  loans was an increase in the average  yield  earned on the consumer
loan portfolio to 7.40% in fiscal 2000, compared to 7.20% for the prior year.

Interest  income on  investment  securities  and other  interest-earning  assets
increased  $6.2 million for the year ended June 30,  2000,  from the prior year.
The  increase  was  primarily  due to an $88.6  million  increase in the average
balance  outstanding  for the year ended June 30, 2000, over the prior year. The
average yield earned on investment

                                       39
<PAGE>


securities  and other  interest-earning  assets for the year ended June 30, 2000
increased slightly to 6.98% from 6.96% for the prior year.

Interest  income on the  mortgage-backed  securities  portfolio  decreased  $3.7
million for the year ended June 30,  2000 as  compared  to the prior  year.  The
decrease in interest income on mortgage-backed  securities  primarily reflects a
$55.8 million decrease in the average balance  outstanding to $105.9 million for
the year ended June 30, 2000 compared to $161.7 million for the prior year.

Interest  Expense.  Interest  expense  increased $2.4 million for the year ended
June 30, 2000 from $71.9 million for the year ended June 30, 1999.  The increase
in  the  current  year  was  primarily  due  to an  increase  in  the  Company's
borrowings. Average deposits and borrowings increased $69.4 million for the year
ended June 30, 2000 when  compared to the prior year period,  with $63.4 million
of the increase in the Company's  borrowings.  For the year ended June 30, 2000,
there was a decrease in the average rate paid on deposits but an increase in the
cost of borrowings,  when compared to the prior year. Overall,  the average cost
of deposits and  borrowings  decreased to 4.85% for the year ended June 30, 2000
from 4.92% for the prior year.  Including the Trust  Preferred  securities,  the
average  rate  paid on  deposits,  borrowings  and  Trust  Preferred  securities
decreased to 4.95% in the current fiscal year from 5.02% paid in the prior year.

Net Interest and Dividend Income.  Net interest and dividend income for the year
ended June 30, 2000 was $37.4 million,  reflecting a $3.8 million  increase from
$33.6 million  recorded in the prior year.  The increase  primarily  reflects an
improvement  in net interest  rate spread  coupled with growth in the  Company's
average  interest-earning  assets. The net interest rate spread and net interest
margin for the year ended June 30, 2000 were 2.12% and 2.37%,  respectively,  an
increase from 2.01% and 2.24%, respectively,  for the comparable prior year. The
current year  increases in the net interest rate spread and net interest  margin
were  primarily  attributable  to the  decreases  in the  average  rate  paid on
deposits and, to a lesser extent, growth in the commercial and multi-family real
estate and consumer loan portfolios.

Provision for Loan Losses. The provision for loan losses for the year ended June
30, 2000 was $860,000 compared to $780,000 for the prior year. The allowance for
loan  losses  at June 30,  2000 of $4.0  million  showed an  increase  from $3.2
million at June 30,  1999.  The  allowance  for loan losses as a  percentage  of
non-performing  loans was 146.70% at June 30,  2000,  compared to 87.44% at June
30, 1999 due primarily to the reduction in non-performing  loans in fiscal 2000.
The  allowance  for loan  losses  was  0.32% of  total  loans at June 30,  2000,
compared to 0.30% at June 30, 1999.

Non-Interest  Income. For the year ended June 30, 2000,  non-interest income was
$2.9  million  compared to $3.5  million for the prior year.  The  decrease  was
primarily  attributable  to an  $824,000  reduction  in the net gain on sales of
loans during the year ended June 30, 2000, as compared to fiscal year 1999.  The
$860,000  net gain on sales of loans for the year ended June 30, 1999 relates to
the approximate $150.5 million of one- to four-family residential mortgage loans
which were sold in the secondary market.  For the year ended June 30, 2000, $5.5
million  of one- to four-  family  residential  mortgage  loans were sold in the
secondary market early in the fiscal year for a net gain of $36,000.  Due to the
majority of one- to four- family  residential  mortgage  loan  production  being
adjustable rate and due to the higher  interest rate  environment in the current
year,  loan sale  activity  was  reduced  from the fiscal  1999  levels,  as the
majority of new  production  was retained in  portfolio.  The level of loan sale
activity  will  continue to be  evaluated  with primary  consideration  given to
interest rate risk, long-term  profitability and liquidity  objectives.  Service
charge  income for the year ended June 30,  2000 was $2.2  million,  compared to
$2.1 million for the prior year.  The net gain from real estate  operations  was
$114,000 for the year ended June 30, 2000. This compares to $31,000 for the year
ended June 30,  1999.  For the years  ended June 30,  2000,  other  non-interest
income  reflects an $83,000  increase from the year ended June 30, 1999. For the
years ended June 30, 2000 and 1999, other non-interest  income included $248,000
and $230,000 in earnings from the Investment  Services at Penn Federal  program,
respectively.   Through  this  program,  customers  have  convenient  access  to
financial   consulting/advisory   services  and  related  uninsured  non-deposit
investment and insurance  products.  In addition,  other non-interest income for
the year ended  June 30,  2000  included a $48,000  gain on the sale of a former
branch location.

Non-Interest  Expenses.  Non-interest  expenses  were $19.6 million for the year
ended June 30, 2000  compared to $18.6  million for the prior year.  In February
and June of the prior fiscal year, the Company opened new branches in Toms River
and  Livingston,  NJ,  respectively.  The current  year  included a full year of
expenses associated with these branches resulting in an increase in non-interest
expenses in the current  year when  compared  to the prior year.  The  Company's
noninterest  expenses as a percent of average assets for the year ended June 30,
2000 of 1.20% was unchanged from the prior year.

                                       40

<PAGE>


Income Tax Expense. Income tax expense for the year ended June 30, 2000 was $7.1
million compared to $6.3 million for the year ended June 30, 1999. The effective
tax rate for the year ended June 30, 2000 was 35.4%.  The effective tax rate was
35.5% for the year ended June 30, 1999.

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

General.  For the year ended June 30,  1999,  net income was $11.5  million,  or
$1.29 per diluted share,  compared to net income of $11.2 million,  or $1.16 per
diluted share, for the year ended June 30, 1998.

Interest and Dividend  Income.  Interest and dividend  income for the year ended
June 30, 1999 increased to $105.6 million from $100.8 million for the year ended
June 30,  1998.  The  increase  in the year  ended  June 30,  1999 was due to an
increase in average  interest-earning  assets, partially offset by a decrease in
the average yield earned on interest-earning  assets.  Average  interest-earning
assets  were $1.5  billion  for the year ended June 30,  1999  compared  to $1.4
billion for the prior fiscal year. The average yield on interest-earning  assets
decreased  to 7.03% for the year  ended  June 30,  1999 from  7.32% for the year
ended June 30, 1998.

Interest income on residential  one- to four-family  mortgage loans for the year
ended June 30, 1999  increased  $2.9 million  when  compared to the prior fiscal
year.  The  increase  in  interest  income on  residential  one- to  four-family
mortgage  loans was due to an increase of $81.8  million in the average  balance
outstanding  for the year ended June 30, 1999 over the prior  fiscal  year.  The
increase in the average  balance on  residential  one- to  four-family  mortgage
loans was partially offset by a decrease of 0.31% in the average yield earned on
this loan portfolio to 6.98% for the year ended June 30, 1999 from 7.29% for the
prior fiscal year.

Interest  income on investment  securities  increased  $6.5 million for the year
ended June 30, 1999 from the prior fiscal year.  The increase was  primarily due
to a $100.3 million increase in the average balance  outstanding for fiscal 1999
compared to fiscal  1998.  The  increase in the  average  balance on  investment
securities was partially  offset by a 0.35% decrease in the average yield earned
on these  securities for the year ended June 30, 1999 when compared to the prior
year.

Interest income on the mortgage-backed  securities  portfolio for the year ended
June 30, 1999  decreased  $6.3  million  when  compared  to the prior year.  The
decrease in interest income on mortgage-backed  securities primarily reflects an
$87.1  million  decrease  in the  average  balance  outstanding  for fiscal 1999
compared to the prior year.

Interest  Expense.  Interest  expense  increased $3.9 million for the year ended
June 30, 1999 from $68.0 million for fiscal 1998. The increase was  attributable
to an  increase  in total  average  deposits,  borrowings  and  Trust  Preferred
securities,  partially  offset by a  decrease  in the  Company's  cost of funds.
Average  deposits,  borrowings and Trust Preferred  securities  increased $123.2
million  for the year ended  June 30,  1999  compared  to the 1998  period.  The
average  rate  paid on  deposits,  borrowings  and  Trust  Preferred  securities
decreased  to 5.02% for the year  ended  June 30,  1999 from 5.20% for the prior
fiscal year.  The average  balance and interest  expense for the year ended June
30, 1998 only included the Trust Preferred  securities since their issuance date
in October 1997.  Trust  Preferred  securities  had an average  balance of $32.7
million for the year ended June 30, 1999 compared to $22.7 million for the prior
year.

Net Interest and Dividend  Income.Net  interest and dividend income for the year
ended June 30, 1999 was $33.6 million, reflecting an increase from $32.8 million
recorded in the prior fiscal year. The increase reflects the Company's growth in
average assets,  primarily in investment  securities and loans  receivable.  The
increase in net interest and dividend  income was partially  offset by a decline
in the net interest  rate spread.  The net interest rate spread and net interest
margin for the year ended June 30,  1999 were 2.01% and 2.24%,  respectively,  a
decline  from 2.12% and 2.38%,  respectively,  for the year ended June 30, 1998.
For the year ended June 30, 1999,  the declines in the net interest  rate spread
and  net  interest  margin  were  partially  due to the  issuance  of the  Trust
Preferred  securities.  The  declines  in the net  interest  rate spread and net
interest  margin  were also  attributable  to the  relatively  flat yield  curve
environment  experienced  during  fiscal 1999 in which  higher  yielding  assets
pre-paid at accelerated rates and were replaced by lower yielding assets.  Since
the  Company's  liabilities  generally  reprice  more  quickly  than its assets,
interest margins will likely decrease if interest rates rise.

Provision for Loan Losses.The  provision for loan losses for the year ended June
30, 1999 was  $780,000  compared  to $600,000  for the prior  fiscal  year.  The
allowance  for loan losses at June 30, 1999 of $3.2 million  reflects a $433,000
increase  from the June 30,  1998  level.  The  allowance  for loan  losses as a
percentage  of  non-performing  loans was 87.44% at June 30,  1999,  compared to
74.18% at June 30, 1998. The increase is principally  attributable  to a decline
in

                                       41
<PAGE>


the  Company's  non-performing  loans.  The  allowance  for  loan  losses  as  a
percentage of total loans at June 30, 1999 was 0.30%.

Non-Interest  Income. For the year ended June 30, 1999,  non-interest income was
$3.5 million compared to $2.7 million for the prior fiscal year.  Service charge
income  increased  to $2.1  million for the year ended June 30, 1999 versus $2.0
million for the comparable prior year. The net gain from real estate  operations
was $31,000  for the year ended June 30,  1999.  This  compares to a net loss of
$156,000  for the  year  ended  June 30,  1998.  A net gain on sales of loans of
$860,000  was  recorded  for the year ended  June  30,1999.  Low-coupon,  longer
duration one- to four-family  residential mortgage loans totaling $150.5 million
were sold in the secondary  market during the year ended June 30, 1999. Gains of
approximately  $494,000 on sales of $70 million of one- to four-family  mortgage
loans were  reflected in the year ended June 30, 1998. The prior year loan sales
were   undertaken   to  manage   prepayment   risk  as  part  of  the  Company's
asset/liability  management  strategy.  Recurring loan sales in fiscal 1999 were
undertaken to mitigate the effects of low interest rates and a flat yield curve.
A $221,000  improvement in other non-interest  income reflected increases due to
earnings  from  theInvestment  Services  at Penn  Federalprogram.  Through  this
program,  customers  have  convenient  access to  financial  consulting/advisory
services and related uninsured  non-deposit  investment products at local branch
offices through a non-affiliated entity.

Non-Interest  Expenses.  The Company's  non-interest expenses were $18.6 million
for the year ended June 30, 1999  compared to $17.4  million for the prior year.
Non-interest  expenses  increased  in  fiscal  1999  to  support  the  Company's
increased  lending  volumes  and the new  Bayville,  Toms  River and  Livingston
branches   which  opened  in  October   1997,   February  1999  and  June  1999,
respectively.  Nevertheless, the Company's non-interest expenses as a percent of
average  assets  declined  slightly  to 1.20% for the year ended  June 30,  1999
compared to 1.22% for the prior year.

Income Tax Expense. Income tax expense for the year ended June 30, 1999 was $6.3
million  compared to $6.2 million for the prior fiscal year.  The  effective tax
rate was 35.5% for the year ended June 30,  1999  compared to 35.8% for the year
ended June 30, 1998.

Year 2000

By  following  a carefully  prescribed  Year 2000  Project  Plan,  all  mission-
critical  systems,  including  interfaces to the main systems,  were  completely
renovated and tested. To date, the Company has not experienced any problems with
respect to the century  rollover.  The Company will  continue to monitor for any
Year 2000 problems, as appropriate, through the end of the calendar year.

The cost for the Year 2000  effort  incurred  in  fiscal  1999 was  $45,000.  No
additional costs were incurred in fiscal 2000 and no additional expenditures are
anticipated.  The actual  expenditures do not include  manpower costs of Company
personnel associated with this effort, who retained their individual operational
responsibilities in addition to Year 2000 duties. No assurance can be given that
any remaining  issues relating to the Year 2000 will not have a material adverse
effect on the Company's financial condition or results of operations.

Liquidity and Capital Resources

The  Company's  primary  sources of funds are  deposits,  principal and interest
payments on loans and mortgage-backed  securities,  and borrowings from the FHLB
of New York.  While  scheduled  loan  repayments  and maturing  investments  are
relatively  predictable,  deposit  flows  and  early  loan  repayments  are more
influenced by interest rates,  general economic conditions and competition.  The
Company has  competitively set rates on deposit products for selected terms and,
when necessary,  has  supplemented  deposits with  longer-term or less expensive
alternative sources of funds.

Federal  regulations  require  the Bank to  maintain  minimum  levels  of liquid
assets. The required percentage has varied from time to time based upon economic
conditions  and savings  flows.  The current  required  percentage  is 4% of net
withdrawable  deposits  payable on demand or in one year or less and  borrowings
payable  on demand or in one year or less,  both as of the end of the  preceding
calendar quarter. Liquid assets for purposes of this ratio include cash, accrued
interest  receivable,  certain  time  deposits,  U.S.  Treasury  and  government
agencies and other

                                       42
<PAGE>

securities and obligations  generally having  remaining  maturities of less than
five years. All  mortgage-backed  securities are includable in liquid assets, as
well.  The  Company's  most liquid  assets are cash and cash  equivalents,  U.S.
government agency securities and mortgage-backed securities. The levels of these
assets are dependent on the Bank's operating,  financing,  lending and investing
activities  during  any given  period.  At June 30,  2000 and 1999,  the  Bank's
liquidity ratios were 8.71% and 21.30%, respectively.

In the event  that the  Company  should  require  funds  beyond  its  ability to
generate them internally,  additional sources of funds are available through the
use of FHLB of New York advances and reverse repurchase agreements. In addition,
the Company may access funds, if necessary, through the use of $107.0 million of
overnight  repricing  lines of credit and a $50.0  million  one-month  overnight
repricing  line of credit from the FHLB of New York. The Company uses its liquid
resources  principally  to fund  maturing  certificates  of deposit  and deposit
withdrawals,  to purchase  loans and  securities,  to fund  existing  and future
commitments,  and to meet operating expenses.  At June 30, 2000, the Company had
outstanding  commitments  to  extend  credit  which  amounted  to $94.1  million
(including  $65.7  million in  available  lines of credit)  and  commitments  to
purchase loans of $26.8 million.  Management  believes that loan  repayments and
other  sources  of funds  will be  adequate  to meet the  Company's  foreseeable
liquidity needs.

The  Company's  cash  needs for the year ended June 30,  2000 were  provided  by
operating  activities,  proceeds from  maturities of investment  securities,  an
increase in advances from the FHLB of New York and other  borrowings,  increased
deposits  and  principal  repayments  on loans and  mortgage-backed  securities.
During  fiscal 2000,  the cash  provided was  primarily  used to fund  investing
activities,  which  included  the  origination  and  purchase  of loans  and the
purchase of investment securities.  During fiscal 1999, the Company's cash needs
were provided by operating activities, primarily from proceeds from the sales of
loans and from maturities of investment securities. During fiscal 1999, the cash
provided was  principally  used for  investing  activities,  which  included the
purchase of investment  securities and the origination and purchase of loans. In
addition to cash provided by operating  activities,  the  Company's  fiscal 1998
cash needs were provided by increased deposits, an increase in advances from the
FHLB  of  New  York  and  other   borrowings   and   principal   repayments   of
mortgage-backed securities.  Furthermore,  during fiscal 1998, proceeds from the
Trust Preferred  securities  offering,  maturities of investment  securities and
sales of loans  contributed to meeting the Company's  cash needs.  During fiscal
1998,  the cash provided was used for investing  activities,  which included the
origination and purchase of loans and the purchase of investment securities.

Current  regulatory  standards  impose the  following  capital  requirements:  a
risk-based  capital standard expressed as a percentage of risk- adjusted assets;
a ratio of core  capital  to  risk-adjusted  assets;  a  leverage  ratio of core
capital to total adjusted  assets;  and a tangible  capital ratio expressed as a
percentage of total adjusted assets.  As of June 30, 2000, the Bank exceeded all
regulatory   capital   requirements   and  qualified  as  a   "well-capitalized"
institution.  See "Regulation" and Note P - Stockholders'  Equity and Regulatory
Capital, in the Notes to Consolidated Financial Statements.

The Company  initiated a quarterly  cash  dividend on its common stock of $0.035
per share in the second  quarter of fiscal 1997. The quarterly cash dividend was
increased  to $0.04 per  share in the  second  quarter  of  fiscal  1999.  Total
dividends paid for the years ended June 30, 2000,  1999, and 1998 were $0.16 per
share, $0.155 per share and $0.14 per share,  respectively.  The declaration and
payment of dividends  are subject to, among other  things,  PennFed's  financial
condition  and  results of  operations,  regulatory  capital  requirements,  tax
considerations,    industry   standards,    economic   conditions,    regulatory
restrictions, general business practices and other factors.



                                       43
<PAGE>


Item 8. Financial Statements and Supplementary Data

Independent Auditors' Report

Board of Directors and Stockholders
PennFed Financial Services, Inc. and Subsidiaries West
Orange, New Jersey

We have audited the accompanying  consolidated statements of financial condition
of PennFed Financial Services,  Inc. and Subsidiaries (the "Company") as of June
30, 2000 and 1999, and the related consolidated statements of income, changes in
stockholders'  equity and cash  flows for each of the three  years in the period
ended  June  30,  2000.  These   consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of PennFed Financial
Services, Inc. and Subsidiaries as of June 30, 2000 and 1999, and the results of
their  operations and their cash flows for each of the three years in the period
ended June 30, 2000 in conformity with accounting  principles generally accepted
in the United States of America.



/s/ Deloitte & Touche LLP
-------------------------
Deloitte & Touche LLP


Parsippany, New Jersey
July 26, 2000


                                       44

<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
                 Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>

                                                                                              June 30,
                                                                                   ------------------------------
                                                                                        2000              1999
                                                                                   ------------------------------
                                                                                       (Dollars in thousands)
<S>                                                                                <C>              <C>
Assets
Cash and cash equivalents ....................................................     $    13,866      $      9,900
Investment securities held to maturity, at amortized cost, market value
   of $278,643 and $281,880 at June 30, 2000 and 1999 ........................         303,026           293,282
Mortgage-backed securities held to maturity, at amortized cost, market value
   of $86,861 and $128,617 at June 30, 2000 and 1999 .........................          87,561           127,983
Loans held for sale ..........................................................              --             5,180
Loans receivable, net of allowance for loan losses of $3,983 and $3,209
   at June 30, 2000 and 1999 .................................................       1,259,248         1,061,431
Premises and equipment, net ..................................................          20,076            19,240
Real estate owned, net .......................................................             334               936
Federal Home Loan Bank of New York stock, at cost ............................          22,295            16,623
Accrued interest receivable, net .............................................          10,227             9,680
Goodwill and other intangible assets .........................................           8,996            11,118
Other assets .................................................................           3,590             3,390
                                                                                   ------------------------------
                                                                                   $ 1,729,219      $  1,558,763
                                                                                   ==============================
Liabilities and Stockholders' Equity
Liabilities:

  Deposits ...................................................................     $ 1,080,350      $  1,063,600
  Federal Home Loan Bank of New York advances ................................         364,465           244,465
  Other borrowings ...........................................................         112,175            88,738
  Mortgage escrow funds ......................................................          11,888            10,102
  Due to banks ...............................................................           7,908             7,385
  Accounts payable and other liabilities .....................................           5,647             4,230
                                                                                   ------------------------------
  Total liabilities ..........................................................       1,582,433         1,418,520
                                                                                   ------------------------------
  Guaranteed Preferred Beneficial Interests in the
   Company's Junior Subordinated Debentures ..................................          34,500            34,500
  Unamortized issuance expenses ..............................................          (1,695)           (1,757)
                                                                                   ------------------------------
  Net Trust Preferred securities .............................................          32,805            32,743
                                                                                   ------------------------------
Commitments and Contingencies (Note O)

Stockholders' Equity:
  Serial preferred stock, $.01 par value,
    7,000,000 shares authorized, no shares issued ............................              --                --
  Common stock, $.01 par value, 15,000,000 shares authorized,
    11,900,000 and 11,897,858 shares issued and  8,396,019
    and 8,813,416  shares outstanding at June 30, 2000 and 1999
   (excluding shares held in treasury of3,503,981 and
    3,084,442 at June 30, 2000 and 1999) ......................................             60                59
  Additional paid-in capital ..................................................         60,523            59,488
  Employee Stock Ownership Plan Trust debt ....................................         (2,320)           (2,804)
  Retained earnings, partially restricted .....................................         91,840            80,673
  Treasury stock, at cost, 3,503,981 and 3,084,442 shares
    at June 30, 2000 and 1999 .................................................        (36,122)          (29,916)
                                                                                   ------------------------------
Total stockholders' equity ....................................................        113,981           107,500
                                                                                   ------------------------------
                                                                                    $1,729,219        $1,558,763
                                                                                   ==============================
</TABLE>

See notes to consolidated financial statements

                                       45
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
                        Consolidated Statements of Income
<TABLE>
<CAPTION>

                                                                                   For the years ended June 30,
                                                                            -----------------------------------------
                                                                                2000           1999              1998
                                                                            -----------------------------------------
                                                                                       (Dollars in thousands)
<S>                                                                         <C>            <C>            <C>
Interest and Dividend Income:
 Interest and fees on loans ...........................................     $   82,026     $   78,288     $    73,822
 Interest on federal funds sold .......................................             17             68              18
 Interest and dividends on investment securities ......................         22,547         16,318           9,814
 Interest on mortgage-backed securities ...............................          7,173         10,883          17,151
                                                                            -----------------------------------------
                                                                               111,763        105,557         100,805
                                                                            -----------------------------------------
Interest Expense:
 Deposits .............................................................         46,758         48,648          48,200
 Borrowed funds .......................................................         24,443         20,138          17,669
 Trust Preferred securities ...........................................          3,132          3,132           2,174
                                                                            -----------------------------------------
                                                                                74,333         71,918          68,043
                                                                            -----------------------------------------
Net Interest and Dividend Income Before
 Provision for Loan Losses ............................................         37,430         33,639          32,762
Provision for Loan Losses .............................................            860            780             600
                                                                            -----------------------------------------
 Net Interest and Dividend Income After
  Provision for Loan Losses ...........................................         36,570         32,859          32,162
                                                                            -----------------------------------------
Non-Interest Income:
 Service charges ......................................................          2,172          2,113           1,974
 Net gain (loss) from real estate operations ..........................            114             31            (156)
 Net gain on sales of loans ...........................................             36            860             528
 Other ................................................................            625            542             321
                                                                            -----------------------------------------
                                                                                 2,947          3,546           2,667
                                                                            -----------------------------------------
Non-Interest Expenses:
 Compensation and employee benefits ...................................          9,843          8,961           8,109
 Net occupancy expense ................................................          1,663          1,333           1,275
 Equipment ............................................................          1,763          1,642           1,542
 Advertising ..........................................................            393            359             380
 Amortization of intangibles ..........................................          2,121          2,363           2,437
 Federal deposit insurance premium ....................................            429            627             591
 Other ................................................................          3,384          3,359           3,055
                                                                            -----------------------------------------
                                                                                19,596         18,644          17,389
                                                                            -----------------------------------------
Income Before Income Taxes ............................................         19,921         17,761          17,440
Income Tax Expense ....................................................          7,051          6,304           6,242
                                                                            -----------------------------------------
Net Income ............................................................     $   12,870     $   11,457     $    11,198
                                                                            =========================================

Weighted average number of common shares outstanding:
 Basic ................................................................      8,138,104      8,408,175       8,949,357
                                                                            =========================================
 Diluted ..............................................................      8,582,513      8,878,491       9,689,655
                                                                            =========================================
Net income per common share:
 Basic ................................................................     $     1.58     $     1.36     $      1.25
                                                                            =========================================
 Diluted ..............................................................     $     1.50     $     1.29     $      1.16
                                                                            =========================================
</TABLE>

See notes to consolidated financial statements.

                                       46

<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
           Consolidated Statements of Changes in Stockholders' Equity
                For the Years Ended June 30, 2000, 1999 and 1998

<TABLE>
<CAPTION>


                                                                                    Restricted    Employee
                                                                                      Stock -      Stock
                                                    Serial             Additional    Management   Ownership
                                                  Preferred    Common    Paid-In    Recognition   Plan Trust  Retained  Treasury
                                                    Stock      Stock     Capital       Plan          Debt      Earnings    Stock
                                                  --------------------------------------------------------------------------------
                                                                     (Dollars in thousands)

<S>             <C> <C>                                 <C>      <C>     <C>          <C>          <C>          <C>      <C>
Balance at June 30, 1997 ........................       $--      $  60   $ 57,441     $(1,062)     $ (3,671)    $61,051  (16,549)
Allocation of ESOP stock ........................                                                       418
Employee Stock Ownership Plan (ESOP) and
  Management Recognition Plan (MRP)
  adjustment ....................................                             837
Purchase of 325,000 shares of treasury stock                                                                     (5,581)
Issuance of 66,740 shares of treasury stock
  for options exercised and Dividend
  Reinvestment Plan (DRP) .......................                                                                  (166)     498
Amortization of MRP stock .......................                                         531
Cash dividends of $0.14 per common share ........                                                                (1,302)
Net income for the year ended June 30, 1998......                                                                11,198
                                                  --------------------------------------------------------------------------------
Balance at June 30, 1998 ........................        --         60     58,278        (531)       (3,253)     70,781  (21,632)
Allocation of ESOP stock ........................                                                       449
ESOP and MRP adjustment .........................                           1,221
Purchase of 618,000 shares of treasury stock ....                                                                         (8,729)
Issuance of 47,570 shares of treasury stock
  for options exercised and DRP .................                                                                  (212)     445
Cancellation of 2,142 MRP shares ................                   (1)       (11)
Amortization of MRP stock .......................                                         531
Cash dividends of $0.155 per common share .......                                                                (1,353)
Net income for the year ended June 30, 1999 .....                                                                11,457
                                                  --------------------------------------------------------------------------------
Balance at June 30, 1999 ........................        --         59     59,488          --        (2,804)     80,673  (29,916)
Allocation of ESOP stock ........................                                                       484
ESOP and MRP adjustment .........................                             999
Purchase of 492,000 shares of treasury stock ....                                                                         (6,931)
Issuance of 72,461 shares of treasury stock
  for options exercised and DRP .................                                                                  (362)     725
Reissuance of 2,142 shares for MRP ..............                    1         36         (36)
Amortization of MRP stock .......................                                          36
Cash dividends of $0.16 per common share ........                                                                (1,341)
Net income for the year ended June 30, 2000 .....                                                                12,870
                                                  --------------------------------------------------------------------------------
  Balance at June 30, 2000 ......................       $--     $   60   $ 60,523         $--      $ (2,320)    $91,840 $(36,122)
                                                  =================================================================================
</TABLE>


See notes to consolidated financial statements.

                                       47

<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
                     Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                   For the years ended June 30,
                                                                             -----------------------------------------
                                                                                 2000            1999           1998
                                                                             -----------------------------------------
                                                                                        (Dollars in thousands)
<S>                                                                          <C>            <C>            <C>
Cash Flows from Operating Activities:
  Net income ...........................................................     $  12,870      $  11,457      $  11,198
  Adjustments to reconcile net income to net cash provided by operating
   activities:
  Net gain on sales of loans ...........................................           (36)          (860)          (528)
  Proceeds from sales of loans held for sale ...........................         5,568        151,468          1,616)
  Originations of loans held for sale ..................................            --             --         (2,181)
  Net gain on sales of real estate owned ...............................          (126)          (110)           (95)
  Amortization of investment and mortgage-backed securities premium, net           192            351            319
  Depreciation and amortization ........................................         1,385          1,364          1,297
  Provision for losses on loans and real estate owned ..................           860            825            751)
  Amortization of cost of stock plans ..................................         1,520          2,101          1,786
  Amortization of intangibles ..........................................         2,121          2,363          2,437
  Amortization of premiums on loans and loan fees ......................         1,437          2,338          1,565
  Amortization of Trust Preferred securities issuance costs ............            62             62             42
  Increase in accrued interest receivable, net of accrued interest payable      (1,659)          (509)          (974)
  (Increase) decrease in other assets ..................................          (200)         1,970         (2,464)
  Increase (decrease) in deferred income tax liability .................          (118)           288            642
  Increase in accounts payable and other liabilities ...................         1,535          1,144            230
  Increase (decrease) in mortgage escrow funds .........................         1,786           (432)         1,679
  Increase (decrease) in due to banks ..................................           523         (4,684)         4,832
  Other, net ...........................................................           (34)            30             --
                                                                             -----------------------------------------
  Net cash provided by operating activities ............................        27,686        169,166         22,152
                                                                             -----------------------------------------
  Cash Flows From Investing Activities:
  Proceeds from maturities of investment securities ....................        10,175        147,070         70,141
  Purchases of investment securities held to maturity ..................       (19,991)      (262,096)      (213,168)
  Net outflow from loan originations net of principal repayments of loans      (94,799)       (93,695)      (152,786)
  Purchases of loans ...................................................      (106,049)       (31,220)       (89,910)
  Proceeds from principal repayments of mortgage-backed securities .....        40,522         76,206         83,775
  Purchases of mortgage-backed securities ..............................          (220)           (34)            --
  Proceeds from sale of loans ..........................................            --             --         75,108
  Proceeds from sale of premises and equipment .........................           250             --             --
  Purchases of premises and equipment ..................................        (2,487)        (2,542)        (2,954)
  Proceeds from sales of real estate owned .............................         1,161          1,202          1,300
  Purchases of Federal Home Loan Bank of New York stock ................        (5,672)        (1,558)        (2,652)
                                                                             -----------------------------------------
  Net cash used in investing activities ................................      (177,110)      (166,667)      (231,146)
                                                                             -----------------------------------------
  Cash Flows From Financing Activities:

  Net increase in deposits .............................................        17,862         35,052        109,387
  Increase (decrease) in advances from the Federal Home Loan Bank of New
   York and other borrowings ...........................................       143,437        (28,762)        73,750
  Net proceeds from issuance of Trust Preferred securities ............            --             --         32,639
  Cash dividends paid .................................................         (1,341)        (1,353)        (1,302)
  Purchases of treasury stock, net of reissuance .......................        (6,568)        (8,496)        (5,249)
                                                                             -----------------------------------------
  Net cash provided by (used in) financing activities ..................       153,390         (3,559)       209,225
                                                                             -----------------------------------------
  Net Increase (Decrease) in Cash and Cash Equivalents .................         3,966         (1,060)           231
  Cash and Cash Equivalents, Beginning of Year .........................         9,900         10,960         10,729
                                                                             -----------------------------------------
  Cash and Cash Equivalents, End of Year ...............................     $  13,866      $   9,900      $  10,960
                                                                             =======================================
  Supplemental Disclosures of Cash Flow Information:
  Cash paid during the year for:
  Interest .............................................................     $  74,175      $  70,684      $  66,821
                                                                             =========================================
  Income taxes .........................................................     $   7,608      $   4,700      $   6,707
                                                                             =========================================
  Supplemental Schedule of Non-Cash Activities:
  Transfer of loans receivable to real estate owned, net ...............     $     382      $     432      $   2,115
                                                                             =========================================
  Transfer of loans receivable to loans held for sale, at market .......     $     352      $ 155,223      $      --
                                                                             =========================================
  Transfer of premises and equipment, net to real estate owned, net ....     $      50      $      --      $      --
                                                                             =========================================
</TABLE>

  See notes to consolidated financial statements.


                                       48
<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 2000, 1999 and 1998


A.  Summary of Significant Accounting Policies

PennFed Financial Services, Inc. ("PennFed") was organized in March 1994 for the
purpose of  becoming  the  savings and loan  holding  company  for Penn  Federal
Savings  Bank (the  "Bank")  in  connection  with the Bank's  conversion  from a
federally  chartered mutual savings bank to a federally  chartered stock savings
bank (the "Conversion").

Principles of Consolidation -- The consolidated  financial statements of PennFed
and subsidiaries  (with its subsidiaries the "Company")  include the accounts of
PennFed and its  subsidiaries  (the Bank and PennFed  Capital Trust I).  PennFed
owns all of the outstanding  stock of the Bank issued on July 14, 1994 (see Note
B  -  Stock  Conversion).  All  references  to  the  Company,  unless  otherwise
indicated,  prior to July 14, 1994,  refer to the Bank and its subsidiaries on a
consolidated  basis.  All  intercompany  accounts  and  transactions  have  been
eliminated in consolidation.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those  estimates.  The most significant area in
the accompanying  financial  statements where estimates have an impact is in the
allowance for loan losses.

Cash and Cash Equivalents -- For purposes of reporting cash flows, cash and cash
equivalents include cash and amounts due from depository institutions.

Investment  Securities  and  Mortgage-Backed  Securities -- In  accordance  with
Statement of Financial  Accounting  Standards No. 115,  "Accounting  for Certain
Investments  in Debt  and  Equity  Securities"  ("SFAS  115"),  debt  securities
classified  as held to  maturity  are  carried  at  amortized  cost  only if the
reporting  entity has a positive intent and ability to hold those  securities to
maturity.

The Company classifies investment  securities and mortgage-backed  securities as
either  held to  maturity  or  available  for sale.  Investment  securities  and
mortgage-backed  securities  held to maturity  are stated at cost,  adjusted for
amortization of premiums and accretion of discounts,  since the Company has both
the ability and intent to hold the securities to maturity. Investments available
for sale are carried at market value with  unrealized  gains and losses excluded
from earnings and reported as a separate component of stockholders' equity.

Loans Held for Sale -- Mortgage  loans  originated  and intended for sale in the
secondary  market are carried at the lower of cost or estimated  market value in
the  aggregate.  Aggregate  net  unrealized  losses are  recorded as a valuation
allowance and recognized as charges to income.

Loans Receivable -- Interest income is not accrued on loans where management has
determined  that the  borrowers may be unable to meet  contractual  principal or
interest  obligations or where interest and/or principal is 90 days or more past
due. When a loan is placed on nonaccrual status, accrual of interest ceases and,
in general,  uncollected  past due interest  (including  interest  applicable to
prior years, if any) is reversed and charged against current income.  Therefore,
interest  income is not  recognized  unless the financial  condition and payment
record of the borrower warrant the recognition of interest  income.  Interest on
loans  that  have  been  restructured  is  generally  accrued  according  to the
renegotiated terms.

In  accordance  with  Statement  of  Financial  Accounting  Standards  No.  114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") and Statement of
Financial  Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income  Recognition  and  Disclosures"  ("SFAS  118"),  the  Company
accounts for impaired  loans,  except those loans that are accounted for at fair
value  or at the  lower  of cost or fair  value,  at the  present  value  of the
estimated  future  cash flows of the loan  discounted  at the  loan's  effective
interest rate or at the loan's  observable market price or the fair value of the
collateral  if the loan is collateral  dependent.  A loan is impaired when it is
probable that all principal and interest amounts will not be collected according
to the loan contract.  Delinquent,  smaller balance,  homogeneous loans that are
evaluated  collectively on a portfolio  basis are not considered  impaired under
SFAS 114. The Company  generally  evaluates the  collectibility  of consumer and
one- to four-family loans on a total portfolio basis.

                                       49
<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Allowance  for Loan  Losses -- The  allowance  for loan  losses  is  established
through  charges to earnings.  Loan losses are charged against the allowance for
loan losses when management believes that the recovery of principal is unlikely.
If,  as a  result  of  loans  charged  off or  increases  in the  size  or  risk
characteristics  of the  loan  portfolio,  the  allowance  is  below  the  level
considered by management to be adequate to absorb future loan losses on existing
loans,  the  provision  for loan  losses is  increased  to the level  considered
necessary  to provide an adequate  allowance.  The  allowance  is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the collectibility of the
loans.  The evaluations take into  consideration  such factors as changes in the
nature and volume of the loan portfolio,  overall portfolio  quality,  review of
specific  problem  loans and  current  economic  conditions  that may affect the
borrowers'  ability to pay.  Economic  conditions may result in the necessity to
change  the  allowance  quickly  in order to  react to  deteriorating  financial
conditions of the Company's  borrowers.  As a result,  additional  provisions on
existing loans may be required in the future if borrowers'  financial conditions
deteriorate or if real estate values decline.

Premises  and  Equipment  -- Premises  and  equipment  are stated at cost,  less
accumulated  depreciation  and  amortization.  Provisions  for  depreciation  of
premises and  equipment are computed on the  straight-line  method over three to
ten years  for  furniture  and  equipment  and  twenty-five  to forty  years for
buildings.   Amortization  of  leasehold  improvements  is  provided  using  the
straight-line  method over the terms of the respective lease or estimated useful
life of the improvement, whichever is shorter.

Real Estate Owned -- Real estate properties acquired by foreclosure are recorded
at the lower of cost or  estimated  fair value  less  costs to dispose  with any
write down charged against the allowance for loan losses.  Subsequent valuations
are periodically performed by management and the carrying value is adjusted by a
charge to expense to reflect  any  subsequent  declines  in the  estimated  fair
value. Further declines in real estate values may result in increased foreclosed
real estate expense in the future.  Routine holding costs are charged to expense
as incurred and  improvements  to real estate owned that increase the fair value
of the real  estate  are  capitalized.  Gains on sale of real  estate  owned are
generally  recognized  upon  disposition of the property.  Losses are charged to
operations as incurred.

Goodwill--  The excess of cost over fair value of assets  acquired  ("goodwill")
arising from the acquisitions  discussed in Note C is amortized to expense by an
accelerated   method  over  the   estimated   remaining   lives  of   long-term,
interest-bearing  assets  acquired (14 years) in  accordance  with  Statement of
Financial  Accounting  Standards No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions."

Core  Deposit  Premium  -- The  premium  resulting  from the  valuation  of core
deposits  arising from the  aforementioned  acquisitions  is being  amortized to
expense over the  estimated  average  remaining  life of the  existing  customer
deposit base acquired (10 years).

Due to Banks -- This item  represents a book  overdraft  relating to outstanding
checks  written on the  Company's  Federal Home Loan Bank of New York  operating
account.

Income Taxes -- In accordance with Statement of Financial  Accounting  Standards
No. 109,  "Accounting for Income Taxes" ("SFAS 109"), the Company uses the asset
and liability method for financial accounting and reporting for income taxes.

Earnings  Per Common  Share -- Basic  earnings  per common  share is computed by
dividing income available to common  stockholders by the weighted average number
of common  shares  outstanding  during the  period,  less the  weighted  average
unallocated ESOP shares of common stock. The computation of diluted earnings per
share is similar to the  computation of basic earnings per share except that the
denominator is increased to include the number of additional  common shares that
would have been  outstanding  if the dilutive  potential  common shares had been
issued.

Loan  Origination  Fees  and  Discounts  and  Premiums  --  Nonrefundable   loan
origination fees net of certain direct loan origination costs are deferred.  Net
deferred fees on loans held for  investment  are amortized  into income over the
life of the related loans by use of the level-yield method. Net deferred fees on
loans  originated  for sale are deferred and  recognized  as part of the gain or
loss on sale of loans.

Discounts and premiums on investment  and  mortgage-backed  securities and loans
purchased are recognized as income/expense  over the estimated life of the asset
purchased using the level-yield method.

Interest  Rate  Swaps -- The  Company  has  utilized  interest  rate  swaps as a
component of managing interest rate risk.

                                       50
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Swap  agreements are held for purposes other than trading.  The Company's  swaps
are  considered  to be matched  swaps,  as they are  specifically  linked with a
liability. Periodic net cash settlements under swap agreements are accrued as an
adjustment to interest expense over the life of the agreements.  In the event of
the  termination of an interest rate swap  agreement,  the gain or loss would be
deferred and amortized as an adjustment to interest  expense over the shorter of
the remaining life of the hedged item or the remaining  contract period.  In the
event of liquidation of the liability to which the interest rate swap is linked,
the  interest  rate swap would be  recorded  at its fair  market  value with any
change in such fair market value recorded in the period it occurs.

Recently  Issued  Accounting  Guidance -- In December  1999 the  Securities  and
Exchange   Commission  issued  Staff  Accounting   Bulletin  No.  101,  "Revenue
Recognition  in Financial  Statements"  ("SAB  101").  SAB 101 draws on existing
accounting  rules  with  respect to the basic  criteria  that must be met before
revenue can be recorded.  SAB 101 further  explains  how those rules apply.  The
Company has reviewed the guidance in SAB 101 and has concluded  that there is no
effect on the Company's financial condition or results of operations.

Stock Split -- All share  information has been adjusted to reflect a two-for-one
stock split in the form of a 100% stock  dividend paid on February 10, 1998. For
further  information  refer  to  Note P-  Stockholders'  Equity  and  Regulatory
Capital.

Reclassifications  -- Certain  reclassifications  have been made to prior years'
financial statements to conform with current year's presentation.

B.  Stock Conversion

On July 14, 1994,  the Bank  completed the  Conversion and became a wholly owned
subsidiary of PennFed,  a newly formed holding  company.  In connection  with an
initial public offering,  PennFed issued 11,900,000 shares of common stock at $5
per share ($.01 par value),  increasing  consolidated  equity by $52.1  million,
which was net of conversion  expenses of  approximately  $2.7 million and shares
issued to the ESOP  representing  8% of the shares of common stock  issued.  The
Bank received  proceeds of $28.0 million from PennFed in exchange for all of its
common stock.

As part of the  Conversion,  in order to grant a priority  to  eligible  account
holders in the event of future  liquidation in accordance  with Office of Thrift
Supervision ("OTS")  regulations,  the Bank established a liquidation account in
an amount equal to $40.9 million (the retained  earnings of the Bank as of March
31, 1994). The total amount of the liquidation  account will be decreased as the
balances of eligible  account holders are reduced  subsequent to the Conversion.
In the event of a  complete  liquidation  of the Bank,  and only in such  event,
eligible  account holders who continue to maintain their deposit  accounts shall
be entitled to receive a distribution from the liquidation  account in an amount
proportionate  to the current  adjusted  qualifying  balances for accounts  then
held.

C.  Branch Acquisitions

In 1995, the Bank acquired from the  Resolution  Trust  Corporation  ("RTC") the
deposit  liabilities  and  certain of the assets and other  liabilities  of four
branch  offices  of  Carteret   Federal  Savings  Bank,   Madison,   New  Jersey
("Carteret"). The four Carteret branch offices were located in Caldwell, Verona,
Fairfield and Wayne,  New Jersey.  Immediately  following the purchase,  under a
pre-arranged "consortium" agreement,  Atlantic Stewardship Bank of Midland Park,
New Jersey  acquired  from the Bank the deposit  liabilities  and certain of the
assets  and other  liabilities  of the  Wayne,  New  Jersey  branch  office.  In
connection with this transaction, no gain or loss was recorded by the Bank.

The Bank  submitted an  $18,739,000  deposit  premium bid, of which  $18,000,000
related to the  Caldwell,  Verona and  Fairfield  branches.  In  addition to the
$18,000,000  deposit  premium,  the Bank also  capitalized  $141,000 of expenses
reflecting a total deposit  premium  intangible  asset of  $18,141,000.  For the
years ended June 30, 2000,  1999 and 1998,  amortization  of the deposit premium
intangible of $1,814,000 was recorded each year.

The Company acquired Sayreville Savings and Loan Association effective September
1982 and First  Federal  Savings and Loan  Association  of  Montclair  effective
September  1989.  The  acquisitions  have been  accounted for as purchases  and,
accordingly,  the purchase  prices have been allocated to assets and liabilities
acquired based on their fair value at their date of acquisition. For each of the
years ended June 30,  2000,  1999 and 1998,  the effect of the  amortization  of
goodwill was to reduce  income before  income taxes by  approximately  $274,000,
$347,000 and $421,000, respectively.

                                       51

<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued


D.  Investment Securities

<TABLE>
<CAPTION>
                                                       June 30, 2000            June 30, 1999
                                                ---------------------------------------------------
                                                   Carrying       Market     Carrying     Market
                                                     Value        Value        Value       Value
                                                ---------------------------------------------------
                                                                   (In thousands)
<S>                                                <C>           <C>         <C>          <C>
U.S. government
agencies:
Maturing:
   After five years but within ten years . . . .   $  10,000     $  9,494    $ 10,000     $  9,628
   After ten years       . . . . . . . . . . . .     264,532      244,572     254,538      244,615
                                                  -------------------------------------------------
                                                     274,532      254,066     264,538      254,243

Obligations of states and political subdivisions:
Maturing:
   After one year but  within five years . . . .          30           32          40           45
                                                  -------------------------------------------------
                                                          30           32          40           45
Trust preferred securities:
Maturing:
After ten years. . . . . . . . . . . . . . . . .      28,464       24,545      28,704       27,592
                                                  -------------------------------------------------
                                                    $303,026     $278,643    $293,282     $281,880
                                                  =================================================
</TABLE>


At June 30,  2000 and  1999,  investment  securities  with a  carrying  value of
$208,357,000 and $82,500,000,  respectively, were pledged to secure Federal Home
Loan Bank of New York advances and other borrowings.

Gross unrealized gains and losses of investment securities at June 30, 2000 and
1999 were as follows:

<TABLE>
<CAPTION>

                                                                  June 30, 2000          June 30, 1999
                                                              ------------------------------------------------
                                                                 Gross        Gross       Gross       Gross
                                                              Unrealized    Unrealized  Unrealized  Unrealized
                                                                 Gains        Losses      Gains       Losses
                                                              ------------------------------------------------
                                                                                (In thousands)
<S>                                                             <C>          <C>           <C>        <C>
U.S. government agencies   . . . . . . . . . . . . . . . . . .  $   --       $20,466       $--        $10,295
Obligations of states and political subdivisions . . . . . . .       2            --         5             --
Trust preferred securities . . . . . . . . . . . . . . . . . .      --         3,919        41          1,153
                                                               -----------------------------------------------
                                                                $    2       $24,385       $46        $11,448
                                                               ===============================================
</TABLE>


There were no sales of investment securities for the years ended June 30, 2000,
1999 and 1998.
                                       52

<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

E.  Mortgage-Backed Securities

                                                                June 30,
                                                        ------------------------
                                                          2000          1999
                                                        ------------------------
                                                             (In thousands)
Ginnie Mae     . . . . . . . . . . . . . . . . . . . . $  1,358       $  2,071
Freddie Mac    . . . . . . . . . . . . . . . . . . . .   48,759         74,622
Fannie Mae     . . . . . . . . . . . . . . . . . . . .   37,197         50,899
Collateralized Mortgage Obligations/REMICs . . . . . .       79            103
                                                        ------------------------
                                                         87,393        127,695
Unamortized premiums, net . . . . . . . . . . . . . .       168            288
                                                       ------------------------
                                                       $ 87,561       $127,983
                                                       =========================

The estimated market values of  mortgage-backed  securities were $86,861,000 and
$128,617,000  at June 30,  2000 and 1999,  respectively.  There were no sales of
mortgage-backed securities in the years ended June 30, 2000, 1999 and 1998.

The carrying value of mortgage-backed securities pledged were as follows:

                                                               June 30,
                                                       ------------------------
                                                           2000          1999
                                                       ------------------------
                                                            (In thousands)
Pledged to secure:
Federal Home Loan Bank of New York advances ........     $ 47,085     $ 78,467
Other borrowings ...................................       10,795       19,461
Public funds on deposit ............................        2,456        3,304
Interest rate swap agreements ......................          542        4,825
                                                       ------------------------
                                                         $ 60,878     $106,057
                                                       =========================

Collateralized  mortgage  obligations  consist primarily of fixed and adjustable
rate sequentially paying securities with short durations.

The gross unrealized gains and losses of mortgage-backed securities held at June
30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>

                                                                        June 30, 2000            June 30, 1999
                                                                   ------------------------------------------------
                                                                      Gross       Gross        Gross       Gross
                                                                   Unrealized   Unrealized   Unrealized  Unrealized
                                                                      Gains       Losses       Gains      Losses
                                                                   ------------------------------------------------
                                                                                    (In thousands)

<S>                                                                   <C>          <C>        <C>           <C>
Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . .      $ 34         $   1      $   92        $--
Freddie Mac    . . . . . . . . . . . . . . . . . . . . . . . . .       284           661         570        288
Fannie Mae     . . . . . . . . . . . . . . . . . . . . . . . . .       173           526         459        198
Collateralized Mortgage Obligations/REMICs  . . . . . . . . . .         --             3          --          1
                                                                   ------------------------------------------------
                                                                      $491        $1,191      $1,121       $487
                                                                   ================================================
</TABLE>

                                       53

<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

F.  Loans Receivable, Net

                                                            June 30,
                                               ---------------------------------
                                                  2000                  1999
                                               ---------------------------------
                                                         (In thousands)
First Mortgage Loans:
Conventional . . . . . . . . . . . . . . . .   $1,065,005            $ 909,576
FHA insured . . . . . . . . . . . . . . . .         4,224                4,585
VA guaranteed . . . . . . . . . . . . . . .           819                1,083
                                               --------------------------------
Total one- to four-family . . . . . . . . .     1,070,048              915,244
Commercial and multi-family . . . . . . . .        86,257               74,613
                                               --------------------------------
Total first mortgage loans . . . . . . . . .    1,156,305              989,857
                                               --------------------------------
Consumer:
Second mortgages . . . . . . . . . . . . . .       45,659               37,243
Home equity lines of credit . . . . . . . .        46,394               31,754
Other . . . . . . . . . . . . . . . . . . .         5,534                3,575
                                               --------------------------------
Total consumer loans . . . . . . . . . . . .       97,587               72,572
                                               --------------------------------
Total loans . . . . . . . . . . . . . . . .     1,253,892            1,062,429
                                               --------------------------------
Add (Less):
Allowance for loan losses . . . . . . . . .        (3,983)              (3,209)
Unamortized premium . . . . . . . . . . . .         3,091                2,112
Unearned income on consumer loans . . . . .           (20)                 (20)
Net deferred loan fees . . . . . . . . . . .        6,268                5,299
                                               --------------------------------
                                                    5,356                4,182
                                               --------------------------------
                                               $1,259,248           $1,066,611
                                               ================================


Conventional  one- to  four-family  mortgage  loans  at June 30,  1999  included
$5,180,000 of mortgages held for sale. At June 30, 1999, there was no commitment
to sell these loans.  There were no one- to four-family  mortgage loans held for
sale at June 30, 2000.

Non-accruing  loans at June 30, 2000 and 1999 were  $2,715,000  and  $3,670,000,
respectively,  which  represents 0.21% and 0.34%,  respectively,  of total loans
outstanding.  The total  interest  income that would have been  recorded for the
years ended June 30, 2000 and 1999,  had these loans been current in  accordance
with their original  terms,  or since the date of origination if outstanding for
only part of the year, was approximately $97,000 and $137,000, respectively.

At  June  30,  2000  and  1999  impaired  loans  totaled  $97,000  and  $48,000,
respectively. The average balance of impaired loans for the years ended June 30,
2000 and 1999 was $97,000 and $339,000,  respectively. All impaired loans have a
related allowance for losses, which totaled $60,000 and $48,000 at June 30, 2000
and 1999, respectively.  Interest income related to impaired loans is recognized
under the  cash-basis  method.  For the year  ended  June 30,  2000 there was no
interest  income  recognized on impaired loans.  Interest  income  recognized on
impaired  loans for the year ended June 30,  1999 was  $10,000.  Total  interest
income that would have been recorded for the years ended June 30, 2000 and 1999,
had  these  loans  been  current  in  accordance  with  their  loan  terms,  was
approximately $9,000 and $36,000, respectively.

                                       54

<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

The following is an analysis of the allowance for loan losses:


                                                   Year ended June 30,
                                           ----------------------------------
                                             2000          1999        1998
                                           ----------------------------------
                                                    (In thousands)

Balance, beginning of year ...........     $ 3,209      $ 2,776      $ 2,622
Provisions for losses on loans .......         860          780          600
Recoveries ...........................          37           49           --
Losses charged to allowance ..........        (123)        (396)        (446)
                                           ---------------------------------
Balance, end of year .................     $ 3,983      $ 3,209      $ 2,776
                                           =================================


The Company's loan portfolio  consists primarily of loans secured by residential
and  commercial  real  estate  located  in  its  market  areas.  Therefore,  the
collectibility  of these  loans is  dependent  to a large  degree on the overall
strength of the New Jersey economy, as well as the specific strength of the real
estate sector.

At June 30, 2000 and 1999, commercial and multi-family real estate loans totaled
$86,257,000  and  $74,613,000,  respectively.  These  loans  are  considered  by
management  to be of  somewhat  greater  risk  of  collectibility  due to  their
dependency on income  production.  The majority of the Company's  commercial and
multi-family real estate loans were collateralized by real estate located in New
Jersey.   Commercial  and  multi-family  real  estate  loans  collateralized  by
multi-family  mixed use properties were  $33,433,000 and $31,288,000 at June 30,
2000 and  1999,  respectively.  At June 30,  2000  and 1999 the  commercial  and
multi-family real estate loan portfolio  included $694,000 and $605,000 of lines
of credit  secured by non-real  estate  business  assets.  Furthermore,  under a
program  introduced during fiscal 2000, there were $120,000 of loans outstanding
at June 30, 2000 under the Accounts  Receivable  Financing Program for small and
mid-sized   businesses.   The  remaining   commercial  real  estate  loans  were
collateralized by commercial properties.

Loans serviced for others totaled approximately $108,518,000 and $116,180,000 at
June 30,  2000 and 1999,  respectively.  Servicing  loans for  others  generally
consists  of  collecting   mortgage   payments,   maintaining  escrow  accounts,
disbursing  payments to investors and  foreclosure  processing.  Loan  servicing
income is  recorded  on the  accrual  basis  and  includes  servicing  fees from
investors and certain charges assessed to borrowers,  such as late payment fees.
In connection  with these loans serviced for others,  the Company held borrowers
escrow  balances  of  $1,235,000  and  $1,354,000  at June 30,  2000  and  1999,
respectively.

G.  Premises and Equipment, Net

                                                            June 30,
                                                    -----------------------
                                                      2000           1999
                                                    -----------------------
                                                         (In thousands)

Land ..........................................     $ 3,934        $ 4,004
Buildings and improvements ....................      15,870         14,923
Leasehold improvements ........................       1,607          1,521
Furniture and equipment .......................      11,269         10,587
                                                    -----------------------
                                                     32,680         31,035
Less: accumulated depreciation and amortization      12,604         11,795
                                                    -----------------------
                                                    $20,076        $19,240
                                                    =======================


H.  Real Estate Owned

                                                                   June 30,
                                                             ------------------
                                                              2000        1999
                                                             ------------------
                                                               (In thousands)

Acquired by foreclosure or deed in lieu of foreclosure. . .   $367      $1,018
Allowance for losses on real estate owned. . . . . . . . .     (33)        (82)
                                                             ------------------
                                                              $334      $  936
                                                             ==================
                                       55

<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued


Results of real estate operations were as follows:


                                                       Year ended June 30,
                                                  ----------------------------
                                                   2000       1999        1998
                                                  ----------------------------
                                                          (In thousands)

Net gain on sales of real estate owned .......... $ 126      $ 110      $  95
Holding costs ...................................   (12)       (34)      (100)
Provision for losses on real estate owned .......    --        (45)      (151)
                                                  ----------------------------
Net gain (loss) from real estate operations ..... $ 114      $  31      $(156)
                                                  ============================


Activity in the allowance for losses on real estate owned was as follows:

                                                        Year ended June 30,
                                                   -----------------------------
                                                    2000     1999        1998
                                                   -----------------------------
                                                          (In thousands)

Balance, beginning of year ...................     $ 82      $ 207      $ 102)
Provisions charged to operations .............       --         45        151
Losses charged to allowance ..................      (49)      (170)       (46)
                                                   -----------------------------
Balance, end of year .........................     $ 33      $  82      $ 207
                                                   =============================

I.  Deposits

<TABLE>
<CAPTION>

                                                       June 30, 2000              June 30, 1999
                                               ------------------------------------------------------
                                                              Weighted                   Weighted
                                                              Average                    Average
                                                   Amount   Interest Rate   Amount    Interest Rate
                                               ------------------------------------------------------
                                                              (Dollars in thousands)

<S>                                            <C>                <C>    <C>                <C>
Non-interest-bearing demand ..............     $   42,426                $   37,738
Interest-bearing demand ..................         70,923         2.06%      58,255         1.56%
Money market accounts ....................         11,099         2.14       12,406         2.02
Savings accounts .........................        153,679         1.55      164,893         1.67
Certificates with remaining maturities of:
  One year or less .......................        567,733         5.64      616,600         5.08
  Over one year to three years ...........        177,439         6.17      157,922         5.61
  Over three years to five years .........         55,005         6.13       12,628         5.50
                                               ----------                 ---------

Total certificates .......................        800,177         5.79      787,150         5.20
Accrued interest payable .................          2,046                     3,158
                                               ----------                 ---------
                                               $1,080,350         4.67%  $1,063,600         4.21%
                                               ==========                ==========
</TABLE>



The  aggregate  amount of accounts with a  denomination  of $100,000 or more was
approximately   $175,022,000  and  $168,613,000  at  June  30,  2000  and  1999,
respectively.

                                       56
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

J.  Federal Home Loan Bank of New York Advances and Other Borrowings

The following  table  presents  Federal Home Loan Bank of New York ("FHLB of New
York") advances at the earlier of the callable date or maturity date:

<TABLE>
<CAPTION>

                                                         June 30, 2000             June 30, 1999
                                                    -------------------------------------------------
                                                                  Weighted                Weighted
                                                                   Average                 Average
                                                      Amount    Interest Rate   Amount  Interest Rate
                                                    -------------------------------------------------
                                                                 (Dollars in thousands)

<S>                                                  <C>           <C>         <C>           <C>
Within one year ................................     $ 50,000      6.25%       $ 90,000      6.17%
After one year but within two years ............       70,000      6.06          20,000      5.80
After two years but within three years..........      135,000      6.09          70,000      6.06
After three years but within four years ........       19,000      5.15          45,000      5.60
After four years but within five years .........       90,000      6.37          19,000      5.15
After five years ...............................          465      7.39             465      7.39
                                                     --------                  --------
                                                     $364,465      6.13%       $244,465      5.93%
                                                     ========                  ========
</TABLE>


The FHLB of New York  advances  are all  fixed  rate  borrowings  collateralized
either under a blanket pledge agreement by one- to four-family mortgage loans or
with investment and mortgage-backed securities.

At June  30,  2000,  the  Company  had  available  from  the FHLB of New York an
overnight  repricing  line of credit for  $100,000,000  which  expires on May 3,
2001.  The line of credit has a variable  interest  rate.  At June 30,  2000 and
1999, the Company had $72,900,000 and $29,900,000 of overnight  borrowings under
this  credit  line with an interest  rate of 7.23% and 5.98%,  respectively.  In
addition, the Company had available overnight variable repricing lines of credit
with other  correspondent  banks totaling  $7,000,000.  There were no borrowings
under these lines at June 30, 2000 or 1999. Also, the Company had available from
the  FHLB  of New  York a  one-month  overnight  repricing  line of  credit  for
$50,000,000  which  expires on May 3,  2001.  This line of credit has a variable
interest  rate.  There were no  borrowings  under this line at June 30,  2000 or
1999.  On July 11,  2000,  the Company  entered  into a $3.5  million  unsecured
revolving line of credit.  This line of credit has a variable interest rate tied
to 30-day LIBOR.

From time to time, the Company enters into sales of securities  under agreements
to repurchase ("reverse repurchase agreements").  These agreements are accounted
for as financing  arrangements and the obligations to repurchase securities sold
are reflected as other borrowings in the accompanying Consolidated Statements of
Financial  Condition.  The reverse  repurchase  agreements are collateralized by
investment and mortgage-backed securities which continue to be carried as assets
by the Company,  with a carrying  value of  $43,284,000  and  $59,461,000  and a
market  value  of  $40,731,000  and  $57,601,000  at June  30,  2000  and  1999,
respectively.

The following table presents reverse repurchase agreements at the earlier of the
callable date or the maturity date:

<TABLE>
<CAPTION>

                                              June 30, 2000             June 30, 1999
                                         -------------------------------------------------
                                                       Weighted                Weighted
                                                        Average                 Average
                                           Amount    Interest Rate   Amount  Interest Rate
                                         -------------------------------------------------
                                                     (Dollars in thousands)

<S>                                       <C>           <C>         <C>          <C>
Within one year    . . . . . . . . .      $19,875       5.77%       $19,563      5.01%
After one year but within five years       19,400       6.10         39,275      5.93
                                         -------------------------------------------------
                                          $39,275       5.93%       $58,838      5.63%
                                         =================================================
</TABLE>



The average  balance of reverse  repurchase  agreements for the years ended June
30, 2000 and 1999 was $44,954,000 and $51,039,000, respectively.

                                       57

<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

K.  Guaranteed   Preferred   Beneficial   Interests  in  the  Company's   Junior
Subordinated Debentures

The Company formed a wholly-owned trust subsidiary, PennFed Capital Trust I (the
"Trust").  Effective  October 21,  1997,  the Trust sold $34.5  million of 8.90%
cumulative  trust preferred  securities to the public which are reflected on the
Consolidated Statement of Financial Condition as Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated  Debentures (the "Trust Preferred
securities").  The Trust used the proceeds from the sale of the Trust  Preferred
securities to purchase 8.90% junior subordinated  deferrable interest debentures
issued by  PennFed.  The sole  assets of the Trust are $35.6  million  of junior
subordinated  debentures  which mature on October 31, 2027 and are redeemable at
any time after five years.  The  obligations of the Company related to the Trust
constitute  a full and  unconditional  guarantee  by the  Company  of the  Trust
Issuer's obligations under the Trust Preferred securities.  The Company used the
proceeds from the junior subordinated debentures for general corporate purposes,
including  a $20  million  capital  contribution  to the Bank to support  future
growth.

L.  Incentive Savings Plan

The Company's  employee  benefits  include the Penn Federal  Savings Bank 401(k)
Plan (the  "Plan").  All  employees of the Company who work at least 1,000 hours
per year and are at least 201/2 years old are  eligible  to  participate  in the
Plan.  The  Plan  provides  for  a  discretionary   Company  match  of  employee
contributions. For the years ended June 30, 2000, 1999 and 1998, expense related
to the Plan was $111,000, $107,000 and $101,000,  respectively. At June 30, 2000
and 1999,  the Plan assets  included  common  stock of the Company with a market
value of $290,000 and $282,000, respectively.

M.  Stock Plans

Employee Stock Ownership Plan ("ESOP")

In connection with the Conversion,  the Company established an ESOP for eligible
employees. All full-time employees are eligible to participate in the ESOP after
they attain age 21 and  complete  one year of service  during which they work at
least 1,000 hours.  Employees  were credited for years of service to the Company
prior to the adoption of the ESOP for participation  and vesting  purposes.  The
Bank's   contribution   is  allocated   among   participants  on  the  basis  of
compensation.  Each participant's account is credited with cash or shares of the
Company's  common  stock  based upon  compensation  earned  during the year with
respect to which the  contribution  is made.  After  completing  seven  years of
service,  a  participant  will be 100%  vested in  his/her  ESOP  account.  ESOP
participants  are entitled to receive  distributions  from the ESOP account only
upon termination of service, which includes retirement and death.

The ESOP borrowed $4,760,000 from PennFed and purchased 952,000 shares of common
stock  issued in the  Conversion.  This loan is to be repaid from  discretionary
contributions  by the  Bank to the ESOP  trust.  The  Bank  has and  intends  to
continue  to make  contributions  to the ESOP in amounts  at least  equal to the
principal and interest  requirement of the debt, assuming a ten year term and an
interest rate of 7.46%. Annual contributions to the ESOP, which are used to fund
principal and interest  payments on the ESOP debt,  total $692,000.  At June 30,
2000 and 1999, the loan had an outstanding  balance of $2,320,000 and $2,804,000
and the ESOP had unallocated shares of 464,098 and 560,710, respectively.  Based
upon a $14.13  closing  price per share of common  stock on June 30,  2000,  the
unallocated  shares had a fair value of $6,555,000.  The unamortized  balance of
the ESOP debt is reflected as a reduction of stockholders' equity.

For the years ended June 30, 2000, 1999 and 1998, the Bank recorded compensation
expense   related  to  the  ESOP  of  $1,256,000,   $1,173,000  and  $1,273,000,
respectively.  The compensation  expense related to the ESOP includes  $865,000,
$826,000 and $959,000,  respectively,  for a valuation adjustment to reflect the
increase in the average fair value of  allocated  shares for the period from the
time of purchase to the allocation date. The ESOP allocated  96,612,  89,904 and
83,662 shares for the years ended June 30, 2000, 1999 and 1998, respectively, to
participants in the plan.

Management Recognition Plan

In  connection  with  the  Conversion,  the  Company  established  a  Management
Recognition Plan ("MRP") as a means of enhancing and encouraging the recruitment
and retention of directors and officers.  A maximum  amount of an additional 4%,
or 476,000 shares,  of the shares  outstanding upon Conversion were permitted to
be awarded under the plan.

                                       58

<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

All 476,000  shares of  restricted  stock were awarded under the MRP. The shares
vested in equal installments,  generally over a five-year period, with the final
installment  vesting on April 28, 1999. Of the total  original  shares  awarded,
2,142 shares did not vest and were cancelled. These 2,142 shares were re-awarded
and vested  during the year ended June 30,  2000.  For the years  ended June 30,
2000,  1999 and 1998,  the Company  recorded  expense of $36,000,  $431,000  and
$531,000, respectively, related to the MRP.

Stock Option Plan

In connection with the Conversion, the Company established the 1994 Stock Option
and Incentive Plan ("Option  Plan").  The exercise price for the options granted
under the Option Plan cannot be less than the fair market value of the Company's
common stock on the date of the grant. The options are granted, and the terms of
the options  are  established,  by the  Compensation  Committee  of the Board of
Directors.  Transactions  during the years  ended June 30,  2000,  1999 and 1998
relating to the Option Plan are as follows:

                                                                      Weighted
                                                                      Average
                                                                      Exercise
                                                      Options          Price
                                                     -------------------------
Balance, June 30, 1997 . . . . . . . . . . .. . .    1,134,400)       $ 5.55
  Granted . . . . . . . . . . . . . . . . .  . . .     486,700)        16.92
  Exercised . . . . . . . . . . . . . . . .  . . .     (63,800)         5.25
  Expired . . . . . . . . . . . . . . . . .  . . .          --            --
  Forfeited . . . . . . . . . . . . . . . .  . . .          --            --
                                                     -------------------------
Balance, June 30, 1998 . . . . . . . . . . .. . .    1,557,300          9.11
  Granted . . . . . . . . . . . . . . . . .  . . .          --            --
  Exercised . . . . . . . . . . . . . . . .  . . .     (44,400)         5.25
  Expired . . . . . . . . . . . . . . . . .  . . .      (7,000)        17.19
  Forfeited . . . . . . . . . . . . . . . .  . . .     (19,950)        13.63
                                                     -------------------------
Balance, June 30, 1999 . . . . . . . . . . .. . .    1,485,950          9.13
  Granted . . . . . . . . . . . . . . . . .  . . .      74,336         16.81
  Exercised . . . . . . . . . . . . . . . .  . . .     (69,270)         5.25
  Expired . . . . . . . . . . . . . . . . .  . . .        (666)        17.19
  Forfeited . . . . . . . . . . . . . . . .  . . .        (333)        17.19
                                                     -------------------------
Balance, June 30, 2000 . . . . . . . . . . .. . .    1,490,017        $ 9.69
                                                     =========================

At June 30,  2000,  1999 and 1998,  1,474,267  options,  1,343,583  options  and
1,023,527 options were exercisable,  respectively,  with exercise prices ranging
from $5.25 to $17.19.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"  ("SFAS 123"),  if fully  adopted,  requires  companies to measure
employee stock  compensation plans based on the fair value method of accounting.
The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly,
the Company  continues  to apply  Accounting  Principles  Board  Opinion No. 25,
"Accounting   for  Stock   Issued  to   Employees,"   ("APB  25")  and   related
interpretations  in  accounting  for its plans.  In  accordance  with APB 25, no
compensation expense has been recognized for its stock-based  compensation plans
other than for restricted  stock. Pro forma  disclosures as if the Company fully
adopted the cost recognition requirements under SFAS 123 are presented below.

The estimated  weighted  average fair value of each stock option  granted during
fiscal  2000 was  estimated  as $8.83 on the date of  grant.  The fair  value of
options at date of grant was estimated  using the  Black-Scholes  model with the
following weighted average  assumptions:  stock volatility of 26.14%;  risk-free
interest rate of 5.83%; and an expected life of 10 years. Had compensation  cost
for the  grants  been  determined  based  upon the fair  value at the grant date
consistent with the methodology  prescribed under SFAS 123, the Company's fiscal
2000 pro forma net  income  and  diluted  earnings  per  share  would  have been
approximately $12.5 million and $1.46,  respectively.  As the SFAS 123 method of
accounting has not been applied to stock options  granted prior to July 1, 1996,
the  resulting pro forma effect on net income is not  representative  of the pro
forma effect on net income in future years.

                                       59

<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

N.  Income Taxes

The income tax provision is comprised of the following components:


                                                  Year ended June 30,
                                           --------------------------------
                                             2000         1999      1998
                                           --------------------------------
                                                    (In thousands)

Current provision ......................    $7,169      $6,016     $5,600
Deferred provision (benefit) ...........      (118)        288        642
                                           --------------------------------
Total income tax provision .............   $ 7,051      $6,304     $6,242
                                           ================================


Income taxes payable is included in accounts  payable and other  liabilities  in
the  Consolidated  Statements of Financial  Condition at June 30, 2000 and 1999.
The financial  statements  also include a net deferred tax liability of $715,000
that has been recorded for the temporary  differences  between the tax basis and
the financial  statement carrying amounts of assets and liabilities.  The source
of these  temporary  differences  and their deferred tax effect at June 30, 2000
and 1999 is as follows:


                                                              June 30,
                                                    --------------------------
                                                        2000             1999
                                                    --------------------------
                                                           (In thousands)

Deferred tax assets:
  Allowance for loan losses ......................     $   986      $   657
  Litigation reserves ............................           4            4
  Deposit premium intangible .....................       1,111          950
  MRP expense ....................................          --          192
  Depreciation ...................................         476          503
                                                    --------------------------
Total deferred tax assets ........................       2,577        2,306
                                                    --------------------------
Deferred tax liabilities:
  Deferred loan fees .............................       2,871        2,650
  Loan sale premiums .............................          10           13
  Purchase accounting ............................         137          158
  Servicing asset ................................         274          318
                                                    --------------------------
Total deferred tax liabilities ...................       3,292        3,139
                                                    --------------------------
Net deferred tax liability .......................     $  (715)     $  (833)
                                                    ============================


A  reconciliation  of the statutory income tax provision to the effective income
tax provision is as follows:


                                                   Year ended June 30,
                                           -----------------------------------
                                              2000         1999           1998
                                           -----------------------------------
                                                     (In thousands)

Income tax provision at statutory rate     $ 6,972      $ 6,216      $ 6,104
Amortization of intangibles ..........          96          121          147
State and local tax provision ........          --           --           --
Other, net ...........................         (17)         (33)          (9)
                                           -----------------------------------
Total income tax provision ...........     $ 7,051      $ 6,304      $ 6,242
                                           ===================================

                                       60
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Pursuant to SFAS 109, the Company is not required to provide  deferred  taxes on
its tax loan loss reserve as of December 31, 1987. The amount of this reserve on
which no deferred taxes have been provided is  approximately  $16,300,000.  This
reserve  could be  recognized  as taxable  income  and  create a current  and/or
deferred tax  liability  using the income tax rates then in effect if one of the
following occur: (1) the Company's retained earnings represented by this reserve
are used for dividends or  distributions in liquidation or for any other purpose
other than to absorb losses from bad debts,  (2) the Company fails to qualify as
a Bank,  as provided by the Internal  Revenue  Code, or (3) there is a change in
federal tax law.

O.  Commitments and Contingencies

Lease  Commitments  -- At June 30, 2000,  minimum rental  commitments  under all
noncancellable operating leases with initial or remaining terms of more than one
year are as follows:

                                                         Minimum Rent
                                                        (In thousands)
                                                        --------------
Year ending June 30,
2001 .................................................      $  277
2002 .................................................         285
2003 .................................................         294
2004 .................................................         205
2005 .................................................         149
2006 and later .......................................         484
                                                            ------
                                                            $1,694
                                                            ======

Rentals under long-term  operating leases for certain branch offices amounted to
$345,000,  $263,000 and  $234,000  for the years ended June 30,  2000,  1999 and
1998,  respectively.  Rental  income of $439,000,  $454,000 and $444,000 for the
years  ended  June 30,  2000,  1999 and 1998,  respectively,  is netted  against
occupancy expense in the Consolidated Statements of Income.

Financial  Instruments With Off-Balance  Sheet Risk -- The Company is a party to
financial  instruments  with  off-balance  sheet  risk in the  normal  course of
business  to  meet  the  financing  needs  of  its  customers.  These  financial
instruments  are not  recorded on the balance  sheet when either the exchange of
the underlying  asset or liability has not yet occurred or the notional  amounts
are used solely as a means to determine  the cash flows to be  exchanged.  These
financial  instruments are commitments to extend credit, unused lines of credit,
commitments  to  purchase  loans and  interest  rate  swaps.  These  instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the Consolidated Statements of Financial Condition.

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the  financial  instrument  for  commitments  to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional  obligations
as it does for on-balance sheet instruments.

                                       61

<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

The following  summarizes  the notional  amount of off-balance  sheet  financial
instruments:

                                                      June 30,
                                              -------------------------
                                                2000             1999
                                              -------------------------
                                                   (In thousands)

Commitments to extend credit   . . . . . . .  $28,330        $  24,122
Unused lines of credit . . . . . . . . . . .   65,746           46,441
Commitments to purchase loans  . . . . . . .   26,826           25,094
Interest rate swaps . . . . . . . . . . . . .  30,000          150,000


Commitments  to extend  credit and unused  lines of credit are  legally  binding
agreements  to  lend to a  customer  as long as  there  is no  violation  of any
condition established in the contract. Commitments and lines of credit generally
have fixed expiration dates or other termination clauses and may require payment
of a fee.  Since some of the  commitments  are expected to expire  without being
drawn upon, the total  commitment  amounts do not necessarily  represent  future
cash requirements.  The Company evaluates each customer's credit worthiness on a
case-by-case  basis.  The amount of  collateral  obtained  by the  Company  upon
extension of credit is based on management's  credit evaluation of the borrower.
Collateral  held varies but may include  mortgages on commercial and residential
real estate and other tangible properties.

Commitments  to purchase  loans  represent  agreements to purchase loans through
correspondent  relationships established by the Company with other institutions.
The Company currently purchases newly originated one- to four-family residential
mortgages  secured by  properties  primarily  located in New  Jersey.  A limited
amount of loans secured by properties located in Pennsylvania, Massachusetts and
Connecticut are also purchased.  Prior to purchase, the Company applies the same
underwriting criteria used in its own originations.

The Company has periodically  entered into interest rate swap agreements to help
reduce certain  interest rate exposure on a portion of the short-term  deposits.
Interest rate swaps are contractual  agreements  between two parties to exchange
interest  payments at particular  intervals,  computed on different  terms, on a
specified  notional  amount.  The notional  amounts  represent the base on which
interest due each counter party is calculated and do not represent the potential
for gains or  losses  associated  with the  market  risk or credit  risk of such
transactions.  At June 30,  2000 and 1999,  the Company had $30 million and $150
million,   respectively,  in  notional  amount  interest  rate  swap  agreements
outstanding  on which the  Company  pays a fixed  interest  rate and  receives a
floating  interest  rate based on  three-month  LIBOR from the counter  parties,
which are nationally  recognized  investment  firms. At June 30, 2000, the fixed
interest rates payable by the Company ranged from 4.99% to 6.23% and three-month
LIBOR was 6.77%.  The average  balance of  notional  amount  interest  rate swap
agreements  in  fiscal  2000  and  1999  was   $72,877,000   and   $165,753,000,
respectively.  Included in interest  expense for the years ended June 30,  2000,
1999 and 1998 was $67,000,  $1,116,000  and $507,000,  respectively,  of expense
related to interest  rate swap  agreements.  Mortgage-backed  securities  with a
carrying   value  of  $542,000  and  $4,824,000  at  June  30,  2000  and  1999,
respectively,  were pledged to secure these  agreements.  The interest rate swap
agreements mature or are callable between July 7, 2000 and September 28, 2001.

Other  Contingencies  -- In 1987,  the New Jersey  Department  of  Environmental
Protection ("NJDEP") conducted an environment contamination investigation of the
Orange  Road  branch  site of First  Federal  Savings  and Loan  Association  of
Montclair  ("First  Federal").  Prior to the  acquisition by First Federal,  the
location was used as a gasoline service  station.  On August 16, 1989, the NJDEP
issued a "no further  action"  letter to First Federal with regard to this site.
The Bank acquired First Federal  effective  September 11, 1989.  Notwithstanding
the earlier "no further  action"  letter,  on June 25, 1997,  the NJDEP issued a
letter  demanding that Penn Federal  Savings Bank develop a remedial action work
plan for the Orange Road branch site as a result of an  investigation  conducted
on behalf of an adjacent  property  owner.  The Bank disputed the NJDEP position
that Penn Federal  Savings Bank was a responsible  party.  On July 1, 1998,  the
NJDEP issued a letter  determining  that Penn Federal  Savings  Bank,  Mobil Oil
Corporation and the former  gasoline  service station owner were all responsible
parties for the clean up at the subject site. Responsible parties may ultimately
have full or partial  obligation for the cost of  remediation.  As of this date,
the  apportionment  of  the  remediation  costs  to the  Bank,  if  any,  is not
determinable. The Bank continues to vigorously contest this determination and to
seek contribution or indemnification from the other named responsible parties.

                                       62
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued

The Company is a defendant in certain  claims and legal  actions  arising in the
ordinary course of business. At the present time, management does not anticipate
losses on any of these  claims or actions  which  would have a material  adverse
effect on the accompanying consolidated financial statements.

P.  Stockholders' Equity and Regulatory Capital

On January 13, 1998,  the  Company's  Board of Directors  declared a two-for-one
stock split in the form of a 100% stock  dividend,  payable on February 10, 1998
to common stockholders of record as of January 27, 1998.

During the year ended June 30, 2000, the Company  repurchased  492,000 shares of
its outstanding  common stock. The prices paid for the repurchased shares ranged
from $11.06 to $15.81 per share, for a total cost of $6,931,000. During the year
ended June 30, 1999, the Company  repurchased  618,000 shares of its outstanding
common stock at prices ranging from $11.50 to $16.63 per share, for a total cost
of  $8,729,000.  During the year ended June 30,  1998,  the Company  repurchased
325,000 shares of its outstanding  common stock at prices ranging from $16.63 to
$17.88 per share, for a total cost of $5,581,000.

On March 21, 1996, the Board of Directors of the Company (the "Board") adopted a
Stockholder  Protection  Rights Plan ("Rights  Plan") and declared a dividend of
one common share purchase right  ("Right") for each share of common stock of the
Company  outstanding  on April 1, 1996 and each share issued after that date and
prior to the expiration or redemption of the Rights.  Until it is announced that
a person or group has  acquired 15% or more of the  outstanding  common stock of
the  Company  ("Acquiring  Person") or has  commenced a tender  offer that could
result in such  person or group  owning 15% or more of such  common  stock,  the
Rights will initially be redeemable for $0.01 each, will be evidenced  solely by
the  Company's  common stock  certificates,  will  automatically  trade with the
Company's common stock and will not be exercisable.

Upon  announcement  that any person or group has become an Acquiring  Person and
unless the Board acts to redeem the Rights,  then ten  business  days after such
announcement  (the "Flip-in Date"),  each Right (other than Rights  beneficially
owned by any Acquiring Person or transferee  thereof,  which Rights become void)
will entitle the holder to purchase,  for the $67.50 exercise price, a number of
shares of the  Company's  common  stock  having  an  aggregate  market  value of
$135.00. In addition, if, after the Acquiring Person gains control of the Board,
the  Company is  involved  in a merger with any person or sells more than 50% of
its assets or earning  power to any person (or has entered  into an agreement to
do either of the foregoing),  and, in the case of a merger,  an Acquiring Person
will  receive  different  treatment  than  other  stockholders,  each Right will
entitle  its holder to  purchase,  for the $67.50  exercise  price,  a number of
shares of common stock of such other person having an aggregate  market value of
$135.00.  If any person or group  acquires  between 15% and 50% of the Company's
common stock,  the Board may, at its option,  require the Rights to be exchanged
for common stock of the  Company.  The Rights  generally  may be redeemed by the
Board for $0.01 per Right prior to the Flip-in Date.

The Bank is subject to various regulatory capital  requirements  administered by
the OTS.  Failure to meet minimum capital  requirements  could result in certain
mandatory and possible  discretionary  actions by the OTS that,  if  undertaken,
could have a direct material effect on the Company's financial statements. Under
capital adequacy  guidelines and the regulatory  framework for prompt corrective
action, the Bank must meet specific quantitative capital guidelines.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios of tangible  capital of
not less than 1.5% of tangible assets,  core capital of not less than 4% of both
adjusted tangible assets and risk-weighted  assets and risk-based capital of not
less than 8% of  risk-weighted  assets.  As of June 30,  2000,  the Bank met all
capital adequacy requirements to which it was subject.

As  of  its  last   regulatory   examination,   the  Bank  was   categorized  as
"well-capitalized"   under  the  prompt  corrective  action  framework.   To  be
considered as "well-capitalized", the Bank must maintain a core capital ratio of
not less than 5% and a risk-based  capital ratio of not less than 10%. There are
no conditions or events since that  notification  that management  believes have
changed the Bank's category.

                                       63
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued

The Bank's capital amounts and ratios are presented in the following table.

<TABLE>
<CAPTION>

                                                                                          To Be Well
                                                                                       Capitalized Under
                                                            For Minimum Capital        Prompt Corrective
                                              Actual         Adequacy Purposes         Action Provisions
                                        ----------------------------------------------------------------------
                                         Amount     Ratio      Amount       Ratio       Amount        Ratio
                                        ----------------------------------------------------------------------
                                                             (Dollars in thousands)
<S>                                       <C>        <C>       <C>           <C>        <C>          <C>
As of June 30, 2000
 Tangible capital, and ratio to
  adjusted total assets    . . . . . . .  $133,365    7.76%    $25,785       1.50%       N/A           N/A
 Tier 1 (core) capital, and ratio to
  adjusted total assets . . . . . . . .   $133,365    7.76%    $68,761       4.00%       $85,952       5.00%
 Tier 1 (core) capital, and ratio to
  risk-weighted assets     . . . . . . .  $133,365   15.07%    $35,395       4.00%       $53,093       6.00%
 Risk-based capital, and ratio to
  risk-weighted assets     . . . . . . .  $137,197   15.50%    $70,791       8.00%       $88,488       10.00%

As of June 30, 1999
 Tangible capital, and ratio to
  adjusted total assets    . . . . . . .  $121,910    7.88%    $23,207       1.50%       N/A           N/A
 Tier 1 (core) capital, and ratio to
  adjusted total assets . . . . . . . . . $121,943    7.88%    $61,888       4.00%       $77,360       5.00%
 Tier 1 (core) capital, and ratio to
  risk-weighted assets     . . . . . . .  $121,943   15.90%    $30,687       4.00%       $46,030       6.00%
 Risk-based capital, and ratio to
  risk-weighted assets     . . . . . . .  $124,976   16.29%    $61,374       8.00%       $76,717       10.00%
</TABLE>


In August 1993,  the OTS adopted a regulation  requiring that an amount be added
to an institution's  risk-based capital  requirement equal to 50% of the decline
in  market  value  of  portfolio   equity   ("MVPE")  that  exceeds  2%  of  the
institution's  assets,  under a hypothetical  200 basis points shock in interest
rates.  MVPE is defined as the market value of assets,  less the market value of
liabilities,  plus or minus the market value of off-balance  sheet items. At the
present time, the OTS has indefinitely postponed the effective date of the rule.
However,  if the  regulation had been in effect at June 30, 2000, the Bank would
still have exceeded its risk-based capital requirement.

The Bank's management believes that, with respect to regulations,  the Bank will
continue to meet its minimum capital  requirements  in the  foreseeable  future.
However, events beyond the control of the Bank, such as increased interest rates
or a  downturn  in the  economy  in areas  where the Bank has most of its loans,
could  adversely  affect future earnings and,  consequently,  the ability of the
Bank to meet its future minimum capital requirements.

The previous table reflects  information for the Bank.  Savings and loan holding
companies,  such as PennFed, are not subject to capital requirements for capital
adequacy  purposes or for prompt corrective  action  requirements.  Bank holding
companies, however, are subject to capital requirements established by the Board
of Governors of the Federal  Reserve  System (the "FRB").  The  following  table
summarizes  the  Company's  capital  amounts and ratios under the FRB's  capital
requirements for bank holding companies.

                                       64
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued

<TABLE>
<CAPTION>

                                                                                            To Be Well
                                                                                        Capitalized Under
                                                              For Minimum Capital       Prompt Corrective
                                                Actual         Adequacy Purposes        Action Provisions
                                         ------------------------------------------------------------------
                                          Amount     Ratio    Amount     Ratio         Amount       Ratio
                                         ------------------------------------------------------------------
                                                                     (Dollars in thousands)
<S>                                         <C>         <C>     <C>        <C>           <C>            <C>
As of June 30, 2000
 Tangible capital, and ratio to
  adjusted total assets    . . . . . . .    $137,789    8.01%   $25,805    1.50%          N/A           N/A
 Tier 1 (core) capital, and ratio to
  adjusted total assets . . . . . . . . ..  $137,789    8.01%   $68,814    4.00%          $86,018       5.00%
 Tier 1 (core) capital, and ratio to
  risk-weighted assets     . . . . . . .    $137,789   15.75%   $34,997    4.00%          $52,495       6.00%
 Risk-based capital, and ratio to
  risk-weighted assets     . . . . . . .    $141,621   16.19%   $69,993    8.00%          $87,492       10.00%

As of June 30, 1999
 Tangible capital, and ratio to
  adjusted total assets    . . . . . . .    $128,385    8.29%   $23,217    1.50%          N/A           N/A
 Tier 1 (core) capital, and ratio to
  adjusted total assets . . . . . . . . ..  $128,419    8.30%   $61,913    4.00%          $77,391       5.00%
 Tier 1 (core) capital, and ratio to
  risk-weighted assets     . . . . . . .    $128,419   16.98%   $30,253    4.00%          $45,380       6.00%
 Risk-based capital, and ratio to
  risk-weighted assets     . . . . . . .    $131,452   17.38%   $60,507    8.00%          $75,633       10.00%

</TABLE>


Federal  regulations impose certain  limitations on the payment of dividends and
other capital  distributions  by the Bank.  Under current  regulations,  savings
institutions,  such  as the  Bank,  are  generally  permitted  to  make  capital
distributions  without  OTS  approval  during a  calendar  year equal to 100% of
year-to-date  net income plus retained net income for the two previous  years. A
savings  institution,  such as the Bank,  which is a subsidiary of a savings and
loan  holding  company,  must file a notice of the  proposed  dividend  or other
capital  distribution  with the OTS at least 30 days prior to the declaration of
such  dividend  or  distribution.  At June 30,  2000,  the Bank  could have paid
dividends totaling approximately $24.4 million.


                                       65

<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued

Q.  Computation of EPS

The computation of EPS is presented in the following table.

<TABLE>
<CAPTION>

                                                                            For the year ended June 30,
                                                                    -------------------------------------------
                                                                         2000           1999             1998
                                                                    -------------------------------------------
                                                                 (Dollars in thousands, except per share amounts)
<S>                                                                 <C>             <C>             <C>
Net income .....................................................    $    12,870     $    11,457     $    11,198
                                                                    ===========================================
Number of shares outstanding:
Weighted average shares issued .................................     11,899,842      11,899,349      11,900,000
Less: Weighted average shares held in treasury .................      3,261,279       2,896,595       2,268,513
Less: Average shares held by the ESOP ..........................        952,000         952,000         952,000
Plus: ESOP shares released or committed to be
   released during the fiscal year .............................        451,541         357,421         269,870
                                                                    -------------------------------------------
Average basic shares ...........................................      8,138,104       8,408,175       8,949,357
Plus: Average common stock equivalents .........................        444,409         470,316         740,298
                                                                    -------------------------------------------
Average diluted shares .........................................      8,582,513       8,878,491       9,689,655
                                                                    ===========================================

Earnings per common share:
  Basic ........................................................    $      1.58     $      1.36     $      1.25
                                                                    ===========================================
  Diluted ......................................................    $      1.50     $      1.29     $      1.16
                                                                    ===========================================
</TABLE>


R.  Disclosure About Fair Value of Financial Instruments

The  carrying  amounts  and  estimated  fair  value of the  Company's  financial
instruments at June 30, 2000 and 1999 were as follows:

<TABLE>
<CAPTION>

                                                               June 30, 2000               June 30, 1999
                                                         -------------------------------------------------------
                                                           Carrying      Estimated     Carrying       Estimated
                                                            Amount      Fair Value      Amount       Fair Value
                                                         -------------------------------------------------------
                                                                              (In thousands)
<S>                                                      <C>            <C>            <C>            <C>
Financial assets:
Cash and cash equivalents ..........................     $   13,866     $   13,866     $    9,900     $    9,900
Investment securities ..............................        303,026        278,643        293,282        281,880
Mortgage-backed securities .........................         87,561         86,861        127,983        128,617
FHLB of New York stock .............................         22,295         22,295         16,623         16,623
                                                         -------------------------------------------------------
Total cash and investments .........................        426,748        401,665        447,788        437,020
Loans held for sale ................................             --             --          5,180          5,180
Loans receivable, less allowance for loan losses ...      1,259,248      1,220,343      1,061,431      1,049,735
                                                         -------------------------------------------------------
Total loans ........................................      1,259,248      1,220,343      1,066,611      1,054,915
Accrued interest receivable, net ...................         10,227         10,227          9,680          9,680
                                                         -------------------------------------------------------
Total financial assets .............................     $1,696,223     $1,632,235     $1,524,079     $1,501,615
                                                         =======================================================
Financial liabilities:
Deposits ...........................................     $1,080,350     $1,079,158     $1,063,600     $1,064,543
FHLB of New York advances ..........................        364,465        353,736        244,465        245,103
Other borrowings ...................................        112,175        111,939         88,738         88,810
Mortgage escrow funds ..............................         11,888         11,888         10,102         10,102
Due to banks .......................................          7,908          7,908          7,385          7,385

Net Trust Preferred securities .....................         32,805         29,843         32,743         34,414
                                                         -------------------------------------------------------
Total financial liabilities ........................     $1,609,591     $1,594,472     $1,447,033     $1,450,357
                                                         =======================================================
</TABLE>

                                       66
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued

<TABLE>
<CAPTION>

                                             June 30, 2000         June 30, 1999
                                           ----------------------------------------
                                           Notional Estimated   Notional Estimated
                                            Amount  Fair Value   Amount  Fair Value
                                           ----------------------------------------
                                                    (In thousands)
<S>                                        <C>          <C>     <C>         <C>
Off-balance sheet financial instruments:
Commitments to extend credit.............  $28,330      $ --    $ 24,122    $  --
Unused lines of credit ..................   65,746        --      46,441       --
Commitments to purchase loans............   26,826        --      25,094       --
Interest rate swaps .....................   30,000       264     150,000     (256)
</TABLE>


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

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

Investment  Securities and  Mortgage-Backed  Securities -- For these securities,
fair values are based on quoted market prices.

Federal  Home Loan Bank of New York Stock  --For  this  security,  the  carrying
amount,  which is par, is a reasonable  estimate of fair value. All transactions
in the capital stock of the FHLB of New York are executed at par.

Loans Held for Sale -- Fair value is based on the market price.

Loans  Receivable  -- Fair values are  estimated  for  portfolios  of loans with
similar  financial  characteristics.  The total loan  portfolio is first divided
into performing,  held for sale and non-performing categories.  Performing loans
are then segregated  into  adjustable and fixed rate interest terms.  Fixed rate
loans  are  segmented  by  type,  such  as  residential  real  estate  mortgage,
commercial real estate and consumer  loans.  Adjustable rate loans are segmented
by  repricing  characteristics.  Residential  loans  are  further  segmented  by
maturity.

For loans,  fair value is calculated by discounting  scheduled future cash flows
through estimated maturity using a discount rate equivalent to the rate at which
the  Company  would  currently  make  loans  which are  similar  with  regard to
collateral,  maturity and type of  borrower.  The  discounted  value of the cash
flows  is  reduced  by  a  credit  risk   adjustment   based  on  internal  loan
classifications.  Based  on  the  current  composition  of  the  Company's  loan
portfolio,  as well as both past experience and current economic  conditions and
trends,  future cash flows are adjusted by prepayment  assumptions which shorten
the estimated remaining time to maturity and, therefore,  impact the fair market
valuation.

Accrued Interest  Receivable,  Net -- For these short-term  assets, the carrying
amount is a reasonable estimate of fair value.

Deposits -- The fair value of deposits with no stated maturity, such as savings,
money market and other demand accounts, is equal to the amount payable on demand
as of June 30, 2000 and 1999.  Time deposits are segregated by type and original
term.  The fair  value of time  deposits  is  based on the  discounted  value of
contractual  cash flows.  The discount rate is equivalent to the rate  currently
offered by the Company for deposits of similar type and maturity.

Federal Home Loan Bank of New York Advances-- The fair value of FHLB of New York
advances  is based  on the  discounted  value of  contractual  cash  flows.  The
discount  rate is equivalent  to the rate  currently  offered by the FHLB of New
York on borrowings of similar type and maturity.

Other Borrowings -- For these short-term borrowings,  the fair value is based on
the discounted  value of contractual cash flows. The discount rate is equivalent
to the rate currently offered for borrowings of similar type and maturity.

Mortgage Escrow Funds and Due to Banks -- For these short-term liabilities,  the
carrying amount is a reasonable estimate of fair value.

Trust  Preferred  Securities -- For these  securities,  fair value is based on a
quoted market price.

                                       67
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued

Commitments  to Extend  Credit and  Unused  Lines of Credit -- The fair value of
commitments  is estimated to be zero since the fees  collected on commitments to
extend credit approximates the amount of costs incurred. No estimated fair value
is presented for unused lines of credit because the rates  associated with these
lines are market rates.

Commitments  to  Purchase  Loans  -- No  fair  value  is  estimated  due  to the
short-term nature of these commitments.

Interest Rate Swaps -- For this  off-balance  sheet financial  instrument,  fair
value  represents  the amount the  Company  would have to pay to  terminate  the
agreements based upon quoted market prices as provided by financial institutions
which are counter parties to the agreements.

S.  Related Party Transactions

In the ordinary  course of business,  the Company at times has made loans to and
engaged  in other  financial  transactions  with  its  directors,  officers  and
employees.  Such transactions are generally made on substantially the same terms
as those prevailing at the time for comparable  transactions  with others and do
not involve more than normal risk of collectibility.

The  following  sets forth an analysis of loans,  all of which are  current,  to
directors, officers and employees:


                                                              June 30,
                                                      ----------------------
                                                       2000             1999
                                                      ----------------------
                                                          (In thousands)

Balance, beginning of year ......................     $ 3,608      $ 3,963
New loans granted ...............................       2,116          728
Repayments/reductions ...........................        (944)      (1,083)
                                                      ---------------------
Balance, end of year ............................     $ 4,780      $ 3,608
                                                      =====================

In addition to the above amount of loans,  at June 30, 2000 and 1999,  there was
$45,000 and $46,000, respectively, of outstanding balances on overdraft checking
lines for directors, officers and employees.

T.  Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133,  "Accounting for Derivative  Instruments and Hedging Activities" ("SFAS
133").  SFAS 133 establishes  accounting and reporting  standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts and for hedging  purposes.  SFAS 133 requires that an entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
condition  and measure  those  instruments  at fair value.  The  accounting  for
changes in the fair value of a  derivative  depends on the  intended  use of the
derivative.  In June 1999, the FASB issued  Statement No. 137,  "Accounting  for
Derivative  Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137"). SFAS 137 delays the original  effective
date of SFAS 133. In  accordance  with SFAS 137,  SFAS 133 is effective  for all
fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued Statement No. 138,  "Accounting for Certain  Derivative  Instruments
and Certain Hedging Activities -- an amendment of FASB Statement No. 133" ("SFAS
138"). SFAS 138 adds to the accounting  guidance for derivative  instruments and
hedging  activities.  SFAS  133  as  amended  by  SFAS  138  is  intended  to be
comprehensive guidance on accounting for derivatives and hedging activities.

As required, effective July 1, 2000, the Company will adopt these new accounting
standards.  As of June 30, 2000, the Company's only derivatives were $30 million
in notional  amount of interest rate swaps.  Therefore,  the adoption of the new
standards is not expected to have a material  impact on the Company's  financial
condition  or  results  of  operations.  However,  the  impact on the  Company's
financial  condition or results of operations  for each  reporting  period after
adoption  is  directly  related  to the size and  composition  of the  Company's
portfolio of derivatives and market conditions.


                                       68
<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued

U. Condensed Financial  Information of PennFed Financial Services,  Inc. (Parent
Company Only)

The following are the condensed financial statements for PennFed, parent company
only,  as of June 30, 2000 and 1999 and for the years ended June 30, 2000,  1999
and 1998 and  should  be read in  conjunction  with  the  Notes to  Consolidated
Financial Statements.

Condensed Statements of Financial Condition

<TABLE>
<CAPTION>

                                                                                          June 30,
                                                                                   ----------------------
                                                                                      2000         1999
                                                                                   ----------------------
                                                                                       (In thousands)
<S>                                                                                <C>          <C>
Assets
Cash .........................................................................     $     25     $     25
Intercompany overnight investment ............................................          796        2,674
                                                                                   ----------------------
 Total cash and cash equivalents .............................................          821        2,699
Investment securities held to
 maturity, at amortized cost .................................................       11,005       11,186
Investment in subsidiaries ...................................................      143,685      134,359
Prepaid Trust Preferred securities expenses ..................................        1,695        1,757
Accrued interest receivable ..................................................          267          271
Other assets .................................................................          558        1,560
                                                                                   ----------------------
                                                                                   $158,031     $151,832
                                                                                   ======================
Liabilities and Stockholders' Equity

Junior subordinated debentures ...............................................     $ 35,568     $ 35,568
Intercompany loan payable ....................................................        7,100        7,100
Accrued interest payable .....................................................          528          528
Other accrued expenses and other liabilities .................................          854        1,136
Stockholders' equity .........................................................      113,981      107,500
                                                                                   ---------------------
                                                                                   $158,031     $151,832
                                                                                   =====================
</TABLE>

Condensed Statements of Operations

<TABLE>
<CAPTION>

                                                                                  Year ended June 30,
                                                                         -------------------------------------
                                                                           2000           1999          1998
                                                                         -------------------------------------
                                                                                      (In thousands)
<S>                                                                      <C>           <C>           <C>
Income

Interest income on intercompany balances ...........................     $    301      $    318      $    860
Interest income on investment securities ...........................          992         1,006           582
Other income .......................................................            4             3             4
                                                                         ------------------------------------
                                                                            1,297         1,327         1,446
Expenses

Interest expense on Junior subordinated debentures .................        3,166         3,166         2,198
Interest on intercompany loan ......................................          666           379            --
Other expenses .....................................................          412           365           328
                                                                         ------------------------------------
                                                                            4,244         3,910         2,526
                                                                         ------------------------------------
Loss before undistributed net income of subsidiaries ...............       (2,947)       (2,583)       (1,080)
Equity in undistributed net income of subsidiaries .................       14,819        13,169        11,923
                                                                         ------------------------------------
Income before income taxes .........................................       11,872        10,586        10,843
Income tax benefit .................................................         (998)         (871)         (355)
                                                                         ------------------------------------
Net income .........................................................     $ 12,870      $ 11,457      $ 11,198
                                                                         ====================================
</TABLE>

                                       69

<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued

Condensed Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                   Year ended June 30,
                                                                         -------------------------------------------
                                                                            2000           1999             1998
                                                                         -------------------------------------------
                                                                                      (In thousands)
<S>                                                                       <C>            <C>            <C>
Cash Flows From Operating Activities:

Net income .........................................................      $ 12,870       $ 11,457       $ 11,198
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in undistributed net income of subsidiaries .................       (14,819)       (13,169)       (11,923)
Amortization of investment securities premium ......................            15             15              8
Amortization of cost of stock plans ................................            36            520            534
Increase in accrued interest payable, net of accrued
interest receivable ................................................             4             --            257
(Increase) decrease in other assets ................................         1,064         (1,459)        (1,819)
Increase (decrease) in other liabilities ...........................          (282)           615           (294)
                                                                         -------------------------------------------
Net cash used in operating activities ..............................        (1,110)        (2,021)        (2,039)
                                                                         -------------------------------------------
Cash Flows From Investing Activities:

Investments in subsidiary bank .....................................            --             --        (20,000)
Investment in the Trust ............................................            --             --         (1,068)
Purchase of investment securities ..................................            --             --        (11,209)
Dividends received from subsidiary bank ............................         6,492          3,246             --
Proceeds from principal repayment on ESOP loan .....................           484            449            418)
Proceeds from maturities of investment securities ..................           165             --             --
                                                                         -------------------------------------------
Net cash provided by (used in) investing activities ................         7,141          3,695        (31,859)
                                                                         -------------------------------------------
Cash Flows From Financing Activities:

Proceeds from issuance of junior subordinated debentures ...........            --             --         35,568)
Proceeds from intercompany loan ....................................            --          7,100             --
Purchases of treasury stock, net of re-issuance ....................        (6,568)        (8,496)        (5,249)
Payment of cash dividends ..........................................        (1,341)        (1,353)        (1,302)
                                                                         -------------------------------------------
Net cash provided by (used in) financing activities ................        (7,909)        (2,749)        29,017
                                                                         -------------------------------------------
Net decrease in cash and cash equivalents ..........................        (1,878)        (1,075)        (4,881)
Cash and cash equivalents, beginning of year .......................         2,699          3,774          8,655)
                                                                         -------------------------------------------
Cash and cash equivalents, end of year .............................      $    821       $  2,699       $  3,774)
                                                                         ===========================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes .......................................................           $--            $--       $     85
                                                                         ===========================================
</TABLE>

                                       70

<PAGE>

                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued

V.  Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>

                                                               Quarter ended
                                          ---------------------------------------------------
                                                     1999                        2000
                                          ---------------------------------------------------
                                          September 30   December 31    March 31     June 30
                                          ---------------------------------------------------
                                               (In thousands, except per share amounts)
<S>                                          <C>           <C>           <C>          <C>
Total interest income .................      $26,635       $27,642       $28,205      $29,281
Total interest expense ................       17,477        18,114        18,749       19,993
                                          ---------------------------------------------------
Net interest income ...................        9,158         9,528         9,456        9,288
Provision for loan losses .............          210           210           210          230
Non-interest income ...................          808           767           681          691
Non-interest expenses .................        4,969         4,929         4,926        4,772
Income tax expense ....................        1,705         1,833         1,777        1,736
                                          ---------------------------------------------------
 Net income ...........................      $ 3,082       $ 3,323       $ 3,224      $ 3,241
                                          ===================================================

Net income per common share:
 Basic ................................      $  0.37       $  0.40       $  0.40      $  0.41
                                          ===================================================
 Diluted ..............................      $  0.35       $  0.38       $  0.38      $  0.39
                                          ===================================================
</TABLE>

<TABLE>
<CAPTION>
                                                              Quarter ended
                                          ---------------------------------------------------
                                                     1998                        1999
                                          ---------------------------------------------------
                                          September 30   December 31    March 31     June 30
                                          ---------------------------------------------------
                                               (In thousands, except per share amounts)
<S>                                        <C>            <C>           <C>          <C>
Total interest income .................    $27,238        $26,552       $26,072      $25,695
Total interest expense ................     18,944         18,361        17,533       17,080
                                          ---------------------------------------------------
Net Interest Income ...................      8,294          8,191         8,539        8,615
Provision for loan losses .............        175            185           210          210
Non-interest income ...................      1,015            912           995          624
Non-interest expenses .................      4,672          4,544         4,790        4,638
Income tax expense ....................      1,611          1,556         1,626        1,511
                                          ---------------------------------------------------
 Net income ...........................    $ 2,851        $ 2,818       $ 2,908      $ 2,880
                                          ===================================================
Net income per common share:

 Basic ................................    $  0.33        $  0.33       $  0.35      $  0.35
                                          ===================================================
 Diluted ..............................    $  0.31        $  0.31       $  0.33      $  0.33
                                          ===================================================
</TABLE>

                                       71

<PAGE>

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

There  has been no  Current  Report  on Form 8-K  filed  reporting  a change  of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

Information Concerning Directors and Executive Officers

Information  concerning  Directors of the Registrant is  incorporated  herein by
reference  from the  Registrant's  definitive  Proxy  Statement  for the  Annual
Meeting of  Stockholders  scheduled to be held on October 25,  2000,  except for
information  contained  under the  headings  "Compensation  Committee  Report on
Executive  Compensation" and "Stock  Performance  Presentation," a copy of which
will be filed not later than 120 days after the close of the  fiscal  year.  For
information  concerning  Executive  Officers of the  Registrant who are not also
Directors,  see  "Executive  Officers"  in Part I of this Annual  Report on Form
10-K.

Section 16(a) Beneficial Ownership Reporting Compliance

Information  concerning  compliance  with the reporting  requirements of Section
16(a) of the  Securities  Exchange  Act of 1934 by  Directors,  Officers and ten
percent beneficial owners of the Registrant is incorporated  herein by reference
from the  Registrant's  definitive  Proxy  Statement  for the Annual  Meeting of
Stockholders scheduled to be held on October 25, 2000.

Item 11.  Executive Compensation

Information   concerning  executive   compensation  is  incorporated  herein  by
reference  from the  Registrant's  definitive  Proxy  Statement  for the  Annual
Meeting of  Stockholders  scheduled to be held on October 25,  2000,  except for
information  contained  under the  headings  "Compensation  Committee  Report on
Executive  Compensation" and "Stock  Performance  Presentation," a copy of which
will be filed not later than 120 days after the close of the fiscal year.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Information  concerning  security  ownership  of certain  beneficial  owners and
management is incorporated herein by reference from the Registrant's  definitive
Proxy Statement for the Annual Meeting of  Stockholders  scheduled to be held on
October  25,  2000,   except  for  information   contained  under  the  headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation,"  a copy of which  will be filed not later than 120 days after the
close of the fiscal year.

Item 13.  Certain Relationships and Related Transactions

Information   concerning  certain  relationships  and  related  transactions  is
incorporated  herein  by  reference  from  the  Registrant's   definitive  Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on October
25, 2000,  except for  information  contained  under the headings  "Compensation
Committee   Report   on   Executive   Compensation"   and   "Stock   Performance
Presentation,"  a copy of which  will be filed not later than 120 days after the
close of the fiscal year.

                                       72
<PAGE>

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    (a) (1) Financial Statements:

    The following  information  appearing in Part I, Item 8 of this Form 10-K is
    incorporated herein by reference.

    Independent Auditors' Report

       Consolidated  Statements of Financial Condition at June 30, 2000 and 1999

       Consolidated Statements of Income for the Years Ended June 30, 2000, 1999
       and 1998

       Consolidated  Statements of Changes in Stockholders' Equity for the Years
       Ended June 30, 2000, 1999 and 1998

       Consolidated  Statements of Cash Flows for the Years Ended June 30, 2000,
       1999 and 1998

    Notes to Consolidated Financial Statements

    (a) (2)  Financial Statement Schedules:

    All financial  statement  schedules have been omitted as the  information is
    not required under the related instructions or is not applicable.

                                       73

<PAGE>


                PENNFED FINANCIAL SERVICES, INC.AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --Continued

(a) (3)  Exhibits:

<TABLE>
<CAPTION>

Regulation                                                                                Reference to
   S-K                                                                                    Prior Filing
  Exhibit                                                                                  or Exhibit
  Number       Document                                                                      Number
-------------------------------------------------------------------------------------------------------------
<S> <C>       <C>                                                                             <C>
    2         Plan of acquisition, reorganization, arrangement, liquidation or succession     None
    3 (i)     Certificate of Incorporation                                                    *
    3 (ii)    Bylaws                                                                          **
    4         Instruments defining the rights of security holders, including indentures       *
    4 (i)     Stockholder Protection Rights Agreement                                         ***
    9         Voting trust agreement                                                          None
    10        Material contracts:
              (a) Employee Stock Ownership Plan                                                  *
              (b) 1994 Stock Option and Incentive Plan                                        ****
              (c) Management Recognition Plan                                                 *
              (d) Employment Agreement with Joseph L. LaMonica                                *****
              (e) Employment Agreement with Patrick D. McTernan                               *****
              (f ) Employment Agreement with Lucy T. Tinker                                   *****
              (g) Amendment to Employment Agreement with Joseph L. LaMonica                   **
              (h) Amendment to Employment Agreement with Lucy T. Tinker                       **
              (i) Amendment to Employment Agreement with Patrick D. McTernan                  **
              (j ) Employment Agreement with Jeffrey J. Carfora                               **
              (k) Employment Agreement with Barbara A. Flannery                               **
    11        Statement re: computation of per share earnings                                 11
    12        Statements re: computation of ratios                                            12
    13        Annual Report to security holders                                               Not required
    16        Letter re: change in certifying accountant                                      Not required
    18        Letter re: change in accounting principles                                      None
    21        Subsidiaries of the registrant                                                  21
    22        Published report regarding matters submitted to vote of security holders        None
    23        Consents of independent auditors and counsel                                    23
    24        Power of Attorney                                                               Not required
    27        Financial Data Schedule                                                         27
    99        Additional Exhibits                                                             Not applicable
</TABLE>

---------------------
    * Filed as  exhibits to the  Company's  Registration  Statement  on Form S-1
      under the Securities  Act of 1933,  filed with the Securities and Exchange
      Commission  on March 25, 1994  (Registration  No.  33-76854).  All of such
      previously filed documents are hereby  incorporated herein by reference in
      accordance with Item 601 of Regulation S-K.

   ** Filed as exhibits to the Company's Form 10-K under the Securities Exchange
      Act of  1934,  filed  with  the  Securities  and  Exchange  Commission  on
      September  24,  1999  (File No.  0-24040).  All of such  previously  filed
      documents are hereby incorporated by reference in accordance with Item 601
      of Regulation S-K.

  *** Filed as an exhibit to the  Company's  Registration  Statement on Form 8-A
  under the  Securities  Exchange  Act of 1934,  filed with the  Securities  and
  Exchange  Commission  on March 28,  1996 as  amended  on Form 8-A/A (the "Form
  8-A/A")  filed with the  Securities  and Exchange  Commission  on February 11,
  1998, and as further  amended on Form 8-A/A-2 (the "Form  8-A/A-2") filed with
  the  Securities  and  Exchange  Commission  on  October  14,  1998.  The First
  Amendment  to the  Stockholders  Protection  Rights  Agreement  is filed as an
  exhibit  to the  Form  8-A/A  and the  Second  Amendment  to the  Stockholders
  Protection Rights Agreement is filed as an exhibit to the Form 8-A/A-2.  These
  documents are hereby  incorporated by reference in accordance with Item 601 of
  Regulation S-K.

 **** Filed as an exhibit to the  Company's  Registration  Statement on Form S-8
 under  the  Securities  Act of 1933  filed  with the  Securities  and  Exchange
 Commission on September 26, 1997.

***** Filed as exhibits to the Company's Form 10-K under the Securities Exchange
Act of 1934, filed with the Securities and Exchange  Commission on September 27,
1994. All of such previously filed documents are hereby  incorporated  herein by
reference in accordance with Item 601 of Regulation S-K.

(b) Reports on Form 8-K:

There were no reports  filed on Form 8-K for the three month  period  ended June
30, 2000.

                                       74

<PAGE>



                                   SIGNATURES


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

                                                PENNFED FINANCIAL SERVICES, INC.



Date: September 25, 2000                        By:  /s/ Joseph L. LaMonica
                                                    ----------------------------
                                                     Joseph L. LaMonica
                                                     President and Chief
                                                     Executive Officer
                                                     (Duly Authorized
                                                      Representative)

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



By:  /s/ Joseph L. LaMonica                     By:  /s/ William C. Anderson
    ----------------------------------------        ----------------------------
    Joseph L. LaMonica                              William C. Anderson
    President, Chief Executive Officer              Chairman of the Board
    and Director
    (Principal Executive Officer)

Date: September 25, 2000                        Date: September 25, 2000


By:  /s/ Patrick D. McTernan                    By:  /s/ Amadeu L. Carvalho
    ----------------------------------------        ----------------------------
    Patrick D. McTernan                             Amadeu L. Carvalho
    Senior Executive Vice President, General        Director
    Counsel, Secretary and Director

Date: September 25, 2000                        Date: September 25, 2000


By:  /s/ Marvin D. Schoonover                   By:  /s/ Mario Teixeira, Jr.
    ----------------------------------------        ----------------------------
    Marvin D. Schoonover                            Mario Teixeira, Jr.
    Director                                        Director

Date: September 25, 2000                        Date: September 25, 2000


By:  /s/ Lucy T. Tinker                         By:  /s/ Jeffrey J. Carfora
    ----------------------------------------        ----------------------------
    Lucy T. Tinker                                  Jeffrey J. Carfora
    Senior Executive Vice President and             Executive Vice President and
    Chief Operating Officer                         Chief Financial Officer
    (Principal Financial Officer)                   (Principal Accounting
                                                     Officer)

Date: September 25, 2000                        Date: September 25, 2000