OFFICE OF THRIFT SUPERVISION

WASHINGTON, D.C. 20552
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FORM 10-K

(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996

|_| 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
________________________ OTS file number 7708

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POUGHKEEPSIE SAVINGS BANK, FSB
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United States of America 14-0978220
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
249 Main Mall, Poughkeepsie, New York 12601
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (914) 431-6200

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Securities registered pursuant to Section 12(b) of the Act:
(Not Applicable)

Securities registered pursuant to section 12(g) of the Act:
(Title of class)

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Common Stock, Par Value $0.01 Per Share

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

Based upon the market price of the Registrant's Common Stock as of March
5, 1997 the aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $78.7 million.

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. |_|

The number of shares outstanding of the Registrant's Common Stock as of
March 5, 1997 was 12,592,525 shares.

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Documents Incorporated by Reference

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 30, 1997 are incorporated by reference in Part
III hereof.

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

POUGHKEEPSIE SAVINGS BANK, FSB

ANNUAL REPORT FOR 1996 ON FORM 10-K

TABLE OF CONTENTS

Page
----
PART I

Item 1. Business of the Bank ......................................... 1
Executive Officers of the Registrant.......................... 33
Item 2. Properties.................................................... 34
Item 3. Legal Proceedings............................................. 35
Item 4. Submission of Matters to a Vote of Security Holders........... 35

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 35
Item 6. Selected Consolidated Financial Data.......................... 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 37
Item 8. Financial Statements and Supplementary Data................... 52
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 89

PART III

Item 10. Directors and Executive Officers of the Registrant............ 89
Item 11. Executive Compensation........................................ 89
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 89
Item 13. Certain Relationships and Related Transactions................ 89

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 89

PART I

Item 1. Business of the Bank.

General

Poughkeepsie Savings Bank, FSB ("Poughkeepsie Savings" or the "Bank"),
headquartered in Poughkeepsie, New York, is a community savings bank serving the
Mid-Hudson Valley area of New York through eleven branches in Dutchess, Orange
and Rockland counties, as well as eight residential loan origination offices in
five New York counties and New Jersey and Connecticut. Branch locations in
Orange and Rockland Counties use the name Bank of the Hudson, Poughkeepsie
Savings Bank.

Poughkeepsie Savings was chartered as a mutual savings bank by the New York
State Legislature in 1831, converted to a federal mutual savings bank in 1981
and converted to stock form in 1985. At December 31, 1996, the Bank had total
assets of $858.7 million, net loans of $634.7 million, total deposits of $575.2
million and stockholders' equity of $71.7 million.

In recent years, the business of Poughkeepsie Savings has consisted
primarily of obtaining funds in the form of deposits from the general public and
borrowings, and using such funds to make residential mortgage loans and
commercial mortgage loans as well as commercial business loans, consumer loans,
student loans and other investments. Currently, the Bank conducts community
banking operations in the Mid-Hudson region of New York (primarily Dutchess,
Orange, Ulster, Putnam, Rockland and Westchester counties as well as contiguous
areas).

The Bank's operating strategy is to increase deposits and consumer loans in
its local market, become a leader in one-to-four family residential lending in
the Mid-Hudson Valley, originate commercial real estate and business loans,
continue to reduce the levels of non-performing assets and improve customer
service. In addition, the Bank is committed to providing leadership and support
to the communities it serves.

The Bank, as a federally chartered savings bank, is subject to
comprehensive regulation and examination by the Office of Thrift Supervision
("OTS"), as its chartering authority and primary regulator, and by the Federal
Deposit Insurance Corporation ("FDIC"), which administers the Savings
Association Insurance Fund ("SAIF"), which insures the Bank's deposits to the
maximum extent permitted by law. The Bank is a member of the Federal Home Loan
Bank ("FHLB") of New York, which is one of the 12 regional banks which comprise
the FHLB System. The Bank is further subject to regulations of the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") governing
reserves required to be maintained against deposits and certain other matters.

The Bank's principal executive offices are located at 249 Main Mall,
Poughkeepsie, New York 12601, and its telephone number is (914) 431-6200.

Lending Activities

General

Poughkeepsie Savings Bank is a community bank serving the individual and
business borrowers of the Mid-Hudson Valley. The Bank's loan portfolio (net of
deferred fees and the allowance for loan losses) totaled $634.7 million at
December 31, 1996, representing 73.9% of total assets.

The following tables set forth information concerning the composition of
the Bank's loan portfolio by type of loan and by type of collateral.

December 31,
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- --------------------
Type of Loan Amount Percent Amount Percent Amount Percent
------------ ------ ------- ------ ------- ------ -------
(Dollars in thousands)

Conventional mortgage loans:

Existing property.................. $565,784 89.3% $469,756 81.6% $448,643 94.3%
Construction....................... 39,602 6.2 17,138 3.0 8,287 1.7
Commercial business loans................ 7,196 1.1 7,397 1.3 10,181 2.1
Other loans (1).......................... 30,907 4.9 28,453 4.9 27,103 5.7
-------- ----- -------- ----- -------- -----
643,489 101.5 522,744 90.8 494,214 103.8
Deferred loan origination fees........... (606) (0.1) (679) (0.1) (304) (0.1)
Allowance for loan losses................ (8,652) (1.4) (8,259) (1.4) (18,195) (3.8)
Commercial loans held for sale (2)....... -- -- 61,510 10.7 -- --
Residential loans held for sale.......... 456 -- 192 -- 279 0.1
-------- ----- -------- ----- -------- -----
$634,687 100.0% $575,508 100.0% $475,994 100.0%
======== ===== ======== ===== ======== =====
Type of Collateral
------------------

Residential:

One-to-four-family................. $393,941 62.2% $317,441 55.1% $248,729 52.4%
Multi-family....................... 85,609 13.5 72,029 12.5 98,731 20.7
Commercial real estate................... 126,292 19.9 97,616 17.0 109,749 23.1
Savings accounts......................... 31 -- 40 -- 51 --
Property improvement loans (3)........... 175 -- 190 -- 212 --
Commercial businesss loans (4)........... 7,196 1.1 7,397 1.3 10,181 2.1
Other installment loans (5).............. 30,701 4.8 28,223 4.9 26,840 5.6
-------- ----- -------- ----- -------- -----
643,945 101.5 522,936 90.8 494,493 103.9
Deferred loan origination fees........... (606) (0.1) (679) (0.1) (304) (0.1)
Allowance for loan losses................ (8,652) (1.4) (8,259) (1.4) (18,195) (3.8)
Commercial loans held for sale (2)....... -- -- 61,510 10.7 -- --
-------- ----- -------- ----- -------- -----
$634,687 100.0% $575,508 100.0% $475,994 100.0%
======== ===== ======== ===== ======== =====

- ----------

(1) Includes auto and home equity loans, property improvement loans, savings
account loans, and student loans.

(2) Represents commercial real estate, multi-family and commercial business
loans which were identified for bulk sale and carried at the lower of cost
or market value.

(3) Includes FHA Title I loans.

(4) Includes secured and unsecured loans. The security for secured commercial
loans generally includes general business assets such as inventory,
receivables, property and equipment.

(5) Includes automobile, home equity loans, and student loans.

The following tables show the contractual maturities of the Bank's loan
portfolio as of December 31, 1996 and 1995. 1-4 Family Residential Mortgage
Loans held for sale, which are typically sold within 90 days of origination,
Commercial Loans Held for Bulk Sale, and deferred loan origination fees have
been excluded. The tables do not include estimated future repayments and
scheduled amortization.

At December 31, 1996
----------------------------------------------------------------------------
Real Estate
Mortgage Loans
---------------------------------
Total Commercial
1-4 Commercial Mortgage Business Consumer
Construction Family Real Estate Loans Loans Loans Total
------------ ------ ----------- ----- ----- ----- -----
(Dollars in thousands)

Amounts due:
Within 1 year.............. $18,564 $ 2,204 $ 39,344 $ 60,112 $ 992 $ 823 $ 61,927
------- -------- -------- -------- ------ ------- --------
1 - 2 years................ 16,799 808 21,741 39,348 49 981 40,378
2 - 3 years................ 3,515 1,466 30,141 35,122 5,427 1,873 42,422
3 - 5 years................ 724 3,397 60,861 64,982 556 3,072 68,610
5 - 10 years............... -- 8,894 23,874 32,768 172 4,372 37,312
10 - 15 years.............. -- 41,259 435 41,694 -- 6,624 48,318
Beyond 15 years............ -- 330,548 812 331,360 -- 13,162 344,522
------- -------- -------- -------- ------ ------- --------
Total due after 1 year 21,038 386,372 137,864 545,274 6,204 30,084 581,562
------- -------- -------- -------- ------ ------- --------
Total................ $39,602 $388,576 $177,208 $605,386 $7,196 $30,907 $643,489
======= ======== ======== ======== ====== ======= ========

Amounts due after 1 year:
Fixed-rate................. $ 400 $160,666 $104,151 $265,217 $ 643 $14,039 $279,899
Adjustable-rate (1)........ 20,638 225,706 33,713 280,057 5,561 16,045 301,663
------- -------- -------- -------- ------ ------- --------
Total due after 1 year $21,038 $386,372 $137,864 $545,274 $6,204 $30,084 $581,562
======= ======== ======== ======== ====== ======= ========

- ----------

(1) Adjustable rate loans includes loans whose rates are subject to adjustment
at intervals ranging from daily to 10 years.

At December 31, 1995
----------------------------------------------------------------------------
Real Estate
Mortgage Loans
---------------------------------
Total Commercial
1-4 Commercial Mortgage Business Consumer
Construction Family Real Estate Loans Loans Loans Total
------------ ------ ----------- ----- ----- ----- -----
(Dollars in thousands)

Amounts due:
Within 1 year.............. $ 9,830 $ 4,168 $ 11,422 $ 25,420 $1,469 $ 823 $ 27,712
------- -------- -------- -------- ------ ------- --------
1 - 2 years................ 6,551 1,372 33,763 41,686 43 602 42,331
2 - 3 years................ -- 1,786 24,377 26,163 75 1,557 27,795
3 - 5 years................ 757 3,498 66,455 70,710 5,634 2,357 78,701
5 - 10 years............... -- 12,402 15,256 27,658 176 3,665 31,499
10 - 15 years.............. -- 34,943 1,325 36,268 -- 6,349 42,617
Beyond 15 years............ -- 258,527 462 258,989 -- 13,100 272,089
------- -------- -------- -------- ------ ------- --------
Total due after 1 year 7,308 312,528 141,638 461,474 5,928 27,630 495,032
------- -------- -------- -------- ------ ------- --------
Total................ $17,138 $316,696 $153,060 $486,894 $7,397 $28,453 $522,744
======= ======== ======== ======== ====== ======= ========
Amounts due after 1 year:

Fixed-rate................. $ 400 $142,666 $ 95,150 $238,216 $ 297 $10,482 $264,891
Adjustable-rate............ 6,908 169,862 46,488 223,258 5,631 17,148 230,141
------- -------- -------- -------- ------ ------- --------
Total due after 1 year $ 7,308 $312,528 $141,638 $461,474 $5,928 $27,630 $495,032
======= ======== ======== ======== ====== ======= ========

The following tables show as of December 31, 1996 and 1995 the Bank's
fixed-rate and adjustable-rate mortgage loans by interest rate ranges and by
contractual maturity date. Loans held for sale of $0.5 million and $61.7 million
as of December 31, 1996 and 1995, respectively, have been excluded.

At December 31, 1996
----------------------------------------------------------------------------------------
Fixed-Rate Mortgage Loans Adjustable-Rate Mortgage Loans
------------------------------------------- -------------------------------------------
Contractual Less 10.01 - Over Less 10.01 - Over
Maturity than 8% 8-10% 12% 12% Total than 8% 8-10% 12% 12% Total
----------- ------- ------ ------ ------ ------ ------- ------ ------ ------ ------
(Dollars in thousands)

0-1 years........... $ 871 $ 21,670 $1,613 $ 36 $ 24,190 $ 3,801 $ 23,813 $ 8,308 -- $ 35,922
1-2 years........... 8,632 1,715 404 6 10,757 40 25,107 3,444 -- 28,591
2-3 years........... 8,201 8,306 2,136 15 18,658 25 12,323 4,116 -- 16,464
3-5 years........... 5,951 51,789 223 78 58,041 39 6,806 96 -- 6,941
5-10 years.......... 21,044 5,601 737 137 27,519 701 3,501 941 $106 5,249
10-15 years......... 29,807 6,328 376 118 36,629 2,115 2,693 239 18 5,065
Over 15 years....... 76,910 34,809 1,747 147 113,613 123,047 93,855 845 -- 217,747
-------- -------- ------ ---- -------- -------- -------- ------- ---- --------
$151,416 $130,218 $7,236 $537 $289,407 $129,768 $168,098 $17,989 $124 $315,979
======== ======== ====== ==== ======== ======== ======== ======= ==== ========

At December 31, 1995
-----------------------------------------------------------------------------------------
Fixed-Rate Mortgage Loans Adjustable-Rate Mortgage Loans
------------------------------------------- -------------------------------------------
Contractual Less 10.01 - Over Less 10.01 - Over
Maturity than 8% 8-10% 12% 12% Total than 8% 8-10% 12% 12% Total
---------- ------- ------ ------ ------ ------ ------- ------ ------ ------ ------
(Dollars in thousands)

0-1 years........... $ 374 $ 2,801 $ 218 $ 37 $ 3,430 $ 841 $12,590 $ 8,559 -- $ 21,990
1-2 years........... 7,397 8,932 9,635 -- 25,964 748 12,338 2,636 -- 15,722
2-3 years........... 10,455 2,448 47 11 12,961 814 4,850 7,518 $20 13,202
3-5 years........... 12,291 32,069 2,423 31 46,814 988 13,118 9,790 -- 23,896
5-10 years.......... 11,306 10,857 146 -- 22,309 3,222 763 1,258 106 5,349
10-15 years......... 27,791 2,068 193 62 30,114 3,779 1,409 966 -- 6,154
Over 15 years....... 60,274 39,308 216 256 100,054 146,330 12,439 166 -- 158,935
-------- -------- ------ ---- -------- -------- -------- ------- ---- --------
$129,888 $98,483 $12,878 $397 $241,646 $156,722 $57,507 $30,893 $126 $245,248
======== ======= ======= ==== ======== ======== ======= ======= ==== ========

LOAN ORIGINATIONS

General

The Bank's loan origination operations are divided among: one-to-four
family residential, commercial real estate, commercial business and consumer
installment lending. Each area originates loans within policies established by
the Board of Directors. Among other things these policies address requirements
such as acceptable collateral, underwriting (such as evaluating debt service
coverage ratios), maximum loan amounts, geographic concentrations, appraisal
requirements, documentation requirements and compliance with the Community
Reinvestment Act. These policies are maintained by the Credit Department which
is independent of the loan origination operations.

The Bank's Management Loan Committee, consisting of several senior officers
of the Bank, has authority to approve loans up to $1 million and recommends
loans in excess of $1 million to the Directors' Loan Committee. The Directors'
Loan Committee must approve all loans in excess of $1 million. The Board of
Directors' has set specific parameters whereby certain commercial loans of less
than $1 million, with limits determined by a risk rating assigned by the Bank's
Credit Department, may have the origination, credit review, appraisal review and
approval process accomplished by a minimum of three specifically designated
officers of the Bank. One-to-four family residential mortgage loans and consumer
loans can be processed and approved with two authorized signatures within
certain size limitations.

The following table summarizes activity in the Bank's loan portfolio:

Year Ended December 31,
---------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)

Originations and purchases:
One-to-four family residential real estate loans:
Originations ........................................ $ 130,396 $ 102,789 $ 70,003
Purchases ........................................... -- 2,203 --
--------- --------- ---------
Subtotal one-to-four family ......................... 130,396 104,992 70,003
Commercial real estate and multi-family residential loans 73,447 64,597 28,362
Commercial business loans ............................... 1,343 3,649 2,615
Consumer and other loans ................................ 14,398 11,317 12,789
--------- --------- ---------
Total originations and purchases .................... 219,584 184,555 113,769
Sales of one-to-four family residential loans ............. (18,874) (8,408) (11,825)
Bulk sale of certain commercial loans ..................... (33,178) -- --
Sales of student loans .................................... (954) (1,049) (1,187)
Principal reductions ...................................... (107,269) (85,434) (62,894)
--------- --------- ---------
Increase in loans receivable .............................. $ 59,309 $ 89,664 $ 37,863
========= ========= =========

One-to-Four Family Residential Mortgage Loan Origination

Under applicable regulations, the Bank may originate or purchase whole
one-to-four family residential mortgage loans secured by properties located
anywhere in the United States. Currently, the Bank is generally limiting its
origination of new residential mortgage loans to properties within the Bank's
Mid-Hudson Valley market area and nearby counties, as well as northern New
Jersey and southern Connecticut.

The Bank operates a full service residential mortgage loan origination
division, which originates "investment quality" loans for portfolio and for sale
in the secondary mortgage market. Currently, the Bank is an approved
originator/seller with various mortgage investors, an approved originator/seller
servicer with the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA") and an approved State of New York
Mortgage Agency ("SONYMA") lender. The Bank anticipates retaining the servicing
on most of the loans it originates during 1997 in order to generate future loan
servicing fees and build customer relationships.

Residential lending is pursued through the use of qualified loan
originators located throughout the Bank's market area with a number of
residential loan products, both fixed-rate and variable-rate. The Bank has
invested in updated technology to provide for quick turnaround on applications
processing and loan closings. Each loan officer is equipped with a laptop
computer and trained to submit applications electronically. The Bank also
participates in the "Loan Prospector" program of FHLMC. The "Loan Prospector"
program links the Bank to FHLMC's database and uses artificial intelligence to
produce a credit decision within four minutes from the time the application data
is electronically transmitted to FHLMC.

The Bank's goal in residential lending is to serve a broad spectrum of
borrowers. Special emphasis is placed on serving the low to moderate income
sector by the use of insured programs such as Federal Housing Administration
("FHA"), Veterans Administration ("VA") and a variety of affordable housing
programs. The Bank's total residential loan originations, including loans
originated for sale in the secondary market, were $130.4 million for 1996 as
compared to $102.8 million in 1995 and $70.0 million in 1994.

Excluding SONYMA, FHA, VA and certain low/moderate income and first-time
homebuyer mortgages, the Bank primarily originates residential mortgage loans
with loan-to-value ratios up to 95%. On all conventional mortgage loans
exceeding an 80% loan-to-value ratio, the Bank requires private mortgage
insurance. As part of its residential lending program, the Bank offers
construction loans with up to 80% loan-to-value ratios to qualified builders and
individuals for terms of up to twelve months.

With few exceptions, residential mortgage loans are underwritten and
documented in accordance with secondary market standards and are intended to be
saleable in the secondary market. As part of its asset/liability management the
Bank may sell mortgage loans which it originates in the future. Property
securing real estate loans originated by the Bank is appraised by independent
appraisers who have met the Bank's criteria and have been approved by the Board
of Directors.

The Bank originates fixed-rate residential mortgage loans and
adjustable-rate mortgage loans ("ARMs") on which the payment amount and the
amortization schedule may change periodically as a result of changes in interest
rates. ARMs are not subject to regulatory limitations on interest rate
adjustments, provided that changes in interest rates are based upon an index
agreed to by the Bank and the borrower. The index must be readily available to
and verifiable by the borrower, and, except with respect to downward adjustments
in the interest rate, adjustments must correspond directly to the movement of
the index agreed to by the Bank and the borrower, subject only to such
limitations as are contained in the loan contract.

The Bank's ARMs are typically written at or near competitive market rates
and are subsequently repriced relative to the specified rate index. Initial
rates on ARMs originated by the Bank are often lower than those that would
prevail were the index used for repricing applied at origination. However, the
accretion of fees charged in connection with the origination of the Bank's ARMs
generally results in a yield in the period prior to the first adjustment at or
near the yield that would result from application of the index.

The Bank's current ARM programs call for interest rate adjustments based
upon a spread over the weekly average yield on U.S. Treasury securities adjusted
to a constant maturity as published by the Federal Reserve Board, corresponding
to the rate adjustment period. The interest rate on the Bank's ARMs normally
adjusts annually, with the change in the rate limited to a maximum of two
percentage points at any adjustment date. Currently, the maximum lifetime
adjustment is between five and six percentage points above the initial rate.
Upon each interest rate increase or decrease, the borrower's monthly principal
and interest payment is adjusted to amortize the remaining principal balance
over the remaining loan term.

Due to the nature of ARMs, there are unquantifiable risks resulting from
potential increases in the borrower's monthly payments as a result of the
repricing. The Bank does not originate ARMs with payment limitations that could
produce negative amortization.

The Bank uses its headquarters-based loan servicing operation to service
all new residential loans originated for its portfolio as well as loans serviced
for others. At December 31, 1996, the Bank serviced $316.8 million of
one-to-four family residential mortgage loans, including $25.5 million of loans
serviced for others, while third parties serviced $102.3 million of one-to-four
family residential mortgage loans on behalf of the Bank.

At December 31, 1996, the Bank's residential mortgage portfolio was
comprised of $230 million of adjustable-rate loans with interest rates ranging
from 4.0% to 11.0% and $163.4 million of fixed-rate loans with interest rates
ranging from 5.75% to 13.5%. Non-performing residential mortgage loans amounted
to $5.5 million, or 1.39% of such portfolio at December 31, 1996 as compared to
$4.8 million, or 1.5% as of December 31, 1995, and $5.0 million, or 2.0%, as of
December 31, 1994.

The Bank's first mortgage loans customarily include "due-on-sale" clauses,
which are provisions giving the Bank the right to declare a loan immediately due
and payable in the event the borrower sells or otherwise disposes of the real
property subject to the mortgage and the loan is not repaid. The Bank enforces
"due-on-sale" clauses through foreclosures and other legal proceedings to the
extent available under applicable laws. Loans insured by the FHA or partially
guaranteed by the VA do not contain due-on-sale clauses. As of December 31,
1996, FHA and VA loans represented 1.8% of the Bank's total loan portfolio.

Sale and Servicing of One-to-Four Family Residential Mortgage Loans

In addition to originating residential mortgage loans for its portfolio,
the Bank also originates such loans to be sold. During 1996, 1995, and 1994, the
Bank sold $18.9 million, $8.4 million, and $11.8 million, respectively, of
mortgage loans to investors. These sales generated gains (including Mortgage
Servicing Rights) of $0.2 million, $0.1 million and $0.2 million in 1996, 1995
and 1994, respectively.

Servicing includes collecting and remitting loan payments, monthly
reporting to investors, holding escrow funds for the payment of real estate
taxes and insurance premiums, contacting delinquent mortgagors, in some cases
advancing to the investor principal and interest when the mortgage is
delinquent, supervising foreclosures in the event of unremedied defaults and
generally administering the loans. The Bank recorded servicing income of $18,000
in 1996, $12,000 in 1995, and $6,000 in 1994.

SFAS No.122, "Accounting for Mortgage Servicing Rights", a new accounting
rule adopted by the Bank as of January 1, 1996, requires that the fair value of
rights to service mortgages for others be recognized as an asset regardless of
how originated. As a result, loans sold servicing retained now generate
approximately the same accounting results as loans sold servicing released. The
Bank retained the servicing on $17.1 million, $5.5 million, and $3.0 million of
loans sold to investors in 1996, 1995 and 1994, respectively.

Commercial and Multi-Family Mortgage Loan Origination

The Bank has established itself as a commercial lender which focuses its
efforts on commercial and multi-family mortgage loans in the Mid-Hudson Valley
and nearby counties. On a selective basis, the Bank will entertain prudent
lending opportunities in immediately contiguous counties should they arise.
Commercial and multi-family mortgage loan originations amounted to $73.4 million
in 1996, $64.6 million in 1995, and $28.4 million in 1994. In addition to the
$73.4 million of commercial and multi-family loan originations in 1996, the Bank
made $4.0 million of loans to facilitate the disposition of OREO properties. As
of December 31, 1996 the Bank had 18 loans aggregating $48.9 million which were
made to facilitate the sale of OREO.

The Bank generally has offered construction loans with 18-month terms and
loan-to-value ratios of up to 75% on multi-family and commercial properties, and
single family sub-divisions. This 75% loan-to-value ratio is based on the lesser
of the current appraised value or the cost of construction (land plus building).
Appraisal reports on the properties are completed by qualified independent fee
appraisers. In most cases, the rates associated with these interim loans "float"
over national prime rate indices.

The Bank also offers permanent commercial and multi-family real estate
financing with loan-to-value ratios of up to 80%. Permanent mortgage loans are
generally made on the basis of a 20 to 25 year amortization schedule with a
"balloon payment" due after five years. Permanent loans generally have
adjustable/variable interest rates tied to national prime rate indices, or are
fixed-rate loans based on one-to-five year Treasury note

rates plus a margin. The Bank had conducted its commercial and multi-family
mortgage lending in selected areas along the eastern seaboard, but now lends
primarily in the Mid-Hudson Valley region of New York (and nearby counties)
except to facilitate the sale of OREO located outside this region.

As of December 31, 1996, the Bank's commercial real estate and multi-family
mortgage loan portfolio amounted to $211.0 million, or 32.9% of the Bank's total
loan portfolio compared to 31.9% at December 31, 1995. The largest aggregate
amount of commercial mortgage loans and commitments to one borrower or
affiliated borrowers at December 31, 1996 was $9.5 million. The average
commercial mortgage loan amount at December 31, 1996 was $0.9 million.
Commercial and multi-family mortgage loans are generally considered to involve a
higher degree of risk than residential mortgage loans because the borrowers are
generally more sensitive to negative changes in the economic environment.
Commercial and multi-family mortgage loans typically involve large loan balances
to single borrowers or groups of related borrowers. The payment experience on
such loans is typically dependent on the successful operation of the real estate
project. These risks can be significantly affected by supply and demand
conditions in the local real estate market, and as such, commercial real estate
and multi-family residential loans may be subject to a greater extent to adverse
conditions in the local real estate market and in the economy in general.

The following table sets forth information concerning the Bank's
non-performing commercial real estate and multi-family residential mortgage
loans and commercial OREO properties at December 31, 1996, 1995 and 1994,
respectively.

Year Ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)

Non-performing commercial real estate and
multi-family residential mortgage loans ............ $ 9,447 $ 471(1) $ 8,135
Commercial OREO ...................................... 9,733 11,424 11,201
------- ------- -------
Total .......................................... $19,180 $11,895 $19,336
======= ======= =======
As a percent of total non-performing assets .......... 73.3% 65.3% 68.3%
As a percent of total assets ......................... 2.2% 1.4% 2.7%

- ----------
(1) Excludes $8.8 million of commercial real estate loans which were loans
written down to fair value and included with "Commercial Loans Held for
Bulk Sale," at December 31, 1995. These loans would otherwise have been
considered non-accrual. See Bulk Sale of Certain Commercial Loans on page
9.

Commercial Business Loan Origination

The Bank also pursues commercial business loan opportunities in the
Mid-Hudson Valley region of New York (and nearby counties). As of December 31,
1996, the Bank's commercial business loan portfolio amounted to $7.2 million, or
1.1% of its total loan portfolio, as compared to $7.3 million at December 31,
1995 and $9.9 million at December 31, 1994. The largest aggregate amount of
outstanding commercial business loans and commitments to one borrower or
affiliated borrowers at December 31, 1996 was $5.2 million.

Commercial business loans are generally considered to involve a higher
degree of risk than residential mortgage loans because the collateral is
typically in the form of intangible assets and inventory subject to market
obsolescence. Commercial business loans typically involve large loan balances to
single borrowers or groups of related borrowers, with the repayment of such
loans typically dependent on the successful operations and income stream of the
borrower. Such risks can be significantly affected by economic conditions. In
addition, commercial lending generally requires substantially greater oversight
efforts compared to residential real estate lending.

At December 31, 1996, $0.4 million, or 6.1%, of the Bank's commercial
business loan portfolio was non-performing, as compared to $0.1 million at
December 31, 1995 and $2.4 million at December 31, 1994. At December 31, 1995,
the category "Commercial Loans Held for Bulk Sale" included $2.4 million of
commercial business loans written down to fair value which the Bank otherwise
would have considered non-accrual as of December 31, 1995. See the following
discussion on "Bulk Sale of Certain Commercial Loans".

Bulk Sale of Certain Commercial Loans

As of December 31, 1995, the Bank transferred certain commercial loans to
the "Commercial Loans Held for Bulk Sale" category. These loans, which totaled
$78.2 million before transfer, were transferred to the Held for Sale category at
their then fair value of $61.5 million. Fair value was determined by competitive
bid. The following table summarizes the activity in the "Commercial Loans Held
for Bulk Sale" category during 1996:

Amount
Total Non-Accrual
----- -----------
(in thousands)

Balance as of 1/1/96 ......................... $ 61,510 $ 11,201
Sold during 1996 ............................. (33,178) (10,470)
Paid off during 1996 ......................... (4,564) --
Additional Write-downs ....................... (894) --
Principal payments received .................. (227) --
Returned to portfolio ........................ (22,647) (731)
-------- --------
Balance as of 12/31/96 ....................... $ -- $ --
======== ========

Of the amount returned to portfolio, two loans totaling $6.1 million became
non-performing during 1996 and were subsequently disposed of in January and
February 1997 at no additional loss to the Bank. A $3.1 million loan paid off in
January 1997; the other loan totaling $3.0 million became OREO in December 1996
and was sold in February 1997.

Consumer Loan Origination

Federal savings banks are permitted to make secured and unsecured consumer
loans aggregating up to 35% of their assets. The Bank's consumer loan portfolio
totaled $31.2 million at December 31, 1996, representing 4.9% of its total loan
portfolio, as compared to $28.7 million at December 31, 1995 and $27.3 million
at December 31, 1994.

The Bank currently originates a variety of consumer loans, including home
equity, property improvement, automobile and other secured and unsecured
personal installment loans at each of its banking offices. Consumer loans
generally have terms ranging from three to five years. The Bank originates these
loans through its branch offices on a direct basis. Using the Bank's "On-Line
Lending" program, a customer can also complete an application for a consumer
loan electronically as well as browse the Bank's product offerings.

The Bank offers a home equity line of credit, a variable-rate open line of
credit which the customer can access by writing a check and which is
collateralized by a lien on residential real property. The line of credit,
together with all loans collateralized by such property, is limited to 80% of
the property's appraised value. The Bank also offers a single disbursement
fixed-rate home equity loan which, together with all other loans secured by the
same property, is limited to 90% of the property's appraised value.

The Bank also offers "Totally Business Banking", a package of products and
services designed to meet the banking needs of small businesses. Totally
Business Banking offers a business line of credit from $5,000 to $50,000, a
business checking account with no per transaction charges, and other business
services including: merchant card processing, direct deposit, night depository,
payroll, wire transfer and tax filing services.

FEE INCOME FROM LENDING ACTIVITIES

The Bank realizes interest and loan fee income from its lending activities,
including loan origination fees for originating loans and fees for making
commitments to originate construction, residential and commercial mortgage
loans. Most of these fees, net of direct origination costs, are amortized over
the life of the respective loan. In addition, the Bank receives loan fees
related to existing loans, which include prepayment charges, late charges,
assumption fees and extension fees.

The Bank offers a range of loan commitments for which it charges fees. As
part of certain loan applications, the borrower also pays the Bank for its
out-of-pocket costs in reviewing the application, whether or not the loan is
closed. The interest rate charged on the mortgage loan is normally the
prevailing rate at the time the loan application is received, approved, or when
the loan is closed. At December 31, 1996, the Bank was committed to originate or
fund $31.6 million of one-to-four family residential mortgage loans and $32.2
million of commercial loans. At December 31, 1996, the Bank had commitments to
sell one-to-four family residential mortgage loans totaling $13.0 million; the
Bank uses forward contracts to hedge against the price risk on its "pipeline" of
loans committed to secondary market investors.

NON-PERFORMING ASSETS

General

Management of the Bank regularly reviews the loan portfolio. Generally,
loans are placed on non-accrual status when the loan is past due more than 90
days, or earlier if in management's judgment, the ability of a borrower to repay
principal or interest is in doubt. When a loan is placed on non-accrual status,
previously accrued but unpaid interest is deducted from interest income.
Consumer loans that are 120 days delinquent are generally charged-off against
the allowance for loan losses; subsequent recoveries are credited back to the
allowance.

The Bank's Asset Recovery Group is responsible for the resolution of all
problem commercial and residential real estate assets. Non-performing assets
totaled $26.1 million, $18.2 million and $28.3 million as of December 31, 1996,
1995 and 1994, respectively. In connection with the planned Bulk Sale of certain
commercial loans, the Bank, in December 1995, transferred certain loans,
including $11.2 million of non-performing loans to the "Commercial Loans Held
for Bulk Sale" account at fair value (determined by bid amount); as a result of
this transaction, non-performing assets were reduced by $14.4 million as of
December 31, 1995. During 1996, $10.5 million of the non-accrual "Commercial
Loans Held for Bulk Sale" were sold and the remaining $0.7 million was
transferred back to portfolio. See Bulk Sale of Certain Commercial Loans on page
9. Efforts are ongoing to further reduce non-performing assets.

When a borrower fails to make a required payment on a residential mortgage
loan, the Bank attempts to cure the deficiency by contacting the borrower.
Written contacts are made after payment is 15 days past due and, in most cases,
deficiencies are cured promptly. If the delinquency is not cured by the 30th
day, the Bank attempts to contact the borrower by telephone to arrange payment
of the delinquency. If these efforts have not resolved the delinquency within 45
days after the due date, a second written notice is sent to the borrower, and on
the 60th day a notice is sent to the borrower warning that foreclosure
proceedings will be commenced unless the delinquent amount is paid. If the
delinquency has not been cured within a reasonable period of time after the
foreclosure notice has been sent, the Bank institutes appropriate legal action
to foreclose the property. If foreclosed, property collateralizing the loan is
sold at a public sale and may be purchased by the Bank. If the Bank is in fact
the successful bidder at the foreclosure sale, upon receipt of a deed to the
property, the Bank initiates a sales program to dispose of the property at the
earliest possible date.

Collection efforts on commercial real estate and multi-family residential
loans are similar to efforts on 1-4 family residential mortgages; however, these
efforts generally begin as soon as a payment date is missed. The Bank also
maintains periodic contact with commercial loan customers and monitors and
reviews the borrowers' financial statements and compliance with debt covenants
on a regular basis.

Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure are classified as Other Real Estate Owned ("OREO")
until sold. When property is classified as OREO, it is recorded at the lower of
cost or fair value (net of disposition costs) at that date and any writedown
resulting therefrom is charged to the allowance for loan losses. Subsequent
writedowns are charged to operating expense. Interest accrual, if any, ceases on
the date of transfer to OREO. Net income from operating OREO reduces the
carrying value of the asset. Net expense from OREO is expensed as incurred, on a
property by property basis (See discussion of OREO included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" at
Item 7).

The following table sets forth information concerning the principal
balances and percent of the total loan portfolio represented by loans delinquent
as to interest as of December 31 for the periods indicated:

1996 1995(1) 1994
------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)

Delinquencies:
30 to 59 days........................ $11,486 1.79% $ 9,834 1.88% $10,943 2.21%
60 to 89 days........................ 2,286 0.36 3,880 .74 7,366 1.49
90 or more days...................... 15,423 2.40 5,435 1.04 15,682 3.17
------- ---- ------- ---- ------- ----
Total................................ $29,195 4.55% $19,149 3.66% $33,991 6.87%
======= ==== ======= ==== ======= ====

- ----------
(1) Excludes delinquent loans included with "Commercial Loans Held for Bulk
Sale." See Bulk Sale of Certain Commercial Loans on page 9.

The following table presents information regarding the Bank's
non-performing assets, performing troubled debt restructurings, performing
investment in real estate, and accruing loans 90 days or more past contractual
maturity at year-end 1996, 1995 and 1994, respectively.

December 31,
-------------------------------------
1996 1995(1) 1994
---- ------- ----
(Dollars in thousands)

Non-accrual loans:
1-4 family residential real estate loans................... $ 5,453 $ 4,829 $ 4,965
Commercial real estate and multi-family residential loans.. 9,447 471 8,135
Commercial business........................................ 436 51 2,410
Loans 90 days or more past due as to interest and accruing....... 87 84 172
------- ------- -------
Total non-performing loans ............................ 15,423 5,435 15,682
Other real estate owned.......................................... 10,726 12,781 12,636
------- ------- -------
Total non-performing assets............................ $26,149 $18,216 $28,318
======= ======= =======
Allowance for loan losses........................................ $ 8,652 $ 8,259 $18,195
======= ======= =======
Ratio of:
Non-performing loans to total loans........................ 2.4% 1.0% 3.2%
======= ======= =======
Non-performing assets to total assets...................... 3.0% 2.2% 3.9%
======= ======= =======
Allowance for loan losses to total non-performing loans.... 56.1% 152.0% 116.0%
======= ======= =======
Allowance for loan losses to total loans................... 1.3% 1.6% 3.7%
======= ======= =======

Total non-performing assets (details above)...................... $26,149 $18,216 $28,318
Accruing loans 90 days or more past contractual maturity......... 7,016 2,023 3,320
Performing troubled debt restructurings.......................... 9,499 29 27,953
Performing investment in real estate............................. -- 1,192 1,136
------- ------- -------
Total non-performing assets, accruing loans 90 days or more
past contractual maturity, performing troubled debt
restructurings and performing investment in real estate........ $42,664 $21,460 $60,727
======= ======= =======
Total non-performing loans and accruing loans 90 days or
more past contractual maturity................................ $22,439 $ 7,458 $19,002
======= ======= =======
Ratio of total allowance for loan losses to total non-performing
loans and accruing loans 90 days or more past contractual
maturity....................................................... 38.6% 110.7% 95.8%
======= ======= =======

- ----------
(1) Loans included as part of the "Bulk Sale", and which are carried at the
lower of cost or market value, have been excluded.

At December 31, 1995, $8.8 million of non-accrual commercial real estate
and multi-family residential loans and $2.4 million of non-accrual commercial
business loans, were included with "Commercial Loans Held for Bulk Sale" at
their then fair value and excluded from non-accrual loans at December 31, 1995
in the above table. See "Bulk Sale of Certain Commercial Loans" on page 9.

Had non-accrual and restructured loans performed in accordance with their
original terms and conditions interest income recorded in 1996, 1995, and 1994
would have increased by $1.9 million, $2.6 million and $1.3 million,
respectively.

The table below lists the aggregate of the Bank's non-accrual loans and
OREO geographically and by type of collateral as of December 31, 1996 and 1995:

All Total Total
Other At At
New York New Jersey S. Carolina Connecticut Locations 12/31/96 12/31/95
--------- ---------- ----------- ----------- --------- -------- --------
(1)
(In thousands)

Office/industrial buildings...... $ 6,819 $3,000 $ 9,819 $ 3,668
Single-family residential........ 5,173 186 $173 $192 $ 721 6,445 6,186
Condominiums/cooperatives........ 1,012 -- -- -- -- 1,012 3,090
Land ........................... 1,659 -- -- -- -- 1,659 1,712
Commercial business loans........ 436 -- -- -- -- 436 51
Construction..................... 3,169 -- -- -- -- 3,169 2,913
Shopping/retail centers.......... -- -- 100 -- -- 100 106
Multi-family apartments.......... 3,234 -- -- -- 188 3,422 405
Other ........................... 87 -- -- -- -- 87 85
------- ------ ---- ---- ------ ------- -------
Total at 12/31/96:........... $21,589 $3,186 $273 $192 $ 909 $26,149
======= ====== ==== ==== ====== =======

Total at 12/31/95:........... $11,966 $2,856 $215 $208 $2,971 $18,216
======= ====== ==== ==== ====== =======

- ----------
(1) The largest individual loan included in this category was $188,000.

The following table summarizes the activity in OREO during the periods
indicated.

Activity 1996 1995 1994
-------- ---- ---- ----
(in thousands)

Balance at beginning of year................. $13,973 $13,772 $24,948
Real estate acquired in settlement of loans.. 4,080 4,788 2,899
Capital improvements......................... 907 1,091 2,131
Dispositions................................. (2,480) (3,598) (5,139)
Transfer to performing loans................. (5,236) (1,845) (9,890)
Net excess cash flow......................... (147) (141) (401)
Write-downs.................................. (371) (94) (776)
------- ------- -------
Balance at end of year (1)................... $10,726 $13,973 $13,772
======= ======= =======

- ----------
(1) Includes $1.2 million of performing investments in real estate as of
December 31, 1995 and 1994 and 1994, respectively, which was transferred to
performing loan status in 1996.

The following table sets forth the types of properties which constitute the
Bank's OREO and investment in real estate.

December 31, 1996
---------------------
Number of December 31, December 31,
Type of Properties $ Amount Properties 1995 1994
----------------- -------- ---------- ----------- ------------
(Dollars in thousands)

Townhouses, condominiums and cooperatives. $ 410 1 $ 3,090 $ 3,291
Office and industrial buildings........... 4,496 3 3,530 2,134
Apartment buildings (1)................... -- -- 1,371 1,226
Commercial/multi-family construction...... 3,169 5 2,913 2,339
Land...................................... 1,659 3 1,712 3,123
Single-family residential................. 992 15 1,357 1,435
Other..................................... -- -- -- 224
------- ---- ------- -------
Total............................... $10,726 27 $13,973 $13,772
======= ==== ======= =======

- ----------
(1) Includes $1.2 million of performing investments in real estate as of
December 31, 1995 and 1994 which was transferred to performing loan status
in 1996.

Asset Classification

Under OTS regulations, the Bank is required to assign risk ratings to all
its assets and to establish prudent allowances for losses. The regulations
include the defined categories of "substandard," "doubtful" and "loss" as
classified assets. Substandard assets must have one or more defined weaknesses
and are characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets, with the additional characteristic that
the weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, highly questionable or improbable. Assets
classified as loss are considered uncollectible and of such little value that
their continuance as assets is not warranted without establishment of a specific
reserve in the full amount of the loan or property. Institutions are not
required to establish specific valuation allowances for assets classified as
doubtful, although general allowances should be adjusted to reflect doubtful
assets. In addition, a "special mention" designation identifies assets that do
not yet warrant classification but nonetheless possess credit or other
deficiencies or potential weaknesses deserving management's close attention.
With respect to assets classified substandard or doubtful, if an OTS examiner
concludes that the existing aggregate general valuation allowances are
inadequate, the examiner will determine the extent of any increase necessary in
the general allowance for loan losses, subject to review by the OTS Field
Manager. For the portion of assets classified as loss, the regulations require
institutions either to establish specific allowances for losses equal to 100% of
the amount classified as loss, or to charge-off the asset.

The Bank's classified assets, including unfunded commitments, as of
December 31, 1996 and 1995 are set forth in the following table:

Classified Assets
---------------------------
Total Total Total
Substandard Doubtful Loss 12/31/96 12/31/95 12/31/94
---------- --------- ---- --------- -------- --------
(Dollars in thousands) (1)

Commercial real estate and
multi-family residential
loans.................................. $12,375 -- -- $12,375 $ 2,020 $44,946
1-4 family residential loans............. 7,402 $122 -- 7,524 6,331 5,695
Other loans.............................. 562 7 -- 569 734 3,847
------- ---- ----- ------- ------- -------
Total classified loans.............. 20,339 129 -- 20,468 9,085 54,488
OREO & Investment in real estate......... 10,293 535 -- 10,828 12,783 12,739
------- ---- ----- ------- ------- -------
Total classified assets............. $30,632 $664 -- $31,296 $21,868 $67,227
======= ==== ===== ======= ======= =======

- ----------
(1) As a result of a planned Bulk Sale, loans totaling $51.3 million and $2.9
million were excluded from Substandard and Doubtful classifications,
respectively. These loans were included with Commercial Loans Held for Bulk
Sale and carried at the lower of cost or market. See Bulk Sale of Certain
Commercial Loans on page 9.

The table below lists the aggregate of the Bank's classified assets
geographically and by type of collateral as of December 31, 1996 and 1995:

All Total Total
New York New Jersey Connecticut Virginia Other 12/31/96 12/31/95
--------- ---------- --------- -------- -------- -------- --------
(Dollars in thousands) (1)

Office and industrial buildings.. $ 6,819 $3,000 $ 28 $ 9,847 $ 3,717
Single-family residential......... 6,794 186 $ 192 $376 968 8,516 7,587
Condominiums/cooperatives......... 1,012 1,625 2,637 3,090
Construction...................... 3,271 3,271 3,015
Land ............................ 1,824 1,824 2,537
Commercial business loans......... 486 486 501
Shopping/retail centers........... 641 21 100 762 781
Multi-family apartments........... 3,632 188 3,820 405
Other ............................ 133 133 235
------- ------ ------ ---- ------ ------- -------
Total at 12/31/96:.......... $24,612 $3,207 $1,817 $376 $1,284 $31,296
======= ====== ====== ==== ====== =======

Total at 12/31/95:.......... $13,716 $2,881 $ 633 $132 $4,506 $21,868
======= ====== ====== ==== ====== =======

- ----------
(1) The largest individual loan in this category was $188,000.

ALLOWANCE FOR LOAN LOSSES

At December 31, 1996, the Bank's allowance for loan losses amounted to $8.7
million compared with $8.3 million at December 31, 1995. The allowance for loan
losses is maintained at a level which management considers adequate based on its
regular review of the Bank's loan portfolios taking into consideration the
likelihood of repayment, the diversity of the borrowers, the type of loan, the
quality of the collateral, current market conditions and associated risks. The
Bank's allowance for loan losses is not allocated by loan category. (See
"Provision for Loan Losses," included in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" at Item 7 and Note 4 of "Notes
to Consolidated Financial Statements" at Item 8).

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

Year Ended December 31,
--------------------------
1996 1995 1994
------ ------- -------
(Dollars in thousands)

Balance at beginning of year ............................... $8,259 $18,195 $19,726
------ ------- -------
Provision for loan losses .................................. 850 1,525 120
------ ------- -------
Loans charged-off:
1-4 family residential real estate(1) ................ 457 562 1,317
Commercial real estate and multi-family residential .. 208 1,395 667
Commercial business .................................. 6 -- 123
Consumer ............................................. 62 108 92
------ ------- -------
Total charge-offs ............................... 733 2,065 2,199
------ ------- -------
Recoveries:
Commercial real estate and multi-family residential(2) 110 308 50
Commercial business .................................. 93 43 42
Consumer ............................................. 73 254 456
------ ------- -------
Total recoveries ................................ 276 605 548
------ ------- -------
Net charge-offs ............................................ 457 1,460 1,651
------ ------- -------
Writedowns of loans transferred to Commercial Loans Held
for Bulk Sale(3) ......................................... -- 10,001 --
------ ------- -------
Balance at end of year ..................................... $8,652 $ 8,259 $18,195
====== ======= =======
Ratio of:
Net charge-offs to average loans outstanding ......... 0.07% 0.27% 0.36%
------ ------- -------
Net charge-offs to allowance for loan losses at
beginning of year ................................. 5.5% 8.0% 8.4%
====== ======= =======

- ----------
(1) In 1994, 1-4 family residential charge-offs include $611 thousand related
to 18 condominium units located in the same condominium. The majority of
these units were foreclosed on and sold in 1994.
(2) Once a real estate loan is foreclosed, the asset balance is transferred to
OREO. Any recoveries on foreclosed assets are credited to OREO expense;
therefore, recoveries credited to the allowance for loan losses tend to be
low.
(3) See Bulk Sale of Certain Commercial Loans on page 9.

SECURITIES

The Bank may invest in various securities, including mortgage-backed
securities, U.S. Treasury obligations and securities of various government
agencies, municipal and state obligations, corporate obligations and short-term
money market instruments.

The following table shows the components of the Bank's investment
securities portfolio at the dates indicated:

12/31/96 12/31/95 12/31/94
-------- -------- --------
(Dollars in thousands)

Available for sale:
Mortgage-backed securities................................. $113,575 $161,961 $187,623
Corporate bonds............................................ 5,180 23,535 11,143
U.S. Treasury and agency securities........................ 17,035 104 4,889
Other securities........................................... -- -- 228
-------- -------- --------
Held to maturity:................................................ 135,790 185,600 203,883
Mortgage-backed securities................................. 29,957 -- --
-------- -------- --------
$165,747 $185,600 $203,883
======== ======== ========

Securities provide an investment alternative to loans and are periodically
acquired pending the funding of loans, as well as to maintain minimum liquidity
requirements set by the OTS. (See "Regulation -- Equity Risk Investments" and
"Regulation -- Other Restrictions.") With deposits becoming increasingly
sensitive to interest rate movements, most of the Bank's investments in recent
years have been in short-term securities with maturities of five years or less.
For further information, see Note 3 of "Notes to Consolidated Financial
Statements" at Item 8.

The Bank maintains a significant portfolio of mortgage-backed securities as
a means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention and to
provide liquidity. Mortgage-backed securities are also generally deemed to have
a lesser degree of risk than traditional mortgage loans. At December 31, 1996,
the Bank's mortgage-backed securities portfolio amounted to $143.5 million or
16.7% of total assets. Of this amount, $137.5 million or 96% are U.S. Government
Agency securities which carry the highest investment grade and are readily
liquid through active markets. At December 31, 1996, the mortgage-backed
security portfolio had $108.6 million of adjustable rate securities (with annual
and lifetime caps) and $34.9 million of fixed rate securities. Generally, fixed
rate securities either fully amortize over 15 years or have balloon payments due
after 5 years. All of the Bank's investments in recent years have been in such
"Agency" securities. By acquiring mortgage-backed securities, management seeks
to achieve a positive spread over the cost of funds used to purchase these
securities.

The unrealized holding losses of the Bank's securities portfolio decreased
by $0.6 million in 1996, compared to a decrease of $8.3 million during 1995.
Unrealized holding losses aggregated $0.1 million at December 31, 1996 as
compared to $0.7 million at December 31, 1995 and of $9.0 million at December
31, 1994. This volatility was the direct result of generally lower interest
rates during 1996 and 1995 as compared with year end 1994. The offset for
unrealized holding gains (losses) on available-for-sale securities is shown as a
separate component of stockholders' equity, after adjustments for deferred
income tax effects. These securities are subject to future market value
adjustments depending on future interest rate changes and periodic rate
adjustments on adjustable rate mortgage-backed securities.

During 1989, the Bank securitized approximately $100.0 million of seasoned
one-year ARMs, originated primarily in the Hudson Valley, with FHLMC. At the
time of securitization, an agreement was entered into requiring the Bank to
repay the FHLMC for any foreclosure losses incurred on that portfolio through
1999. During 1996, payments of $37,000 were made on this agreement. Since 1989,
payments on this agreement have totaled $605,000. The outstanding balance on
these mortgage-backed securities was approximately $27.8 million at December 31,
1996, $32.7 million at December 31, 1995 and $38.2 million at December 31, 1994.

SOURCES OF FUNDS

General

Deposit accounts, including savings accounts, have been an important source
of funds for lending and for other general business purposes. The Bank also
obtains funds from borrowings under repurchase agreements, proceeds from
maturing securities, loan repayments, proceeds from loan sales, cash flow from
operations and borrowings from the FHLB of New York.

The Bank seeks to obtain funds to finance its loan originations and
operations from the most competitively priced sources. The Bank has followed a
policy of pricing its deposits based primarily upon its borrowing alternatives
and upon prevailing local competitive pricing.

Deposits

Consumer and commercial deposits are attracted principally from within the
Bank's primary market areas through the offering of a selection of deposit
instruments including consumer and commercial demand deposit accounts,
negotiable order of withdrawal ("NOW") accounts, money market accounts, passbook
accounts, certificates of deposit and retirement plans.

During 1996, the Bank opened three in-store supermarket branches bringing
the total number of branches to eleven, of which five are in-store locations.
The Bank plans to open five additional retail branches in 1997, four of which
will be in-store locations. All in-store banking centers are open for extended
hours seven days a week and utilize the latest technology and customer delivery
systems for maximum customer convenience.

In July 1995, the Bank introduced, via a direct mailing campaign, a new
checking account program under the banner "Totally Free Checking." The program
offers customers a choice of seven different checking account products, each
tailored to different customer needs. In 1996 the Bank continued to aggressively
market this program. Management believes this program will increase the Bank's
share of local market deposits, particularly demand deposits. Total deposits
under the "Totally Free Checking" program were $16.5 million and $8.2 million as
of December 31, 1996 and 1995, respectively.

In June 1996, the Bank introduced a certificate of deposit product known as
"3 Year Double-Step CD" which offers a competitive starting rate and two
opportunities to step up the rate after the first year. Response to this product
has been good; as of December 31, 1996 the Bank had $33.4 million of deposits
related to this new product.

The following tables show balances and weighted average rates paid by
deposit categories and maturities of certificates of deposit by rate range at
the indicated dates.

December 31,
--------------------------------------------------
1996 1995
---------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- -------- ------- --------
(Dollars in thousands)

Money market and demand:
Checking accounts................................. $ 25,787 -- $ 15,987 --
NOW and Super NOW checking........................ 15,796 2.16% 19,545 2.16%
Money market deposits............................. 126,233 4.56 102,866 4.37
-------- --------
Total money market and demand................ 167,816 3.64 138,398 3.55
-------- --------
Savings:
Passbook and statement savings.................... 93,061 3.27 93,470 3.28
Club accounts..................................... 310 3.00 294 3.00
-------- --------
Total savings................................ 93,371 3.27 93,764 3.28
-------- --------
Certificate accounts (see below)....................... 314,059 5.56 301,879 5.91
-------- --------
$575,246 4.63% $534,041 4.84%
======== ========

Certificates of Deposit at December 31, 1996
--------------------------------------------------------------
Maturing in
---------------------------------------------
Rate Range Amount 1997 1998 1999 Thereafter
----------- -------- -------- ------- ------- -------
(Dollars in thousands)

3 - 3.99% (1)............................ $ 999 $ 986 $ 1 $ 11 $ 1
4 - 5.99%................................ 262,639 201,202 16,198 39,945 5,294
6 - 7.99%................................ 47,469 14,698 2,918 13,272 16,581
8 - 9.99%................................ 1,903 654 664 97 488
10 -11.99%............................... 1,049 105 32 65 847
-------- -------- ------- ------- -------
$314,059 (2) $217,645 $19,813 $53,390 $23,211
======== ======== ======= ======= =======

- ----------
(1) Primarily matured certificates of deposits in which the customer has not
provided reinvestment instructions; these deposits earn at the passbook
savings rate.
(2) Includes $26.6 million in "jumbo" (over $100,000) certificates of deposit
which mature as follows: $20.2 million in 1997, $1.2 million in 1998, $2.4
million in 1999 and $2.8 million thereafter.

BORROWINGS

As of December 31, 1996, the Bank had $198.7 million in outstanding
borrowings, consisting of Federal Home Loan Bank ("FHLB") advances and
borrowings under repurchase agreements.

FHLB System Advances

The FHLB of New York functions as a central reserve bank providing credit
for member savings banks, savings and loan associations and certain other member
financial institutions. As a member of the FHLB of New York, Poughkeepsie
Savings is required to own capital stock in the FHLB of New York. The capital
stock owned by the Bank is pledged to the FHLB as collateral for any advances
made by the FHLB to the Bank. The Bank may apply for advances from the FHLB,
subject to the limitations noted below and the pledging of acceptable
collateral. Collateral acceptable to the FHLB includes mortgage loans,
mortgage-backed securities, securities of the United States or any agency
thereof, and deposits at the FHLB. Other collateral is subject to the specific
approval of the FHLB, and must be housing related. Advances are made pursuant to
several different credit programs. Each credit program has its own interest rate
and range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of a savings bank's assets or on
the FHLB of New York's assessment of the savings bank's credit worthiness. The
FHLB of New York is required to review its credit limitations and standards at
least once every six months. The FHLB's current collateralization requirement is
110% for most assets acceptable as collateral. Changes in the FHLB's policies
regarding credit and collateral can impact the Bank by changing the level of
advances which can be drawn against a given pool of collateral. The FHLB may
change its policies at its discretion. As of December 31, 1996, the Bank had
$35.0 million of advances outstanding. The maximum amount of FHLB advances
outstanding at any month-end during 1996 was $137.6 million. As of December 31,
1996, the Bank's maximum borrowing authority from the FHLB was $346 million, or
40% of total assets, subject to collateral availability. (See "Regulation --
Capital Requirements" at Item 1.) Increases in the collateral requirement for
the Bank would result in lower advances to the Bank by the FHLB, require the
Bank to repay current advances or require the Bank to provide additional
collateral.

At December 31, 1996, the Bank was approved by the FHLB of New York for a
$84.7 million line of credit under the FHLB's "Overnight Advance Program."
Advances under this program carry competitive market rates and are used to meet
short-term funding needs. The advances are subject to various terms and
conditions, including the Bank's overall borrowing limit from the FHLB and
collateral requirements. As of December 31, 1996, the Bank had $49.8 million of
outstanding advances pursuant to such line of credit. The line of credit is
subject to annual renewal. The current line will expire in August 1997. (See
Notes Payable to Federal Home Loan Bank table set forth in Note 7 of "Notes to
Consolidated Financial Statements" at Item 8 and "Regulation.")

Other Borrowings

The Bank uses borrowings under repurchase agreements as a short-term
funding source; all such repurchase agreements are with dealers who must meet
the Bank's internal selection criteria. At December 31, 1996 these agreements
totaled $109.0 million. The Bank also sold certain municipal investment
securities in 1984 to a unit investment trust, which, under certain
circumstances, can be put back to the Bank; this sale was accounted for as a
financing and has a remaining balance of $4.9 million as of December 31, 1996.
The maximum amounts of borrowings under repurchase agreements and borrowings
under the unit investment trust at any month end during 1996 were $112.4 million
and $5.0 million, respectively. The average repurchase agreements outstanding
during 1996, 1995 and 1994 were $70.7 million, $72.0 million and $11.2 million,
respectively. (See Note 8 of "Notes to Consolidated Financial Statements" at
Item 8.)

The Bank actively manages its interest rate sensitivity and uses interest
rate hedge agreements to help achieve certain targets. See the "Asset/Liability
and Interest Rate Risk Management" section under "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations"
located elsewhere herein.

RATE AND MATURITY ANALYSIS

The following table sets forth, as of December 31, 1996, the maturity and
rate sensitivity of the Bank's interest-earning assets (excluding non-performing
and cash basis assets) and interest-bearing liabilities as well as the weighted
average rates and cost of funds.

Less than 1 Year 1 - 5 Years 5 - 10 Years Over 10 Years
----------------- ----------------- ------------------- ------------------
Interest - Earning Assets Amount Rate Amount Rate Amount Rate Amount Rate Total
- ------------------------- -------- ---- -------- ---- -------- ---- -------- ---- --------
(Dollars in thousands)

Residential mortgage loans ....... $144,247 8.10% $ 97,347 7.72% $108,298 7.39% $ 38,167 7.74% $388,059
Commercial real estate loans ..... 110,225 9.38 81,559 8.71 9,608 7.73 143 9.63% 201,535
Mortgage loans held for sale ..... 456 8.04 -- -- -- -- -- -- 456
Commercial business loans ........ 6,264 8.70 489 9.19 5 8.43 -- -- 6,758
Installment loans ................ 19,332 9.69 7,523 9.19 4,139 9.32 200 9.97 31,194
Mortgage backed securities ....... 118,120 7.23 13,811 7.43 7,948 7.39 3,653 7.23 143,532
Other securities ................. 14,745 6.74 17,034 6.37 158 8.50 38 8.13 31,975
-------- -------- -------- ------- --------
Total interest - earning assets .. 413,389 8.22 217,763 8.02 130,156 7.48 42,201 7.71 803,509
-------- -------- -------- ------- --------

Interest - Bearing Liabilities
- ------------------------------
Time deposits .................... 217,644 5.31 95,344 6.07 995 10.07 76 8.77 314,059
Money market deposits ............ 126,233 4.61 -- -- -- -- -- -- 126,233
FHLB advances .................... 59,800 5.52 25,000 5.69 -- -- -- -- 84,800
Repurchase agreements ............ 109,005 5.46 -- -- -- -- 4,889 9.00 113,894
Core deposits:
Savings ....................... 93,371 3.22 -- -- -- -- -- -- 93,371
Demand ........................ 41,583 1.37 -- -- -- -- -- -- 41,583
Escrow ........................ 4,134 1.43 -- -- -- -- -- -- 4,134
-------- -------- -------- ------- --------
Total static interest-bearing
liabilities ...................... 651,770 4.64 120,344 5.99 995 10.07 4,965 9.00 778,074
Adjustment:
Core deposit accounts ......... (93,601) 45,077 26,952 21,572 --
Interest rate swap ............ (20,000) 20,000 -- -- --
Interest rate collar .......... (95,000) 95,000 -- -- --
-------- -------- -------- ------- --------
Total interest-bearing liabilities 443,169 280,421 27,947 26,537 778,074
-------- -------- -------- ------- --------
Excess (deficiency) of interest
earning assets over interest-
bearing liabilities .......... $(29,780) $(62,658) $102,209 $15,664 $ 25,435
======== ======== ======== ======= ========

- ----------
For purposes of the above Rate and Maturity Analysis:

o Fixed rate assets are scheduled by contractual maturity, and adjustable
rate assets are scheduled by the next repricing date. Normal amortization
and prepayment estimates have been applied to both fixed rate and
adjustable rate assets, where appropriate.
o For purposes of measuring interest sensitivity, interest-bearing
liabilities are reduced by the amount of core deposits, interest rate
swaps, and interest rate collars. Core deposits are estimated to be
withdrawn at rates ranging from 15% to 20% per year.

SERVICE CORPORATION ACTIVITIES

OTS regulations limit the Bank's equity investment in service corporations
to 10% of total assets. As of December 31, 1996, the Bank's investment in
service corporation subsidiaries was $10.2 million, or 0.12% of total assets.
Such investments eliminate in consolidation. At December 31, 1996, the Bank's
subsidiary operations included six corporations each of which is 100% owned by
the Bank. The following is a brief description of the Bank's two significant
service corporations and their principal activities. The Bank owns several other
service corporations which are either inactive or primarily serve as a holding
company for assets acquired through foreclosure or are otherwise held for
disposition.

PSB Associates, Inc.

PSB Associates, Inc. ("PSB Associates") was organized in 1983 as a life
insurance agency. Its principal office is located at 25 Market Street,
Poughkeepsie, New York. Through agreements entered into with insurance companies
and general agencies, PSB Associates, as agent, offers diversified life
insurance products and services through an insurance office of the Bank and
financial service representatives located in the Bank's branches. Since 1988,
through agreements with a third party broker/dealer, the product list was
expanded to include mutual funds, variable annuities, and unit investment
trusts. Effective January 1, 1995, the Bank began using Prime Capital Services,
Inc., a Poughkeepsie, New York based broker/dealer, to provide these products.
Prior to 1995, the Bank used GNA Securities, Inc., a Seattle, Washington based
broker/dealer. Effective February 1997, PSB Associates launched "HudsonTradersm
Discount Brokerage Service" which will offer discount trading through Prime
Capital Services, Inc.. HudsonTrader Discount Brokerage Service will afford
individuals the opportunity to purchase and sell a variety of investment
products including stocks, bonds and mutual funds. Investments purchased through
HudsonTrader Discount Brokerage Service are not FDIC insured and are not
deposits of the Bank.

PSB Building Corp.

PSB Building Corp. was organized in 1993. PSB Building Corp. holds the
leasehold interest to a 100,000 square foot office building located at 249 Main
Mall, Poughkeepsie, New York, which the Bank acquired in 1993. A portion of the
249 Main Mall building serves as the Bank's headquarters.

OTHER SERVICES

Savings Bank Life Insurance

Savings banks in New York may offer Savings Bank Life Insurance ("SBLI")
with a maximum policy coverage of $50,000 and up to $350,000 of Financial
Institutions Group Life Insurance. The Bank's SBLI program is administered
through the Savings Bank Life Insurance Fund, a corporate body established by
the New York legislature. Although the Bank's employees administer the Bank's
SBLI program, the Bank is not liable under any policy, and premiums are not at
the Bank's disposal. The Bank's SBLI program is kept separate from the rest of
the Bank's operations for purposes of accounting and investment. Any surplus
earned by the program must be maintained to meet losses incurred by the program
or to pay dividends to policyholders and does not accrue to the benefit of the
Bank's general operations. Upon any discontinuance of the program, the Bank
would be required to transfer, perform or reinsure the life insurance policies
and to transfer to the Savings Bank Life Insurance Fund all assets remaining
after payment of the program's liabilities. As of December 31, 1996, the Bank's
SBLI program had $345.9 million of ordinary and group policies in force and a
surplus of $1.3 million. SBLI is subject to regulation by the New York State
Banking Department and the New York State Insurance Department.

Leeway Investment Authority

Pursuant to federal statutes, upon its conversion to a federal mutual
savings bank in December 1981, the Bank retained "grandfathered" powers under
New York law, including a power generally referred to as "leeway" authority. The
Bank could utilize this authority to make acquisitions for expansion and
diversification to the extent permitted by applicable law.

COMPETITION

As with the thrift and banking industries generally, Poughkeepsie Savings
experiences substantial competition in attracting and retaining deposits and in
lending funds. The primary factors in competing for deposits are the ability to
offer attractive rates and the availability of convenient office locations.
Direct competition for deposits comes from other savings banks, savings and loan
associations and commercial banks, and credit unions, many of which have
substantially greater resources than the Bank. The Hudson Valley Employees
Federal Credit Union is a major competitor in the Bank's Dutchess County market
area. Significant competition for savings deposits also comes from
broker/dealers, mutual funds and corporate and government securities.

The primary factors in competing for loans are interest rates, loan
origination fees and the range of services offered. Competition for origination
of loans normally comes from other savings banks, savings and loan associations,
commercial banks, credit unions, mortgage bankers, mortgage brokers and
insurance companies.

The banking industry is in a period of consolidation and regulatory reform
that will affect banks in all regions of the country, including the Mid-Hudson
Valley, which should further heighten competition within the industry.

EMPLOYEES

At December 31, 1996, Poughkeepsie Savings and its subsidiaries employed
236 full-time employees and 52 part-time employees, none of whom are represented
by a collective bargaining group. Management believes it has a good relationship
with its employees.

Poughkeepsie Savings currently maintains a comprehensive employee benefit
program providing, among other benefits, a qualified pension plan, a 401(k) tax
deferred savings plan with a Bank match and a profit-sharing based annual
contribution, an employee stock ownership plan, hospitalization and major
medical and dental insurance, paid sick leave, long-term disability insurance
and life insurance. As part of a broad-based expense reduction program initiated
in 1991, the Board of Directors approved an amendment to the Bank's pension
plan, effective October 1, 1991. The amendment provides that there will be no
new enrollments in the pension plan and that there will be no further benefit
accruals under the pension plan. The amendment will remain in effect until
rescinded by the Board of Directors. (See Note 11 of "Notes to Consolidated
Financial Statements" at Item 8.)

REGULATION

Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Bank. The description of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.

General

The OTS has extensive authority over the operations of savings
associations. As part of this authority, savings associations are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of savings
associations are prescribed by federal laws and regulations and savings
associations are prohibited from engaging in any activities not permitted by
such laws and regulations. Those laws and regulations generally are applicable
to all federally chartered savings associations and may also apply to
state-chartered savings associations. Such regulation and supervision is
primarily intended for the protection of depositors.

On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted into law. The FDICIA provides for, among
other things, the recapitalization of the Bank Insurance Fund ("BIF"); the
authorization of the FDIC to make emergency special assessments under certain
circumstances against BIF members and members of the Savings Association
Insurance Fund ("SAIF"); the establishment of risk-based deposit insurance
premiums; and improved examinations and reporting requirements. The FDICIA also
provides for enhanced federal supervision of depository institutions based on,
among other things, an institution's capital level. See "Prompt Corrective
Action."

The OTS' enforcement authority over all savings associations and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal 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.

Insurance of Accounts

The deposits of the Bank are insured up to $100,000 per insured member (as
defined by law and regulation) by the Savings Association Insurance Fund
("SAIF") and are backed by the full faith and credit of the United States
Government. SAIF is administered by the FDIC. As insurer, the FDIC 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 threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action.

Under current FDIC regulations, SAIF member institutions are assigned to
one of three capital groups which are based solely on the level of an
institution's capital -- "well-capitalized," "adequately-capitalized," and
"undercapitalized" -- which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the Federal
Deposit Insurance Act ("FDIA"). These three groups are then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered to be healthy to those which are considered to be of substantial
supervisory concern. As of December 31, 1996, these nine assessment risk
classifications carry premiums ranging from 0% for well-capitalized, healthy
institutions to .27% for undercapitalized institutions with substantial
supervisory concerns. The insurance premium applicable to the Bank as of
December 31, 1996 was 0% of insured deposits.

The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged in or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.

Summary of Recent Events. The BIF fund met its target reserve level in
September 1995, but the SAIF fund was not expected to meet its target reserve
level until at least 2002. Consequently, in late 1995, the FDIC approved a final
rule regarding deposit insurance premiums which, effective with respect to the
semiannual premium assessment beginning January 1, 1996, reduced deposit
insurance premiums for BIF member institutions to zero basis points (subject to
an annual minimum of $2,000) for institutions in the lowest risk category.
Deposit insurance premiums for SAIF members were maintained at their existing
levels (23 basis points for institutions in the lowest risk category).

On September 30, 1996, President Clinton signed into law legislation which
will eliminate the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation provides that all SAIF member institutions pay a one-time
special assessment to recapitalize the SAIF, which in the aggregate will be
sufficient to bring the reserve ratio in the SAIF to 1.25% of insured deposits.
The legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.

Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment equal to 65.7 basis points for all SAIF-assessable deposits as of
March 31, 1995, which was collected on November 27, 1996. The Bank's one-time
assessment amounted to $2.6 million. Net of related tax benefits, the one-time
special assessment amounted to $1.6 million which immediately reduced the Bank's
capital by such an amount. Nevertheless, management does not believe that this
one-time special assessment will have a material adverse effect on the Bank's
consolidated financial condition and the Bank continues to be in full compliance
with all regulatory capital requirements.

On October 16, 1996, the FDIC proposed to lower assessment rates for SAIF
members to reduce the disparity in the assessment rates paid by BIF and SAIF
members. Beginning October 1, 1996, effective SAIF rates range from zero basis
points to 27 basis points. From 1997 through 1999, SAIF members will pay 6.4
basis points to fund the Financing Corporation (FICO) while BIF member
institutions will pay approximately 1.3 basis points. While the Bank's insurance
premiums were reduced from 23 basis points to 0 basis points, the Bank is
required to pay 6.4 basis points related to funding for the FICO debt. Based
upon the $571.9 million of assessable deposits at December 31, 1996, the Bank
would expect to pay approximately $0.2 million less in insurance premiums per
quarter during 1997 ($0.8 million for the year).

Capital Requirements

Federally insured savings associations are required to maintain minimum
levels of regulatory capital. The OTS has established capital standards
applicable to all savings associations. These standards generally must be as
stringent as the comparable capital requirements imposed on national banks. The
OTS also is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis.

Current OTS capital standards require savings associations to satisfy three
different capital requirements. Under these standards, savings associations must
maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets depending on the OTS's capital
adequacy evaluation and "total" capital (a combination of core and
"supplementary" capital) equal to 8.0% of "risk-weighted" assets. As discussed
below, under the OTS' prompt corrective action regulations, the core capital
ratio generally must be at least 4.0%. For purposes of the regulation, core
capital generally consists of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
non-withdrawable accounts and pledged deposits, and "qualifying supervisory
goodwill". Unrealized gains (losses) on available-for-sale securities are not
included in determining core capital. Tangible capital is given the same
definition as core capital but does not include qualifying supervisory goodwill
and is reduced by the amount of all the savings association's intangible assets,
except for mortgage servicing rights and deferred tax assets which are
includable within certain specified limits.

Both core and tangible capital are further reduced where applicable by an
amount equal to a savings association's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies).

A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital does not exceed the savings association's core capital. Supplementary
capital generally

consists of hybrid capital instruments; perpetual preferred stock which is not
eligible to be included as core capital; subordinated debt and intermediate-term
preferred stock; and, subject to limitations, general allowances for loan
losses. Assets are adjusted under the risk-based guidelines to take into account
different risk characteristics, with the categories ranging from 0% (requiring
no capital) for assets such as cash to 100% for repossessed assets or loans more
than 90 days past due. Single-family residential real estate loans which are not
past-due or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.

In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating the risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with the risk-based capital requirement. An institution with a greater
than "normal" interest rate risk is defined as an institution that would suffer
a loss of net portfolio value exceeding 2.0% of the estimated market value of
its assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component will be
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0%, multiplied by the market
value of its assets. The rule also authorizes the director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally effective as of January 1,
1994, subject however to a two quarter "lag" time between the reporting date of
the data used to calculate an institution's interest rate risk and the effective
date of each quarter's interest rate risk component. However, in October 1994
the Director of the OTS indicated that it would waive the capital deductions for
institutions with a greater than "normal" risk until the OTS publishes an
appeals process.

On August 21, 1995, the OTS released Thrift Bulletin 67 which established
(i) an appeals process to handle "requests for adjustments" to the interest rate
risk component and (ii) a process by which "well-capitalized" institutions may
obtain authorization to use their own interest rate risk model to determine
their interest rate risk component. The Director of the OTS indicated,
concurrent with the release of Thrift Bulletin 67, that the OTS will continue to
delay the implementation of the capital deduction for interest rate risk pending
the testing of the appeals process set forth in Thrift Bulletin 67. Management
of the Bank believes that the OTS' implementation of an interest rate risk
component to the risk-based capital requirement will not adversely affect the
Bank.

The following table sets forth the Bank's compliance with each of the
above-described capital requirements at December 31, 1996.

Tangible Core Risk-Based
Capital Capital Capital
------- ------- ---------
(Dollars in thousands)

Stockholders' equity under GAAP.................................. $71,668 $71,668 $71,668
Unrealized losses on available for sale securities, net
of tax ........................................................ 85 85 85
Limitation on deferred tax assets................................ (15,296) (15,296) (15,296)
General allowance for loan losses (to extent allowable).......... n/a n/a 6,897
------- ------- -------
Regulatory capital............................................... 56,457 56,457 63,354
Minimum required regulatory capital............................. 12,652 33,739 44,199
------- ------- -------
Excess........................................................... $43,805 $22,718 $19,155
======= ======= =======
Regulatory capital as a percent of assets(1)..................... 6.69% 6.69% 11.47%
Minimum required................................................. 1.50% 4.00% 8.00%
------- ------- -------
Excess........................................................... 5.19% 2.69% 3.47%
======= ======= =======

- ----------
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $843.5 million. Risk-based capital is computed as a percentage of
total risk-weighted assets of $552.5 million.

Prompt Corrective Action

Under Section 38 of the FDIA as added by the "FDICIA", each federal banking
agency is required to implement a system of prompt corrective action for
institutions which it regulates. In early September 1992, the federal banking
agencies, including the OTS, adopted substantially similar regulations which are
intended to implement Section 38 of the FDIA. These regulations became effective
December 19, 1992. Under the regulations, an institution shall be deemed to be
(i) "well-capitalized" if it has total risk-based capital of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital
ratio of 5.0% or more and is not subject to any order or final capital directive
to meet and maintain a specific capital level for any capital measure; (ii)
"adequately-capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well-capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Section 38 of the FDIA and the regulations
promulgated thereunder also specify circumstances under which a federal banking
agency may reclassify a well-capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized). At December 31,
1996, the Bank was in the "well-capitalized" category.

Liquidity Requirements

All savings associations 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. The liquidity 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 required minimum liquid asset ratio is
5%. At December 31, 1996, the Bank's liquidity ratio was 5.05%.

Safety and Soundness

FDICIA requires each federal banking regulatory agency to prescribe by
regulation or guideline, standards for all insured depository institutions and
depository institution holding companies relating to (i) internal controls,
information systems and audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi)
compensation, fees and benefits; and (vii) such other operational and managerial
standards as the agency determines to be appropriate. The compensation standards
would prohibit employment contracts or other compensatory arrangements that
provide excess compensation, fees or benefits or could lead to material
financial loss. In addition, each federal banking regulatory agency must
prescribe, by regulation or guideline, standards relating to asset quality,
earnings and stock valuation as the agency determines to be appropriate. On July
10, 1995, the federal banking agencies, including the OTS, adopted final rules
and proposed guidelines concerning standards for safety and soundness required
to be prescribed by regulation pursuant to Section 39 of the FDIA. In general,
the standards relate to (1) operational and managerial matters; (2) asset
quality and earnings; and (3) compensation. The operational and managerial
standards cover (a) internal controls and information systems, (b) internal
audit system, (c) loan documentation, (d) credit underwriting, (e) interest rate
exposure, (f) asset growth, and (g) compensation, fees and underwriting. Under
the proposed asset quality and earnings standards, a savings association would
be required to establish and maintain systems to (i) identify problem assets and
prevent deterioration in those assets, and (ii) evaluate and monitor earnings
and ensure that earnings are sufficient to maintain adequate capital reserves.
Finally, the proposed compensation standard

states that compensation will be considered excessive if it is unreasonable or
disproportionate to the services actually performed by the individual being
compensated. If a savings association fails to meet any of the standards
promulgated by regulation, then such institution will be required to submit a
plan within 30 days to the OTS specifying the steps it will take to correct the
deficiency. In the event that a savings association fails to submit or fails in
any material respect to implement a compliance plan within the time allowed by
the federal banking agency, Section 39 of the FDIA provides that the OTS must
order the institution to correct the deficiency and may (1) restrict asset
growth; (2) require the savings association to increase its ratio of tangible
equity to assets; (3) restrict the rates of interest that the savings
association may pay; or (4) take any other action that would better carry out
the purpose of prompt corrective action. On August 27, 1996, the federal banking
agencies, including the OTS, adopted final guidelines substantially as proposed.
The Bank believes that it has been and will continue to be in full compliance
with each of the standards as they have been adopted by the OTS.

Accounting Requirements

The OTS is required to establish accounting standards to be applicable to
all savings associations for purposes of complying with regulations, except to
the extent otherwise specified in the capital standards. Such standards must
incorporate generally accepted accounting principles ("GAAP") to the same degree
as is prescribed by the Federal banking agencies for banks or may be more
stringent than such requirements.

On September 2, 1992, the OTS amended a number of its accounting
regulations and reporting requirements (effective October 2, 1992). The
amendments reflected the adoption by the OTS of the following standards: (i)
regulatory reports will incorporate GAAP when GAAP is used by federal banking
agencies; (ii) savings association transactions, financial condition and
regulatory capital must be reported and disclosed in accordance with OTS
regulatory reporting requirements that will be at least as stringent as for
national banks; and (iii) the director of the OTS may prescribe regulatory
reporting requirements more stringent than GAAP whenever the director determines
that such requirements are necessary to ensure the safe and sound reporting and
operation of savings associations. The OTS anticipates further similar revisions
to its regulations in the near future.

The OTS adopted a statement of policy ("Statement") set forth in Thrift
Bulletin 52 concerning (i) procedures to be used in the selection of a
securities dealer, (ii) the need to document and implement prudent policies and
strategies for securities, whether held for investment, trading or for sale, and
to establish systems and internal controls to ensure that securities activities
are consistent with the financial institution's policies and strategies, (iii)
securities trading and sales practices that may be unsuitable in connection with
securities held in an investment portfolio, (iv) high-risk mortgage securities
that are not suitable for investment portfolio holdings for financial
institutions, and (v) disproportionately large holdings of long-term,
zero-coupon bonds that may constitute an imprudent investment practice. The
Statement applies to investment securities, high-yield corporate debt
securities, loans, mortgage-backed securities and derivative securities, and
provides guidance concerning the proper classification of accounting for
securities held for investment, sale, and trading. Securities held for
investment, sale or trading may be differentiated based upon an institution's
desire to earn an interest yield (held to maturity), to realize a holding gain
from assets held for indefinite periods of time (available for sale), or to earn
a dealer's spread between the bid and asked prices (held for trading).
Depository institution investment portfolios are maintained to provide earnings
consistent with the safety factors of quality, maturity, marketability and risk
diversification. Securities that are purchased to accomplish these objectives
may be reported at their amortized cost only when the depository institution has
both the positive intent and ability to hold the assets for long-term investment
purposes. Securities held for investment purposes may be accounted for at
amortized cost, securities available for sale are to be carried at the lower of
aggregate cost or market, and securities held for trading are to be accounted
for at market. The Bank believes that its investment activities have been and
will continue to be conducted in accordance with the requirements of OTS
policies and generally accepted accounting principles. (Thrift

Bulletin 52 was issued prior to SFAS No. 115 which requires available for sale
securities to be carried at fair value.)

The Omnibus Reconciliation Act of 1993 added a new Section 475 to the
Internal Revenue Code of 1986, as amended (the "Code") which provides that
certain financial institutions must recognize gain or loss annually with regard
to any securities held by them as inventory for resale. Gain and loss is not
required to be recognized with regard to securities which are intended to be
held until their maturity. Section 475 of the Code has not had a material impact
on the financial statements of the Bank.

Qualified Thrift Lender (QTL) Test

Under Section 2303 of the Economic Growth and regulatory Paperwork
Reduction Act of 1996, a savings association can comply with the QTL test by
either meeting the QTL test set forth in the Home Owners' Loan Act, as amended
("HOLA"), and implementing regulations or qualifying as a domestic building and
loan association as defined in Section 7701(a)(19) of the Code. A savings
association that does not comply with the QTL Test must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
association may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the association shall be restricted
to those of a national bank; (iii) the association shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
association shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the association
ceases to be a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).

The QTL Test set forth in the HOLA requires that Qualified Thrift
Investments ("QTIs") represent 65% of portfolio assets. Portfolio assets are
defined as total assets less intangibles, property used by a savings association
in its business and liquidity investments in an amount not exceeding 20% of
assets. Generally, QTIs are residential housing related assets. The 1996
amendments allow small business loans, credit card loans, student loans and
loans for personal, family and household purposes to be included without
limitation as qualified investments. At December 31, 1996, approximately 81.1%
of the Bank's assets were invested in QTIs, which was in excess of the
percentage required to qualify the Bank under the QTL test in effect at that
time.

Restrictions on Capital Distributions

OTS regulations govern capital distributions by savings associations, which
include cash dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt and other transactions charged to
the capital account of a savings association to make capital distributions.
Generally, the regulation creates a safe harbor for specified levels of capital
distributions from associations meeting at least their minimum capital
requirements, so long as such associations notify the OTS and receive no
objection to the distribution from the OTS. Savings institutions and
distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.

Generally, savings associations that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 associations, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the association's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
association's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the association. Tier 2
associations, which generally are associations that before and after the
proposed distribution meet or exceed their minimum capital

requirements, may make capital distributions over the most recent four quarter
period up to a specified percentage of their net income during that four quarter
period, depending on how close the association is to meeting its fully phased-in
capital requirements. Tier 2 associations that meet all capital requirements are
permitted to make distributions totaling up to 75% of net income over the four
quarter period. Tier 3 associations, which generally are associations that do
not meet current minimum capital requirements, cannot make any capital
distribution without obtaining OTS approval prior to making such distributions.

In order to make distributions under these safe harbors, Tier 1 and Tier 2
associations must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 association as a result of such a determination. The Bank is no
longer deemed to be in need of more than normal supervision. The Bank currently
is a Tier 1 institution for purposes of the regulation on capital distribution.

OTS regulations also prohibit the Bank from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
(or total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form.

On December 5, 1994, the OTS published a notice of proposed rule making to
amend its capital distribution regulation. Under the proposal, institutions
would be permitted to only make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized," as defined above under "Prompt Corrective Action." The Bank does
not believe that the proposal will adversely affect its ability to make capital
distributions if it is adopted substantially as proposed.

Policy Statement on Nationwide Branching

Effective May 11, 1992, the OTS amended its policy statement on branching
by federally chartered savings associations to delete then-existing regulatory
restrictions on the branching authority of such associations and to permit
nationwide branching to the extent allowed by federal statute. (Prior OTS policy
generally permitted interstate branching for federally chartered savings
associations only to the extent allowed state-chartered savings associations in
the states where the association's home office was located and where the branch
was sought or if the branching resulted from OTS approval of a supervisory
interstate acquisition of a troubled institution.) Current OTS policy generally
permits a federally chartered savings association to establish branch offices
outside of its home state if the association meets the domestic building and
loan test in Section 7701(a)(19) of the Internal Revenue Code of 1986, as
amended (the "Code"), or the asset composition test of subparagraph (c) of that
section, and if, with respect to each state outside of its home state where the
association has established branches, the branches, taken alone, also satisfy
one of the two tax tests. An association seeking to take advantage of this
authority would have to have a branching application approved by the OTS, which
would consider the regulatory capital of the association and its record under
the Community Reinvestment Act of 1977, as amended, among other things.

Federal Home Loan Bank System

The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs that administers the home financing credit function of savings
associations. 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.

As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, or 5% of outstanding

FHLB advances, or 0.3% of total assets. At December 31, 1996, the Bank had $9.8
million in FHLB stock, which met this requirement. The FHLB may, at its option,
redeem through repurchase, investments in its common stock in excess of the
required amount.

As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future. For the years ended December
31, 1996, 1995, and 1994, dividends paid by the FHLB of New York to the Bank
totaled approximately $0.6 million, $0.5 million and $0.8 million, respectively.

Federal Reserve System

The Federal Reserve Board requires all depository institutions to maintain
reserves against their transaction accounts (primarily checking and NOW
accounts) and non-personal time deposits. At December 31, 1996, the Bank was in
compliance with applicable requirements. However, because required reserves must
be maintained in the form of vault cash or a non-interest bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets.

FEDERAL AND STATE TAXATION

Under applicable provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), although generally subject to the corporate income tax
provisions of the Code, savings institutions such as the Bank that meet certain
definitional tests relating to composition of assets and the nature of its
business are permitted to establish reserves for bad debts and to make annual
additions thereto which qualify as deductions in computing taxable income. The
bad debt deduction is generally based upon a savings institution's actual loss
experience (the "experience method"). In addition, a savings institution may
elect annually to compute its allowable addition to its reserves for losses on
qualifying real property loans (generally loans secured by improved real estate)
by reference to a percentage of its taxable income (the "percentage of taxable
income method").

The percentage that is used to compute the bad debt reserve addition under
the percentage of taxable income method (the "percentage bad debt deduction") is
8%. The percentage bad debt deduction thus computed is reduced by the amount
permitted as a deduction for the addition to the reserve for losses on
non-qualifying loans under the experience method. Also, the percentage bad debt
deduction for any taxable year may not exceed the lesser of (i) the amount
necessary to increase the balance in the reserve for losses on qualifying real
property loans to 6% of such loans at the end of the taxable year, or (ii) the
amount by which 12% of the institution's deposits at the end of the taxable year
exceeds the surplus, undivided profits and reserves at the beginning of the
taxable year.

If an institution's qualifying assets (generally, loans secured by
residential real estate or deposits, educational loans, cash, government
obligations and certificates of deposit) constitute less than 60% of its total
assets, the institution is not eligible to compute its bad debt deduction under
the percentage of taxable income method. At December 31, 1996, 1995 and 1994,
the Bank's qualifying assets exceeded the 60% requirement. The Bank intends to
continue to meet this test in the future; however, management will consider
alternatives should favorable circumstances arise.

A savings institution organized in stock form that has computed its
allowable addition to its bad debt reserve under the percentage of taxable
income method may also be subject to recapture taxes on a portion of such
reserves if it made certain types of distributions to its stockholders. The Bank
has no current intentions to make such distributions to stockholders or redeem
any shares of common stock which could require any amount of its bad debt
reserves to be recaptured into taxable income.

Pursuant to certain legislation which was recently enacted and which was
effective for tax years that began after December 31, 1995, a large bank (one
with an adjusted basis of assets of greater than $500 million), such as the
Bank, would no longer be permitted to make additions to its tax bad debt reserve
under the percentage of taxable income method. Such legislation also requires
the Bank to realize increased tax liability over a period of at least six years,
beginning in 1996, relating to the Bank's "applicable excess reserves." The
amount of applicable excess reserves is taken into account ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to the residential loan requirement described below. The amount of
the Bank's applicable excess reserves at December 31, 1995 was $1.5 million,
calculated as the excess of (1) the balance of its reserves, as defined in the
Code, as of December 31, 1995 over (2) the balance of such reserves (i.e., its
reserve for losses on qualifying real property loans and its reserve for losses
on nonqualifying loans) as of December 31, 1987 (as adjusted). The recapture
requirement would be suspended for each of two successive taxable years
beginning January 1, 1996 in which the Bank originates an amount of certain
kinds of residential loans which in the aggregate are equal to or greater than
the average of the principal amounts of such loans made by the Bank during its
six taxable years preceding 1996.

While New York State tax law is generally based on federal law, on July 30,
1996, New York State enacted legislation, effective January 1, 1996, which
generally retains the percentage of taxable income method for calculating the
tax bad debt deduction and does not require the Bank to recapture into income
its excess tax bad debt reserves over its base year reserves for New York State
tax purposes.

On December 1, 1988 the Bank's Board of Directors approved a stock
repurchase program whereby the Bank could acquire up to 5%, or approximately
196,000 shares, of its outstanding stock. For federal tax purposes, this
transaction may result in a recapture of a portion of the Bank's bad debt
reserve resulting in a current tax liability. The Bank purchased 105,000 shares
of its stock under this program through December 31, 1989. Since 1989, the Bank
has not repurchased any of its outstanding stock under this program.

At December 3l, 1996, the Bank's recorded bad debt reserve is available to
be deducted for tax purposes in the future.

A savings institution may carryback net operating losses to the preceding
three taxable years and carryforward such losses to the succeeding 15 taxable
years on its federal tax return. At December 31, 1996, the Bank had a net
operating loss carryforward for tax purposes of approximately $24.9 million
which begins to expire in 2005. The Bank has been audited by the Internal
Revenue Service with respect to its tax returns through 1990.

New York has a bank franchise tax which subjects the Bank to a tax
generally equal to the greater of (i) 9% of the Bank's "New York entire net
income," (ii) 0.01% (or, in certain instances, a lesser portion) of the Bank's
"New York taxable assets," or (iii) 3% of the Bank's "New York alternative net
income." In addition, such tax is subject to a 2.5% surtax (for the 1996 taxable
year) and a surcharge of 17% under a New York law designed to raise funds for
mass transit. New York does not allow net operating loss carrybacks or
carryforwards for financial institutions. For additional information regarding
taxation see Note 9 of Notes to Consolidated Financial Statements at Item 8.

EXECUTIVE OFFICERS

Joseph B. Tockarshewsky, age 57, has been Chairman, President and Chief
Executive Officer of the Bank since July, 1992. From 1986 to 1992, he served as
Executive Vice President at American Security Bank in Washington, DC. From 1983
to 1986, Mr. Tockarshewsky served as Executive Vice President of Carteret
Savings and Loan Association in Morristown, NJ. Prior to that, from 1979 to
1982, he served as Executive Vice President and Director at First Federal
Savings and Loan Association in New York City.

Robert J. Hughes, age 50, has been Executive Vice President and Chief
Financial Officer of the Bank since February, 1992 and Director since April
1995, and was a consultant to the Bank during January and February, 1992. From
April, 1983 to December, 1991, he was Executive Vice President and Chief
Financial Officer of American Savings Bank, White Plains, NY. From July, 1978 to
March, 1983, he was Vice President and Assistant Corporate Comptroller of
American Express Company.

Joel A. Brotman, age 53, has been Senior Vice President/Residential Lending
since July, 1995, and was a consultant to the Bank from April to July, 1995. Mr.
Brotman served as Senior Vice President-Retail Mortgage Production Manager at
First Fidelity Bank, North Brunswick, NJ from 1993 to 1995; as Senior Vice
President/Wholesale and Retail Production at First Town Mortgage Corporation,
Secaucus, NJ from 1991 to 1993 and as Senior Vice President of The Howard
Savings Bank and President & Chief Executive Officer of The Howard Mortgage
Group, Inc., Livingston, NJ from 1990 to 1991. Prior thereto, Mr. Brotman was
Senior Vice President Production/Secondary Market Support at Margaretten and
Company, Inc., Perth Amboy, NJ from 1984 to 1990.

Richard J. Malena, age 49, has been a Senior Vice President of the Bank
since September 1988. He joined the Bank in 1983 as an Assistant Vice President
and Manager of the Consumer Lending Department. From 1988 to 1990, Mr. Malena
was Northeast Regional Manager of Market Street Mortgage Corporation (former
Bank Subsidiary). Since 1990, he has served as Senior Vice President/Retail
Banking. From 1965 to 1983, Mr. Malena served in various capacities of retail
banking with the Bank of New York.

Jeffrey C. McDonough, age 33, was elected Vice President/Human Resources in
December 1992; he had been the Director of Human Resources since June, 1992.
Prior thereto, he served as Compensation and Benefits Manager. From 1985 to
1988, he was a Regional Human Resources Manager for Marshalls, Inc. in
Hartsdale, NY.

Sten F. B. Sandlund, age 42, has been Vice President/Commercial Real Estate
Division since January, 1997. From September, 1993 to 1996, he was Vice
President/Special Assets. From June 1991 to September, 1993, Mr. Sandlund served
as Senior Vice President, American Institutional Advisors of Illinois, Inc., a
real estate debt and equity placement firm in Chicago, Illinois.

Tanya G. Vanasse, age 36, has been Vice President/Marketing Director since
May, 1996. From May 1994 to May 1996, Ms. Vanasse was Second Vice
President/Workplace Banking Manager at The Chase Manhattan Bank; from November,
1989 to April, 1994, she served as Division Marketing & Sales Manager
(Westchester County) at The Chase Manhattan Bank.

Item 2. Properties.

Poughkeepsie Savings' executive offices are located at 249 Main Mall,
Poughkeepsie, New York. The Bank conducts business from eleven (11) full service
retail branches and eight (8) residential loan production offices.

The Bank also has its own automated teller machines ("ATMs") in thirteen
(17) locations in the Hudson Valley and has a link to the New York Cash Exchange
("NYCE") with approximately 17,000 ATMs, 73,000 point of sale terminals, and
1,300 participating institutions. The Bank is linked to the PLUS Network with
approximately 125,000 ATMs in the USA and in various countries around the world.

The table below sets forth certain information on properties used by the
Bank for retail banking and administrative purposes as of December 31, 1996.
Loan production offices are excluded.

Owned Number of Total
or Years at Office
Leased Location Square Feet
------ -------- -----------

Home Office:
21 Market Street, Poughkeepsie, NY............... Owned 50+ 7,500

Branch Offices:
Main Street & Innis Ave, Poughkeepsie, NY........ Owned 31 4,500
Hudson Plaza, Poughkeepsie, NY................... Leased 25 3,500
Hyde Park Mall, Hyde Park, NY.................... Leased 23 2,400
South Hills Mall, Poughkeepsie, NY............... Leased 21 2,300
Lakeside Plaza, Newburgh, NY..................... Leased 6 2,860

In-Store Locations:
Super Stop & Shop, Wappingers Falls, NY.......... Leased 2 680
Super Stop & Shop, Poughkeepsie, NY.............. Leased 1 400
ShopRite, Spring Valley, NY...................... Leased 2 400
ShopRite, West Haverstraw, NY.................... Leased 1 400
Price Chopper, Vails Gate, NY.................... Leased 1 400

Operations/Office Buildings:
13 Market Street, Poughkeepsie, NY............... Owned 18 9,000
25 Market Street, Poughkeepsie, NY............... Owned 50+ 11,900
249 Main Mall, Poughkeepsie, NY.................. Note (1) 7 40,000

- ----------
(1) The Bank purchased the leasehold interest on the headquarters building in
1993. The building contains 100,000 square feet of useable space of which
the Bank continues to occupy approximately 40,000 square feet.

The net book value of land, buildings and leasehold improvements was
approximately $6.1 million and $5.9 million at December 31, 1996 and 1995,
respectively. The Bank leases certain Branch locations from other parties and,
during 1996, paid rentals of $0.5 million on these properties. As of December
31, 1996, the Bank was committed under contracts for the construction and
installation of four new in-store branches totaling approximately $1.4 million.

Item 3. Legal Proceedings.

The Bank is involved in routine legal proceedings occurring in the ordinary
course of business. In the opinion of management, final disposition of these
lawsuits will not have a material adverse affect on the financial condition or
results of operation of the Bank.

Item 4. Submission of Matters to a Vote of Securities Holders.

No matters were submitted to a vote of securities holders in the fourth
quarter of 1996.

PART II

Item 5. Market for Registrant's Common Stock and Related Shareholder's Matters.

Poughkeepsie Savings Bank, FSB common stock was initially issued on
November 19, 1985 and is traded on the NASDAQ National Market under the symbol
PKPS. Information concerning the range of high and low sales prices for the
Bank's common stock for each quarterly period within the past two fiscal years,
as well as net income and dividends declared per share, is set forth below.

Net End of Dividends
Quarter Ended Income High Low Period Declared
- -------------- ------- ----- ---- ------ --------

1996
- ----
December 31............................. $.09 $5.38 $5.00 $5.25 $.025
September 30............................ (.05) 5.25 4.75 5.00 .025
June 30................................. .00 5.63 4.88 5.00 .025
March 31................................ .06 5.63 5.00 5.38 .025

1995
- ----
December 31............................. $.94 $5.38 $4.50 $5.25 $.02
September 30............................ .07 5.88 4.88 5.25 .02
June 30................................. .13 6.13 4.38 5.75 .02
March 31................................ .13 4.88 4.00 4.63 .02

As of March 5, 1997, the closing price of the Bank's common stock was
$6.375 per share. As of that date, the Bank had 1,743 stockholders of record and
12,592,525 outstanding shares of common stock. This does not reflect the number
of persons or entities who hold their stock in nominee or "street" name through
various brokerage firms.

As part of its regulations covering capital distributions, the OTS may
object to the Bank making any capital distribution, which includes dividends.
See "Regulation -- Restrictions on Capital Distributions." On January 28, 1997,
the Bank declared a dividend of $.025 per share on its outstanding common stock
to be paid on March 6, 1997 to stockholders of record on February 14, 1997.

Item 6. Selected Consolidated Financial Data

December 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -----------
(Dollars in thousands, except per share data)

Statement of financial condition data:
Net loans .................................... $ 634,687 $ 575,508 $ 475,994 $ 439,881 $ 466,270
Securities and mortgage-backed securities .... 165,747 185,600 203,883 218,646 158,540
Federal funds and money market
investments ................................ -- -- 4,500 3,000 4,300
Other real estate and investment
in joint ventures ......................... 10,726 13,973 13,772 24,948 55,652
Total assets ................................. 858,690 825,448 727,625 718,874 726,633
Deposit accounts ............................. 575,246 534,041 489,144 437,660 457,355
Borrowings .................................. 198,694 206,985 178,635 219,919 229,676
Stockholders'equity (1) ...................... 71,668 70,924 50,478 49,600 23,328
Number of outstanding shares (2) ............. 12,591,825 12,530,825 12,467,100 12,376,510 3,799,225
Statement of operations data:
Interest and dividend income ................ $ 63,620 $ 58,959 $ 49,536 $ 47,433 $ 66,387
Interest expense ............................ 37,857 35,475 27,620 29,941 52,830
------------ ------------ ------------ ------------ -----------
Net interest income .......................... 25,763 23,484 21,916 17,492 13,557
Provision for loan losses .................... 850 1,525 120 400 3,900
------------ ------------ ------------ ------------ -----------
Net interest income after provision
for loan losses ............................ 24,913 21,959 21,796 17,092 9,657
Loan servicing and sale of servicing income . 304 48 153 293 10,923
Loss on bulk asset sale (3) ................. (894) (7,546) -- -- --
Other income ................................ 2,052 1,584 2,698 6,630 13,251
SAIF - special assessment (4) ............... (2,624) -- -- -- --
Other expenses .............................. (21,352) (18,269) (17,980) (18,196) (39,248)
------------ ------------ ------------ ------------ -----------
Income (loss) before taxes ................... 2,399 (2,224) 6,667 5,819 (5,417)
Income tax expense (benefit) (5) ............ 963 (18,486) 150 -- --
------------ ------------ ------------ ------------ -----------
Net income (loss) ............................ $ 1,436 $ 16,262 $ 6,517 $ 5,819 $ (5,417)
============ ============ ============ ============ ===========
Weighted average common and common
equivalent shares outstanding during the year . 12,910,458 12,855,251 12,746,235 8,252,277 3,647,554
Per common share:
Net income (loss) ........................... $ 0.11 $ 1.27 $ 0.51 $ 0.71 $ (1.49)
Cash dividends (6) .......................... 0.10 0.08 -- -- --
Book value ................................... 5.69 5.66 4.05 4.01 6.14
Operating ratios:
Return (loss) on average stockholders' equity 2.02% 28.48% 13.31% 11.73% (23.06)%
Return (loss) on average assets ............. 0.17 2.12 0.91 0.82 (0.59)
Interest rate spread ........................ 2.98 2.80 2.97 2.54 1.86
Net interest margin ......................... 3.21 3.12 3.17 2.60 1.61
Average stockholders' equity to
average assets .............................. 8.41 7.44 6.84 5.53 2.55
Efficiency ratio (7) ......................... 71.87 71.41 70.30 81.10 104.33
Branch data:
Full service branches (8) ................... 11 8 7 7 7
Loan production offices ..................... 8 7 5 -- --

- ----------
(1) For information regarding the Bank's regulatory capital, see "Regulation -
Capital Requirements."
(2) Excluding unallocated ESOP shares, where applicable.
(3) Represents the accrued loss on sale of certain commercial loans held for
bulk sale, see "Bulk Sale of Certain Commercial Loans", on page 9.
(4) The one-time SAIF Special Assessment resulted from legislation signed into
law on September 30, 1996 and is applicable to all SAIF insured
institutions. The special assessment was levied by the FDIC to recapitalize
the SAIF fund.
(5) In 1995, the Bank recognized deferred tax assets under SFAS No. 109
"Accounting for Income Taxes" by reducing previously established valuation
allowances. See Note 9 of the Notes to Consolidated Financial Statements.
(6) On January 28, 1997, the Bank declared a dividend of $.025 per share
payable to stockholders of record on February 14, 1997.
(7) The efficiency ratio is computed by dividing total non-interest expenses,
excluding OREO operating costs, by the sum of net interest income plus
non-interest income, excluding non-recurring items.
(8) During 1996 the Bank opened three in-store supermarket branches bringing
the total number of branches to eleven, of which five are in-store
locations.

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

Summary

The Bank reported net income of $1.4 million, or $0.11 per share, for the
year ended December 31, 1996, compared with $16.3 million, or $1.27 per share,
for 1995, and $6.5 million, or $0.51 per share, for 1994. The results for 1996
and 1995 included the following non-operating and special items:

1996

o SAIF Special Assessment of $2.6 million ($1.6 million, net of tax).

o Loss on Bulk Sale of $0.9 million ($0.5 million, net of tax)

1995

o Income tax benefits of $18.7 million attributable to the reduction of
valuation allowances in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."

o A $7.5 million pre-tax loss on the pending "bulk sale" of certain
commercial loans and a $1.0 million special addition to the allowance
for loan losses.

The following table shows comparable results (net of tax) for the years
ended December 31, 1996, 1995, and 1994, respectively:

1996 1995 1994
-------- -------- ------
(in 000's)
Earnings from operations ...................... $ 3,547 $ 3,793 $6,517
SAIF special assessment ....................... (1,575) -- --
Loss on bulk sale ............................. (536) (4,527) --
Additional loan loss provision ................ -- (600) --
Recognition of future tax
benefits and higher effective tax rate ..... -- 17,596 --
-------- -------- ------
$ 1,436 $ 16,262 $6,517
======== ======== ======

Earnings from operations, which consists of net income excluding certain
items deemed to be non-operating or special, are down $0.2 million from 1995 and
$3.0 million from 1994. Earnings from operations in 1996 were lower than both
1995 and 1994 as the operating costs of new branches and new product promotions
more than offset the increases recorded in net interest income and fee income.
Also, 1994's earnings from operations reflect an effective tax rate of
approximately 5% compared to 40% in both 1995 and 1996. If 1994's results were
taxed at a 40% effective tax rate, earnings from operations in 1994 would have
been reduced by $2.5 million to $4.0 million.

1996 accomplishments include the following:

o The Bank opened three additional in-store banking centers.

o The Bank completed the disposition of $38.0 million of certain
non-performing, sub-performing, and performing commercial loans
primarily in a bulk sale transaction.

o Deposits increased by 8% in a year which saw record inflows to mutual
funds with which banks now compete for funds.

o One-to-four family residential mortgage loan originations increased by
27%.

o Commercial and multi-family mortgage loan originations increased by
14%.

o Consumer/installment loan originations increased by 27%.

The following discussion of the Bank's financial condition and results of
operations should be read in conjunction with the Bank's Consolidated Financial
Statements which are included elsewhere herein.

Financial Condition

Total assets increased in 1996 by $33.2 million, or 4.0%, from $825.4
million at December 31, 1995 to $858.7 million at December 31, 1996. This
compares to asset growth of 13.4% in 1995. Asset growth in 1996 was due
primarily to a $59.2 million increase in net loans, partially offset by a $18.4
million decrease in mortgage-backed securities.

Net loans increased during 1996 due largely to a $74.5 million (or 23.3%)
increase in residential real estate loans; this increase is consistent with the
Bank's strategy to become a leader in one-to-four family residential lending in
the Mid-Hudson Valley. One-to-four family residential loan originations were
$130.4 million as compared to $102.8 million in 1995 and $70.0 million in 1994.
Commercial real estate and multi-family residential loans decreased $17.5
million during 1996. Commercial real estate and multi-family residential loan
originations during 1996 totaled $73.4 million; these originations were more
than offset by principal repayments and the sale of certain commercial loans in
a bulk sale transaction. Of the $61.5 million of "Commercial Loans Held for Bulk
Sale" at December 31, 1995, $38.0 million were sold or paid off, an additional
$0.9 million of write-downs were recognized, and the remaining $22.6 million was
transferred back to portfolio during 1996. Of the $22.6 million transferred back
to portfolio, $3.1 million was paid off in January 1997 at no additional loss to
the Bank.

Mortgage-backed securities declined by $18.4 million (or 11.4%) in 1996 due
largely to principal amortization and prepayments. During 1996, $35.3 million of
fixed-rate mortgage-backed securities were transferred from "Available for Sale"
to "Held to Maturity" classification as the Bank has the positive intent and
ability to hold these securities to maturity. For additional information, see
Note 3 to the "Notes to Consolidated Financial Statements."

Other real estate owned decreased by $3.2 million in 1996 to $10.7 million
at December 31, 1996. OREO activity during 1996 included sales of $6.5 million,
acquisitions of $4.1 million, capital improvements of $0.9 million and transfers
to performing loans of $1.2 million. The Bank's efforts to dispose of other real
estate owned include, where appropriate, extending loans to facilitate such
sales. However, in such instances it is the Bank's general practice to seek a
down-payment of at least 10% to 20% in order to ensure that there is a
sufficient transfer of risk to the borrower. In 1996, the Bank made loans to
facilitate the disposition of OREO totaling $4.0 million at the time of
origination. Total loans in portfolio which were originally made to facilitate
the sales of OREO properties aggregated $48.9 million at December 31, 1996.

Real estate acquired by the Bank through foreclosure proceedings or the
acceptance of a deed-in-lieu of foreclosure are classified as other real estate
owned until sold. When property is acquired, it is recorded at the lesser of the
loan's remaining principal balance or the estimated fair value of the property,
after reduction for estimated selling costs. Any balance in excess of such
estimated fair value on the date the property is acquired is charged to the
allowance for loan losses. All costs incurred thereafter in maintaining the
property and subsequent declines in fair value are charged to operating expense.
For further information, see Note 5 to the "Notes to Consolidated Financial
Statements."

Net deferred tax assets decreased by $1.0 million in 1996 to $16.8 million
at December 31, 1996 as deferred tax assets (e.g. net operating loss carry
forwards) were utilized to reduce taxes otherwise payable. For further
information, see Note 9 of the "Notes to Consolidated Financial Statements".

Deposits increased in 1996 by $41.2 million (or 7.7%) to $575.2 million
following a 9.2% increase in 1995. The increase in deposits was the result of
aggressive pricing and the introduction of new deposit products which have
attracted customers. During 1996, money market and demand deposits posted double
digit increases, while time deposits increased modestly. Savings accounts were
level with the prior year, halting the previous trend of declines experienced by
the Bank, and the banking industry in general, which saw customers transfer
funds out of savings accounts to higher rate time deposits and/or mutual funds
and equity securities.

Total borrowings decreased in 1996 by $8.3 million (or 4.0%) to $198.7
million as deposit increases exceeded net asset growth.

Asset/Liability and Interest Rate Risk Management

The Bank attempts to manage the maturity and repricing characteristics of
its balance sheet in order to maintain the sensitivity of both net interest
income and the market value of the Bank's balance sheet within acceptable
ranges.

Modifying the interest sensitivity embedded in the balance sheet can be
accomplished in several ways. By emphasizing the origination of new assets and
liabilities, or the rollover of existing assets and liabilities, which have
favorable characteristics compared to the existing balance sheet, incremental
change towards the desired sensitivity position can be achieved. Hedging
activities such as the utilization of interest rate hedge agreements, ("caps,"
"swaps" and "collars") can effect immediate change in the sensitivity position.
Restructuring of the balance sheet can also be used to effect immediate change.
In recent years, the Bank has utilized each of these strategies to manage its
sensitivity position.

In order to measure its sensitivity to changes in interest rates, the Bank
utilizes Net Portfolio Value ("NPV") simulation modeling to measure variability
of net interest income and the market value of the Bank's balance sheet under a
number of different interest rate scenarios. In addition to NPV simulation
modeling, management uses gap (the difference between the amount of assets and
liabilities repricing in any particular period) analysis as a part of its review
of the Bank's position with respect to potential exposure to risk under various
interest-rate scenarios. The results of these analyses are periodically
presented to both the Board of Directors and the Asset/Liability Committee
("ALCO"), which is comprised of members of Senior Management representing the
Finance, Lending and Retail Banking areas, among others. The Board has set
specific limits on the Bank's sensitivity position, as required by OTS
regulations.

The Bank uses a variety of on- and off-balance-sheet financial instruments
to manage its business and financial market risks related to interest rates.
Specific areas subject to interest rate risk include: net interest margins,
prepayments on residential mortgages and mortgage-backed securities, and the
residential mortgage applications in the "pipeline" which have been rate locked
by the borrower.

The Bank's net interest margin is affected by fluctuations in market
interest rates as a result of timing differences in the repricing of its assets
and liabilities. The repricing differences are measured in specific time
intervals and are referred to within the banking industry as interest rate
sensitivity gaps. The Bank manages the interest rate risk of current and future
earnings to a level consistent with the Bank's mix of businesses and seeks to
limit such risk exposure to a percentage of earnings and stockholders' equity.
The Bank has established interest rate risk limits based on a Net Portfolio
Value ("NPV") concept consistent with the approach used by the OTS in
determining risk based capital requirements. The Bank uses interest rate hedge
agreements and manages the mix of its short and long term borrowings to achieve
its desired risk profile relative to NPV under a variety of interest rate
assumptions.

Prepayments on residential mortgages and mortgage-backed securities, which
are generally not subject to prepayment penalties, can alter the Bank's interest
sensitivity gap. Prepayments on fixed-rate commercial real estate loans are
generally subject to prepayment penalties. The Bank considers estimates of
prepayments when calculating its interest rate sensitivity and NPV limits.
Prepayments tend to accelerate in a falling interest rate environment when it
may be difficult to reinvest the funds at the same interest rate.

The residential mortgage pipeline is susceptible to changes in interest
rates. Loans in the pipeline originated for portfolio have not been hedged.
Loans in the pipeline which are targeted for sale to secondary market investors
(e.g. FHLMC and FNMA) are either price locked with the investor or hedged using
off-balance instruments (generally forward contracts).

Hedging Activities. In accordance with policies approved by the Board of
Directors, the Bank uses certain derivative financial instruments and forward
contracts to assist in managing its interest rate risk exposure, but does not
utilize such instruments for speculative purposes. Derivative financial
instruments used by the Bank during 1996 were interest rate swaps, caps and
collars. The Bank has not entered into any derivative financial instrument
agreements containing embedded options.

The Bank has entered into interest rate hedge agreements with certain
approved broker/dealers ("Brokers"). An interest rate cap is a guarantee given
by one party (a Broker) to another party (the Bank), in exchange for the payment
of a premium, that if interest rates rise above a specified rate on a specified
interest rate index, the issuer will pay to the purchaser the difference between
the then current market rate and the specified rate on a notional principal
amount for a pre-determined period of time. No funds are actually borrowed or
repaid. The principal purpose of purchasing these caps is to prevent the
occurrence of a negative spread in the Bank's portfolio during a period in which
the cost of funds borrowed to acquire such assets rises. Until the rate index
rises above the rate cap, interest rate caps generally decrease the net interest
margin because the Bank receives no payment from the issuer but continues to
amortize the prepaid premium. An interest rate swap is an agreement where one
party (a broker) agrees to pay a floating rate of interest on a notional
principal amount to another party (the Bank) in exchange for receiving a fixed
rate of interest on the same notional amount. An interest rate collar involves
the simultaneous purchase of an interest rate cap and sale of an interest rate
floor, both tied to specific indices and based on notional principal amounts.

The following table summarizes, by category of asset or liability hedged,
the notional amount of the Bank's outstanding derivative financial instruments
as of December 31, 1996:

Interest Interest Forward
Rate Swaps Rate Collars Contracts Total
---------- ------------ --------- -----
(in 000's)

Notional Amount:
MBS available for sale ....... -- $70,000 -- $ 70,000
Mortgage pipeline ............ -- -- $8,000 8,000
Adjustable-rate borrowings.... $20,000 25,000 -- 45,000
------- ------- ------ --------
Total Notional Amount .......... $20,000 $95,000 $8,000 $123,000
======= ======= ====== ========

Interest rate swaps and collars generally are long term contracts made at
market interest rates when purchased. Forward contracts are generally of short
term duration, usually 60 to 90 days in length. The market value of all hedge
transactions are measured monthly. At December 31, 1996, the unrealized gain or
(loss) on hedge transactions was $(1.0) million on interest rate swaps, $0.4
million on interest rate collars, and zero on forward contracts. The asset or
liability being hedged generally has a offsetting unrealized gain or loss. It is
the Bank's intention to hold the hedging instruments until the contracts expire.

Net Portfolio Value Model and Interest Sensitivity Gap. The NPV approach
calculates the difference between the present value of liabilities and the
expected cash flows from assets and off-balance sheet contracts which would
result from instantaneous and sustained parallel shifts in the yield curve.
Under OTS regulations which may be implemented in the near future, an
institution's "normal" level of interest rate risk in the event of an assumed
change in interest rates is a decrease in the institution's NPV in an amount not
exceeding 2% of the present value of its assets in the event of a 200 basis
point increase or decrease in interest rates. Had this regulation been
implemented at December 31, 1996 the Bank believes its interest rate risk
profile would have been considered "normal".

The following table represents the composition of the Bank's one-year
interest sensitive gap for the dates indicated:

December 31,
---------------------
1996 1995
------ ------
(Dollars in millions)

Interest-earning assets subject to repricing in one year:
Residential mortgage loans ..................................... $144.7 $178.9
Commercial real estate loans ................................... 110.2 81.9
Commercial loans held for bulk sale ............................ -- 61.5
Commercial business loans ...................................... 6.3 7.0
Installment loans .............................................. 19.3 19.8
Mortgage backed securities ..................................... 118.1 129.2
Other securities ............................................... 14.7 24.3
------ ------
Total rate-sensitive assets ................................ 413.3 502.6
------ ------
Interest-bearing liabilities subject to repricing within one year:
Money-rate deposits and borrowings:
Time deposits ................................................ 217.6 192.9
Money market accounts ........................................ 126.2 102.9
Securities sold under repurchase agreements .................. 109.0 28.5
FHLB advances ................................................ 59.8 148.5
Core Deposits:
Savings ..................................................... 93.4 93.8
Demand ...................................................... 41.6 35.5
Escrow ...................................................... 4.1 4.2
------ ------
Total static rate-sensitive liabilities .................. 651.7 606.3
Adjustments:
Core deposit accounts .......................................... (93.6) (91.8)
Interest rate hedge agreements ................................. (115.0) (70.0)
------ ------
Total rate-sensitive liabilities ............................. 443.1 444.5
------ ------
One-year interest-sensitive gap -- excess (deficiency) of
rate-sensitive assets over rate sensitive liabilities ......... $(29.8) $ 58.1
====== ======

Rate-sensitive assets as a % of rate-sensitive liabilities ....... 93.3% 113.1%
One-year interest sensitive gap as a % of total assets ........... (3.5)% 7.0%

The gap table presented above is based on the contractual maturity of
fixed-rate products, and the next repricing date of adjustable-rate products.
Normal amortization and prepayment estimates have been applied to both fixed
rate and adjustable rate assets, where appropriate.

Liquidity and Capital Resources

The Bank manages its liquidity position within the overall context of its
asset/liability management program. Liquidity is maintained to meet regulatory
requirements, to meet normal funding needs and to be responsive to the inherent
credit and maturity risks of its assets and liabilities.

Under OTS regulations, the Bank is required to maintain average primary
liquidity levels, as defined by the OTS, equal to 5.0% of net withdrawable
deposit accounts plus borrowings due within one year. The required level may be
changed by the OTS from time to time. The Bank complied with this requirement
throughout 1996.

The Bank's funding requirements consist primarily of loan commitments, debt
repayments, deposit withdrawals and operating expenses. As of December 31, 1996,
the Bank had commitments under standby letters of credit, and unused lines of
credit of approximately $2.8 million and $12.5 million, respectively. At
December 31, 1996, the Bank was also committed to originate or fund $31.6
million one-to-four family residential mortgage loans and $32.2 million of
commercial loans.

Sources of funds include payments and prepayments on loans and securities,
deposits, borrowings, interest income, other revenue and asset sales. The Bank
had a $84.7 million ($34.9 million of which was unused) overnight line of credit
from the FHLB of New York at December 31, 1996. The line is subject to various
conditions, including the pledging and delivery of acceptable collateral. As of
December 31, 1996, the Bank had sufficient available collateral to borrow up to
an additional $247 million in the form of FHLB advances or reverse repurchase
agreements. The sources of funds described above are believed to be sufficient
to meet funding demands.

Management continually reviews the Bank's expected cash inflows and
outflows in order to ensure its ability to meet its overall funding
requirements. The Bank relies primarily on operating cash flows to meet its
daily requirements, and on borrowings to meet additional significant
requirements.

While the Bank can exert significant control over some items affecting
liquidity, such as the making of new loan commitments, it has more limited
ability to control others, such as net changes in deposit levels and prepayment
rates. While deposit products are, in management's opinion, competitively
priced, future deposit flows will be subject to the Bank's ability to
effectively compete for customer funds with other financial institutions and
investment alternatives.

OTS regulations require the Bank to meet certain minimum regulatory capital
requirements. At December 31, 1996 the Bank had regulatory capital substantially
in excess of requirements. The Bank is deemed to be "well capitalized" by its
regulators. Additional information concerning the Bank's regulatory capital
position is provided in Note 15 of "Notes to Consolidated Financial Statements"
at Item 8.

Results of Operations

The earnings of the Poughkeepsie Savings Bank, FSB are largely dependent
upon net interest income and fee income. Net interest income is the difference
between interest earned on its loan and securities portfolios and interest paid
on deposit accounts and borrowed funds. Non-interest income is primarily the
result of deposit account and transaction fees and net gains (losses) on sales
of securities and other assets.

Net interest income is affected by a number of variables. One such variable
is the interest rate spread, that is, the difference between the yields on
average interest-earning assets and the cost of average interest-bearing
liabilities. Another important variable is the relative amounts of
interest-earning assets and interest-bearing liabilities. Net interest margin
represents net interest income divided by average interest-earning assets. Net
interest margins were 3.21%, 3.12% and 3.17% for the years ended December 31,
1996, 1995 and 1994, respectively.

The Bank's net interest margin in 1997 is expected to come under increased
pressure as a result of increased competition for originating loans and
maintaining and increasing deposit levels.

The table below sets forth information relating to Poughkeepsie Savings'
interest-earning assets (including non-performing assets), interest-bearing
liabilities and net interest income during the periods indicated.

For the Year Ended December 31,
---------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1) Balance Interest Rate(1)
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)

Interest-earning assets:
Mortgage loans........ $579,578 $48,519 8.37% $501,973 $42,071 8.38% $428,799 $33,726 7.87%
Other loans........... 37,581 3,388 9.02 38,210 3,425 8.96 33,401 2,867 8.58
Mortgage-backed
securities........ 151,424 9,593 6.33 181,084 11,454 6.33 194,945 10,527 5.40
Other securities...... 30,762 1,973 6.41 27,962 1,824 6.52 33,868 2,388 7.05
Money market
investments and
federal funds..... 2,804 147 5.22 3,186 185 5.81 627 28 4.53
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total........ 802,149 63,620 7.93% 752,415 58,959 7.84% 691,640 49,536 7.16%
-------- ------- ---- -------- ------- ---- -------- ------- ----

Interest-bearing liabilities:
Deposits.............. 554,925 25,834 4.64 517,142 24,321 4.70 458,570 17,454 3.81
FHLB Advances......... 79,637 4,492 5.55 67,881 4,016 5.84 149,704 7,593 5.07
Other borrowings (2).. 128,699 7,531 5.84 118,945 7,138 6.00 51,593 2,573 4.99
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total........ 763,261 37,857 4.95% 703,968 35,475 5.04% 659,867 27,620 4.19%
-------- ------- ---- -------- ------- ---- -------- ------- ----

Excess of interest-
earning assets over
interest-bearing
liabilities....... $ 38,888 $ 48,447 $ 31,773
======== ======== ========
Net interest and
dividend income... $25,763 $23,484 $21,916
======= ======= =======
Interest rate
spread (3)........ 2.98% 2.80% 2.97%
==== ==== ====
Net interest
margin (4)........ 3.21% 3.12% 3.17%
==== ==== ====

- ----------
(1) Includes loan origination fees and costs treated as adjustments to loan
yields.
(2) Other borrowings include notes payable, securities sold under repurchase
agreements and draws against the Federal Home Loan Bank line of credit.
(3) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest and dividend income divided by
average interest-earning assets.

The following table sets forth the weighted-average coupons and costs for
the Bank's interest-earning assets (excluding non-performing loans) and
interest-bearing liabilities at the dates indicated.

December 31,
------------------------
1996 1995 1994
---- ---- ----
Weighted-average yield on:
Loan portfolio ............................. 8.20% 8.38% 8.26%
Mortgage-backed securities ................. 7.26 7.41 6.14
Other securities ........................... 6.55 6.78 6.35
Other interest earning assets .............. 9.38 9.19 9.62
All interest-earning assets ................ 8.02 8.21 7.69
Weighted-average cost of:
Deposits ................................... 4.67 4.86 4.31
Federal Home Loan Bank term advances ....... 5.58 5.65 5.91
Other borrowings ........................... 5.61 6.29 5.39
All interest-bearing liabilities ........... 4.88 5.09 4.70

Comparison of Operating Results for the Years Ended December 31, 1996 and 1995

Earnings Overview. The Bank reported net income for 1996 of $1.4 million,
or $0.11 per share, as compared with net income of $16.3 million, or $1.27 per
share, for 1995. Earnings from operations, which consists of net income
excluding certain items deemed to be non-operating or special, were $3.5
million, or $0.27 per share, in 1996 as compared with $3.8 million, or $0.30 per
share, in 1995. A reconciliation of earnings from operations to net income is
presented below (amounts are in thousands, except per share data and are
net-of-tax):

1996 1995
------------------ -------------------
Per share Per share
--------- ---------

Earnings from operations ......... $ 3,547 $0.27 $ 3,793 $0.30
SAIF Special Assessment .......... (1,575) (0.12) -- --
Loss on Bulk Sale ................ (536) (0.04) (4,527) (0.35)
Additional loan loss provision ... -- -- (600) (0.05)
Recognition of future tax benefits
and higher effective tax rate .. -- -- 17,596 1.37
------- ----- -------- -----
Net income ....................... $ 1,436 $0.11 $ 16,262 $1.27
======= ===== ======== =====

The $0.2 million decrease in earnings from operations from 1995 to 1996 was
primarily the result of increased operating expenses related to new branches and
product promotions partially offset by higher net interest income related to
portfolio growth and increased margins.

Net interest income. Net interest income for the year ended December 31,
1996 totaled $25.8 million, an increase of $2.3 million from 1995 net interest
income of $23.5 million. Average yields on interest-earning assets rose 9 basis
points (with 100 basis points equal to 1%) to 7.93% while the average cost of
interest-bearing liabilities decreased by 9 basis points to 4.95%.

Interest income rose $4.7 million, or 7.9%, reflecting an increase in
average interest earning assets together with the effect of higher average
rates. Average-earning assets increased due largely to new loan originations.

Non-performing and restructured assets also effect the Bank's interest
income. During 1996 and 1995, non-performing assets averaged $21.6 million and
$31.9 million respectively, while performing troubled debt restructurings
(TDR's) averaged $3.2 million and $26.5 million, respectively. Had these assets
performed in accordance with their original terms throughout the year, interest
income would have been greater than the reported amounts by $1.9 million in 1996
and $2.6 million in 1995.

Interest expense increased by $2.4 million, or 6.7%, reflecting higher
average deposits and borrowings outstanding during 1996 compared to 1995 and
offset by lower average rates on both deposits and borrowings. The weighted
average cost of deposits decreased by 6 basis points to 4.64% and the weighted
average cost of borrowings, which includes borrowings from the Federal Home Loan
Bank and short-term repurchase agreements, decreased by 22 basis points to
5.75%.

The changes in net interest income from 1995 to 1996, including
non-performing assets, attributable to changes in average balances and interest
rates is summarized as follows:

Change Attributable to
---------------------- Net
Volume Rate Change
------- ----- -------
(Dollars in thousands)

Interest - earning assets:
Mortgage loans ........................... $ 6,504 $ (56) $ 6,448
Other loans .............................. (56) 20 (36)
Mortgage-backed securities ............... (1,876) 14 (1,862)
Other securities ......................... 183 (34) 149
Money market investments and federal funds (22) (16) (38)
------- ----- -------
Total interest income ................. 4,733 (72) 4,661
------- ----- -------

Interest - bearing liabilities:
Deposits ................................. 1,777 (264) 1,513
FHLB advances ............................ 696 (220) 476
Other borrowings ......................... 585 (192) 393
------- ----- -------
Total interest expense ................ 3,058 (676) 2,382
------- ----- -------
Net interest income ................... $ 1,675 $ 604 $ 2,279
======= ===== =======

As noted earlier, interest spread is a factor in determining net interest
income. The following table summarizes the components of the Bank's interest
rate spread in 1996 and 1995:

1996 1995
---- ----
Average yield on loans................................... 8.41% 8.42%
Average yield on mortgage-backed securities.............. 6.33 6.33
Average yield on other securities........................ 6.41 6.52
Average yield on money market
investments and federal funds.......................... 5.22 5.81
Combined average yield on interest-earning assets........ 7.93 7.84
Average cost of deposits................................. 4.64 4.70
Average cost of FHLB Advances............................ 5.55 5.84
Average cost of other borrowings......................... 5.84 6.00
Combined average cost of funds........................... 4.95 5.04
Interest rate spread during the year..................... 2.98 2.80

Provision for Possible Loan Losses. The provision for loan losses was $0.9
million in 1996 as compared to $1.5 million in 1995. As mentioned in the
earnings overview, an additional non-recurring $1.0 million provision for loan
losses was recorded in the fourth quarter of 1995; this provision was made to
strengthen the allowance for loan losses and provide increased flexibility in
working out or selling certain commercial loans not included in the "bulk sale."
Excluding the non-recurring $1.0 million provision made in 1995, the provision
for loan losses was increased by $0.4 million in 1996 as a result of loan
growth.

From December 31, 1995 to December 31, 1996, non-accrual loans increased
from $5.4 million to $15.4 million while classified assets (which include
non-accrual loans) increased from $21.9 million to $31.3 million. The allowance
for loan losses was $8.7 million and $8.3 million at December 31, 1996 and 1995,
respectively. The allowance represented 1.3% and 1.6% of the total loan
portfolios and 56% and 152% of total non-performing loans at December 31, 1996
and 1995, respectively. Of this increase, $6.1 million related to commercial
loans held for bulk sale which became non-accrual during 1996; commercial loans
held for bulk sale are carried at fair value.

The allowance for loan losses is maintained at a level which management
considers adequate based on its regular review of the Bank's loan portfolios
taking into consideration the likelihood of repayment, the diversity of the
borrowers, the type of loan, delinquency data, the quality of the collateral,
current market conditions and the associated risks. Further additions to the
allowance for loan losses may be necessary if the economic conditions currently
affecting the likelihood of repayment and property values deteriorate further
and until management's efforts further reduce the amount of non-performing
loans.

Non-Interest Income. Excluding the loss recognized on the bulk sale of
certain commercial loans, non-interest income amounted to $2.4 million in 1996
as compared with $1.6 million in 1995.

Banking service fees and other income rose by $0.5 million to $2.2 million
in 1996 primarily as the result of an increase in the number of customer
checking accounts. Banking service fees and other income relates to recurring
income generated from retail banking fees, net commission income on sales of
investment products and loan charges and late fees.

Mortgage banking income rose by $0.1 million due to increased sales of
residential mortgage loan production to secondary market investors.

In 1996, a loss of $0.9 million was recognized to further reduce the
carrying value of certain loans held for bulk sale which became non-accrual
during 1996. In 1995, a $7.5 million loss was recorded to write down loans held
for bulk sale to the lower of cost or market value.

Non-Interest Expenses. The following table sets forth the primary
components of non-interest expense for the periods indicated.

Year Ended December 31,
------------------------
1996 1995
------- -------
(In thousands)

Salaries and wages................................... $ 8,284 $ 7,074
Employee benefits.................................... 2,467 2,127
Legal................................................ 511 595
Occupancy............................................ 1,447 1,139
Furniture and equipment.............................. 1,001 1,006
Deposit insurance.................................... 1,426 1,447
Net cost of operating other real estate owned........ 1,143 249
Third party loan servicing expenses.................. 549 645
Advertising/Marketing................................ 1,101 1,003
Insurance............................................ 243 204
Professional services................................ 1,115 1,051
Other................................................ 2,065 1,729
------- -------
Sub-total.......................................... 21,352 18,269
SAIF special assessment.............................. 2,624 --
------- -------
Total non-interest expenses.......................... $23,976 $18,269
======= =======

Most operating expense categories posted increases in 1996 over 1995 levels
due largely to increased staffing and related expenses of new supermarket
branches and costs of enhanced customer delivery systems; marketing costs also
increased in 1996 related to new products and new branches. The net cost of
operating OREO increased by $0.9 million in 1996, driven in part by lower gains
on the sale of OREO property.

The one-time SAIF Special Assessment resulted from legislation signed into
law on September 30, 1996 and is applicable to all SAIF insured institutions.
The special assessment was levied by the FDIC to recapitalize the SAIF. The
recapitalization of the SAIF fund is expected to provide lower deposit insurance
premiums for at least the next three years. The anticipated savings in the
Bank's deposit insurance premiums is estimated to be approximately $0.9 million
per year, beginning in 1997.

Income Taxes. In 1996, income tax expense totaled $1.0 million as compared
with an income tax benefit of $18.5 million in 1995. The 1995 income tax amount
included the reversal of a $19.8 million valuation allowance previously
established against deferred tax assets. Excluding the effect of reversing the
valuation allowance in 1995, the combined effective tax rate for 1996 and 1995
was approximately 40%.

The Bank adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. Among other provisions, SFAS No. 109 requires that a valuation
allowance be recorded to reduce net deferred tax assets to an amount that will
be realized based on a "more likely than not" criteria. The valuation allowance
is subject to adjustment based on changes in circumstances that affect
management's judgement about the realizability of the deferred tax asset.
Adjustments to increase or decrease the valuation allowance are charged or
credited, respectively, to income tax expense.

The income tax benefit in 1995 was primarily due to a reduction in the
valuation allowance reflecting management's best judgment regarding the amounts
and timing of future taxable income. The valuation allowance was reduced by
$19.8 million, of which $15.3 million related to deferred tax asset balances
prior to the effects of the "bulk sale". As a result, net deferred tax assets
totaled $17.8 million at December 31, 1995 as compared with $2.0 million at
December 31, 1994. The principal components of the Bank's deferred tax assets
are net operating loss carryforwards, and temporary differences attributable to
loan loss reserves, the bulk sale transaction, and certain OREO activity.
Elimination of the valuation allowance for future tax benefits in 1995 requires
that earnings reported in future periods be tax effected at the statutory rates.

Comparison of Operating Results for the Years Ended December 31, 1995 and 1994

Earnings Overview. The Bank recorded net income of $16.3 million, or $1.27
per share, for the year ended December 31, 1995, compared with net income of
$6.5 million, or $0.51 per share, for 1994. Full year results for 1995 include
aggregate net income of $10.2 million, or $0.79 per share, related to the
following non-recurring items: income for future tax benefits under SFAS No.
109, the $7.5 million loss on "bulk sale" of certain assets, and $1.0 million in
related additional loan loss provisions. Excluding these non-recurring items,
net income was $6.1 million in 1995 as compared with $6.5 million in 1994.

The $0.4 million decrease in comparable earnings from 1994 to 1995 was
primarily the result of a $1.5 million increase in operating expenses related to
new branches and new product promotions, a $1.0 million decrease in gains on
sales of securities, and a $405,000 increase in loan loss provisions related to
loan growth. The declines were partially offset by a $1.6 million increase in
net interest income and a $972,000 decrease in the net cost of OREO.

Net interest income. Net interest income for the year ended December 31,
1995 totaled $23.5 million, an increase of $1.6 million from 1994 net interest
income of $21.9 million. Average yields on interest-earning assets rose 68 basis
points (with 100 basis points equal to 1%) to 7.84% while the average cost of
interest-bearing liabilities increased by 85 basis points to 5.04%.

Interest income rose $9.4 million, or 19.0%, reflecting an increase in
average interest earning assets together with the effect of higher average
rates. Average-earning assets increased due largely to new loan originations.
Rate increases on mortgage loans and mortgage-backed securities reflect, in
large part, the full year effect of loans originated during 1994 at relatively
high rates together with higher average rates on adjustable rate instruments due
to periodic rate resets.

Non-performing and restructured assets also effect the Bank's net interest
income. As of December 31, 1995 and 1994, the Bank's non-accrual loans totaled
$5.4 million and $15.7 million, respectively, while performing troubled debt
restructurings (TDRs) were $29,000 and $28.0 million, respectively. As part of
the 1995 "bulk sale" of certain commercial loans, $14.4 million of non-accrual
loans and $29.2 million of performing troubled debt restructurings were
transferred to "Commercial Loans Held for Bulk Sale" at the lower of cost or
market value as of December 31, 1995 and, as a result, were not

considered non-accrual or TDRs as of December 31, 1995. See Bulk Sale of Certain
Commercial Loans on page 9. Had these assets performed in accordance with their
original terms throughout the year, interest income would have been greater than
the reported amounts by $2.6 million in 1995 and $1.3 million in 1994.

Interest expense increased by $7.9 million, or 19.0%, reflecting higher
average deposits outstanding during 1995 compared to 1994 and higher rates on
both deposits and borrowings. The weighted average cost of deposits increased by
89 basis points to 4.70% and the weighted average cost of borrowings, which
includes borrowings from the Federal Home Loan Bank and short-term repurchase
agreements, increased by 92 basis points to 5.97%.

The changes in net interest income from 1994 to 1995, including
non-performing assets, attributable to changes in average balances and interest
rates is summarized as follows:

Change Attributable to
---------------------- Net
Volume Rate Change
------- ------- -------
(Dollars in thousands)

Interest-earning assets:
Mortgage loans ........................... $ 5,755 $ 2,590 $ 8,345
Other loans .............................. 413 145 558
Mortgage-backed securities ............... (748) 1,675 927
Other securities ......................... (416) (148) (564)
Money market investments and federal funds 114 43 157
------- ------- -------
Total interest income .................... 5,118 4,305 9,423
------- ------- -------
Interest-bearing liabilities:
Deposits ................................. 2,229 4,638 6,867
FHLB advances ............................ (4,150) 573 (3,577)
Other borrowings ......................... 3,359 1,206 4,565
------- ------- -------
Total interest expense ................... 1,438 6,417 7,855
------- ------- -------
Net interest income ...................... $ 3,680 $(2,112) $ 1,568
======= ======= =======

As noted earlier, interest spread is a factor in determining net interest
income. The following table summarizes the components of the Bank's interest
rate spread in 1995 and 1994:

1995 1994
---- ----
Average yield on loans ................................. 8.42% 7.92%
Average yield on mortgage-backed securities ............ 6.33 5.40
Average yield on other securities ...................... 6.52 7.05
Average yield on money market investments
and federal funds .................................... 5.81 4.53
Combined average yield on interest-earning assets ...... 7.84 7.16
Average cost of deposits ............................... 4.70 3.81
Average cost of FHLB Advances .......................... 5.84 5.07
Average cost of other borrowings ....................... 6.00 4.99
Combined average cost of funds ......................... 5.04 4.19
Interest rate spread during the year ................... 2.80 2.97

Provision for Possible Loan Losses. The provision for loan losses was $1.5
million in 1995 as compared to $120,000 in 1994. As mentioned in the earnings
overview, an additional non-recurring $1.0 million provision for loan losses was
recorded in the fourth quarter of 1995; this provision was made to strengthen
the allowance for loan losses and provide increased flexibility in working out
or selling certain commercial loans not included in the "bulk sale." The
remaining increase of $405,000 relates mainly to loan growth recorded during
1995.

From December 31, 1994 to December 31, 1995, non-accrual loans declined
from $15.7 million to $5.4 million while classified assets (which include
non-accrual loans) declined from $67.2 million to $21.9 million. The allowance
for loan losses was $8.3 million and $18.2 million at December 31, 1995 and
1994,

respectively. The allowance represented 1.6% and 3.7% of the total loan
portfolios and 152% and 116% of total non-performing loans at December 31, 1995
and 1994, respectively. Of the loans included in the "bulk sale," $54.2 million
were classified as substandard or doubtful, including $14.4 million of
non-accrual loans. As bulk sale loans were written down to market value, these
amounts have been excluded from non-performing and classified asset totals.

Net securities gains (losses). The net securities loss of $60,000 reported
for 1995 relates primarily to a first quarter 1995 write-off of a $120,000
investment in a correspondent bank which filed for bankruptcy protection and is
now in process of liquidation. The Bank had no other investments in this
correspondent bank as of December 31, 1995. The 1994 net securities gain of
$980,000 relates mainly to the December 1994 sale of $5.2 million of tax
advantaged bonds at a net gain of $937,000.

Loss on Bulk Asset Sale. The $7.5 million loss recorded in 1995 relates to
the pending bulk sale of certain non-performing, sub-performing and performing
commercial loans totaling $78.2 million. In addition to a $10.0 million
charge-off against loan loss reserves, the $7.5 million loss was recorded to
transfer the loans to "Commercial Loans Held for Bulk Sale" at the lower of cost
or market value. Market value was based on accepted bid prices. See Note 4 of
the "Notes to Consolidated Financial Statements" at Item 8.

Other Income. Other income of $1.6 million in 1995 and $1.7 in 1994 was
primarily recurring income generated from retail banking fees, loan charges and
late fees, and net commission income on sales of investment products.

Non-Interest Expenses. Non-interest expenses in 1995 increased by $289,000
over 1994. The following table sets forth the primary components of non-interest
expense for the periods indicated.

Year Ended December 31,
-----------------------
1995 1994
------- -------
(In thousands)

Salaries and wages ................................. $ 7,074 $ 6,316
Employee benefits .................................. 2,127 2,086
Legal .............................................. 595 491
Occupancy .......................................... 1,139 1,324
Furniture and equipment ............................ 1,006 966
Deposit insurance .................................. 1,447 1,464
Net cost of operating other real estate owned ...... 249 1,221
Third party loan servicing expenses ................ 645 740
Advertising/Marketing .............................. 1,003 700
Insurance .......................................... 204 291
Professional services .............................. 1,051 923
Other .............................................. 1,729 1,458
------- -------
Total ............................................ $18,269 $17,980
======= =======

Most operating expense categories posted increases in 1995 over 1994 levels
due largely to increased staffing and related expenses of new supermarket
branches and costs of enhanced customer delivery systems; marketing costs also
increased in 1995 related to new products and new branches. The net cost of
operating OREO declined by $972,000 to $249,000 in 1995, driven in part by
higher gains on the sale of OREO property.

Income Taxes. The Bank recorded an income tax benefit of $18.5 million in
1995 as compared to income tax expense of $150,000 in 1994. The income tax
benefit in 1995 was primarily due to a reduction in the valuation allowance
reflecting management's best judgment regarding the amounts and timing of future
taxable income. The valuation allowance was reduced by $19.8 million, of which
$15.3 million related to deferred tax asset balances prior to the effects of the
"bulk sale". As a result, net deferred tax assets totaled $17.8 million at
December 31, 1995 as compared with $2.0 million at December 31, 1994. The
principal components of the Bank's deferred tax assets are net operating loss
carryforwards, and temporary differences attributable to loan loss reserves, the
bulk sale transaction, and certain OREO activity. Elimination of the valuation
allowance for future tax benefits in 1995 requires that earnings reported in
future periods be tax effected at the the statutory rates. In 1994 and 1993, the
Bank's income tax provision related primarily to income taxes payable to New
York State.

Impact of Inflation and Changing Prices

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

[THIS PAGE INTENTIONALLY LEFT BLANK]

Item 8. Financial Statements and Supplementary Data.

POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31,
------------------------
1996 1995
--------- ---------
(Dollars in thousands)
A S S E T S

Cash and due from banks ................................ $ 6,863 $ 9,960
Securities available for sale (Notes 3 and 8):
Mortgage-backed securities ........................... 113,575 161,961
Other securities ..................................... 22,215 23,639
Securities held to maturity (Note 3):
Mortgage-backed securities, fair value $29,597 ....... 29,957 --
--------- ---------
Total securities ................................... 165,747 185,600
--------- ---------
Loans, net:
Residential real estate mortgage loans ............... 393,513 319,029
Commercial real estate and multi-family
residential mortgage loans ......................... 210,982 167,018
Commercial loans ..................................... 7,194 7,315
Installment loans .................................... 31,194 28,702
--------- ---------
642,883 522,064
Allowance for loan losses (Note 4) ................... (8,652) (8,259)
Commercial loans held for bulk sale (Note 4) ......... -- 61,510
Residential loans held for sale ...................... 456 193
--------- ---------
Total loans, net ................................... 634,687 575,508
--------- ---------
Federal Home Loan Bank stock ........................... 9,760 8,917
Accrued interest and dividends receivable .............. 5,278 5,899
Bank premises and equipment (Note 6) ................... 6,793 6,241
Real estate owned and investment in real estate (Note 5) 10,726 13,973
Net deferred tax assets (Note 9) ....................... 16,812 17,788
Other assets ........................................... 2,024 1,562
--------- ---------
Total assets ....................................... $ 858,690 $ 825,448
========= =========

See accompanying notes to consolidated financial statements.

POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION--(Continued)

December 31,
------------------------
1996 1995
--------- ---------
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY

Deposit accounts (Note 13):
Savings accounts ............................................ $ 93,371 $ 93,764
Time deposits ............................................... 314,059 301,879
Money market deposits ....................................... 126,233 102,866
Demand deposits ............................................. 41,583 35,532
--------- ---------
Total deposits ............................................ 575,246 534,041
--------- ---------

Advances from FHLB (Note 7) .................................. 84,800 173,499
Securities Sold Under Repurchase Agreements (Note 8) .......... 113,894 33,486
Accrued interest payable ...................................... 1,618 1,847
Mortgagors' escrow deposits ................................... 4,134 4,192
Other liabilities ............................................. 7,330 7,459
--------- ---------
Total liabilities ......................................... 787,022 754,524
--------- ---------
Commitments and contingencies (Notes 8 and 12)

STOCKHOLDERS' EQUITY

Common stock ($0.01 par value; 40,000,000 shares authorized;
12,696,825 and 12,635,825 shares issued and 12,591,825 and
12,530,825 shares outstanding in 1996 and 1995, respectively) 127 126
Additional paid in capital .................................... 66,736 66,515
Retained earnings (Note 14) ................................... 6,827 6,647
Unrealized losses on securities ............................... (85) (427)
Treasury stock, at cost, 105,000 shares ....................... (1,937) (1,937)
--------- ---------
Total stockholders' equity (Notes 14 and 15) .............. 71,668 70,924
--------- ---------
Total liabilities and stockholders' equity ................ $ 858,690 $ 825,448
========= =========

See accompanying notes to consolidated financial statements.

POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,
-----------------------------------
1996 1995 1994
-------- -------- -------
(Dollars in thousands,
except per share data)

Interest and dividend income:
Real estate mortgage loans ........................... $ 48,519 $ 42,071 $33,726
Other loans .......................................... 3,388 3,425 2,867
Mortgage-backed securities ........................... 9,593 11,454 10,527
Other securities ..................................... 1,973 1,824 2,388
Federal funds and money market investments ........... 147 185 28
-------- -------- -------
Total interest and dividend income ................ 63,620 58,959 49,536
-------- -------- -------
Interest expense:
Deposits ............................................. 25,834 24,321 17,454
Borrowings ........................................... 12,023 11,154 10,166
-------- -------- -------
Total interest expense ............................ 37,857 35,475 27,620
-------- -------- -------
Net interest income .................................. 25,763 23,484 21,916
Provision for loan losses .................................. 850 1,525 120
-------- -------- -------
Net interest income after provision for loan losses .. 24,913 21,959 21,796
-------- -------- -------
Non-interest income:
Net realized securities gains (losses) ............... 25 (60) 980
Mortgage banking income .............................. 186 64 173
Loss on bulk sale of commercial loans ................ (894) (7,546) --
Other income, net .................................... 2,145 1,628 1,698
-------- -------- -------
Total other income ................................ 1,462 (5,914) 2,851
-------- -------- -------
Non-interest expense:
Salaries and wages ................................... 8,284 7,074 6,316
Employee benefits (Note 10) .......................... 2,467 2,127 2,086
Legal ................................................ 511 595 491
Occupancy ............................................ 1,447 1,139 1,324
Furniture and equipment .............................. 1,001 1,006 966
Deposit insurance .................................... 1,426 1,447 1,464
SAIF - special assessment (Note 19) ................. 2,624 -- --
Net cost of operating other real estate owned (Note 5) 1,143 249 1,221
Third party loan servicing expenses .................. 549 645 740
Other ................................................ 4,524 3,987 3,372
-------- -------- -------
Total operating expenses .......................... 23,976 18,269 17,980
-------- -------- -------
Income (loss) before income taxes ...................... 2,399 (2,224) 6,667
Income tax expense (benefit) (Note 9) ...................... 963 (18,486) 150
-------- -------- -------
Net income ........................................... $ 1,436 $ 16,262 $ 6,517
======== ======== =======
Net income per common and common
equivalent share (Note 2) ................................ $ 0.11 $ 1.27 $ 0.51
======== ======== =======
Dividends per share ........................................ $ 0.10 $ 0.08 --
======== ======== =======

See accompanying notes to consolidated financial statements.

POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

Retained Common
Additional Earnings Unrealized Stock Total
Common Paid-in (Accumulated) Gains(Losses) Held by Treasury Stockholders'
Stock Capital Deficit) on Securities ESOP Stock Equity
-------- --------- ------------ ------------- ------- -------- -------------
(Dollars in thousands)

Balance at December 31, 1993......... $ 125 $ 66,666 $(15,132) $ 454 $ (576) $(1,937) $ 49,600
Net Income............................... 6,517 6,517
Allocation of ESOP Shares................ (271) 385 114
Stock options exercised.................. 126 126
Change in unrealized losses on
available for sale securities, net..... (5,879) (5,879)
----- -------- -------- ------- ------ ------- --------
Balance at December 31, 1994............. 125 66,521 (8,615) (5,425) (191) (1,937) 50,478

Net Income............................... 16,262 16,262
Cash dividends declared.................. (1,000) (1,000)
Allocation of ESOP Shares................ (120) 191 71
Stock options exercised.................. 1 114 115
Change in unrealized losses on
available for sale securities, net..... 4,998 4,998
----- -------- -------- ------- ------ ------- --------
Balance at December 31, 1995............. 126 66,515 6,647 (427) -- (1,937) 70,924

Net Income............................... 1,436 1,436
Cash dividends declared.................. (1,256) (1,256)
Stock options exercised.................. 1 221 222
Change in unrealized losses on
available for sale securities, net..... 342 342
----- -------- -------- ------- ------ ------- --------
Balance at December 31, 1996............. $ 127 $ 66,736 $ 6,827 $ (85) -- $(1,937) $ 71,668
===== ======== ======== ======= ====== ======= ========

See accompanying notes to consolidated financial statements.

POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in thousands)
Increase (decrease) in cash

Cash flows from operating activities:
Net income ...................................................................... $ 1,436 $ 16,262 $ 6,517
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ..................................................... 850 1,525 120
Writedowns on other real estate owned ......................................... 372 94 776
Depreciation .................................................................. 743 809 840
Amortization of premiums and discounts on mortgage-backed
securities, other securities and loans ...................................... 239 436 812
Net (gains) losses on sale of assets .......................................... 687 6,715 (1,106)
Deferred tax expense (benefit) ................................................ 963 (18,760) --
(Increase) decrease in interest and dividend receivable ....................... 621 (1,083) (307)
(Increase) decrease in other assets ........................................... (746) 480 1,171
Increase (decrease) in interest payable ....................................... (229) 1,351 (960)
Increase (decrease) in other liabilities ...................................... (129) 681 (1,834)
(Increase) decrease in residential loans held for sale ........................ (263) 86 3,295
--------- --------- ---------
Net cash provided by operating activities ..................................... 4,544 8,596 9,324
--------- --------- ---------
Cash flows from investing activities:
Purchases of mortgage-backed securities - available for sale .................... (19,841) (44,624) (57,420)
Purchases of other securities - available for sale .............................. (36,459) (15,132) (9,749)
Proceeds from sales of mortgage-backed securities - available for sale .......... 3,096 49,781 21,465
Proceeds from sales of other securities - available for sale .................... 37,626 3,000 1,000
Principal repayments on mortgage-backed securities - available for sale ......... 31,278 27,629 34,565
Principal repayments on mortgage-backed securities - held to maturity ........... 3,623 -- --
Proceeds from maturities of other securities - available for sale .............. 133 5,129 10,171
FHLB Stock (purchases) redemptions .............................................. (843) (1,587) 6,281
Residential whole loan purchases ................................................ -- (2,203) --
Loan originations, net of repayments ............................................ (112,267) (117,478) (41,863)
Proceeds from sales of commercial loans held for bulk sale ...................... 33,178 -- --
Proceeds from sales of loans in portfolio ....................................... 19,828 9,457 13,012
Purchases of fixed assets ....................................................... (1,295) (1,348) (297)
Proceeds from sale of other real estate owned ................................... 2,480 3,598 5,253
--------- --------- ---------
Net cash used in investing activities ............................................. (39,463) (83,778) (17,582)
--------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in demand, money market, and savings accounts ........... 29,025 (19,644) 10,538
Net increase in time deposits ................................................... 12,180 64,541 40,946
Net increase in repurchase agreements ........................................... 80,408 1,451 27,016
Repayment of long-term FHLB Advances ............................................ -- (10,000) (100,000)
Proceeds from long-term FHLB Advances ........................................... -- 25,000 10,000
Net increase (decrease) in short-term FHLB borrowings ........................... (88,699) 11,899 21,700
Increase (decrease) in escrow deposits .......................................... (58) 983 581
Purchase of interest rate caps .................................................. -- -- (470)
Stock issued .................................................................... 222 186 126
Dividends paid .................................................................. (1,256) (1,000) --
--------- --------- ---------
Net cash provided by financing activities ......................................... 31,822 73,416 10,437
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .............................. (3,097) (1,766) 2,179
Cash and cash equivalents, beginning of year ...................................... 9,960 11,726 9,547
--------- --------- ---------
Cash and cash equivalents, end of year ............................................ $ 6,863 $ 9,960 $ 11,726
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during year for:
Interest credited on deposits ................................................. $ 25,779 $ 24,334 $ 17,342
Interest paid on borrowings ................................................... 12,309 9,887 11,238
Income/franchise taxes paid ................................................... 240 129 169
Net non-cash investing and financing activities:
Decrease in net unrealized losses on available for sale
securities, net of deferred tax effect ...................................... 342 427 5,879
Investment securities transferred from available-for-sale
to held-to-maturity category ................................................ 35,300 -- --
Change in common stock held by ESOP ........................................... -- 191 385
Loans transferred to other real estate ........................................ 4,080 4,788 2,899
Loans to facilitate asset sales ............................................... 4,000 1,080 7,600

See accompanying notes to consolidated financial statements.

POUGHKEEPSIE SAVINGS BANK, FSB AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

Poughkeepsie Savings Bank, FSB ("Bank") is a federally chartered stock
savings bank serving the Mid-Hudson Valley region of New York through eleven
branches in Dutchess, Orange and Rockland counties and eight residential loan
origination offices. In recent years, the business of the Bank has consisted
primarily of obtaining funds in the form of deposits from the general public and
borrowings, and using such funds to make residential mortgage loans and
commercial mortgage loans as well as commercial business loans, consumer loans,
student loans and other investments. The Bank's deposits are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is
subject to comprehensive regulation, examination and supervision by the Office
of Thrift Supervision ("OTS"), its primary regulator, and the FDIC. The Bank
also is a member of the Federal Home Loan Bank ("FHLB") system.

2. Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

The consolidated financial statements include the Bank's wholly owned
subsidiaries: PSB Associates, Inc., a life insurance agency; PSB Building Corp.,
a holding company for the Bank's headquarters building; and several other
subsidiaries primarily engaged in holding real estate acquired through
foreclosure or otherwise intended for disposition, including: PoSaBk, Inc.,
Plural Realty, Inc., and Markgard Realty, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Certain 1995 and 1994 amounts in the consolidated financial statements have
been reclassified to conform with the 1996 presentation.

Use of Estimates

The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and prevalent practices used within the
banking industry. In preparing such financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statement of financial condition
and the revenues and expenses for the period. Actual results could differ
significantly from those estimates. Estimates that are particularly susceptible
to significant change relate to the determination of the adequacy of the
allowance for loan losses and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and the valuation of other real
estate owned ("OREO"), management obtains independent appraisals for significant
properties.

Management believes that the allowance for loan losses is adequate and the
valuation of OREO is appropriate. While management uses available information to
recognize possible loan losses, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses and the valuation of OREO. Such agencies
may require the Bank to recognize additions to the allowance or reduce the
valuation of OREO based on their judgments of information available to them at
the time of their examination.

Securities

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," the
Bank classifies its securities at acquisition and each reporting date thereafter
as either held-to-maturity, available-for-sale or trading. Securities classified
as held-to-maturity are limited to debt securities for which the Bank has the
positive intent and ability to

hold to maturity. Trading securities are debt and equity securities that are
bought for the purpose of selling them in the near term. All other securities
are classified as available-for-sale.

As required by SFAS No. 115, held-to-maturity securities are carried at
amortized cost; available-for-sale securities are carried at fair value, with
unrealized gains and losses excluded from earnings and reported on a net-of-tax
basis as a separate component of stockholders' equity. Fair values for these
securities are based on quoted market prices, where available. If quoted market
prices are not available, fair values are based on quoted market prices for
similar securities. The Bank has no trading securities. Federal Home Loan Bank
stock is a restricted security held in accordance with certain regulatory
requirements and is carried at cost.

Purchases and sales are recorded on the trade date and realized gains and
losses on sales of securities are determined using the specific identification
method. Premiums and discounts are amortized to interest income using the level
yield method over the term of the securities, adjusted, in the case of
mortgage-based securities, for actual prepayments.

Loans

Loans generally are stated at their outstanding unpaid principal balance
net of any deferred fees or costs. Interest income on loans is recognized as
earned based on principal amounts outstanding. Non-refundable loan origination
fees and costs directly associated with the loan origination process are
deferred and recognized as a yield adjustment over the life of the related loan.

Non-Accrual Loans: Generally, a loan (including a loan defined as impaired
under SFAS No. 114) is classified as non-accrual when the loan becomes 90 days
past due, or earlier if the probability of collection is deemed to be
insufficient to warrant continued accrual, even though the loan currently is
performing. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. All previously accrued
interest for loans placed on non-accrual is deducted from interest income and
any cash receipts from these assets are generally credited directly to the
outstanding principal balances. Generally, loans are restored to accrual status
when the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time and the ultimate
collectibility is no longer in doubt. Consumer loans that are more than 120 days
delinquent are generally charged off against the allowance for loan losses.

Allowance for Loan Losses: The allowance for loan losses is maintained at a
level which management considers adequate based on its regular review of the
Bank's loan portfolios taking into consideration the likelihood of repayment,
the diversity of the borrowers, the type of loan, the quality of the collateral,
current market conditions and associated risks.

SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by SFAS No. 118, "Accounting for Impairment of a Loan -- Income
Recognition and Disclosures," was adopted by the Bank as of January 1, 1995.
Adoption of SFAS No. 114, as amended, did not result in any adjustment to the
allowance for loan losses. The Bank uses the loan-by-loan measurement method,
however, one-to-four family residential loans and consumer installment loans are
collectively evaluated for impairment and are not subject to SFAS No. 114
measurement criteria.

Under SFAS No. 114, a loan is recognized as impaired when it is probable
that principal and/or interest will not be collected in accordance with its
contractual terms. A loan in not considered impaired if there is a insignificant
delay in receipt of payment. The Bank measures impairment based on the fair
value of the collateral for all collateral dependent loans. Impaired loans which
are not collateral dependent are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate; this
evaluation is inherently subjective, as it requires material estimates that may
be susceptible to significant change. If the fair value of an impaired loan is
less than the related recorded amount, a valuation allowance is established or
the write-down is charged against the allowance for loan losses if the
impairment is considered to be permanent.

Mortgage Banking Activities: The Bank originates certain one-to-four family
residential mortgage loans in its local market area for sale to unrelated
investors. Residential mortgage loans held for sale are carried at the lower of
aggregate cost or market. Interest rate exposure with respect to mortgage
production is hedged primarily through mortgage sale commitments. Gains (losses)
on the sale of loans are recorded when the loans are sold to unrelated
investors.

Commercial Loans Held for Bulk Sale: Commercial loans held for bulk sale
include commercial real estate mortgage loans, multi-family mortgage loans, and
commercial business loans collateralized by accounts receivable and inventory.
These assets are reported at the lower of cost or market, where market value was
determined by signed letters of intent from third party investors. During 1996,
the majority of these loans were either sold or paid off and the remaining loans
returned to portfolio at their written down amounts.

Bank Premises and Equipment

Bank premises and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation on banking premises, leasehold
improvements, and furniture and equipment is computed by the straight-line
method over the estimated useful lives of the related assets or, if shorter, the
related lease terms, which range from 3 to 40 years.

Other Real Estate Owned ("OREO") and Investment in Real Estate

Real estate acquired by foreclosure or deed in lieu of foreclosure is
stated at the lower of the recorded investment or estimated fair value less
costs of disposition. Upon classification as OREO, the excess of the recorded
investment over the estimated fair value of the collateral, if any, is charged
to the allowance for loan losses. Net income derived from these properties
reduces the carrying value of the property. Net expenses incurred in maintaining
properties, subsequent write-downs due to reductions in estimated fair values,
and gains or losses upon disposition are included in operating expenses.
Expenditures to complete or improve properties are capitalized only if
reasonably expected to be recovered; otherwise they are expensed as incurred. In
accordance with SFAS No. 114, loans previously classified as in-substance
foreclosures ("ISF") and reported with OREO in prior years even though the Bank
had not taken possession of the collateral, were reclassified to loans in 1995.
This reclassification was not material to the Bank's financial condition or
results of operations. Investment in real estate represents loans made to
facilitate the sale of OREO which have not met all criteria for classification
as performing loans.

Mortgage Servicing Rights

The Bank adopted, effective January 1, 1996, SFAS No. 122, "Accounting for
Mortgage Servicing Rights". SFAS No. 122 amended SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities," and requires that a mortgage banking
enterprise recognize, as separate assets, the rights to service mortgage loans
for others, whether those rights are acquired through loan purchase or loan
origination activities. Mortgage servicing rights (MSRs) on loans serviced for
others are recognized based on their fair value (relative to the fair value of
the loan without the servicing rights) at the time the loan is sold. Mortgage
servicing rights are amortized as a reduction of loan servicing income over the
estimated servicing period.

In accordance with SFAS No. 122, MSRs are assessed for impairment based
upon their estimated fair value. To evaluate impairment the Bank stratifies MSRs
based principally on the loan type and interest rate. MSR impairment, if any, is
recognized through a valuation allowance. The Bank's financial condition and
results of operations were not materially effected by the adoption of SFAS No.
122.

Securities Sold Under Repurchase Agreements

The Bank enters into sales of securities under agreements to repurchase the
same or substantially the same securities. These agreements are treated as
financings, and the obligations to repurchase securities sold are reflected as a
liability in the consolidated statement of financial condition. The securities
underlying the agreements are included in the asset accounts.

Interest on Deposits

Interest on deposits is compounded annually, monthly or continuously using
a daily percentage rate (except for certain money market deposits and time
deposits over one hundred thousand dollars, which do not receive compound
interest) and is credited to depositors' accounts monthly, quarterly, annually
or at maturity.

Stock Options

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Bank has opted to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Bank's stock at the date of grant over
the amount an employee must pay to acquire the stock. See Note 11 for a further
discussion of the Bank's stock option plans.

Hedging Activities

In accordance with policies approved by the Board of Directors, the Bank
uses certain derivative financial instruments and forward contracts to assist in
managing its interest rate risk exposure, but does not utilize such instruments
for speculative purposes. The Bank uses three principle types of derivative
financial instruments: interest rate caps and collars (which reduce the Bank's
cash flow exposures to changing interest rates), interest rate swaps (which
effectively convert a portion of the Bank's variable rate borrowings to a fixed
rate), and forward contracts (which effectively reduce the Bank's exposure to
interest rate changes on residential mortgage applications which have been rate
locked by the borrower and, if funded, the Bank plans to sell into the secondary
market). The fair value of forward contracts which hedge mortgage applications
in the pipeline are deferred and recognized as adjustments to gain or loss on
sale of the underlying loans. Interest rate swaps are accounted for on a
settlement basis, with the net amounts paid or received under such contracts
included in interest income or expense. Interest rate caps and collars are also
accounted for on a settlement basis. See Notes 16 and 18 for more information
regarding the Bank's derivative financial instruments.

Income Taxes

Provisions for income taxes are based on taxes payable or refundable for
the current year (after exclusion of non-taxable items) plus deferred taxes.
Deferred taxes are provided when income or expense is recognized in different
periods for tax purposes than for financial reporting purposes using an asset
and liability approach for recognizing the tax effects of temporary differences.
Significant temporary differences include additions to the allowance for loan
losses and write-downs of OREO, which generally are not deductible for tax
purposes until the loans are charged off or the properties are sold. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be realized or settled. The effect on deferred tax assets and
liabilities of a change in tax laws or rates is recognized in income in the
period the change is enacted.

The Bank and its subsidiaries file a consolidated Federal income tax
return.

Pending Accounting Pronouncements

In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets and Extinguishments of Liabilities." SFAS No. 125 establishes
consistent accounting standards for transfers and servicing of financial assets
and extinguishments of liabilities. SFAS No. 125 provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
of financial assets that are secured borrowings based upon the existence of
control. SFAS No. 125 is required to be adopted by the Bank in 1997, except for
certain provisions (related to accounting for secured borrowings and collateral
and the accounting for transfers and servicing of repurchase agreements, dollar
rolls, securities lending and similar transactions) which have been deferred
until 1998 in accordance with SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125." The adoption of these standard is
not expected to have a material effect upon the Bank's consolidated financial
statements.

Net income per common share

The 1996, 1995 and 1994 net income per common share amount is based on net
income divided by the weighted average number of common and common equivalent
shares outstanding of 12,910,458 shares, 12,855,251 shares, and 12,746,235
shares, respectively.

The weighted average number of common and common equivalent shares excludes
the unallocated shares owned by the Employee Stock Ownership Plan (ESOP) and
treasury stock, and includes the effect of stock options (when dilutive).

3. Securities

A summary of the Bank's securities at December 31 follows:

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ------ -------- --------
1996 (In thousands)

Available-for-Sale Securities:
Securities of U.S. Government
agencies and corporations ....... $ 17,071 $ 2 $ 38 $ 17,035
Securities of financial
institutions and corporations ... 5,157 23 -- 5,180
Mortgage-backed securities ........ 113,456 718 599 113,575
-------- ------ -------- --------
$135,684 $ 743 $ 637 $135,790
======== ====== ======== ========
Held-to-Maturity Securities:
Mortgage-backed securities ........ $ 29,957 $ -- $ 360 $ 29,597
======== ====== ======== ========

1995
Available-for-Sale Securities:
Securities of U.S. Government
agencies and corporations ....... $ 98 $ 6 $ 104
Securities of financial
institutions and corporations ... 23,366 179 $ 10 23,535
Mortgage-backed securities ........ 162,847 426 1,312 161,961
-------- ------ -------- --------
$186,311 $ 611 $ 1,322 $185,600
======== ====== ======== ========
Held-to-Maturity Securities:
Mortgage-backed securities ........ $ -- $ -- $ -- $ --
======== ====== ======== ========

In February 1996, the Bank reclassified $35.3 million of fixed rate
mortgage-backed securities from the available-for-sale category to the
held-to-maturity category. At the date of transfer, these securities had a net
unrealized loss of $0.3 million which is being amortized over the remaining life
of the underlying securities, 14 years. The net unrealized loss on securities
classified as available for sale is reported, net of income taxes, as a separate
component of stockholders' equity. Proceeds from sales of investment securities
during 1996, 1995 and 1994 totaled approximately $40.7 million, $52.8 million,
and $22.5 million, respectively, and resulted in gross gains of $0.1 million,
$0.4 million, and $1.0 million, respectively, and gross losses of $0.1 million,
$0.5 million and $0.1 million, respectively. In 1995 the Bank wrote off a $0.1
million investment in a correspondent bank which filed bankruptcy.

The amortized cost and fair value of securities at December 31, 1996, by
maturity date, are summarized below. Mortgage-backed securities are included in
the table based upon remaining contractual term. Due to prepayment features,
certain of these securities may repay prior to contractual maturity.

Available-for-Sale Held-to-Maturity
--------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- ------- -------
(In thousands)

Due in one year or less ................ $ 8,303 $ 8,252 -- --
Due after one year through five years .. 19,460 19,405 -- --
Due after five years through ten years . 158 160 -- --
Due after ten years .................... 107,763 107,973 $29,957 $29,597
-------- -------- ------- -------
Total .................................. $135,684 $135,790 $29,957 $29,597
======== ======== ======= =======

The composition of the Bank's mortgage-backed securities portfolio at
December 31, 1996 is as follows:

Available-for-Sale Held-to-Maturity
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- ------- -------
(In thousands)

FHLMC participation certificates .... $ 49,254 $ 49,438 $14,082 $13,793
GNMA certificates ................... 59,244 59,126 -- --
FNMA mortgage-backed securities ..... 4,958 5,011 9,832 9,761
Private mortgage-backed securities .. -- 6,043 6,043
-------- -------- ------- -------
Total ............................... $113,456 $113,575 $29,957 $29,597
======== ======== ======= =======

At December 31, 1996, mortgage-backed securities totaling $134.8 million
were pledged as collateral for FHLB borrowings, repurchase agreements, certain
interest rate hedge agreements and for other purposes.

4. Allowance for Loan Losses

The following is a summary of changes in the allowance for loan losses:

Year Ended December 31,
------------------------------
1996 1995 1994
------ ------- -------
(In thousands)

Balance, beginning of year ............................. $8,259 $18,195 $19,726
------ ------- -------
Provision for loan losses .............................. 850 1,525 120
------ ------- -------
Charge-offs:
1-4 family residential real estate ............... 457 562 1,317
Commercial real estate ........................... 208 1,395 667
Commercial business .............................. 6 -- 123
Consumer ......................................... 62 108 92
------ ------- -------
Total charge-offs ................................ 733 2,065 2,199
------ ------- -------
Recoveries:
Commercial real estate ........................... 110 308 50
Commercial business .............................. 93 43 42
Consumer ......................................... 73 254 456
------ ------- -------
Total recoveries ................................. 276 605 548
------ ------- -------
Net charge-offs ........................................ 457 1,460 1,651
------ ------- -------
Writedowns of loans transferred to Commercial Loans Held
for Bulk Sale ........................................ -- 10,001 --
------ ------- -------
Balance, end of year ................................... $8,652 $ 8,259 $18,195
====== ======= =======

The Bank currently originates loans primarily in the Mid-Hudson Valley
region of New York and adjacent counties in New Jersey and Connecticut. The
ability of borrowers to perform in accordance with the terms of their loan
agreements is affected by, among other things, the real estate market conditions
prevailing within the Bank's market area.

During the fourth quarter of 1995, the Bank charged-off $10.1 million
related to its efforts to sell, in bulk, certain non-performing, sub-performing,
and performing commercial loans. In addition to this $10.1 million charge-off
against the allowance for loan losses, a loss of $7.5 million was recorded to
write these loans down to their then fair value of $61.5 million. During 1996,
an additional $0.9 million write-down was recorded to recognize a decline in
fair value on certain loans held for bulk sale which became non-performing in
1996. During 1996, the Bank closed on the sale of $33.1 million of these loans,
was paid off on an additional $4.6 million, and the balance of $22.6 million was
returned to portfolio.

Loans delinquent 90 days or more as to interest (including non-accrual
loans) amounted to $15.4 million and $5.4 million at December 31, 1996 and 1995,
respectively. Loans which are 90 days or more past their contractual maturity,
predominantly commercial real estate mortgages, were approximately $7.0 million
and $2.0 million at December 31, 1996 and 1995, respectively. These loans have
not "performed" in accordance with their principal repayment terms but continue
to perform in accordance with their interest terms. Interest income is
recognized on these loans. The loan portfolio also includes certain restructured
loans that are performing in accordance with their modified terms. Restructured
loans totaled $9.5 million and $0.1 million at December 31, 1996 and 1995,
respectively.

Interest income recorded in 1996, 1995 and 1994 would have increased by
approximately $1.9 million, $2.6 million and $1.3 million had non-accrual loans
and restructured loans performed in accordance with their original terms and
conditions. Interest income recorded on these loans totaled approximately $1.4
million in 1996 and $3.0 million in 1995.

At December 31, 1996, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $19.4 million. Generally, the fair value
of impaired loans was determined using the fair value of the underlying
collateral. Included in this amount is $0.9 million of impaired loans for which
the related valuation allowance for loan losses is $0.3 million and $13.3
million of impaired loans that as a result of write-downs do not have an
allowance for credit losses. During 1996 and 1995, the average recorded
investment in impaired loans was approximately $9.4 million and $31.8 million,
respectively, and the Bank recognized interest income on these impaired loans of
approximately $1.4 million and $2.1 million. No interest income was recognized
on the cash basis method of interest recognition. Included with "Commercial
Loans Held for Bulk Sale" at December 31, 1995 were $34.4 million of loans
previously considered impaired under SFAS No. 114 which were carried at the
lower of cost or market value.

At December 31, 1995, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $0.7 million. Generally, the fair value of
impaired loans was determined using the fair value of the underlying collateral.
Included in this amount was $0.3 million of impaired loans for which the related
valuation allowance for loan losses is $0.1 million, and $0.2 million of
impaired loans that as a result of write-downs do not have an allowance for
credit losses.

5. Other Real Estate Owned and Investment in Real Estate

The following is a summary of the activity in the other real estate owned
and investment in real estate accounts:

Performing Non-Performing
Investment ---------------------
in Real Commercial Residential
Estate OREO OREO Total
------- -------- ------- -------
(In thousands)

Balance at January 1, 1995 .......... $ 1,136 $ 11,201 $ 1,435 $13,772
Real estate acquired in settlement
of loans .......................... 3,282 1,506 4,788
Capital improvements ................ 56 1,035 1,091
Dispositions ........................ (2,333) (1,265) (3,598)
Transfer to performing loans ........ (1,590) (255) (1,845)
Net excess cash flow ................ (137) (4) (141)
Write-downs ......................... (34) (60) (94)
------- -------- ------- -------
Balance at December 31, 1995 ........ 1,192 11,424 1,357 13,973
Real estate acquired in settlement
of loans .......................... 3,000 1,080 4,080
Capital improvements ................ 907 907
Dispositions ........................ (1,180) (1,300) (2,480)
Transfer to performing loans ........ (1,192) (4,044) (5,236)
Net excess cash flow ................ (39) (108) (147)
Write-downs ......................... (335) (36) (371)
------- -------- ------- -------
Balance at December 31, 1996 ........ $ -- $ 9,733 $ 993 $10,726
======= ======== ======= =======

The investment in real estate represents advances on a loan to facilitate
the sale of OREO. In 1996 this loan met all the criteria for classification as a
performing loan and was transferred to the commercial real estate loan category.

6. Bank Premises and Equipment

Below is a summary of the Bank's premises and equipment:

December 31,
--------------------------
1996 1995
-------- --------
(In thousands)

Banking offices ............................ $ 7,600 $ 7,445
Furniture and equipment .................... 7,517 6,869
Leasehold improvements ..................... 2,521 2,059
-------- --------
17,638 16,373
Accumulated depreciation ................... (10,845) (10,132)
-------- --------
$ 6,793 $ 6,241
======== ========

As of December 31, 1996, the Bank was committed under contracts for the
construction and installation of four in-store branches totaling approximately
$1.4 million.

7. Advances from the Federal Home Loan Bank of New York

The following table provides certain information regarding the Bank's term
advances and short-term overnight borrowings which had fixed rates and
adjustable rates of interest as of December 31, 1996 and 1995:

1996 1995
------------------- --------------------
Average Average
Amount Rate Amount Rate
------- -------- -------- --------
(Dollars in thousands)

Long-term advances...................................... $35,000 5.64% $ 35,000 5.74%
Short-term advances and overnight
borrowings under the FHLB line of credit........... 49,800 5.45 138,499 5.62
------- --------
$84,800 $173,499
======= ========

The long-term advances outstanding as of December 31, 1996 are scheduled to
mature in 1998 with interest rates of 5.5% to 5.7%.

In connection with term advances, the Bank has granted to the FHLB, as
collateral, a security interest in specific assets including mortgage loans with
an aggregate value of 110% of the outstanding advance. As of December 31, 1996,
the Bank had sufficient available collateral to borrow an additional $247
million in the form of FHLB advances or reverse repurchase agreements.

In addition, at December 31, 1996, the Bank had available an unused line of
credit of $34.9 million, from a total line of $84.7 million granted by the FHLB,
which is subject to various terms and conditions, including collateralization.

8. Securities Sold Under Repurchase Agreements

Securities sold under repurchase agreements are as follows:

December 31,
----------------------
1996 1995
----- -----
(In thousands)

Repurchase agreements....................... $109,005 $28,548
Unit investment trust....................... 4,889 4,938
-------- -------
$113,894 $33,486
======== =======

The securities underlying the agreements to repurchase were delivered to
the various counterparties, who may have sold, loaned or otherwise disposed of
such securities to other parties in the normal course of their operations and
have agreed to resell to the Bank the same (or substantially the same)
securities upon maturity of the agreements. The amount of risk under these
borrowings with any one counterparty, defined as the excess of carrying value of
the asset sold under agreements to repurchase, including accrued interest, over
the amount borrowed, adjusted for accrued interest was approximately $0.7
million at December 31, 1996. The weighted average rate for the borrowings under
repurchase agreements was 5.46% and 5.82% at December 31, 1996 and 1995,
respectively.

The repurchase agreements outstanding at December 31, 1996 matured during
January 1997. The maximum amounts outstanding at any month-end during 1996, 1995
and 1994 were $112.4 million, $142.4 million and $28.9 million, respectively.

In 1984, the Bank sold tax-exempt municipal investment securities subject
to a 14 day put option, under certain circumstances, to a unit investment trust.
The transaction was accounted for as a borrowing due to the recourse nature of
the put option and the municipal securities are included in the securities
portfolio. The underlying collateral to the municipal security is a first
mortgage secured by a commercial property which may prepay without penalty. Such
prepayment would cause the dissolution of the put option as well as the
elimination of the Bank's investment and borrowing. Such prepayment could result
in a loss to the Bank. The loss, had such prepayment occurred at December 31,
1996, would have been approximately $0.2 million. The weighted average interest
rate on borrowings under the unit investment trust was 8.0% at both December 31,
1996 and 1995.

The following were pledged as additional collateral for the unit investment
trust as of December 31 for the periods indicated:

1996 1995
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(In thousands)

FHLMC participation certificates............. $ 697 $ 690 $1,017 $1,001
Private mortgage-backed securities........... 234 152 530 435
GNMA certificates............................ 6,548 6,451 6,682 6,586
------ ------ ------ ------
$7,479 $7,293 $8,229 $8,022
====== ====== ====== ======

9. Income Taxes

A reconciliation of the income tax provision to the amount computed using
the federal statutory rate is as follows:

Year Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
(In thousands)

Income tax expense (benefit) at federal statutory rate (34%) .. $ 816 $ (756) $ 2,267
State income tax .............................................. 177 181 150
Tax-exempt interest income .................................... 21 21 (182)
Bad debt deduction ............................................ -- 1,768 895
Decrease in valuation allowance ............................... -- (19,808) (2,817)
Other ......................................................... (51) 108 (163)
----- -------- -------
Income tax expense (benefit) .................................. $ 963 $(18,486) $ 150
===== ======== =======

The components of the provision for income taxes are as follows:

Year Ended December 31,
-------------------------------
1996 1995 1994
---- ----- ----
(In thousands)
Federal:
Deferred.............................. $696 $(16,849) --
State:
Current............................... 80 274 $ 150
Deferred.............................. 187 (1,911) --
---- -------- -----
Income tax expense (benefit)................ $963 $(18,486) $ 150
==== ======== =====

In accordance with SFAS No. 109, deferred income tax assets and liabilities
reflect the impact of temporary differences between values recorded as assets
and liabilities for financial reporting purposes and values utilized for
remeasurement in accordance with tax laws. The tax effects of temporary
differences giving rise to the Bank's deferred tax assets at December 31, 1996
and 1995 are as follows:

1996 1995
-------- --------
(In thousands)

Net operating loss (NOL) carryforward ................... $ 8,495 $ 6,020
Allowance for loan losses and OREO ...................... 3,230 7,847
Bulk sale transaction ................................... -- 3,017
Loans with different tax and book basis ................. 3,763 --
Deferred loan fees ...................................... 384 299
AMT credit .............................................. 694 694
Net unrealized losses on available for sale securities .. (42) 285
Other, net .............................................. 288 (374)
-------- --------
16,812 17,788
Valuation allowance ..................................... -- --
-------- --------
Net deferred tax asset .................................. $ 16,812 $ 17,788
======== ========

Under SFAS No. 109, deferred tax assets must be reduced by a valuation
allowance to an amount that is "more likely than not" to be realized. Based on
recent historical and anticipated future pre-tax earnings, management believes
that it is more likely than not that the Bank will realize its net deferred tax
assets. Accordingly, the Bank eliminated the valuation allowance in December
1995. At December 31, 1996, the Bank had a net operating loss carryforward and
alternative minimum tax credit carryforward of $24.9 million and $0.7 million,
respectively. The net operating loss carryforward begins to expire in 2005.

Until December 31, 1995, savings banks that met certain definitions, tests
and other conditions prescribed by the Internal Revenue Code were allowed a bad
debt deduction, subject to certain limitations. This deduction was computed
either as a percentage of taxable income before such deductions or based on
actual loss experience. SFAS No. 109 provides that the cumulative tax bad debt
reserves as of December 31, 1987 (the "base year reserves") are temporary
differences which do not require the establishment of a deferred tax liability.
The tax "base year reserves" for the Bank is approximately $5.7 million. This
"base year reserve" could be recognized as taxable income and create a current
tax liability at the income tax rates then in effect if one of the following
occur: 1) the Bank's retained earnings represented by the reserve is used for
purposes other than to absorb losses from bad debts; or 2) the Bank fails to
qualify as a Savings Bank as defined by the Internal Revenue Code. Neither of
these events occurred as of December 31, 1996. Furthermore, no additions to the
"base year reserves" were made in years 1988 through 1995 for financial
statement purposes. However, in September 1996 when the Bank filed its 1995 tax
return, the deduction taken for bad debts increased the Bank's tax bad debt
reserves to an amount which exceeded the "base year reserves" by approximately
$1.5 million.

On August 20, 1996, legislation was signed into law which repealed the
percentage of taxable income method of tax bad debt deduction available for
thrift institutions. This repeal is effective for the Bank's taxable year
beginning January 1, 1996. In addition, the legislation requires that tax bad
debt reserves in excess of "base year reserves" be recaptured into taxable
income over a 6 to 8 year period dependent on whether certain residential loan
origination levels are maintained. As previously mentioned, after the filing of
its 1995 tax return, the Bank's tax bad debt reserves exceed its base year
reserves by approximately $1.5 million. However, the change in tax law had no
effect on the Bank's income tax expense recorded in 1996. The additional
deferred tax liability related to excess reserves were offset by an increase in
deferred tax assets related to additional NOL carryforwards created as a result
of the bad debt deductions taken on the 1995 tax return. The effect of this
change in tax law on the Bank is that some available net operating loss
carryforwards will be utilized earlier than anticipated to offset the required
recapture of these excess bad debt reserves into taxable income in future years.

10. Employee Benefit Plans

Pension Plans

The Bank has a non-contributory defined benefit pension plan (the "Plan")
with the Retirement Systems Group, Inc., (formerly The Savings Bank Retirement
System), covering employees meeting certain eligibility requirements. The Bank's
policy is to fund pension costs to the extent they can be deducted for federal
income tax purposes.

The following table sets forth the funded status of the Bank's pension plan
covering employees as of the plan's year ended September 30:

1996 1995
------ ------
(In thousands)

Accumulated benefit obligation:
Vested benefits ........................................ $ 773 $ 784
Nonvested benefits ..................................... 27 34
------ ------
Accumulated benefit obligation ........................... 800 818
Effect of projected future compensation levels ........... -- --
------ ------
Projected benefit obligation ............................. 800 818
Plan assets at fair value ................................ 1,307 1,238
------ ------
Plan assets in excess of projected benefit obligation .... 507 420
Unrecognized loss ........................................ 221 290
Unrecognized past service liability ...................... 1 1
------ ------
Prepaid pension asset .................................... $ 729 $ 711
====== ======

1996 1995 1994
----- ----- -----

Components of pension expense are:
Interest cost .................................... $ 63 $ 61 $ 62
Return on assets ................................. (141) (185) 45
Amortization of deferred investment gain (loss) .. 42 95 (146)
Amortization of unrecognized investment loss ..... 18 18 14
----- ----- -----
Pension credit ......................................... $ (18) $ (11) $ (25)
===== ===== =====

Due to the financial condition of the Bank in 1991, the Plan was amended,
effective October 1, 1991, to provide that there would be no new enrollments in
the Plan and that there would be no further benefit accruals under the Plan.
This benefit "suspension" was initially intended to be temporary. However, it is
now expected to remain in effect indefinitely. Deferred investment losses in the
above table have been fully reserved.

The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.5% for 1996 and 8.25% for 1995, and the
expected long-term rate of return on plan assets was 8.0% for both plan years.
Plan assets consist primarily of equity and debt securities.

In 1996 the Bank reactivated the Non-Employee Directors' Retirement Plan
which covers non-employee directors. The Plan is a defined benefit,
non-qualified and unfunded Plan. The following table sets forth information on
this Plan as of December 31, 1996. Although this Plan was not directly funded,
during 1996 the Bank contributed $0.5 million into a Grantor Trust which was
established to meet the benefit obligations of this Plan as they become due.

(in thousands)

Accumulated benefit obligation:
Vested benefits .................................................. $ 564
Nonvested benefits ............................................... --
-----
Accumulated benefit obligation ................................... 564
Effect of projected future compensation levels ................... --
-----
Projected benefit obligation ..................................... 564
Plan assets at fair value ........................................ --
-----
Projected benefit obligation in excess of Plan assets ............ (564)
Unrecognized loss ................................................ 46
Unrecognized past service liability .............................. 491
-----
Accrued pension expense .......................................... $ (27)
=====
Components of pension expense are:
Service cost ..................................................... $ 24
Interest cost .................................................... 44
Amortization of unrecognized past service liability .............. 47
-----
Pension expense .................................................. $ 115
=====

The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.75% for 1996. The amortization period for
the unrecognized past service liability is 10 years.

Postretirement Medical and Life Insurance Benefits

The Bank provides medical and life insurance benefits to all currently
eligible pension recipients. However, during 1992 the Bank amended its
post-retirement medical benefit plan to eliminate substantially all current
employees from becoming eligible for these benefits. Through 1992, expenses
related to these benefits were recorded in the Bank's financial statements as
incurred along with active employee benefit expenses. In December 1991, the FASB
issued SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other
than Pensions". This statement requires the recognition of post-retirement
benefits on an accrual basis over the employee's service period. Post-retirement
benefit costs are assigned to the employee's years of service prior to
eligibility for the benefits, based on the amount expected to be paid after
retirement. The unfunded obligation can be recognized immediately or amortized
over specified future periods. SFAS No. 106 was implemented in 1993 and the Bank
chose to recognize the transition obligation over future periods. Expenses for
these post retirement benefits are substantially lower than they may have been
had all current employees been expected to become eligible for these benefits.

The following tables set forth the status of the Bank's post-retirement
benefit plan:

December 31,
---------------------
Financial Position 1996 1995
------------------ ------- -------
(Dollars in thousands)
Accumulated post-retirement benefit
obligation ("APBO") .............................. $(1,231) $(1,210)
Unrecognized net gain .............................. (441) (507)
Unrecognized net transition obligation ............. 1,330 1,413
------- -------
Accrued post-retirement benefit cost ............... $ (342) $ (304)
======= =======

Net Periodic Post-Retirement Expense 1996 1995 1994
------------------------------------ ----- ----- -----

Service cost ................................................ $ 6 $ 10 $ 15
Interest cost ............................................... 85 94 107
Amortization of unrecognized net transition obligation ...... 83 83 83
Amortization of unrecognized net gain ....................... (71) (70) (4)
----- ----- -----
Net periodic post-retirement expense charged to operations .. $ 103 $ 117 $ 201
===== ===== =====

Assumptions 1996 1995 1994
----------- ----- ----- -----
Discount rate ..................................... 7.50% 7.25% 8.00%

Service Plus
Service Interest Interest
Effect of a 1% Increase in Health Trend Rates APBO Cost Cost Cost
--------------------------------------------- ------- ------- ------- -----------
(In thousands)

Current basis........................................ $1,231 $6 $85 $91
1% trend increase.................................... 1,303 7 90 97
------ -- --- ---
Effect of 1% change due to increase.................. $ 72 $1 $ 5 $ 6
====== == === ===

Other Benefit Plans

The Bank has a defined contribution 401(k) plan, covering substantially all
full time employees meeting certain eligibility requirements. The Bank's 401(k)
contributions in 1996, 1995 and 1994 were $339,000, $304,000, and $124,000,
respectively.

In 1987, the Bank established a non-contributing leveraged Employee Stock
Ownership Plan (ESOP), which acquired shares of the Bank's stock for the benefit
of all eligible employees. The ESOP borrowed funds from an unrelated financial
institution and acquired 318,200 shares in 1987 and 37,673 shares in 1988 of the
Bank's stock in the open market at an average price of $14.05 per share. No
borrowings remained as of December 31, 1996 or 1995.

During 1995 and 1994, ESOP expense charged to operating expense was $0.2
million, and $0.1 million, respectively, and consisted primarily of 13,625
shares and 27,340 shares, respectively, allocated to employees at their fair
market value plus interest costs funded by the Bank. The difference between the
average cost and the market value of the allocated shares is charged to
additional paid-in capital. The ESOP had no shares available for allocation
during 1996, and consequently, no ESOP expense was recorded in 1996. Unallocated
shares acquired by the ESOP were recorded at the average cost per share and
shown under stockholders' equity in the consolidated statements of financial
condition as common stock held by the ESOP.

The Bank has employment contracts with certain executive officers which
provide these individuals with post-termination benefits under certain specified
conditions, including a change in control of the Bank.

11. Stock Option Plans

1985 Stock Option Plan

The Bank received shareholder approval in 1985 for a stock option plan for
directors, officers and employees of the Bank and its subsidiaries under which
options granted may be either qualifying incentive stock options or nonqualified
options. A total of 391,867 shares were authorized under this plan. The options
are exercisable at the market price at the date of grant and vest over periods
ranging up to four years. The options may permit the holder to purchase any
combination of market value or book value shares or to exercise stock
appreciation rights. Book value options are exercisable at the book value per
share of common stock at the end of the most recent fiscal quarter prior to the
date of grant and require the Bank to repurchase shares issued upon exercise of
the options at the book value per share of common stock at the end of the most
recent fiscal quarter prior to the repurchase. All options currently outstanding
to non-directors do not contain book value share exercise features or stock
appreciation rights.

A summary of the transactions of the 1985 Stock Option Plan follows:

Weighted Average
Exercise Price
Shares Per Share
------ ----------------

Outstanding, January 1, 1994 ................ 215,014 $ 3.85
Granted ................................. 60,000 4.75
Exercised ............................... (40,750) 1.72
Canceled ................................ (5,020) 13.50
-------
Outstanding, December 31, 1994 .............. 229,244 4.25
Granted ................................. -- --
Exercised ............................... (13,950) 2.24
Canceled ................................ (45,000) 9.61
-------
Outstanding, December 31, 1995 .............. 170,294 3.00
Exercised ................................... (500) 1.50
-------
Outstanding, December 31, 1996 .............. 169,794 3.01
=======

At December 31, 1996, options to purchase 65,212 shares under this plan
were available for future grant and 169,794 options are exercisable with a
weighted average exercise price of $3.01.

1993 Stock Incentive Plan

The Bank received shareholder approval for a 1993 Stock Incentive Plan
("1993 Plan") which provides for the granting of incentive stock options
intended to comply with the requirements of Section 422 of the Internal Revenue
Code, non-incentive or compensatory stock options and stock appreciation rights.
The 1993 Plan is administered and interpreted by a committee of not less than
two members of the Board of Directors, none of whom is an officer or employee of
the Bank and each of whom is a "disinterested person" within the meaning of the
applicable regulations under the federal securities law. The committee
determines who will be granted options, whether such options will be incentive
or compensatory options, the number of shares subject to each option and the
exercise price of each compensatory option when such options become exercisable.
The per share exercise price of an incentive stock option at least equals the
fair market value of a share of Common Stock on the date the option is granted.
Each stock option or portion thereof is exercisable at any time on or after it
vests. A total of 595,315 shares were authorized under this plan in 1993, and in
1996, stockholders approved an amendment to this plan which increased the number
of shares authorized by 525,288 shares for a total authorization of 1,120,603
shares.

A summary of the transactions of the 1993 Stock Incentive Plan follows:

Weighted Average
Exercise Price
Shares Per Share
------ ----------------

Outstanding, January 1, 1994 ................. 439,000 $ 2.50
Granted .................................. 145,000 4.72
Exercised ................................ (15,500) 2.50
Canceled ................................. (12,250) 1.50
-------
Outstanding, December 31, 1994 ............... 556,250 3.10
Granted .................................. 20,000 5.38
Exercised ................................ (36,150) 2.50
Canceled ................................. (1,500) 2.50
-------
Outstanding, December 31, 1995 ............... 538,600 3.22
Granted .................................. 438,000 5.12
Exercised ................................ (60,500) 3.98
-------
Outstanding, December 31, 1996 ............... 916,100 4.08
=======

At December 31, 1996, options to purchase 92,353 shares under this plan
were available for future grant and 363,100 options are exercisable with a
weighted exercise price of $3.10. The weighted average fair value of options
granted during 1996 and 1995 was $5.12 and $5.38, respectively.

1993 Directors' Stock Option Plan

The Bank also received shareholder approval for a 1993 Directors' Stock
Option Plan (the "Directors' Plan"), which provides for the grant of
non-qualified stock options to non-employee directors of the Bank. The
Directors' Plan is administered and interpreted by the entire Board of Directors
of the Bank. A total of 255,135 shares were authorized under this plan.

Each non-employee director of the Bank in June 1993, upon the completion
date of the Bank's Offering, received compensatory options to purchase 25,000
shares of common stock, 7,000 of which vest and are exercisable twelve months
after the date of grant, and 18,000 of which vest and are exercisable thereafter
at the rate of 4,500 shares at the end of each succeeding twelve-month period.
All of these initial grants were at $2.50 per share, the subscription price for
a share of common stock in the Offering.

Any person who becomes a member of the Board of Directors of the Bank
subsequent to the Offering and who is not an employee of the Bank will receive
an option to purchase 25,000 shares of stock (or such lesser number as may then
be available for grant under the Directors' Plan), 7,000 of which vest and are
exercisable twelve months after the date of grant, and 18,000 of which vest and
are exercisable thereafter at the rate of 4,500 shares at the end of each
succeeding twelve-month period. The exercise price of such shares will be the
fair market value at the date of grant.

A summary of the 1993 Directors' Stock Option Plan transactions follows:

Weighted Average
Exercise Price
Shares Per Share
------ ----------------

Outstanding, January 1, 1994 ................. 150,000 $2.50
Granted ................................... 50,000 4.00
Exercised ................................. (7,000) 2.50
-------
Outstanding, December 31, 1994 ............... 193,000 2.89
No activity in 1995 or 1996 ............... -- --
-------
Outstanding, December 31, 1996 ............... 193,000 2.89
=======

At December 31, 1996, options to purchase 55,135 shares under this plan
were available for future grant and 121,000 options are exercisable with a
weighted average exercise price of $2.79.

General

At December 31, 1996, the Bank has three stock option plans as described
above. The Bank applies APB Opinion 25 and related Interpretations in accounting
for these plans. Accordingly, no compensation cost has been recognized for these
plans. Had compensation cost for the Bank's stock option plans been determined
based on the fair value at the grant dates for awards under these plans
consistent with the fair value method of SFAS No. 123, "Accounting for Stock
Based Compensation", the Bank's net income and earnings per share would have
been reduced to the pro forma amounts indicated below (amounts in thousands,
except per share data):

1996 1995
---- ----
Net income As reported $1,436 $16,262
Pro forma 1,375 16,258

Net income per share As reported $0.11 $1.27
Pro forma 0.11 1.27

The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants awarded in 1996 and 1995, respectively: dividend yield of
2.0% and 1.5%; expected volatility of 31% and 36%; risk-free interest rate of
5.5% in both years; and expected lives of 4.5 years and 4.0 years.

The following table summarizes information, covering all of the Bank's
stock option plans, about stock options outstanding at December 31, 1996:

Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ------------- ---------------

$1.00 to 3.00 609,174 6.3 years $ 2.34 459,174 $ 2.29
3.01 to 6.00 658,000 9.1 4.95 183,000 4.67
6.01 and greater 11,720 1.8 10.49 11,720 10.49
--------- -------
1,278,894 7.7 3.76 653,894 3.10
========= =======

12. Commitments and Contingencies

The Bank leases various branch and loan origination offices and certain
equipment under noncancelable agreements. These leases have expiration dates
through 2021. Certain of the lease agreements contain escalation clauses which
have been aggregated into the annual rent expense and minimum annual rentals. At
December 31, 1996, aggregate minimum annual rentals were as follows:

Year Ending
December 31,
------------ (In thousands)
1997....................................................... $1,075
1998....................................................... 728
1999....................................................... 666
2000....................................................... 576
2001....................................................... 416
Thereafter................................................. 3,259
------
$6,720
======

Rental expense aggregated $0.7 million, $0.5 million, and $0.4 million in
1996, 1995 and 1994, respectively. Rent expense relates primarily to the cost of
leasing retail branch locations and loan production offices.

In the course of its business, the Bank is involved in various legal
proceedings. No predictions can be made presently as to the outcome or nature of
any relief that may be ultimately granted with respect to any of these
proceedings. In the opinion of management, pending or threatened legal
proceedings are not expected to result in a material adverse effect on the
Bank's consolidated financial statements.

During 1989 the Bank securitized approximately $100 million of seasoned
one-year adjustable rate mortgages, originated primarily in the Mid-Hudson
Valley, with the Federal Home Loan Mortgage Corporation (FHLMC). An agreement
was entered into requiring the Bank to repay FHLMC for any foreclosure losses
incurred on that portfolio through 1999. During 1996, payments of $37,000 were
made on this agreement. Since 1989, payments on this agreement have aggregated
$605,000. The outstanding balance on these mortgage-backed securities was
approximately $27.8 million at December 31, 1996 and $32.7 million at December
31, 1995.

Loans sold with recourse are identified when a loan is sold and the buyer
retains the right to enforce a repurchase by the seller under certain
conditions. The Bank does not sell loans with recourse as part of normal
operations. However, it did so to facilitate the sale of its Farmers Federal
division in 1988. Repurchases under this agreement have not been material.

13. Deposit Accounts

Below is a summary of the Bank's deposit accounts at December 31 for the periods
indicated:

1996 1995
----------------- ----------------
Amount Rate Amount Rate
-------- ------ -------- ------
(Dollars in thousands)
Checking accounts..................... $ 25,787 -- $ 15,987 --
NOW accounts.......................... 15,796 2.16% 19,545 2.16%
Passbook accounts..................... 93,061 3.27 93,470 3.28
Money market deposit accounts......... 126,233 4.56 102,866 4.37
Club accounts......................... 310 3.00 294 3.00
Certificate accounts.................. 314,059 5.56 301,879 5.91
-------- --------
$575,246 4.63% $534,041 4.84%
======== ========

The following is a summary of certificate accounts by remaining term to
contractual maturity at December 31:

1996 1995
------------------- -------------------
Amount Rate Amount Rate
-------- ---- -------- ----
(Dollars in thousands)

3 months or less ......... $ 69,976 5.27% $ 69,063 5.91%
3 to 6 months ............ 78,253 5.35 59,516 5.82
6 to 12 months ........... 69,416 5.32 64,270 5.61
1 to 2 years ............. 19,813 5.67 63,676 5.86
2 to 3 years ............. 53,390 5.98 11,398 5.94
3 to 4 years ............. 16,989 6.87 16,613 6.38
More than 4 years ........ 6,222 6.67 17,343 7.07
-------- --------
Total certificates ....... $314,059 5.56% $301,879 5.91%
======== ========

Interest expense on deposits, summarized by major categories, were as follows:

Year Ended December 31,
---------------------------------
1996 1995 1994
------- ------- -------
(In thousands)

Savings accounts ........................ $ 3,036 $ 3,288 $ 4,937
Time deposits ........................... 17,195 15,949 9,637
Money market deposits ............. 4,988 4,543 2,284
Demand deposits ................... 564 501 571
Mortgagors' escrow deposits ....... 51 40 25
------- ------- -------
$25,834 $24,321 $17,454
======= ======= =======

At December 31, 1996 and 1995 there were n1o brokered deposits. Deposits in
excess of $100,000 at December 31, 1996 and 1995 were $69.0 million and $56.1
million, respectively.

14. Stockholders' Equity

Upon the Bank's conversion from mutual to stock form in 1985, a liquidation
account was established within stockholders' equity for the benefit of all
eligible account holders in an amount equal to $38.0 million, representing total
retained earnings at June 30, 1985. In the event of complete liquidation of the
Bank, such account holders would be entitled to their interest in the
liquidation account prior to any payments to shareholders. In addition, no
dividend declaration or payment would be permitted which would reduce
stockholders' equity below the aggregate amount required in the liquidation
account. The aggregate liquidation account is determined at the end of each
fiscal year and is reduced proportionately as eligible account holders reduce
their balances. In no event may the liquidation account be increased. The
liquidation account amounted to $7.3 million and $8.0 million at December 31,
1996 and 1995, respectively.

On May 1, 1988, the Bank's Board of Directors adopted a shareholder rights
plan which expires on May 1, 1998. The plan provides for a dividend of one share
purchase right for each of the Bank's common shares held of record as of the
close of business on May 18, 1988. Initially, the rights are not exercisable;
right certificates are not distributed, and the rights automatically trade with
the Bank's common shares. However, 20 days following the acquisition of 20% or
more of the Bank's common shares or 20 days following the commencement of a
tender offer for 30% or more of the Bank's common shares, the rights will become
exercisable and separate right certificates will be distributed. The rights will
entitle the holders of the Bank's common shares to purchase additional shares at
an exercise price of $75 per share. In addition, in the event of certain
triggering events described in the rights plan, holders of the rights (other
than the acquiring person) will be entitled to acquire the Bank's common shares
having a market value of twice the then-current exercise price of the rights. In
addition, in the event the Bank enters into certain business combination
transactions, holders of the rights will be provided a right to acquire equity
securities of the acquiring entity having a market value of twice the
then-current exercise price of the rights. The Bank will be entitled to redeem
the rights upon the occurrence of certain events.

15. Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tangible and Core capital (as defined) to adjusted total assets (as
defined), and of Core and Total capital (as defined in the regulations) to
risk-weighted assets (as defined). Core capital to adjusted total assets is also
known as the "Leverage" ratio. Management believes, as of December 31, 1996,
that the Bank exceeds all capital adequacy requirements to which it is subject.

As of December 31, 1996, the most recent information from the Bank's
primary regulator, the Office of Thrift Supervision ("the OTS"), categorized the
Bank as "well capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must maintain minimum
core, tangible, and risk-based capital ratios as set forth in the table below.
There are no conditions or events since that notification that management
believes have changed the Bank's category. The Bank's actual capital amounts and
ratios are also presented in the table.

OTS Requirements To Be Well Capitalized
for Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ------- ------ -------- ------
(Dollars in thousands)

As of December 31, 1996:
Tangible Capital/Adjusted Total Assets.. $56,457 6.69% => $12,652 => 1.5% -- --
Core Capital/Adjusted Total Assets...... $56,457 6.69% => $25,304 => 3.0% => $42,175 => 5.0%
Core Capital/Risk Weighted Assets....... $56,457 10.22% -- -- => $33,150 => 6.0%
Total Capital/Risk Weighted Assets...... $63,354 11.47% => $44,199 => 8.0% => $55,250 => 10.0%

As of December 31, 1995:
Tangible Capital/Adjusted Total Assets.. $55,091 6.80% => $12,144 => 1.5% -- --
Core Capital/Adjusted Total Assets...... $55,091 6.80% => $24,288 => 3.0% => $40,481 => 5.0%
Core Capital/Risk Weighted Assets....... $55,091 10.58% -- -- => $31,251 => 6.0%
Total Capital/Risk Weighted Assets...... $61,623 11.83% => $41,668 => 8.0% => $52,085 => 10.0%

For the Bank, both Tangible and Core capital are calculated as total
stockholders' equity adjusted by the net unrealized gain or loss on
available-for-sale securities, and reduced by the estimated amount of deferred
tax assets which are not realizable within one year. Total capital is calculated
as Core capital plus an amount for the general allowance for loan losses,
subject to certain limits. Adjusted total assets for Bank were $843.5 million
and $809.6 million as of December 31, 1996 and 1995, respectively. Risk-weighted
assets for the Bank were $552.5 million and $520.8 million as of December 31,
1996 and 1995, respectively.

The Federal Reserve System requires all depository institutions to maintain
reserves against their transaction accounts (primarily NOW, SuperNOW and
checking accounts). As of December 31, 1996, a 3% reserve was required on total
transaction balances in excess of $4.3 million but less than $47.7 million.
Reserves of 10% were required on total transaction balances in excess of $47.7
million. Because required reserves must be maintained in the form of vault cash
or a non-interest bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the Bank's earning assets. Required reserves
aggregated $1.3 million at December 31, 1996.

16. Off-Balance Sheet Risk

In the normal course of business, the Bank utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers, and to reduce its own exposure to fluctuations in interest rates.
These off-balance sheet activities may include commitments to extend credit,
commercial letters of credit, standby letters of credit, commitments to purchase
and sell loans, and interest rate hedge agreements. The credit and market risks
associated with these financial instruments are generally managed in conjunction
with the Bank's balance sheet activities and are subject to normal credit
policies, financial controls and risk limiting and monitoring procedures. The
maximum dollar effect of the risks may be in excess of the amounts recognized in
the consolidated statements of condition because these amounts vary depending on
the nature of the underlying instrument and the related accounting policy.

Credit losses are incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Bank's exposure to credit loss is
represented by the contractual amount of the commitments to extend credit,
commitments to purchase and sell loans, commercial letters of credit and standby
letters of credit. This is the maximum potential loss of principal in the event
the commitment is drawn upon and the counterparty defaults. With respect to
other financial instruments, the contractual or notional amounts of interest
rate caps do not necessarily represent the actual credit exposure, but the
extent of involvement in a particular class of instrument. In addition, the
measurement of the risks associated with these financial instruments is
meaningful only when all related and offsetting transactions are identified.

A summary of the Bank's contractual or notional amounts for off-balance
sheet activities at December 31, 1996 and 1995 and further discussion of these
activities follows:

1996 1995
---- ----
(In thousands)
Credit activities:
Commitments to extend credit:
1-4 family residential mortgage loans ................ $29,026 $24,885
Commercial loans ..................................... 8,040 8,213
Unfunded commitments on:
One-to-four family construction loans ................ 2,567 1,229
Other construction loans, primarily
residential sub-divisions ........................ 24,181 21,392
Consumer lines ....................................... 12,312 11,389
Commercial lines ..................................... 192 2,237
Standby letters of credit ............................ 2,790 2,788
Securitized 1-4 family mortgage loans sold
with recourse .................................... 13,440 15,879
Loans sold with recourse ............................. 5,900 5,998
Commitments to sell loans:
1-4 family residential mortgage loans ................ 12,985 5,252
Other financial instrument activities:
Interest rate cap agreements (notional amount) ....... -- 25,000
Interest rate swap agreements (notional amount) ...... 20,000 20,000
Interest rate collar agreements (notional amount) .... 95,000 50,000
Forward contracts .................................... 8,000 --

Credit Activities

Commitments to extend credit are legally binding agreements to lend money
at predetermined interest rates for a specific period of time. The exposure to
loss is minimized by maintaining specific credit standards and by requiring the
borrower to comply with certain terms and conditions prior to the disbursement
of funds. Collateral is obtained when deemed necessary and may include but is
not limited to accounts receivable, inventory, equipment, real estate, or income
producing assets. Since commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent the total amount of future
outlays.

Commercial letters of credit, which are included in commitments to extend
credit in the preceding table, are issued to facilitate certain trade
transactions. The risks associated with these transactions would be a result of
the customer's failure to perform in accordance with the terms and conditions of
the agreement which is limited by applying adequate monitoring procedures.

Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The Bank issues standby letters
of credit to ensure contract performance or assure payment by its customers. The
risk involved in issuing standby letters of credit is the same as the credit
risk involved in extending loan facilities to customers; therefore, standby
letters of credit are subject to the same credit approvals and monitoring
procedures.

Commitments to sell loans are primarily utilized by the Bank to hedge
origination activity. These commitments obligate the Bank to deliver a fixed
amount of loans by a specified date. Risk originates from the inability of
counterparties to meet the terms of their contracts (credit risk).

Other Financial Instrument Activities

Interest rate caps are an agreement between two parties to limit the
effects of rising interest rates. The issuer of an interest rate cap assumes a
liability to the purchaser for the excess interest of a stated market rate over
a contracted cap rate on a notional amount of principal. The Bank uses interest
rate caps to protect itself from rising interest rates on certain liabilities.
The risks associated with these caps are the abilities of the counterparties to
meet the terms of the contract (credit risk) and exposure to movements in
interest rates (market risk). These risks are subject to the review and approval
process of the asset/liability committee. The premium paid on interest rate caps
is amortized on a straight-line basis over the life of the individual
agreements. The Bank's risk of loss is limited to the remaining unamortized
premiums on these agreements.

An interest rate swap is an agreement where one party (a broker) agrees to
pay a floating rate of interest (based on the 3-month LIBOR) on a notional
principal amount to another party (the Bank) in exchange for receiving a fixed
rate of interest on the same notional amount. As of December 31, 1996, the Bank
had one outstanding swap on which receives a floating rate of 5.625% and pays on
a fixed rate was 7.335%. The swap expires in March 2000. The Bank's risk of loss
on this swap is equal to the fair value of the swap, which as of December 31,
1996 was an unrealized loss of $1.0 million.

An interest rate collar involves the simultaneous purchase of an interest
rate cap and sale of an interest rate floor, both tied to specific indices and
based on notional principal amounts. The premium paid on interest rate collars
is amortized on a straight-line basis over the life of the individual
agreements. As of December 31, 1996, the weighted average cap rate, floor rate
and maturity of the Bank's interest rate collar agreements were, 6.75%, 5.35%,
and 28 months, respectively.

Forward contracts are agreements where the Bank has agreed to deliver to a
counterparty a specific type of security at a agreed upon rate. These contracts
are generally settled within 60 to 90 days. At December 31, 1996, the Bank had
committed to sell, under forward agreements, an aggregate principal amount of
$8.0 million of mortgage-backed securities with a weighted average rate of
7.375%. These agreements were entered into in connection with mortgage banking
activities.

17. Related Party Transactions

Loans and lines of credit are made available to directors and senior
officers on the same terms, including interest rates and collateral
requirements, as loans to other Bank employees and to the public.

At December 31, 1996, the full amount of credit extended to directors,
senior officers and their affiliates was $897,000 which includes the unfunded
portion of lines of credit. The table below indicates the activity in these loan
accounts during 1996 (amounts in whole dollars)`:

Outstanding balance at December 31, 1995....................... $461,000
Additions.................................................. 553,000
Deductions................................................. (422,000)
--------
Outstanding balance at December 31, 1996....................... $592,000
========

18. Financial Instruments

SFAS No. 107 requires disclosure of the estimated fair value of certain
financial instruments. The following estimated fair values have been determined
using available market information and appropriate valuation methodologies.
Considerable judgment is required to interpret market data and to develop
estimates of fair value. The estimates presented are not necessarily indicative
of amounts the Bank could realize in a current market exchange. The use of
alternative market assumptions and estimation methodologies could have a
material effect on these estimates of fair value.

December 31, 1996 December 31, 1995
-------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------- ---------- -------- ---------
(in millions)

Assets:
Cash and due from banks................... $ 6.9 $ 6.9 $ 10.0 $ 10.0
Mortgage-backed securities and accrued
interest................................ 144.7 144.3 163.3 163.3
Other securities and accrued interest..... 32.1 32.1 32.9 32.9
Loans and accrued interest, net........... 638.7 636.6 518.0 526.8
Loans held for sale.................... -- -- 61.7 61.7
Liabilities:
Deposits with no stated maturity.......... 261.5 261.5 232.4 232.4
Time deposits and accrued interest........ 314.4 313.4 302.2 304.0
Borrowings................................ 198.7 198.7 207.0 206.0
Mortgagors' escrow deposits............... 4.1 4.1 4.2 4.2
Other Financial Instruments:
Interest rate hedge agreements............ -- (1.0) -- (1.6)

Cash and Due From Banks: The estimated fair value approximates the carrying
amount because of the immediate availability of these funds or based on the
short maturities and current rates for similar deposits with other banks.

Mortgage-backed and Other Securities: The fair value was estimated based on
quoted market prices or dealer quotes, where available. If quoted market prices
are not available, fair values are based on quoted market prices for similar
securities.

Loans: The fair value of fixed rate loans has been estimated by discounting
projected cash flows using current rates for similar loans reduced by specific
and general loan loss allowances. For loans which reprice frequently to market
rates, the carrying amount, net of the applicable credit factor, is a reasonable
estimate of fair value. Impaired loans, which include non-accrual loans, are
included in the above table based generally on the fair value of the underlying
collateral.

Deposits: The estimated fair value of demand deposits, savings accounts,
and certain money market deposits, as required by SFAS No. 107, is the amount
payable at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of similar
remaining maturities.

Borrowings: Rates currently available to the Bank for borrowings with
similar terms and remaining maturities are used to estimate fair value.

Mortgagors' Escrow Deposits: The estimated fair value of mortgagors' escrow
deposits is the amount payable at the reporting date.

Other Financial Instruments: The fair value of interest rate hedge
instruments is the amount at which they could be settled, based on estimates
obtained from dealers.

At December 31, 1996, the Bank had an interest rate swap agreement which
expires in March 2000, covering an aggregate notional amount of $20.0 million,
where the Bank receives 3-month LIBOR and pays 7.335% fixed.

At December 31, 1996, the Bank had interest rate collar agreements covering
an aggregate notional amount of $95.0 million which expire as follows: $50.0
million in 1998, $20.0 million in 1999, and $25.0 million in 2000. The interest
rate floors and caps are based on the 3-month LIBOR. At December 31, 1996, the
weighted average floor rate was 5.35% and the weighted cap rate was 6.75%. Under
these interest rate collar agreements, the Bank receives payments if 3-month
LIBOR is greater than cap rate and pays if 3-month LIBOR is less than floor
rate.

At December 31, 1996, the Bank had committed to sell, under forward
agreements, an aggregate principal amount of $8.0 million of mortgage-backed
securities with a weighted average rate of 7.375%. These agreements were entered
into in connection with mortgage banking activities and generally must be
settled within 90 days.

Commitments include commitments to extend permanent financing and letters
of credit. The fair value of commitments is estimated based upon fees currently
charged to enter into similar agreements taking into account the remaining terms
of the agreement and the present creditworthiness of the counterparties. The
fair value of letters of credit is based on fees currently charged for similar
agreements. The fair value of commitments at December 31, 1996 and 1995,
respectively, approximate the recorded amounts of related fees, which are not
material.

19. Savings Association Insurance Fund ("SAIF") Special Assessment

On September 30, 1996, legislation was signed into law which included
provisions designed to replenish the Savings Association Insurance Fund. Under
this legislation, all SAIF insured institutions (including the Bank) were
assessed a one-time fee of 65.7 cents on every $100 of insured deposits held on
March 31, 1995, as adjusted. This one-time special assessment charged to the
Bank totaled $2.6 million and was paid on November 27, 1996. This assessment was
recorded as a charge to earnings on September 30, 1996 and is included in the
accompanying Statement of Income with non-interest expenses. The
recapitalization of the SAIF fund is expected to provide for lower deposit
insurance premiums for at least the next three years.

20. Quarterly Data (Unaudited)

Following is the quarterly financial information of Poughkeepsie Savings
Bank, FSB and its subsidiaries for 1996 and 1995. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the Bank's results of operations for such periods are
reflected.

Three Months Ended
-------------------------------------------------
12/31/96 9/30/96 6/30/96 3/31/96
-------- -------- -------- -------
(Dollars in thousands, except per share data)

Interest and dividend income ........................ $ 16,586 $ 15,938 $ 15,172 $15,924
Interest expense .................................... 9,751 9,594 9,100 9,412
-------- -------- -------- -------
Net interest and dividend income .................... 6,835 6,344 6,072 6,512
Provision for loan losses ........................... 300 250 150 150
-------- -------- -------- -------
Net interest income after provision
for loan losses ..................................... 6,535 6,094 5,922 6,362
Other income ........................................ 708 597 (331) 488
Other expenses ...................................... 5,204 7,673 5,568 5,531
-------- -------- -------- -------
Income (loss) before taxes .......................... 2,039 (982) 23 1,319
Income tax expense (benefit) ........................ 817 (394) 7 533
-------- -------- -------- -------
Net income (loss) ................................... $ 1,222 $ (588) $ 16 $ 786
======== ======== ======== =======
Net income (loss) per common and
common equivalent share .......................... $ 0.09 $ (0.05) $ 0.00 $ 0.06
======== ======== ======== =======
Dividends per common share .......................... $ 0.025 $ 0.025 $ 0.025 $ 0.025
======== ======== ======== =======
Weighted average common and common
equivalent shares outstanding........................ 12,920,090 12,890,832 12,907,787 12,922,124

Three Months Ended
-------------------------------------------------
12/31/95 9/30/95 6/30/95 3/31/95
-------- -------- -------- -------
(Dollars in thousands, except per share data)

Interest and dividend income ........................ $ 15,556 $ 15,046 $ 14,622 $13,735
Interest expense .................................... 9,575 9,266 8,759 7,875
-------- -------- -------- -------
Net interest and dividend income .................... 5,981 5,780 5,863 5,860
Provision for loan losses ........................... 1,150 250 100 25
-------- -------- -------- -------
Net interest income after provision for loan losses . 4,831 5,530 5,763 5,835
Other income ........................................ (7,011) 386 413 298
Other expenses ...................................... 4,414 4,963 4,412 4,480
-------- -------- -------- -------
Income (loss) before taxes .......................... (6,594) 953 1,764 1,653
Income tax expense (benefit) ........................ (18,666) 38 102 40
-------- -------- -------- -------
Net income .......................................... $ 12,072 $ 915 $ 1,662 $ 1,613
======== ======== ======== =======
Net income per common and
common equivalent share .......................... $ 0.94 $ 0.07 $ 0.13 $ 0.13
======== ======== ======== =======
Dividends per common share .......................... $ 0.02 $ 0.02 $ 0.02 $ 0.02
======== ======== ======== =======
Weighted average common and common equivalent
shares outstanding............................... 12,859,935 12,899,832 12,863,327 12,470,975

Included in the above quarterely data were the following: December 1995,
pre-tax loss on bulk sale of $7.5 million; additional loan loss provision of
$1.0 million; and $18.7 million income tax benefit related to the reversal of
valuation allowances under SFAS No. 109. June 1996, additional pre-tax loss of
$0.9 million on commercial loans held for bulk sale. September 1996, one time
SAIF special assessment of $2.6 million, pre-tax.

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
POUGHKEEPSIE SAVINGS BANK, FSB
Poughkeepsie, New York

We have audited the accompanying consolidated statements of financial
condition of Poughkeepsie Savings Bank, FSB and subsidiaries (the "Bank") as of
December 31, 1996 and 1995 and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Bank'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 Poughkeepsie
Savings Bank, FSB and subsidiaries at December 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP

Stamford, Connecticut
January 24, 1997

REPORT OF MANAGEMENT TO THE STOCKHOLDERS

Consolidated Financial Statements

The management of Poughkeepsie Savings Bank, FSB ("the Bank") is
responsible for the preparation, integrity, and fair presentation of its
published financial statements and all other information presented in this
Annual Report. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on informed judgments and estimates made by management.

The consolidated financial statements have been audited by an independent
accounting firm, which was given unrestricted access to all financial records
and related data, including minutes of all meetings of stockholders, the Board
of Directors and committees of the Board. Management believes all
representations made to the independent auditors during their audit were valid
and appropriate. The independent auditors' report is presented on page 85.

Internal Control

Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting, including safeguarding of
assets, presented in conformity with both generally accepted accounting
principles and the Office of Thrift Supervision instructions for Thrift
Financial Reports ("TFR Instructions"). The internal control structure contains
monitoring mechanisms and actions are taken to correct deficiencies identified.

There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.

Management assessed the Bank's internal control structure over financial
reporting, including safeguarding of assets, presented in conformity with
generally accepted accounting principles and TFR Instructions as of December 31,
1996. This assessment was based on criteria for effective internal control over
financial reporting, including safeguarding of assets, described in "Internal
Control -- Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that the Bank maintained an effective internal control structure over
financial reporting, including safeguarding of assets, presented in conformity
with generally accepted accounting principles and TFR Instructions as of
December 31, 1996.

Audit Committee

The Audit Committee of the Board of Directors is comprised entirely of
non-employee directors who are independent of the Bank's management. The Audit
Committee is responsible for recommending to the Board of Directors the
selection of independent auditors, which selection is then ratified by the
stockholders. The Audit Committee meets periodically with management, the
independent auditors, and the internal auditors to ensure that they are carrying
out their responsibilities. The Audit Committee is also responsible for
performing an oversight role by reviewing and monitoring the financial,
accounting and auditing procedures of the Bank in addition to reviewing the
Bank's financial reports. The independent auditors and the internal auditors
have full and free access to the Audit Committee, with or without the presence
of management, to discuss the adequacy of the internal control structure for
financial reporting and any other matters which they believe should be brought
to the attention of the Audit Committee.

Compliance With Laws and Regulations

Management is also responsible for ensuring compliance with the federal
laws and regulations concerning loans to insiders and the federal and state laws
and regulations concerning dividend restrictions, both of which are designated
by the Federal Deposit Insurance Corporation as safety and soundness laws and
regulations.

Management assessed its compliance with the designated safety and soundness
laws and regulations and has maintained records of its determinations and
assessments as required by the Federal Deposit Insurance Corporation. Based on
this assessment, management believes that the Bank has complied, in all material
respects, with the designated safety and soundness laws and regulations for the
year ended December 31, 1996.

JOSEPH B. TOCKARSHEWSKY ROBERT J. HUGHES
Chairman, President and Executive Vice President
Chief Executive Officer and Chief Financial Officer

January 24, 1997

INDEPENDENT ACCOUNTANTS' REPORT

To the Audit Committee
POUGHKEEPSIE SAVINGS BANK, FSB
Poughkeepsie, New York

We have examined management's assertion that, as of December 31, 1996,
Poughkeepsie Savings Bank, FSB ("the Bank") maintained an effective internal
control structure over financial reporting, including safeguarding of assets,
presented in conformity with both generally accepted accounting principles and
the Office of Thrift Supervision instructions for Thrift Financial Reports
included in the accompanying Report of Management to the Stockholders.

Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control structure over financial
reporting, testing, and evaluating the design and operating effectiveness of the
internal control structure over financial reporting, including safeguarding of
assets, and such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable basis for
our opinion.

Because of inherent limitations in any internal control structure, errors
or irregularities may occur and not be detected. Also, projections of any
evaluation of the internal control structure over financial reporting to future
periods are subject to the risk that the internal control structure may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies may deteriorate.

In our opinion, management's assertion that, as of December 31, 1996, the
Bank maintained an effective internal control structure over financial
reporting, including safeguarding of assets, presented in conformity with both
generally accepted accounting principles and the Office of Thrift Supervision
instructions for Thrift Financial Reports is fairly stated, in all material
respects, based on the criteria established in "Internal Control -- Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

DELOITTE & TOUCHE LLP

Stamford, Connecticut
January 24, 1997

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

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

Information under the caption Election of Directors of the Registrant's
Proxy Statement for its 1996 Annual Meeting of Stockholders is incorporated
herein by this reference.

Except for the information included herein, items 10 through 13 are
incorporated by reference from the information appearing under the caption of
the same name in the Registrant's Proxy Statement for its 1996 Annual Meeting of
Stockholders.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Item 13. Certain Relationships and Related Transactions.

Noel deCordova, Jr., a director, is of counsel to the law firm of Van
DeWater and Van DeWater of Poughkeepsie, New York. Van DeWater and Van DeWater
performed services for the Bank during 1996. The fees paid did not exceed five
percent of Van DeWater and Van DeWater's gross revenues for that firm's last
fiscal year. Mr. deCordova did not share in any income derived from services
performed by Van DeWater and Van DeWater for the Bank.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Documents Filed as Part of this Report:

(1) Financial Statements:

Page
Reference
---------
Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995.......................................... 52 - 53
Consolidated Statements of Income for the fiscal years ended
December 31, 1996, 1995 and 1994.................................... 54
Consolidated Statements of Changes in Stockholders' Equity for the
fiscal years ended December 31, 1996, 1995 and 1994................. 55
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1996, 1995 and 1994.................................... 56
Notes to Consolidated Financial Statements............................ 57 - 84
Independent Auditors' Report.......................................... 85
Report of Management to the Stockholders.............................. 86 - 87
Independent Accountants' Report....................................... 88

(2) Financial Statement Schedules

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are included in the Notes to Consolidated Financial
Statements at pages 57 - 84 incorporated herein by reference and therefore have
been omitted.

(3) Exhibits.

The following exhibits are either filed as a part of this report or are
incorporated herein by reference to documents previously filed as indicated
below:

Exhibit
Number Description Reference
------ ----------- ---------

3.1 -- Amended and Restated Federal Stock Incorporated by reference from Exhibit 3.1 to
Charter. the Annual Report on Form 10-K for the fiscal
year ended December 31, 1993 ("1993 10-K").

3.2 -- Bylaws, as amended. Incorporated by reference from Exhibit 3.2 to
the Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 ("1994 10-K").

4.1 -- Amended Specimen Certificate for Incorporated by reference from Exhibit 4.1 to
Common Stock. the 1993 10-K.

10.1 -- Agreement between the Bank and Filed herewith.
Joseph B. Tockarshewsky, dated
February 25, 1997.

10.2 -- Agreement between the Bank and Filed herewith.
Robert J. Hughes dated January 1,
1994 and effective as of February 24,
1994, and amendment thereto
effective as of April 10, 1996.

10.3 -- Form of Indemnification Agreement Incorporated by reference from Exhibit 10.8 to
between the Bank and its directors, the Annual Report on Form 10-K for the year
director emeritus and certain ended December 31, 1985 ("1985 10-K").
executive officers.

10.4 -- 1985 Stock Option Plan. Incorporated by reference from Exhibit 10.11
to the 1985 10-K.

10.5 -- 1988 Amendment to the 1985 Stock Incorporated by reference from Exhibit 10.12
Option Plan. to the Annual Report on Form 10-K for the year
ended December 31, 1988 ("1988 10-K").

10.6 -- Rights Agreement between Poughkeepsie Incorporated by reference from Exhibit 4.1 to
Savings Bank, FSB and the Bank of New the Quarterly Report on Form 10-Q for the
York dated as of May 1, 1988. Quarter Ended June 30, 1988.

10.7 -- Poughkeepsie Savings Bank, FSB Incorporated by reference from Exhibit 10.8 to
Employees Deferred Compensation the Annual Report on Form 10-K for the fiscal
Plan effective as of April 18, 1995 year ended December 31, 1995 ("1995 10-K").
and as amended and restated
December 1, 1995.

10.8 -- Poughkeepsie Savings Bank, FSB Incorporated by reference from Exhibit 10.9 to
Board of Directors Deferred the 1995 10-K.
Compensation Plan, effective
as of April 18, 1995.

10.9 -- Non-Employee Directors' Retirement Incorporated by reference from Exhibit 10.21
Plan. to the 1988 10-K.

10.10 -- Management Award Program ("MAP") Incorporated by reference from Exhibit 10.12
for designated Bank Officers. to the 1994 10-K.

10.11 -- 1996 Amendment to the Poughkeepsie Filed herewith.
Savings Bank, FSB Employees Deferred
Compensation Plan.

10.12 -- 1993 Directors' Stock Option Plan Filed herewith.

10.13 -- 1993 Stock Incentive Plan. Filed herewith.

10.14 -- 1996 Amendments to the 1993 Stock Filed herewith.
Incentive Plan.

(b) Reports on Form 8-K.

NONE

SIGNATURES

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

POUGHKEEPSIE SAVINGS BANK, FSB

March 11, 1997

By: /s/ JOSEPH B. TOCKARSHEWSKY
-------------------------------
Joseph B. Tockarshewsky,
Chairman of the Board,
President and Chief Executive Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 11, 1997.

Signature Title
--------- -----

/S/ JOSEPH B. TOCKARSHEWSKY Chairman of the Board, President and
- ----------------------------------------- Chief Executive Officer
Joseph B. Tockarshewsky

/S/ ROBERT J. HUGHES Director, Executive Vice President
- ----------------------------------------- and Chief Financial Officer
Robert J. Hughes

/S/ NOEL DECORDOVA, JR. Director
- -----------------------------------------
Noel deCordova, Jr.

/S/ BURTON GOLD Director
- -----------------------------------------
Burton Gold

/S/ JEH V. JOHNSON Director
- -----------------------------------------
Jeh V. Johnson

/S/ HENRY C. MEAGHER Director
- -----------------------------------------
Henry C. Meagher

/S/ ROBERT M. PERKINS Director
- -----------------------------------------
Robert M. Perkins

/S/ ELIZABETH K. SHEQUINE Director
- -----------------------------------------
Elizabeth K. Shequine

/S/ JAMES V. TOMAI, JR. Director
- -----------------------------------------
James V. Tomai, Jr.