PROVIDENT BANCORP INC/NY/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 1999

OR

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

Commission File Number: 0-25233

PROVIDENT BANCORP, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)

Federal 06-1537499
- -------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)

400 Rella Boulevard, Montebello, New York 10901
- ------------------------------------------ ----------
(Address of Principal Executive Office) (Zip Code)

(914) 369-8040
---------------------------------------------------
(Registrant's Telephone Number including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [ X ] NO [ ]

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

As of September 30, 1999, there were issued and outstanding 8,280,000
shares of the Registrant's common stock. The aggregate value of the voting stock
held by non-affiliates of the Registrant, computed by reference to the closing
price of the common stock as of November 30, 1999, was $63,273,000.

DOCUMENTS INCORPORATED BY REFERENCE

1. Sections of Annual Report to Stockholders for the fiscal year ended
September 30, 1999 (Parts II and IV).

2. Proxy Statement for the Annual Meeting of Stockholders (Part III) to be
held in February 2000.

1

PART I

ITEM 1. Business

Provident Bancorp, Inc.

Provident Bancorp, Inc. (the "Company") was organized at the direction
of the Board of Directors of Provident Bank (the "Bank") for the purpose of
acting as the stock holding company of the Bank. The Company's assets consist
primarily of all outstanding capital stock of the Bank, and cash and securities
of $12.3 million representing a portion of the net proceeds from the Company's
stock offering completed January 7, 1999. At September 30, 1999, 3,864,000
shares of the Company's common stock, par value $0.10 per share, were held by
the public, and 4,416,000 shares were held by Provident Bancorp, MHC, the
Company's parent mutual holding company (the "Mutual Holding Company"). The
Company's principal business is overseeing and directing the business of the
Bank and investing the net stock offering proceeds retained by it.

The Company's office is located at 400 Rella Boulevard, Montebello, New
York 10901. Its telephone number is (914) 369-8040.

Provident Bank

The Bank was organized in 1888 as a New York-chartered mutual savings
and loan association, adopted a federal mutual charter in 1986 and reorganized
into the stock form of ownership in 1999 as part of its reorganization into the
mutual holding company structure. The Bank's deposits are insured by the Savings
Association Insurance Fund ("SAIF"), as administered by the Federal Deposit
Insurance Corporation ("FDIC"), up to the maximum amount permitted by law. The
Bank is engaged primarily in the business of offering various FDIC-insured
savings and demand deposits to customers through its thirteen full-service
offices, and using those deposits, together with funds generated from operations
and borrowings, to originate one- to four-family residential and commercial real
estate loans, consumer loans, construction loans and commercial business loans.
The Bank also invests in investment securities and mortgage-backed securities.

The Bank's executive office is located at 400 Rella Boulevard,
Montebello, New York 10901. Its telephone number is (914) 369-8040.

Provident Bancorp, MHC

The Mutual Holding Company was formed in January 1999 as part of the
Bank's mutual holding company reorganization. The Mutual Holding Company is
chartered under federal law and owns 53.33% of the outstanding common stock of
the Company. The Mutual Holding Company does not engage in any business
activities other than owning the common stock of the Company, investing in
liquid assets and contributing to local charities.

The Mutual Holding Company's office is located at 400 Rella Boulevard,
Montebello, New York 10901. Its telephone number is (914) 369-8040.

Forward-Looking Statements

In addition to historical information, this annual report contains
forward-looking statements. For this purpose, any statements contained herein
(including documents incorporated herein by reference) that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believe", "anticipates", "plans", "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those contemplated by such forward-looking
statements. These important factors include, without limitation, the Company's

2

continued ability to originate quality loans, fluctuations in interest rates,
real estate conditions in the Company's lending areas, general and local
economic conditions, unanticipated Year 2000 issues, the Company's continued
ability to attract and retain deposits, the Company's ability to control costs,
and the effect of new accounting pronouncements and changing regulatory
requirements. The Company undertakes no obligation to publicly release the
results of any revisions to those forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

Market Area

The Bank is an independent community bank offering a broad range of
customer-focused services as an alternative to money center banks in its market
area. At September 30, 1999, the Bank operated eleven full-service banking
offices, including one full-service supermarket branch, in Rockland County, New
York. In the weeks before and after September 30, 1999, the Bank also opened and
now operates two full-service supermarket branches in Orange County, New York,
bringing the total number of branch offices to thirteen in the two counties. The
Bank's primary market for deposits is currently concentrated around the areas
where its full-service banking offices are located. The Bank's primary lending
area also has been historically concentrated in Rockland and contiguous
counties.

Rockland County is a suburban market with a broad employment base.
Rockland County also serves as a bedroom community for nearby New York City and
other suburban areas including Westchester County and northern New Jersey.
Neighboring Orange County, where the Bank has opened its two newest branches, is
one of the two fastest growing counties in New York State. The favorable
economic environment in the New York metropolitan area has led to an increase in
residential and commercial construction activity in recent years.

The economy of the Bank's primary market areas is based on a mixture of
service, manufacturing and wholesale/retail trade. Other employment is provided
by a variety of industries and state and local governments. The diversity of the
employment base is evidenced by its many major employers. Additionally, Rockland
and Orange Counties have numerous small employers.

Lending Activities

General. Historically, the principal lending activity of the Bank has
been the origination of fixed-rate and adjustable-rate mortgage ("ARM") loans
collateralized by one- to four-family residential real estate located within its
primary market area. The Bank also originates commercial real estate loans,
commercial business loans and construction loans (collectively referred to as
the "commercial loan portfolio"), as well as consumer loans such as home equity
lines of credit and homeowner loans. The Bank retains most of the loans that it
originates, although from time to time it may sell longer-term one- to
four-family residential real estate loans.

3

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

September 30,
-----------------------------------------------------------------------------
1999 1998 1997 1996
------------------ ------------------ ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- ------- --------- -------
(Dollars in Thousands)

One- to four-family residential mortgage loans....... $ 344,731 60.2% $ 290,334 62.0% $ 241,886 59.3% $ 219,827 59.0%
--------- ----- --------- ----- --------- ----- --------- -----

Commercial real estate loans......................... 110,382 19.3 71,149 15.1 62,910 15.4 66,145 17.7
Commercial business loans............................ 30,768 5.4 24,372 5.2 18,433 4.5 15,268 4.1
Construction loans................................... 19,147 3.3 20,049 4.3 23,475 5.7 16,074 4.3
--------- ----- --------- ----- --------- ----- --------- -----
Total commercial loans............................. 160,297 28.0 115,570 24.6 104,818 25.6 97,487 26.1
--------- ----- --------- ----- --------- ----- --------- -----

Home equity lines of credit.......................... 25,380 4.4 26,462 5.7 31,671 7.8 31,511 8.5
Homeowner loans...................................... 34,852 6.1 27,208 5.8 19,160 4.7 13,035 3.5
Other consumer loans................................. 7,463 1.3 8,999 1.9 10,741 2.6 10,984 2.9
--------- ----- --------- ----- --------- ----- --------- -----
Total consumer loans............................... 67,695 11.8 62,669 13.4 61,572 15.1 55,530 14.9
--------- ----- --------- ----- --------- ----- --------- -----

Total loans.......................................... 572,723 100.0% 468,573 100.0% 408,276 100.0% 372,844 100.0%
===== ===== ===== =====
Allowance for loan losses............................ (6,202) (4,906) (3,779) (3,357)
--------- --------- ---------- ---------

Total loans, net..................................... $ 566,521 $ 463,667 $ 404,497 $ 369,487
========= ========= ========= =========

September 30,
------------------
1995
------------------
Amount Percent
--------- -------
(Dollars in Thousands)

One- to four-family residential mortgage loans....... $ 199,017 59.2%
--------- -----

Commercial real estate loans......................... 66,820 20.0
Commercial business loans............................ 11,160 3.3
Construction loans................................... 6,228 1.9
--------- ------
Total commercial loans............................. 84,208 25.2
--------- ------

Home equity lines of credit.......................... 31,771 9.5
Homeowner loans...................................... 10,433 3.1
Other consumer loans................................. 9,990 3.0
--------- ------
Total consumer loans............................... 52,194 15.6
--------- ------

Total loans.......................................... 335,419 100.0%
=====
Allowance for loan losses............................ (3,472)
---------

Total loans, net..................................... $ 331,947
=========

4

Loan Maturity Schedule. The following table summarizes the contractual
maturities of the Bank's loan portfolio at September 30, 1999. Loans with
adjustable or renegotiable interest rates are shown as maturing at the end of
the contractual term of the loan. The table reflects the entire unpaid principal
balance of a loan maturing in the period that includes the final payment date
and, accordingly, does not give effect to periodic principal payments or
possible prepayments.

One- to Four-Family Commercial Real Estate Construction (2) Commercial Business
----------------------- ----------------------- --------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------- ------ ----------- ------- ----------- --------- --------- ---------
(Dollars in Thousands)
Due During the Years Ending
September 30,
- -----------------------------

2000 (1)..................... $ 142 8.83% $ 5,016 8.44% $ 11,971 8.46% $ 18,566 8.58%
2001......................... 427 8.91 9,571 8.26 1,726 9.01 1,307 8.62
2002......................... 826 8.11 1,257 8.47 1,199 9.86 2,263 8.45
2003 and 2004................ 2,436 7.93 15,553 8.33 373 7.75 5,638 8.38
2005 to 2009................. 34,450 7.29 43,276 8.37 3,602 7.50 2,225 8.72
2010 to 2024................. 195,768 7.15 35,709 8.04 249 9.25 437 9.38
2025 and following........... 110,682 7.20 --- --- 27 8.50 332 9.24
-------- ---- -------- ---- -------- ---- -------- ----
Total ..................... $344,731 7.19% $110,382 8.25% $ 19,147 8.41% $ 30,768 8.56%
======== ==== ======== ==== ======== ==== ======== ====

Consumer Total
-------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- --------- --------- --------
(Dollars in Thousands)
Due During the Years Ending
September 30,
- -----------------------------

2000 (1)..................... $ 1,874 10.78% $ 37,569 8.60%
2001......................... 2,686 10.70 15,717 8.83
2002......................... 4,005 10.39 9,550 9.33
2003 and 2004................ 16,733 8.54 40,733 8.40
2005 to 2009................. 27,874 8.51 111,427 8.03
2010 to 2024................. 14,218 8.42 246,381 7.36
2025 and following........... 305 11.55 111,346 7.22
-------- ----- -------- ----
Total ..................... $ 67,695 8.77% $572,723 7.72%
======== ===== ======== ====

- -------------------------------
(1) Includes demand loans, loans having no stated maturity, and overdraft loans.
(2) Includes land loans.

5

The following table sets forth the dollar amounts of fixed- and
adjustable-rate loans at September 30, 1999 that are contractually due after
September 30, 2000.

Due After September 30, 2000
------------------------------------------
Fixed Adjustable Total
----------- ----------- -----------
(In Thousands)

One- to four-family residential mortgage loans............ $ 263,479 $ 81,110 $ 344,589
----------- ----------- -----------

Commercial real estate loans.............................. 44,850 60,516 105,366
Commercial business loans................................. 8,009 4,193 12,202
Construction loans........................................ 3,838 3,338 7,176
----------- ----------- -----------
Total commercial loans........................... 56,697 68,047 124,744
----------- ----------- -----------

Consumer loans............................................ 41,260 24,561 65,821
----------- ----------- -----------

Total loans...................................... $ 361,436 $ 173,718 $ 535,154
=========== =========== ===========

One- to Four-family Real Estate Lending. The Bank's primary lending
activity is the origination of one- to four-family residential mortgage loans
secured by properties located in the Bank's primary market area. The Bank offers
conforming and non-conforming, fixed-rate and adjustable-rate residential
mortgage loans with maturities of up to 30 years and maximum loan amounts
generally of up to $600,000.

The Bank currently offers both fixed- and adjustable-rate conventional
mortgage loans with terms of 10 to 30 years that are fully amortizing with
monthly or bi-weekly loan payments. One- to four-family residential mortgage
loans are generally underwritten according to Fannie Mae and Freddie Mac
guidelines, and loans that conform to such guidelines are referred to as
"conforming loans." The Bank generally originates both fixed-rate and ARM loans
in amounts up to the maximum conforming loan limits as established by Fannie Mae
and Freddie Mac secondary mortgage market standards, which are currently
$240,000 for single-family homes. Private mortgage insurance is generally
required initially for loans with loan-to-value ratios in excess of 80%. Loans
in excess of conforming loan limits, in amounts of up to $600,000, are also
underwritten to both Fannie Mae and Freddie Mac secondary mortgage market
standards. These loans are eligible for sale to various conduit firms that
specialize in the purchase of such non-conforming loans, although most of these
loans are retained in the Bank's loan portfolio.

The Bank's bi-weekly one- to four-family residential mortgage loans
result in significantly shorter repayment schedules than conventional monthly
mortgage loans. The accelerated repayment schedule that accompanies a bi-weekly
mortgage loan results in lower total interest payments and a more rapid increase
in home equity. Bi-weekly mortgage loans are also repaid through an automatic
deduction from the borrower's savings or checking account, which enables the
Bank to avoid the cost of processing payments. As of September 30, 1999,
bi-weekly loans totaled $98.4 million or 28.5% of the Bank's residential loan
portfolio.

Fixed-rate mortgage loans originated by the Bank include due-on-sale
clauses which provide that the loan is immediately due and payable in the event
the borrower transfers ownership of the property. Due-on-sale clauses are an
important means of adjusting the yields on the Bank's fixed-rate residential
loan portfolio, and the Bank generally exercises its rights under these clauses.

The Bank actively monitors its interest rate risk position to determine
the desirable level of investment in fixed-rate mortgages. Depending on market
interest rates and the Bank's capital and liquidity position, the Bank may
retain all of its newly originated longer term fixed-rate, fixed-term
residential mortgage loans or may decide to sell all or a portion of such loans
in the secondary mortgage market to government sponsored enterprises such as
Fannie Mae and Freddie Mac. As a matter of policy, the Bank retains the
servicing rights on all loans sold to generate fee income and reinforce its
commitment to customer service. For the year ended September 30, 1999, the Bank
sold mortgage loans totaling $14.1 million compared with $17.2 million for the
year ended September 30, 1998. As of September 30, 1999 and 1998, the Bank's
portfolio of loans serviced for others totaled $109.0 million and $120.7
million, respectively.

6

The Bank currently offers several ARM loan products secured by
residential properties with rates that adjust every six months to one year,
after an initial fixed-rate period ranging from six months to seven years. After
the initial term, the interest rate on these loans is reset based upon a
contractual spread or margin above the average yield on U.S. Treasury
securities, adjusted to a constant maturity of six months to one year (the "U.S.
Treasury Constant Maturity Index"), as published weekly by the Federal Reserve
Board. ARM loans are generally subject to limitations on interest rate increases
of 2% per adjustment period, and an aggregate adjustment of 6% over the life of
the loan. ARM loans require that any payment adjustment resulting from a change
in the interest rate on the ARM loan be sufficient to result in full
amortization of the loan by the end of the loan term, and thus, do not permit
any of the increased payment to be added to the principal amount of the loan,
commonly referred to as negative amortization. At September 30, 1999, the Bank's
ARM portfolio included $14.2 million in loans which re-price every six months,
$29.7 million in one-year ARMs and $37.1 million in loans with an initial
fixed-rate period ranging from three to seven years.

The retention of ARM loans, as opposed to long term, fixed-rate
residential mortgage loans, in the Bank's portfolio helps reduce its exposure to
interest rate risk. However, ARM loans generally pose different credit risks
than fixed-rate loans primarily because the underlying debt service payments of
the borrowers rise as interest rates rise, thereby increasing the potential for
default. In order to minimize this risk, borrowers of one- to four-family one
year ARM loans are qualified at the rate which would be in effect after the
first interest rate adjustment, if that rate is higher than the initial rate.

While one- to four-family residential loans typically are originated
with 15 to 30 year terms, such loans, whether fixed-rate or ARMs, generally
remain outstanding in the Bank's loan portfolio for substantially shorter
periods of time because borrowers must prepay their loans in full upon sale of
the property pledged as security or upon refinancing the loan. Thus, average
loan maturity is a function of, among other factors, the level of purchase and
sale activity in the Bank's primary lending market, prevailing market interest
rates, and the interest rates payable on outstanding loans.

The Bank requires title insurance on all of its one- to four-family
mortgage loans, and also requires that fire and extended coverage casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the lesser of the loan balance or the replacement cost of the
improvements. Loans with initial loan-to-value ratios in excess of 80% must have
private mortgage insurance, although occasional exceptions may be made. Nearly
all residential loans must have a mortgage escrow account from which
disbursements are made for real estate taxes and for hazard and flood insurance.

Commercial Real Estate Lending. The Bank originates real estate loans
secured predominantly by first liens on commercial real estate and apartment
buildings. The commercial real estate properties are predominantly
non-residential properties such as office buildings, shopping centers, retail
strip centers, industrial and warehouse properties and, to a lesser extent, more
specialized properties such as churches, mobile home parks, restaurants,
motel/hotels and auto dealerships. The Bank may, from time to time, purchase
commercial real estate loan participations. Loans secured by commercial real
estate totaled $110.4 million or 19.3% of the Bank's total loan portfolio as of
September 30, 1999, and consisted of 208 loans outstanding with an average loan
balance of approximately $531,000. Substantially all of the Bank's commercial
real estate loans were secured by properties located in its primary market area.

As part of the Bank's ongoing interest rate risk management, the Bank
offers adjustable-rate commercial real estate loans. The initial interest rates
on a substantial portion of these loans adjust after an initial five year period
to new market rates that generally range between 200 to 350 basis points over
the then-current five year U.S. Treasury or FHLB rates. More typically,
commercial real estate loans may have a term of approximately 5 to 10 years,
with an amortization schedule of approximately 20 to 25 years, and may be repaid
subject to certain penalties. Fixed rate loans for a term of 15 to 20 years may
also be made, from time to time.

In the underwriting of commercial real estate loans, the Bank generally
lends up to 70% of the property's appraised value on apartment buildings, up to
70% of the property's appraised value on commercial properties that are not
owner-occupied, and up to 75% of the property's appraised value on commercial
properties that are owner-occupied. Decisions to lend are based on the economic
viability of the property and the creditworthiness of the borrower. In

7

evaluating a commercial real estate loan, the Bank emphasizes primarily the
ratio of net cash flow to debt service for the property, generally requiring a
ratio of at least 110%, computed after deduction for a vacancy factor and
property expenses deemed appropriate by the Bank. In addition, a personal
guarantee of the loan is generally required from the principal(s) of the
borrower. On all real estate loans, the Bank requires title insurance insuring
the priority of its lien, fire and extended coverage casualty insurance, and
flood insurance, if appropriate, in order to protect the Bank's security
interest in the underlying property.

Commercial real estate loans generally carry higher interest rates and
have shorter terms than those on one- to four-family residential mortgage loans.
Commercial real estate loans, however, entail significant additional credit
risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income producing properties typically depends on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market and in the
economy generally.

Construction Loans. The Bank originates acquisition, development and
construction loans to builders in its market area. This portfolio totaled $19.1
million, or 3.3% of total loans, at September 30, 1999.

Acquisition loans are made to help finance the purchase of land
intended for further development, including single-family houses, multi-family
housing, and commercial income property. In some cases, the Bank may make an
acquisition loan before the borrower has received approval to develop the land
as planned. Loans for the acquisition of land are generally limited to the
Bank's most creditworthy customers. In general, the maximum loan-to-value ratio
for a land acquisition loan is 50% of the appraised value of the property. The
Bank also makes development loans to builders in its market area to finance
improvements to real estate, consisting mostly of single-family subdivisions,
typically to finance the cost of utilities, roads and sewers. Builders generally
rely on the sale of single family homes to repay development loans, although in
some cases the improved building lots may be sold to another builder. The
maximum loan-to-value ratio for these loans is generally 60% of the appraised
value of the property. Advances are made in accordance with a schedule
reflecting the cost of improvements.

The Bank also grants construction loans to area builders, often in
conjunction with development loans. These loans finance the cost of completing
homes on the improved property. The loans are generally limited to the lesser of
70% of the appraised value of the property or the actual cost of improvements.
In the case of single-family construction, the Bank limits the number of houses
it will finance that are not under contract for sale. As part of its
underwriting process for construction loans on income producing properties, such
as apartment buildings and commercial rental properties, the Bank considers the
likelihood of leasing the property at the expected rental amount, and the time
to achieve sufficient occupancy levels. The Bank generally requires a percentage
of the building to be leased prior to granting a construction loan on
income-producing property.

Advances on construction loans are made in accordance with a schedule
reflecting the cost of construction. The Bank's policy is to confirm, prior to
each advance, that the construction has been completed properly as evidenced by
an inspection report issued by an appraiser or engineer hired by the Bank. The
Bank also confirms that its lien priority remains in force before advancing
funds. Repayment of construction loans on residential subdivisions is normally
expected from the sale of units to individual purchasers. In the case of income
producing property, repayment is usually expected from permanent financing upon
completion of construction. The Bank commits to provide the permanent mortgage
financing on most of its construction loans on income-producing property.

Acquisition, development and construction lending exposes the Bank to
greater credit risk than permanent mortgage financing. The repayment of
acquisition, development and construction loans depends upon the sale of the
property to third parties or the availability of permanent financing upon
completion of all improvements. In the event the Bank makes an acquisition loan
on property that is not yet approved for the planned development, there is the
risk that approvals will not be granted or will be delayed. These events may
adversely affect the borrower and the collateral value of the property.
Development and construction loans also expose the Bank to the risk that
improvements will not be completed on time in accordance with specifications and
projected costs. In addition, the ultimate sale or rental of the property may
not occur as anticipated.

8

Commercial Business Loans. The Bank currently offers commercial
business loans to customers in its market area, some of which are secured in
part by additional real estate collateral. In an effort to expand its customer
account relationships and develop a broader base of more interest rate sensitive
assets, the Bank makes various types of secured and unsecured commercial loans
for the purpose of financing equipment acquisition, expansion, working capital
and other general business purposes. The terms of these loans generally range
from less than one year to seven years. The loans are either negotiated on a
fixed-rate basis or carry adjustable interest rates indexed to a lending rate
which is determined internally, or a short-term market rate index. The Bank may,
from time to time, purchase commercial business loan participations. At
September 30, 1999, the Bank had 285 commercial business loans outstanding with
an aggregate balance of $30.8 million, or 5.4% of the total loan portfolio. As
of September 30, 1999, the average commercial business loan balance was
approximately $108,000.

Commercial credit decisions are based upon a complete credit assessment
of the loan applicant. A determination is made as to the applicant's ability to
repay in accordance with the proposed terms as well as an overall assessment of
the risks involved. An investigation is made of the applicant to determine
character and capacity to manage. Personal guarantees of the principals are
generally required. In addition to an evaluation of the loan applicant's
financial statements, a determination is made of the probable adequacy of the
primary and secondary sources of repayment to be relied upon in the transaction.
Credit agency reports of the applicant's credit history as well as bank checks
and trade investigations supplement the analysis of the applicant's
creditworthiness. Collateral supporting a secured transaction is also analyzed
to determine its marketability and liquidity. Commercial business loans
generally bear higher interest rates than residential loans, but they also
involve a higher risk of default since their repayment is generally dependent on
the successful operation of the borrower's business.

Consumer Loans. The Bank originates a variety of consumer and other
loans, including homeowner loans, home equity lines of credit, new and used
automobile loans, and personal unsecured loans, including fixed-rate installment
loans and prime rate variable lines-of-credit. As of September 30, 1999,
consumer loans totaled $67.7 million, or 11.8% of the total loan portfolio.

At September 30, 1999, the largest group of consumer loans consisted of
$60.2 million of loans secured by junior liens on residential properties. The
Bank offers fixed-rate, fixed-term second mortgage loans, referred to as
"homeowner loans," and adjustable-rate home equity lines of credit. Homeowner
loans are offered in amounts up to 100% of the appraised value of the property
(including prior liens) with a maximum loan amount of $75,000. Home equity loans
are generally offered in amounts up to 75% of the appraised value of the
property including prior liens, with a maximum loan amount of $200,000. As of
September 30, 1999, homeowner loans totaled $34.9 million or 6.1% of the Bank's
total loan portfolio. The disbursed portion of home equity lines of credit
totaled $25.4 million, or 4.4% of the Bank's total loan portfolio, with $54.8
million remaining undisbursed.

Other consumer loans include personal loans and loans secured by new or
used automobiles. As of September 30, 1999, these loans totaled $7.5 million, or
1.3% of the Bank's total loan portfolio. The Bank originates automobile loans
directly to its customers and has no outstanding agreement with automobile
dealerships to generate indirect loans. The maximum term for an automobile loan
is generally 60 months for a new car, and 36 to 48 months for a used car. The
Bank will generally lend up to 100% of the purchase price of a new car, and up
to 90% of the lesser of the purchase price or the National Automobile Dealers'
Association book rate for a used car. The Bank requires all borrowers to
maintain collision insurance on automobiles securing loans in excess of $5,000,
with the Bank listed as loss payee. Personal loans also include secured and
unsecured installment loans. Unsecured installment loans generally have shorter
terms than secured consumer loans, and generally have higher interest rates than
rates charged on secured installment loans with comparable terms.

The Bank's procedures for underwriting consumer loans include an
assessment of an applicant's credit history and the ability to meet existing
obligations and payments on the proposed loan. Although an applicant's
creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral security, if any, to the
proposed loan amount.

9

Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly, such as automobiles. In such cases,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan and the remaining deficiency often
does not warrant further substantial collection efforts against the borrower. In
addition, the repayment of consumer loans depends on the borrower's continued
financial stability, as their repayment is more likely than a single family
mortgage loan to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws
(including bankruptcy and insolvency laws) may limit the amount that can be
recovered on such loans.

Loan Originations, Purchases, Sales and Servicing. While the Bank
originates both fixed-rate and adjustable-rate loans, its ability to generate
each type of loan depends upon borrower demand, market interest rates, borrower
preference for fixed- versus adjustable-rate loans, and the interest rates
offered on each type of loan by other lenders in the Bank's market area. This
includes competing banks, savings banks, credit unions, and mortgage banking
companies, as well as life insurance companies, and Wall Street conduits that
also actively compete for local commercial real estate loans. Loan originations
are derived from a number of sources, including branch office personnel,
existing customers, borrowers, builders, attorneys, real estate broker referrals
and walk-in customers.

The Bank's loan origination and sales activity may be adversely
affected by a rising interest rate environment that typically results in
decreased loan demand. Accordingly, the volume of loan originations and the
profitability of this activity can vary from period to period. One- to
four-family residential mortgage loans are generally underwritten to current
Fannie Mae and Freddie Mac seller/servicer guidelines. One- to four-family loans
are also closed on standard Fannie Mae/Freddie Mac documents and sales are
conducted using standard Fannie Mae/Freddie Mac purchase contracts and master
commitments as applicable. One- to four-family mortgage loans may be sold both
to Fannie Mae and Freddie Mac on a non-recourse basis whereby foreclosure losses
are generally the responsibility of either Fannie Mae or Freddie Mac and not the
Bank.

The Bank is a qualified loan servicer for both Fannie Mae and Freddie
Mac. The Bank's policy has been to retain the servicing rights for all loans
sold, and to continue to collect payments on the loans, maintain tax escrows and
applicable fire and flood insurance coverage, and supervise foreclosure
proceedings if necessary. The Bank retains a portion of the interest paid by the
borrower on the loans as consideration for its servicing activities.

10

The following table sets forth the loan origination, sale and repayment
activities of the Bank for the periods indicated. The Bank has not purchased any
loans in recent years.

Year Ended September 30,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(In Thousands)

Unpaid principal balances at beginning of year....................... $ 468,573 $ 408,276 $ 372,844
--------- --------- ---------
Originations by Type
Adjustable-rate:
One- to four-family............................................. 17,563 14,976 11,299
Commercial real estate.......................................... 17,540 9,025 8,257
Commercial business.................................................. 20,616 19,593 8,140
Construction.................................................... 16,941 12,529 14,240
Consumer........................................................ 12,510 11,587 14,166
--------- --------- ---------
Total adjustable-rate......................................... 85,170 67,710 56,102
--------- --------- ---------
Fixed-rate:
One- to four-family............................................. 100,873 93,493 33,214
Commercial real estate.......................................... 22,244 8,161 710
Commercial business............................................. 4,584 3,209 4,788
Construction.................................................... -- -- 1,002
Consumer........................................................ 21,213 20,100 16,954
--------- --------- ---------
Total fixed-rate.............................................. 148,914 124,963 56,668
--------- --------- ---------

Total loans originated.......................................... 234,084 192,673 112,770

Sales................................................................ (13,804) (17,003) (243)
Principal repayments................................................. (115,525) (114,166) (75,744)
Net charge-offs...................................................... (294) (610) (636)
Transfers to real estate owned....................................... (311) (597) (715)
--------- --------- ---------
Unpaid principal balances at end of year............................. 572,723 468,573 408,276

Allowance for loan losses............................................ (6,202) (4,906) (3,779)
--------- --------- ---------

Net loans at end of year............................................. $ 566,521 $ 463,667 $ 404,497
========= ========= =========

Loan Approval Authority and Underwriting. The Bank has four levels of
lending authority: the Board of Directors, the Director Loan Committee, the
Management Loan Committee, and individual loan officers. The Board grants
lending authority to the Director Loan Committee, the majority of the members of
which are Directors. The Director Loan Committee in turn may grant authority to
the Management Loan Committee and individual loan officers. In addition,
designated members of management may grant authority to individual loan officers
up to specified limits. The lending activities of the Bank are subject to
written policies established by the Board. These policies are reviewed
periodically.

The Director Loan Committee may approve loans of up to a maximum of
$3.2 million in the aggregate to any one borrower and related entities in
accordance with the Bank's loans-to-one borrower policy. Loans exceeding $3.2
million in the aggregate require approval of the Board of Directors. The
Management Loan Committee may approve loans of up to an aggregate of $650,000 to
any one borrower and related borrowers. Two loan officers with sufficient loan
authority acting together may approve loans up to $350,000. The maximum
individual authority to approve an unsecured loan is $50,000.

The Bank has established a risk rating system for its commercial
business loans, commercial real estate loans, and construction loans to
builders. The risk rating system assesses a variety of factors to rank the risk
of default and risk of loss associated with the loan. These ratings are
performed by commercial credit personnel who do not have responsibility for loan
originations. The Bank determines its maximum loans to one borrower based upon
the rating of the loan. The large majority of loans fall into three categories.
The maximum for the best rated borrowers is $7.5

11

million, for the next group of borrowers is $5.5 million, and for the third
group is $3.5 million. Sublimits apply based on reliance on any single property,
and for commercial loans.

In connection with its residential and commercial real estate loans,
the Bank requires property appraisals performed by independent appraisers who
are approved by the Board. Appraisals are then reviewed by the appropriate loan
underwriting areas of the Bank. The Bank also requires title insurance, hazard
insurance and, if indicated, flood insurance on property securing its mortgage
loans. For consumer loans under $50,000, such as equity lines of credit and
homeowner loans, title insurance is not required.

Loan Origination Fees and Costs. In addition to interest earned on
loans, the Bank also receives loan origination fees. Such fees vary with the
volume and type of loans and commitments made, and competitive conditions in the
mortgage markets, which in turn respond to the demand and availability of money.
The Bank defers loan origination fees and costs, and amortizes such amounts as
an adjustment to yield over the term of the loan by use of the level-yield
method. Deferred loan origination costs (net of deferred fees) were $838,000 at
September 30, 1999.

To the extent that originated loans are sold on or after January 1,
1997, Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," requires the Bank to capitalize a mortgage servicing asset at the
time of the sale. In the year ended September 30, 1999, the Bank recognized
$139,000 in income upon capitalization of originated mortgage servicing rights
for loans sold on a servicing-retained basis. The capitalized amount is
amortized thereafter (over the period of estimated net servicing income) as a
reduction of servicing fee income. The unamortized amount is fully charged to
income when loans are prepaid. Asset recognition of servicing rights on sales of
originated loans was not permitted under accounting standards in effect prior to
SFAS No. 125, when the Bank sold the majority of the loans it presently services
for others. Originated mortgage servicing rights with an amortized cost of
$255,000 are included in other assets at September 30, 1999. See also Notes 1
and 5 of the Notes to Consolidated Financial Statements.

Loans-to-One Borrower. Savings associations are subject to the same
loans-to-one borrower limits as those applicable to national banks, which under
current regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired net worth on an unsecured basis, and an additional amount equal to
10% of unimpaired net worth if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
The Bank monitors its credit limits by relationship and by total credit
exposure, including the unused portion of credit made available by the Bank,
such as unadvanced amounts on construction loans and unused lines of credit. At
September 30, 1999, the five largest aggregate amounts loaned to individual
borrowers by the Bank (including any unused lines of credit) were as follows:
$7.2 million, consisting of mortgage-secured financing; $7.0 million consisting
of mortgage secured and unsecured financing; $6.9 million secured by a mortgage;
$5.3 million, consisting of mortgage-secured and unsecured financing; and $5.1
million, secured by marketable securities. All of the loans discussed above are
performing in accordance with their terms.

Delinquent Loans, Other Real Estate Owned and Classified Assets

Collection Procedures. A computer generated late notice is sent by the
17th day of the month requesting the payment due plus the late charge that was
assessed. After the late notices have been mailed, accounts are assigned to a
collector for follow-up to determine reasons for delinquency and to review
payment options. Additional system-generated collection letters are sent to
customers every 10 days. Notwithstanding ongoing collection efforts, all
consumer loans are fully charged-off after 120 days.

Loans Past Due and Non-performing Assets. Loans are reviewed on a
regular basis. Loans are placed on non-accrual status when either principal or
interest is 90 days or more past due. In addition, loans are placed on
non-accrual status when, in the opinion of management, there is sufficient
reason to question the borrower's ability to continue to meet contractual
principal or interest payment obligations. Interest accrued and unpaid at the
time a loan is placed on a non-accrual status is reversed from interest income.
Interest payments received on non-accrual loans are not recognized as income
unless warranted based on the borrower's financial condition and payment record.
At

12

September 30, 1999, the Bank had non-accrual loans of $4.6 million. The ratio of
non-performing loans to total loans was 0.82% at September 30, 1999.

Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses. At September 30, 1999, the
Bank had REO of $403,000. The Bank had total non-performing assets (non-accrual
loans and REO) of $5.0 million and a ratio of non-performing assets to total
assets of 0.62% at September 30, 1999.

The following table sets forth certain information with respect to the
Bank's loan portfolio delinquencies at the dates indicated.

Loans Delinquent For
------------------------------------------
60-89 Days 90 Days and Over Total
------------------ ------------------ --------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in Thousands)

At September 30, 1999
One- to four-family............... 15 $ 1,834 37 $ 2,839 52 $ 4,673
Commercial real estate............ 1 45 4 1,133 5 1,178
Commercial business............... --- --- 2 208 2 208
Construction...................... --- --- 1 27 1 27
Consumer.......................... 21 432 23 429 44 861
---- -------- ----- -------- ---- --------
Total............................ 37 $ 2,311 67 $ 4,636 104 $ 6,947
==== ======== ===== ======== ==== ========
At September 30, 1998
One- to four-family............... 9 $ 719 33 $ 2,965 42 $ 3,684
Commercial real estate............ 2 261 2 871 4 1,132
Commercial business............... --- --- 7 368 7 368
Construction...................... --- --- 3 1,256 3 1,256
Consumer.......................... 15 264 14 647 29 911
---- -------- ----- -------- ---- --------
Total............................ 26 $ 1,244 59 $ 6,107 85 $ 7,351
==== ======== ===== ======== ==== ========
At September 30, 1997
One- to four-family............... 11 $ 1,245 28 $ 2,549 39 $ 3,794
Commercial real estate............ 2 204 4 1,375 6 1,579
Commercial business............... 4 98 7 243 11 341
Construction...................... C C 2 276 2 276
Consumer ......................... 5 87 23 234 28 321
---- -------- ----- -------- ---- --------
Total............................ 22 $ 1,634 64 $ 4,677 86 $ 6,311
==== ======== ===== ======== ==== ========

13

Non-Performing Assets. The table below sets forth the amounts and
categories of the Bank's non-performing assets at the dates indicated. At each
date presented, the Bank had no troubled debt restructurings (loans for which a
portion of interest or principal has been forgiven and loans modified at
interest rates materially less than current market rates).

September 30,
---------------------------------------------------
1999 1998 1997 1996 1995
------- -------- -------- -------- --------
(Dollars in Thousands)

Non-accrual loans:
One- to four-family.............................. $ 2,839 $ 2,965 $ 2,549 $ 2,731 $ 1,972
Commercial real estate........................... 1,133 871 1,375 2,087 3,346
Commercial business.............................. 208 368 243 109 654
Construction..................................... 27 1,256 276 920 209
Consumer......................................... 429 647 234 503 421
------- -------- -------- -------- --------
Total non-performing loans...................... 4,636 6,107 4,677 6,350 6,602
------- -------- -------- -------- --------

Real estate owned:
One- to four-family.............................. 403 92 186 347 50
Commercial real estate........................... --- 274 --- 960 160
------- -------- -------- -------- --------
Total real estate owned......................... 403 366 186 1,307 210
------- -------- -------- -------- --------

Total non-performing assets........................ $ 5,039 $ 6,473 $ 4,863 $ 7,657 $ 6,812
======= ======== ======== ======== ========

Ratios:
Non-performing loans to total loans.............. 0.82% 1.32% 1.16% 1.72% 1.99%
Non-performing assets to total assets............ 0.62 0.94 0.75 1.21 1.29

For the year ended September 30, 1999, gross interest income that would
have been recorded had the non-accrual loans at the end of the period remained
on accrual status throughout the period amounted to $395,000. Interest income
actually recognized on such loans totaled $131,000.

Classification of Assets. The Bank's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
that are considered to be of lesser quality as substandard, doubtful, or loss
assets. An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the savings institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets is not
warranted. Assets that do not expose the Bank to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated as special mention by management. As
of September 30, 1999, the Bank had $4.6 million of assets designated as special
mention.

When the Bank classifies assets as either substandard or doubtful, it
allots for analytical purposes a portion of general valuation allowances or loss
reserves to such assets as deemed prudent by management. General allowances
represent loss allowances that have been established to recognize the inherent
risk associated with lending activities, but which have not been allocated to
particular problem assets. When the Bank classifies problem assets as loss, it
is required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge-off such amount. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowance is subject to review by its regulatory agencies, which can
order the establishment of additional loss allowances. Management regularly
reviews the Bank's asset portfolio to determine whether any assets require
classification in accordance with applicable regulations. On the basis of
management's review of the Bank's assets at September 30, 1999, classified
assets consisted of substandard assets of $4.2 million (loans receivable of $3.8
million and REO of $403,000) and doubtful assets (loans receivable) of $271,000.
There were no assets classified as loss at September 30, 1999.

14

Allowance for Loan Losses. The Bank provides for loan losses based on
the allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to income based on various factors which, in
management's judgment, deserve current recognition in estimating probable
losses. Management regularly reviews the loan portfolio and makes provisions for
loan losses in order to maintain the adequacy of the allowance for loan losses.
The allowance for loan losses consists of amounts specifically allocated to
non-performing loans and potential problem loans (if any) as well as allowances
determined for each major loan category. Loan categories such as single-family
residential mortgages and consumer loans are generally evaluated on an aggregate
or "pool" basis by applying loss factors to the current balances of the various
loan categories. The loss factors are determined by management based on an
evaluation of historical loss experience, delinquency trends, volume and type of
lending conducted, and the impact of current economic conditions in the Bank's
market area. While management uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations.

In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.

At September 30, 1999, the allowance for loan losses was $6.2 million,
which equaled 1.10% of net loans and 133.78% of non-performing loans. For the
years ended September 30, 1999, 1998 and 1997, the Bank recorded net loan
charge-offs of $294,000, $610,000 and $636,000, respectively, as a reduction of
the allowance for loan losses. Provisions for loan losses added to the allowance
were $1.6 million, $1.7 million and $1.1 million during the respective periods.

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

Years Ended September 30,
1999 1998 1997 1996 1995
------- ------- ------- -------- --------
(Dollars in Thousands)

Balance at beginning of year........................... $ 4,906 $ 3,779 $ 3,357 $ 3,472 $ 2,837
------- ------- ------- -------- --------

Charge-offs:

One- to four-family.................................. (9) (13) (114) (33) (85)
Commercial real estate............................... --- (87) (301) (840) -
Commercial business.................................. (567) (10) (173) - -
Construction......................................... --- (355) - - -
Consumer............................................. (346) (200) (171) (203) (67)
------- ------- ------- -------- --------
Total charge-offs.................................. (922) (665) (759) (1,076) (152)
------- ------- ------- -------- --------
Recoveries:
One- to four-family.................................. --- --- 42 3 -
Commercial real estate............................... 101 --- --- --- ---
Commercial business.................................. 194 --- - - -
Construction......................................... 286 2 32 14 -
Consumer............................................. 47 53 49 33 27
------- ------- ------- -------- --------
Total recoveries................................... 628 55 123 50 27
------- ------- ------- -------- --------

Net charge-offs........................................ (294) (610) (636) (1,026) (125)
Provision for loan losses.............................. 1,590 1,737 1,058 911 760
------- ------- ------- -------- --------
Balance at end of year................................. 6,202 4,906 $ 3,779 $ 3,357 $ 3,472
======= ======= ======= ======== ========

Ratios:
Net charge-offs to average loans outstanding......... 0.06% 0.14% 0.17% 0.29% 0.04%
Allowance for loan losses to non-performing loans.... 133.78 80.33 80.80 52.87 52.59
Allowance for loan losses to total loans, net ....... 1.10 1.06 0.93 0.91 1.05

15

Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category, and the percent of loans in each category to total loans
at the dates indicated. The allowance for loan losses allocated to each category
is not necessarily indicative of future losses in any particular category and
does not restrict the use of the allowance to absorb losses in other categories.

September 30,
--------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Balances Category Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in Thousands)

One- to four-family ...... $ 2,091 $344,731 60.2% $ 1,320 $290,334 62.0% $ 734 $241,886 59.3%
Commercial real estate ... 2,416 110,382 19.3 1,976 71,149 15.1 1,431 62,910 15.4
Commercial business ...... 254 30,768 5.4 376 24,372 5.2 443 18,433 4.5
Construction ............. 614 19,147 3.3 301 20,049 4.3 389 23,475 5.7
Consumer ................. 827 67,695 11.8 933 62,669 13.4 782 61,572 15.1
-------- -------- ----- -------- -------- ----- -------- -------- -----

Total.................. $ 6,202 $572,723 100.0% $ 4,906 $468,573 100.0% $ 3,779 $408,276 100.0%
======== ======== ===== ======== ======== ===== ======== ======== =====

September 30,
--------------------------------------------------------------------
1996 1995
------------------------------ -------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in Thousands)

One- to four-family ...... $ 756 $219,827 59.0% $ 696 $199,017 59.3%
Commercial real estate ... 1,247 66,145 17.7 1,377 66,820 19.9
Commercial business ...... 536 15,268 4.1 536 11,160 3.3
Construction ............. 389 16,074 4.3 389 6,228 1.9
Consumer ................. 429 55,530 14.9 474 52,194 15.6
-------- -------- ----- -------- -------- -----

Total.................. $ 3,357 $372,844 100.0% $ 3,472 $335,419 100.0%
======== ======== ===== ======== ======== =====

16

Securities Activities

The Company's securities investment policy is established by the Board
of Directors. This policy dictates that investment decisions will be made based
on the safety of the investment, liquidity requirements, potential returns, cash
flow targets, and consistency with the Company's interest rate risk management
strategy. The Board's asset/liability committee oversees the Company's
investment program and evaluates on an ongoing basis the Company's investment
policy and objectives. The chief financial officer, or the chief financial
officer acting with the chief executive officer, is responsible for making
securities portfolio decisions in accordance with established policies. The
Company's chief financial officer and chief executive officer have the authority
to purchase and sell securities within specific guidelines established by the
investment policy. In addition, all transactions are reviewed by the Board's
asset/liability committee at least quarterly.

The Company's current policies generally limit securities investments
to U.S. Government and U.S. Agency securities, municipal bonds, and corporate
debt obligations, as well as investments in preferred and common stock of
government agencies such as Fannie Mae, Freddie Mac and the FHLB (federal agency
securities). Securities in these categories are classified as "investment
securities" for financial reporting purposes. The policy also permits
investments in mortgage-backed securities, including pass-through securities
issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as
collateralized mortgage obligations ("CMOs") issued or backed by securities
issued by these government agencies. Also permitted are investments in
securities issued or backed by the Small Business Administration and
asset-backed securities collateralized by auto loans, credit card receivables,
and home equity and home improvement loans. The Company's current investment
strategy uses a risk management approach of diversified investing in fixed-rate
securities with short- to intermediate-term maturities, as well as
adjustable-rate securities, which may have a longer term to maturity. The
emphasis of this approach is to increase overall investment securities yields
while managing interest rate risk. To accomplish these objectives, the Company
focuses on investments in mortgage-backed securities and CMOs. In addition, U.S.
Government and other non-amortizing securities are used for call protection and
liquidity.

SFAS No. 115 requires the Company to designate its securities as held
to maturity, available for sale, or trading, depending on the Company's ability
and intent. Available for sale securities are carried at fair value, while held
to maturity securities are carried at amortized cost. The Company does not have
a trading portfolio.

As of September 30, 1999, the Company's overall securities portfolio
had a carrying value of $205.2 million. In accordance with SFAS No. 115,
securities with a fair value of $148.4 million, or 18.2% of total assets, were
classified as available for sale, while securities with an amortized cost of $
56.8 million, or 6.9% of total assets, were classified as held to maturity. The
estimated fair value of these held to maturity securities at September 30, 1999
was $56.5 million, which was $303,000 less than their amortized cost.

Government Securities. At September 30, 1999, the Company held $61.9
million, or 7.6% of total assets, in government securities, consisting primarily
of U.S. Treasury and agency obligations with short- to medium-term maturities
(one to five years), of which $58.9 million was classified as available for sale
and $3.0 million was classified as held to maturity. While these securities
generally provide lower yields than other investments such as mortgage-backed
securities, the Company's current investment strategy is to maintain investments
in such instruments to the extent appropriate for liquidity purposes, as
collateral for borrowings, and for prepayment protection.

Corporate Bonds and Other Debt Securities. At September 30, 1999, the
Company held $23.7 million in corporate debt securities, all of which was
classified as available for sale. Although corporate bonds may offer a higher
yield than that of a U.S. Treasury or agency security of comparable duration,
corporate bonds also may have a higher risk of default due to adverse changes in
the creditworthiness of the issuer. In recognition of this potential risk, the
Company's policy limits investments in corporate bonds to securities with ten
years or less and rated "A" or better by at least one nationally recognized
rating agency, and to a total investment of no more than $2.0 million per issuer
and a total portfolio limit of $40.0 million. At September 30, 1999, the Company
held $11.2 million in bonds issued by

17

states and political subdivisions, of which $10.8 million was classified as
available for sale and $415,000 was classified as held to maturity. The bonds
are not rated.

Equity Securities. At September 30, 1999, the Company's equity
securities portfolio totaled $3.2 million, all of which was classified as
available for sale, and consisted of preferred stock issued by Freddie Mac and
Fannie Mae, and certain other equity investments. The Company benefits from its
investment in common and preferred stock due to a tax deduction the Company
receives with regard to dividends paid by domestic corporate issuers on equity
securities held by other corporate entities, such as the Company. The Company
also held $6.2 million of common stock in the FHLB of New York that must be held
as a condition of membership in the Federal Home Loan Bank System.

Mortgage-Backed Securities. The Company purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower credit risk as a result of the guarantees
provided by Freddie Mac, Fannie Mae and Ginnie Mae; and (iii) increase
liquidity. The Company invests primarily in mortgage-backed securities issued or
sponsored by Fannie Mae, Freddie Mac, and Ginnie Mae. The Company also invests
to a lesser extent in securities backed by the Small Business Administration, or
agencies of the U.S. Government.

Mortgage-backed securities are created by pooling mortgages and issuing
a security collateralized by the pool of mortgages with an interest rate that is
less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of the Company's
mortgage-backed securities investments are collateralized by single-family
mortgages. The issuers of such securities (generally U.S. Government agencies
and government sponsored enterprises, including Fannie Mae, Freddie Mac and
Ginnie Mae) pool and resell the participation interests in the form of
securities to investors, such as the Company, and guarantee the payment of
principal and interest to these investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees, credit enhancements and servicing fees. However,
mortgage-backed securities are usually more liquid than individual mortgage
loans and may be used to collateralize certain liabilities and obligations of
the Company. Investments in mortgage-backed securities involve a risk that
actual prepayments will be greater than the estimated life of the security,
which may require adjustments to the amortization of any premium or accretion of
any discount relating to such instruments, thereby reducing the net yield on
such securities. There is also reinvestment risk associated with cash flows from
and redemptions of such securities. In addition, the market value of such
securities may be adversely affected by changes in interest rates. The Company
reviews prepayment estimates for its mortgage-backed securities at purchase to
ensure that prepayment assumptions are reasonable considering the underlying
collateral for the securities at issue and current interest rates, and to
determine the yield and estimated maturity of the mortgage-backed securities
portfolio.

At September 30, 1999, the Company's mortgage-backed pass-through
securities portfolio totaled $74.2 million, of which $26.5 million was available
for sale and $47.7 million was held to maturity. Although the average
contractual maturity of the aggregate mortgage-backed securities portfolio was
approximately 15 years, the actual maturity of a mortgage-backed security may be
less than its stated contractual maturity due to prepayments of the underlying
mortgages. Prepayments that are faster than anticipated may shorten the life of
the security and may result in a loss of any premiums paid and thereby reduce
the net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Company may be subject to reinvestment risk
because, to the extent that the mortgage-backed securities prepay faster than
anticipated, the Company may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate of return. Conversely, in a
rising interest rate environment prepayments may decline, thereby extending the
estimated life of the security and depriving the Company of the ability to
reinvest cash flows at the increased rates of interest.

CMOs and REMICs. In addition to mortgage-backed pass-through
securities, the Company invests in CMOs or collateralized mortgage obligations,
including REMICs. This portfolio is limited to CMOs and REMICs backed by Fannie
Mae and Freddie Mac. CMOs are a type of debt security issued by a
special-purpose entity that aggregates pools

18

of mortgages and mortgage-backed securities and creates different classes of CMO
securities with varying maturities and amortization schedules, as well as a
residual interest, with each class possessing different risk characteristics.
The cash flows from the underlying collateral are generally divided into
"tranches" or classes whereby tranches have descending priorities with respect
to the distribution of principal and interest repayment of the underlying
mortgages and mortgage-backed securities, as opposed to pass-through
mortgage-backed securities where cash flows are distributed pro rata to all
security holders. In contrast to mortgage-backed securities from which cash flow
is received (and hence, prepayment risk is shared) pro rata by all securities
holders, the cash flow from the mortgages or mortgage-backed securities
underlying CMOs is paid in accordance with a predetermined priority to investors
holding various tranches of such securities or obligations. A particular tranche
of CMOs may, therefore, carry prepayment risk that differs from that of both the
underlying collateral and other tranches. Investments in CMOs involve a risk
that actual prepayments will differ from those estimated in pricing the
security, which may result in adjustments to the net yield on such securities.
Additionally, the market value of such securities may be adversely affected by
changes in market interest rates. Management believes these securities may
represent attractive alternatives relative to other investments due to the wide
variety of maturity, repayment and interest rate options available.

The Company's practice is to limit fixed-rate CMO investments primarily
in the early to intermediate tranches, which have the greatest cash flow
stability. Floating rate CMOs are purchased with emphasis on the relative
trade-offs between life rate caps, prepayment risk, and interest rates. The
Company's current policy with respect to CMOs limits investments to non-high
risk securities unless approval is given by the Board of Directors and an
analysis is provided on how a high-risk CMO will improve the overall interest
rate risk of the Company. High-risk CMOs are defined as those securities
exhibiting significantly greater volatility of estimated average life and price
relative to interest rates compared to 30-year, fixed-rate securities.

Available for Sale Portfolio

As of September 30, 1999, securities with a fair value of $148.4
million, or 18.2% of total assets, were classified as available for sale.
Investment securities, consisting of U.S. Government and agency securities,
municipal bonds, and corporate debt obligations as well as investments in
preferred and common stock, made up $96.6 million of this total, or 11.8 % of
total assets, with mortgage-backed securities totaling $51.8 million, or 6.4% of
total assets.

19

The following table sets forth the composition of the Company's
available for sale portfolio at the dates indicated.

September 30,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------- ------- ------- -------- -------- --------
(Dollars in Thousands)

Investment Securities:
U.S. Government securities.............. $31,657 $31,507 $26,119 $ 26,547 $ 27,273 $ 27,387
Federal agency obligations.............. 27,966 27,407 17,028 17,278 15,993 15,948
Corporate debt securities .............. 24,201 23,667 1,999 1,997 3,007 3,005
State and municipal securities.......... 11,700 10,808 --- --- --- ---
Equity securities....................... 3,175 3,236 2,017 2,249 2,017 2,177
------- ------- ------- -------- -------- --------
Total investment securities available
for sale ............................. 98,699 96,625 47,163 48,071 48,290 48,517
------- ------- ------- -------- -------- --------

Mortgage-Backed Securities:
Pass-through securities:
Fannie Mae.......................... 16,053 15,930 10,726 10,907 13,172 13,335
Freddie Mac ........................ 3,252 3,306 5,052 5,210 7,364 7,571
Other .............................. 7,163 7,252 3,167 3,185 4,584 4,567
CMOs and REMICs...................... 25,625 25,274 30,358 30,610 10,665 10,680
------- ------- ------- -------- -------- --------
Total mortgage-backed securities
available for sale ................... 52,093 51,762 49,303 49,912 35,785 36,153
------- ------- ------- -------- -------- --------

Total available for sale securities..... $150,792 $148,387 $96,466 $ 97,983 $ 84,075 $ 84,670
======== ======== ======= ======== ======== ========

At September 30, 1999, the Company's available for sale U. S. Treasury
securities portfolio totaled $31.5 million, or 3.9% of total assets. These
securities had maturities of less than five years, with a weighted average yield
of 4.86%. At September 30, 1999, the federal agency securities in the Company's
available for sale portfolio totaled $27.4 million, or 3.4% of total assets, and
had maturities of less than five years, with a weighted average yield of 6.07%.
The agency securities portfolio includes both non-callable and callable
debentures. The agency debentures are callable on a quarterly basis following an
initial holding period of from twelve to twenty-four months. At September 30,
1999, the state and municipal securities in the Company's available for sale
portfolio totaled $10.8 million, or 1.3% of total assets, and had weighted
average maturity of approximately 10 years, with a weighted average tax-free
yield of 4.35%. Available for sale corporate debt securities totaled $23.7
million at September 30, 1999, while equity securities available for sale
totaled $3.2 million.

At September 30, 1999, $26.5 million of the Company's available for
sale mortgage-backed securities consisted of pass-through securities, which
totaled 3.3% of total assets. At the same date, the Company's available for sale
CMO portfolio totaled $25.3 million, or 3.1% of total assets, and consisted of
CMOs issued by government sponsored agencies such as Fannie Mae and Freddie Mac
with a weighted average yield of 5.99%. The Company owns both fixed-rate and
floating-rate CMOs. The Company's CMO portfolio at September 30, 1999 included
securities of $24.0 million (principally available for sale securities) for
which the underlying mortgage collateral had contractual maturities of over ten
years. However, as with mortgage-backed pass-through securities, the actual
maturity of a CMO may be less than its stated contractual maturity due to
prepayments of the underlying mortgages.

20

Held to Maturity Portfolio

As of September 30, 1999, securities with an amortized cost of $56.8
million, or 7.0% of total assets, were classified as held to maturity.
Investment securities, consisting of U.S. Government and agency securities,
municipal bonds, and corporate debt obligations made up $3.4 million of this
total, or 0.4% of total assets. Mortgage-backed securities totaling $53.4
million, or 6.6% of total assets, made up the remainder of this portfolio.

The following table sets forth the composition of the Company's held to
maturity portfolio at the dates indicated.

September 30,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------- ------- ------- -------- -------- --------
(Dollars in Thousands)

Investment Securities:

U.S. Government securities................ $ --- $ --- $ 8,988 $ 9,011 $ 8,952 $ 8,913
Federal agency obligations................ 2,987 2,953 9,481 9,544 12,521 12,457
State and municipal and other securities.. 415 415 707 707 722 721
------- ------- ------- -------- -------- --------
Total investment securities held to
maturity ............................. 3,402 3,368 19,176 19,262 22,195 22,091
------- ------- ------- -------- -------- --------

Mortgage-Backed Securities:
Pass-through securities:
Ginnie Mae.............................. 5,106 5,140 6,526 6,616 7,971 8,114
Fannie Mae.............................. 18,116 17,786 26,117 26,349 29,674 29,565
Freddie Mac............................. 22,014 21,900 33,014 33,639 49,158 49,497
Other................................... 2,453 2,499 2,171 2,264 2,222 2,282
CMOs and REMICs........................... 5,691 5,786 11,398 11,542 15,046 15,166
------- ------- ------- -------- -------- --------
Total mortgage-backed securities held
to maturity .......................... 53,380 53,111 79,226 80,410 104,071 104,624
------- ------- ------- -------- -------- --------

Total held to maturity securities........... $56,782 $56,479 $98,402 $99,672 $126,266 $126,715
======= ======= ======= ======= ======== ========

At September 30, 1999, the federal agency securities in the Company's
held to maturity portfolio totaled $3.0 million, or 0.4% of total assets, and
had maturities of less than five years, with a weighted average yield of 6.05%.
The agency securities portfolio includes both non-callable and callable
debentures. The agency debentures are callable on a quarterly basis following an
initial holding period of from twelve to twenty-four months.

At September 30, 1999, the Company's held to maturity mortgage-backed
pass-through securities portfolio totaled $47.7 million, of which $2.0 million
had a weighted average yield of 5.53% and contractual maturities within one
year; $7.4 million had a weighted average yield of 5.99% and contractual
maturities within five years; $14.8 million had a weighted average yield of
6.69% and contractual maturities of five to ten years; and $21.0 million had a
weighted average yield of 7.10% and contractual maturities of over ten years.

At September 30, 1999, $5.7 million of the CMO portfolio, or 0.7% of
total assets, was classified as held-to-maturity. The estimated fair value of
the Company's held-to-maturity CMO portfolio at September 30, 1999 was $5.8
million, or $95,000 more than the amortized cost.

21

The composition and maturities of the investment securities portfolio
(debt securities) and the mortgage-backed securities portfolio at September 30,
1999 are summarized in the following table. Maturities are based on the final
contractual payment dates, and do not reflect the impact of prepayments or
redemptions that may occur.

More than One Year More than Five Years
One Year or Less through Five Years through Ten Years More than Ten Years
------------------- ------------------- ------------------- ---------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
-------- -------- -------- -------- -------- --------- --------- ---------
(Dollars in Thousands)

Available for Sale:
Mortgage-Backed Securities
Freddie Mac ................ $ --- ---% $ 749 7.32% $ 69 8.79% $ 2,434 6.78%
Fannie Mae.................. 521 6.43 592 6.59 5,265 6.20 9,675 6.55
CMOs and REMICs............. --- --- --- --- 6,964 6.13 18,661 5.93
Other....................... --- --- --- --- 4,732 6.32 2,431 5.97
------- ------- ------- ------- ------- -------- -------- --------
Total .................... 521 6.43 1,341 7.00 17,030 6.21 33,201 6.18
------- ------- ------- ------- ------- -------- -------- --------
Investment Securities
U.S. Gov't and agency
securities ............... 10,124 6.37 49,499 5.24 --- --- --- ---
State and municipal
securities ............... --- --- --- --- 4,711 3.99 6,989 4.60
Corporate debt securities... 2,006 5.03 10,062 6.09 12,133 6.75 --- ---
------- ------- ------- ------- ------- -------- -------- --------
Total .................... 12,130 6.14 59,561 5.38 16,844 5.98 6,989 4.60
------- ------- ------- ------- ------- -------- -------- --------
Total available for sale...... $12,651 6.16% $60,902 5.42% $33,874 6.10% $ 40,190 5.90%
======= ======= ======= ======= ======= ======== ======== ========
Held to Maturity:
Mortgage-Backed Securities
Freddie Mac ................ $ --- ---% $ 1,333 6.21% $ 8,983 6.66% $ 11,698 7.04%
Fannie Mae.................. 1,999 5.53 6,096 5.94 4,730 6.41 5,291 6.67
Ginnie Mae.................. --- --- 6 7.31 1,052 8.30 4,048 7.85
CMOs and REMICs............. --- --- --- --- --- --- 5,691 6.32
Other....................... --- --- --- --- 28 11.50 2,425 7.35
------- ------- ------- ------- ------- -------- -------- --------
Total .................... 1,999 5.53 7,435 5.99 14,793 6.70 29,153 6.97
------- ------- ------- ------- ------- -------- -------- --------
Investment Securities
U.S. Gov't and agency
securities ............... --- --- 2,987 6.05 --- --- --- ---
State and municipal
securities ............... --- --- 25 7.75 --- --- 390 6.75
------- ------- ------- ------- ------- -------- -------- --------
Total .................... --- --- 3,012 6.06 --- --- 390 6.75
------- ------- ------- ------- ------- -------- -------- --------
Total held to maturity........ $ 1,999 5.53% $10,447 6.01% $14,793 6.70% $ 29,543 6.97%
======= ======= ======= ======= ======= ======== ======== ========

Total Securities
-------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
--------- --------- ---------
(Dollars in Thousands)

Available for Sale:
Mortgage-Backed Securities
Freddie Mac ................ $ 3,252 $ 3,307 6.95%
Fannie Mae.................. 16,053 15,930 6.43
CMOs and REMICs............. 25,629 25,273 5.99
Other....................... 7,163 7,252 6.20
-------- -------- --------
Total .................... 52,093 51,762 6.21
-------- -------- --------
Investment Securities
U.S. Gov't and agency
securities ............... 59,623 58,914 5.43
State and municipal
securities ............... 11,700 10,808 4.35
Corporate debt securities... 24,201 23,667 6.33
-------- -------- --------
Total .................... 95,524 93,389 5.23
-------- -------- --------
Total available for sale...... $147,617 $145,151 5.77%
======== ======== ========
Held to Maturity:
Mortgage-Backed Securities
Freddie Mac ................ $ 22,014 $ 21,900 6.83%
Fannie Mae.................. 18,116 17,786 6.23
Ginnie Mae.................. 5,106 5,140 7.94
CMOs and REMICs............. 5,691 5,786 6.32
Other....................... 2,453 2,499 7.39
-------- -------- --------
Total .................... 53,380 53,111 6.71
-------- -------- --------
Investment Securities
U.S. Gov't and agency
securities ............... 2,987 2,953 6.05
State and municipal
securities ............... 415 415 6.81
-------- -------- --------
Total .................... 3,402 3,368 6.14
-------- -------- --------
Total held to maturity........ $ 56,782 $ 56,479 6.67%
======== ======== ========

22

Sources of Funds

General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, proceeds from maturing securities
and cash flows from operations, are the primary sources of the Bank's funds for
use in lending, investing and for other general purposes. To a lesser extent,
the Bank uses borrowed funds (primarily FHLB advances) to fund its operations.

Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. Its deposit accounts consist of savings accounts, NOW
accounts, checking accounts, money market accounts, club accounts and
certificates of deposit. It offers certificates of deposit with balances in
excess of $100,000, as well as IRAs and other qualified plan accounts. The Bank
provides commercial checking accounts for small to moderately-sized businesses,
as well as low-cost checking account services for low-income customers.

At September 30, 1999, the Bank's deposits totaled $586.6 million.
Interest-bearing deposits totaled $526.8 million, and non-interest bearing
demand deposits totaled $59.8 million. NOW, savings and money market deposits
totaled $289.0 million at September 30, 1999. Also at that date, the Bank had a
total of $237.8 million in certificates of deposit, of which $197.4 million had
maturities of one year or less. Although the Bank has a significant portion of
its deposits in shorter-term certificates of deposit, management monitors
activity on these accounts and, based on historical experience and the Bank's
current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.

The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. It relies primarily on competitive pricing
of its deposit products, customer service and long-standing relationships with
customers to attract and retain these deposits; however, market interest rates
and rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain deposits. The Bank uses traditional means
of advertising its deposit products, including radio and print media, and
generally does not solicit deposits from outside its market area. While
certificates of deposit in excess of $100,000 are accepted by the Bank, and may
be subject to preferential rates, it does not actively solicit such deposits as
they are more difficult to retain than core deposits. Historically, the Bank has
not used brokers to obtain deposits.

The following table sets forth the distribution of the Bank's deposit
accounts, by account type, at the dates indicated.

September 30,
---------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
-------- ------ ----- -------- ------ ----- -------- ------ -----
(Dollars in Thousands)

Demand deposits

Retail ............... $ 35,701 6.1% ---% $ 31,045 5.4% ---% $ 32,104 5.9% ---%
Commercial ........... 24,147 4.1 --- 19,285 3.4 --- 17,117 3.1 ---
-------- ------ ----- -------- ------ ----- -------- ------ -----
Total demand deposits 59,848 10.2 --- 50,330 8.8 --- 49,221 9.0 ---
NOW deposits.......... 47,129 8.0 1.01 41,738 7.3 1.22 32,985 6.0 1.25
Savings deposits...... 161,809 27.6 2.02 155,934 27.2 1.99 153,171 28.0 2.25
Money market deposits. 80,033 13.6 2.75 76,010 13.3 2.65 75,339 13.8 2.96
-------- ------ ----- -------- ------ ----- -------- ------ -----
348,819 59.4 1.70 324,012 56.6 1.74 310,716 56.8 1.96
Certificates of deposit 237,821 40.6 4.82 249,162 43.4 5.15 236,130 43.2 5.31
-------- ------ ----- -------- ------ ----- -------- ------ -----

Total deposits....... $586,640 100.0% 2.97% $573,174 100.0% 3.22% $546,846 100.0% 3.40%
======== ====== ===== ======== ====== ===== ======== ====== =====

23

The following table sets forth, by interest rate ranges, information
concerning the Bank's certificates of deposit at the dates indicated.

At September 30, 1999
----------------------------------------------------------------------------- Total at
Period to Maturity September 30,
----------------------------------------------------------------------------- ---------------------
Less than One to Two to More than Percent
Interest Rate Range One Year Two Years Three Years Three Years Total of Total 1998 1997
------------------- -------- ----------- ----------- ----------- ---------- ----------- ------- ---------
(Dollars in Thousands)

4.00% and below.......... $ 11,195 $ 79 $ --- $ 2,745 $ 14,019 5.9% $ 1,003 $ 716
4.01% to 5.00%........... 120,081 12,151 1,272 1,876 135,380 56.9 103,713 68,707
5.01% to 6.00%........... 56,155 16,207 3,944 1,583 77,889 32.8 123,044 151,729
6.01% to 7.00%........... 6,627 122 248 29 7,026 2.9 17,943 9,557
7.01% and above.......... 3,315 77 115 --- 3,507 1.5 3,459 5,421
-------- ------- ------- ------- -------- ------ -------- --------

Total................. $197,373 $28,636 $ 5,579 $ 6,233 $237,821 100.0% $249,162 $236,130
======== ======= ======= ======= ======== ====== ======== ========

The following table sets forth the amount of the Bank's certificates of
deposit by time remaining until maturity as of September 30, 1999.

Maturity
-----------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
------- ------- ------- ------- -------
(In Thousands)

Certificates of deposit less than $100,000............. $59,309 $46,954 $68,755 $35,523 $210,541
Certificates of deposit of $100,000 or more (1)........ 8,331 5,968 8,056 4,925 27,280
------- ------- ------- ------- --------
Total of certificates of deposit.................... $67,640 $52,922 $76,811 $40,448 $237,821
======= ======= ======= ======= ========

- -----------------------
(1) The weighted average interest rates for these accounts, by maturity period,
are 4.40% for 3 months or less; 4.77% for 3 to 6 months; 5.31% for 6 to 12
months; and 4.90% for over 12 months. The overall weighted average interest
rate for accounts of $100,000 or more was 4.84%.

Borrowings. At September 30, 1999, the Bank had $117.8 million of
borrowings, of which $115.5 million consisted of FHLB advances. FHLB advances
were $38.6 million as of September 30, 1998 and $24.0 million as of September
30, 1997. At September 30, 1999, the Bank had access to additional FHLB
borrowings of up to $128.9 million.

The following table sets forth information concerning balances and
interest rates on the Bank's FHLB advances at the dates and for the periods
indicated.

Years Ended September 30,
----------------------------------
1999 1998 1997
-------- ------- -------
(Dollars in Thousands)

Balance at end of year............................................ $115,515 $38,646 $24,000
Average balance during year....................................... 74,319 28,817 23,730
Maximum outstanding at any month end.............................. 118,526 38,646 38,000
Weighted average interest rate at end of year..................... 5.60% 5.97% 6.69%
Average interest rate during year................................. 5.53% 5.96% 6.27%

24

Subsidiary Activities

Provest Services Corp. I is a wholly-owned subsidiary of the Bank
holding an investment in a limited partnership which operates an assisted-living
facility. A percentage of the units in the facility are for low-income
individuals. Provest Services Corp. II is a wholly-owned subsidiary of the Bank
which has engaged a third-party provider to sell annuities and mutual funds to
the Bank's customers. Through September 30, 1999, the activities of these
subsidiaries have had an insignificant effect on the Bank's consolidated
financial condition and results of operations. During fiscal 1999, the Bank
established Provident REIT, Inc., a wholly-owned subsidiary in the form of a
real estate investment trust ("REIT"). The REIT holds both residential and
commercial real estate loans.

Competition

The Bank faces significant competition in both originating loans and
attracting deposits. The New York metropolitan area has a high concentration of
financial institutions, most of whom are significantly larger institutions that
have greater financial resources than the Bank, and all of which are competitors
of the Bank to varying degrees. The Bank's competition for loans comes
principally from commercial banks, savings banks, mortgage banking companies,
credit unions and insurance companies and other financial service companies. Its
most direct competition for deposits has historically come from commercial
banks, savings banks and credit unions. The Bank faces additional competition
for deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Further competition may
arise as restrictions on the interstate operations of financial institutions are
removed.

Employees

As of September 30, 1999, the Bank had 211 full-time employees and 38
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.

REGULATION

General

As a federally chartered, SAIF-insured savings bank, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The Bank also is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") governing reserves to be maintained against deposits and certain
other matters. The OTS examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors. The FDIC also has examination
authority over the Bank in its role as the administrator of the SAIF. The Bank's
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws, especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, or Congress,
could have a material adverse impact on the Company and the Bank and their
operations.

Federal Regulation of Savings Institutions

Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings association
may engage. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.

25

Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus, and an additional 10% of unimpaired capital and surplus if
such loan is secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. The OTS by regulation has
amended the loans to one borrower rule to permit savings associations meeting
certain requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.

Qualified Thrift Lender Requirement. The HOLA requires savings
institutions to be qualified thrift lenders ("QTL"). To be a QTL, the Bank can
either satisfy the QTL test, or the Domestic Building and Loan Association
("DBLA") Test of the Internal Revenue Code of 1986, as amended (the "Code").
Under the QTL test, a savings bank is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct business) in certain "qualified thrift investments,"
primarily residential mortgages and related investments, including certain
mortgage-backed and related securities on a monthly basis in 9 out of every 12
months. Under the DBLA test, an institution must meet a "business operations
test" and a "60% of assets test." The business operations test requires the
business of a DBLA to consist primarily of acquiring the savings of the public
and investing in loans. An institution meets the public savings requirements
when it meets one of two conditions: (i) the institution acquires its savings in
conformity with OTS rules and regulations; or (ii) the general public holds more
than 75% of its deposits, withdrawable shares, and other obligations. The
general public may not include family or related business groups or persons who
are officers or directors of the institution.

The 60% of assets test requires that at least 60% of a DBLA's assets
must consist of assets that thrifts normally hold, except for consumer loans
that are not educational loans. The DBLA test does not include, as the QTL test
does to a limited or optional extent, mortgage loans originated and sold into
the secondary market and subsidiary investments. A savings bank that fails to be
a QTL must either convert to a bank charter or operate under certain
restrictions. As of September 30, 1999, the Bank met the QTL test.

Limitations on Capital Distributions. OTS regulations impose
limitations upon all capital distributions by savings institutions, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. A "well capitalized" institution can, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year in an amount up to 100 percent of its net income during the
calendar year, plus its retained net income for the preceding two years. As of
September 30, 1999, the Bank was a "well-capitalized" institution.

In addition, OTS regulations require the Mutual Holding Company to
notify the OTS of any proposed waiver of its right to receive dividends. It is
the OTS' recent practice to review dividend waiver notices on a case-by-case
basis, and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS No. 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association
(and the savings association's capital ratios adjusted accordingly) in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.

Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
at September 30, 1999 exceeded the then applicable requirements.

Community Reinvestment Act and Fair Lending Laws. Savings associations
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws

26

could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received an
outstanding CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.

Transactions with Affiliates. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any nonsavings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies.

Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.

Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit systems; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. If an institution fails to meet these standards, the appropriate federal
banking agency may require the institution to submit a compliance plan.

Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 4% tier 1 core capital ratio, a
4% tier 1 risk-based ratio, and an 8% total risk-based ratio. Tier 1 core
capital is defined as common stockholders' equity less investments in and
advances to "nonincludable" subsidiaries, goodwill and other intangible assets,
nonqualifying equity instruments and disallowed servicing assets, and other
disallowed assets; plus accumulated losses (gains) on certain available-for-sale
securities and cash flow hedges (net of taxes), qualifying intangible assets,
minority interest in includable consolidated subsidiaries, and mutual
institutions' nonwithdrawable deposit accounts. Adjusted total assets is defined
as total assets less assets of "nonincludable" subsidiaries, goodwill and other
intangible assets and disallowed servicing assets and other disallowed assets;
plus accumulated losses (gains) on certain available-for sale securities and
cash flow hedges, and qualifying intangible assets. Total risk-based capital is
defined as tier 1 (core) capital plus 45% of net unrealized gains on
available-for-sale equity securities, qualifying

27

subordinated debt and redeemable preferred stock, capital certificates,
nonwithdrawable deposit accounts not included in core capital, other equity
instruments and allowances for loan and lease losses; less equity investments
and other assets required to be deducted, low-level recourse deduction and
capital reduction for interest-rate risk exposure.

In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset.

At September 30, 1999, the Bank exceeded each of the OTS capital
requirements as summarized below:

To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ---------------------- ---------------------
Amount Ratio (1) Amount Ratio (1) Amount Ratio(1)
------ --------- ------ --------- ------ --------

Tangible capital.................. $ 76,894 9.6% $ 12,069 1.5% $ --- ---%
Tier I core capital............... 76,894 9.6 32,184 4.0 40,230 5.0
Tier I risk-based capital......... 76,894 15.9 --- --- 28,986 6.0
Total risk-based capital.......... 82,935 17.2 38,648 8.0 48,310 10.0

- --------------------
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.

Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective
Action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0% is considered to be undercapitalized.
A savings institution that has total risk-based capital of less than 6.0%, a
Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that
is less than 3.0% is considered to be "significantly undercapitalized," and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS may also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.

At September 30, 1999, the Bank was categorized as "well capitalized,"
meaning that the Bank's total risk-based capital ratio exceeded 10.0%, Tier I
risk-based capital ratio exceeded 6.0%, leverage capital ratio exceeded 5.0%,
and the Bank was not subject to a regulatory order, agreement or directive to
meet and maintain a specific capital level for any capital measure.

28

Insurance of Deposit Accounts. The FDIC has adopted a risk-based
deposit insurance assessment system. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period,
consisting of (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. The FDIC is
authorized to raise the assessment rates in certain circumstances. The FDIC has
exercised this authority several times in the past and may raise insurance
premiums in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank.

Federal Home Loan Bank System

The Bank, as a federal association, is required to be a member of the
FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central
credit facility primarily for member institutions. The Bank, as a member of the
FHLB of New York, is required to acquire and hold shares of capital stock in
that FHLB in an amount at least equal to 1% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. As of September 30, 1999, the Bank was in compliance with this
requirement. The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.

Federal Reserve System

The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). At September 30, 1999, the Bank
was in compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.

Financial Modernization Legislation

On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley
Act, which will be effective on March 11, 2000, and will expand the permissible
activities of bank holding companies like Financial. Upon the effective date of
the legislation, the Company will be permitted to own and control depository
institutions and to engage in activities that are financial in nature or
incidental to financial activities, or activities that are complementary to a
financial activity and do not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The
legislation identifies certain activities that are deemed to be financial in
nature, including nonbanking activities currently permissible for bank holding
companies to engage in both within and outside the United States, as well as
insurance and securities underwriting and merchant banking activities.

In order to take advantage of this new authority, a savings and loan
holding company's depositary institution subsidiaries must be well capitalized
and well managed and have at least a satisfactory record of performance under
the Community Reinvestment Act. The Bank currently meets these requirements. No
prior regulatory notice would be required to acquire a company engaging in these
activities or to commence these activities directly or indirectly through a
subsidiary.

Holding Company Regulation

General. The Mutual Holding Company and the Company are nondiversified
mutual savings and loan holding companies within the meaning of the HOLA. As
such, the Mutual Holding Company and the Company are registered with the OTS and
are subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Mutual
Holding Company and the Company and any nonsavings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. As federal corporations, the Company and the Mutual Holding Company
are generally not subject to state business organizations law.

Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS
regulations and policy, a Mutual Holding Company and a federally chartered
mid-tier holding company such as the Company may engage in the following
activities: (I) investing in the stock of a savings association; (ii) acquiring
a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings association; (iv)
investing in a corporation, the capital stock of which is available for purchase
by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets owned
or acquired from a savings subsidiary

29

of such company; (vii) holding or managing properties used or occupied by a
savings association subsidiary of such company properties used or occupied by a
savings association subsidiary of such company; (viii) acting as trustee under
deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by
regulation, has determined to be permissible for bank holding companies under
Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by
regulation, prohibits or limits any such activity for savings and loan holding
companies; or (B) in which multiple savings and loan holding companies were
authorized (by regulation) to directly engage on March 5, 1987; and (x)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such savings and loan
holding company is approved by the Director. If a Mutual Holding Company
acquires or merges with another holding company, the holding company acquired or
the holding company resulting from such merger or acquisition may only invest in
assets and engage in activities listed in (I) through (x) above, and has a
period of two years to cease any nonconforming activities and divest of any
nonconforming investments.

The HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or holding
company thereof, without prior written approval of the OTS. It also prohibits
the acquisition or retention of, with certain exceptions, more than 5% of a
nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.

The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (I) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.

Waivers of Dividends by the Mutual Holding Company. OTS regulations
require the Mutual Holding Company to notify the OTS of any proposed waiver of
its right to receive dividends. The OTS reviews dividend waiver notices on a
case-by-case basis, and, in general, does not object to any such waiver if: (I)
the Mutual Holding Company's board of directors determines that such waiver is
consistent with such directors' fiduciary duties to the Mutual Holding Company's
members; (ii) for as long as the savings association subsidiary is controlled by
the Mutual Holding Company, the dollar amount of dividends waived by the Mutual
Holding Company are considered as a restriction to the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the Mutual Holding
Company is available for declaration as a dividend solely to the Mutual Holding
Company, and, in accordance with SFAS No. 5, where the savings association
determines that the payment of such dividend to the Mutual Holding Company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the Mutual Holding Company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the Mutual Holding Company.

Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to undertake a conversion from mutual to stock
form ("Conversion Transaction"). In a Conversion Transaction a new holding
company would be formed as the successor to the Company (the "New Holding
Company"), the Mutual Holding Company's corporate existence would end, and
certain customers of the Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock ("Common Stock") held by stockholders of the Company other
than the Mutual Holding Company ("Minority Stockholders") would be automatically
converted into a number of shares of common stock of the New

30

Holding Company determined pursuant an exchange ratio that ensures that after
the Conversion Transaction, subject to the dividend waiver adjustment described
below and any adjustment to reflect the receipt of cash in lieu of fractional
shares, the percentage of the to-be outstanding shares of the New Holding
Company issued to Minority Stockholders in exchange for their Common Stock would
be equal to the percentage of the outstanding shares of Common Stock held by
Minority Stockholders immediately prior to the Conversion Transaction. The total
number of shares held by Minority Stockholders after the Conversion Transaction
would also be affected by any purchases by such persons in the offering that
would be conducted as part of the Conversion Transaction.

The dividend waiver adjustment would decrease the percentage of the
to-be outstanding shares of common stock of the New Holding Company issued to
Minority Stockholders in exchange for their shares of Common Stock to reflect
(I) the aggregate amount of dividends waived by the Mutual Holding Company and
(ii) assets other than Common Stock held by the Mutual Holding Company. Pursuant
to the dividend waiver adjustment, the percentage of the to-be outstanding
shares of the New Holding Company issued to Minority Stockholders in exchange
for their shares of Common Stock would be equal to the percentage of the
outstanding shares of Common Stock held by Minority Stockholders multiplied by a
dividend waiver fraction. The dividend waiver fraction is equal to the product
of (a) a fraction, of which the numerator is equal to the Company's
stockholders' equity at the time of the Conversion Transaction less the
aggregate amount of dividends waived by the Mutual Holding Company and the
denominator is equal to the Company's stockholders' equity at the time of the
Conversion Transaction, and (b) a fraction, of which the numerator is equal to
the appraised pro forma market value of the New Holding Company minus the value
of the Mutual Holding Company's assets other than Common Stock and the
denominator is equal to the pro forma market value of the New Holding Company.

Federal Securities Law

The common stock of the Company is registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act. Common stock of the Company held by persons who are affiliates
(generally officers, directors and principal stockholders) of the Company may
not be resold without registration or unless sold in accordance with certain
resale restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.

ITEM 2. Properties
- -------------------

Properties

In the weeks before and after September 30, 1999, Provident opened its
first two branches in Orange County, extending its market area from its base of
11 conveniently located branches in Rockland County. Currently the Bank leases
eight premises, including its headquarters location, from third parties under
terms and conditions considered by the management to be favorable to the Bank.
In addition, the Bank owns six premises.

Following is a list of Bank locations:

Corporate Office and Commercial Lending Group

400 Rella Boulevard 38-40 New Main Street
Montebello, NY 10901 Haverstraw, NY 10927
(914) 369-8040 (914) 942-3880

Rockland County:

44 W. Route 59 375 Rt. 303 at Kings Highway
Nanuet, NY 10954 Orangeburg, NY 10962
(914) 627-6180 (914) 398-4810

31

148 Rt. 9W 196 Rt. 59
Stony Point, NY 10980 Suffern, NY 10901
(914) 942-3890 (914) 369-8360

179 South Main Street 1633 Rt. 202
New City, NY 10956 Pomona, NY 10970
(914) 639-7750 (914) 364-5690

72 West Eckerson Rd. Orange County:
Spring Valley, NY 10977
(914) 426-7230 125 Dolson Avenue
(In the ShopRite Supermarket)*
1 Lake Road West Middletown, NY 10940
Congers, NY 19020 (914)-342-5777
(914) 267-2180
153 Rt. 94
71 Lafayette Avenue (In the ShopRite Supermarket)
Suffern, NY 10901 Warwick, NY 10990
(914) 369-8350 (914) 986-9540

26 North Middletown Rd. * Opened in October, 1999
(In the ShopRite Supermarket)
Pearl River, NY 10965
(914) 627-6170

ITEM 3. Legal Proceedings
- -------------------------

The Bank is a defendant in a lawsuit, Patrick Gawrysiak a/k/a Patrick
Gray v. Provident Bank, brought by a prospective purchaser of REO property,
alleging breach of contract, negligence, consumer fraud and civil conspiracy.
The plaintiff brought the lawsuit in the Superior Court of New Jersey, Bergen
County Law Division, and is seeking compensatory damages of $500,000, exemplary
damages of $1.0 million, "nominal" damages of $1.0 million and punitive damages
of $1.0 million. The Bank retained counsel and vigorously contested the claim.
On September 24, 1999, the Bank's motion for summary judgment was granted
dismissing the lawsuit for lack of personal jurisdiction over the Bank.
Plaintiff has filed a notice of appeal of that decision. Management continues to
believe the underlying claim is baseless and intends to vigorously contest the
plaintiff's appeal.

The Company is not involved in any other pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business which, in the aggregate, involved amounts which are believed by
management to be immaterial to the financial condition and operations of the
Company.

ITEM 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------

No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.

PART II

ITEM 5. Market for Company's Common Stock and Related Security Holder Matters

The "Common Stock and Related Matters" section of the Company's Annual
Report to Stockholders is incorporated herein by reference.

32

ITEM 6. Selected Financial Data
- -------------------------------

The "Selected Consolidated Financial and Other Data" section for the
year ended September 30, 1999 is filed as part of the Company's Annual Report to
Stockholders is incorporated herein by reference.

ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------

The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------

The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.

ITEM 8. Financial Statements and Supplementary Data
- ----------------------------------------------------

The financial statements contained in the Company's Annual Report to
Stockholders are incorporated herein by reference.

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

None

PART III

ITEM 10. Directors and Executive Officers of the Company
- --------------------------------------------------------

The "Proposal 1-Election of Directors" section of the Company's Proxy
Statement for the Company's Annual Meeting of Stockholders to be held in
February 2000 (the "Proxy Statement") is incorporated herein by reference.

ITEM 11. Executive Compensation
- -------------------------------

The "Proposal I-Election of Directors" section of the Proxy Statement
is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------

The "Proposal I-Election of Directors" section of the Proxy Statement
is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions
- -------------------------------------------------------

The "Transactions with Certain Related Persons" section of the Proxy
Statement is incorporated herein by reference.

33

PART IV

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

(a)(1) Financial Statements

The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:

(A) Independent Auditors' Report

(B) Consolidated Statements of Condition

(C) Consolidated Statements of Income

(D) Consolidated Statements of Changes in Stockholders'
Equity

(E) Consolidated Statements of Cash Flows

(F) Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules

All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.

(b) Reports on Form 8-K

None.

(c) Exhibits

3.1 Stock Holding Company Charter of Provident Bancorp, Inc.
(incorporated herein by reference to the Company's
Registration Statement on Form S-1, file No. 333-63593 (the
"S-1"))

3.2 Bylaws of Provident Bancorp, Inc. (incorporated herein by
reference to the S-1)

4 Form of Stock Certificate of Provident Bancorp, Inc.
(incorporated herein by reference to the S-1)

10.1 Form of Employee Stock Ownership Plan (incorporated herein by
reference to the S-1)

10.2 Employment Agreement with George Strayton, as amended
(incorporated herein by reference to the S-1)

10.3 Form of Employment Agreement (incorporated herein by reference
to the S-1)

10.4 Deferred Compensation Agreement (incorporated herein by
reference to the S-1)

10.5 Supplemental Executive Retirement Plan, as amended
(incorporated herein by reference to the S-1)

10.6 Management Incentive Program (incorporated herein by reference
to the S-1)

34

10.7 1996 Long-Term Incentive Plan for Officers and Directors, as
amended (incorporated herein by reference to the S-1)

13 Annual Report to Stockholders

21 Subsidiaries of the Company

27 EDGAR Financial Data Schedule

35

Signatures

Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

Provident Bancorp, Inc.

Date: December 23, 1999 By: \s\ George Strayton
--------------------
George Strayton

President, Chief Executive Officer and
Director

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

By: \s\ George Strayton By: \s\ Katherine Dering
---------------------------------- ----------------------------------
George Strayton Katherine Dering
President, Chief Executive Officer and Chief Financial Officer and Senior
Director Vice President

Date: December 23, 1999 Date: December 23, 1999

By: \s\ William F. Helmer By: \s\ Dennis L. Coyle
---------------------------------- ----------------------------------
William F. Helmer Dennis L. Coyle, Vice Chairman
Chairman of the Board

Date: December 23, 1999 Date: December 23, 1999

By: \s\ Murray L. Korn By: \s\ Donald T. McNelis
---------------------------------- ----------------------------------
Murray L. Korn, Director Donald T. McNelis, Director

Date: December 23, 1999 Date: December 23, 1999

By: \s\ Richard A. Nozell By: \s\ William R. Sichol, Jr.
---------------------------------- ----------------------------------
Richard A. Nozell, Director William R. Sichol, Jr., Director

Date: December 23, 1999 Date: December 23, 1999

By: By: \s\ F. Gary Zeh
---------------------------------- ----------------------------------
Wilbur C. Ward, Director F. Gary Zeh, Director

Date: December 23, 1999

36