<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

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

         For the fiscal year ended March 31, 1997

                                       OR

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

         For the transition period from                 to

         COMMISSION FILE NUMBER  0-26466

                           TAPPAN ZEE FINANCIAL, INC.
             (Exact name of registrant as specified in its charter)

         DELAWARE                                          13-3840352
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                            Identification Number)

75 NORTH BROADWAY, TARRYTOWN, NEW YORK                                10591-0187
(Address of principal executive offices)                              (Zip Code)

                                 (914) 631-0344
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:
                                (Not applicable)
           Securities registered pursuant to Section 12(g) of the Act:
                           Common Stock $.01 par value
                                (Title of class)

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

                               YES  X   NO ____

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

As of May 31, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $18,524,000 based on the closing price on
the that date and a total of 1,534,062 shares of Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)   Portions of the Registrant's Annual Report to Shareholders for fiscal 1997
      are incorporated herein by reference into Item 1 of Part I and Items 5,6,7
      and 8 of Part II.
(2)   Portions of the definitive Proxy Statement for the Registrant's 1997
      Annual Meeting of Shareholders are incorporated herein by reference into
      Items 10, 11, 12 and 13 of Part III.
<PAGE>   2
                            TAPPAN ZEE FINANCIAL, INC.


                                      PART I
<TABLE>
<CAPTION>

                                                                                                                      Page
                                                                                                                      ----

<S>           <C>                                                                                                     <C>
Item 1.       Business                                                                                                   2
Item 2.       Properties                                                                                                25
Item 3.       Legal Proceedings                                                                                         25
Item 4.       Submission of Matters to a Vote of  Security Holders                                                      25


                                                          PART II

Item 5.       Market for the Registrant's Common Equity and Related Stockholder Matters                                 25
Item 6.       Selected Financial Data                                                                                   25
Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations                     25
Item 8.       Financial Statements and Supplementary Data                                                               26
Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                      26


                                                         PART III

Item 10.      Directors and Executive Officers of the Registrant                                                        26
Item 11.      Executive Compensation                                                                                    26
Item 12.      Security Ownership of Certain Beneficial Owners and Management                                            26
Item 13.      Certain Relationships and Related Transactions                                                            26
                                                                                                                        26


                                                          PART IV

Item 14.      Exhibits, Financial  Statement Schedules, and Reports on Form 8-K                                         27
              Signatures                                                                                                30
</TABLE>

Explanatory Note: This Annual Report on Form 10-K contains certain
forward-looking statements consisting of estimates with respect to the financial
condition, results of operations and business of the Company that are subject to
various factors which could cause actual results to differ materially from these
estimates. These factors include changes in general, economic and market, and
legislative and regulatory conditions, and the development of an interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Company's operations and investments.

                                        1
<PAGE>   3
                                     PART I
ITEM 1.    BUSINESS

GENERAL

         Tappan Zee Financial, Inc. (the "Registrant") is the unitary savings
bank holding company for Tarrytowns Bank, FSB (the "Bank"), a federally
chartered savings bank and wholly-owned subsidiary of the Registrant. On October
5, 1995, the Bank converted from a mutual savings bank to a stock savings bank
(the " Conversion"). Collectively, the Registrant and the Bank are referred to
herein as the "Company." Concurrent with the Conversion, the Registrant sold
1,620,062 shares of its common stock in a subscription and community offering at
a price of $10 per share, for net proceeds of $14.9 million (the "Stock
Offering").

         The Company's primary market area consists of the Village of Tarrytown
and its neighboring communities in Westchester County, New York with business
conducted from one office located in Tarrytown, New York. The Bank is a
community-oriented savings institution whose business primarily consists of
accepting deposits from customers within its market area and investing those
funds in mortgage loans secured by one- to four-family residences. To a
significantly lesser extent, funds are invested in multi-family, commercial real
estate, construction, commercial business and consumer loans. The Company also
invests in mortgage-backed and other securities. The Registrant has no business
activities other than its ownership of the Bank.

         The Company's results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
its interest-earning assets, such as loans and securities, and the interest
expense on its interest-bearing liabilities, such as deposits. The Company also
generates non-interest income such as service charges and other fees. The
Company's non-interest expense consists of compensation and benefits, occupancy
expenses, federal deposit insurance costs, data processing service fees, net
costs of real estate owned and other operating expenses. The Company's results
of operations are significantly affected by general economic and competitive
conditions (particularly changes in market interest rates), government policies,
changes in accounting standards and actions of regulatory agencies.

MARKET AREA AND COMPETITION

         The Company's deposit gathering and lending markets are concentrated in
the communities surrounding its office in the Village of Tarrytown located in
Westchester County, New York, although the Company also lends to borrowers
located in other areas of Westchester County. Westchester County borders New
York City to the south, Connecticut to the east, northern New Jersey and the
County of Rockland in New York to the west and the New York County of Putnam to
the north. In addition to being a suburb of New York City, Westchester contains
villages, towns and cities with shopping, office and industrial centers, as well
as farms and rural areas. The population of Westchester County is approximately
885,000. The population of the Village of Tarrytown exceeds 10,000, with a
median household income of approximately $45,000.

         Some of the nation's major corporations have Westchester operations,
including IBM Corporation, Texaco Inc., AT&T, NYNEX, PepsiCo, Inc., Readers
Digest, Inc., Tambrands, Inc., Kraft General Foods, Inc., Metro-North Commuter
Railroad Company and Consolidated Edison of New York, Inc. Many other
industrial, insurance, educational, financial and health service corporations
employ significant numbers of local residents and also serve to meet the
educational, cultural and social needs of the area. The labor force contains
larger percentages of professional, technical and clerical workers than New York
State as a whole. However, many companies have downsized their operations and
staff sizes in the last few years. For example, in June 1996 General Motors
closed its plant located in the Village of North Tarrytown, which employed
approximately 2,100 people. Many of the employees who worked at the plant did
not live in Tarrytown or its neighboring communities, therefore, the plant
closing has not had a material adverse effect on the Company's operations.
However, it is the Company's understanding that a substantial portion of North
Tarrytown's tax base is attributable to the General Motors plant. It is possible
that the commercial businesses and homeowners in North Tarrytown and Tarrytown
(which comprise a single school district) will face higher property tax
assessments due to the plant closing. This could adversely affect the ability of
those commercial businesses and homeowners who are borrowers of the Company to
continue to repay their outstanding loans in a timely fashion. The Company,
however, is unable to determine at this time the ultimate impact of any such
event.

         The Northeast region of the United States, which includes the Company's
market area, was affected by the prolonged recession that occurred in the early
1990s, which resulted in a contraction of economic activity and a deterioration
of the local real estate market. Since then, the local economy has shown signs
of improvement. However, if another recession were to occur, and as a result the
Company were to experience a significant increase in non-performing assets, it
is likely that the


                                       2
<PAGE>   4
Company's future operating results would be affected by (i) significant
provisions for loan losses and reduced interest income, (ii) significant
provisions for real estate owned losses, and (iii) significant costs incurred in
connection with managing foreclosed properties and collection efforts on
delinquent loans.

         The Company faces substantial competition for both the deposits it
accepts and the loans it makes. Westchester County has a high density of
financial institutions, including branch offices of major commercial banks, all
of which compete with the Company to varying degrees. The Village of Tarrytown
has full-service branch offices of the following commercial banks: First Union
National Bank, Chase Bank, Fleet Bank, Bank of New York and Union State Bank.
The Company also encounters significant competition for deposits from commercial
banks, savings banks and savings and loan associations located in Westchester
County, as well as short-term money market securities, money market mutual
funds, and corporate and government securities. Due to the size of the Company
relative to its competitors, the Company offers a more limited product line than
many competitors, with an emphasis on product delivery and customer service
rather than a very broad product line. The Company competes for deposits by
offering a variety of customer services and deposit accounts at generally
competitive interest rates. The Company's competition for loans comes
principally from savings banks, savings and loan associations, commercial banks,
mortgage bankers, brokers and other institutional lenders. The Company competes
for loans primarily by emphasizing the quality of its loan services and by
charging loan fees and interest rates that are generally competitive within its
market area. Changes in the demand for loans relative to the availability of
credit may affect the level of competition from financial institutions which may
be more willing than the Company or its competitors to make credit available but
which have not generally engaged in lending activities in the Company's market
area in the past. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.

LENDING ACTIVITIES

         Loan Portfolio Composition. The Company's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to four-family
residences. At March 31, 1997, the Company had total net loans outstanding of
$55.1 million (gross loans of $56.3 million less the allowance for loan losses,
unearned discounts and net deferred loan fees). A total of $44.0 million, or
79.8% of net loans, were one- to four-family, residential mortgage loans. The
following table sets forth the composition of the Company's loan portfolio in
dollar amounts and as a percentage of the portfolio at the dates indicated:

<TABLE>
<CAPTION>
                                                                 AT MARCH 31,
                                         -------------------------------------------------------------
                                                     1997                          1996
                                         ----------------------------   ---------------------------
                                                            PERCENT                       PERCENT
                                           AMOUNT           OF TOTAL      AMOUNT          OF TOTAL
                                           ------           --------      ------          --------
<S>                                     <C>                <C>           <C>              <C>
Mortgage loans:
  One- to four-family                   $ 43,958           79.76%        $ 38,762         75.75%
  Multi-family                             2,289            4.15            3,287          6.42
  Commercial                               3,910            7.09            3,561          6.96
  Construction,net                         1,719            3.12            2,462          4.81
  Net deferred loan fees                    (279)          (0.51)            (284)        (0.55)
                                        --------           -----         --------         -----
       Total mortgage loans               51,597           93.61           47,788         93.39

Commercial loans:
  Commercial business loans, net           2,831            5.14            2,727          5.33
  Net deferred loan fees                      (1)             --               (1)           --
                                        --------           -----         --------         -----
       Total commercial loans              2,830            5.14            2,726          5.33

Consumer loans:
  Automobile loans                           781            1.42              724          1.41
  Other consumer loans                       797            1.45              821          1.60
  Unearned discounts                        (239)          (0.43)            (235)        (0.46)
  Net deferred loan costs                      4            0.01                4          0.01
                                        --------           -----         --------         -----
       Total consumer loans                1,343            2.45            1,314          2.56

Allowance for loan losses                   (660)          (1.20)            (654)        (1.28)
                                        --------           -----         --------         -----
       Total loans, net                 $ 55,110          100.00%        $ 51,174        100.00%
                                        ========           =====         ========         =====
</TABLE>

<TABLE>
<CAPTION>
                                                                         AT   MARCH 31,
                                        --------------------------------------------------------------------------------
                                                        1995                         1994                        1993
                                        --------------------------   --------------------------  -----------------------
                                                         PERCENT                     PERCENT                    PERCENT
                                          AMOUNT         OF TOTAL      AMOUNT        OF TOTAL      AMOUNT       OF TOTAL
                                          ------         --------      ------        --------      ------       --------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                       <C>              <C>         <C>           <C>            <C>           <C>
Mortgage loans:
  One- to four-family                     $ 39,020         77.68%      $ 36,011       79.98%        $ 35,634      77.11%
  Multi-family                               3,443          6.85          2,649        5.88            2,757       5.97
  Commercial                                 4,019          8.00          2,965        6.59            2,958       6.40
  Construction,net                           1,115          2.22            824        1.83            1,462       3.16
  Net deferred loan fees                      (324)        (0.64)          (278)      (0.62)            (237)     (0.51)
                                          --------         -----       --------       -----         --------      -----
       Total mortgage loans                 47,273         94.11         42,171       93.66           42,574      92.13

Commercial loans:
  Commercial business loans, net             2,415          4.81          2,211        4.91            2,878       6.23
  Net deferred loan fees                        (1)           --             (1)         --               --         --
                                          --------         -----       --------       -----         --------      -----
       Total commercial loans                2,414          4.81          2,210        4.91            2,878       6.23

Consumer loans:
  Automobile loans                             603          1.20            415        0.92              501       1.08
  Other consumer loans                         789          1.57          1,003        2.23              994       2.15
  Unearned discounts                          (199)        (0.40)          (236)      (0.52)            (258)     (0.56)
  Net deferred loan costs                        3          0.01              3          --                4       0.01
                                          --------         -----       --------       -----         --------      -----
       Total consumer loans                  1,196          2.38          1,185        2.63            1,241       2.68

Allowance for loan losses                     (650)        (1.30)          (540)      (1.20)            (482)     (1.04)
                                          --------         -----       --------       -----         --------      -----
       Total loans, net                   $ 50,233        100.00%      $ 45,026      100.00%        $ 46,211     100.00%
                                          ========         =====       ========       =====         ========      =====
</TABLE>

                                       3
<PAGE>   5
         The types of loans that the Company may originate are subject to
federal and state laws and regulations. Interest rates charged by the Company on
loans are affected by the demand for such loans, the supply of money available
for lending purposes and the rates offered by competitors. These factors are
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board ("FRB"), and legislative
tax policies.

              Loan Maturity. The following table shows the contractual maturity
of the Company's gross loans at March 31, 1997. The table reflects the entire
unpaid principal balance in the maturity period that includes the final loan
payment dates and, accordingly, does not give effect to periodic principal
repayments or possible prepayments. Principal repayments and prepayments totaled
$7.9 million, $8.2 million and $9.5 million for the years ended March 31, 1997,
1996 and 1995, respectively.

<TABLE>
<CAPTION>
                                                                          AT MARCH 31, 1997
                                               ----------------------------------------------------------------
                                               ONE-TO FOUR-      MULTI-                  COMMERCIAL
                                                 FAMILY          FAMILY         MORTGAGE           CONSTRUCTION
                                                 ------          ------         --------           ------------
                                                                         (IN THOUSANDS)
<S>                                             <C>              <C>             <C>                 <C>
Contractual maturity:
    One year or less                            $ 1,058          $  485          $  441              $1,719
                                                -------          ------          ------              ------
    After one year:
       More than 1 year to 5 years                2,085           1,334           2,644                  --
       More than 5 years                         40,815             470             825                  --
                                                -------          ------          ------              ------
       Total after one year                      42,900           1,804           3,469                  --
                                                -------          ------          ------              ------

       Total amount due                         $43,958          $2,289          $3,910              $1,719
                                                =======          ======          ======              ======
</TABLE>

<TABLE>
<CAPTION>
                                                         AT MARCH 31, 1997
                                           ------------------------------------------
                                                  COMMERCIAL
                                           BUSINESS          CONSUMER        TOTAL
                                           --------          --------        -----
                                                         (IN THOUSANDS)
<S>                                        <C>                 <C>           <C>
Contractual maturity:
    One year or less                       $1,571              $   81        $ 5,355
                                           ------              ------        -------
    After one year:
       More than 1 year to 5 years          1,100               1,280          8,443
       More than 5 years                      160                 217         42,487
                                           ------              ------        -------
       Total after one year                 1,260               1,497         50,930
                                           ------              ------        -------

       Total amount due                    $2,831              $1,578        $56,285
                                           ======              ======        =======
</TABLE>

              The following table sets forth the dollar amounts in each loan
category at March 31, 1997 that are contractually due after March 31, 1998, and
whether such loans have fixed interest rates or adjustable interest rates.

<TABLE>
<CAPTION>
                                                               DUE AFTER MARCH 31, 1998
                                              -----------------------------------------------------------
                                                  FIXED               ADJUSTABLE              TOTAL
                                              ----------------   ---------------------   ----------------
                                                                   (IN THOUSANDS)
<S>                                           <C>                 <C>                     <C>
    Mortgage loans (1):
       One-to four-family                         $30,541             $  12,359              $42,900
       Multi-family                                 1,601                   203                1,804
       Commercial                                   3,227                   242                3,469
    Commercial business loans                         935                   325                1,260
    Consumer loans                                  1,497                    --                1,497
                                                  --------            ----------             --------
         Total                                    $37,801             $  13,129              $50,930
                                                  ========            ==========             ========
</TABLE>

(1)      There are no construction loans that are contractually due after March
         31, 1998.

         Origination, Purchase, Sale and Servicing of Loans. The Company's
lending activities are conducted through its office. The Company originates both
adjustable-rate mortgage loans and fixed-rate mortgage loans. Loan originations
are generally obtained from existing or past customers and members of the local
communities. The Company's ability to originate loans is dependent upon the
relative customer demand for fixed-rate or adjustable-rate mortgage loans, which
is affected by the current and expected future levels of interest rates. During
the fiscal year ended March 31, 1997, the Company experienced an increase in
fixed-rate mortgage loan originations, as compared to originations of
adjustable-rate mortgage loans. The Company currently holds for its portfolio
all loans it originates and, from time to time, may purchase participations in
mortgage loans originated by other institutions. The determination to purchase
participations in specific loans or pools of loans is based upon criteria
substantially similar to the Company's underwriting policies, such as the
financial condition of the borrower, the location of the underlying property and
the appraised value of the property, among other factors. The Company has no
current plans to sell loans it originates in the future, but continually reviews
the merits of adopting such a program to increase liquidity or reduce interest
rate risk. The Company does not service loans for others and has no current
plans to begin such activities.

                                       4
<PAGE>   6
         The following table sets forth the Company's loan originations,
repayments and other portfolio activity for the periods indicated.

<TABLE>
<CAPTION>
                                                                      FOR THE YEAR ENDED MARCH 31,
                                                       ---------------------------------------------------------
                                                            1997                1996                1995
                                                            ----                ----                ----
                                                                           (IN THOUSANDS)
<S>                                                    <C>                     <C>                  <C>
Unpaid principal balances at beginning of year            $ 53,102             $ 52,239             $ 46,160
  Loans originated:
    Mortgage loans:
        One- to four-family                                  6,740                4,125                8,201
        Multi-family                                            --                  150                1,399
        Commercial                                           1,085                   --                1,257
        Construction                                         1,475                2,580                2,280
    Commercial business                                      1,799                1,471                2,289
    Consumer                                                   790                  967                  732
                                                          --------             --------             --------
      Total loans originated                                11,889                9,293               16,158
                                                          --------             --------             --------

  Principal repayments                                      (7,942)              (8,233)              (9,462)
  Charge-offs                                                  (63)                 (86)                 (63)
  Transfers to real estate owned                                --                 (111)                (554)
                                                          --------             --------             --------
Unpaid principal balances at end of year                    56,986               53,102               52,239

Less:
   Construction loans in process                              (686)                (738)                (815)
   Unearned discounts                                         (239)                (235)                (199)
   Unused lines of credit                                      (15)                 (20)                 (20)
   Allowance for loan losses                                  (660)                (654)                (650)
   Net deferred loan fees                                     (276)                (281)                (322)
                                                          --------             --------             --------
Net loans at end of year                                  $ 55,110             $ 51,174             $ 50,233
                                                          ========             ========             ========
</TABLE>

         One- to Four-Family Mortgage Lending. The Company offers both
fixed-rate and adjustable-rate mortgage loans, with maturities up to thirty
years, which are secured by one- to four-family residences. Substantially all
such loans are secured by owner-occupied properties located in Westchester
County, New York. At March 31, 1997, $44.0 million, or 79.8% of the Company's
net loans outstanding, were one- to four-family residential mortgage loans. Of
the one- to four-family residential mortgage loans outstanding at that date,
71.8%, or $31.6 million, were fixed-rate loans and 28.2%, or $12.4 million, were
adjustable-rate loans. The interest rates for the majority of the Company's
adjustable-rate mortgage loans are indexed to the yield on one-year U.S.
Treasury securities. The Company currently offers a number of adjustable-rate
mortgage loan programs with interest rates which adjust either every one, three
or five years. An adjustable-rate mortgage loan may carry an initial interest
rate that is less than the fully-indexed rate for the loan. All adjustable-rate
mortgage loans offered have lifetime interest rate caps or ceilings. Generally,
adjustable-rate mortgage loans pose credit risks somewhat greater than the
credit risk inherent in fixed-rate loans primarily because, as interest rates
rise, the underlying payments of the borrowers rise, increasing the potential
for default. It is the Company's policy to underwrite its adjustable-rate
mortgage loans based on the fully-indexed rate. The Company currently has no
mortgage loans that are subject to negative amortization.

         In view of its operating strategy, the Company adheres to its Board
approved underwriting guidelines for loan origination, which, though prudent in
approach to credit risk and evaluation of collateral, allow management
flexibility with respect to documentation of certain matters and certain credit
requirements. However, the Company generally originates loans using guidelines
comparable to Federal National Mortgage Association ("FNMA") or Federal Home
Loan Mortgage Corporation ("FHLMC") underwriting guidelines. The Company's
policy is to originate one- to four-family residential mortgage loans in amounts
up to 80% of the lower of the appraised value or the selling price of the
property securing the loan. The Company


                                       5
<PAGE>   7
has not offered and currently does not offer products with a higher
loan-to-value ratio in conjunction with private mortgage insurance, and has no
plans to do so in the future. Mortgage loans originated by the Company generally
include due-on-sale clauses which provide the Company with the contractual right
to deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Company's consent. Due-on-sale clauses are
an important means of adjusting the rates on the Company's fixed-rate mortgage
loan portfolio and the Company has generally exercised its rights under these
clauses.

         Multi-Family Mortgage Lending. The Company originates multi-family
mortgage loans generally secured by five- to ten-unit apartment buildings
located in the Company's market area. In reaching its decision on whether to
make a multi-family loan, the Company considers the qualifications of the
borrower as well as the underlying property. Some of the factors considered are:
the net operating income of the mortgaged premises before debt service and
depreciation; the debt service ratio (the ratio of the property's net cash flow
to debt service requirements); and the ratio of loan amount to appraised value.
When evaluating the qualifications of the borrower for a multi-family mortgage
loan, the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar properties,
and the Company's lending experience with the borrower. The Company requires
that the borrower be able to demonstrate strong management skills and the
ability to maintain the property from current rental income. The borrower is
also required to provide evidence of the ability to repay the mortgage and a
history of making mortgage payments on a timely basis. In making its assessment
of the creditworthiness of the borrower, the Company generally reviews the
financial statements, employment and credit history of the borrower, as well as
other related documentation.

         Pursuant to the Company's underwriting policies, a multi-family
mortgage loan may only be made in an amount up to the lesser of (i) 75% of the
appraised value of the underlying property or (ii) the Company's current
loans-to-one borrower limit. See "Regulation -- Regulation of Federal Savings
Association -- Loans to One Borrower." Subsequent declines in the real estate
values in the Company's primary market area have resulted in an increase in the
loan-to-value ratios on certain multi-family mortgage loans. The Company's
multi-family mortgage loans are generally fixed-rate loans and may be made with
terms up to fifteen years, generally with a five-year balloon maturity and a
fifteen-year amortization schedule. The Company's multi-family mortgage loan
portfolio at March 31, 1997 was approximately $2.3 million, or 4.2% of net loans
outstanding. The Company's largest multi-family mortgage loan at March 31, 1997
had an outstanding balance of $267,000 and is secured by a five-unit apartment
house.

         Mortgage loans secured by apartment buildings and other multi-family
residential properties are generally larger and involve a greater degree of risk
than one- to four-family residential mortgage loans. Because payments on loans
secured by multi-family properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to circumstances outside the borrower's control,
including adverse conditions in the real estate market or the economy. The
Company seeks to minimize these risks through its underwriting policies, which
require such loans to be qualified at origination on the basis of the property's
income and debt service ratio.

         Commercial Real Estate Mortgage Lending. The Company originates
commercial real estate mortgage loans that are generally secured by a
combination of residential and retail facilities and, to a lesser extent,
properties used for business purposes, such as small office buildings, located
in the Company's market area. The Company's underwriting procedures provide that
commercial real estate loans may be made in amounts up to the lesser of (i) 75%
of the lesser of the appraised value or purchase price of the property or (ii)
the Company's current loans-to-one borrower limit. These loans are generally
fixed-rate loans and may be made with terms up to fifteen years, generally with
a five-year balloon maturity and a fifteen-year amortization schedule. The
Company's underwriting standards and procedures for these loans are similar to
those applicable to its multi-family mortgage loans, whereby the Company
considers factors such as the net operating income of the property and the
borrower's expertise, credit history and profitability. At March 31, 1997, the
Company's commercial real estate mortgage portfolio was $3.9 million, or 7.1% of
net loans outstanding. The largest commercial real estate loan in the Company's
portfolio at March 31, 1997 was $559,000 and is secured by a light industrial
office and warehouse.

              Mortgage loans secured by commercial real estate properties, like
multi-family mortgage loans, are generally larger and involve a greater degree
of risk than one- to four-family residential mortgage loans. This risk is
attributable to the uncertain realization of projected income-producing cash
flows which are affected by vacancy rates, the ability to maintain rent levels
against competitively-priced properties and the ability to collect rent from
tenants on a timely basis. Because payments on loans secured by commercial real
estate properties are often dependent on the successful operation or management
of the properties, repayment of such loans may be subject to a greater extent to
circumstances outside the borrower's control, including adverse conditions in
the real estate market or the economy. The Company seeks to minimize these risks
through its underwriting standards, which require such loans to be qualified at
origination on the basis of the property's income and debt service ratio.


                                       6
<PAGE>   8
         Construction Lending. The Company originates loans for the acquisition
and development of property to contractors and individuals in its market area.
The Company's construction loans primarily have been made to finance the
construction of one- to four-family, owner-occupied residential properties,
multi-family properties and other properties. These loans are all fixed-rate
loans with maturities of one year or less. The Company's policies provide that
construction loans may be made in amounts up to 80% of the appraised value of
the property for construction of one- to four-family residences and multi-family
properties, and up to 75% of the appraised value of other types of properties.
All construction loans are subject to the Company's loans-to-one borrower limit.
If the borrower is a corporation, the Company generally requires personal
guarantees and a permanent loan commitment from another lender if the Company
will not be making the permanent loan. Loan proceeds are disbursed in
increments, subject to inspection by Company inspectors as construction
progresses. Subject to the Company's limitation on loans-to-one borrower, during
favorable economic conditions, the Company will consider making up to two
residential construction loans to one borrower. If economic conditions are not
favorable, the Company will not make construction loans, unless there is a
confirmed permanent mortgage takeout or the Company has approved the borrower
for permanent financing. At March 31, 1997, the Company had $1.7 million (net of
undisbursed loan funds of $686,000) of construction loans which amounted to 3.1%
of the Company's net loans outstanding. The largest construction loan in the
Company's portfolio at March 31, 1997 was $500,000 (all of which had been
disbursed) and is secured by retail commercial property.

         Construction lending generally involves additional risks to the lender
as compared with residential permanent mortgage lending. These risks are
attributable to the fact that loan funds are advanced upon the security of the
project under construction, predicated on the present value of the property and
the anticipated future value of the property upon completion of construction or
development. Moreover, because of the uncertainties inherent in delays resulting
from labor problems, materials shortages, weather conditions and other
contingencies, it is relatively difficult to evaluate the total funds required
to complete a project and to establish the loan-to-value ratio. If the Company's
initial estimate of the property's value at completion is inaccurate, the
Company may be confronted with a project, when completed, having an insufficient
value to assure full repayment.

         Commercial Business Lending. The Company also offers limited types of
short-term and medium-term commercial business loans on a secured and unsecured
basis to borrowers located in the Company's market area. These loans include
time and demand loans, term loans and lines of credit. At March 31, 1997, the
Company's commercial business loan portfolio amounted to $2.8 million, or 5.1%
of net loans outstanding. The largest commercial business loan outstanding at
March 31, 1997 was a $325,000 loan secured by marketable securities.

         The Company's lines of credit are typically established for one year
and are subject to renewal upon satisfactory review of the borrower's financial
statements and credit history. Secured short-term commercial business loans are
usually collateralized by real estate and are generally guaranteed by a
principal of the borrower. Interest on these loans is usually payable monthly at
rates that fluctuate based on a spread above the prime rate. The Company offers
term loans with terms of up to ten years, although the majority of such loans
have terms of five years or less. Typically, term loans have floating interest
rates based on a spread above the prime rate. The Company also offers business
loans on a revolving basis, whereby the borrower pays interest only. Interest on
such loans fluctuates based on the prime rate. Normally these loans require
periodic interest payments during the loan term, with full repayment of
principal and interest at maturity.

         Similar to construction loans and commercial mortgage loans, commercial
business loans generally carry greater credit risks than residential mortgage
loans because their repayment is more dependent on (i) the underlying financial
condition of the borrower, (ii) the value of any property or the cash flow from
any property securing the loan or the business being financed, and (iii) general
and local economic conditions.

         Consumer Lending. The Company offers various types of secured and
unsecured consumer loans, including automobile loans, home improvement loans and
personal loans. The Company's consumer loans have original maturities of not
more than five years, with the exception that home improvement loans may have
original maturities of up to ten years. Interest rates charged on such loans are
set at competitive rates, taking into consideration the type and term of the
loan. Consumer loan applications are reviewed and approved in conformance with
standards approved by the Company's Board of Directors. At March 31, 1997, the
Company's consumer loan portfolio totaled $1.3 million, or 2.5% of net loans
outstanding.

         Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies of the Company and reviews properties offered
as security. The Board of Directors has established the following lending
authority: the Vice President may approve mortgage loans in amounts up to
$200,000 and commercial business loans in amounts up to $75,000; the President
may approve mortgage loans up to $350,000 and commercial business loans up to
$150,000; commercial business loans in excess of $150,000 and up to $225,000
must be approved by both the President and Vice President or by the


                                       7
<PAGE>   9
Board; and mortgage loans above $350,000 and commercial business loans above
$225,000 require Board approval. The foregoing lending limits are reviewed
annually and, as needed, revised by the Board of Directors.

         For all loans originated by the Company, upon receipt of a completed
loan application from a prospective borrower, a credit report is ordered and
certain other information is verified by an independent credit agency, and, if
necessary, additional financial information is required to be submitted by the
borrower. An appraisal of any real estate intended to secure the proposed loan
is required, which appraisal currently is performed by an independent appraiser
designated and approved by the Company. The Board annually approves the
independent appraisers used by the Company and approves the Company's appraisal
policy. It is the Company's policy to require title and hazard insurance on all
real estate loans. In connection with a borrower's request for a renewal of a
multi-family or commercial mortgage loan with a five-year balloon maturity, the
Company evaluates both the borrower's ability to service the renewed loan
applying an interest rate that reflects prevailing market conditions, as well as
the value of the underlying collateral property. The evaluation of the property
typically involves a letter update of the existing appraisal unless in the
appraiser's opinion the original appraisal is no longer substantially relevant,
in which case a full appraisal is obtained.

ASSET QUALITY

         Non-Performing Loans. Loans are considered non-performing if they are
in foreclosure or are 90 or more days delinquent. Management and the Board of
Directors perform a monthly review of all delinquent loans. The actions taken by
the Company with respect to delinquencies vary depending on the nature of the
loan and period of delinquency. The Company's policies generally provide that
delinquent mortgage loans be reviewed and that a written late charge notice be
mailed no later than the 15th day of delinquency. The Company's policies provide
that telephone contact be attempted to ascertain the reasons for delinquency and
the prospects of repayment. When contact is made with the borrower at any time
prior to foreclosure, the Company attempts to obtain full payment or work out a
repayment schedule with the borrower to avoid foreclosure.

         Non-performing loans amounted to $1.66 million at March 31, 1997, as
compared to $1.63 million at March 31, 1996, representing 13 loans at both
dates. The following table sets forth delinquencies in the Company's loan
portfolio at the dates indicated:

<TABLE>
<CAPTION>
                                                      MARCH 31, 1997
                              --------------------------------------------------------------
                                        60-89 DAYS                       90 DAYS OR MORE
                              ----------------------------         -------------------------
                                   NUMBER        PRINCIPAL          NUMBER         PRINCIPAL
                                  OF LOANS        BALANCE          OF LOANS         BALANCE
                                  --------        -------          --------         -------
                                                  (Dollars in thousands)
<S>                            <C>                <C>              <C>              <C>
Mortgage loans:
   One- to four-family               5             $  890              8             $1,355
   Multi-family                      1                143             --                 --
   Commercial                        -                 --              2                195
   Construction                      1                500              1                100
Commercial business loans            -                 --             --                 --
Consumer loans                       -                 --              2                  8
                                     =             ======             ==             ======
    Total                            7             $1,533             13             $1,658
                                     =             ======             ==             ======

                                     0.98%           2.75%            1.83%            2.97%
                                     ====          ======             ====           ======
</TABLE>

<TABLE>
<CAPTION>
                                                  MARCH 31, 1996
                              ------------------------------------------------------
                                      60-89 DAYS                 90 DAYS OR MORE
                              -------------------------       ----------------------
                               NUMBER         PRINCIPAL         NUMBER     PRINCIPAL
                              OF LOANS         BALANCE         OF LOANS     BALANCE
                              --------         -------         --------     -------
                                             (Dollars in thousands)
<S>                           <C>             <C>               <C>        <C>
Mortgage loans:
   One- to four-family           2             $286              8         $1,198
   Multi-family                  1              266             --             --
   Commercial                    1              144              2            392
   Construction                  -               --             --             --
Commercial business loans        -               --              1             40
Consumer loans                   1                4              2              2
                                 =             ====             ==         ======
    Total                        5             $700             13         $1,632
                                 =             ====             ==         ======

                                 0.71%         1.35%            1.84%        3.15%
                                 ====          ====             ====       ======
</TABLE>

         It is the Company's general policy to stop the accrual of interest on
all loans 90 days or more past due. Certain loans 90 days or more past due may
continue to accrue interest based on management's evaluation of the loan, and
the underlying collateral and the credit worthiness of the borrower.

         When a loan is placed on non-accrual status, unpaid interest is
reversed against interest income of the current period. Thereafter, interest
payments received on non-accrual loans are recognized as income unless future
collections are doubtful, in which case the payments received are applied as a
reduction of principal. A loan remains on non-accrual status until the factors
that indicated doubtful collectibility no longer exist or until a loan is
determined to be uncollectible and is charged-off against the allowance for loan
losses.

         The classification of a loan as non-performing does not necessarily
indicate that loan principal or interest will not be collected. Historical
experience indicates that a portion of non-performing assets will eventually be
recovered. When all collection efforts have been exhausted, and management
determines that the borrower is unable to repay its obligation, the Company will
commence foreclosure procedures.

                                       8
<PAGE>   10
         Real Estate Owned. Property acquired by the Company as a result of
foreclosure on a mortgage loan is classified as real estate owned ("REO") and is
initially recorded fair value, less estimated sales costs, with any resulting
writedown charged to the allowance for loan losses. Thereafter, an allowance for
losses on REO is established for any further declines in fair value less
estimated sales costs. The Company obtains an appraisal on a REO property as
soon as practicable after it takes possession of the real property. The Company
will generally reassess the value of REO at least annually thereafter. At March
31, 1997, REO amounted to $122,000 and related to one single-family residence.

         See page 10 of the 1997 Annual Report to Shareholders (the "1997 Annual
Report") herein incorporated by reference, for further information regarding
non-accrual loans, other past due loans and real estate owned.

         Classified Assets. Federal regulations require that the Bank utilize an
internal asset classification system as a means of reporting problem and
potential problem assets. The Bank has incorporated the Office of Thrift
Supervision ("OTS") internal asset classifications as a part of its credit
monitoring system. The Bank currently classifies problem and potential problem
assets as "Substandard," "Doubtful" or "Loss" assets. An asset is considered
"Substandard" if it is inadequately protected by the current equity and paying
capacity of the obligor or of the collateral pledged, if any. "Substandard"
assets include those characterized by the "distinct possibility" that the
insured 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 without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."

         When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances, which is a regulatory term, represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
one or more assets, or portions thereof, as "Loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge-off such amount.

         A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectability of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that adequate specific and general loan loss
allowances have been established, actual losses are dependent upon future events
and, as such, further additions to the level of specific and general loan loss
allowances may become necessary.

         The Bank's Internal Auditor reviews and classifies the Bank's assets
monthly and reports the results to the Examining and Audit Committee of the
Board of Directors on a monthly basis. The Examining and Audit Committee then
reviews the report of the Internal Auditor and reports the results of its review
to the Board of Directors. Assets are classified in accordance with the
management guidelines described above. At March 31, 1997, the Bank had $1.8
million of assets classified as Substandard ($1.7 million of non-performing
loans and $122,000 of REO) and no assets classified as Special Mention, Doubtful
or Loss. As of March 31, 1997, loans classified as Substandard included six
loans totaling $1.0 million secured by one- to four-family, owner-occupied
residences. These loans are classified as Substandard due to delinquencies or
other identifiable weaknesses.

         Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Company's loan portfolio. The allowance for loan losses is
maintained at an amount management considers adequate to cover loan losses which
are deemed probable and estimable. The allowance is based upon a number of
factors, including asset classifications, economic trends, industry experience
and trends, industry and geographic concentrations, estimated collateral values,
historical loan loss experience, and the Company's underwriting policies. At
March 31, 1997, the Company's allowance for loan losses was $660,000, or 1.2% of
total loans and 39.8% of non-performing loans, as compared to $654,000, or 1.3%
of total loans and 40.1% of non-performing loans, at March 31,


                                       9
<PAGE>   11
1996. The Company will continue to monitor and modify its allowance for loan
losses as conditions dictate. The OTS, as an integral part of its examination
process, periodically reviews the Company's allowance for loan losses. The OTS
may require the Company to establish additional allowances, based on its
judgments of the information available at the time of the examination. See page
11 of the 1997 Annual Report for the activity in the Company's allowance for
loan losses.

         The following table sets forth the Company's allowance for loan losses
allocated by loan category, the percent of the allocated allowances to the total
allowance, and the percent of loans in each category to total loans at the dates
indicated.

<TABLE>
<CAPTION>
                                                         MORTGAGE LOANS
                                 ---------------------------------------------------------------
                                 ONE- TO
                                  FOUR-            MULTI-             COM-              CON-
                                  FAMILY           FAMILY            MERCIAL           STRUCTION
                                  ------           ------            -------           ---------
                                                      (DOLLARS IN THOUSANDS)

<S>                            <C>                 <C>               <C>                <C>
AT MARCH 31, 1997
Allowance amount                     $211             $ 9             $49                  $ 29
Percent of allowance to
  total allowance                      32%              1%              8%                    4%
Percent of loans in each
  category to total loans              78%              4%              7%                    4%


AT MARCH 31, 1996
Allowance amount                     $184             $13             $56                  $ 32
Percent of allowance to
  total allowance                      28%              2%              9%                    5%
Percent of loans in each
  category to total loans              75%              6%              7%                    5%


AT MARCH 31, 1995
Allowance amount                     $204             $68             $66                  $ 19
Percent of allowance to
  total allowance                      31%             11%             10%                    3%
Percent of loans in each
  category to total loans              76%              7%              8%                    2%


AT MARCH 31, 1994
Allowance amount                     $128             $12             $32                  $173
Percent of allowance to
  total allowance                      24%              2%              6%                   32%
Percent of loans in each
  category to total loans              79%              6%              6%                    2%


AT MARCH 31, 1993
Allowance amount                     $112             $27             $30                  $ 85
Percent of allowance to
  total allowance                      23%              6%              6%                   18%
Percent of loans in each
  category to total loans              76%              6%              6%                    3%
</TABLE>


<TABLE>
<CAPTION>
                                COMMERCIAL
                                 BUSINESS         CONSUMER         UN-
                                  LOANS             LOANS          ALLOCATED         TOTAL
                                  -----             -----          ---------         -----
                                                   (DOLLARS IN THOUSANDS)

<S>                              <C>               <C>             <C>                <C>
AT MARCH 31, 1997
Allowance amount                     $28             $17             $317             $660
Percent of allowance to
  total allowance                      4%              3%              48%             100%
Percent of loans in each
  category to total loans              5%              2%              - %             100%


AT MARCH 31, 1996
Allowance amount                     $29             $15             $325             $654
Percent of allowance to
  total allowance                      4%              2%              50%             100%
Percent of loans in each
  category to total loans              5%              2%              - %             100%


AT MARCH 31, 1995
Allowance amount                     $24             $15             $254             $650
Percent of allowance to
  total allowance                      4%              2%              39%             100%
Percent of loans in each
  category to total loans              5%              2%              - %             100%


AT MARCH 31, 1994
Allowance amount                     $24             $14             $157             $540
Percent of allowance to
  total allowance                      4%              3%              29%             100%
Percent of loans in each
  category to total loans              5%              2%              - %             100%


AT MARCH 31, 1993
Allowance amount                     $54             $16             $158             $482
Percent of allowance to
  total allowance                     11%              3%              33%             100%
Percent of loans in each
  category to total loans              6%              3%              - %             100%
</TABLE>

                                       10
<PAGE>   12
INVESTMENT ACTIVITIES

         Investment Policies. The investment policy of the Company, which is
established by the Board of Directors, is based upon the Company's
asset/liability management goals and emphasizes high credit quality and
diversified investments while seeking to optimize net interest income within
acceptable limits of safety and liquidity. The investment policy is designed to
provide and maintain liquidity to meet day-to-day, cyclical and long-term
changes in the Company's asset/liability structure. The Company's investment
goal has been to invest available funds in highly liquid instruments that have
adjustable and fixed rates and that generally, at the time of purchase, do not
exceed an average life of eight years with respect to collateralized mortgage
obligations ("CMOs") and eleven years with respect to other mortgage-backed
securities, or that meet specific requirements of the Company's asset/liability
goals. A CMO is a special type of debt security in which the stream of principal
and interest payments on the underlying mortgages or mortgage-backed securities
is used to create classes with different maturities and, in some cases,
amortization schedules as well as a residual interest, with each class
possessing different risk characteristics. At March 31, 1997, the Company's
securities portfolio amounted to $55.1 million (amortized cost) with an
estimated weighted average remaining life of 4.0 years.

         The Company's investment policy permits it to invest in U.S. government
obligations; certain securities of various government-sponsored agencies,
including mortgage-backed securities issued/guaranteed by FNMA, FHLMC and the
Government National Mortgage Association ("GNMA"); certificates of deposit of
insured banks and savings associations; federal funds; and investment grade
corporate debt securities (typically issued by municipalities and utility
companies) and commercial paper.

         The Company's investment policy prohibits investment in certain types
of mortgage derivative securities that management considers to be high risk. The
Company generally purchases only short-and medium-term classes of CMOs
guaranteed by FNMA or FHLMC. A substantial portion of the Company's CMOs have
consisted of real estate mortgage investment conduits ("REMICs").

         Thrift Bulletin Number 52, the OTS Policy Statement on securities
portfolio policies and unsuitable investment practices ("TB-52"), requires that
institutions classify mortgage derivative products acquired, including certain
tranches of CMOs, as "high-risk mortgage securities" if such products exhibit
greater price volatility than a benchmark fixed-rate 30-year mortgage-backed
pass-through security. Institutions may only hold high-risk mortgage securities
to reduce interest-rate risk in accordance with safe and sound practices and
must also follow certain prudent safeguards in the purchase and retention of
such securities. At March 31, 1997, the Company did not have any CMOs that were
identified as "high-risk mortgage securities." The Company has never invested in
CMO residual interests or in CMO tranches that met the definition of a high-risk
mortgage security at the time of investment.

         Mortgage-Backed Securities. The Company invests in mortgage-backed
securities to complement its mortgage lending activities and supplement such
activities at times of low mortgage loan demand. At March 31, 1997, the carrying
value of mortgage-backed securities totaled $39.4 million, or 32.3% of total
assets. The fair value of all mortgage-backed securities totaled $38.8 million
at March 31, 1997. Mortgage-backed securities held in the Company's
available-for-sale portfolio are carried at fair value. Mortgage-backed
securities held in the Company's held-to-maturity portfolio are carried at
amortized cost. At March 31, 1997, $37.4 million of the Company's
mortgage-backed securities are fixed-rate with a weighted average yield of 7.35%
and an estimated weighted average remaining life of 4.82 years. The Company's
adjustable-rate mortgage-backed securities at March 31, 1997 totaled $2.0
million with a weighted average yield of 7.00% and an estimated weighted average
remaining life of 1.82 years. The Company's mortgage-backed securities portfolio
includes CMOs with a fair value at March 31, 1997 of $9.1 million, a weighted
average yield of 6.54% and a weighted average estimated remaining life of 2.91
years.

         At March 31, 1997, all securities in the Company's mortgage-backed
securities portfolio were directly insured or guaranteed by GNMA, FNMA or FHLMC,
thereby providing the certificate holder a guarantee of timely payments of
interest and scheduled principal payments, whether or not they have been
collected. The Company's mortgage-backed securities portfolio had a weighted
average yield of 7.33% at March 31, 1997.

         Mortgage-backed securities generally yield less than the loans that
underlie such securities because of servicing fees and the cost of payment
guarantees or credit enhancements that reduce credit risk. In addition,
mortgage-backed securities are more liquid than individual mortgage loans and
may be used to collateralize borrowings of the Company. In general, under OTS
regulations mortgage-backed securities issued or guaranteed by GNMA, FNMA and
FHLMC and certain AAA-rated mortgage-backed pass-through securities are weighted
at no more than 20% for risk-based capital purposes, compared to the 50% risk
weighting assigned to most non-securitized residential mortgage loans. See
"Regulation--Regulation of Federal


                                       11
<PAGE>   13
Savings Association--Capital Requirements."

         While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. In contrast to mortgage-backed pass-through
securities in which cash flow is received (and, hence, prepayment risk is
shared) pro rata by all securities holders, the cash flows from the mortgages or
mortgage-backed securities underlying CMOs are segmented and paid in accordance
with a predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of a CMO may therefore carry
prepayment risk that differs from that of both the underlying collateral and
other tranches. It is the Company's strategy to purchase tranches of CMOs that
are categorized as "planned amortization classes," "targeted amortization
classes" or "very accurately defined maturities" and are intended to produce
stable cash flows in different interest rate environments.

         The following table sets forth activity in the Company's
mortgage-backed securities portfolio for the periods indicated.

<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED MARCH 31,
                                             ------------------------------------------------------
                                                  1997               1996               1995
                                             ----------------   ----------------  -----------------
                                                                (IN THOUSANDS)
<S>                                          <C>                <C>                <C>
Amortized cost at beginning of year                  $31,559            $23,935            $21,157
Purchases                                             22,648             14,137              5,510
Sales                                                (11,890)            (3,709)                --
Principal repayments                                  (2,985)            (2,812)            (2,733)
Premium and discount amortization, net                    25                  8                  1
                                             ----------------   ----------------  -----------------

Amortized cost at end of year                        $39,357            $31,559            $23,935
                                             ================   ================  =================
</TABLE>

         At March 31, 1997, the Company held no securities issued by any one
entity with a total carrying value in excess of 10% of the Company's equity at
that date, except for obligations of the U.S. government and
government-sponsored agencies and certain mortgage-backed securities which are
fully collateralized by mortgages held by single-purpose entities and guaranteed
by government-sponsored agencies.

                                       12
<PAGE>   14
         The following table sets forth the amortized cost and fair value of the
Company's securities, by accounting classification category and by type of
security, at the dates indicated:

<TABLE>
<CAPTION>
                                                                             AT MARCH 31,
                                   ------------------------------------------------------------------------------------------------
                                                  1997                              1996                           1995
                                   ------------------------------------------------------------------------------------------------
                                       AMORTIZED           FAIR          AMORTIZED          FAIR          AMORTIZED        FAIR
                                          COST             VALUE            COST            VALUE           COST           VALUE
                                   ------------------------------------------------------------------------------------------------
                                                                            (IN THOUSANDS)
<S>                                <C>               <C>            <C>              <C>             <C>              <C>
HELD-TO-MATURITY
Mortgage-backed securities:
  CMOs                                 $    996           $   994       $  1,108          $ 1,113         $  6,177        $ 5,968
  Pass-through securities                14,078            13,881          5,129            5,249            7,688          7,648
                                   -------------    --------------  -------------    -------------   --------------   ------------
                                         15,074            14,875          6,237            6,362           13,865         13,616

Agency and other debt securities          3,049             3,014          3,199            3,234            3,199          3,031
                                   -------------    --------------  -------------    -------------   --------------   ------------
  Total                                  18,123            17,889          9,436            9,596           17,064         16,647
                                   -------------    --------------  -------------    -------------   --------------   ------------
AVAILABLE-FOR-SALE
Mortgage-backed securities:
  CMOs                                    8,329             8,116         17,651           17,555            7,773          7,487
  Pass-through securities                15,954            15,799          7,671            7,622            2,297          2,307
                                   -------------    --------------  -------------    -------------   --------------   ------------
                                         24,283            23,915         25,322           25,177           10,070          9,794
Other debt securities:
  U.S. Treasury                              --                --          6,490            6,493            1,008            983
  Agency and other                        8,029             7,814          8,616            8,530            2,610          2,517
                                   -------------    --------------  -------------    -------------   --------------   ------------
                                          8,029             7,814         15,106           15,023            3,618          3,500
Equity securities                         4,655             4,655          1,344            1,344               23             23
Net unrealized loss                        (583)               --           (228)              --             (394)            --
                                   -------------    --------------  -------------    -------------   --------------   ------------
  Total                                  36,384            36,384         41,544           41,544           13,317         13,317
                                   -------------    --------------  -------------    -------------   --------------   ------------

  Total securities, net                $ 54,507           $54,273       $ 50,980          $51,140         $ 30,381        $29,964
                                   =============    ==============  =============    =============   ==============   ============
</TABLE>

                                       13
<PAGE>   15
     The following table sets forth certain information regarding the amortized
cost, fair value and weighted average yield of the Company's debt securities at
March 31, 1997, by remaining period to contractual maturity. With respect to
mortgage-backed securities, the entire amount is reflected in the maturity
period that includes the final security payment date and, accordingly, no effect
has been given to periodic repayments or possible prepayments.

<TABLE>
<CAPTION>
                                                         AT MARCH 31, 1997
                                        ----------------------------------------------------
                                                        AVAILABLE-FOR-SALE
                                        ----------------------------------------------------
                                                                                   WEIGHTED
                                            AMORTIZED               FAIR            AVERAGE
                                               COST                VALUE            YIELD
                                        -------------------   -----------------   ----------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                       <C>                 <C>                  <C>
Mortgage-backed securities due:
  After one year through five years         $  1,359             $ 1,325            6.50%
  After five years through ten years             953                 947            7.48
  After ten years                             21,971              21,643            7.28
                                            --------             -------
    Total                                   $ 24,283             $23,915            7.25%
                                            ========             =======

Agency and other debt securities due:
  In one year or less                       $     --             $   --             -- %
  After one year through five years            3,454               3,397            5.89
  After five years through ten years           4,530               4,372            6.75
  After ten years                                 45                  45            5.50
                                            --------             -------
    Total                                   $  8,029             $ 7,814            6.37%
                                            ========             =======

Total due:
  In one year or less                       $    --              $   --             -- %
  After one year through five years            4,813               4,722            6.06
  After five years through ten years           5,483               5,319            6.87
  After ten years                             22,016              21,688            7.28
                                            --------             -------
    Total                                   $ 32,312             $31,729            7.03%
                                            ========             =======
</TABLE>

<TABLE>
<CAPTION>
                                                           AT MARCH 31, 1997
                                          -------------------------------------------------
                                                           HELD-TO-MATURITY
                                          -------------------------------------------------
                                                                                  WEIGHTED
                                              AMORTIZED              FAIR          AVERAGE
                                                 COST                VALUE         YIELD
                                          -------------------   ----------------  ---------
                                                    (DOLLARS IN THOUSANDS)
<S>                                     <C>                    <C>                 <C>
Mortgage-backed securities due:
  After one year through five years           $    671            $   661          6.46%
  After five years through ten years               864                873          7.84
  After ten years                               13,539             13,341          7.37
                                              --------            ------- 
    Total                                     $ 15,074            $14,875          7.35%
                                              ========            ======= 

Agency and other debt securities due:
  In one year or less                         $     50            $    50          7.13%
  After one year through five years                100                100          7.25
  After five years through ten years             2,700              2,660          7.19
  After ten years                                  199                204          5.75
                                              --------            --------
    Total                                     $  3,049            $ 3,014          7.10%
                                              ========            ========

Total due:
  In one year or less                         $     50            $    50          7.13%
  After one year through five years                771                761          6.56
  After five years through ten years             3,564              3,533          7.35
  After ten years                               13,738             13,545          7.34
                                              --------            ------- 
    Total                                     $ 18,123            $17,889          7.31%
                                              ========            ======= 
</TABLE>

SOURCES OF FUNDS

         General. Deposits, loan and security repayments and prepayments,
proceeds from sales of available-for-sale securities and cash flows generated
from operations are the primary sources of the Company's funds for use in
lending, investing and for other general purposes.

         Deposits. The Company offers a variety of deposit accounts with a range
of interest rates and terms. The Company's deposits consist of regular
(passbook) savings accounts, statement savings accounts, checking accounts,
money market accounts and certificates of deposit. In recent years, the Company
has offered certificates of deposit with maturities of up to 30 months. At March
31, 1997, the Company's core deposits (which the Company considers to consist of
checking accounts, NOW accounts, money market accounts, regular savings accounts
and statement savings accounts) constituted 36.1% of total deposits, compared to
41.8% a year earlier. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and competition. The Company's deposits are obtained predominantly from
the areas nearby its office location. The Company relies primarily on 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 Company's ability to attract and
retain deposits. The Company does not actively solicit


                                       14
<PAGE>   16
certificate accounts in excess of $100,000 or use brokers to obtain deposits.

         The following table presents the deposit activity of the Company for
the periods indicated.

<TABLE>
<CAPTION>
                                                    FOR THE YEAR ENDED MARCH 31,
                                   ---------------------------------------------------------------
                                          1997                 1996                  1995
                                          ----                 ----                  ----
                                                             (IN THOUSANDS)

<S>                                   <C>                   <C>                   <C>
Deposits                                $151,962              $147,679              $107,186
Withdrawals                              147,624               143,571               105,777
                                        --------              --------              --------     
Net cash inflow                            4,338                 4,108                 1,409
Interest credited                          4,081                 3,987                 2,894
                                        --------              --------              --------     
  Net increase in deposits              $  8,419              $  8,095              $  4,303
                                        ========              ========              ========      
</TABLE>

         At March 31, 1997, the Company had $9.4 million in certificate accounts
in amounts of $100,000 or more maturing as follows:

<TABLE>
<CAPTION>
                                                                          WEIGHTED
                                                   AMOUNT               AVERAGE RATE
                                                   ------               ------------
                                                      (DOLLAR IN THOUSANDS)
<S>                                          <C>                        <C>
Within three months                               $ 1,655                  5.33 %
After three but within six months                   2,182                  5.64
After six but within 12 months                      2,470                  5.63
After 12 months                                     3,139                  5.65
                                                    -----              
  Total                                           $ 9,446                  5.58 %
                                                  =======       
</TABLE>

         The following table sets forth the distribution of the Company's
deposit accounts and the related weighted average interest rates at the dates
indicated.

<TABLE>
<CAPTION>
                                                                                 AT MARCH 31,
                                            ------------------------------------------------------------------------------------
                                                             1997                                       1996
                                            ---------------------------------------      --------------------------------------
                                                            PERCENT        WEIGHTED                    PERCENT         WEIGHTED
                                                           OF TOTAL        AVERAGE                     OF TOTAL        AVERAGE
                                             AMOUNT        DEPOSITS         RATE          AMOUNT       DEPOSITS          RATE
                                            -------       ---------      ---------       -------      ---------        ---------
                                                                                (DOLLARS IN THOUSANDS)
<S>                                         <C>           <C>             <C>          <C>            <C>              <C>
Checking                                    $ 2,771            2.82%                   $   2,001           2.23%
NOW                                           3,756            3.82           2.00%        4,164           4.63             2.00%
Money market                                  3,157            3.21           2.75         3,484           3.88             2.75
Regular savings                              15,008           15.26           2.75        16,402          18.24             3.10
Statement savings                            10,757           10.94           2.92        11,563          12.86             3.20
Certificate accounts:
  Less than one year to maturity             49,026           49.86           5.72        40,448          44.99             5.68
  One to three years to maturity             13,852           14.09           5.98        11,846          13.17             6.33
                                            -------       ---------      ---------       -------      ---------        ---------
    Total certificate accounts               62,878           63.95           5.78        52,294          58.16             5.83
                                            -------       ---------      ---------       -------      ---------        ---------
    Total                                   $98,327          100.00%          4.60%      $89,908         100.00%            4.57%
                                            =======       =========      =========       =======      =========        =========
</TABLE>

<TABLE>
<CAPTION>
                                                           AT MARCH 31,
                                              ---------------------------------------
                                                              1995
                                              ---------------------------------------
                                                             PERCENT       WEIGHTED
                                                             OF TOTAL       AVERAGE
                                                AMOUNT       DEPOSITS        RATE
                                              -------       ---------      ---------
                                                       (DOLLARS IN THOUSANDS)
<S>                                         <C>              <C>          <C>
Checking                                    $   1,554            1.90%
NOW                                             4,423            5.41           2.00%
Money market                                    3,865            4.72           3.00
Regular savings                                17,940           21.93           3.25
Statement savings                              11,070           13.53           3.88
Certificate accounts:
  Less than one year to maturity               34,753           42.48           5.33
  One to three years to maturity                8,208           10.03           6.01
                                              -------       ---------      ---------
    Total certificate accounts                 42,961           52.51           5.46
                                              -------       ---------      ---------
    Total                                     $81,813          100.00%          4.35%
                                              =======       =========      =========
</TABLE>

         Borrowings. As part of its operating strategy, the Company may obtain
advances from the Federal Home Loan Bank ("FHLB") of New York as an alternative
to retail deposit funds. FHLB advances may also be used to acquire certain other
assets as may be deemed appropriate for investment purposes. These advances
would be collateralized primarily by certain of the Company's mortgage loans and
mortgage-backed securities and secondarily by the Company's investment in
capital stock of the FHLB. Such advances may be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB. As of March 31, 1997, the maximum
amount of FHLB advances available to the Company was $13.5 million, based on the
Bank's current investment in FHLB

                                       15
<PAGE>   17
stock; the Company's total FHLB borrowing capacity (including advances), based
on 25% of the Bank's assets, was $29.3 million. Although the Company
historically had not used borrowings as a source of funds, during the fiscal
1997 the Company utilized short-term advances from the FHLB, the balance of
which averaged $204,000 for the year. No such borrowings were outstanding at
March 31, 1997.

SUBSIDIARY ACTIVITIES

         The sole subsidiary of the Registrant is the Bank. The Bank does not
have any subsidiaries.

PERSONNEL

         As of March 31, 1997, the Company had 12 full-time employees and one
part-time employee. The Company has experienced a very low turnover rate among
its employees and, as of March 31, 1997, 11 of the Company's employees have been
with the Company for more than five years. The employees are not represented by
a collective bargaining unit and the Company considers its relationship with its
employees to be good.

                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

         General. The Registrant and the Bank report their income for tax return
purposes on a calendar-year basis using the accrual method of accounting and are
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Bank's tax reserve for bad debts
discussed below. The Registrant and the Bank currently file separate federal
income tax returns on a calendar-year basis. The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Registrant. The Bank
was last audited by the IRS for its taxable year ended December 31, 1994.

         Recent Tax Legislation Regarding Tax Bad Debt Reserves. Prior to the
enactment, on August 20, 1996, of the Small Business Job Protection Act of 1996
(the "Small Business Act"), for federal income tax purposes, thrift institutions
such as the Bank, which met certain definitional tests primarily relating to
their assets and the nature of their business, were permitted to establish tax
reserves for bad debts and to make annual additions thereto, which additions
could, within specified limitations, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, could be computed
using an amount based on a six-year moving average of the Bank's actual loss
experience (the "Experience Method"), or a percentage equal to 8.0% of the
Bank's taxable income (the "PTI Method"), computed without regard to this
deduction and with additional modifications and reduced by the amount of any
permitted addition to the non-qualifying reserve.

         Under the Small Business Act, the PTI Method was repealed and the Bank,
as a "small bank" (one with assets having an adjusted basis of $500 million or
less) will be required to use the Experience Method of computing additions to
its bad debt reserve for taxable years beginning with the Bank's taxable year
beginning January 1, 1996. In addition, the Bank will be required to recapture
(i.e., take into taxable income) over a six-year period, beginning with the
Bank's taxable year beginning January 1, 1996, the excess of the balance of its
bad debt reserves (other than the supplemental reserve) as of December 31, 1995
over the greater of (a) the balance of its "base year reserve," i.e., its
reserves as of December 31, 1987 or (b) an amount that would have been the
balance of such reserves as of December 31, 1995 had the Bank always computed
the additions to its reserves using the Experience Method. However, under the
Small Business Act such recapture requirements will be suspended for each of the
two successive taxable years beginning January 1, 1996 in which the Bank
originates a minimum amount of certain residential loans during such years that
is not less than the average of the principal amounts of such loans made by the
Bank during its six taxable years preceding January 1, 1996.

         Distributions. To the extent that the Bank makes "nondividend
distributions" to shareholders, such distributions will be considered to result
in distributions from the Bank's base year reserve to the extent thereof and
then from its supplemental reserve for losses on loans, and an amount based on
the amount distributed will be included in the Bank's taxable income.
Nondividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not constitute nondividend distributions and,
therefore, will not be included in the Bank's income.

                                       16
<PAGE>   18
         The amount of additional taxable income created from an nondividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, approximately one and
one-half times the nondividend distribution would be includable in gross income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate.

         Corporate Alternative Minimum Tax. The Internal Revenue Code (the
"Code") imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at
a rate of 20%. AMTI is increased by certain preference items. Only 90% of AMTI
can be offset by net operating loss carryovers, of which the Company currently
has none. AMTI is also adjusted by determining the tax treatment of certain
items in a manner that negates the deferral of income resulting from the regular
tax treatment of those items. Thus, the Company's AMTI is increased by an amount
equal to 75% of the amount by which the Company's adjusted current earnings
exceeds its AMTI (determined without regard to this adjustment and prior to
reduction for net operating losses). In addition, for taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
 .12% of the excess of AMTI (with certain modifications) over $2.0 million is
imposed on corporations, including the Bank, whether or not an Alternative
Maximum Tax ("AMT") is paid. Under President Clinton's fiscal year 1998 budget
proposal, as submitted to Congress on February 6, 1997 ("President Clinton's
Proposal"), the corporate environmental income tax would be reinstated for
taxable years beginning after December 31, 1996 and before January 1, 2008.
Under Congressional legislative proposals, the AMT would be repealed for "small
corporations," effective for taxable years beginning after December 31, 1997.
The Company does not expect to be subject to the AMT or the environmental tax
liability.

         Dividends Received Deduction and Other Matters. In any taxable period
for which the Registrant owns more than 80% of the Bank's voting stock, the
Registrant may exclude from its income 100% of dividends received from the Bank
as a member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which the Registrant and the Bank will not
file a consolidated tax return, except that if the Registrant and the Bank own
more than 20% of the stock of a corporation distributing a dividend then 80% of
any dividends received may be deducted. Under President Clinton's proposal, the
70% dividends received deduction would be reduced to 50%.

STATE TAXATION

         New York. The Bank and the Registrant are subject to New York state
franchise tax on net income or one of several alternative bases, whichever
results in the highest tax. "Net income" means federal taxable income with
adjustments. The New York state tax rate for the 1997 and 1996 calendar years
was 10.53% and 10.755%, respectively (including commuter transportation and
other surcharges). In general, the Registrant will not be required to pay New
York state tax on dividends and interest received from the Bank or on gains
realized on the sale of Bank stock.

         In July 1996, New York state enacted legislation to preserve the use of
the percentage of taxable income bad debt deduction for thrift institutions such
as the Bank. In general, the legislation provides for a deduction equal to 32%
of the Bank's New York state taxable income, which is comparable to the
deductions permitted under the prior tax law. The legislation also provides for
a floating base year, which will allow the Bank's to switch from the percentage
of taxable income method to the experience method without recapture of any
reserve. Previously, the Bank had established a deferred New York state tax
liability for the excess of its New York state tax bad debt reserve over the
amount of its base-year reserve. Since the new legislation effectively
eliminated the excess state reserve for which a deferred tax liability had been
recognized, the Company reduced its deferred tax liability by $166,000,
representing a state tax benefit of $252,000 less related federal taxes of
$86,000.

         Generally, New York state tax law has requirements similar to federal
requirements regarding the recapture of base-year tax bad debt reserves. One
notable exception is that, after the recent legislation, New York continues to
require that the Bank maintain its thrift institution charter and hold at least
60% of its assets in specified assets (generally, loans secured by residential
real estate or deposits, educational loans, cash and certain government
obligations). The Bank expects to continue to meet these requirements and does
not anticipate engaging in any transactions which would require recapture of its
base-year reserve. Accordingly, it does not maintain a deferred tax liability
with respect to such reserve. The Bank's unrecognized deferred state taxes (net
of related federal taxes) were approximately $0.3 million at March 31, 1997.

         Delaware. As a Delaware holding company not earning income in Delaware,
the Registrant is exempt from Delaware corporate income tax but is required to
file an annual report with and pay an annual franchise tax to the State of
Delaware.

                                       17
<PAGE>   19
                                   REGULATION

GENERAL

         The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the Federal Deposit
Insurance Corporation ("FDIC'), as its deposit insurer. The Bank's deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF') of the FDIC, and it is a member of FHLB of New York. The
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition, and it must obtain regulatory approvals prior to entering
into certain transactions, such as mergers with, or acquisitions of, other
depository institutions. The OTS and the FDIC conduct periodic examinations to
assess the Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings association can engage and is intended primarily for the
protection of the insurance fund and depositors. The Registrant, as a savings
association holding company, is also required to file certain reports with, and
otherwise comply with, the rules and regulations of the OTS and of the
Securities and Exchange Commission (the "SEC") under the federal securities
laws.

         The OTS and the FDIC have significant discretion in connection with
their supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Registrant, the Bank and the operations of both.

         The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations, and it does not
purport to be a comprehensive description of all such statutes and regulations.

REGULATION OF FEDERAL SAVINGS ASSOCIATION

         Business Activities. The Bank derives its lending and investment powers
from the Home Owner's Loan Act, as amended ("HOLA") and the regulations of the
OTS thereunder. Under these laws and regulations, the Bank may invest in
mortgage loans secured by residential and commercial real estate, commercial and
consumer loans, certain types of debt securities, and certain other assets. The
Bank may also establish service corporations that may engage in activities not
otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations, including (a) a prohibition against the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories; (b) a limit of 400% of an association's capital on
the aggregate amount of loans secured by nonresidential real estate property;
(c) a limit of 20% of an association's assets on commercial loans; (d) a limit
of 35% of an association's assets on the aggregate amount of consumer loans and
acquisitions of certain debt securities; (e) a limit of 5% of assets on
non-conforming loans (loans in excess of the specific limitations of HOLA); and
(f) a limit of the greater of 5% of assets or an association's capital on
certain construction loans made for the purpose of financing what is or is
expected to become residential property.

         Loans to One Borrower. Under HOLA, savings associations are generally
subject to the same limits on loans to one borrower as are imposed on national
banks. Generally, under these limits, a savings association may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus. An additional amount may be
lent, equal to 10% of unimpaired capital and surplus, if such loan or extension
of credit is fully secured by readily-marketable collateral. Such collateral is
defined to include certain debt and equity securities and bullion, but generally
does not include real estate. At March 31, 1997, the Bank's limit on loans to
one borrower was $2.4 million. At March 31, 1997, the Bank's largest aggregate
amount of loans to one borrower was $626,000 and the second largest borrower had
an aggregate balance of $625,000.


         QTL Test. HOLA requires a savings association to meet a qualified
thrift lender ("QTL") test. Under the QTL test, a savings association is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least 9 months of the most recent 12-month
period. "Portfolio assets" means, in general, an association's total assets less
the sum of (a) specified liquid assets up to 20% of total assets, (b) certain
intangibles, including goodwill and credit card servicing rights, and (c) the
value of property used to conduct the association's business. "Qualified thrift
investments" includes various types of loans made for residential and housing
purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and consumer loans. At March 31, 1997,
the Bank maintained 85.3% of its portfolio assets in qualified thrift
investments. The Bank had also met the QTL test in each of the prior 12 months
and, therefore, was a qualified thrift lender.

                                       18
<PAGE>   20
         A savings association that fails the QTL test must either operate under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions include prohibitions against (a) engaging in any new activity not
permissible for a national bank, (b) paying dividends not permissible under
national bank regulations, (c) obtaining new advances from any FHLB, and (d)
establishing any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings association ceases to meet the QTL test, any company controlling the
association would have to register under, and become subject to the requirements
of, the Bank Holding Company Act of 1956, as amended. If the savings association
does not requalify under the QTL test within the three-year period after it
failed the QTL test, it would be required to terminate any activity and to
dispose of any investment not permissible for a national bank and would have to
repay as promptly as possible any outstanding advances from an FHLB. A savings
association that has failed the QTL test may requalify under the QTL test and be
free of such limitations, but it may do so only once.

         Capital Requirements. The OTS regulations require savings associations
to meet three minimum capital standards: a tangible capital ratio requirement of
1.5% of total assets as adjusted under the OTS regulations, a leverage ratio
requirement of 3% of core capital to such adjusted total assets, and a
risk-based capital ratio requirement of 8% of core and supplementary capital to
total risk-based assets. In determining the amount of risk-weighted assets for
purposes of the risk-based capital requirement, a savings association must
compute its risk-based assets by multiplying its assets and certain off-balance
sheet items by risk-weights, which range from 0% for cash and obligations issued
by the United States Government or its agencies to 100% for consumer and
commercial loans, as assigned by the OTS capital regulation based on the risks
OTS believes are inherent in the type of asset.

         Tangible capital is defined, generally, as common stockholder's equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related earnings, minority interests in equity accounts of fully
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. Core capital is defined
similarly to tangible capital, but core capital also includes certain qualifying
supervisory goodwill and certain purchased credit card relationships.
Supplementary capital currently includes cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, and the allowance for loan and lease losses.
The allowance for loan and lease losses includable in supplementary capital is
limited to a maximum of 1.25% of risk-weighted assets, and the amount of
supplementary capital that may be included as total capital cannot exceed the
amount of core capital.

         The OTS has adopted regulations to require a savings association to
account for interest rate risk when determining its compliance with the
risk-based capital requirement. A savings association with "above normal"
interest rate risk is required, by these regulations, to deduct a portion of its
total capital to account for any "above normal" interest rate risk. A savings
association's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
resulting from a hypothetical 2% increase or decrease in market rates of
interest, divided by the estimated economic value of the association's assets,
as calculated in accordance with guidelines set forth by the OTS. At the times
when the 3-month Treasury bond equivalent yield falls below 4%, an association
may compute its interest rate risk on the basis of a change equal to one-half of
that Treasury rate rather than on the basis of 2%. A savings association whose
measured interest rate risk exposure exceeds 2% would be considered to have
"above normal" risk. The interest rate risk component is an amount equal to
one-half of the difference between the association's measured interest rate risk
and 2%, multiplied by the estimated economic value of the association's assets.
That dollar amount is deducted from an association's total capital in
calculating compliance with its risk-based capital requirement. Any required
deduction for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the association's financial data on
which the interest rate risk was computed. The regulations do not require a
savings association with assets of less than $300 million and a risk-based
capital ratio in excess of 12% to comply with the standard reporting
requirements for the interest rate risk component, unless the OTS determines
otherwise, and the association may provide such selected information as the OTS
determines. Currently, the Bank qualifies for this exemption from the filing
requirements. The regulations also authorize the Director of the OTS to waive or
defer an association's interest rate risk component on a case-by-case basis. The
OTS has indefinitely deferred implementation of the interest rate component in
the computation of an institution's risk-based capital requirement.

                                       19
<PAGE>   21
At March 31, 1997, the Bank met each of its capital requirements. The table
below presents the Bank's regulatory capital amounts and ratios as of March 31,
1997, compared to the OTS requirements at that date.

<TABLE>
<CAPTION>
                                                  AMOUNT    ASSETS(1)
                                                  -------   ---------
                                                (DOLLARS IN THOUSANDS)

<S>                                               <C>       <C>
                  GAAP capital                    $16,298        13.9%
                                                  =======   =========
                  Tangible capital:
                    Capital level (2)             $16,607        14.1%
                    Requirement                     1,763         1.5
                                                  -------   ---------
                    Excess                        $14,844        12.6%
                                                  =======   =========
                  Core capital:
                    Capital level (2)             $16,607        14.1%
                    Requirement                     3,526         3.0
                                                  -------   ---------
                    Excess                        $13,081        11.1%
                                                  =======   =========
                  Total risk-based capital:
                    Capital level (2)             $17,151        39.5%
                    Requirement                     3,475         8.0
                                                  -------   ---------
                    Excess                        $13,676        31.5%
                                                  =======   =========
</TABLE>

(1) Tangible capital levels are shown as a percentage of tangible assets. Core
capital levels are shown as a percentage of adjusted assets. Risk-based capital
levels are shown as a percentage of risk-weighted assets.

(2) The difference between capital under generally accepted accounting
principles ("GAAP") and regulatory tangible and core capital is an adjustment to
increase regulatory capital by the amount of the net unrealized loss on
available-for-sale securities recognized for GAAP purposes. Regulatory
risk-based capital reflects this adjustment and the inclusion of a portion of
the general allowance for loan losses.

         Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by savings associations, such as cash
dividends, payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. At least 30-days written notice must be
given to the OTS of a proposed capital distribution by a savings association,
and capital distributions in excess of specified earnings or by certain
institutions are subject to approval by the OTS. An association that has capital
in excess of all regulatory capital requirements before and after a proposed
capital distribution and that is not otherwise restricted in making capital
distributions, could, after prior notice but without the approval of the OTS,
make capital distributions during a calendar year equal to the greater of (a)
100% of its net earnings to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its fully phased-in capital requirements) at the beginning of the calendar year,
or (b) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of more
than normal supervision or if it determines that a proposed distribution by an
association would constitute an unsafe or unsound practice. Furthermore, under
the OTS prompt corrective action regulations, the Bank would be prohibited from
making any capital distribution if, after the distribution, the Bank failed to
meet its minimum capital requirements, as described above. See "-- Prompt
Corrective Regulatory Action."

         Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 5%. OTS regulations also require each
savings association to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and 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 for the month ended March 31,
1997 was 13.5%, which exceeded the applicable requirements. The Bank has never
been subject to monetary penalties for failure to meet its liquidity
requirements.

         Assessments. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported in
the association's latest quarterly Thrift Financial Report. The assessments


                                       20
<PAGE>   22
paid by the Bank for the fiscal years ended March 31, 1997, 1996 and 1995
totaled $35,000, $31,000 and $29,000, respectively.

         Branching. Subject to certain limitations, HOLA and the OTS regulations
permit federally chartered savings associations to establish branches in any
state of the United States. The authority to establish such a branch is
available (a) in states that expressly authorize branches of savings
associations located in another state and (b) to an association that qualifies
as a "domestic building and loan association" under the Code, which imposes
qualification requirements similar to those for a "qualified thrift lender"
under HOLA. See "-- QTL Test." The authority for a federal savings association
to establish an interstate branch network would facilitate a geographic
diversification of the association's activities. This authority under HOLA and
the OTS regulations preempts any state law purporting to regulate branching by
federal savings associations.

         Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings association,
to assess the association's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such association. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA rating
in its most recent examination. The OTS's CRA regulations establish an
assessment system that bases an association's rating on its actual performance
in meeting community needs. In particular, the assessment system focuses on
three tests: (a) a lending test, to evaluate the institution's record of making
loans in its service areas; (b) an investment test, to evaluate the
institution's record of investing in community development projects, affordable
housing, and programs benefiting low or moderate income individuals and
businesses; and (c) a service test, to evaluate the institution's delivery of
services through its branches, ATMs, and other offices. Small savings
associations would be assessed pursuant to a streamlined approach focusing on a
lesser range of information and performance standards. The term "small savings
association" is defined as including associations with less than $250 million in
assets or an affiliate of a holding company with banking and thrift assets of
less than $1 billion, which would include the Bank.

         Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act ("FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other company
that is controlled by a company that controls the Bank, excluding any Bank
subsidiary other than those that are insured depository institutions. The OTS
regulations prohibit a savings association (a) from lending to any of its
affiliates that is engaged in activities that are not permissible for bank
holding companies under Section 4(c) of the Bank Holding Company Act ("BHC Act")
and (b) from purchasing the securities of any affiliate other than a subsidiary.
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings association and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings association's capital and surplus. Extensions of credit to 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 association as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies.

         The Bank's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and 22(h)
of the FRA and Regulation O of the FRB thereunder. Among other things, these
provisions require that extensions of credit to insiders (a) be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
association's capital. In addition, extensions of credit in excess of certain
limits must be approved by the association's board of directors.


         Enforcement. Under the Federal Deposit Insurance Act ("FDI Act"), the
OTS has primary enforcement responsibility over savings associations and has the
authority to bring enforcement action against all "institution-affiliated
parties," including any controlling stockholder or any shareholder, attorney,
appraiser and accountant who knowingly or recklessly participates in
<PAGE>   23
any violation of applicable law or regulation or breach of fiduciary duty or
certain other wrongful actions that causes or is likely to cause more than a
minimal loss or other significant adverse effect on an insured savings
association. Civil penalties cover a wide range of violations and actions and
range from $5,000 for each day during which violations of law, regulations,
orders, and certain written agreements and conditions continue, up to $1,000,000
per day for such violations if the person obtained a substantial pecuniary gain
as a result of such violation or knowingly or recklessly caused a substantial
loss to the institution. Criminal penalties for certain financial institution
crimes include fines of up to $1 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to its capital requirements. Possible enforcement
actions range from the types of action that may be taken under the "prompt
corrective actions," discussed below under "---Prompt Corrective Regulatory
Action" to the termination of deposit insurance. 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 association. If action is not taken
by the Director of the OTS, the FDIC has authority to take such action under
certain circumstances.

         Standards for Safety and Soundness. Pursuant to the FDI Act, as amended
by Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and
the Riegle Community Development and Regulatory Improvement Act of 1994
("Community Development Act"), the OTS and the other federal bank regulatory
agencies have adopted guidelines prescribing safety and soundness standards. The
guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, asset quality, earnings, and
compensation, fees and benefits. In general, the guidelines require, among other
things, appropriate systems and practices to identify and manage the risks and
exposures specified in the guidelines. The guidelines prohibit excessive
compensation as an unsafe and unsound practice and describe compensation as
excessive when the amounts paid are unreasonable or disproportionate to the
services performed by an executive officer, employee, director or principal
shareholder. In addition, the OTS regulations authorize, but do not require, the
OTS to order an institution that has been given notice by the OTS that it is not
satisfying any of such safety and soundness standards to submit a compliance
plan. If, after being so notified, an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an accepted
compliance plan, the OTS must issue an order directing action to correct the
deficiency and may issue an order directing other actions of the types to which
an undercapitalized association is subject under the "prompt corrective action"
provisions of FDICIA. If an institution fails to comply with such an order, the
OTS may seek to enforce such order in judicial proceedings and to impose civil
money penalties.

         Prompt Corrective Regulatory Action. FDICIA established a system of
prompt corrective action to resolve the problems of undercapitalized depository
institutions. Under this system, the federal banking regulators are required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends on the institution's degree of capitalization. For
this purpose, a savings association would be placed in one of five categories
based on the association's capital. Generally, a savings association is treated
as "well capitalized" if its ratio of total capital to risk-weighted assets is
at least 10.0%, its ratio of core capital to risk-weighted assets is at least
6.0%, its ratio of core capital to total assets is at least 5.0%, and it is not
subject to any order or directive by the OTS to meet a specific capital level. A
savings association will be treated as "adequately capitalized" if its ratio of
total capital to risk-weighted assets is at least 8.0%, its ratio of core
capital to risk-weighted assets is at least 4.0%, and its ratio of core capital
to total assets is at least 4.0% (3.0% if the association receives the highest
rating on the CAMEL financial institutions rating system). A savings association
that has a total risk-based capital of less than 8.0% or a leverage ratio or a
Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating on the CAMEL financial institutions
rating system) is considered to be "undercapitalized." A savings association
that has a total risk-based capital of less than 6.0% or a Tier 1 risk-based
capital ratio or a leverage ratio of less than 3.0% is considered to be
"significantly undercapitalized." A savings association that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." The elements of an association's capital for purposes of the
prompt corrective action regulations are defined generally as they are under the
regulations for minimum capital requirements. See "-- Capital Requirements."

         Generally, a capital restoration plan must be filed with the OTS within
45 days of the date an association receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." The OTS may not accept a capital restoration plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. In
addition, for a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution will
comply with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of (i) an amount equal to the five
percent of the depository institution's total assets at the time it became
"undercapitalized," and (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
applicable with respect to such institution as of the time it fails to comply
with the plan. In the event of a savings and loan holding company's bankruptcy,
any commitment by the savings and loan company to a federal bank regulatory
agency to maintain the capital of a subsidiary
<PAGE>   24
depository institution will be assumed by the bankruptcy trustee and entitled to
a priority of payment. If a depository institution fails to submit an acceptable
plan, it is treated as if it is "significantly undercapitalized."

         An undercapitalized association also becomes immediately subject to
various mandatory restrictions, including restrictions on growth of assets and
other forms of expansion. The OTS can 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. "Significantly
undercapitalized" institutions are subject to more severe restrictions.
Generally, subject to a narrow exception, FDICIA requires the OTS to appoint a
receiver or conservator for a savings association that is critically
undercapitalized. As of March 31, 1997, the Bank was considered "well
capitalized" by the OTS.

         Where appropriate, the OTS can impose corrective action by a savings
and loan holding company under the "prompt corrective action" provisions of
FDICIA.

         Insurance of Deposit Accounts. Pursuant to FDICIA, the FDIC established
a risk-based assessment system for determining the deposit insurance assessments
to be paid by insured depository institutions. Under the 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. The three capital categories consist of (a)
well capitalized, (b) adequately capitalized, or (c) undercapitalized. The FDIC
also assigns an institution to 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 that 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. Under the regulation,
there are nine assessment risk classifications (i.e., combinations of capital
groups and supervisory subgroups) to which different assessment rates are
applied. For the first three quarters of 1996, assessment rates for SAIF-insured
institutions ranged from 0.23% of deposits for an institution in the highest
category (i.e., well-capitalized and financially sound, with no more than a few
minor weaknesses), such as the Bank, to 0.31% of deposits for an institution in
the lowest category (i.e., undercapitalized and substantial supervisory
concern). In contrast, the least risky institutions insured under the Bank
Insurance Fund ("BIF") paid deposit insurance assessments at the annual minimum
of $2,000, and the other BIF-insured institutions paid assessments at rates that
ranged from 0.03% to 0.27% of deposits.

         On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
"Funds Act") was enacted into law to address, among other things, the disparity
in the deposit insurance assessment rates imposed on BIF-insured and on
SAIF-insured institutions. The Funds Act amended the FDIA in several ways to
recapitalize the SAIF and to reduce the disparity in the assessment rates for
the BIF and the SAIF. To recapitalize the SAIF, the Funds Act authorized the
FDIC to impose a special assessment on all institutions with SAIF-assessable
deposits in the amount necessary to recapitalize the SAIF. As implemented by the
FDIC, the special assessment was fixed, subject to adjustment, at 0.657% of an
institution's SAIF-assessable deposits, and the special assessment was paid on
November 27, 1996. The special assessment was based on the amount of
SAIF-assessable deposits held at March 31, 1995, as adjusted under the Funds
Act. For the Bank, the special assessment on the deposits held on March 31,
1995, was $538,000 ($329,000 net of taxes).

         The Funds Act also provides that the FDIC cannot assess regular
insurance assessments for an insurance fund unless required to maintain or to
achieve the designated reserve ratio of 1.25%, except on those of its member
institutions that are not classified as "well capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank has not been so classified by the FDIC or the
OTS. In view of the recapitalization of the SAIF, the FDIC reduced the annual
assessment rates for SAIF-assessable deposits for periods beginning on October
1, 1996. For the last quarter of 1996, the reduced annual assessment rates
ranged from 0.18% to 0.27% of deposits. Beginning with January 1, 1997, the
annual assessment rates are the same for both BIF-insured and SAIF-insured
institutions, with the annual assessment rates ranging from 0.0% to 0.27% of
deposits. The Bank's assessment rate for deposit insurance is 0.0% of deposits
for calendar 1997.

     In addition, the Funds Act expanded the assessment base for the payments on
the bonds ("FICO bonds") issued in the late 1980s by the Financing Corporation
to recapitalize the now defunct Federal Savings and Loan Insurance Corporation.
Beginning January 1, 1997, the deposits of both BIF- and SAIF-insured
institutions are assessed for the payments on the FICO bonds. Until December 31,
1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of
the rate imposed on SAIF-assessable deposits. The rate of assessments for the
payments on the FICO bonds is currently 0.013% for BIF-assessable deposits and
0.0648% for SAIF-assessable deposits.


                                       23
<PAGE>   25
         The Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the thrift charter. The Funds Act required the Secretary of the Treasury to
conduct a study of relevant factors with respect to the development of a common
charter for all insured depository institutions and the abolition of separate
charters for banks and thrifts and to report the Secretary's conclusions and the
findings to the Congress. The Secretary of the Treasury has recommended that the
separate charter for thrifts be eliminated only if other legislation is adopted
that permits bank holding companies to engage in certain non-financial
activities. Absent legislation permitting such non-financial activity, the
Secretary of the Treasury recommended retention of the thrift charter. The
Secretary of the Treasury also recommended the merger of the BIF and the SAIF
irrespective of whether the thrift charter is eliminated. Other proposed
legislation has been introduced in Congress that would require thrift
institutions to convert to bank charters.

         Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of the regional FHLBs composing the FHLB System. Each FHLB
provides a central credit facility primarily for its member institutions. The
Bank, as a member of the FHLB of New York, is required to acquire and hold
shares of capital stock in the FHLB of New York in an amount at least equal to
the greater of 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 of New York. The Bank was in compliance
with this requirement with an investment in FHLB of New York stock at March 31,
1997, of $674,000. Any advances from a FHLB must be secured by specified types
of collateral, and all long-term advances may be obtained only for the purpose
of providing funds for residential housing finance.

         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 earnings that the FHLBs can pay as
dividends to their members and could also result in the FHLBs imposing a higher
rate of interest on advances to their members. For the fiscal years ended March
31, 1997, 1996 and 1995, dividends from the FHLB of New York to the Bank
amounted to $37,000, $37,000 and $36,000, respectively. If dividends were
reduced, or interest on future FHLB advances increased, the Bank's net interest
income would likely also be reduced.

         Federal Reserve System. The Bank is subject to provisions of the FRA
and the FRB's regulations pursuant to which depository institutions may be
required to maintain non-interest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be maintained
against transaction accounts (primarily NOW and regular checking accounts). The
FRB regulations generally require that reserves be maintained in the amount of
3% of the aggregate of transaction accounts up to $49.3 million. The amount of
aggregate transaction accounts in excess of $49.3 million are currently subject
to a reserve ratio of 10%, which ratio the FRB may adjust between 8% and 12%.
The FRB regulations currently exempt $4.4 million of otherwise reservable
balances from the reserve requirements, which exemption is adjusted by the FRB
at the end of each year. The Bank is in compliance with the foregoing reserve
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a FRB, or a pass-through account
as defined by the FRB, the effect of this reserve requirement is to reduce the
Bank's interest-earning assets. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS. FHLB System members are also authorized to borrow from the
Federal Reserve "discount window," but FRB regulations require such institutions
to exhaust all FHLB sources before borrowing from a FRB.

HOLDING COMPANY REGULATION

         General. The Registrant is a unitary bank holding company within the
meaning of the HOLA. As such, the Registrant is required to register with the
OTS and is subject to OTS examination, regulation and reporting requirements.
The OTS has enforcement authority over the Registrant. Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the Bank.

         The Registrant is required to obtain the prior approval of the OTS to
acquire all, or substantially all, of the assets of another savings institution
or holding company thereof. Prior OTS approval is required for the Registrant to
acquire direct or indirect ownership or control of any voting securities of a
non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA, if, after giving effect to such acquisition, the Registrant would,
directly or indirectly, own or control more than 5% of any class of voting
shares of such institution or company.

         Interstate Banking. 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


                                       24
<PAGE>   26
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. Under New York law, reciprocal interstate
acquisitions are authorized for savings and loan holding companies and savings
institutions. Certain states do not authorize interstate acquisitions under any
circumstances; however, federal law authorizing acquisitions in supervisory
cases preempts such state law.

         Acquisition of the Holding Company. Federal law generally provides that
no person (including a company), or group acting in concert, directly or
indirectly, may acquire 10% or more of a class of the outstanding voting
securities of a savings association holding company without giving at least 60
days written notice to the OTS and providing the OTS an opportunity to
disapprove the proposed acquisition. Such acquisitions of control may be
disapproved if it is determined, among other things, that (i) the acquisition
would substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the savings
institution or prejudice the interests of its depositors; or (iii) the
competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.

         In addition, federal regulations governing conversions of mutual
savings institutions to the stock form of organization prohibit the direct or
indirect acquisition without OTS approval of more than 10% of any equity
security of a savings institution within three years of the savings
institution's conversion to stock form. This limitation applies to acquisitions
of the stock of the Registrant. Such acquisition may be disapproved if it is
found, among other things, that the proposed acquisition (i) would frustrate the
purposes of the provisions of the regulations regarding conversions, (ii) would
be manipulative or deceptive, (iii) would subvert the fairness of the
conversion, (iv) would be likely to result in injury to the savings institution,
(v) would not be consistent with economical home financing, (vi) would otherwise
violate law or regulation, or (vii) would not contribute to the prudent
deployment of the savings institution's conversion proceeds.

         Federal Securities Laws. The Registrant's common stock is registered
with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"). The Registrant is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.

ITEM 2. PROPERTIES

         The Company conducts its business through its office located in
Tarrytown, New York. The property, which had a net book value of $466,000 as of
March 31, 1997, was acquired in 1973. Management believes that the Company's
current facilities are adequate to meet the present and immediately foreseeable
needs of the Company.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

        None.

ITEM 6. SELECTED FINANCIAL DATA

         The information required by this item appears on page 1 of the 1997
Annual Report incorporated herein by reference.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

         The information required by this item appears on pages 3 through 11 of
the 1997 Annual Report incorporated herein by reference.

                                       25
<PAGE>   27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this item appears on pages 12 through 34 of
the 1997 Annual Report incorporated herein by reference.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        None.


                                    PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

         The information required by this item appears under the captions
"Election of Directors," "Nominees for Election as Director," "Continuing
Directors," "Committees and Meetings of the Board of Directors of the Company"
and "Executive Officers" on pages 6 through 10 and "Section 16 (a) Beneficial
Ownership Reporting Compliance" on page 19 of the Registrant's Proxy Statement,
previously filed with the Commission, for its Annual Meeting of Shareholders to
be held on August 6, 1997 (the "1997 Proxy Statement") incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

         The information required by this item appears under the captions
"Compensation of Directors" on pages 8 through 10 and "Summary Compensation
Table," "Employment Agreements," and "Benefits" on pages 11 through 18 of the
1997 Proxy Statement incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item appears under the captions
"Principal Shareholders of the Company" on page 3 and 4, and "Stock Owned by
Management" on page 5 of the 1997 Proxy Statement incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item appears under the caption
"Transactions with Certain Related Persons" on page 19 of the 1997 Proxy
Statement incorporated herein by reference.

                                       26
<PAGE>   28
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a) The following consolidated financial statements of the Registrant, its
bank subsidiary, and the independent auditors' report thereon, are included on
pages 12 through 34 of the 1997 Annual Report incorporated herein by reference.

         1. Consolidated Financial Statements:

            Balance Sheets at March 31, 1997 and 1996;

            Statements of Income for the years ended March 31, 1997, 1996 and
            1995;

            Statements of Changes in Shareholders' Equity for the years ended
            March 31, 1997, 1996 and 1995; Statements of Cash Flows for the
            years ended March 31, 1997, 1996 and 1995; and

            Notes to Consolidated Financial Statements.

         2. All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.

         3. Exhibits

     (a) The following exhibits are filed as part of this report, except as
otherwise indicated.


DESIGNATION          DESCRIPTION
-----------          -----------


3.1                 Certificate of Incorporation of Tappan Zee Financial, Inc.
                    (incorporated by reference to Exhibit 3.1 to the
                    Registration Statement on Form S-1, No. 33-94128, filed on
                    June 30, 1995, as amended (the "Registration Statement"))

3.2                 Bylaws of Tappan Zee Financial, Inc. (incorporated by
                    reference to Exhibit 3.2 to the Registration Statement)

4.1                 Certificate of Incorporation of Tappan Zee Financial, Inc.
                    (see Exhibit 3.1 hereto)

4.2                 Bylaws of Tappan Zee Financial, Inc. (see Exhibit 3.2
                    hereto)

4.3                 Specimen Stock Certificate (incorporated by reference to
                    Exhibit 4.3 to the Registration Statement)

10.1.0              Tappan Zee Financial, Inc. 1996 Stock Option Plan for
                    Officers and Employees ("Employee Option Plan")
                    (incorporated by reference to Exhibit A to the Registrant's
                    Proxy Statement for use in connection with its 1996 Annual
                    Meeting of Shareholders (the "1996 Proxy Statement"),
                    previously filed with the Commission

10.1.1              Amendment No. 1 to the Employee Option Plan

10.1.2              Amendment No. 2 to the Employee Option Plan (incorporated by
                    reference to Exhibit A to the 1997 Proxy Statement)

10.2.0              Tappan Zee Financial, Inc. 1996 Stock Option Plan for
                    Outside Directors ("Outside Director Option Plan")
                    (incorporated by

                                       27
<PAGE>   29
                    reference to Exhibit B to the 1996 Proxy Statement)

10.2.1              Amendment No. 1 to the Outside Director Option Plan

10.2.2              Amendment No. 2 to the Outside Director Option Plan
                    (incorporated by reference to Exhibit B to the 1997 Proxy
                    Statement)

10.3.0              Tappan Zee Financial, Inc. 1996 Recognition and Retention
                    Plan for Officers and Employees ("Employee RRP")
                    (incorporated by reference to Exhibit C to the 1996 Proxy
                    Statement)

10.3.1              Amendment No. 1 to the Employee RRP

10.3.2              Amendment No. 2 to the Employee RRP (incorporated by
                    reference to Exhibit C to the 1997 Proxy Statement)

10.4.0              Tappan Zee Financial, Inc. 1996 Recognition and Retention
                    Plan for Outside Directors ("Outside Director RRP")
                    (incorporated by reference to Exhibit D to the 1996 Proxy
                    Statement)
10.4.1              Amendment No. 1 to the Outside Director RRP

10.4.2              Amendment No. 2 to the Outside Director RRP (incorporated by
                    reference to Exhibit D to the 1997 Proxy Statement)

10.5                Employee Stock Ownership Plan of Tappan Zee Financial, Inc.
                    and Certain Affiliates, as amended (incorporated by
                    reference to Exhibit 10.6 to the Registrant's Annual Report
                    on Form 10-K for the fiscal year ended March 31, 1996 (the
                    "1996 10-K"))

10.6                Loan Agreement to the Employee Stock Ownership Plan Trust of
                    Tappan Zee Financial, Inc. and Certain Affiliates
                    (incorporated by reference to Exhibit 10.7 to the 1996 10-K)

10.7                Tarrytowns Bank Deferred Compensation Plan for Directors of
                    Tarrytowns Bank, FSB (Incorporated by reference to Exhibit
                    10.7 to the Registration Statement)

10.8                Retirement Plan for Board Members of Tappan Zee Financial,
                    Inc. and Certain Affiliates, adopted effective as of October
                    5, 1995 (incorporated by reference to Exhibit 10.9 to the
                    1996 10-K)

10.09               Employment Agreement by and between Tappan Zee Financial,
                    Inc. and Stephen C. Byelick, adopted effective as of October
                    5, 1995 (incorporated by reference to Exhibit 10.10 to the
                    1996 10-K)

10.10               Employment Agreement by and between Tappan Zee Financial,
                    Inc. and Harry G. Murphy, adopted effective as of October 5,
                    1995 (incorporated by reference to Exhibit 10.11 to the 1996
                    10-K)

10.11               Employment Agreement by and between Tarrytowns Bank, FSB and
                    Stephen C. Byelick, effective as of October 5, 1995
                    (incorporated by reference to Exhibit 10.12 to the 1996
                    10-K)

10.12               Employment Agreement by and between Tarrytowns Bank, FSB and
                    Harry G. Murphy, effective as of October 5, 1995
                    (incorporated by reference to Exhibit 10.13 to the 1996
                    10-K)

                                       28
<PAGE>   30
10.13               Employee Retention Agreement by and among Tappan Zee
                    Financial, Inc., Tarrytowns Bank, FSB and Christina Vidal,
                    effective as of October 5, 1995 (incorporated by reference
                    to Exhibit 10.15 to the 1996 10-K)

10.14               R Employee Retention Agreement by and among Tappan Zee Fi
                    Financial, Inc., Tarrytowns Bank, FSB and Margaret E.
                    Sampson, effective as of October 5, 1995 (incorporated by
                    reference to Exhibit 10.16 to the 1996 10-K)

10.15               Employee Retention Agreement by and among Tappan Zee
                    Financial, Inc., Tarrytowns Bank, FSB and Valerie Wilson,
                    effective as of October 5, 1995 (incorporated by reference
                    to Exhibit 10.17 to the 1996 10-K)

10.16               Forms of Stock Option Agreement by and between Tappan Zee
                    Financial, Inc. and recipients of stock options granted
                    pursuant to the Employee Option Plan and the Outside
                    Director Option Plan

10.17               Forms of Restricted Stock Award Notices to award recipients,
                    pursuant to the Employee RRP and the Outside Director RRP

10.18               Agency Agreement, by and among Tappan Zee Financial, Inc.,
                    Tarrytowns Bank FSB, and Sandler O'Neill & Partners, L.P.,
                    dated August 14, 1995 (incorporated by reference to Exhibit
                    1.2 to the Registration Statement.

11                  Statement re: Computation of Earnings Per Share

13.1                1997 Annual Report to Shareholders

21.1                Subsidiaries of the Registrant (incorporated by reference to
                    Exhibit 21.1 to the Registration Statement)

27                  Financial Data Schedule (EDGAR filing only)

99.1                Proxy Statement for 1997 Annual Meeting of Shareholders

                                       29
<PAGE>   31
                                   SIGNATURES


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

                                       Tappan Zee Financial, Inc.



Dated:  June 23, 1997                  By: /s/Stephen C. Byelick
                                           ----------------------
                                           Stephen C. Byelick
                                           President and Chief Executive Officer



Dated:  June 23, 1997                  By: /s/Harry G. Murphy
                                           -------------------
                                           Harry G. Murphy
                                           Vice President and Secretary

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

<TABLE>
<CAPTION>
Signature                                     Title              Date
---------                                     -----              ----

<S>                                           <C>                <C>
/s/Marvin Levy                                 Chairman          June 23, 1997
-------------------------
Marvin Levy


/s/ Stephen C. Byelick                         Director          June 23, 1997
-------------------------
Stephen C. Byelick


/s/ John T. Cooney                             Director          June 23, 1997
-------------------------
John T. Cooney


/s/Gerald L. Logan                             Director          June 23, 1997
-------------------------
Gerald L. Logan


/s/Harry G. Murphy                             Director          June 23, 1997
-------------------------
Harry G. Murphy


/s/Kevin  J. Plunkett                          Director          June 23, 1997
-------------------------
Kevin  J. Plunkett


/s/Paul R. Wheatley                            Director          June 23, 1997
-------------------------
Paul R. Wheatley
</TABLE>

                                       30
<PAGE>   32
<TABLE>
<CAPTION>

DESIGNATION                                   DESCRIPTION                                      PAGE
-----------                                   -----------                                      ----
<S>      <C>                                                                                  <C>
3.1      Certificate of Incorporation of Tappan Zee Financial, Inc.
         (incorporated by reference to Exhibit 3.1 to the Registration Statement
         on Form S-1, No. 33-94128, filed on June 30, 1995, as amended (the
         "Registration Statement"))

3.2      Bylaws of Tappan Zee Financial, Inc. (incorporated by reference to
         Exhibit 3.2 to the Registration Statement)

4.1      Certificate of Incorporation of Tappan Zee Financial, Inc. (see Exhibit
         3.1 hereto)

4.2      Bylaws of Tappan Zee Financial, Inc. (see Exhibit 3.2 hereto)

4.3      Specimen Stock Certificate (incorporated by reference to Exhibit 4.3 to
         the Registration Statement)

10.1.0   Tappan Zee Financial Inc. 1996 Stock Option Plan for Officers and
         Employees ("Employee Option Plan") (incorporated by reference to
         Exhibit A to the Registrant's Proxy Statement for use in connection
         with its 1996 Annual Meeting of Shareholders (the "1996 Proxy
         Statement"), previously filed with the Commission

10.1.1   Amendment No. 1 to the Employee Option Plan ...........................           

10.1.2   Amendment No. 2 to the Employee Option Plan (incorporated by reference
         to Exhibit A to the 1997 Proxy Statement)

10.2.0   Tappan Zee Financial, Inc. 1996 Stock Option Plan for Outside Directors
         ("Outside Director Option Plan") (incorporated by reference to Exhibit
         B to the 1996 Proxy Statement)

10.2.1   Amendment No. 1 to the Outside Director Option Plan ...................

10.2.2   Amendment No. 2 to the Outside Director Option Plan (incorporated by
         reference to Exhibit B to the 1997 Proxy Statement)

10.3.0   Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for
         Officers and Employees ("Employee RRP") (incorporated by reference to
         Exhibit C to the 1996 Proxy Statement)

10.3.1   Amendment No. 1 to the Employee RRP ...................................
</TABLE>

<PAGE>   33
-------------------------------------------------------------------------------



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549





                                ----------------

                                    EXHIBITS
                                       to
                                   FORM 10-K

                              SEC File No. 0-26466

                                ----------------




                           TAPPAN ZEE FINANCIAL, INC.
                              Tarrytown, New York


-------------------------------------------------------------------------------
<PAGE>   34
<TABLE>
<CAPTION>

DESIGNATION                                   DESCRIPTION                                      PAGE
-----------                                   -----------                                      ----
<S>      <C>                                                                                  <C>

10.3.2   Amendment No. 2 to the Employee RRP (incorporated by reference to
         Exhibit C to the 1997 Proxy Statement)

10.4.0   Tappan Zee Financial, Inc. 1996 Recognition and Retention Plan for
         Outside Directors ("Outside Director RRP") (incorporated by reference
         to Exhibit D to the 1996 Proxy Statement)

10.4.1   Amendment No. 1 to the Outside Director RRP...........................

10.4.2   Amendment No. 2 to the Outside Director RRP (incorporated by reference
         to Exhibit D to the 1997 Proxy Statement)

10.5     Employee Stock Ownership Plan of Tappan Zee Financial, Inc. and Certain
         Affiliates, as amended (incorporated by reference to Exhibit 10.6 to
         the Registrant's Annual Report on Form 10-K for the fiscal year ended
         March 31, 1996 ("the 1996 10-K"))

10.6     Loan Agreement to the Employee Stock Ownership Plan Trust of Tappan Zee
         Financial, Inc. and Certain Affiliates (incorporated by reference to
         Exhibit 10.7 to the 1996 10-K)

10.7     Tarrytowns Bank Deferred Compensation Plan for Directors of Tarrytowns
         Bank, FSB (incorporated by reference to Exhibit 10.7 to the
         Registration Statement)

10.8     Retirement Plan for Board Members of Tappan Zee Financial, Inc. and
         Certain Affiliates, adopted effective as of October 5, 1995
         (incorporated by reference to Exhibit 10.9 to the 1996 10-K)

10.9     Employment Agreement by and between Tappan Zee Financial, Inc. and
         Stephen C. Byelick, adopted effective as of October 5, 1995
         (incorporated by reference to Exhibit 10.10 to the 1996 10-K)

10.10    Employment Agreement by and between Tappan Zee Financial, Inc. and
         Harry G. Murphy, adopted effective as of October 5, 1995 (incorporated
         by reference to Exhibit 10.11 to the 1996 10-K)

10.11    Employment Agreement by and between Tarrytowns Bank, FSB and Stephen C.
         Byelick, adopted effective as of October 5, 1995 (incorporated by
         reference to Exhibit 10.12 to the 1996 10-K)
</TABLE>



<PAGE>   35
<TABLE>
<CAPTION>

DESIGNATION                                   DESCRIPTION                                      PAGE
-----------                                   -----------                                      ----
<S>      <C>                                                                                  <C>

10.12    Employment Agreement by and between Tarrytowns Bank, FSB and Harry G.
         Murphy, effective as of October 5, 1995 (incorporated by reference to
         Exhibit 10.13 to the 1996 10-K)

10.13    Employee Retention Agreement by and among Tappan Zee Financial, Inc.,
         Tarrytowns Bank, FSB and Christine Vidal, effective as of October 5,
         1995 (incorporated by reference to Exhibit 10.15 to the 1996 10-K)

10.14    Employee Retention Agreement by and among Tappan Zee Financial, Inc.,
         Tarrytowns Bank, FSB and Margaret E. Sampson, effective as of October
         5, 1995 (incorporated by reference to Exhibit 10.16 to the 1996 10-K)

10.15    Employee Retention Agreement by and among Tappan Zee Financial, Inc.,
         Tarrytowns Bank, FSB and Valerie Wilson, effective as of October 5,
         1995 (incorporated by reference to Exhibit 10.17 to the 1996 10-K)

10.16    Forms of Stock Option Agreement by and between Tappan Zee Financial,
         Inc. and recipients of stock options granted pursuant to the Employee
         Option Plan and the Outside Director Option
         Plan.................................................................. 

10.17    Forms of Restricted Stock Award Notices to award recipients, pursuant
         to the Employee RRP and the Outside Director RRP.....................

10.18    Agency Agreement, by and among Tappan Zee Financial, Inc., Tarrytowns
         Bank, FSB and Sandler O'Neill & Partners, L.P., dated August 14, 1995
         (incorporated by reference to Exhibit 1.2 to the Registration
         Statement)

11       Statement re: Computation of Earnings Per Share......................

13.1     1997 Annual Report to Shareholders...................................

21.1     Subsidiaries of the Registrant (incorporated by reference to Exhibit
         21.1 to the Registration Statement)

27       Financial Data Schedule (EDGAR Filing only)..........................

99.1     Proxy Statement for 1997 Annual Meeting of Shareholders..............
</TABLE>