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 [FEE REQUIRED]

                     For the fiscal year ended June 30, 1999

                                       OR

[  ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

             For the transition period from                          to

                         Commission file number 0-24040

                        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
                                (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  10,  1999,  was
$119,150,000.  (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  10,  1999,  there were  issued  and outstanding
8,847,410 shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

              Part III of Form 10-K - Portions of the Proxy  Statement  for 1999
Annual Meeting of Stockholders.
<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,  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  and  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, 1999, the Company had total assets of $1.6 billion, deposits of $1.1
billion,  borrowings  of  $333.2  million  and  stockholders'  equity  of $107.5
million.

At June 30, 1999,  the  Company's  gross loan  portfolio  totaled $1.1  billion,
including  $915.2  million of one- to  four-family  residential  first  mortgage
loans,  $74.6 million of commercial and multi-family real estate loans and $72.6
million of consumer  loans.  In addition,  on that date,  the Company had $128.0
million of  mortgage-backed  securities and $309.9  million of other  investment
securities and FHLB of New York stock.

At June 30, 1999, 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  the State of New
Jersey,  the  majority  are  one-  to  four-family  loans  and the  balance  are
commercial and multi-family  real estate 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.
<PAGE>
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.

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,  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
areas and  selected  areas of  central/southern  New Jersey,  which are serviced
through twenty 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 34% 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
<PAGE>
area,  accounting for approximately 39% of total Bank deposits at June 30, 1999.
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 27% 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  mortgages  with  maturities  between 10 and 30
years.  Adjustable  rate mortgage  ("ARM") loans are originated and purchased in
order to increase the  percentage  of loans with more  frequent  repricing  than
fixed rate, one- to four-family mortgage loans. 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  between  $750,000  and $1.25  million  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 above $1.25 million.

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, 1999,  the maximum  amount which the Company could have lent to any one
borrower and the borrower's  related entities was  approximately  $18.8 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, 1999,
the  Company  did not have any  loans or series  of loans to one  borrower  with
outstanding  balances in excess of $3.0 million. At June 30, 1999, the Company's
largest  group of loans to one borrower  totaled  $3.0 million and  consisted of
four  commercial real estate loans  aggregating  $2.7 million and one commercial
real estate loan for $283,000 for which a borrower on the four  commercial  real
estate loans is also a guarantor on this loan. The four  commercial  real estate
loans are secured by multi-family  properties in Essex County. The $283,000 loan
represents  the  Company's  participation  in a  construction  loan for a senior
assisted-living complex in Morris County. At June 30, 1999, there was a total of
19 loans or lender  relationships in excess of $1.0 million,  for a total amount
of $30.9 million. At that date, all of these loans were performing in accordance
with their respective repayment terms.
<PAGE>
Loan Portfolio  Composition.  The following  table sets forth the composition of
the Company's loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                                   June 30,
                                              --------------------------------------------------------------------------------------
                                                       1999                          1998                              1997
                                                Amount      Percent           Amount      Percent              Amount       Percent
                                              -----------    ------         -----------    ------             --------    ------
                                                                            (Dollars in thousands)
<S>                                           <C>            <C>           <C>             <C>               <C>          <C>
First mortgage loans:
   One- to four-family(1)                     $   915,244     86.15%        $   971,668     89.01%            $831,843     89.55%
   Commercial and multi-family                     74,613      7.02              65,833      6.03               56,811      6.12
                                              -----------    ------         -----------    ------             --------    ------
        Total first mortgage loans                989,857     93.17           1,037,501     95.04              888,654     95.67
                                              -----------    ------         -----------    ------             --------    ------
Other loans:
   Consumer loans:
     Second mortgages                              37,243      3.50              27,232      2.49               23,665      2.55
     Home equity lines of credit                   31,754      2.99              23,538      2.16               14,040      1.51
     Other                                          3,575      0.34               3,331      0.31                2,512      0.27
                                              -----------    ------         -----------    ------             --------    ------
        Total consumer loans                       72,572      6.83              54,101      4.96               40,217      4.33
                                              -----------    ------         -----------    ------             --------    ------
        Total loans                             1,062,429    100.00%          1,091,602    100.00%             928,871    100.00%
                                                             ======                        ======                         ======

Add/(less):
   Loans in process                                    --                            --                             --
   Unamortized premiums, deferred
     loan fees, and other, net                      7,391                         7,026                          5,202
   Allowance for loan losses                       (3,209)                       (2,776)                        (2,622)
                                              -----------                   -----------                       --------
     Total loans receivable, net               $1,066,611                    $1,095,852                       $931,451
                                               ==========                    ==========                       ========
 </TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                            June 30,
                                                     -----------------------------------------------------
                                                              1996                          1995
                                                     --------------------          -----------------------
                                                        Amount    Percent           Amount        Percent
                                                       --------    ------          --------      ------
                                                                     (Dollars in thousands)
<S>                                                    <C>          <C>            <C>           <C>
(Dollars in thousands)
First mortgage loans:
   One- to four-family(1)                              $565,924     86.68%         $386,125       82.17%
   Commercial and multi-family                           52,014      7.97            50,448       10.74
                                                       --------    ------          --------      ------
        Total first mortgage loans                      617,938     94.65           436,573       92.91
                                                       --------    ------          --------      ------
Other loans:
   Consumer loans:
     Second mortgages                                    23,912      3.66            21,105        4.49
     Home equity lines of credit                          8,955      1.37             9,792        2.08
     Other                                                2,117      0.32             2,461        0.52
                                                       --------    ------          --------      ------
        Total consumer loans                             34,984      5.35            33,358        7.09
                                                       --------    ------          --------      ------
        Total loans                                     652,922    100.00%          469,931      100.00%
                                                                   ======                        ======

Add/(less):
   Loans in process                                          --                          --
   Unamortized premiums, deferred
     loan fees, and other, net                            2,279                         606
   Allowance for loan losses                             (2,630)                     (2,860)
                                                       --------                    --------
     Total loans receivable, net                       $652,571                    $467,677
                                                       ========                    ========
 </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, 1997 and 1995.


Loan Maturity. The following schedule sets forth the contractual maturity of the
Company's loan portfolio as of June 30, 1999.  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.
<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)
<S>                             <C>            <C>            <C>            <C>            <C>            <C>            <C>
First mortgage loans:
One- to four-family .........   $      321     $    3,424     $    7,107     $   73,867     $  217,989     $  612,536     $  915,244
Commercial and multi-family .        4,313          5,459          2,905         15,930         44,105          1,901         74,613
                                ----------     ----------     ----------     ----------     ----------     ----------     ----------
   Total first mortgage loans        4,634          8,883         10,012         89,797        262,094        614,437        989,857
Consumer loans ..............        3,658          1,024          5,962         12,674         48,626            628         72,572
                                ----------     ----------     ----------     ----------     ----------     ----------     ----------
   Total loans, gross .......   $    8,292     $    9,907     $   15,974     $  102,471     $  310,720     $  615,065     $1,062,429
                                ==========     ==========     ==========     ==========     ==========     ==========     ==========
</TABLE>
Loans due after June 30, 2000,  which have fixed interest rates amount to $671.0
million, while those with adjustable rates amount to $383.1 million, detailed as
follows:
<TABLE>
<CAPTION>
                                                Due After June 30, 2000
                                        ----------------------------------------
                                           Fixed        Adjustable       Total
                                        -----------    -----------    ----------
                                                    (In thousands)
<S>                                     <C>            <C>            <C>
First mortgage loans:
One- to four-family ...............     $  626,139     $  288,784     $  914,923
Commercial and multi-family .......          7,288         63,012         70,300
                                        ----------     ----------     ----------
     Total first mortgage loans ...        633,427        351,796        985,223

Consumer loans ....................         37,573         31,341         68,914
                                        ----------     ----------     ----------
     Total loans, gross ...........     $  671,000     $  383,137     $1,054,137
                                        ==========     ==========     ==========
</TABLE>


One- to  Four-Family  Residential  Mortgage  Lending.  At  June  30,  1999,  the
Company's one- to four-family residential mortgage loans totaled $915.2 million,
or approximately 86.15% of the Company's gross loan portfolio.  Residential loan
originations  are  generated  by  the  Company's  in-house  originations  staff,
marketing efforts,  its 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, 1999, the Company  originated  $257.7 million of fixed rate real estate
loans  secured  by  one- to  four-family  residential  real  estate.  ARM  loans
originated  during fiscal 1999 totaled $37.8 million.  Substantially  all of the
Company's one- to four-family  residential mortgage  originations are secured by
properties located in the State of New Jersey.
<PAGE>
During fiscal 1999, the Company had one correspondent  relationship with another
institution  through which it purchased $15.4 million of newly  originated fixed
and $15.8  million  of newly  originated  adjustable  rate  one- to  four-family
residential first mortgages,  all of which are secured by properties  located in
the State of New Jersey. A second  correspondent  relationship was added in late
fiscal 1999.  Actual purchases of loans from this second  correspondent  did not
begin until July 1999. 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
security  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 security property.

Commercial  and  Multi-Family  Real  Estate  Lending.  The  Company  engages  in
commercial and multi-family real estate lending in its market areas. At June 30,
1999, the Company had $74.6 million of commercial and  multi-family  real estate
loans which represented 7.02% of the Company's gross loan portfolio. This amount
includes  less than  $625,000  of lines of credit  secured  by  non-real  estate
business assets. At June 30, 1999, the average per loan balance of the Company's
commercial and multi-family real estate loans outstanding was $265,000.

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  security  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 the Wall Street Journal.  In underwriting  these loans,  the Company analyzes
the current financial condition of the borrower,  the borrower's credit history,
and the  reliability  and  predictability  of the  cash  flow  generated  by the
property securing the loan. The Company usually requires personal  guarantees 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.
<PAGE>
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 of principal 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, 1999, the Company's total
consumer loan portfolio was $72.6 million, or 6.83% of its gross loan portfolio,
of which  approximately  56% were fixed rate loans and 44% 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% or less of the appraised value of the property securing
the loan.  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,  1999,  second  mortgage  loans and home  equity  lines of credit
amounted to $69.0 million or 6.49% of the Company's gross 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 borrower'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  unsecured or 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  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.
<PAGE>
Originations, Purchases, Sales and Servicing of Loans

For the fiscal year ended June 30, 1999, the Company  originated  $371.0 million
of loans, compared to $340.2 million and $173.5 million in fiscal 1998 and 1997,
respectively.  Mortgage  loan  originations  are  handled  by  employees  of the
Company.

During  the  fiscal  years  ended  June 30,  1999,  1998 and 1997,  the  Company
purchased $31.2 million, $89.9 million and $195.5 million of one- to four-family
first mortgage loans,  respectively,  through  correspondent  relationships with
other institutions. The purchased loans represent both fixed and adjustable rate
first mortgages secured by properties  primarily located  throughout New Jersey.
Prior to fiscal 1999, a limited amount of loans secured by properties located in
the Commonwealth of Pennsylvania and State of Massachusetts were purchased.

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.

In prior years,  the Company sold one-to  four-family  first mortgage loans from
time to time, to Freddie Mac and other secondary market purchasers.  The Company
sold loans in aggregate  amounts of $76.2 million and $585,000  during the years
ended June 30, 1998 and 1997, respectively.

In periods of a higher interest rate and steeper yield curve  environment,  such
as the  beginning of fiscal 2000,  loan sale  activity is expected to be reduced
from the fiscal  1999  level.  The level of such  activity  will  continue to be
evaluated with primary  consideration  given to interest rate risk and long-term
profitability 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
$116.2  million,  $110.9  million and $78.8  million at June 30, 1999,  1998 and
1997, respectively.
<PAGE>
The following  table sets forth the activity in the Company's loan portfolio for
the years indicated.
<TABLE>
<CAPTION>
                                                                 Year ended June 30,
                                                     ----------------------------------------
                                                         1999           1998           1997
                                                     ----------     ----------     ----------
                                                                   (In thousands)
<S>                                                  <C>            <C>            <C>
Net loans receivable at beginning of year ......     $1,095,852     $  931,451     $  652,571

Plus:
    Loans originated:
        One- to four-family ....................        295,522        283,666        141,736
        Commercial and multi-family real estate          22,938         18,901         12,225
        Consumer ...............................         52,560         37,595         19,501
                                                     ----------     ----------     ----------
            Total loans originated .............        371,020        340,162        173,462
                                                     ----------     ----------     ----------

    One- to four-family loans purchased ........         31,220         89,910        195,514
                                                     ----------     ----------     ----------

            Total loans originated and purchased        402,240        430,072        368,976

Less:
    One- to four-family loans sold .............        150,474         76,196            585
    Loan principal payments and other, net .....        280,575        187,360         87,821
    Loans transferred to real estate owned .....            432          2,115          1,690
                                                     ----------     ----------     ----------
Net loans receivable at end of year ............     $1,066,611     $1,095,852     $  931,451
                                                     ==========     ==========     ==========
</TABLE>

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 law
suit is filed, if necessary, to obtain a judgement.

At June 30, 1999, the Company's loans  delinquent 60 to 89 days totaled $435,000
of which  $425,000  were one- to  four-family  mortgage  loans and $10,000  were
consumer loans.
<PAGE>
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 were, therefore, considered performing.
<TABLE>
<CAPTION>
                                                                At June 30,
                                          ------------------------------------------------------
                                           1999        1998        1997        1996        1995
                                          ------      ------      ------      ------      ------
                                                          (Dollars in thousands)
<S>                                       <C>         <C>         <C>         <C>         <C>
Non-accruing loans:
 One- to four-family ................     $2,937      $2,575      $3,567      $4,009      $3,040
 Commercial and multi-family ........         46         414       1,053         913       1,090
 Consumer ...........................        687         753         865       1,264       1,435
                                          ------      ------      ------      ------      ------
   Total non-accruing loans .........      3,670       3,742       5,485       6,186       5,565

Real estate owned, net ..............        936       1,643         884       1,083       1,177
                                          ------      ------      ------      ------      ------
   Total non-performing assets ......      4,606       5,385       6,369       7,269       6,742

Restructured loans ..................          _       1,415       1,451       2,340       2,922
                                          ------      ------      ------      ------      ------
   Total risk elements ..............     $4,606      $6,800      $7,820      $9,609      $9,664
                                          ======      ======      ======      ======      ======
Non-accruing loans as a percentage
     of total loans .................       0.34%       0.34%       0.59%       0.95%       1.18%
                                          ======      ======      ======      ======      ======
Non-performing assets as a percentage
     of total assets ................       0.30%       0.35%       0.48%       0.67%       0.78%
                                          ======      ======      ======      ======      ======
Total risk elements as a percentage
     of total assets ................       0.30%       0.44%       0.59%       0.88%       1.11%
                                          ======      ======      ======      ======      ======
</TABLE>

For the year ended June 30, 1999,  gross  interest  income which would have been
recorded  had the  non-accruing  loans  been  current in  accordance  with their
original  terms  amounted to  $137,000,  none of which was  included in interest
income during this period.

Non-Performing Assets.  Non-accruing loans at June 30, 1999 were comprised of 38
one-  to  four-family  loans   aggregating  $2.9  million,   20  consumer  loans
aggregating  $687,000  and one  commercial  and  multi-family  real  estate loan
totaling $46,000.

Real estate owned at June 30, 1999 included six one- to  four-family  properties
totaling  $357,000,  the largest of which had a net book value of $127,000,  and
one commercial property with a total net book value of $579,000.

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 three fiscal years.  Any loan that has been  restructured  continues to
perform in accordance with the restructured terms.
<PAGE>
Other Loans of Concern.  As of June 30,  1999,  there were $1.1 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,  1999 are six  loans to one
borrower and one loan to an affiliated  party totaling $1.0 million  acquired in
the 1989 acquisition of First Federal Savings and Loan Association of Montclair.
The six loans consist of one commercial real estate loan of $436,000,  four one-
to four-family loans totaling $217,000 and a $79,000 line of credit. The loan to
an affiliated  party consists of a commercial real estate loan of $262,000.  All
of these loans are secured by properties  located in New Jersey.  The commercial
real  estate  loans are secured by  mixed-use  properties  consisting  of retail
stores and apartments  located in Essex County,  New Jersey.  All of these loans
were  originated  from 1985 to 1989 with thirty year terms.  At June 30, 1999, a
$16,000  one- to  four-family  loan and the line of credit,  both secured by the
same property,  were more than 90 days past due.  Foreclosure  proceedings  have
begun.  Another one- to four-family  mortgage loan with a balance of $89,000 was
30 days  delinquent  at June 30,  1999.  The  borrower  has  indicated  that the
property  securing this  particular  loan is under contract for sale. All of the
remaining 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,  but which, unlike specific  allowances,  have not been allocated to
particular problem assets. 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
<PAGE>
classification  in  accordance  with  applicable  regulations.  On the  basis of
management's  review  of its  assets at June 30,  1999,  the  Bank's  classified
assets,  including  real estate owned,  totaled $5.7 million,  with $5.5 million
classified as  substandard  and $198,000  classified as loss.  Total  classified
assets  represent 5.33% of the Company's  stockholders'  equity and 0.37% 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 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.
<PAGE>
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,
                                          ---------------------------------------------------------------
                                            1999          1998          1997          1996          1995
                                          -------       -------       -------       -------       -------
                                                                (Dollars in thousands)
<S>                                       <C>           <C>           <C>           <C>           <C>
Balance at beginning of year ........     $ 2,776       $ 2,622       $ 2,630       $ 2,860       $ 3,060

Charge-offs:
  One- to four-family ...............         (60)         (306)         (392)         (195)         (267)
  Commercial and multi-family .......        (165)          (44)         (147)         (508)         (223)
  Consumer ..........................        (171)          (96)         (146)         (238)         (279)
                                          -------       -------       -------       -------       -------
                                             (396)         (446)         (685)         (941)         (769)
                                          -------       -------       -------       -------       -------

Recoveries:
  One- to four-family ...............          --            --            --            --            --
  Commercial and multi-family .......          49            --            --           101            --
  Consumer ..........................          --            --            42            --            --
                                          -------       -------       -------       -------       -------
                                               49            --            42           101            --
                                          -------       -------       -------       -------       -------

Net charge-offs .....................        (347)         (446)         (643)         (840)         (769)
Additions charged to operations .....         780           600           635           610           569
                                          -------       -------       -------       -------       -------
Balance at end of year ..............     $ 3,209       $ 2,776       $ 2,622       $ 2,630       $ 2,860
                                          =======       =======       =======       =======       =======

Ratio of net charge-offs during the
   year to average loans outstanding
   during the year ..................        0.03%         0.04%         0.08%         0.16%         0.19%
                                          =======       =======       =======       =======       =======

Ratio of allowance for loan losses
   to total loans at end of year ....        0.30%         0.25%         0.28%         0.40%         0.61%
                                          =======       =======       =======       =======       =======

Ratio of allowance for loan losses to
   non-accruing  loans at end of year       87.44%        74.18%        47.80%        42.52%        51.39%
                                          =======       =======       =======       =======       =======
</TABLE>


The  distribution  of the  Company's  allowance  for loan  losses  at the  dates
indicated is  summarized in the  following  table.  The portion of the allowance
allocated  to each  loan  category  does not  necessarily  represent  the  total
available  for  possible  future  losses  within that  category  since the total
allowance is applicable to the entire loan portfolio.

<PAGE>
<TABLE>
<CAPTION>

                                                                      June 30,
                                    -----------------------------------------------------------------------------
                                           1999                        1998                        1997
                                    --------------------        --------------------       -----------------------
                                              Percent of                  Percent of                  Percent of
                                               Loans in                    Loans in                    Loans in
                                                  Each                       Each                        Each
                                               Category                    Category                    Category
                                               to Total                    to Total                    to Total
                                    Amount       Loans          Amount       Loans          Amount       Loans
                                    ------      ------          ------      ------          ------      ------
                                                              (Dollars in thousands)
<S>                                 <C>          <C>            <C>          <C>            <C>          <C>
One- to four-family                 $1,797       86.15%         $1,502       89.01%         $1,463       89.55%
Commercial and
   multi-family real estate            855        7.02             740        6.03             654        6.12
Consumer                               557        6.83             534        4.96             505        4.33
                                    ------      ------          ------      ------          ------      ------

     Total                          $3,209      100.00%         $2,776      100.00%         $2,622      100.00%
                                    ======      ======          ======      ======          ======      ======
<CAPTION>
                                                          June 30,
                                    ------------------------------------------------------
                                            1996                          1995
                                    ---------------------      ---------------------------
                                               Percent of                    Percent of
                                                Loans in                      Loans in
                                                  Each                          Each
                                                Category                      Category
                                                to Total                      to Total
                                     Amount      Loans          Amount          Loans
                                    ------      ------         -------         ------
                                                 (Dollars in thousands)
<S>                                 <C>          <C>           <C>              <C>
One- to four-family                 $1,290       86.68%        $   657          82.17%
Commercial and
   multi-family real estate            782        7.97           1,602          10.74
Consumer                               558        5.35             601           7.09
                                    ------      ------         -------         ------

     Total                          $2,630      100.00%         $2,860         100.00%
                                    ======      ======         =======         ======
 </TABLE>
<PAGE>
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, 1999, the Bank's
liquidity  ratio  (liquid  assets as a percentage  of net  withdrawable  deposit
accounts and current borrowings) was 21.30%. See "Regulation-Liquidity."

At June 30, 1999, the Company had a securities portfolio consisting  principally
of U.S.  Government agency  securities,  including  mortgage-backed  securities.
These  investments  carry  a low  risk  weighting  for  OTS  risk-based  capital
purposes,  generally satisfy OTS liquid-asset requirements and are of relatively
short   duration.   See   "Regulation-Regulatory   Capital   Requirements"   and
"Regulation-Liquidity."

Investment  Securities.  At June 30, 1999, the Company's  investment  securities
(including a $16.6 million  investment in FHLB of New York stock) totaled $309.9
million,  or 19.9 % 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. During fiscal 1998, PennFed
invested in certain  non-investment  grade Trust  preferred  securities of other
financial  institutions.  At June 30, 1999,  PennFed held $11.2  million of such
non-investment grade securities. In addition,  investment securities at June 30,
1999 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.
<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, 1999
                               --------------------------------------------------------------------------
                                 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 and
     agency obligations ...     $     --        $ 10,000        $254,538        $264,538        $254,243
Obligations of states and
     political subdivisions           40              --              --              40              45
Trust preferred
     securities ...........           --              --          28,704          28,704          27,592
                                --------        --------        --------        --------        --------
Total investment
     securities ...........     $     40        $ 10,000        $283,242        $293,282        $281,880
                                ========        ========        ========        ========        ========

Weighted average yield at
     year end .............        10.38%           6.77%           7.04%           7.03%
                                ========        ========        ========        ========
</TABLE>




At June 30, 1999,  the weighted  average life of this  portfolio  was 3.4 years,
based on the shorter of the remaining maturity or anticipated call date.

The Company's  investment  securities portfolio at June 30, 1999 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, 1999, mortgage-backed securities totaled
$128.0 million,  or 8.2% of the Company's total assets,  of which  approximately
20% consisted of adjustable rate securities.  The Company has invested primarily
in federal agency  securities,  principally those of Ginnie Mae, Freddie Mac and
Fannie Mae.
<PAGE>
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, 1999
                               --------------------------------------------------------------------------
                                 After            After
                               One Year       Five Years         After                  Total
                                Through         Through           Ten               Mortgage-backed
                               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>
Ginnie Mae ..............       $     79        $    994        $    998        $  2,071        $  2,162
Freddie Mac .............         25,549          12,526          36,547          74,622          75,119
Fannie Mae ..............          9,162          13,284          28,453          50,899          51,233
CMOs/REMICs .............             --              --             103             103             103
                                --------        --------        --------        --------        --------

   Total mortgage-backed
     securities .........       $ 34,790        $ 26,804        $ 66,101        $127,695        $128,617
                                ========        ========        ========        ========        ========
Weighted average yield at
   year end .............           6.75%           7.07%           7.21%           7.06%
                                ========        ========        ========        ========
</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   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,
                                            ------------------------------------
                                              1999          1998          1997
                                            --------      --------      --------
                                                      (In thousands)
<S>                                         <C>           <C>           <C>
Mortgage-backed securities, net:
   At beginning of year ..............      $204,452      $288,539      $346,068
    Securities purchased ..............            34          --            --
Less:
   Principal repayments ..............        76,207        83,775        57,266
   Amortization of premiums ..........           296           312           263
                                            --------      --------      --------
   At end of year ....................      $127,983      $204,452      $288,539
                                            ========      ========      ========
</TABLE>
<PAGE>
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,
                                                          --------------------------------------------------------------------------
                                                                      1999                                    1998
                                                          ------------------------------------  ------------------------------------
                                                                                      Percent                               Percent
                                                                                      of Total                              of Total
                                                           Book        Market           Book      Book        Market          Book
                                                           Value        Value          Value      Value       Value           Value
                                                          --------     --------        ------   --------     --------        ------
                                                                                     (Dollars in thousands)
<S>                                                       <C>          <C>             <C>      <C>          <C>             <C>
Investment securities:
    U.S. Government and
        agency obligations ....................           $264,538     $254,243         85.36%  $166,969     $166,985         86.35%
    Obligations of states and
        political subdivisions ................                 40           45          0.01        140          147          0.07
    Trust preferred securities ................             28,704       27,592          9.27     11,201       11,611          5.79
                                                          --------     --------        ------   --------     --------        ------
        Total investment securities ...........            293,282      281,880         94.64    178,310      178,743         92.21
        FHLB of New York stock ................             16,623       16,623          5.36     15,065       15,065          7.79
                                                          --------     --------        ------   --------     --------        ------
        Total investment securities and
           FHLB of New York stock .............           $309,905     $298,503        100.00%  $193,375     $193,808        100.00%
                                                          ========     ========        ======   ========     ========        ======

     Weighted average life of investment
     securities excluding FHLB of New York stock (1)                  3.4 years                             0.9 years

Mortgage-backed securities:
    Ginnie Mae ................................           $  2,071     $  2,162         1.62%   $  3,005     $  3,195          1.47%
    Freddie Mac ...............................             74,622       75,119        58.31     123,444      125,931         60.38
    Fannie Mae ................................             50,899       51,233        39.77      77,019       78,601         37.67
    CMOs/REMICs ...............................                103          103         0.08         400          401          0.19
                                                          --------     --------        ------   --------     --------        ------
                                                           127,695      128,617        99.78     203,868      208,128         99.71
    Unamortized premiums, net .................                288           --         0.22         584           --          0.29
                                                          --------     --------        ------   --------     --------        ------
        Total mortgage-backed securities ......           $127,983     $128,617       100.00%   $204,452     $208,128        100.00%
                                                          ========     ========        ======   ========     ========        ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                        June 30,
                                                           ---------------------------------
                                                                          1997
                                                           ---------------------------------
                                                                                    Percent
                                                                                    of Total
                                                             Book        Market       Book
                                                             Value       Value        Value
                                                           --------     -------    ------
<S>                                                        <C>          <C>        <C>
Investment securities:
    U.S. Government and
        agency obligations ....................            $ 34,999     $35,125     73.37%

    Obligations of states and
        political subdivisions ................                 291         307      0.61

    Trust preferred securities ................                  --          --        --
                                                           --------     -------    ------
        Total investment securities ...........              35,290      35,432     73.98
        FHLB of New York stock ................              12,413      12,413     26.02
                                                           --------     -------    ------

        Total investment securities and
           and FHLB of New York stock .........            $ 47,703     $47,845    100.00%
                                                           ========     =======    ======


     Weighted average life of investment
     securities excluding FHLB of New York stock (1)                   1.0 year

Mortgage-backed securities:
    Ginnie Mae ................................            $  3,993     $ 4,205      1.38%
    Freddie Mac ...............................             184,028     186,350     63.78
    Fannie Mae ................................              98,684      99,632     34.20
    CMOs/REMICs ...............................                 938         938      0.33
                                                           --------     -------      ----
                                                            287,643     291,125     99.69
    Unamortized premiums, net .................                 896          --      0.31
                                                           --------     -------      ----
        Total mortgage-backed securities ......            $288,539     $291,125   100.00%
                                                           ========     ========   ======

</TABLE>


(1) The weighted  average life of investment  securities is based on the shorter
of the remaining maturity or anticipated call date.
<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, 1999, certificates of deposit
from municipalities totaled $57.9 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.  At June 30, 1999 and 1998, the Company had $1.0 million
of brokered deposits.  See Item 8 - Financial  Statements Note I - Deposits - of
the Notes to Consolidated Financial Statements.
<PAGE>
The  following  table sets forth the  deposit  flows of the  Company  during the
periods indicated.
<TABLE>
<CAPTION>
                                               Year ended June 30,
                                 -----------------------------------------------
                                     1999              1998             1997
                                 -----------       -----------      ------------
<S>                              <C>               <C>              <C>
Opening balance ............     $ 1,028,100       $   918,160      $   836,416
Net deposits (withdrawals) .          (5,555)           68,152           47,233
Interest credited ..........          41,055            41,788           34,511
                                 -----------       -----------      -----------
Ending balance .............     $ 1,063,600       $ 1,028,100      $   918,160
                                 ===========       ===========      ===========
Net increase ...............     $    35,500       $   109,940      $    81,744
                                 ===========       ===========      ===========
Percent increase ...........            3.45%            11.97%            9.77%
                                 ===========       ===========      ===========
</TABLE>

The  following  table  indicates  the amount of the  Company's  certificates  of
deposit by time remaining until maturity as of June 30, 1999.
<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      $134,234     $143,702     $207,935     $154,763     $640,634
Certificates of deposit of $100,000 or more       78,081       19,479       33,116       15,840      146,516
                                                --------     --------     --------     --------     --------
Total certificates of deposit .............     $212,315     $163,181     $241,051     $170,603     $787,150
                                                ========     ========     ========     ========     ========
 </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,  can be invested at a positive  interest rate spread,  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 made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities.
<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,
                                                                ------------------------------------
                                                                  1999           1998         1997
                                                                --------      --------      --------
                                                                           (In thousands)
<S>                                                             <C>           <C>           <C>
Maximum balance for the year ended:
  FHLB of New York advances ...............................     $289,465      $240,465      $205,465
  Other borrowings:
     Overnight repricing lines of credit ..................     $ 54,700      $ 50,000      $ 46,610
     FHLB of New York one-month overnight repricing
        line of credit ....................................       10,000        35,000        15,000
     Reverse repurchase agreements callable or maturing
       within one year ....................................       39,925        49,925        30,100
     Reverse repurchase agreements maturing after one year        49,275        29,875        10,000
                                                                --------      --------      --------
        Total other borrowings ............................     $153,900      $164,800      $101,710
                                                                ========      ========      ========

Average balance for the year ended:
  FHLB of New York advances ...............................     $266,906      $218,568      $147,945
  Other borrowings:
     Overnight repricing lines of credit ..................     $ 21,254      $ 24,620      $ 29,537
     FHLB of New York one-month overnight repricing
        line of credit ....................................        1,221         4,401         8,886
     Reverse repurchase agreements callable or maturing
       within one year ....................................       10,824        23,091        24,244
     Reverse repurchase agreements maturing after one year        40,215        21,487         5,417
                                                                --------      --------      --------
       Total other borrowings .............................     $ 73,514      $ 73,599      $ 68,084
                                                                ========      ========      ========

Balance at June 30:
  FHLB of New York advances ...............................     $244,465      $230,465      $205,465
  Other borrowings:
     Overnight repricing lines of credit ..................     $ 29,900      $ 41,700      $ 32,650
     FHLB of New York one-month overnight repricing
        line of credit ....................................         --          10,000        10,000
     Reverse repurchase agreements callable or maturing
       within one year ....................................       19,563        49,925        30,100
     Reverse repurchase agreements maturing after one year        39,275        29,875        10,000
                                                                --------      --------      --------
       Total other borrowings .............................     $ 88,738      $131,500      $ 82,750
                                                                ========      ========      ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                         Year ended June 30,
                                                                ------------------------------------
                                                                  1999           1998         1997
                                                                --------      --------      --------
                                                                           (In thousands)
<S>                                                             <C>           <C>           <C>
Weighted average cost of funds for the year ended:
  FHLB of New York advances ...............................         6.01%         6.13%         6.14%
  Other borrowings:
     Overnight repricing lines of credit ..................         5.20%         5.75%         5.47%
     FHLB of New York one-month overnight repricing
        line of credit ....................................         5.42%         5.85%         5.48%
     Reverse repurchase agreements callable or maturing
        within one year ...................................         5.58%         5.59%         5.50%
     Reverse repurchase agreements maturing after one year          5.74%         6.06%         6.24%

Weighted average cost of funds at June 30:
  FHLB of New York advances ...............................         5.93%         6.06%         6.13%
  Other borrowings:
     Overnight repricing lines of credit ..................         5.98%         6.25%         6.63%
     FHLB of New York one-month overnight repricing
        line of credit ....................................         --            6.13%         6.38%
     Reverse repurchase agreements callable or maturing
        within one year ...................................         5.01%         5.35%         5.74%
     Reverse repurchase agreements maturing after one year          5.93%         5.93%         6.24%
</TABLE>

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 future 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 $31.2 million at June 30, 1999,
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
$75,000.   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,  1999,  the  Bank's  investment  in its  operating
subsidiary was $421.8 million.
<PAGE>
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 as Investment  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 or 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.  Beginning
sometime in fiscal 2000, life, health and disability insurance will be available
through IFS Agencies,  Inc. To a much lesser extent, PSIA also offers homeowners
insurance to Bank customers.

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


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 the  State  of 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.

<PAGE>
                                   REGULATION

General

Penn Federal is a federally  chartered  savings bank,  the deposits of which are
federally insured up to applicable limits.  Accordingly,  the Bank is subject to
comprehensive  federal regulation and oversight extending to all its operations.
Penn  Federal  is a member  of the FHLB of New York and is  subject  to  certain
limited  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.  The
purpose  of the  regulation  of  PennFed  and  other  savings  and loan  holding
companies is to protect subsidiary savings associations. The Bank is a member of
the Savings Association Insurance Fund ("SAIF") and the deposits of Penn Federal
are  insured  by the FDIC.  As a result,  the FDIC has  certain  regulatory  and
examination   authority  over  the  Bank.  For  purposes  of  the   "Regulation"
discussion,  the  terms  "savings  bank,"  "savings  association"  and  "savings
institution" would apply to the Bank.

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

Federal Regulation of Savings Associations

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 and the FDIC.  The
last regular OTS and FDIC examinations of the Bank were as of September 1998 and
May 1992, respectively.

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, 1999 was $260,000.

The OTS also has extensive  enforcement  authority over all savings institutions
and  their  holding  companies,   including  Penn  Federal  and  PennFed.   This
enforcement authority includes,  among other things, the ability to assess civil
money penalties, to issue cease-and-desist and/or removal and prohibition orders
and to initiate injunctive actions. In general, these enforcement actions may be
initiated  for  violations  of  laws  and  regulations  and  unsafe  or  unsound
practices.  Other  actions or  inactions  may provide the basis for  enforcement
action,  including  misleading or untimely  reports  filed with the OTS.  Except
under certain circumstances,  public disclosure of interim and final enforcement
actions by the OTS is required.

In addition, the investment,  lending and branching authority of Penn Federal is
prescribed by federal laws, and it is prohibited from engaging in any activities
not permitted by such laws. For instance,  no savings  institution may invest in
non-investment  grade corporate debt  securities.  In addition,  the permissible
level of investment by federal  associations in loans secured by non-residential
real property may not exceed 400% of total capital,  except with approval of the
OTS.  At  June  30,  1999,  the  Bank  was in  compliance  with  each  of  these
restrictions.  Federal savings  associations meeting the Qualified Thrift Lender
Test  or  comparable   requirement  are  also  generally  authorized  to  branch
nationwide. See "-- Qualified Thrift Lender Test."
<PAGE>
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.  It also
may 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 institution's  deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or unsound  practices,
or is in an unsafe or unsound condition.

The FDIC's SAIF deposit premiums are assessed through a risk-based  system under
which all insured depository institutions are placed into one of nine categories
and  assessed  insurance  premiums,  based  upon  their  level  of  capital  and
supervisory  evaluation.  The current SAIF premium schedule ranges from 0.00% to
0.27%  of  deposits.  The  Bank  has  been  notified  by the  FDIC  that for the
semi-annual  assessment  period  beginning  July 1,  1999,  it will be  assessed
insurance  premiums  at an  annual  rate  of  0.00%  because  it  is  considered
financially sound. In addition to the SAIF assessment, the FDIC is authorized to
collect  an  assessment  against  SAIF-assessable  deposits  to be  paid  to the
Financing Corporation ("FICO").  The actual FICO assessment rate that is applied
to deposits is not tied to the FDIC risk  classification  and is determined on a
quarterly  basis. For the quarterly period beginning July 1, 1999, the Company's
FICO assessment rate is 0.058% of deposits, on an annualized basis.

Prior to September 30, 1996,  financial  institutions  which were members of the
Bank Insurance Fund ("BIF") were assessed  substantially lower deposit insurance
premiums  because the BIF had achieved its required  level of reserves while the
SAIF had not yet  achieved  its required  reserves.  As a result of  legislation
signed into law on September 30, 1996, the SAIF  recapitalization  plan provided
for a  one-time  assessment  of 0.657% of  deposits,  which was  imposed  on all
institutions  with  SAIF-insured  deposits,  to enable the SAIF to  achieve  its
required level of reserves. The assessment was based on deposits as of March 31,
1995, and the Bank's special assessment was approximately $4.8 million,  or $3.1
million,  net of taxes.  Following the  recapitalization  assessment,  beginning
January 1, 1997 deposit insurance premiums were decreased significantly from the
0.23% of deposits previously paid by the Bank to 0.00%, plus the FICO assessment
described above.

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.
<PAGE>
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, 1999, Penn
Federal had $11.1 million of intangible  assets other than  qualifying  mortgage
servicing rights.

The OTS regulations  establish special  capitalization  requirements for savings
associations that own subsidiaries.  In determining  compliance with the capital
requirements,  all  subsidiaries  engaged solely in activities  permissible  for
national  banks or engaged in certain other  activities  solely as agent for its
customers  are  "includable"  subsidiaries  that are  consolidated  for  capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries,  the debt and equity  investments in such  subsidiaries  are fully
deducted from assets and capital.  The Bank has two  subsidiaries,  Penn Savings
Insurance  Agency,  Inc. and Ferry  Development  Holding Co.,  both of which are
includable subsidiaries.

At June 30, 1999, Penn Federal had tangible capital of $121.9 million,  or 7.88%
of adjusted  total  assets,  which was  approximately  $98.7  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.  Core capital generally  consists of tangible capital plus certain
intangible  assets up to 25% of adjusted  total assets.  At June 30, 1999,  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 core  capital  ratio 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,  1999,  Penn Federal had core capital  equal to $121.9  million,  or
7.88% of adjusted total assets,  which was approximately $60.1 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, 1999, the Bank had no capital instruments that qualify
as  supplementary  capital and had $3.1 million of allowances for loan and lease
losses,  all of which was included since it was less than 1.25% of risk-weighted
assets.

Certain  exclusions  from  capital  and assets are  required  to be made for the
purpose of calculating  total capital,  in addition to the adjustments  required
for calculating core capital.  Such exclusions consist of equity investments (as
defined  by  regulation),   that  portion  of  land  loans  and   nonresidential
construction  loans in  excess  of an 80%  loan-to-value  ratio  and  reciprocal
holdings of qualifying capital  instruments.  At June 30, 1999, Penn Federal had
$50,000 of such exclusions from capital and assets.
<PAGE>
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, 1999,  Penn Federal had total  risk-based  capital of $125.0 million
(including  $121.9  million  in core  capital  and  $3.1  million  in  allowable
supplementary  capital) and  risk-weighted  assets of $767.2 million  (including
$24.3 million in converted  off-balance  sheet  assets)  resulting in risk-based
capital of 16.29% of risk-weighted  assets.  This amount was $63.6 million above
the 8% requirement in effect on that date.

The federal banking agencies,  including the OTS, have also adopted  regulations
authorizing  the  agencies  to  require a  depository  institution  to  maintain
additional  total  capital to account for  concentration  of credit risk and the
risk of non-traditional activities.

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 undercapitalized" (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 the  market  value  of  PennFed's  common  stock.  Stockholders  do not have
preemptive rights,  and therefore,  if the Company is directed by the OTS or the
FDIC to issue additional shares of common stock, such issuance may result in the
dilution in the percentage of ownership of existing stockholders.
<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  that before and after the proposed  distribution  meet
their fully phased-in capital requirements 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.  As a subsidiary of
PennFed, 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 the present time, the minimum liquid asset
ratio is 4%.  Penalties may be imposed upon  associations  for violations of the
liquid asset ratio requirement. At June 30, 1999, Penn Federal was in compliance
with the requirement, with a liquidity ratio of 21.30%.

Accounting

An OTS policy  statement  applicable to all savings  associations  clarifies and
re-emphasizes that the investment activities of a savings association must be in
compliance with approved and documented investment policies and strategies,  and
must  be  accounted  for  in  accordance  with  generally  accepted   accounting
principles  ("GAAP").  Under the policy  statement,  management must support its
classification  of and accounting for loans and securities  (i.e.,  whether held
for investment, sale or trading) with appropriate documentation. Penn Federal is
in compliance with these policy statements.

The OTS has adopted an amendment  to its  accounting  regulations,  which may be
made more  stringent  than GAAP, to require that  transactions  be reported in a
manner that best reflects their underlying  economic substance and inherent risk
and that financial reports must incorporate any other accounting  regulations or
orders prescribed by the OTS.

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, 1999, the Bank
met the QTL test and has always met the test since its effective date.
<PAGE>
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.  If such an  association  has not yet  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 establishment 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  community.  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 for loans to unaffiliated individuals.
<PAGE>
Holding Company Regulation

PennFed is a unitary  savings and loan  holding  company  subject to  regulatory
oversight by the OTS. As such,  PennFed is required to register and file reports
with the OTS and is  subject  to  regulation  and  examination  by the  OTS.  In
addition, the OTS has enforcement authority over PennFed, which also permits the
OTS to restrict or prohibit  activities that are determined to be a serious risk
to the subsidiary savings association.

PennFed must obtain approval from the OTS before acquiring  control of any other
SAIF-insured  association.  Such  acquisitions are generally  prohibited if they
result in a  multiple  savings  and loan  holding  company  controlling  savings
associations in more than one state. However,  such interstate  acquisitions are
permitted based on specific state authorization or in a supervisory  acquisition
of a failing savings association.

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 sold in accordance with certain resale  restrictions.  If
PennFed meets specified current public information requirements,  each affiliate
of PennFed is able to sell in the public market, without registration, a limited
number of shares in any three-month period.

Federal Reserve System

The Federal  Reserve  Board  requires all  depository  institutions  to maintain
non-interest  bearing  reserves at specified  levels  against their  transaction
accounts (primarily  checking  accounts).  At June 30, 1999, Penn Federal was in
compliance with these reserve requirements.  The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS.
See "-Liquidity."

Savings  associations  are  authorized  to borrow from the Federal  Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust  other  reasonable   alternative   sources  of  funds,   including  FHLB
borrowings, before borrowing from the Federal Reserve Bank.

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.
<PAGE>
As a member, Penn Federal is required to purchase and maintain stock in the FHLB
of New York.  At June 30, 1999,  the Bank had $16.6  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 6.93%.

For the year ended June 30, 1999, dividends paid by the FHLB of New York to Penn
Federal totaled $1,124,000, resulting in a 6.90% 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 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.
<PAGE>
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, 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, 1999 of 2.3% of New
Jersey Taxable Income (as defined).  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,
based upon  representations of PennFed regarding its current and future holdings
and  operations,  that  PennFed  will be taxed as an  investment  company.  Penn
Savings Insurance Agency is taxed under the New Jersey Corporation  Business Tax
Act and is, therefore, taxed at a rate of 9%.

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.

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, 1999 regarding
the executive officers of the Bank who are not also directors.
<TABLE>
<CAPTION>


Name                        Age                        Positions Held with the Bank
------------------------------------------------------------------------------------------------------
<S>                         <C>            <C>
Lucy T. Tinker              59             Senior Executive Vice President and Chief Operating Officer

Jeffrey J. Carfora          41             Executive Vice President and Chief Financial Officer

Barbara A. Flannery         43             Executive Vice President and Retail Banking Group Executive

James M. O'Brien            47             Executive Vice President and Lending Group Executive
</TABLE>
<PAGE>
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, 1999, the Company and its subsidiaries had a total of 257 employees,
including 41 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 following table
sets forth information  relating to each of the Company's  properties as of June
30, 1999.

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, 1999 was $19.2 million.
<PAGE>
<TABLE>
<CAPTION>
                                                                                                Lease                   Total
                                                                     Owned or                Expiration               Approximate
Location                               Acquired                       Leased                    Date                Square Footage
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                          <C>                     <C>                        <C>
Home office:
36 Ferry Street
Newark, New Jersey                       1954                          Owned                        --                    3,700

Operations Center:
622 Eagle Rock Avenue
West Orange, New Jersey                  1988                          Owned                        --                   48,063(1)

Branch Offices:
59 Main Street
Sayreville, New Jersey (2)               1982                          Owned                        --                    3,400

Pathmark Office
1043 US Highway 9 N
Old Bridge, New Jersey                   1992                         Leased                  11/30/99                      500

410 Bergen Street
Harrison, New Jersey                     1983                         Leased                  11/30/03                    2,000

77 Main Street
Farmingdale, New Jersey                  1984                          Owned                        --                    1,785

471 County Road 520
Marlboro, New Jersey                     1978                          Owned                        --                    2,000

1696 Route 88 West
Brick, New Jersey                        1975                          Owned                        --                    1,525

155 Central Avenue
East Newark, New Jersey                  1973                          Owned                        --                    1,771

37 Wilson Avenue
Newark, New Jersey                       1976                          Owned                        --                    7,500

493 Bloomfield Avenue
Montclair, New Jersey                    1991                          Owned                        --                    7,395(3)

323 Orange Road
Montclair, New Jersey                    1989                          Owned                        --                    1,650

620 Bloomfield Avenue
Verona, New Jersey                       1995                          Owned                        --                    5,460(4)

597 Valley Road
Montclair, New Jersey                    1989                          Owned                        --                    5,467(5)

265 Bloomfield Avenue
Caldwell, New Jersey                     1995                          Owned                        --                    7,140

198 Jefferson Street
Newark, New Jersey (6)                   1993                          Owned                        --                    2,070

23 Little Falls Road
Fairfield, New Jersey                    1995                          Owned                        --                    4,125
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                             Lease                     Total
                                                                         Owned or         Expiration                Approximate
Location                                              Acquired            Leased             Date                  Square Footage
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>              <C>               <C>                      <C>
340 Atlantic City Boulevard
(U.S. Highway 9 South)
Bayville, New Jersey                                     1997             Leased            8/31/07                       3,600

133 South Livingston Avenue
Livingston, New Jersey                                   1999             Leased            6/30/09                       2,636

916 Fischer Boulevard
Toms River, New Jersey                                   1999             Leased            9/30/03                       2,500

Other Properties:

151 Eagle Rock Avenue (future branch location)
Roseland, New Jersey                                     1997              Owned                 --                       8,300

77 Main Street
Sayreville, New Jersey(2)                                1997              Owned                 --                       4,932

White Horse Pike
Winslow, New Jersey                                      1986              Owned                 --                  4.01 acres

</TABLE>
-------------------
(1)  Includes 20,332 square feet leased to unaffiliated third parties.
(2)  The 59 Main Street branch was relocated to 77 Main Street in Sayreville, NJ
     on July 19, 1999. The 59 Main Street property is under contract for sale.
(3)  Includes 2,100 square feet leased to unaffiliated third parties.
(4)  Land is leased through March 14, 2000 with a 5 year option.
(5)  Includes 3,080 square feet leased to unaffiliated third parties.
(6)  The property was purchased by the Company at the lease expiration of August
     31, 1998.


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


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.
<PAGE>
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  intends  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, 1999.


                                     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 9, 1999,  there were
approximately  560  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.  The closing price of a common share was $15.75
at June 30, 1999 compared to $16.56 at June 30, 1998.
<TABLE>
<CAPTION>
                                        Fiscal  1999 Closing Price                Fiscal  1998 Closing Price
                                     -------------------------------           --------------------------------
                                         High                  Low                 High                   Low
                                     ---------             ---------           ---------              ---------
<S>                                  <C>                   <C>                 <C>                    <C>
Quarter Ended:
September 30, 1998 and 1997          $ 16.8750             $ 10.8750           $ 15.7500              $ 13.5625
December 31, 1998 and 1997             14.2500               10.2500             17.3750                14.6875
March 31, 1999 and 1998                16.0000               12.7500             19.0000                15.8750
June 30, 1999 and 1998                 15.7500               14.0000             18.3750                16.5000
</TABLE>

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.
<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,
                                                       ----------------------------------------------------------------------
                                                          1999           1998           1997           1996           1995
                                                       ----------     ----------     ----------     ----------     ----------
                                                                       (In thousands, except per share amounts)
<S>                                                    <C>            <C>            <C>            <C>            <C>
Selected Financial Condition Data:
Total assets .....................................     $1,558,763     $1,551,938     $1,321,751     $1,086,524     $  868,926
Loans receivable, net ............................      1,066,611      1,095,852        931,451        652,571        467,677
Investment securities ............................        293,282        178,310         35,290         21,288         17,558
Mortgage-backed securities .......................        127,983        204,452        288,539        346,068        319,436
Deposits .........................................      1,063,600      1,028,100        918,160        836,416        713,524
Total borrowings .................................        333,203        361,965        288,215        146,700         50,830
Trust Preferred securities, net ..................         32,743         32,681           --             --             --
Stockholders' equity .............................        107,500        103,703         97,270         90,564         94,170

Book value per common share ......................          13.03          11.87          10.92          10.25           9.09
Tangible book value per common share .............          11.68          10.33           9.13           8.17           7.06



</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                Year ended June 30,
------------------------------------------------------------------------------------------------------------------------------
                                                         1999          1998          1997(1)             1996          1995
                                                       ---------     ---------      ---------         ---------     ---------
                                                                     (In thousands, except per share amounts)
<S>                                                    <C>            <C>            <C>            <C>            <C>
Selected Operating Data:
Total interest and dividend income ...............     $ 105,557     $ 100,805      $  85,401         $  68,123     $  52,719
Total interest expense ...........................        71,918        68,043         53,073            39,121        27,153
                                                       ---------     ---------      ---------         ---------     ---------
Net interest and dividend income .................        33,639        32,762         32,328            29,002        25,566
Provision for loan losses ........................           780           600            635               610           569
                                                       ---------     ---------      ---------         ---------     ---------
Net interest income after provision for
   loan losses ...................................        32,859        32,162         31,693            28,392        24,997
                                                       ---------     ---------      ---------         ---------     ---------
Service charges ..................................         2,113         1,974          1,666             1,602         1,476
Net gain (loss) from real estate operations                   31          (156)          (181)              104           117
Net gain (loss) on sales of loans ................           860           528             --                --            --
Net gain on sales of investment securities .......            --            --             --                94            --
Other non-interest income ........................           542           321            298               402           532
                                                       ---------     ---------      ---------         ---------     ---------
Total non-interest income ........................         3,546         2,667          1,783             2,202         2,125
                                                       ---------     ---------      ---------         ---------     ---------
Total non-interest expenses ......................        18,644        17,389         22,385(1)         17,642        17,561
                                                       ---------     ---------      ---------         ---------     ---------
Income before taxes ..............................        17,761        17,440         11,091            12,952         9,561
Income tax expense ...............................         6,304         6,242          4,205             5,111         3,921
                                                       ---------     ---------      ---------         ---------     ---------
Net income .......................................     $  11,457     $  11,198      $   6,886(1)      $   7,841     $   5,640
                                                       =========     =========      ===========       =========     =========

Net income per common share:
Basic ............................................     $    1.36     $    1.25      $    0.77(1)      $    0.80     $    0.54
                                                       =========     =========      ===========       =========     =========
Diluted ..........................................     $    1.29     $    1.16      $    0.73(1)      $    0.77     $    0.54
                                                       =========     =========      ===========       =========     =========
</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.
<PAGE>
<TABLE>
<CAPTION>
                                                                                  At and for the year ended June 30,
                                                                --------------------------------------------------------------------
Selected Financial Ratios and Other Data:                        1999           1998         1997(1)            1996          1995
                                                                ------         ------        ------            ------        ------
 <S>                                                             <C>            <C>           <C>               <C>           <C>
Performance Ratios:
Return on average assets (ratio of net income to
   average total assets) ...................................      0.74%          0.78%         0.58%(1)          0.82%         0.74%
Return on average stockholders' equity (ratio of
   net income to average stockholders' equity) .............     11.03          10.96          7.42(1)           8.36          5.97
Net interest rate spread during the year ...................      2.01           2.12          2.58              2.96          3.24
Net interest margin (net interest and dividend
   income to average interest-earning assets) ..............      2.24           2.38          2.83              3.22          3.58
Ratio of average interest-earning assets to average
   deposits,  borrowings and Trust Preferred securities ....    104.82         105.20        105.30            105.87        109.05
Ratio of earnings to fixed charges(2):
   Excluding interest on deposits ..........................      1.76x          1.88x         1.86x             3.35x         7.28x
   Including interest on deposits ..........................      1.25x          1.26x         1.21x             1.33x         1.35x
Ratio of non-interest expense to average total assets ......      1.20%          1.22%         1.87%(1)          1.84%         2.31%
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) ..............     44.86          42.65         57.95(1)          48.53         58.63

Asset Quality Ratios:
Non-accruing loans to total loans at end of year ...........      0.34           0.34          0.59              0.95          1.18
Allowance for loan losses to non-accruing loans
   at end of year ..........................................     87.44          74.18         47.80             42.52         51.39
Allowance for loan losses to total loans at end of year ....      0.30           0.25          0.28              0.40          0.61
Non-performing assets to total assets at end of year .......      0.30           0.35          0.48              0.67          0.78
Ratio of net charge-offs during the year to average
   loans outstanding during the year .......................      0.03           0.04          0.08              0.16          0.19

Capital Ratios:
Stockholders' equity to total assets at end of year ........      6.90           6.68          7.36              8.34         10.84
Average stockholders' equity to average total assets .......      6.67           7.14          7.76              9.80         12.44

Tangible capital to tangible assets at end of year(3) ......      7.88           7.09          5.61              5.92          6.29
Core capital to adjusted tangible assets at end of year(3) .      7.88           7.11          5.64              5.97          6.38
Risk-based capital to risk-weighted assets at end of year(3)     16.29          15.16         12.22             13.47         14.49

Other Data:
Number of branch offices at end of year ....................        20             18            17                17            17
Number of deposit accounts at end of year ..................    88,200         87,500        85,400            81,700        78,800

</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%.
<PAGE>
(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.


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.  Results  of  operations  are also
affected by the  Company's  provision  for loan losses and  operating  expenses.
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  law,  regulations  or  government  policies may also have a material
impact on the Company.

Management Strategy

Management's  primary  goal  continues  to be to  improve  profitability,  while
continuing  to manage  risks,  including  interest  rate risk,  so as to enhance
stockholder value, and to foster and maintain 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  originating  and purchasing  traditional
one- to four-family  first  mortgage loans secured by properties  located in New
Jersey. The Company  originated or purchased $326.7 million,  $373.6 million and
$337.3  million in one- to four-family  mortgage loans in fiscal 1999,  1998 and
1997,  respectively.  The Company's  interest income has been derived  primarily
from one- to four-family mortgage loans on residential real estate which totaled
$915.2 million or 86.15% of the Company's gross loan portfolio at June 30, 1999.
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. In periods of a
higher interest rate and steeper yield curve environment,  such as the beginning
of fiscal 2000, loan sale activity is expected to be reduced.  The level of such
activity  will  continue to be  evaluated  with primary  consideration  given to
interest rate risk and long-term profitability objectives.
<PAGE>
Increasing the  Commercial and  Multi-Family  and Consumer Loan  Portfolios.  In
addition to one- to four-family  residential first mortgage lending, the Company
plans to continue  its  emphasis on  commercial  and  multi-family  and consumer
lending.  Such loans reprice more frequently,  have shorter  maturities,  and/or
have higher yields than one-to  four-family  first mortgage  loans.  The Company
originated  $75.5  million,  $56.5 million and $31.7  million of commercial  and
multi-family and consumer loans in fiscal 1999, 1998 and 1997, respectively.

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 0.30% at June 30, 1999.

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  $16.9
million, or 21.34%, in fiscal 1999 and $12.2 million, or 18.26%, in fiscal 1998.

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 origination and purchase of first
mortgage  products with shorter terms to maturity  and/or with  adjustable  rate
features,  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  whole  mortgage
loan sales whereby  longer-term fixed rate conventional  loans have been sold to
reduce the duration of its fixed rate loan portfolios.  In addition, the Company
has  purchased   government   agency  or  callable   securities  with  short  to
intermediate average lives or which have adjustable rate features.  Furthermore,
as part of its interest rate risk strategy,  the Company has  emphasized  longer
term    certificates   of   deposit   and   checking   products   and   utilized
intermediate-term  borrowings.  The  Company  has also  periodically  engaged in
intermediate-term  interest  rate swaps  designed  to extend the  maturities  of
short-term  certificates of deposit to three to five years.  See "-Interest Rate
Sensitivity Analysis" and "-Asset/Liability Strategy."

Improving  Non-Interest Income. The Company continues 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 $386,000,  or 16.8%,  increase  for fiscal 1999  compared to fiscal
1998, due to growth in checking accounts and earnings from the Bank's Investment
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.

Controlling   Non-Interest   Expenses.   Non-interest   expenses  are  carefully
monitored,  which include  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, 1999.
<PAGE>
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  3.5
years. For interest rate swaps, the table 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 10% and 18%.  Commercial and  multi-family  real estate
loans are  assumed  to prepay at an  annualized  rate  between  9% and 38% while
consumer loans are assumed to prepay at a 34% rate.  Fixed and  adjustable  rate
mortgage-backed  securities have annual payment  assumptions ranging from 21% to
33%.  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.
<PAGE>
The Company assumes, based on historical information, that $131.9 million or 80%
of savings  accounts at June 30, 1999,  are core  deposits  and are,  therefore,
expected to roll-off  after five  years.  The  remaining  savings  accounts  are
assumed  to  roll-off  over the first  eighteen  months.  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.
<TABLE>
<CAPTION>


                                                                               Maturing or Repricing
                                                        ---------------------------------------------------------------
                                                                                 Year ended June 30,
                                                        ---------------------------------------------------------------
                                                             2000               2001            2002            2003
                                                        -----------      -----------      -----------      -----------
                                                                              (Dollars in thousands)
<S>                                                     <C>              <C>              <C>              <C>
Fixed rate mortgage loans including
   one- to four-family and commercial
   and multi-family ................................    $    89,735      $    81,496      $    73,210      $    66,737
   Average interest rate ...........................           7.22%            7.22%            7.22%            7.22%

Adjustable rate mortgage loans including
   one- to four-family and commercial
   and multi-family ................................    $   130,005      $    69,744      $    57,769      $    53,939
   Average interest rate ...........................           7.29%            7.35%            7.30%            7.37%

Consumer loans including
   demand loans ....................................    $    49,305      $     9,832      $     6,663      $     4,585
   Average interest rate ...........................           7.20%            7.78%            7.78%            7.78%

Mortgage-backed securities .........................    $    52,567      $    39,241      $    12,405      $    10,138
   Average interest rate ...........................           7.03%            6.89%            7.03%            7.03%

Investment securities and other ....................    $    66,663      $      --        $   214,538      $     2,165
   Average interest rate ...........................           7.12%            0.00%            6.69%            8.73%

   Total interest-earning assets ...................    $   388,275      $   200,313      $   364,585      $   137,564
                                                        ===========      ===========      ===========      ===========

Savings deposits ...................................    $    21,984      $    10,993      $      --        $      --
   Average interest rate ...........................           1.70%            1.70%            0.00%            0.00%

Money market and demand deposits
   (transaction accounts) ..........................    $    12,398      $      --               --        $      --
   Average interest rate ...........................           2.05%            0.00%            0.00%            0.00%

Certificates of deposit ............................    $   616,544      $    99,868      $    58,054      $     5,945
   Average interest rate ...........................           5.09%            5.44%            5.90%            5.69%

FHLB of New York advances ..........................    $    20,000      $    20,000      $   140,000      $    45,000
   Average interest rate ...........................           6.59%            5.80%            6.06%            5.60%

Other borrowings ...................................    $    49,463      $    19,875      $    19,400      $      --
   Average interest rate ...........................           4.97%            5.77%            6.10%            0.00%

Trust Preferred securities .........................    $      --        $      --        $      --        $      --
   Average interest rate ...........................           0.00%            0.00%            0.00%            0.00%

   Total deposits, borrowings and
     Trust Preferred securities ....................    $   720,389      $   150,736      $   217,454      $    50,945
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                                                                               Maturing or Repricing
                                                        ---------------------------------------------------------------
                                                                                 Year ended June 30,
                                                        ---------------------------------------------------------------
                                                             2000               2001            2002            2003
                                                        -----------      -----------      -----------      -----------
                                                                              (Dollars in thousands)
<S>                                                     <C>              <C>              <C>              <C>
Interest rate swaps
  (pay fixed, receive floating) ....................    ($  120,000)     $    90,000      $    30,000      $      --
   Average pay rate ................................           6.49%            5.88%            5.64%
   Average receive rate ............................           5.06%

   Total deposits, borrowings and Trust
     Preferred securities including the effects
     of interest rate swaps ........................    $   600,389      $   240,736      $   247,454      $    50,945
                                                        ===========      ===========      ===========      ===========
Interest earning assets less deposits,
   borrowings and Trust Preferred securities
   (interest-rate sensitivity gap) ...............     ($   212,114)    ($    40,423)     $   117,131      $    86,619
                                                        ===========      ===========      ===========      ===========


Cumulative interest-rate sensitivity gap .........     ($   212,114)    ($   252,537)     ($  135,406)     ($   48,787)
                                                        ===========      ===========      ===========      ===========
Cumulative interest-rate sensitivity
  gap as a percentage of total assets
  at June 30, 1999 .................................        (13.61%)         (16.20%)          (8.69%)          (3.13%)
                                                        ===========      ===========      ===========      ===========
Cumulative interest-rate sensitivity gap
  as a percentage of total interest-
  earning assets at June 30, 1999 ..................        (14.18%)         (16.88%)          (9.05%)          (3.26%)
                                                        ===========      ===========      ===========      ===========
Cumulative interest-earning assets as a
  percentage of cumulative deposits,
  borrowings and Trust Preferred securities
  at June 30, 1999 .................................          64.67%           69.98%           87.56%           95.72%
                                                        ===========      ===========      ===========      ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                               Maturing or Repricing
                                                        -----------------------------------------------------------

                                                                                 Year ended June 30,
                                                        -----------------------------------------------------------
                                                            2004         Thereafter        Total         Fair Value
                                                        -----------     -----------     -----------     -----------
<S>                                                     <C>              <C>            <C>             <C>
Fixed rate mortgage loans including
   one- to four-family and commercial
   and multi-family ................................    $    61,508     $   264,689     $   637,375     $   629,313
   Average interest rate ...........................           7.23%           7.26%           7.24%

Adjustable rate mortgage loans including
   one- to four-family and commercial
   and multi-family ................................    $    20,729     $    17,313     $   349,499     $   345,820
   Average interest rate ...........................           6.64%           7.98%           7.31%

Consumer loans including
   demand loans ....................................    $     1,500     $      --       $    71,885     $    71,930
   Average interest rate ...........................           7.78%           0.00%           7.38%

Mortgage-backed securities .........................    $     8,374     $     4,970     $   127,695     $   128,617
   Average interest rate ...........................           7.02%           7.04%           6.99%

Investment securities and other ....................    $      --       $    26,539     $   309,905     $   298,503
   Average interest rate ...........................           0.00%           8.15%           6.92%

   Total interest-earning assets ...................    $    92,111     $   313,511     $ 1,496,359     $ 1,474,183
                                                        ===========     ===========     ===========     ===========

Savings deposits ...................................    $      --       $   131,914     $   164,893     $   164,893
   Average interest rate ...........................           0.00%           1.70%           1.70%

Money market and demand deposits
   (transaction accounts) ..........................    $      --       $    96,001     $   108,399     $   108,399
   Average interest rate ...........................           0.00%           0.67%           0.83%

Certificates of deposit ............................    $     6,683     $        53     $   787,147     $   788,093
   Average interest rate ...........................           5.33%           4.52%           5.20%

FHLB of New York advances ..........................    $    19,000     $       465     $   244,465     $   245,103
   Average interest rate ...........................           5.15%           7.39%           5.93%

Other borrowings ...................................    $      --       $      --       $    88,738     $    88,810
   Average interest rate ...........................           0.00%           0.00%           5.40%

Trust Preferred securities .........................    $      --       $    32,743     $    32,743     $    34,414
   Average interest rate ...........................           0.00%           8.90%           8.90%

   Total deposits, borrowings and
     Trust Preferred securities ....................    $    25,683     $   261,178     $ 1,426,385     $ 1,429,712
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                               Maturing or Repricing
                                                        -----------------------------------------------------------

                                                                                 Year ended June 30,
                                                        -----------------------------------------------------------
                                                            2004         Thereafter        Total         Fair Value
                                                        -----------     -----------     -----------     -----------
<S>                                                     <C>             <C>             <C>             <C>
Interest rate swaps
  (pay fixed, receive floating) ....................    $      --       $      --       $      --       ($      256)
   Average pay rate ................................                                           5.95%
   Average receive rate ............................                                           5.06%

   Total deposits, borrowings and Trust
     Preferred securities including the effects
     of interest rate swaps ........................    $    25,683     $   261,178     $ 1,426,385     $ 1,429,456
                                                        ===========     ===========     ===========     ===========
Interest earning assets less deposits,
   borrowings and Trust Preferred securities
   (interest-rate sensitivity gap) ...............      $    66,428     $    52,333     $    69,974
                                                        ===========     ===========     ===========

Cumulative interest-rate sensitivity gap .........      $    17,641     $    69,974
                                                        ===========     ===========
Cumulative interest-rate sensitivity
  gap as a percentage of total assets
  at June 30, 1999 .................................           1.13%           4.49%
                                                        ===========     ===========
Cumulative interest-rate sensitivity gap
  as a percentage of total interest-
  earning assets at June 30, 1999 ..................           1.18%           4.68%
                                                        ===========     ===========
Cumulative interest-earning assets as a
  percentage of cumulative deposits,
  borrowings and Trust Preferred securities
  at June 30, 1999 .................................         101.51%         104.91%
                                                        ===========     ===========
</TABLE>
<PAGE>
At June 30, 1999, 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 $212.1 million,
representing  a one year negative gap of 13.61% of total  assets,  compared to a
one  year  negative  gap of  7.28% of total  assets  at June  30,  1998.  See "-
Asset/Liability Strategy." The Company's negative gap position widened from June
30,  1998 as a result of a recent  rise in market  rates and a steeper  Treasury
yield  curve than was  present  at the end of fiscal  1998.  Throughout  most of
fiscal 1999,  a  historically  flat yield curve and low market  rates  supported
strong  residential  lending  activity that was primarily  focused on long-term,
fixed rate products. High levels of prepayments accompanied the low market rates
and asset  cashflows  remained  robust.  To mitigate  the  negative  impact such
lending activity had on interest rate risk, the Company  periodically sold newly
originated, low-coupon fixed rate loans into the secondary market. Proceeds from
such sales were partially  reinvested in callable  government  agency securities
with final  maturities of 15 years or less,  but initially  callable  within one
year and periodically thereafter, and partially to reduce borrowings.  Growth in
short-term  certificates  of  deposit  outpaced  activity  in  intermediate-term
products  as  depositors  were  generally  unwilling  to invest  in  longer-term
products in the flat interest rate  environment.  At June 30, 1999, market rates
were higher and the Treasury yield curve was steeper than was seen previously in
fiscal 1999. As a result,  prepayment  expectations have declined and asset cash
flows have  lengthened.  In  addition,  the majority of the  Company's  callable
agency security portfolio,  previously assumed to be called within one year, has
been extended to its average life.

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.
<PAGE>
As of June 30,  1999,  the Bank's  internally  generated  initial  NPV ratio was
9.81%.  Following a 2% increase in interest  rates,  the Bank's  Post-Shock  NPV
ratio was 7.30%. The change in the NPV ratio, or the Bank's Sensitivity  Measure
was 2.51%.  Though NPV is "measured" on an  unconsolidated  basis for regulatory
purposes,  it is managed  on a  consolidated  basis.  As of June 30,  1999,  the
Company's initial NPV ratio was 10.22%,  the Post-Shock ratio was 7.65%, and the
Sensitivity  Measure was 2.57%.  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,  coupled  with  non-institution
specific assumptions which are based on national averages.  As of June 30, 1999,
the Bank's  initial NPV ratio,  as measured  by the OTS,  was 8.01%,  the Bank's
Post-Shock  ratio was 4.96% and the  Sensitivity  Measure was 3.05%. At June 30,
1998,  the Bank's  initial NPV ratio,  as measured  by the OTS,  was 8.03%,  the
Post-Shock ratio was 6.02% and the Sensitivity Measure was 2.01%.

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.

At June 30, 1999,  based on its  internally  generated  simulation  models,  the
Company's  consolidated net interest income projected for one year forward would
decrease 8.8% 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 1, 3 and 5 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
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  and, during fiscal 1999 more routinely,  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.  $150 million of such loans were sold in fiscal 1999. The
level of such activity will continue to be evaluated with primary  consideration
given to interest rate risk and long-term profitability  objectives.  In periods
of a higher  interest  rate and  steeper  yield  curve  environment,  loan  sale
activity is expected to be reduced.
<PAGE>
4. The Company has purchased government agency guaranteed investments with final
maturities  within 15 years  which are  initially  callable  within one year and
periodically  thereafter.  Such  investments  are expected to be called prior to
their final  maturities.  The Company may continue to purchase such investments,
as well as government  agency guaranteed  mortgage-backed  securities when yield
and duration analysis point to such purchases as favarable  vehicles in managing
interest rate risk.

5. 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 and interest rate swaps,  subject to
market conditions.

6.The Company has also emphasized  growth in core deposit 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 1999,  each of the  strategies  noted above was employed to reduce
the  Company's  sensitivity  to  changes in  interest  rates.  Periodic  one- to
four-family  loan sales coupled with lower market rates,  increased  prepayments
and a  flat  Treasury  yield  curve  resulted  in a  5.8%  decline  in  one-  to
four-family  first  mortgage  loans  between  June 30,  1998 and June 30,  1999.
Despite  the sale of $137.7  million  of fixed  rate one- to  four-family  first
mortgage loans, such balances increased $30.2 million in fiscal 1999. Adjustable
rate one- to four-family  first mortgage loan balances declined $86.6 million in
fiscal 1999, despite the origination and purchase of $53.6 million of adjustable
rate loans. Commercial and multi-family real estate loans increased $8.8 million
from June 30, 1998; fixed rate loans declined 30.3%, while adjustable rate loans
increased  29.3%.  Consumer  loan balances  increased  $18.5 million or 34.1% in
fiscal  1999.  Approximately  50% of the growth in  consumer  loans  occurred in
prime-based  home  equity  lines of  credit,  while the  remainder  occurred  in
products of significantly shorter duration than one- to four-family  residential
mortgages.

Additionally,  medium and  long-term  funds  increased $52 million from June 30,
1998, while  short-term funds decreased $46.3 million.  This shift was supported
through the use of interest rate swaps,  designed to synthetically  lengthen the
maturities of short-term deposits, as well as growth in demand deposit accounts,
FHLB of New York advances and other borrowings.

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. Treasury
and government agency securities and mortgage-backed securities.

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.
<PAGE>
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  26.0%  of  total  deposits  at  June  30,  1999,  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.

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,
1999, 1998 and 1997 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.
<PAGE>
<TABLE>
<CAPTION>









                                                                                      Year ended June 30,
                                                      ------------------------------------------------------------------------------
                                                                          1999                                   1998
                                                      --------------------------------------  --------------------------------------
                                                         Average       Interest                 Average        Interest
                                                      Outstanding      Earned/         Yield/ Outstanding       Earned/       Yield/
                                                         Balance         Paid          Rate     Balance          Paid          Rate
                                                       ----------     ----------       ----   ----------      ----------       ----
                                                                                   (Dollars in thousands)
<S>                                                    <C>            <C>              <C>    <C>             <C>              <C>
Interest-earning assets:
    One- to four-family mortgage loans .............   $  970,924     $   67,785       6.98%  $  889,169      $   64,852       7.29%
    Commercial and multi-family real
       estate loans ................................       68,528          5,922       8.64       58,196           5,235       9.00
    Consumer loans .................................       63,627          4,581       7.20       45,794           3,735       8.16
                                                       ----------     ----------              ----------      ----------

        Total loans receivable .....................    1,103,079         78,288       7.10      993,159          73,822       7.43

    Federal funds sold .............................        1,379             68       4.93          346              18       5.20
    Investment securities and other ................      234,576         16,318       6.96      134,239           9,814       7.31
    Mortgage-backed securities .....................      161,702         10,883       6.73      248,812          17,151       6.89
                                                       ----------     ----------              ----------      ----------
        Total interest-earning assets ..............    1,500,736     $  105,557       7.03    1,376,556      $  100,805       7.32
                                                                      ==========                              ==========
 Non-interest earning assets .......................       57,450                                 54,614
                                                       ----------                             ----------
        Total assets ...............................   $1,558,186                             $1,431,170
                                                       ==========                             ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                      Year ended June 30,
                                                      ------------------------------------------------------------------------------
                                                                          1999                                   1998
                                                      --------------------------------------  --------------------------------------
                                                         Average       Interest                 Average        Interest
                                                      Outstanding      Earned/         Yield/ Outstanding       Earned/       Yield/
                                                         Balance         Paid          Rate     Balance          Paid          Rate
                                                       ----------     ----------       ----   ----------      ----------       ----
                                                                                   (Dollars in thousands)
<S>                                                    <C>            <C>              <C>    <C>             <C>              <C>
Deposits, borrowings and Trust Preferred securities:
    Money market and demand deposits................   $  102,425     $    1,188       1.16%  $   84,958      $    1,049       1.23%
    Savings deposits ...............................      163,636          2,879       1.76      166,243           3,638       2.19
    Certificates of deposit ........................      792,507         44,581       5.63      742,341          43,513       5.86
                                                       ----------     ----------              ----------      ----------
        Total deposits .............................    1,058,568         48,648       4.60      993,542          48,200       4.85

    FHLB of New York advances ......................      266,906         16,052       6.01      218,568          13,403       6.13
    Other borrowings ...............................       73,514          4,086       5.56       73,599           4,266       5.80
                                                       ----------     ----------              ----------      ----------
        Total deposits and borrowings ..............    1,398,988         68,786       4.92    1,285,709          65,869       5.12
    Trust Preferred securities .....................       32,712          3,132       9.57       22,748           2,174       9.56
                                                       ----------     ----------              ----------      ----------
        Total deposits, borrowings
          and Trust Preferred securities ...........    1,431,700     $   71,918       5.02    1,308,457      $   68,043       5.20
                                                                      ==========                              ==========
    Other liabilities ..............................       22,619                                 20,576
                                                       ----------                             ----------

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

    Stockholders' equity ...........................      103,867                                102,137
                                                       ----------                             ----------
        Total liabilities and
           stockholders' equity ....................   $1,558,186                             $1,431,170
                                                       ==========                             ==========

    Net interest income and net interest
        rate spread ................................                  $   33,639       2.01%                  $   32,762       2.12%
                                                                      ==========       ====                   ==========       ====
    Net interest-earning assets and
        interest margin ............................   $   69,036                      2.24%  $   68,099                       2.38%
                                                       ==========                      ====   ==========                       ====
    Ratio of interest-earning assets to
        deposits, borrowings and
        Trust Preferred securities .................                                 104.82%                                 105.20%
                                                                                     ======                                  ======

</TABLE>
<PAGE>
<TABLE>
<CAPTION>






                                                                   Year ended June 30,
                                                       ----------------------------------------
                                                                            1997
                                                       ----------------------------------------
                                                          Average       Interest
                                                       Outstanding      Earned/          Yield/
                                                          Balance        Paid             Rate
                                                       -----------    -----------       -------
<S>                                                    <C>                 <C>            <C>
Interest-earning assets:
    One- to four-family mortgage loans .............   $   713,260     $   53,554         7.51%
    Commercial and multi-family real
       estate loans ................................        54,396          4,912         9.03
    Consumer loans .................................        35,977          3,302         9.18
                                                       -----------     ----------

        Total loans receivable .....................       803,633         61,768         7.69

    Federal funds sold .............................          --             --            --
    Investment securities and other ................        22,611          1,603         7.09
    Mortgage-backed securities .....................       317,394         22,030         6.94
                                                       -----------     ----------

        Total interest-earning assets ..............     1,143,638     $   85,401         7.47
                                                                       ==========

 Non-interest earning assets .......................        53,664
                                                       -----------

        Total assets ...............................   $ 1,197,302
                                                       ===========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                                                                   Year ended June 30,
                                                       ----------------------------------------
                                                                            1997
                                                       ----------------------------------------
                                                          Average       Interest
                                                       Outstanding      Earned/          Yield/
                                                          Balance        Paid             Rate
                                                       -----------    -----------       -------
<S>                                                    <C>                 <C>            <C>
Deposits, borrowings and Trust Preferred securities:
    Money market and demand deposits................   $    80,099    $       977         1.22%
    Savings deposits ...............................       174,114          3,876         2.23
    Certificates of deposit ........................       615,870         35,319         5.73
                                                       -----------    -----------

        Total deposits .............................       870,083         40,172         4.62

    FHLB of New York advances ......................       147,945          9,078         6.14
    Other borrowings ...............................        68,084          3,823         5.62
                                                       -----------    -----------

        Total deposits and borrowings ..............     1,086,112         53,073         4.89
    Trust Preferred securities .....................          --             --            --
                                                       -----------    -----------

        Total deposits, borrowings
          and Trust Preferred securities ...........     1,086,112     $   53,073         4.89
                                                                       ==========
     Other liabilities ..............................       18,337
                                                       -----------

        Total liabilities ..........................     1,104,449

    Stockholders' equity ...........................        92,853
                                                       -----------
        Total liabilities and
           stockholders' equity ....................   $ 1,197,302
                                                       ===========

    Net interest income and net interest
        rate spread ................................                   $   32,328          2.58%
                                                                       ==========          ====
     Net interest-earning assets and
        interest margin ............................   $    57,526                         2.83%
                                                       ===========                         ====
     Ratio of interest-earning assets to
        deposits, borrowings and
        Trust Preferred securities .................                                     105.30%
                                                                                         ======
</TABLE>
<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,
                                                        ---------------------------------------------------
                                                                            1999 vs. 1998
                                                        ---------------------------------------------------
                                                                    Increase (Decrease)
                                                                        Due to
                                                         -------------------------------------      Total
                                                                                       Rate/      Increase
                                                          Volume         Rate         Volume     (Decrease)
                                                         --------      --------      --------      --------
                                                                            (In thousands)
<S>                                                      <C>           <C>           <C>           <C>
Interest-earning assets:
   One- to four-family
      mortgage loans ...............................     $  5,963      $ (2,775)     $   (255)     $  2,933
   Commercial and multi-family
      real estate loans ............................          929          (206)          (36)          687
   Consumer loans ..................................        1,455          (438)         (171)          846
                                                         --------      --------      --------      --------
      Total loans receivable .......................        8,347        (3,419)         (462)        4,466
   Federal funds sold ..............................           54            (1)           (3)           50
   Investment securities and other .................        7,336          (476)         (356)        6,504
   Mortgage-backed securities ......................       (6,005)         (405)          142        (6,268)
                                                         --------      --------      --------      --------
       Total interest-earning assets ................    $  9,732      $ (4,301)     $   (679)     $  4,752
                                                         ========      ========      ========      ========


Deposits, borrowings and Trust Preferred securities:
   Money market and demand deposits.................     $    216      $    (64)     $    (13)     $    139
   Savings deposits ................................          (57)         (713)           11          (759)
   Certificates of deposit .........................        2,941        (1,754)         (119)        1,068
                                                         --------      --------      --------      --------
      Total deposits ...............................        3,100        (2,531)         (121)          448
   FHLB of New York advances .......................        2,964          (258)          (57)        2,649
   Other borrowings ................................           (5)         (175)         --            (180)
                                                         --------      --------      --------      --------
      Total deposits and borrowings ................        6,059        (2,964)         (178)        2,917
   Trust Preferred securities ......................          952             4             2           958
                                                         --------      --------      --------      --------
      Total deposits, borrowings
        and Trust Preferred securities .............     $  7,011      $ (2,960)     $   (176)       $3,875
                                                         ========      ========      ========        ======

   Net change in net interest income ...............     $  2,721      $ (1,341)     $   (503)       $  877
                                                         ========      ========      ========        ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                         1998 vs. 1997
                                                           ------------------------------------
                                                                     Increase (Decrease)
                                                                           Due to
                                                           ------------------------------------        Total
                                                                                        Rate/        Increase
                                                            Volume         Rate         Volume      (Decrease)
                                                           --------      --------      --------      --------
<S>                                                        <C>           <C>           <C>           <C>
Interest-earning assets:
   One- to four-family
      mortgage loans ...............................       $ 13,208      $ (1,532)     $   (378)     $ 11,298
   Commercial and multi-family
      real estate loans ............................            343           (19)           (1)          323
   Consumer loans ..................................            901          (368)         (100)          433
                                                           --------      --------      --------      --------
      Total loans receivable .......................         14,452        (1,919)         (479)       12,054
   Federal funds sold ..............................           --            --              18            18
   Investment securities and other .................          7,914            50           247         8,211
   Mortgage-backed securities ......................         (4,760)         (152)           33        (4,879)
                                                           --------      --------      --------      --------
       Total interest-earning assets ................      $ 17,606      $ (2,021)     $   (181)     $ 15,404
                                                           ========      ========      ========     ========

Deposits, borrowings and Trust Preferred securities:
   Money market and demand deposits ................       $     59      $     12      $      1      $     72
   Savings deposits ................................           (175)          (66)            3          (238)
   Certificates of deposit .........................          7,253           781           160         8,194
                                                           --------      --------      --------      --------
      Total deposits ...............................          7,137           727           164         8,028
   FHLB of New York advances .......................          4,334            (6)           (3)        4,325
   Other borrowings ................................            310           123            10           443
                                                           --------      --------      --------      --------
      Total deposits and borrowings ................         11,781           844           171        12,796
   Trust Preferred securities ......................           --            --           2,174         2,174
                                                           --------      --------      --------      --------
      Total deposits, borrowings
        and Trust Preferred securities .............       $ 11,781      $    844      $  2,345      $ 14,970
                                                           ========      ========      ========      ========
   Net change in net interest income ...............       $  5,825      $ (2,865)     $ (2,526)     $    434
                                                           ========      ========      ========      ========
</TABLE>
<PAGE>
Financial Condition

Comparison of Financial Condition at June 30, 1999 and June 30, 1998

Total  assets at June 30, 1999 of $1.6 billion were  relatively  unchanged  from
June 30,  1998.  Loan  originations  and  purchases  were  more  than  offset by
principal  repayments and sales of one- to four-family first mortgage loans. The
Company  actively  employed a loan sale strategy  during fiscal 1999 to mitigate
the  effects of low  interest  rates and a flat yield  curve.  A $115.0  million
increase  in  investment  securities  was  partially  offset by a $76.5  million
decrease in mortgage-backed securities.

Deposits  increased $35.5 million to $1.064 billion at June 30, 1999 from $1.028
billion at June 30, 1998. The Company's focus on lower costing deposits resulted
in a $16.6  million,  or 6.5%,  increase in core deposits  (i.e.  demand,  money
market and savings). The remaining increase in deposits was modest and reflected
the Company's  reduced  funding needs due to the fiscal 1999 loan sale strategy.
FHLB of New York advances and other  borrowings  totaled  $333.2 million at June
30, 1999, a $28.8 million decrease from $362.0 million at June 30,1998.

Non-performing assets at June 30, 1999 totaled $4.6 million,  representing 0.30%
of total assets, compared to $5.4 million, or 0.35% of total assets, at June 30,
1998.  Non-accruing loans were $3.7 million with a ratio of non-performing loans
to total loans of 0.34% at June 30, 1999 and June 30,  1998.  Real estate  owned
decreased to $936,000 at June 30, 1999 from $1.6 million at June 30, 1998.

Stockholders'  equity at June 30, 1999 totaled $107.5 million compared to $103.7
million  at June 30,  1998.  The  increase  primarily  reflects  the net  income
recorded for the year ended June 30, 1999, partially offset by the repurchase of
618,000 shares of the Company's  outstanding stock at an average market price of
$14.12 per share and the declaration of dividends.


Results of Operations

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.
<PAGE>
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 31 basis points 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 35 basis  point  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.
<PAGE>
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 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 the current fiscal
year were  undertaken  to mitigate the effects of low interest  rates and a flat
yield curve.  Future  gains are expected to fluctuate  depending on the level of
loan  sale  activity.  A  $221,000  improvement  in  other  non-interest  income
reflected increases due to earnings from the Investment Services at Penn Federal
Savings Bank program. Through this program,  customers have convenient access to
financial   consulting/advisory  services  and  related  non-deposit  investment
products at local branch offices.

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 have increased 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.

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

General. For the year ended June 30, 1998 net income was $11.2 million, or $1.16
per  diluted  share,  as compared  to net income of $6.9  million,  or $0.73 per
diluted  share for the prior  year.  The year ended June 30, 1997  included  the
effects of the one-time  SAIF  recapitalization  assessment  which  totaled $4.8
million ($3.1 million after-tax), or $0.33 per share on a diluted basis.

Interest and Dividend  Income.  Interest and dividend  income for the year ended
June 30, 1998  increased to $100.8 million from $85.4 million for the year ended
June 30,  1997.  The  increase  in fiscal 1998 was due to an increase in average
interest-earning  assets,  primarily  residential  loans,  partially offset by a
decrease  in the  average  yield  earned  on  interest-earning  assets.  Average
interest-earning  assets  were  $1.377  billion for the year ended June 30, 1998
compared  to $1.144  billion for the prior year.  The  average  yield  earned on
interest-earning assets decreased to 7.32% for the year ended June 30, 1998 from
7.47% for the year ended June 30, 1997.
<PAGE>
Interest income on residential  one- to four-family  mortgage loans for the year
ended June 30, 1998  increased  $11.3  million,  or 21.1%,  when compared to the
prior year. The increase in interest  income on residential  one- to four-family
mortgage  loans was due to a $175.9  million  increase  in the  average  balance
outstanding  to $889.2  million  for the year ended June 30,  1998  compared  to
$713.3  million for the prior  year.  The  increase  in the  average  balance on
residential  one- to  four-family  mortgage  loans  was  partially  offset  by a
decrease of 0.22% in the average  yield  earned on this loan  portfolio to 7.29%
for the year ended June 30, 1998 from 7.51% for the prior year.

Interest on investment securities increased $8.2 million for the year ended June
30, 1998 from the prior year. The increase was primarily due to a $112.0 million
increase in the average balance  outstanding and a 0.22% increase in the average
yield earned on these assets for the year ended June 30, 1998.

Interest  income on the  mortgage-backed  securities  portfolio  decreased  $4.9
million,  or 22.1%,  for the year ended June 30,  1998 as  compared to the prior
year. The decrease in interest income on  mortgage-backed  securities  primarily
reflects a $68.6 million  decrease in the average balance  outstanding to $248.8
million  for the year ended June 30,  1998  compared  to $317.4  million for the
prior year.

Interest  Expense.  Interest expense  increased $15.0 million for the year ended
June 30, 1998 from $53.1 million for the year ended June 30, 1997.  The increase
was primarily  attributable to an increase in total average deposits,  primarily
certificates of deposit,  and FHLB of New York advances coupled with an increase
in the  Company's  cost of funds.  Interest  expense also  increased  due to the
issuance of the Trust  Preferred  securities.  Average  deposits and  borrowings
increased  $199.6  million for the year ended June 30,  1998  compared to fiscal
1997.  The  average  rate  paid on  deposits,  borrowings  and  Trust  Preferred
securities  increased  to 5.20% for the year ended June 30,  1998 from 4.89% for
the prior year.

Net Interest and Dividend Income.  Net interest and dividend income for the year
ended June 30, 1998 was $32.8 million,  reflecting a slight  increase from $32.3
million  recorded in the prior year. The increase  reflects the Company's growth
in  assets,   primarily  in  investment   securities  and  residential  one-  to
four-family mortgage loans. The increase in net interest and dividend income was
partially  offset by a decline in the net interest rate spread as well as timing
differences  between  the  receipt  of the  proceeds  from the  Trust  Preferred
securities  offering  and  full  implementation  of  the  Company's   investment
strategy.  The net  interest  rate spread and net  interest  margin for the year
ended June 30, 1998 were 2.12% and 2.38%, respectively, a decline from 2.58% and
2.83%,  respectively,  during the prior year.  For the year ended June 30, 1998,
the declines in net interest rate spread and net interest  margin were partially
due to the addition of the Trust Preferred  securities.  The declines in the net
interest rate spread and net interest margin were also  attributable to the flat
yield curve  environment  experienced in which higher yielding loans pre-paid at
accelerated rates and were replaced by lower yielding loans.

Provision for Loan Losses. The provision for loan losses for the year ended June
30, 1998 was $600,000 compared to $635,000 for the prior year. The allowance for
loan losses at June 30, 1998 of $2.8  million  showed an increase  from the $2.6
million at June 30,  1997.  The  allowance  for loan losses as a  percentage  of
non-performing loans was 74.18% at June 30, 1998, compared to 47.80% at June 30,
1997.
<PAGE>
Non-Interest  Income. For the year ended June 30, 1998,  non-interest income was
$2.7 million compared to $1.8 million for the prior year. Gains of approximately
$494,000  on  sales  of $70  million  of one-  to  four-family  mortgage  loans,
primarily  30 year fixed rate loans,  were  reflected in the year ended June 30,
1998. These loan sales were undertaken to manage  prepayment risk as part of the
Company's  asset/liability  management  strategy.  In addition  to these  gains,
growth in non-interest income was primarily attained through the introduction of
charging  non-customers for ATM transactions,  fees recorded for the origination
of loans provided to other  investors and an increase in service charges related
to  checking  accounts.  Furthermore,  for the year  ended  June 30,  1998,  the
increase  was  partially  attributable  to a decrease  in the net loss from real
estate operations. The net loss from real estate operations was $156,000 for the
year ended June 30, 1998  compared to a net loss from real estate  operations of
$181,000 for the prior year.

Non-Interest  Expenses.  Non-interest  expenses  were $17.4 million for the year
ended June 30, 1998 compared to $22.4 million for the prior year. The year ended
June 30, 1997  included  $4.8  million for the  one-time  SAIF  recapitalization
assessment. Excluding the effects of the SAIF assessment,  non-interest expenses
for the year ended June 30, 1998 were  slightly  lower than fiscal 1997.  Due to
expense control measures,  the Company's  non-interest  expenses as a percent of
average assets declined to 1.22% for the year ended June 30, 1998 from 1.47% for
the prior year, excluding the SAIF assessment.

Income Tax Expense. Income tax expense for the year ended June 30, 1998 was $6.2
million compared to $4.2 million for the year ended June 30, 1997. Excluding the
effects of the one-time SAIF recapitalization assessment,  income tax expense of
$6.0  million was recorded for the prior year.  The  effective  tax rate for the
year ended June 30, 1998 was 35.8%.  Excluding  the effects of the one-time SAIF
recapitalization assessment, the effective tax rate was 37.5% for the year ended
June 30, 1997.

Year 2000

The concern  comprising  the Year 2000 issue has its basis in the fact that many
existing computer programs have  traditionally used only two digits in many date
fields to  identify  the  year.  The  century  representation  has been  largely
assumed. As a century change rapidly approaches,  any  misinterpretation  of the
proper  meaning  could  cause  logic  and  other  software   errors  in  various
applications.  Year 2000  readiness  means  being  able to clearly  discern  and
traverse the century boundary in all applications.

It is  not,  however,  just  a  computer  issue.  Building,  communications  and
environmental systems are also involved.  The issue is further compounded by the
degree to which  other  entities,  such as bank  customers  and  suppliers,  are
successful in addressing this same issue. The Year 2000 issue affects  virtually
all organizations  globally.  Penn Federal has been taking, as have most banking
institutions, a proactive stance on this issue for several years.

A formal Year 2000 Project Plan (the "Year 2000 Plan") was prepared and approved
by the Company's  Board of Directors.  The Year 2000 Plan  identified  different
phases: awareness, assessment, renovation, testing and contingency planning. The
Board of Directors  continues to be updated on a monthly  basis as to the status
of all phases,  with an  independent  verification  of progress  completed  on a
quarterly basis. The OTS is also reviewing all of its regulated institutions for
Year 2000 preparedness.
<PAGE>
A task force,  with  representatives  from all  divisions  within the Bank,  was
assembled to implement  the Year 2000 Plan,  under the direction of an executive
vice  president  and a senior vice  president.  The task force engaged in a wide
range of associated  tasks.  These included  informing bank personnel  about the
complexity  of the issue,  assessing  its impact upon Penn  Federal  systems and
applications  and arranging for the  remediation of affected  items. As the Bank
primarily runs software purchased from a few key vendors, the task force met and
worked  closely with those vendors and  suppliers to ensure a smooth  transition
into the next millennium.

By  following a  carefully  prescribed  Year 2000 Plan,  as of June 30, 1999 all
mission-critical  systems,  including interfaces to the main systems,  have been
completely  renovated and tested.  Significant  progress is being made to inform
customers  of the  Company's  Year 2000  preparedness.  The  Company  intends to
continue to test systems and plans  throughout the remainder of 1999, as well as
sponsor regional seminars for customers.

Due to variables outside the direct control of the Company, contingency planning
is an  ongoing  process.  Members  of the task  force  have  responsibility  for
identifying a contingency plan for the different areas of software tested.  This
type of contingency  planning is critical because,  regardless of the validation
of systems,  the  potential  still  exists that the systems  will not operate as
expected.  If software  for certain  critical  systems  does not operate and the
current vendor is unable to supply Year 2000 compliant  software  upgrades,  the
use of an alternative vendor could be required to be pursued, at additional cost
to the Company.

Contingency planning also includes other factors,  such as potential disruptions
in vital utility  services,  which could negatively impact the Company's ability
to service its customers.  The Company has developed, and the Board of Directors
has reviewed and approved,  a business  resumption  contingency  plan. This plan
focuses on and attempts to anticipate  potential  problems  that may arise,  and
provides  alternative  contingency  planning  strategies to mitigate  risk.  The
business  resumption  contingency plan identifies actions that could help reduce
the  likelihood  or  lessen  the  impact  of a Year  2000  problem,  as  well as
identifies  the  appropriate  response  actions  to be taken in the event that a
problem does occur.

The  Company is  continuing  to review  and  assess the Year 2000  status of its
larger borrowers.  All commercial and multi-family loans have been evaluated for
Year 2000 exposure through an independent review process. As part of the current
credit approval process,  all new and renewed  commercial and multi-family loans
are  evaluated for Year 2000 risk.  The Company has  requested  that each of its
larger borrowers provide  information  regarding the nature of steps being taken
by the borrowers to address their own Year 2000 issues.

The cost  for the  Year  2000  effort  incurred  in  fiscal  1999  was  $45,000.
Additional  future  costs  are not  expected  to have a  material  effect on the
results  of  operations   and  are  estimated  to  be  $25,000.   No  additional
expenditures are currently  anticipated for hardware or software  upgrades.  The
estimated  remaining  costs  are  expected  to cover  any  ongoing  testing  and
contingency  planning.  The actual and  estimated  expenditures  do not  include
manpower costs of Company  personnel  associated with the task force, who retain
their individual  operational  responsibilities in addition to Year 2000 duties.
The costs are based upon  management's  analysis  of the  information  currently
available to it. No assurance can be given that issues relating to the Year 2000
will not have a material adverse effect on the Company's  financial condition or
results of operations.
<PAGE>
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  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, short-term investments 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, 1999 and 1998, the
Bank's liquidity ratios were 21.30% and 24.50%, 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 $57.0 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, 1999, the Company had
outstanding  commitments  to  extend  credit  which  amounted  to $70.6  million
(including  $46.4  million in  available  lines of credit)  and  commitments  to
purchase loans of $25.1 million.  Management  believes that loan  repayments and
other  sources  of funds  will be  adequate  to meet the  Company's  foreseeable
liquidity needs.

During  fiscal  1999,  the  Company's  cash needs  were  provided  by  operating
activities, primarily from proceeds from the sales of loans. 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
and 1997 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 and  1997,  the cash  provided  was used for  investing  activities,  which
included the  origination  and purchase of loans and the purchase of  investment
securities.
<PAGE>
Current  regulatory  standards  impose the  following  capital  requirements:  a
risk-based  capital standard expressed as a percentage of 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,
1999, 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, 1999,  1998 and 1997 were $0.155 per
share, $0.14 per share and $0.105 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.
<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, 1999 and 1998, 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,  1999.  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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of PennFed Financial
Services, Inc. and Subsidiaries as of June 30, 1999 and 1998, and the results of
their  operations and their cash flows for each of the three years in the period
ended June 30, 1999 in conformity with generally accepted accounting principles.






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

Parsippany, New Jersey

July 28, 1999




<PAGE>
<TABLE>
<CAPTION>

                               PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
                                Consolidated Statements of Financial Condition

                                                                                             June 30,
                                                                                 ----------------------------
                                                                                     1999             1998
                                                                                 -----------      -----------
                                                                                      (Dollars in thousands)

<S>                                                                              <C>              <C>
Assets
Cash and cash equivalents ..................................................     $     9,900      $    10,960
Investment securities held to maturity, at amortized cost, market value
     of $281,880 and $178,743 at June 30, 1999 and 1998 ....................         293,282          178,310
Mortgage-backed securities held to maturity, at amortized cost, market value
     of $128,617 and $208,128 at June 30, 1999 and 1998 ....................         127,983          204,452
Loans held for sale ........................................................           5,180              565
Loans receivable, net of allowance for loan losses of $3,209 and $2,776
     at June 30, 1999 and 1998 .............................................       1,061,431        1,095,287
Premises and equipment, net ................................................          19,240           18,092
Real estate owned, net .....................................................             936            1,643
Federal Home Loan Bank of New York stock, at cost ..........................          16,623           15,065
Accrued interest receivable, net ...........................................           9,680            8,723
Goodwill and other intangible assets .......................................          11,118           13,481
Other assets ...............................................................           3,390            5,360
                                                                                 -----------      -----------
                                                                                 $ 1,558,763      $ 1,551,938
                                                                                 ===========      ===========
Liabilities and Stockholders' Equity
Liabilities:
     Deposits ..............................................................     $ 1,063,600      $ 1,028,100
     Federal Home Loan Bank of New York advances ...........................         244,465          230,465
     Other borrowings ......................................................          88,738          131,500
     Mortgage escrow funds .................................................          10,102           10,534
     Due to banks ..........................................................           7,385           12,069
     Accounts payable and other liabilities ................................           4,230            2,886
                                                                                 -----------      -----------
     Total liabilities .....................................................       1,418,520        1,415,554
                                                                                 -----------      -----------

     Guaranteed Preferred Beneficial Interests in the
       Company's Junior Subordinated Debentures ............................          34,500           34,500
     Unamortized issuance expenses .........................................          (1,757)          (1,819)
                                                                                 -----------      -----------
     Net Trust Preferred securities ........................................          32,743           32,681
                                                                                 -----------      -----------

Commitments and Contingencies (Note O)

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                               PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
                                Consolidated Statements of Financial Condition
                                                 (CONTINUED)


                                                                                             June 30,
                                                                                 ----------------------------
                                                                                     1999             1998
                                                                                 -----------      -----------
                                                                                      (Dollars in thousands)
<S>                                                                               <C>              <C>
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,
         11,897,858 and 11,900,000  shares issued and 8,813,416 and
         9,385,988 shares  outstanding at June 30, 1999
         and 1998 (excluding shares held in treasury of
         3,084,442 and 2,514,012 at June 30, 1999 and 1998) ................              59               60
     Additional paid-in capital ............................................          59,488           58,278
     Restricted stock - Management Recognition Plan ........................            --               (531)
     Employee Stock Ownership Plan Trust debt ..............................          (2,804)          (3,253)
     Retained earnings, partially restricted ...............................          80,673           70,781
     Treasury stock, at cost, 3,084,442 and 2,514,012 shares at
         June 30, 1999 and 1998 ............................................         (29,916)         (21,632)
                                                                                 -----------      -----------
     Total stockholders' equity ............................................         107,500          103,703
                                                                                 -----------      -----------
                                                                                 $ 1,558,763      $ 1,551,938
                                                                                 ===========      ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>

                            PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
                                   Consolidated Statements of Income


                                                                     For the years ended June 30,
                                                          ---------------------------------------------
                                                               1999            1998             1997
                                                          -----------     -----------      ------------
                                                                         (Dollars in thousands)
<S>                                                       <C>             <C>              <C>
Interest and Dividend Income:
  Interest and fees on loans ........................     $    78,288     $    73,822      $    61,768
  Interest on federal funds sold ....................              68              18             --
  Interest and dividends on investment securities ...          16,318           9,814            1,603
  Interest on mortgage-backed securities ............          10,883          17,151           22,030
                                                          -----------     -----------      -----------
                                                              105,557         100,805           85,401
                                                          -----------     -----------      -----------
Interest Expense:
  Deposits ..........................................          48,648          48,200           40,172
  Borrowed funds ....................................          20,138          17,669           12,901
  Trust Preferred securities ........................           3,132           2,174             --
                                                          -----------     -----------      -----------
                                                               71,918          68,043           53,073
                                                          -----------     -----------      -----------
Net Interest and Dividend Income Before
  Provision for Loan Losses .........................          33,639          32,762           32,328
Provision for Loan Losses ...........................             780             600              635
                                                          -----------     -----------      -----------
Net Interest and Dividend Income After
  Provision for Loan Losses .........................          32,859          32,162           31,693
                                                          -----------     -----------      -----------

Non-Interest Income:
  Service charges ...................................           2,113           1,974            1,666
  Net gain (loss) from real estate operations .......              31            (156)            (181)
  Net gain on sales of loans ........................             860             528             --
  Other .............................................             542             321              298
                                                          -----------     -----------      -----------
                                                                3,546           2,667            1,783
                                                          -----------     -----------      -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                            PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
                                   Consolidated Statements of Income
                                              (CONTINUED)


                                                                     For the years ended June 30,
                                                          ---------------------------------------------
                                                               1999            1998             1997
                                                          -----------     -----------      ------------
                                                                         (Dollars in thousands)
<S>                                                       <C>             <C>              <C>
Non-Interest Expenses:
  Compensation and employee benefits ................           8,961           8,109            7,897
  Net occupancy expense .............................           1,333           1,275            1,129
  Equipment .........................................           1,642           1,542            1,580
  Advertising .......................................             359             380              326
  Amortization of intangibles .......................           2,363           2,437            2,512
  Federal deposit insurance premium .................             627             591            1,112
  SAIF recapitalization assessment ..................            --              --              4,813
  Other .............................................           3,359           3,055            3,016
                                                          -----------     -----------      -----------
                                                               18,644          17,389           22,385
                                                          -----------     -----------      -----------
Income Before Income Taxes ..........................          17,761          17,440           11,091
Income Tax Expense ..................................           6,304           6,242            4,205
                                                          -----------     -----------      -----------
Net Income ..........................................     $    11,457     $    11,198      $     6,886
                                                          ===========     ===========      ===========

Weighted average number of common shares outstanding:
  Basic .............................................       8,408,175       8,949,357        8,902,644
                                                          ===========     ===========      ===========
  Diluted ...........................................       8,878,491       9,689,655        9,439,856
                                                          ===========     ===========      ===========
Net income per common share:
  Basic .............................................     $      1.36     $      1.25      $      0.77
                                                          ===========     ===========      ===========
  Diluted ...........................................     $      1.29     $      1.16      $      0.73
                                                          ===========     ===========      ===========
</TABLE>
See notes to consolidated financial statements.

<PAGE>
<TABLE>
<CAPTION>

                                          PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
                                                     Consolidated Statements of
                                                   Changes in Stockholders' Equity
                                          For the Years Ended June 30, 1999, 1998 and 1997


                                                                                  Restricted     Employee
                                                                                    Stock -        Stock
                                                 Serial             Additional    Management    Ownership
                                               Preferred Common       Paid-In     Recognition    Plan Trust    Retained    Treasury
                                                 Stock    Stock       Capital         Plan          Debt       Earnings      Stock
                                                ------  --------      --------      --------      --------    --------     --------
<S>                                             <C>     <C>           <C>          <C>           <C>           <C>         <C>
Balance at June 30, 1996 ..................     $--     $     60      $ 57,057     $ (1,316)     $ (4,061)     $ 55,172    $(16,348)
Allocation of ESOP stock ..................                                                           390
ESOP and MRP adjustment ...................                                345
Purchase of 32,500 shares of treasury stock                                                                                    (651)
Issuance of 1,804 shares of treasury stock
    for options exercised and Dividend
    Reinvestment Plan (DRP) ...............                                                                        (20)          27
Issuance of 29,155 shares of treasury
    stock for MRP .........................                                 39         (462)                                    423
Amortization of MRP stock .................                                             716
Cash dividends ............................                                                                       (987)
Net income for the year ended June 30, 1997                                                                      6,886
                                                ---     --------      --------     --------      --------      --------    --------

Balance at June 30, 1997 ..................      --           60        57,441       (1,062)       (3,671)       61,051     (16,549)
Allocation of ESOP stock ..................                                                           418
ESOP and 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 DRP .........                                                                        (166)        498
Amortization of MRP stock .................                                             531
Cash dividends ............................                                                                      (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 shares ..............                                 (1)         (11)
Amortization of MRP Stock .................                                             531
Cash dividends ............................                                                                      (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)
                                                ===     ========      ========     =========     ========      ========    =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>

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

                                                                                       For the years ended June 30,
                                                                                ---------------------------------------
                                                                                    1999           1998           1997
                                                                                ---------      ---------      ---------
                                                                                            (Dollars in thousands)
<S>                                                                             <C>            <C>            <C>
Cash Flows from Operating Activities:
   Net income .............................................................     $  11,457      $  11,198      $   6,886
   Adjustments to reconcile net income to net cash provided by operating
      activities:
   Net gain on sales of loans .............................................          (860)          (528)          --
   Proceeds from sales of loans held for sale .............................       151,468          1,616            585
   Originations of loans held for sale ....................................          --           (2,181)          (497)
   Net gain on sales of real estate owned .................................          (110)           (95)           (29)
   Amortization of investment and mortgage-backed securities premium, net .           351            319            260
   Depreciation and amortization ..........................................         1,364          1,297          1,301
   Provision for losses on loans and real estate owned ....................           825            751            747
   Amortization of cost of stock plans ....................................         2,101          1,786          1,466
   Amortization of intangibles ............................................         2,363          2,437          2,512
   Amortization of premiums on loans and loan fees ........................         2,338          1,565            414
   Amortization of Trust Preferred securities issuance costs ..............            62             42           --
   Increase in accrued interest receivable, net of accrued interest payable          (509)          (974)          (113)
   (Increase) decrease in other assets ....................................         1,970         (2,464)         1,731
   Increase in deferred income tax liability ..............................           288            642            185
   Increase in accounts payable and other liabilities .....................         1,144            230            891
   Increase (decrease) in mortgage escrow funds ...........................          (432)         1,679          2,925
   Increase (decrease) in due to banks ....................................        (4,684)         4,832          1,248
   Other, net .............................................................            30           --               (2)
                                                                                ---------      ---------      ---------
   Net cash provided by operating activities ..............................       169,166         22,152         20,510
                                                                                ---------      ---------      ---------

Cash Flows From Investing Activities:
   Proceeds from maturities of investment securities ......................       147,070         70,141         16,000
   Purchases of investment securities held to maturity ....................      (262,096)      (213,168)       (30,000)
   Net outflow from loan originations net of principal repayments of loans        (93,695)      (152,786)       (86,193)
   Purchases of loans .....................................................       (31,220)       (89,910)      (195,514)
   Proceeds from principal repayments of mortgage-backed securities .......        76,206         83,775         57,266
   Purchases of mortgage-backed securities ................................           (34)          --             --
   Proceeds from sale of loans ............................................          --           75,108           --
   Purchases of premises and equipment ....................................        (2,542)        (2,954)        (1,701)
   Proceeds from sales of real estate owned ...............................         1,202          1,300          1,806
   Purchases of Federal Home Loan Bank of New York stock ..................        (1,558)        (2,652)        (4,361)
                                                                                ---------      ---------      ---------
   Net cash used in investing activities ..................................      (166,667)      (231,146)      (242,697)
                                                                                ---------      ---------      ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                    PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
                                         Consolidated Statements of Cash Flows
                                                      (CONTINUED)

                                                                                       For the years ended June 30,
                                                                                ---------------------------------------
                                                                                    1999           1998           1997
                                                                                ---------      ---------      ---------
                                                                                            (Dollars in thousands)
<S>                                                                             <C>            <C>            <C>
Cash Flows From Financing Activities:
   Net increase in deposits ...............................................        35,052        109,387         81,403
   Increase (decrease) in advances from the Federal Home Loan Bank of New
      York and other borrowings ...........................................       (28,762)        73,750        141,515
   Net proceeds from issuance of Trust Preferred securities ...............          --           32,639           --
   Cash dividends paid ....................................................        (1,353)        (1,302)          (987)
   Purchases of treasury stock, net of reissuance .........................        (8,496)        (5,249)          (644)
                                                                                ---------      ---------      ---------
   Net cash provided by (used in) financing activities ....................        (3,559)       209,225        221,287
                                                                                ---------      ---------      ---------
Net Increase (Decrease) in Cash and Cash Equivalents ......................        (1,060)           231           (900)
Cash and Cash Equivalents, Beginning of Year ..............................        10,960         10,729         11,629
                                                                                ---------      ---------      ---------
Cash and Cash Equivalents, End of Year ....................................     $   9,900      $  10,960      $  10,729
                                                                                =========      =========      =========

Supplemental Disclosures of Cash Flow Information:
   Cash paid during the year for:
   Interest ...............................................................     $  70,684      $  66,821      $  52,054
                                                                                =========      =========      =========
   Income taxes ...........................................................     $   4,700      $   6,707      $   3,504
                                                                                =========      =========      =========

Supplemental Schedule of Non-Cash Activities:
   Transfer of loans receivable to real estate owned, net .................     $     432      $   2,115      $   1,690
                                                                                =========      =========      =========
   Transfer of loans receivable to loans held for sale, at market .........     $ 155,223      $    --        $    --
                                                                                =========      =========      =========
   Issuance of treasury stock for Management Recognition Plan .............     $    --        $    --        $     423
                                                                                =========      =========      =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES


                   Notes to Consolidated Financial Statements
                    Years Ended June 30, 1999, 1998 and 1997


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

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.

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

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 -- Federal and state income taxes are based upon earnings  reported
after  permanent  differences.  Deferred income taxes are provided for temporary
differences in the basis of assets and liabilities  between financial  statement
and income tax amounts.

In  accordance  with  Statement  of  Financial  Accounting  Standards  No.  109,
"Accounting  for Income  Taxes"  ("SFAS  109"),  the  Company  uses an 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.
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Interest  Rate  Swaps -- The  Company  has  utilized  interest  rate  swaps as a
component of managing  interest rate risk. 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  Adopted  Accounting  Standards -- Effective  July 1, 1998, the Company
adopted  Statement  of  Financial   Accounting  Standards  No.  130,  "Reporting
Comprehensive  Income" ("SFAS 130"). SFAS 130 establishes standards to reporting
and display of comprehensive  income and its components.  SFAS 130 requires that
all items that are  required to be  recognized  under  accounting  standards  as
components of comprehensive  income be reported in a financial statement that is
displayed with the same  prominence as other financial  statements.  The Company
will be required to classify items of other comprehensive income by their nature
in  a  financial   statement  and  display  the  accumulated  balance  of  other
comprehensive  income separately from retained  earnings and additional  paid-in
capital in the equity  section of the  statement  of  financial  condition.  The
adoption of SFAS 130 did not have an 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.
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

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, 1999,  1998 and 1997,  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,  1999,  1998 and 1997,  the effect of the  amortization  of
goodwill was to reduce  income before  income taxes by  approximately  $347,000,
$421,000 and $496,000, respectively.

<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

D.  Investment Securities
<TABLE>
<CAPTION>
                                                                                  June 30, 1999             June 30, 1998
                                                                              ---------------------     ----------------------
                                                                              Carrying       Market      Carrying       Market
                                                                                Value        Value         Value        Value
                                                                              --------     --------     --------     --------
                                                                                                 (in thousands)
<S>                                                                           <C>          <C>          <C>          <C>
U.S. Treasury and Government Agencies:
    Maturing:
        After five years but within ten years ...........................     $ 10,000     $  9,628     $ 95,000     $ 95,342
        After ten years .................................................      254,538      244,615       71,969       71,643
                                                                              --------     --------     --------     --------
                                                                               264,538      254,243      166,969      166,985
Obligations of states and political subdivisions:
    Maturing:
        Within one year .................................................         --           --            100          101
        After one year but within five years ............................           40           45           40           46
                                                                              --------     --------     --------     --------
                                                                                    40           45          140          147
Trust preferred securities:
    Maturing:
        After ten years .................................................       28,704       27,592       11,201       11,611
                                                                              --------     --------     --------     --------
                                                                              $293,282     $281,880     $178,310     $178,743
                                                                              ========     ========     ========     ========
</TABLE>

At June 30,  1999 and  1998,  investment  securities  with a  carrying  value of
$82,500,000 and $85,969,000,  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, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
                                                             June 30, 1999                  June 30, 1998
--------------------------------------------------------------------------------   ----------------------------
                                                         Gross         Gross          Gross           Gross
                                                      Unrealized    Unrealized     Unrealized      Unrealized
                                                         Gains         Losses          Gains          Losses
                                                        -------        -------        -------        -------
                                                                         (In thousands)
<S>                                                    <C>             <C>            <C>            <C>
U.S. Treasury and Government Agencies ..........        $  --          $10,295        $   353        $   337
Obligations of states and political subdivisions              5           --                7           --
Trust preferred securities .....................             41          1,153            410           --
                                                        -------        -------        -------        -------
                                                        $    46        $11,448        $   770        $   337
                                                        =======        =======        =======       =======
</TABLE>
There were no sales of investment  securities for the years ended June 30, 1999,
1998 and 1997.
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

E.  Mortgage-Backed Securities
<TABLE>
<CAPTION>
                                                                  June 30,
                                                         -----------------------
                                                           1999           1998
                                                         --------       --------
                                                             (In thousands)
<S>                                                      <C>            <C>
Ginnie Mae .......................................       $  2,071       $  3,005
Freddie Mac ......................................         74,622        123,444
Fannie Mae .......................................         50,899         77,019
Collateralized Mortgage Obligations/REMICs .......            103            400
                                                         --------       --------
                                                          127,695        203,868
Unamortized premiums, net ........................            288            584
                                                         --------       --------
                                                         $127,983       $204,452
                                                         ========       ========

</TABLE>

The estimated market values of mortgage-backed  securities were $128,617,000 and
$208,128,000  at June 30,  1999 and 1998,  respectively.  There were no sales of
mortgage-backed securities in the years ended June 30, 1999, 1998 and 1997.

The carrying value of mortgage-backed securities pledged were as follows:
<TABLE>
<CAPTION>

                                                                  June 30,
                                                          ----------------------
                                                             1999          1998
                                                          --------      --------
                                                              (In thousands)
<S>                                                       <C>           <C>
Pledged to secure:
   Federal Home Loan Bank of New York advances .....      $ 78,467      $ 91,213
   Other borrowings ................................        19,461        19,485
   Interest rate swap agreements ...................         4,825         2,618
   Public funds on deposit .........................         3,304         3,865
                                                          --------      --------
                                                          $106,057      $117,181
                                                          ========      ========
</TABLE>


Collateralized  mortgage  obligations  consist primarily of fixed and adjustable
rate sequentially paying securities with short durations.
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

The gross unrealized gains and losses of mortgage-backed securities held at June
30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
                                                     June 30, 1999                June 30, 1998
                                                -------------------------   -------------------------
                                                   Gross        Gross          Gross         Gross
                                                Unrealized    Unrealized    Unrealized    Unrealized
                                                   Gains       Losses          Gains        Losses
                                                  ------        ----          ------        ----
                                                                    (In thousands)
<S>                                               <C>           <C>           <C>           <C>
Ginnie Mae ...............................        $   92        $   --        $  192        $   --
Freddie Mac ..............................           570           288         2,064            19
Fannie Mae ...............................           459           198         1,443             5
Collateralized Mortgage Obligations/REMICs          --               1             1          --
                                                  ------        ------        ------        ------
                                                  $1,121        $  487        $3,700        $   24
                                                  ======        ======        ======        ======
</TABLE>
F.  Loans Receivable, Net
<TABLE>
<CAPTION>
                                                             June 30,
                                                 -------------------------------
                                                      1999              1998
                                                 -----------        -----------
                                                         (In thousands)
<S>                                              <C>                <C>
First Mortgage Loans:
  Conventional ...........................       $   909,576        $   966,073
  FHA insured ............................             4,585              4,180
  VA guaranteed ..........................             1,083              1,415
                                                 -----------        -----------
  Total one- to four-family ..............           915,244            971,668
  Commercial and multi-family ............            74,613             65,833
                                                 -----------        -----------
Total first mortgage loans ...............           989,857          1,037,501
                                                 -----------        -----------
Consumer:
  Second mortgages .......................            37,243             27,232
  Home equity lines of credit ............            31,754             23,538
  Other ..................................             3,575              3,331
                                                 -----------        -----------
Total consumer loans .....................            72,572             54,101
                                                 -----------        -----------
Total loans ..............................         1,062,429          1,091,602
                                                 -----------        -----------
Add (Less):
  Allowance for loan losses ..............            (3,209)            (2,776)
  Unamortized premium ....................             2,112              2,903
  Unearned income on consumer loans ......               (20)               (31)
  Net deferred loan fees .................             5,299              4,154
                                                 -----------        -----------
                                                       4,182              4,250
                                                 -----------        -----------
                                                 $ 1,066,611        $ 1,095,852
                                                 ===========        ===========
</TABLE>
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Conventional  one- to  four-family  mortgage  loans  at June  30,  1999 and 1998
included $5,180,000 and $565,000,  respectively,  of mortgages held for sale. At
June 30, 1999,  there was no commitment  to sell these loans.  At June 30, 1998,
the Company had a commitment to sell these loans.

Non-accruing  loans at June 30, 1999 and 1998 were  $3,670,000  and  $3,742,000,
respectively,  which represents  0.34% of total loans  outstanding at each date.
The total interest income that would have been recorded for the years ended June
30,  1999 and 1998,  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 $137,000 and $167,000, respectively.

At June 30,  1999  and  1998,  impaired  loans  totaled  $48,000  and  $457,000,
respectively. The average balance of impaired loans for the years ended June 30,
1999 and 1998 was $339,000 and $724,000, respectively. All impaired loans have a
related  allowance for losses,  which  totaled  $48,000 and $185,000 at June 30,
1999 and 1998,  respectively.  Interest  income  related  to  impaired  loans is
recognized under the cash-basis  method.  Interest income recognized on impaired
loans  for the years  ended  June 30,  1999 and 1998 was  $10,000  and  $30,000,
respectively.  Total interest income that would have been recorded for the years
ended June 30, 1999 and 1998,  had these loans been current in  accordance  with
their loan terms, was approximately $36,000 and $60,000, respectively.

The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>

                                                    Year ended June 30,
                                            ------------------------------------
                                               1999          1998          1997
                                            -------       -------       -------
                                                       (In thousands)
<S>                                         <C>           <C>           <C>
Balance, beginning of year ...........      $ 2,776       $ 2,622       $ 2,630
Provisions for losses on loans .......          780           600           635
Recoveries ...........................           49          --              42
Losses charged to allowance ..........         (396)         (446)         (685)
                                            -------       -------       -------
Balance, end of year .................      $ 3,209       $ 2,776       $ 2,622
                                            =======       =======       =======
</TABLE>

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

At June 30, 1999 and 1998, commercial and multi-family real estate loans totaled
$74,613,000  and  $65,833,000,  respectively.  These  loans  are  considered  by
management  to be of  somewhat  greater  risk  of  collectibility  due to  their
dependency on income  production.  Commercial and multi-family real estate loans
collateralized  by  multi-family  mixed  use  properties  were  $31,288,000  and
$33,033,000 at June 30, 1999 and 1998,  respectively.  The remaining  commercial
real estate loans were collateralized by commercial properties.  The majority of
the Company's  commercial and multi-family real estate loans were collateralized
by real estate in the State of New Jersey.

Loans serviced for others totaled approximately $116,180,000 and $110,916,000 at
June 30,  1999 and 1998,  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  $1,354,000  and  $1,216,000  at June 30,  1999  and  1998,
respectively.


G.  Premises and Equipment, Net
<TABLE>
<CAPTION>
                                                                   June 30,
                                                           ---------------------
                                                              1999          1998
                                                           -------       -------
                                                               (In thousands)
<S>                                                        <C>           <C>
Land ...............................................       $ 4,004       $ 3,959
Buildings and improvements .........................        14,923        14,143
Leasehold improvements .............................         1,521         1,309
Furniture and equipment ............................        10,587        10,174
                                                           -------       -------

                                                            31,035        29,585
Less: accumulated depreciation and amortization ....        11,795        11,493
                                                           -------       -------
                                                           $19,240       $18,092
                                                           =======       =======
</TABLE>
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

H.  Real Estate Owned
<TABLE>
<CAPTION>
                                                                  June 30,
                                                           ---------------------
                                                             1999        1998
                                                           -------     -------
                                                              (In thousands)
<S>                                                        <C>          <C>
Acquired by foreclosure or deed in lieu of foreclosure     $ 1,018      $ 1,850
Allowance for losses on real estate owned ............         (82)        (207)
                                                           -------      -------
                                                           $   936      $ 1,643
                                                           =======      =======

</TABLE>

Results of real estate operations were as follows:
<TABLE>
<CAPTION>
                                                            Year ended June 30,
                                                      ---------------------------
                                                       1999       1998       1997
                                                      -----      -----      -----
                                                           (In thousands)
<S>                                                   <C>        <C>        <C>
Net gain on sales of real estate owned ............   $ 110      $  95      $  29
Holding costs .....................................     (34)      (100)       (98)
Provision for losses on real estate owned .........     (45)      (151)      (112)
                                                      -----      -----      -----
Net gain (loss) from real estate operations .......   $  31      $(156)     $(181)
                                                      =====      =====      =====
</TABLE>

Activity in the allowance for losses on real estate owned was as follows:
<TABLE>
<CAPTION>

                                                       Year ended June 30,
                                                --------------------------------
                                                 1999        1998          1997
                                                -----        -----        -----
                                                        (In thousands)
<S>                                             <C>          <C>          <C>
Balance, beginning of year ..............       $ 207        $ 102        $  61
Provisions charged to operations ........          45          151          112
Losses charged to allowance .............        (170)         (46)         (71)
                                                -----        -----        -----
Balance, end of year ....................       $  82        $ 207        $ 102
                                                =====        =====        =====
</TABLE>
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

I.  Deposits
<TABLE>
<CAPTION>
                                                         June 30, 1999                                June 30, 1998
                                               ---------------------------------           -----------------------------------
                                                                     Weighted                                    Weighted
                                                                      Average                                     Average
                                                  Amount           Interest Rate            Amount             Interest Rate
                                                  ------           -------------            ------             -------------
                                                                          (Dollars in thousands)
<S>                                            <C>                      <C>               <C>                      <C>
Non-interest-bearing demand ..............     $   37,738                                 $   33,153
Interest-bearing demand ..................         58,255               1.56%                 45,961               2.12%
Money market accounts ....................         12,406               2.02                  13,435               2.02
Savings accounts .........................        164,893               1.67                 164,192               2.12

Certificates with remaining maturities of:
  One year or less .......................        616,600               5.08                 574,747               5.51
  Over one year to three years ...........        157,922               5.61                 151,344               6.27
  Over three years to five years .........         12,628               5.50                  42,558               6.23
                                               ----------                                 ----------

Total certificates .......................        787,150               5.20                 768,649               5.70
Accrued interest payable .................          3,158                                      2,710
                                               ----------                                 ----------

                                               $1,063,600               4.21%             $1,028,100               4.72%
                                               ==========                                 ==========
</TABLE>
The  aggregate  amount of accounts with a  denomination  of $100,000 or more was
approximately   $168,613,000  and  $168,656,000  at  June  30,  1999  and  1998,
respectively.


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, 1999                    June 30, 1998
                                            --------------------------      -------------------------
                                                            Weighted                       Weighted
                                                            Average                        Average
                                             Amount      Interest Rate       Amount     Interest Rate
                                             ------      -------------       ------     -------------
                                                              (Dollars in thousands)
<S>                                         <C>              <C>           <C>              <C>
Within one year .......................     $ 90,000         6.17%         $ 55,000         6.09%
After one year but within two years ...       20,000         5.80            90,000         6.17
After two years but within three years        70,000         6.06            10,000         5.91
After three years but within four years       45,000         5.60            30,000         6.42
After four years but within five years        19,000         5.15            45,000         5.60
After five years ......................          465         7.39               465         7.39
                                            --------                       --------

                                            $244,465         5.93%         $230,465         6.06%
                                            ========                       ========
</TABLE>
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

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,  1999,  the  Company  had  available  from  the FHLB of New York an
overnight repricing line of credit for $50,000,000 which expires on May 1, 2000.
The line of credit has a variable  interest rate. At June 30, 1999 and 1998, the
Company had  $29,900,000  and  $41,700,000  of overnight  borrowings  under this
credit line with an interest rate of 5.98% and 6.25%, 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, 1999 or 1998.  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 1, 2000. This line of credit has a variable  interest rate.
There were no borrowings under this line at June 30, 1999. At June 30, 1998, the
Company had $10,000,000 drawn under this line of credit with an interest rate of
6.13% .

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  $59,461,000  and  $79,454,000  and a
market  value  of  $57,601,000  and  $79,977,000  at June  30,  1999  and  1998,
respectively.

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

                                             June 30, 1999                   June 30, 1998
                                         ------------------------        --------------------------
                                                     Weighted                         Weighted
                                                      Average                          Average
                                          Amount    Interest Rate         Amount     Interest Rate
                                          ------    -------------         ------     -------------
                                                          (Dollars in thousands)
<S>                                      <C>             <C>            <C>             <C>
Within one year ....................     $19,563         5.01%          $49,925         5.44%
After one year but within five years      39,275         5.93            29,875         5.93
                                         -------                        -------

                                         $58,838         5.63%          $79,800         5.62%
                                         =======                        =======

</TABLE>
The average  balance of reverse  repurchase  agreements for the years ended June
30, 1999 and 1998 was $51,039,000 and $44,578,000, respectively.
<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 20 1/2 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, 1999, 1998 and 1997, expense related
to the Plan was $107,000, $101,000 and $78,000,  respectively.  At June 30, 1999
and 1998,  the Plan assets  included  common  stock of the Company with a market
value of $282,000 and $144,000, 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.
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

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,
1999 and 1998, the loan had an outstanding  balance of $2,804,000 and $3,253,000
and the ESOP had unallocated shares of 560,710 and 650,614, respectively.  Based
upon a $15.75  closing  price per share of common  stock on June 30,  1999,  the
unallocated  shares had a fair value of $8,831,000.  The unamortized  balance of
the ESOP debt is reflected as a reduction of stockholders' equity.

For the years  ended  June 30,  1999 and 1998,  the Bank  recorded  compensation
expense  related to the ESOP of $1,173,000  and  $1,273,000,  respectively.  The
compensation  expense  related  to the  ESOP  includes  $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 89,904 and 83,662 shares for the years ended
June 30, 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 may be awarded
under the plan. As of June 30, 1999,  476,000  shares of  restricted  stock have
been 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  awarded,  2,142  shares did not vest and were  cancelled.  For the
years ended June 30, 1999 and 1998, the Company recorded expense of $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,  1999,  1998 and 1997
relating to the Option Plan are as follows:
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

<TABLE>
<CAPTION>
                                                                          Weighted
                                                                           Average
                                                                          Exercise
                                                      Options               Price
                                                     ---------            ---------
<S>                                                  <C>                  <C>
Balance, June 30, 1996 ..................            1,011,450            $    5.25
     Granted ............................              124,950                 7.94
     Exercised ..........................               (1,400)                5.25
     Expired ............................                 --                   --
     Forfeited ..........................                 (600)                5.25
                                                     ---------            ---------

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
                                                     =========            =========

</TABLE>

At June 30,  1999,  1998 and 1997,  1,343,583  options,  1,023,527  options  and
679,760  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  1998 was  estimated  as $8.08 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 18.78%;  risk-free
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

interest rate of 5.93%; 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
1998 pro forma net  income  and  diluted  earnings  per  share  would  have been
approximately  $9.6 million and $0.99,  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 effects on net income is not  representative  of the pro
forma effect on net income in future years.

N.  Income Taxes

 The income tax provision is comprised of the following components:






<TABLE>
<CAPTION>

                                                                 Year ended June 30,
                                        -------------------------------------------------------------------
                                         1999                          1998                           1997
                                        ------                        ------                         ------
                                                                  (In thousands)
<S>                                     <C>                           <C>                            <C>
Current provision                       $6,016                        $5,600                         $4,020
Deferred provision                         288                           642                            185
                                        ------                        ------                         ------
 Total income tax provision             $6,304                        $6,242                         $4,205
                                        ======                        ======                         ======
</TABLE>



Income taxes payable is included in accounts  payable and other  liabilities  in
the  Consolidated  Statements of Financial  Condition at June 30, 1999 and 1998.
The financial  statements  also include a net deferred tax liability of $833,000
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, 1999
and 1998 is as follows:
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

<TABLE>
<CAPTION>
                                                              June 30,
                                                      --------------------------
                                                       1999              1998
                                                      -------           -------
                                                              (In thousands)
<S>                                                   <C>               <C>
Deferred tax assets:
  Allowance for loan losses ................          $   657           $   330
  Litigation reserves ......................                4                22
  Deposit premium intangible ...............              950               726
  MRP expense ..............................              192               229
  Depreciation .............................              503               503
                                                      -------           -------
Total deferred tax assets ..................            2,306             1,810
                                                      -------           -------
Deferred tax liabilities:
  Deferred loan fees .......................            2,650             2,106
  Loan sale premiums .......................               13                15
  Purchase accounting ......................              158               234
  Servicing asset ..........................              318              --
                                                      -------           -------
Total deferred tax liabilities .............            3,139             2,355
                                                      -------           -------
Net deferred tax liability .................          $  (833)          $  (545)
                                                      =======           =======

</TABLE>

A  reconciliation  of the statutory income tax provision to the effective income
tax provision is as follows:
<TABLE>
<CAPTION>
                                                     Year ended June 30,
                                              ----------------------------------
                                                 1999         1998        1997
                                              -------      -------      -------
                                                        (In thousands)
<S>                                           <C>          <C>          <C>
Income tax provision at statutory rate ..     $ 6,216      $ 6,104      $ 3,882
Amortization of intangibles .............         121          147          174
State and local tax provision ...........        --           --            214
Other, net ..............................         (33)          (9)         (65)
                                              -------      -------      -------
Total income tax provision ..............     $ 6,304      $ 6,242      $ 4,205
                                              =======      =======      =======

</TABLE>
<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, 1999,  minimum rental  commitments  under all
noncancellable operating leases with initial or remaining terms of more than one
year are as follows:
<TABLE>
<CAPTION>
 Year ending June 30,                                             (In thousands)
--------------------------------------------------------------------------------
<S>                                                                       <C>
 2000                                                                     $  285
 2001                                                                        206
 2002                                                                        210
 2003                                                                        217
 2004                                                                        174
 2005 and later                                                              596
                                                                          ------
                                                                          $1,688
                                                                          ======
</TABLE>
Rentals under long-term  operating leases for certain branch offices amounted to
$263,000,  $234,000 and  $169,000  for the years ended June 30,  1999,  1998 and
1997,  respectively.  Rental  income of $454,000,  $444,000 and $452,000 for the
years  ended  June 30,  1999,  1998 and 1997,  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.
<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:
<TABLE>
<CAPTION>

                                                              June 30,
                                                      --------------------------
                                                         1999              1998
                                                      --------          --------
                                                           (In thousands)
<S>                                                   <C>               <C>
Commitments to extend credit ...............          $ 24,122          $  6,850
Unused lines of credit .....................            46,441            30,402
Commitments to purchase loans ..............            25,094            11,666
Interest rate swaps ........................           150,000           150,000
</TABLE>

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  located in the State of New Jersey.  Prior to
fiscal  1999, a limited  amount of loans  secured by  properties  located in the
Commonwealth  of  Pennsylvania  and the State of  Massachusetts  were purchased.
Prior to purchase,  the Company applies the same  underwriting  criteria used in
its own originations.

The Company  periodically  enters 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 both June 30, 1999 and 1998,  the Company had $150  million 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, 1999,  the fixed  interest  rates payable by the
Company ranged from 4.99% to 6.63% and three-month  LIBOR was 5.37%. The average
balance of notional amount interest rate swap agreements in fiscal 1999 and 1998
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

was $165,753,000 and  $100,548,000,  respectively.  Included in interest expense
for the  year  ended  June  30,  1999 and  1998  was  $1,116,000  and  $507,000,
respectively,   of  expense   related   to   interest   rate  swap   agreements.
Mortgage-backed securities with a carrying value of $4,824,000 and $2,617,000 at
June 30, 1999 and 1998,  respectively,  were pledged to secure these agreements.
The interest rate swap agreements  mature or are callable between  September 16,
1999 and November 8, 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 intends to vigorously  contest this determination and to
seek contribution or indemnification from the other named responsible parties.

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, 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.  During the year
ended June 30, 1997, the Company  repurchased  65,000 shares of its  outstanding
common stock.  The prices paid for the repurchased  shares ranged from $10.00 to
$10.09 per share, for a total cost of $651,000.

On March 21, 1996, the Board of Directors of the Company (the "Board") initially
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. 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.
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

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 $33.75 exercise price, a number of
shares of the Company's common stock having an aggregate market value of $67.50.
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 $33.75 exercise price, a number of shares of common
stock of such other person  having an aggregate  market value of $67.50.  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  Office of Thrift  Supervision  ("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
adjusted  tangible  assets  and  risk-based  capital  of  not  less  than  8% of
risk-weighted  assets.  As of June 30, 1999, the Bank meets all capital adequacy
requirements to which it is 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.
<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 Capital              Prompt Corrective
                                   Actual                Adequacy Purposes           Action Provisions
                           ---------------------      ----------------------       ---------------------
                           Amount         Ratio         Amount       Ratio         Amount         Ratio
                           ------         -----         ------       -----         ------         -----
                                                         (Dollars in thousands)
<S>                       <C>              <C>        <C>             <C>
As of June 30, 1999
   Tangible capital .     $121,910         7.88%      $ 23,207        1.50%             N/A          N/A
   Core capital .....     $121,943         7.88%      $ 61,888        4.00%        $ 77,360         5.00%
   Risk-based capital     $124,976        16.29%      $ 61,374        8.00%        $ 76,717        10.00%
As of June 30, 1998
   Tangible capital .     $108,580         7.09%      $ 22,960        1.50%             N/A          N/A
   Core capital .....     $108,816         7.11%      $ 61,237        4.00%        $ 76,547         5.00%
   Risk-based capital     $111,262        15.16%      $ 58,705        8.00%        $ 73,381        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, 1999, 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 further  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 summarizes
the Company's  capital  position under the FRB's capital  requirements  for bank
holding companies.
<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
                                                ------           -----     ------         -----       ------           -----
 <S>                                         <C>                 <C>     <C>               <C>    <C>                  <C>
                                                                          (Dollars in thousands)
Stockholders' equity ..................     $   107,500
Add: Qualifying preferred securities ..          32,105
Less: Goodwill ........................            (653)
         Deposit premium intangible ...         (10,465)
         Disallowed servicing assets ..            (102)
                                            -----------
Tangible capital, and ratio to adjusted
     total assets .....................     $   128,385          8.29%  $    23,217        1.50%
                                            ===========                 ===========

Add: Qualifying intangible assets .....     $        34
                                            -----------

Tier I (core) capital, and ratio to
     adjusted total assets ............     $   128,419          8.30%  $    46,434        3.00%  $    77,391         5.00%
                                            ===========                 ===========               ===========

Tier I (core) capital, and ratio to
     risk- weighted assets ............     $   128,419         16.98%  $    30,253        4.00%  $    45,380         6.00%
                                            ===========                 ===========               ===========

Less: Equity investments and
     investments in real estate .......     $       (50)
Add: Allowance for loan losses ........           3,083
                                            -----------

Total risk-based capital, and ratio to
     risk-weighted assets .............     $   131,452         17.38%  $    60,507        8.00%  $    75,633        10.00%
                                            ===========                 ===========               ===========

Total assets ..........................     $ 1,558,763
                                            ===========
Adjusted total assets .................     $ 1,547,815
                                            ===========
Risk-weighted assets ..................     $   756,332
                                            ===========

</TABLE>
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

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,  that  meet  the  fully  phased-in  capital
requirements,  as defined,  subsequent to a capital  distribution  are generally
permitted to make such capital  distribution  without OTS  approval,  so long as
they have not been notified of the need for more than normal  supervision by the
OTS.  The  Bank has not  been so  notified  and,  therefore,  may  make  capital
distributions  during a calendar year equal to 100% of  year-to-date  net income
plus retained net income for the two previous  years. At June 30, 1999, the Bank
could have paid dividends totaling approximately $26.8 million.


Q. Computation of EPS

The computation of EPS is presented in the following table.
<TABLE>
<CAPTION>


                                                            For the year ended June 30,
                                                    -------------------------------------------
                                                         1999            1998            1997
                                                    -----------     -----------     -----------
                                                  (Dollars in thousands, except per share amounts)
<S>                                                 <C>             <C>             <C>
Net income ....................................     $    11,457     $    11,198     $     6,886
                                                    ===========     ===========     ===========
Number of shares outstanding:
Weighted average shares issued ................      11,899,349      11,900,000      11,900,000
Less:  Weighted average shares held in treasury       2,896,595       2,268,513       2,233,752
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 ..         357,421         269,870         188,396
                                                    -----------     -----------     -----------
       Average basic shares ...................       8,408,175       8,949,357       8,902,644
Plus:  Average common stock equivalents .......         470,316         740,298         537,212
                                                    -----------     -----------     -----------
Average diluted shares ........................       8,878,491       9,689,655       9,439,856
                                                    ===========     ===========     ===========

Earnings per common share:
    Basic .....................................     $      1.36     $      1.25     $      0.77
                                                    ===========     ===========     ===========
    Diluted ...................................     $      1.29     $      1.16     $      0.73
                                                    ===========     ===========     ===========

</TABLE>
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

R.  Disclosure About Fair Value of Financial Instruments

The  carrying  amounts  and  estimated  fair  value of the  Company's  financial
instruments at June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
                                                             June 30, 1999                June 30, 1998
                                                       -------------------------     -------------------------
                                                        Carrying       Estimated      Carrying       Estimated
                                                         Amount       Fair Value       Amount       Fair Value
                                                       ----------     ----------     ----------     ----------
                                                                              (In thousands)
<S>                                                    <C>            <C>            <C>            <C>
Financial assets:
  Cash and cash equivalents ......................     $    9,900     $    9,900     $   10,960     $   10,960
  Investment securities ..........................        293,282        281,880        178,310        178,743
  Mortgage-backed securities .....................        127,983        128,617        204,452        208,128
  FHLB of New York stock .........................         16,623         16,623         15,065         15,065
                                                       ----------     ----------     ----------     ----------
  Total cash and investments .....................        447,788        437,020        408,787        412,896
  Loans held for sale ............................          5,180          5,180            565            565
  Loans receivable, less allowance for loan losses      1,061,431      1,049,735      1,095,287      1,097,701
                                                       ----------     ----------     ----------     ----------
  Total loans ....................................      1,066,611      1,054,915      1,095,852      1,098,266
  Accrued interest receivable, net ...............          9,680          9,680          8,723          8,723
                                                       ----------     ----------     ----------     ----------
  Total financial assets .........................     $1,524,079     $1,501,615     $1,513,362     $1,519,885
                                                       ==========     ==========     ==========     ==========
Financial liabilities:
  Deposits .......................................     $1,063,600     $1,064,543     $1,028,100     $1,032,071
  FHLB of New York advances ......................        244,465        245,103        230,465        231,217
  Other borrowings ...............................         88,738         88,810        131,500        131,510
  Mortgage escrow funds ..........................         10,102         10,102         10,534         10,534
  Due to banks ...................................          7,385          7,385         12,069         12,069

  Net Trust Preferred securities .................         32,743         34,414         32,681         35,104
                                                       ----------     ----------     ----------     ----------
  Total financial liabilities ....................     $1,447,033     $1,450,357     $1,445,349     $1,452,505
                                                       ==========     ==========     ==========     ==========

</TABLE>
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>

                                                   June 30, 1999             June 30, 1998
                                             ----------------------     -----------------------
                                             Notional     Estimated      Notional     Estimated
                                              Amount     Fair Value       Amount     Fair Value
                                              ------     ----------       ------     ----------
 <S>                                          <C>          <C>           <C>          <C>
                                                              (In thousands)
Off-balance sheet financial instruments:
Commitments to extend credit ...........     $ 24,122     $   --        $  6,850     $   --
Unused lines of credit .................       46,441         --          30,402         --
Commitments to purchase loans ..........       25,094         --          11,666         --
Interest rate swaps ....................      150,000       (256)        150,000      (1,173)
</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,
non-residential,  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.
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

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, 1999 and 1998.  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.

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

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

<TABLE>
<CAPTION>
                                                      1999               1998
                                                     -------            -------
                                                          (In thousands)
<S>                                                  <C>                <C>
Balance, beginning of year ...............           $ 3,963            $ 3,870
New loans granted ........................               728                961
Repayments/reductions ....................            (1,083)              (868)
                                                     -------            -------
Balance, end of year .....................           $ 3,608            $ 3,963
                                                     =======            =======
</TABLE>

In addition to the above amount of loans,  at June 30, 1999 and 1998,  there was
$46,000 and $38,000, 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.  Although
management  has not yet fully  evaluated the effects,  the impact of SFAS 133 on
the Company's  financial  condition or results of operations is directly related
to the size and composition of the Company's portfolio of derivatives and market
conditions both at the time of adoption and each reporting period thereafter.

<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, 1999 and 1998 and for the years ended June 30, 1999,  1998
and 1997 and  should  be read in  conjunction  with  the  Notes to  Consolidated
Financial Statements.


<TABLE>
<CAPTION>
Condensed Statements of Financial Condition

                                                                 June 30,
                                                         -----------------------
                                                           1999           1998
                                                         --------       --------
                                                             (In thousands)
<S>                                                      <C>            <C>
Assets
Cash .............................................       $     25       $     26
Intercompany overnight investment ................          2,674          3,748
                                                         --------       --------
  Total cash and cash equivalents ................          2,699          3,774
Investment securities held to
  maturity, at amortized cost ....................         11,186         11,201
Investment in subsidiaries .......................        134,359        123,216
Prepaid Trust Preferred securities expenses ......          1,757          1,819
Accrued interest receivable ......................            271            271
Other assets .....................................          1,560             39
                                                         --------       --------
                                                         $151,832       $140,320
                                                         ========       ========

Liabilities and Stockholders' Equity
Junior subordinated debentures ...................       $ 35,568       $ 35,568
Intercompany loan payable ........................          7,100           --
Accrued interest payable .........................            528            528
Other accrued expenses and other liabilities .....          1,136            521
Stockholders' equity .............................        107,500        103,703
                                                         --------       --------
                                                         $151,832       $140,320
                                                         ========       ========
</TABLE>
<PAGE>
                PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

<TABLE>
<CAPTION>
Condensed Statements of Operations

                                                                           Year ended June 30,
                                                                  ------------------------------------
                                                                    1999          1998           1997
                                                                  --------      --------      --------
                                                                         (In thousands)
<S>                                                               <C>           <C>           <C>
Income:
Interest income on intercompany balances ....................     $    318      $    860      $    755
Interest income on investment securities ....................        1,006           582          --
Other income ................................................            3             4          --
                                                                  --------      --------      --------
                                                                     1,327         1,446           755
Expenses:
Interest expense on Junior subordinated debentures ..........        3,166         2,198          --
Interest on intercompany loan ...............................          379          --            --
Other expenses ..............................................          365           328           346
                                                                  --------      --------      --------
                                                                     3,910         2,526           346
                                                                  --------      --------      --------

Income (loss) before undistributed net income of subsidiaries       (2,583)       (1,080)          409
Equity in undistributed net income of subsidiaries ..........       13,169        11,923         6,625
                                                                  --------      --------      --------
Income before income taxes ..................................       10,586        10,843         7,034
Income tax expense (benefit) ................................         (871)         (355)          148
                                                                  --------      --------      --------

Net income ..................................................     $ 11,457      $ 11,198      $  6,886
                                                                  ========      ========      ========
</TABLE>
<PAGE>
                 PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

<TABLE>
<CAPTION>

Condensed Statements of Cash Flows
                                                                                                Year ended June 30,
                                                                                     ------------------------------------
                                                                                        1999         1998          1997
                                                                                     --------      --------      --------
                                                                                                 (In thousands)
 <S>                                                                                  <C>           <C>           <C>
Cash Flows From Operating Activities:
Net income .....................................................................     $ 11,457      $ 11,198      $  6,886
Adjustments to reconcile net income to net cash provided by
    (used in) operating activities:
        Equity in undistributed net income of subsidiaries .....................      (13,169)      (11,923)       (6,625)
        Amortization of investment securities discount .........................           15             8          --
        Amortization of cost of stock plans ....................................          520           534           716
        Increase in accrued interest payable, net of accrued interest receivable         --             257          --
        Increase in other assets ...............................................       (1,459)       (1,819)           (1)
        Increase (decrease) in other liabilities ...............................          615          (294)          165
                                                                                     --------      --------      --------
           Net cash provided by (used in) operating activities .................       (2,021)       (2,039)        1,141
                                                                                     --------      --------      --------

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 ........................................        3,246          --            --
Proceeds from principal repayment on ESOP loan .................................          449           418           390
                                                                                     --------      --------      --------
        Net cash provided by (used in) investing activities ....................        3,695       (31,859)          390
                                                                                     --------      --------      --------

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 ................................       (8,496)       (5,249)         (644)
Payment of cash dividends ......................................................       (1,353)       (1,302)         (987)
                                                                                     --------      --------      --------
        Net cash provided by (used in) financing activities ....................       (2,749)       29,017        (1,631)
                                                                                     --------      --------      --------

Net decrease in cash and cash equivalents ......................................       (1,075)       (4,881)         (100)
Cash and cash equivalents, beginning of year ...................................        3,774         8,655         8,755
                                                                                     --------      --------      --------

Cash and cash equivalents, end of year .........................................     $  2,699      $  3,774      $  8,655
                                                                                     ========      ========      ========

Supplemental Disclosures of Cash Flow Information:
    Cash paid during the year for:
        Income taxes ...........................................................     $     --      $     85      $    131
                                                                                     ========      ========      ========

Supplemental Schedule of Non-Cash Activities:
    Issuance of treasury stock for MRP .........................................     $     --      $     --      $    423
                                                                                     ========      ========      ========
</TABLE>
<PAGE>
                 PENNFED FINANCIAL SERVICES INC, AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued


V.  Quarterly Financial Data (Unaudited)
<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
                                    =======        =======        =======        =======
<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 ......        $23,827        $25,034        $25,925        $26,019
Total interest expense .....         15,665         16,942         17,511         17,925
                                    -------        -------        -------        -------
Net interest income ........          8,162          8,092          8,414          8,094
Provision for loan losses ..            150            150            150            150
Non-interest income ........            485            604            949            629
Non-interest expenses ......          4,221          4,265          4,503          4,400
Income tax expense .........          1,590          1,539          1,662          1,451
                                    -------        -------        -------        -------
  Net income ...............        $ 2,686        $ 2,742        $ 3,048        $ 2,722
                                    =======        =======        =======        =======

Net income per common share:
  Basic ....................        $  0.30        $  0.31        $  0.34        $  0.30
                                    =======        =======        =======        =======
  Diluted ..................        $  0.28        $  0.28        $  0.31        $  0.28
                                    =======        =======        =======        =======
</TABLE>
<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 27,  1999,  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 27, 1999.


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 27,  1999,  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  27,  1999,   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.
<PAGE>
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
27, 1999,  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.
<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, 1999 and
           1998

           Consolidated  Statements of Income for the Years Ended June 30, 1999,
           1998 and 1997

           Consolidated  Statements of Changes in  Stockholders'  Equity for the
           Years Ended June 30, 1999, 1998 and 1997

           Consolidated  Statements  of Cash Flows for the Years  Ended June 30,
           1999, 1998 and 1997

           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.
<PAGE>
(a) (3)  Exhibits:


<TABLE>
<CAPTION>

   Regulation                                                                                                Reference to
       S-K                                                                                                   Prior Filing
     Exhibit                                                                                                  or Exhibit
      Number                             Document                                                               Number
------------------------------------------------------------------------------------------------------------------------------
<S>               <C>                                                                                         <C>
      2           Plan of acquisition, reorganization, arrangement, liquidation or succession                     None
      3 (i)       Certificate of Incorporation                                                                      *
      3 (ii)      Bylaws                                                                                           3.2
      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                                   10.7
                  (h) Amendment to Employment Agreement with Lucy T. Tinker                                       10.8
                  (i) Amendment to Employment Agreement with Patrick D. McTernan                                  10.9
                  (j) Employment Agreement with Jeffrey J. Carfora                                                10.10
                  (k) Employment Agreement with Barbara A. Flannery                                               10.11
     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
     19           Previously unfiled documents                                                                    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
     28           Information from reports furnished to state insurance regulatory authorities                Not required
     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 Act of 1934,
filed with 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.
<PAGE>
***Filed as an exhibit to the Company's Registration Statement on Form 8-A under
the Securities 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 appendix to the Company's  definitive proxy statement filed with
the Securities and Exchange Commission on September 26, 1997.

(b) Reports on Form 8-K:

There were no reports  filed on Form 8-K for the three month  period  ended June
30, 1999.