EXHIBIT 13


SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                                                                             September 30,
                                                       --------------------------------------------------------
                                                         1998        1997        1996         1995       1994
                                                       --------    --------    --------     --------   --------
                                                                            (In Thousands)

Selected Consolidated Financial Condition Data:
-----------------------------------------------
<S>                                                    <C>         <C>         <C>          <C>        <C>     
Total assets......................................     $314,752    $289,619    $283,759     $230,102   $230,518
Cash and cash equivalents.........................        2,795       2,274      39,712       38,064     29,580
Loans receivable, net.............................      137,785     124,337     122,533      118,364    119,233
Mortgage-backed securities........................       90,929      84,794      34,902       13,647     13,922
Other securities..................................       78,068      73,137      82,375       53,443     64,151
Deposits..........................................      209,977     200,912     196,753      197,230    200,825
Borrowings .......................................       31,840      11,385         ---          ---        ---
Shareholders' equity..............................       67,831      71,777      82,381       28,667     26,943

<CAPTION>
                                                                               Years Ended September 30,
                                                            -------------------------------------------------------------
                                                              1998         1997          1996         1995          1994
                                                            -------      -------       -------      -------       -------
                                                                                    (In Thousands)
Selected Consolidated Operations Data:
--------------------------------------
<S>                                                         <C>          <C>           <C>          <C>           <C>    
Total interest income...............................        $21,104      $20,217       $17,932      $15,592       $15,022
Total interest expense..............................          9,960        8,801         9,022        8,009         7,529
                                                            -------      -------       -------      -------       -------
   Net interest income..............................         11,144       11,416         8,910        7,583         7,493
Provision for loan losses...........................            189          300           195          255           465
                                                            -------      -------       -------      -------       -------
Net interest income after provision for loan losses.         10,955       11,116         8,715        7,328         7,028
Total non-interest income...........................            608          512           996          262           339
Total non-interest expense..........................          5,662        5,187         4,258        4,665         3,814
                                                            -------      -------       -------      -------       -------
Income before taxes.................................          5,901        6,441         5,453        2,925         3,553
Income tax expense..................................          2,019        2,534         2,136        1,201         1,463
                                                            -------      -------       -------      -------       -------
   Net income.......................................        $ 3,882      $ 3,907       $ 3,317      $ 1,724       $ 2,090
                                                            =======      =======       =======      =======       =======

Basic earnings per common share ....................           $.95         $.84         $.38*          N/A           N/A
Diluted earnings per common share ..................           $.93         $.83         $.38*          N/A           N/A
</TABLE>

* The Company  completed  its initial  public  offering  on April 18,  1996,  so
earnings per common share is not  applicable  to all periods prior to that date.
In calculating  earnings per share for fiscal 1996,  post  conversion net income
and  weighted  average  shares  outstanding  were  used.  See Note 1 to Notes to
Consolidated Financial Statements.  Certain  reclassifications have been made to
prior years' amounts to conform with current year's presentation.

                                                           4

<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION - CONTINUED

<TABLE>
<CAPTION>
                                                                                          Year Ended September 30,
                                                                    ------------------------------------------------------------
                                                                     1998         1997         1996         1995           1994
                                                                    ------       ------       ------       ------         ------
Selected Financial Ratios and Other Data:
-----------------------------------------
<S>                                                                 <C>          <C>          <C>          <C>            <C>   
Performance Ratios:
  Return on assets (ratio of net income to average total assets)      1.30%        1.40%        1.25%         .76%           .90%
  Return on equity (ratio of net income to average equity) ......     5.60         5.22         6.33         6.15           8.06
  Average net interest rate spread ..............................     2.90         2.93         2.54         2.99           3.03
  Net interest margin(1) ........................................     3.99         4.17         3.44         3.47           3.36
  Ratio of operating expense to average total assets ............     1.90         1.86         1.60         1.77(2)        1.65
  Efficiency ratio(3) ...........................................    46.32        43.80        45.56        51.05          48.47
  Ratio of average interest-earning assets to average interest-
     bearing liabilities ........................................   131.97       138.60       125.79       112.97         109.92

Quality Ratios:
 Non-performing loans to total loans at end of period ...........      .42          .73         1.10          .86            .54
 Non-performing assets to total assets at end of period .........      .20          .40          .61          .66            .45
 Allowance for loan losses to non-performing loans ..............   329.95       206.00       133.89       188.41         268.62
 Allowance for loan losses to total loans at end of period ......     1.40         1.50         1.47         1.61           1.43

Capital Ratios:
 Equity to total assets at end of period ........................    21.55        24.78        29.03        12.46          11.69
 Average equity to average assets ...............................    23.20        26.86        19.73        12.44          11.23

Other Data:
 Number of full-service offices .................................     5            4            3            3              3
</TABLE>

(1)      Net  interest  income on a tax  equivalent  basis  divided  by  average
         interest-earning assets.

(2)      Excludes $660,000 provision for Nationar loss contingency.

(3)      Efficiency  ratio is  non-interest  expense/(non-interest  income + net
         interest income on a tax equivalent basis). For 1997 and 1996, excludes
         Nationar recoveries  included in non-interest  income of $100,000,  and
         $560,000,  respectively  and for 1995 excludes  $660,000  provision for
         Nationar loss contingency included in non-interest expense.


                                                             5

<PAGE>
SUMMARY OF UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                       Year Ended September 30, 1998
                                                                     ---------------------------------------------------------------
                                                                      First        Second         Third        Fourth        Fiscal
                                                                     Quarter       Quarter       Quarter       Quarter        Year
                                                                     -------       -------       -------       -------       -------
                                                                                 (In Thousands, except per share amounts)

<S>                                                                  <C>           <C>           <C>           <C>           <C>    
Total interest income ........................................       $ 5,263       $ 5,216       $ 5,288       $ 5,337       $21,104
Total interest expense .......................................         2,425         2,390         2,507         2,638         9,960
                                                                     -------       -------       -------       -------       -------
   Net interest income .......................................         2,838         2,826         2,781         2,699        11,144
Provision for loan losses ....................................            54            45            45            45           189
                                                                     -------       -------       -------       -------       -------
Net interest income after provision for loan losses ..........         2,784         2,781         2,736         2,654        10,955
Total non-interest income ....................................           119           140           162           187           608
Total non-interest expense ...................................         1,348         1,394         1,469         1,451         5,662
                                                                     -------       -------       -------       -------       -------
Income before taxes ..........................................       $ 1,555       $ 1,527       $ 1,429       $ 1,390       $ 5,901
Income tax expense ...........................................           597           555           455           412         2,019
                                                                     -------       -------       -------       -------       -------
   Net income ................................................       $   958       $   972       $   974       $   978       $ 3,882
                                                                     =======       =======       =======       =======       =======

Basic earnings per common share ..............................       $   .23       $   .23       $   .24       $   .25       $   .95
Diluted earnings per common share ............................           .22           .23           .24           .25           .93
Cash dividends per common share ..............................           .08           .08           .08         .0925         .3325

<CAPTION>
                                                                                       Year Ended September 30, 1997
                                                                     ---------------------------------------------------------------
                                                                      First        Second         Third        Fourth        Fiscal
                                                                     Quarter       Quarter       Quarter       Quarter        Year
                                                                     -------       -------       -------       -------       -------
                                                                                 (In Thousands, except per share amounts)
Total interest income ........................................       $ 4,977       $ 4,963       $ 5,090       $ 5,187       $20,217
Total interest expense .......................................         2,136         2,102         2,244         2,319         8,801
                                                                     -------       -------       -------       -------       -------
   Net interest income .......................................         2,841         2,861         2,846         2,868        11,416
Provision for loan losses ....................................            75            75            75            75           300
                                                                     -------       -------       -------       -------       -------
Net interest income after provision for loan losses ..........         2,766         2,786         2,771         2,793        11,116
Total non-interest income ....................................           177           121           108           106           512
Total non-interest expense ...................................         1,171         1,341         1,324         1,351         5,187
                                                                     -------       -------       -------       -------       -------
Income before taxes ..........................................       $ 1,772       $ 1,566       $ 1,555       $ 1,548       $ 6,441
Income tax expense ...........................................           706           623           606           599         2,534
                                                                     -------       -------       -------       -------       -------
   Net income ................................................       $ 1,066       $   943       $   949       $   949       $ 3,907
                                                                     =======       =======       =======       =======       =======

Basic earnings per common share ..............................       $   .21       $   .20       $   .21       $   .22       $   .84
Diluted earnings per common share ............................       $   .21           .20           .21           .22           .83
Cash dividends per common share ..............................          --             .07           .07           .07           .21
</TABLE>


                                                             6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


GENERAL

Catskill  Financial  Corporation  (the  "Company" or "Catskill  Financial")  was
formed in December  1995 to acquire all of the common stock of Catskill  Savings
Bank (the  "Bank")  upon its  conversion  from a mutual  savings bank to a stock
savings bank. On April 18, 1996, the Company  completed its initial public stock
offering,  issuing 5,686,750 shares of $.01 par value common stock at $10.00 per
share.  Net proceeds to the Company were $54.9 million after  conversion  costs,
and $50.4 million excluding the shares acquired by the Company's  Employee Stock
Ownership  Plan (the "ESOP"),  which were  purchased with the proceeds of a loan
from the Company.

The consolidated  financial  condition and operating  results of the Company are
primarily  dependent  upon  its  wholly  owned  subsidiary,  the  Bank,  and all
references  to the  Company  prior to April 18,  1996,  except  where  otherwise
indicated, are to the Bank.

The Bank has been and continues to be a community oriented financial institution
offering a variety of financial  services.  The Bank attracts  deposits from the
general public and uses such deposits,  together with other funds,  to originate
one to four family  residential  mortgages,  and, to a lesser  extent,  consumer
(including  home equity  lines of credit),  commercial,  and  multi-family  real
estate and other loans in its primary  market area.  The Bank's  primary  market
area is comprised of Greene County and southern Albany County in New York, which
are serviced  through five banking  offices,  the most recent  having  opened in
April 1998. The Bank's  deposit  accounts are insured by the Bank Insurance Fund
("BIF") of the Federal Deposit Insurance Corporation ("FDIC"), and, as a federal
savings  bank,  the Bank is  subject  to  regulation  by the  Office  of  Thrift
Supervision ("OTS").

The Company's profitability, like many financial institutions, is dependent to a
large extent upon its net interest income,  which is the difference  between the
interest it receives on interest earning assets,  such as loans and investments,
and the interest it pays on interest bearing  liabilities,  principally deposits
and borrowings.

Results of operations are also affected by the Bank's provision for loan losses,
non-interest  expenses  such as salaries and employee  benefits,  occupancy  and
other  operating  expenses and to a lesser extent,  non-interest  income such as
service charges on deposit accounts.

Financial  institutions  in general,  including the Company,  are  significantly
affected  by  economic  conditions,  competition  and the  monetary  and  fiscal
policies of the federal  government.  Lending  activities  are influenced by the
demand for and supply of  housing,  competition  among  lenders,  interest  rate
conditions  and  funds  availability.  Deposit  balances  and cost of funds  are
influenced  by  prevailing  market  rates  on  competing  investments,  customer
preference  and the levels of personal  income and savings in the Bank's primary
market area.


                                                             7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


FORWARD-LOOKING STATEMENTS

When used in this  Annual  Report  or future  filings  by the  Company  with the
Securities  and Exchange  Commission,  in the Company's  press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized  executive officer,  the words or phrases "will likely
result",  "are expected to",  "will  continue",  "is  anticipated",  "estimate",
"project",   "believe",   or  similar   expressions  are  intended  to  identify
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigations Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the adequacy
of the allowance for loan losses or an analysis of the interest rate sensitivity
of the Company's assets and  liabilities,  are inherently based upon predictions
of future events and circumstances.  Furthermore, from time to time, the Company
may  publish  other  forward-looking  statements  relating  to such  matters  as
anticipated financial performance, business prospects, and similar matters.

The Private Securities  Litigation Reform Act of 1995 provides a safe harbor for
forward-looking  statements.  In order  to  comply  with  the  terms of the safe
harbor,  the Company  notes that a variety of factors  could cause the Company's
actual results and experience to differ materially from the anticipated  results
or other  expectations  expressed in the Company's  forward-looking  statements.
Some of the risks and uncertainties that may affect the operations, performance,
development and results of the Company's business, the interest rate sensitivity
of its  assets and  liabilities,  and the  adequacy  of its  allowance  for loan
losses, include but are not limited to the following:

         a.    Deterioration  in local,  regional,  national or global  economic
               conditions which could result, among other things, in an increase
               in loan delinquencies, a decrease in property values, or a change
               in the housing turnover rate;

         b.    changes in market interest rates or changes in the speed at which
               market interest rates change;

         c.    changes in laws and regulations  affecting the financial  service
               industry;

         d.    changes in competition; and

         e.    changes in consumer preferences.

The  Company  wishes to  caution  readers  not to place  undue  reliance  on any
forward-looking statements,  which speak only as of the date made, and to advise
readers that various factors,  including those described above, could affect the
Company's financial  performance and could cause the Company's actual results or
circumstances  for future periods to differ materially from those anticipated or
projected.

The Company does not undertake,  and specifically  disclaims any obligation,  to
publicly release any revisions to any forward-looking  statements to reflect the
occurrence of events or circumstances after the date of such statements.



                                                             8

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


FINANCIAL CONDITION

Total  assets were $314.8  million at September  30, 1998,  an increase of $25.2
million,  or 8.7% from the $289.6 million at September 30, 1997. The increase in
assets was primarily in loans and, to a lesser extent, securities and was funded
principally by increases in long-term borrowings and deposits.

Cash and cash  equivalents  were $2.8  million,  an increase of $.5 million,  or
21.7% from the $2.3 million at September 30, 1997. The change was principally an
increase in vault cash and checks in process of collection due to the opening of
a new full service branch in April 1998.

Total  securities,  which  include  securities  held  to  maturity  ("HTM")  and
securities  available for sale ("AFS"),  excluding Federal Home Loan Bank stock,
were  $167.0  million,  an increase  of $10.8  million,  or 6.9% over the $156.2
million as of September  30, 1997.  The  increase in  securities  consisted of a
$16.8 million  increase in AFS securities,  offset by a $6.0 million decrease in
HTM  securities  from  scheduled  maturities  and calls.  The Company  generally
classifies its newly  purchased  securities as AFS to maintain  flexibility  for
balance sheet management purposes. Consequently, as of September 30, 1998, 98.7%
of the Company's investment portfolio excluding the Federal Home Loan Bank Stock
was classified as AFS,  compared to 94.8% as of September 30, 1997. In 1998, the
Company  purchased  approximately  $81.0  million  of AFS  securities,  and  had
repayments,  calls,  sales and paydowns of $66.2  million.  The  purchases  were
principally  bank  qualified  municipals,  which provide the Company  higher tax
equivalent  yields and  longer  call  protection,  and  teaser  rate  adjustable
mortgage-backed   securities  to  replace  run-off  in  the  Company's  existing
adjustable mortgage loan portfolio.
<PAGE>

Loans  receivable  were $139.7  million as of September 30, 1998, an increase of
$13.5  million or 10.7% over the $126.2  million as of September  30, 1997.  The
following  table  shows  the loan  portfolio  composition  as of the  respective
balance sheet dates:
<TABLE>
<CAPTION>
                                                                  September 30,                            September 30,
                                                                      1998                                     1997
                                                                      ----                                     ----
                                                     (In thousands)        % of loans        (In thousands)       % of loans
<S>                                                     <C>                  <C>                <C>                  <C>  
Real Estate Loans
    One-to-four family                                  $113,423              81.0%             $102,232              80.7%
    Multi-family and commercial                            6,389                4.6                4,691                3.7
    Construction                                           1,182                 .8                1,306                1.0
                                                        --------             ------             --------             ------
        Total real estate loans                          120,994               86.4              108,229               85.4
Consumer Loans                                            18,399               13.2               18,410               14.5
Commercial Loans                                             602                 .4                   63                 .1
                                                        --------             ------              -------             ------   
        Gross Loans                                      139,995             100.00%             126,702             100.00%
                                                                             ======                                  ======
Less:  Net deferred loan fees                               (260)                                   (476)
                                                        --------                                --------
        Total loans receivable                          $139,735                                $126,226
                                                        ========                                ========
</TABLE>

During fiscal 1998, the Company  originated  $38.9 million in loans, an increase
of $17.6  million,  or 82.6%,  from the $21.3 million  originated  in 1997.  The
increase was principally caused by aggressive

                                                             9

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


loan promotions  during a period of high potential loan volume as lower interest
rates created one of the most favorable refinancing markets since 1993.

One-to-four  family loans  increased  $11.2  million,  or 10.9%,  as the Company
aggressively  promoted a 15 year fixed rate  mortgage  product  with a preferred
rate for borrowers who have their monthly payments automatically deducted from a
checking account with the Bank. The increase in multi-family and commercial real
estate loans was principally represented by loans to refinance a stripmall and a
fitness complex in the Company's  primary market area, as well as  participation
loans on  certain  commercial  properties.  Commercial  loans  increased  as the
Company began offering  secured and unsecured  lines of credit to its commercial
deposit customers.

Total  deposits  were $210.0  million at September 30, 1998, an increase of $9.1
million,  or 4.5% from the $200.9  million at September 30, 1997.  The following
table shows the deposit composition as of the respective balance sheet dates:
<TABLE>
<CAPTION>
                                                   September 30, 1998                      September 30, 1997
                                                   ------------------                      ------------------
                                                 (In               % of                   (In              % of
                                              thousands)         Deposits              thousands)         Deposits
<S>                                           <C>                 <C>                  <C>                 <C>   
Savings                                       $ 78,075             37.2%               $ 79,448             39.6%
Money market                                     5,949              2.8                   7,115              3.5
NOW                                             12,396              5.9                  10,438              5.2
Non-interest demand                              6,009              2.9                   4,370              2.2
Certificates of deposits                       107,548             51.2                  99,541             49.5
                                              --------            -----                --------            ----- 
                                              $209,977            100.0%               $200,912            100.0%
                                              ========            =====                ========            ===== 
</TABLE>
                                                                             
The growth in deposits of $9.1 million was principally related to the opening of
our fourth and fifth full service  branches in December  1996 and April 1998, as
deposits at other offices  increased only $.9 million since  September 30, 1997.
The  Company  experienced  growth in  checking  accounts,  and  certificates  of
deposits  ("CD's"),  offset  somewhat by a reduction in its money market deposit
product.  The increase in checking accounts  resulted  principally from offering
employees  cash  incentives  for new accounts as well as promoting  certain loan
products at a preferred loan rate if the customer's  payment is directly charged
to a checking  account.  The increase in CD's is principally  from the Company's
promotion  of a  15-month  product,  at  a  premium  rate,  to  retain  maturing
longer-term  CD's and to  satisfy  demand in the  Company's  market  for  higher
yields.

The Company  increased its borrowings,  which are  principally  with the Federal
Home Loan Bank of New York ("FHLB"),  to $31.8 million at September 30, 1998, an
increase of $20.4  million  from the $11.4  million at September  30, 1997.  The
additional  borrowings were used to fund the Company's stock repurchase  program
and the  growth in earning  assets as the  Company  continues  to  leverage  its
capital.  In  January  1998,  the  Company  began  converting  a portion  of its
short-term  borrowings to long-term  borrowings  principally through convertible
(callable) advances.  The borrowings are secured by mortgage-backed  securities,
and have  contractual  maturities of ten years;  however,  they include  options
which  give the lender  the right to call the debt  after a  specified  lock-out
period. The Company has entered into five such borrowings, each in the amount of
$5 million, which have lock-outs ranging from one to five years.

                                                            10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Short-term  borrowings  were $6.8 million at  September  30, 1998, a decrease of
$4.6  million,  or 40.4%,  from the $11.4  million at September  30, 1997. As of
September 30, 1998,  the Company still has additional  available  credit of $7.5
million under its  overnight  line and $14.3 million under its one month advance
program with the FHLB.

Shareholders'  equity at September 30, 1998,  was $67.8  million,  a decrease of
$4.0 million, or 5.6% from the $71.8 million at September 30, 1997. The decrease
was  principally  caused by the  Company's  repurchase  of 486,573 of its common
shares at a cost of $8.5  million,  somewhat  offset by the $2.5  million of net
income  retained after cash dividends and a $1.1 million change in the Company's
net unrealized gain (loss) on securities  available for sale, net of taxes.  The
Company also recorded a $.9 million increase in shareholders'  equity due to the
amortization of restricted  stock awards,  the exercise of stock options and the
allocation of shares under the Company's ESOP.

Shareholders'  equity as a percent of total  assets was 21.5% at  September  30,
1998  compared to 24.8% at September  30,  1997.  Book value per common share at
September  30,  1998,  was  $15.56 or $16.11  excluding  unvested  shares of the
Company's restricted stock plan ("MRP"),  and $17.35 excluding  unallocated ESOP
shares and unvested MRP shares.

ASSET/LIABILITY MANAGEMENT

The Company, like other financial institutions, is subject to interest rate risk
to the extent that its interest-bearing liabilities reprice on a different basis
or at different  time periods from its  interest-earning  assets.  Interest rate
risk may be assessed by analyzing the extent to which assets and liabilities are
"interest rate sensitive" and the resultant  interest rate sensitivity "gap". An
asset or liability is said to be interest rate  sensitive  within a defined time
period if it matures or reprices within that period.  The difference between the
amount of interest-earning  assets and interest-bearing  liabilities maturing or
repricing within a given period is defined as the interest rate sensitivity gap.
Gap is negative  if more  interest-bearing  liabilities  than  interest  earning
assets mature or reprice within a specified time period. If the reverse is true,
then the institution is considered to have a positive gap. Accordingly, during a
period of rising  interest  rates,  an institution  with a negative gap position
would not be in as favorable a position,  as compared with an institution with a
positive gap, to invest in higher yielding assets.  This may result in the yield
on the institution's assets increasing at a slower rate than the increase in its
cost of  interest-bearing  liabilities.  Conversely,  during a period of falling
interest rates, an institution  with a negative gap would experience a repricing
of its assets at a slower  rate than its  interest-bearing  liabilities,  which,
consequently,  may result in its net  interest  income  growing at a faster rate
than an institution with a positive gap position.

The principal  objective of the Company's interest rate risk management function
is to  evaluate  the  interest  rate risk  included  in  certain  balance  sheet
accounts,  determine the level of risk appropriate given the Company's  business
strategy,  capital and liquidity  requirements,  and manage the risk  consistent
with Board of  Directors'  approved  guidelines.  Through such  management,  the
Company  seeks to reduce  the  vulnerability  of its  operations  to  changes in
interest rates;  however,  as of September 30, 1998, the Company has not entered
into any  derivatives  such as futures,  forwards,  interest rate swaps or other
financial instruments with similar characteristics to manage interest rate risk,
or for any other  reason.  The extent of the  movement of  interest  rates is an
uncertainty that could have a negative impact on the

                                                            11

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


earnings of the Company.  The Company  monitors  its interest  rate risk as such
risk relates to its business  strategies.  The Company's  Board of Directors has
established a management  Asset  Liability  Committee  which is responsible  for
reviewing  the  Company's   asset/liability  policies  and  interest  rate  risk
position.  The Committee  meets at least monthly and reports trends and interest
rate risk position to the Executive Committee on a quarterly basis.

The table on the  following  page sets  forth the  amounts  of  interest-earning
assets and interest-bearing liabilities outstanding at September 30, 1998, which
are anticipated by the Company,  based upon certain  assumptions,  to reprice or
mature in each future time period shown.  Except as stated, the amount of assets
and  liabilities  shown which reprice or mature during a particular  period were
determined  in  accordance  with the  earlier  of the term to  repricing  or the
contractual  maturity.  The table is intended to provide an approximation of the
repricing as of September  30, 1998,  within a six-month  period and  subsequent
selected time intervals. Annual prepayments for the Company's one to four family
mortgage loan portfolio and its mortgage-backed securities were assumed to be 18
CPR  (Constant  prepayment  rate),  which  approximates  the  last  three  month
prepayment  performance.   Callable  securities,   principally  U.S.  Government
agencies,  corporates and municipals,  are shown principally by their call date,
since most of the securities would be called based on the securities'  estimated
market  value.  Savings  deposit  accounts  are  shown  with a decay  rate of 9%
annually.  Money Market deposits are assumed to be immediately repricable,  even
though the product is not indexed  and the Bank has sole  discretion  as to rate
changes.  Long-term  borrowings are shown by their  respective  call date,  even
though  the  issuer  has the  option  not to call the  borrowing  at that  time.
Prepayment  and decay  rates  can have a  significant  impact  on the  Company's
sensitivity  gap, and there are no assurances that the Company's  prepayment and
decay rate assumptions will be realized.

Based on these  assumptions,  the  Company,  as of  September  30,  1998,  had a
cumulative  one year  positive  gap of $4.4  million,  or 1.4% of total  assets.
Consequently,  if interest  rates were to decrease  over a one year period,  the
Company's net interest income could be adversely impacted.  However, if interest
rates  were to rise,  the  Company's  net  interest  income  might  not  benefit
correspondingly   since  prepayments  on  mortgage  loans  and  mortgage  backed
securities could slow down, and certain securities with calls might no longer be
called,  both of which could delay the upward repricing of assets while the cost
of funds  increases.  Management  expects to maintain a relatively  balanced gap
position  in order to limit  the  Company's  exposure  to  interest  rate  risk,
including reducing the amount of securities with call risk.

In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent  in the method of analysis  presented  in the  following  table must be
considered.  For  example,  although  certain  assets and  liabilities  may have
similar maturities or periods to repricing,  they may react in different degrees
to changes in market interest  rates.  Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates,  while  interest  rates on other  types may lag behind  changes in market
rates.  Additionally,  certain assets,  such as adjustable rate mortgages,  have
features which restrict changes in interest rates in the short term and over the
life of the  asset.  Further,  in the  event  of a  change  in  interest  rates,
prepayments and early  withdrawal  levels may deviate  significantly  from those
assumed in  calculating  the table.  Any change in  projected  repayments  could
materially affect the rate at which assets reprice. Finally, the ability of many
borrowers to service  their debt may  decrease in the event of an interest  rate
increase.  As a result,  the actual effect of changing interest rates may differ
from that presented in the foregoing table.

                                                            12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                     At September 30, 1998
                                                                                     Maturing or Repricing
                                                                                     ---------------------
                                                                      Over 6
                                                        6 Months     Months to     Over 1-3     Over 3-5       Over
                                                         or Less     One Year        Years        Years       5 Years       Total
                                                         Amount       Amount        Amount       Amount       Amount       Amount
                                                        --------     --------      --------     --------     --------     --------
                                                                                         (Dollars in Thousands)
<S>                                                     <C>          <C>          <C>           <C>           <C>        <C>     
Fixed rate one- to four-family, multi-family and
 commercial real estate and construction loans ......   $ 10,420     $  8,962     $ 25,979      $ 18,069      $ 24,476    $ 87,906
Adjustable rate one- to four-family, multi-family                                                                       
 and commercial real estate and construction loans ..     14,443       10,080        8,119             6           180      32,828
Commercial loans ....................................        602         --           --            --            --           602
Consumer loans ......................................      5,664        4,647        5,063         1,529         1,496      18,399
Mortgage-backed securities ..........................     24,685       15,262       18,594        10,507        21,976      91,024
Other securities(*) .................................     11,930        7,007        6,977         7,277        44,781      77,972
Federal funds and other .............................         67         --           --            --            --            67
                                                        --------     --------     --------      --------      --------    --------
     Total interest-earning assets ..................     67,811       45,958       64,732        37,388        92,909     308,798
                                                        --------     --------     --------      --------      --------    --------
                                                                                                                        
Savings deposits ....................................      4,020        3,271       11,700         9,766        49,318      78,075
Money market ........................................      5,949         --           --            --            --         5,949
Certificate accounts ................................     51,242       27,404       24,282         3,055         1,565     107,548
NOW deposits ........................................       --           --           --            --          12,396      12,396
Other deposits ......................................        673         --           --            --             292         965
Short-term borrowings ...............................      6,840         --           --            --            --         6,840
Long-term borrowings ................................       --         10,000       10,000         5,000          --        25,000
                                                        --------     --------     --------      --------      --------    --------
     Total interest-bearing liabilities .............     68,724       40,675       45,982        17,821        63,571     236,773
                                                        --------     --------     --------      --------      --------    --------
                                                                                                                        
Interest-earning assets less interest-bearing                                                                           
 liabilities ........................................   $   (913)    $  5,283     $ 18,750      $ 19,567      $ 29,338   $ 72,025
                                                        ========     ========     ========      ========      ========   ========
                                                                                                                        
Cumulative interest-rate sensitivity gap ............   $   (913)    $  4,370     $ 23,120      $ 42,687      $ 72,025        --
                                                                                                                        
Cumulative interest-rate gap as a percentage of                                                                         
 interest-earning assets at September 30, 1998 ......      (0.30)%       1.42%        7.49%        13.82%        23.32%       --
                                                                                                                        
Cumulative interest-rate gap as a percentage of total                                                                   
assets at September 30, 1998 ........................      (0.29)%       1.39%        7.35%        13.56%        22.88%       --
</TABLE>
(*)      Includes all securities  available for sale and  investment  securities
         held to  maturity  except  mortgage-backed  securities.  Also  includes
         Federal Home Loan Bank Stock,  which is included in the over five years
         category since the stock has no contractual maturity.

The Bank's interest rate sensitivity is also monitored  quarterly through use of
an OTS model which  generates  estimates  of the change in net  portfolio  value
("NPV")  over a range of interest  rate change  scenarios.  NPV  represents  the
estimated market value of portfolio equity,  and is equal to the market value of
assets  minus  the  market  value  of  liabilities,  with  adjustments  made for
off-balance  sheet items. The NPV ratio is defined as NPV, in that interest rate
scenario,  divided by the market value of assets in the same scenario. While the
OTS model uses  financial data  submitted by the Bank,  many of the  assumptions
imbedded in the model, such as loan and securities prepayments and deposit decay
rates are  determined by the OTS. The  following  are the  estimated  impacts of
immediate  changes  "rate  shocks" in interest  rates at September  30, 1998, as
calculated by the OTS model:

                                                            13

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                                        NPV as a %
                                           Net Portfolio Value                                            Assets
    Rate Change            --------------------------------------------------               -----------------------------------  
      In Basis                  Dollars in Thousands
       Points              -----------------------------                 %                   NPV             Basis Point ("bp")
    (Rate Shock)            Amount                Change               Change               Ratio                  Change
    ------------            ------                ------               ------               -----                  ------
<S>                        <C>                  <C>                      <C>                 <C>                  <C>
      +400                 $ 38,652             $ (33,351)               (46.3)%             13.50%               (865bp)
      +300                   46,820               (25,183)               (35.0)              15.83                (632bp)
      +200                   55,300               (16,703)               (23.2)              18.09                (406bp)
      +100                   63,635                (8,368)               (11.6)              20.18                (197bp)
      static               * 72,003                                                          22.15          
      (100)                  80,679                 8,676                 12.0               24.06                 191bp
      (200)                  90,692                18,689                 26.0               26.14                 399bp
      (300)                 102,830                30,827                 42.8               28.51                 636bp
      (400)                 116,421                44,418                 61.7               30.96                 881bp
</TABLE>

         * Represents Bank only, Holding Company has additional portfolio equity
of $7.5  million not shown in analysis,  which if  included,  would reduce the %
changes.

As is the case with the gap table,  certain  shortcomings  are  inherent  in the
methodology used in NPV measurements. Modeling changes in NPV require the making
of assumptions  which may tend to oversimplify the manner in which actual yields
and costs respond to changes in market interest  rates. In this regard,  the NPV
model  assumes  that  the  composition  of the  interest  sensitive  assets  and
liabilities  repricing  at the  beginning  of the  period  remain  constant,  in
addition, it assumes changes in interest rates change uniformly across the yield
curve  regardless of duration.  Accordingly,  although the NPV model provides an
indication of market value risk at a particular  point in time,  actual  results
may differ from those projected.

ASSET QUALITY

Non-performing  assets include non-accrual loans,  troubled debt restructurings,
loans greater than 90 days past due and still  accruing  interest and other real
estate properties.  Loans are placed on non-accrual status when the loan is more
than 90 days  delinquent  (except for  student,  FHA  insured and VA  guaranteed
loans) or when the  collection  of  principal  and/or  interest in full  becomes
doubtful.  When loans are  designated  as  non-accrual,  all  accrued but unpaid
interest is reversed  against current period income and subsequent cash receipts
generally are applied to reduce the unpaid principal balance.  Foreclosed assets
include assets acquired in settlement of loans.



                                                            14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Non-performing  assets at September 30, 1998 were $.6 million,  or .20% of total
assets,  compared to the $1.2 million or .40% of total  assets at September  30,
1997.  The table below sets forth the amounts and  categories  of the  Company's
non-performing assets.
<TABLE>
<CAPTION>
                                                              September 30,
                                                              -------------
                                              1998      1997      1996      1995      1994
                                             ------    ------    ------    ------    ------
                                                         (Dollars in Thousands)
<S>                                          <C>       <C>       <C>       <C>       <C>   
Non-performing loans:
  One- to four-family real estate ........   $  520    $  780    $1,008    $  784    $  650
  Multi-family and commercial real estate      --        --          78      --        --
  Consumer* ..............................       71       137       283       251      --
                                             ------    ------    ------    ------    ------
     Total ...............................      591       917     1,369     1,035       650
                                             ------    ------    ------    ------    ------
Troubled debt restructured loans:
  Multi-family and commercial real estate      --        --        --        --        --
                                             ------    ------    ------    ------    ------
Foreclosed assets, net:
  One- to four-family real estate ........       53       225       334       326       220
  Multi-family and commercial real estate      --          23        23       158       158
                                             ------    ------    ------    ------    ------
     Total ...............................       53       248       357       484       378
                                             ------    ------    ------    ------    ------
Total non-performing assets ..............   $  644    $1,165    $1,726    $1,519    $1,028
                                             ======    ======    ======    ======    ======

Total non-performing loans as a % of total
 loans ...................................      .42%      .73%     1.10%      .86%      .54%
                                             ======    ======    ======    ======    ======

Total as a percentage of total assets ....      .20%      .40%      .61%      .66%      .45%
                                             ======    ======    ======    ======    ======

</TABLE>

*Loans  greater than 90 days past due and still  accruing,  principally  student
loans.

The  decrease  in  non-performing  loans at  September  30,  1998 as compared to
September 30, 1997 was  attributable  principally  to the  foreclosure  of three
loans which resulted in the Company  acquiring title to the mortgaged  property.
The net realizable value of the properties,  totaling $252,000,  was transferred
to other real estate, and $58,000, representing the excess of the carrying value
of the related loan over the net realizable  value of the property,  was charged
against  the  allowance  for loan  losses.  In  addition,  during the year ended
September  30,  1998,  the Company  sold nine parcels of other real estate which
reduced  real estate owned by  $447,000.  The  following  table  summarizes  the
activity in other real estate for the periods presented:
<TABLE>
<CAPTION>
                                                            Years Ended September 30,
                                                            -------------------------
                                                              1998         1997
                                                              ----         ----
                                                                 (In thousands)

<S>                                                          <C>          <C>  
Other real estate beginning of period ................       $ 248        $ 357
Transfer of loans to other real estate owned .........         252          538
Sales of other real estate, net ......................        (447)        (647)
                                                             -----        -----
Other real estate end of period ......................       $  53        $ 248
                                                             =====        =====
</TABLE>

                                                      15

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


Additionally,  at September 30, 1998, the Company has  identified  approximately
$311,000 in loans  secured by real estate  having more than normal  credit risk.
The Company believes that if economic and/or business  conditions  change in its
lending area, some of these loans could become non-performing in the future.

The allowance for loan losses was $2.0 million,  or 1.40% of period end loans at
September 30, 1998,  and provided  coverage of  non-performing  loans of 329.9%,
compared  to  coverage  of  206.0%  as of  September  30,  1997.  The  following
summarizes  the  activity  in the  allowance  for loan  losses for the past five
years:
<TABLE>
<CAPTION>
                                                                 Years Ended September 30,
                                                 -------------------------------------------------------
                                                   1998        1997        1996        1995        1994
                                                 -------     -------     -------     -------     -------
                                                                 (Dollars in Thousands)
<S>                                              <C>         <C>         <C>         <C>         <C>    
Balance at beginning of period ...............   $ 1,889     $ 1,833     $ 1,950     $ 1,746     $ 1,294
Charge-offs:
  One- to four-family real estate ............       (58)       (162)       (237)        (12)         (3)
  Multi-family and commercial real
           estate ............................      --           (30)       --          --          --
  Consumer ...................................       (90)        (90)        (86)        (50)        (29)
                                                 -------     -------     -------     -------     -------
         Total charge-offs ...................      (148)       (282)       (323)        (62)        (32)
                                                 -------     -------     -------     -------     -------
Recoveries:
  One- to four-family real estate ............      --             4        --             1          14
  Consumer ...................................        20          34          11          10           5
                                                 -------     -------     -------     -------     -------
         Total recoveries ....................        20          38          11          11          19
                                                 -------     -------     -------     -------     -------
Net charge-offs ..............................      (128)       (244)       (312)        (51)        (13)
Provision charged to operations ..............       189         300         195         255         465
                                                 -------     -------     -------     -------     -------
Balance at end of period .....................   $ 1,950     $ 1,889     $ 1,833     $ 1,950     $ 1,746
                                                 =======     =======     =======     =======     =======

Ratio of net charge-offs during the period to
average loans outstanding during the period ..       .10%        .19%        .26%        .04%        .02%
                                                 =======     =======     =======     =======     =======

Allowance for loan losses as a % of period-end
loans ........................................      1.40%       1.50%       1.47%       1.61%       1.43%
                                                 =======     =======     =======     =======     =======
</TABLE>

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998
AND 1997

GENERAL

For the year ended  September  30,  1998,  the  Company  recorded  net income of
$3,882,000,  a decrease of $25,000 or .6%,  compared to the year ended September
30, 1997. The decrease was principally  caused by the Company's stock repurchase
program,  which  reduced the number of common shares  outstanding  but increased
interest expense as the Company increased  borrowings to offset the reduction in
capital, as a funding source. In addition,  net income for the fiscal year ended
September 30, 1997, benefitted from certain non-recurring items, which increased
net income by approximately $117,000.  Basic and diluted earnings per share were
$.96 and $.93 respectively for the year ended September 30, 1998, compared to

                                                            16

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


basic and diluted earnings per share of $.84 and $.83  respectively for the year
ended  September 30, 1997.  Weighted  average common shares - basic for the year
ended September 30, 1998,  were  4,066,971,  a decrease of 562,726 or 12.2% from
the 4,629,697 for the comparable  period ended  September 30, 1997. The decrease
was principally the share repurchase  programs under which the Company,  through
September 30, 1998, had purchased 1,516,049 shares or 26.7% of the shares issued
in its initial  public  offering.  The  aggregate  cost to the Company was $23.8
million, or an average of $15.68 per common share repurchased.

Return on average  assets for the years ended  September 30, 1998 and 1997,  was
1.30% and 1.40%, respectively, and return on average equity was 5.60% and 5.22%,
respectively.

NET INTEREST INCOME

The Company's net income is primarily  dependent upon net interest  income.  Net
interest income is a function of the relative amounts of the Company's  interest
earning assets versus interest  bearing  liabilities,  as well as the difference
("spread")   between   the   average   yield   earned  on   loans,   securities,
interest-earning  deposits,  and federal funds sold and the average rate paid on
deposits and  borrowings.  The interest  rate spread is affected by economic and
competitive  factors  that  influence  interest  rates,  loan demand and deposit
flows. The Company,  like other financial  institutions,  is subject to interest
rate risk to the degree that its interest-bearing  liabilities mature or reprice
at different times, or on a different basis, than its interest-earning assets.

Net interest  income on a tax equivalent  basis for the year ended September 30,
1998, was $11.6 million, an increase of $186,000,  or 1.6%, when compared to the
year ended September 30, 1997. The increase was primarily  volume related as the
Company increased its average earning assets $17.3 million, more than offsetting
the  increase  in  interest  expense  from the  Company's  funding  of its stock
repurchase program. The Company funded the cost of the share repurchases,  along
with its growth in earning assets  principally  with borrowings and, to a lesser
extent, deposit growth.

Interest income on a tax equivalent basis for the year ended September 30, 1998,
was $21.6 million, an increase of $1,345,000, or 6.6%, over the comparable year.
The increase was  principally  volume  related,  with average  earning assets up
$17.3  million,  or  6.3%.  In  addition,  interest  income  benefitted  from  a
deliberate  shift of asset mix, as the Company reduced its average federal funds
and other short-term investments and increased its mortgage-backed and municipal
securities   portfolios.   Average   mortgage-backed  and  municipal  securities
represented 30.7% and 5.8%, respectively, of average earning assets for the year
ended  September  30,  1998,  compared  to 27.4% and less than .1% for the prior
year,  while federal funds sold and other declined from 3.7% to less than .1% of
average earning assets between the periods. The average yield on mortgage-backed
securities  during the year ended  September 30, 1998, was 6.74%,  down 35 basis
points  from the  comparable  period,  but still  higher than the yield of 5.35%
earned on  average  federal  funds sold in the year ended  September  30,  1997.
Mortgage-backed  securities yields declined 35 basis points principally from the
Company's  purchase of Treasury indexed teaser rate ARM's, which yield much less
than the fully indexed rate. The Company's mortgage backed securities  portfolio
had no teaser ARM's in fiscal 1997.  Management  purchased  the ARM's to replace
run-off in its existing  adjustable  rate loan portfolio and expects the average
yield of these ARM's to increase as they

                                                            17

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


adjust to their fully indexed  rate;  however,  the actual  increase will depend
upon the level of the one year constant  maturity  treasury index when the rates
adjust.  Average other securities increased $8.5 million, or 13.4%. In addition,
the tax equivalent yield on other securities increased 47 basis points to 7.21%,
as the  Company  has  been  purchasing  longer  call  protected  bank  qualified
municipal  securities to increase yields and reduce  reinvestment  risk if rates
decline.

Interest  expense for the year ended  September 30, 1998, was $10.0 million,  an
increase of $1,159,000, or 13.2%. The increase was principally volume related as
the Company  increased average interest bearing  liabilities  $23.0 million,  or
11.7%.  The increases were to fund the Company's share  repurchase  program,  as
well as to fund earning asset growth.

Average  long-term  borrowings  were $7.8 million,  or 3.5% of average  interest
bearing  liabilities,  as the  Company  converted  a portion  of its  short-term
borrowings to long-term  borrowings  principally through convertible  (callable)
advances.  There were no long-term borrowings in the comparable period.  Average
short-term  borrowings increased $8.7 million, and now represent 5.1% of average
interest bearing liabilities.  In addition, the Company's average CD's increased
$7.2 million, or 7.6%, as the Company's customers continue to move toward higher
costing  CD's and away from lower  costing  deposits,  such as savings and money
market  accounts.  The Company also experienced an increase of 6 basis points in
its cost of funds,  principally  caused by a change in the Company's funding mix
as borrowings  and CD's,  which  represent  the  Company's  highest cost funding
sources,  now fund 41.7% of earning assets  compared to 35.7% in the prior year.
This was  partially  offset  by an 18 basis  point  decline  in the rate paid on
savings accounts,  as the Company reduced savings rates in response to the lower
market rates.

The Company's net yield on average  earning  assets was 3.99% for the year ended
September 30, 1998,  down 18 basis points  compared to 4.17% for the  comparable
period of 1997.  The  decrease was  principally  caused by the  Company's  stock
repurchase  program,  which reduced the level of no-cost  funding  sources,  and
consequently  increased the amount of average  earning assets funded by interest
bearing  liabilities.  For the year ended  September  30, 1998,  the Company had
$70.6 million of average  earning  assets with no funding  costs,  a decrease of
$5.7 million,  or 7.5%,  from the $76.3 million for the comparable  period.  The
Company also experienced a 3 basis point decrease in its spread principally from
the increase in leverage as the Company's borrowings,  with higher average costs
than deposits,  now represent 8.6% of its average funding mix,  compared to only
1.3% in fiscal 1997.

As  necessary,  management  of the Company will continue to increase or decrease
the Company's  deposit rates and terms in order to manage interest rate risk and
liquidity,  and to  maintain  market  share.  For more  information  on  average
balances,  interest  rates and  yields,  please  refer to the  "Analysis  of Net
Interest Income" and "Rate/Volume Analysis of Net Interest Income" tables.



                                                            18

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


ANALYSIS OF NET INTEREST INCOME

The following  table presents for the periods  indicated the total dollar amount
of  interest  income  from  average  interest-earning  assets and the  resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed  both in dollars and rates.  Tax equivalent  adjustments  totaled $472
thousand  in  1998  and $14  thousand  in  1997;  there  were no tax  equivalent
adjustments in 1996. Non-accruing loans have been included in the table as loans
receivable  with interest  earned  recognized  on a cash basis only.  Securities
include  both  the  securities  available  for  sale  portfolio  and the held to
maturity  portfolio  excluding   mortgage-backed   securities.   Mortgage-backed
securities are primarily classified as available for sale.  Securities available
for sale are included at amortized cost.
<PAGE>
<TABLE>
<CAPTION>
                                                                            Years Ended September 30,
                                                                            -------------------------
                                                   1998                               1997                 
                                                  ------                             ------                
                                       Average    Interest                Average    Interest              
                                     Outstanding   Earned/              Outstanding   Earned/              
                                       Balance      Paid    Yield/Rate    Balance      Paid    Yield/Rate  
                                       -------      ----    ----------    -------      ----    ----------  
                                                                             (Dollars in Thousands)
<S>                                      <C>        <C>         <C>        <C>         <C>         <C>     
Interest-Earning Assets:
 Loans receivable...................     $129,737   $ 10,345     7.97%     $125,146    $ 10,083     8.06%  
 Mortgage backed securities.........       89,400      6,030     6.74        75,069       5,319     7.09   
 Securities.........................       72,058      5,197     7.21        63,521       4,283     6.74   
 Federal funds sold and other.......           68          4     5.88        10,214         546     5.35   
                                         --------   --------    -----      --------    --------    -----   
  Total interest-earning assets.....     $291,263     21,576     7.41      $273,950      20,231     7.38   
                                                                                                           
 Non-interest bearing assets .......        7,437                             4,982                        
                                          -------                          --------                        
     Total Assets ..................     $298,700                          $278,932                        
                                         ========                          ========                        
                                                                                                           
Interest-Bearing Liabilities:                                                                              
 Savings deposits...................     $ 78,903    $ 2,620     3.32%      $80,697     $ 2,821     3.50%  
 Certificate accounts...............      102,431      5,768     5.63        95,215       5,309     5.58   
 Money market.......................        6,341        198     3.12         7,418         242     3.26   
 NOW deposits.......................       11,650        268     2.30         9,667         237     2.45   
 Other(1)...........................        2,252         51     2.26         2,065          43     2.08   
 Short-term borrowings..............       11,317        650     5.74         2,590         149     5.75   
 Long-term borrowings...............        7,802        405     5.19           ---         ---            
                                         --------    -------    ------     --------     -------            
    Total interest-bearing liabilities    220,696      9,960     4.51       197,652       8,801     4.45   
                                                     -------    -----                   -------    -----   
 Non-interest bearing liabilities ..        8,710                             6,372                        
 Shareholders' equity ..............       69,294                            74,908                        
                                         --------                          --------                        
  Total liabilities and equity .....     $298,700                          $278,932                        
                                         ========                          ========                        
                                                                                                           
Net interest income.................                $ 11,616                           $ 11,430            
                                                    ========                           ========            
Net interest rate spread............                             2.90%                              2.93%  
                                                                =====                              =====   
Net earning assets..................     $ 70,567                          $ 76,298                        
                                         ========                          ========                        
Net yield on average interest-earning                                                                      
 assets.............................                             3.99%                              4.17%  
                                                                =====                              =====   
Average interest-earning assets to                                                                         
 average interest-bearing liabilities              131.97x                           138.60x                 
                                                   ======                            ======                
<PAGE>
<CAPTION>
                                          Years Ended September 30,
                                          -------------------------
                                                     1996
                                                    -----
                                         Average    Interest
                                       Outstanding   Earned/
                                         Balance      Paid   Yield/Rate
                                         -------      ----   ----------
                                            (Dollars in Thousands)
<S>                                      <C>        <C>          <C> 
Interest-Earning Assets:
 Loans receivable...................      $121,105   $  9,783     8.08%
 Mortgage backed securities.........        19,541      1,462     7.48
 Securities.........................        51,182      3,062     5.98
 Federal funds sold and other.......        67,245      3,625     5.39
                                          --------   --------    -----
  Total interest-earning assets.....      $259,073     17,932     6.92
                                                     --------
 Non-interest bearing assets .......         6,440
                                          --------
     Total Assets ..................      $265,513
                                          ========
                                         
Interest-Bearing Liabilities:            
 Savings deposits...................      $ 84,607   $  2,962     3.50
 Certificate accounts...............        92,699      5,218     5.63
 Money market.......................         8,431        289     3.43
 NOW deposits.......................         8,764        216     2.46
 Other(1)...........................        11,451        337     2.94
 Short-term borrowings..............            ---       ---
 Long-term borrowings...............            ---       ---
                                          ---------  --------
    Total interest-bearing liabilitie     $205,952      9,022     4.38
                                                     --------    -----
 Non-interest bearing liabilities ..         7,186
 Shareholders' equity ..............        52,375
                                          --------
  Total liabilities and equity .....      $265,513
                                          ========
                                         
Net interest income.................                  $ 8,910
                                                      =======
Net interest rate spread............                              2.54%
                                                                 =====
Net earning assets..................      $ 53,121
                                          ========
Net yield on average interest-earning                            
 assets.............................                              3.44%
                                                                  ====
Average interest-earning assets to       
 average interest-bearing liabilities               125.79x                   
                                                    ====== 
                                                                                                   
</TABLE>
(1)      Other includes  principally  escrow balances on mortgages for taxes and
         insurance,  except  for 1996  which also  includes  approximately  $9.1
         million,  representing the average of common stock  subscriptions  held
         until the Company's public offering was consummated. The Bank paid 3.5%
         interest on those subscriptions,  which was its savings deposit rate at
         that time.


                                                            19

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

The following table presents the dollar amount of changes in interest income and
interest   expense  for  major   components  of   interest-earning   assets  and
interest-bearing  liabilities.  It distinguishes  between the changes related to
average outstanding balances and changes in interest rates. For each category of
interest-earning  assets  and  interest-bearing   liabilities,   information  is
provided  on changes  attributable  to (i) changes in volume  (i.e.,  changes in
volume  multiplied by old rate) and (ii) changes in rate (i.e.,  changes in rate
multiplied by old volume).  For purposes of this table,  changes attributable to
both  rate  and  volume,  which  cannot  be  segregated,   have  been  allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
                                                                      Year Ended September 30,
                                          ---------------------------------------------------------------------------
                                                             1998 vs 1997                         1997 vs 1996
                                          ---------------------------------------------------------------------------
                                                  Increase                              Increase
                                                 (Decrease)                            (Decrease)           
                                                   Due to            Total               Due to            Total
                                              -----------------     Increase        -----------------     Increase
                                              Volume       Rate    (Decrease)       Volume       Rate    (Decrease)
                                              ------       ----    ----------       ------       ----    ----------
                                                                        (In Thousands)
<S>                                               <C>        <C>          <C>           <C>        <C>         <C>   
Interest-earning assets:
 Loans receivable........................        $   377    $ (115)        $ 262       $   315    $ (15)       $  300
 Mortgage-backed securities..............            959      (248)          711         3,929      (72)        3,857
 Securities..............................            601        313          914           800       421        1,221
 Federal funds...........................          (602)         60        (542)       (3,052)      (27)      (3,079)
                                                  ------     ------       ------        ------     -----       ------
   Total interest-earning assets.........         $1,335     $   10       $1,345        $1,992     $ 307       $2,299
                                                  ======     ======       ======        ======     =====       ======

Interest-bearing liabilities:
 Savings deposits........................         $ (61)     $(140)       $(201)        $(141)       ---       $(141)
 Certificate accounts....................            410         49          459           135      (44)           91
 Money market............................           (34)       (10)         (44)          (33)      (14)         (47)
 NOW deposits............................             45       (14)           31            22       (1)           21
 Other(1)................................              4          4            8         (301)         7        (294)
 Short-term borrowings ..................            501        ---          501           149       ---          149
 Long-term borrowings ...................            405        ---          405           ---       ---          ---
                                                  ------     ------       ------        ------     -----       ------
   Total interest-bearing liabilities....         $1,270     $(111)       $1,159        $(169)     $(52)       $(221)
                                                  ------     ------       ------        ------     -----       ------
Net change in net interest income........                                 $  186                               $2,520
                                                                          ======                               ======
</TABLE>

(1)      Other includes  principally  escrow balances on mortgages for taxes and
         insurance,  except  for 1996 which also  includes  interest  expense on
         approximately  $9.1 million,  representing  the average of common stock
         subscriptions  held in escrow until the Company's  public  offering was
         consummated.  The Bank paid its  savings  deposit  rate at that time of
         3.5% on those subscriptions.

PROVISION FOR LOAN LOSSES

The Company  establishes  an  allowance  for loan losses based on an analysis of
risk factors in the loan portfolio.  This analysis  includes  concentrations  of
credit,  past loan loss  experience,  current  economic  conditions,  amount and
composition  of loan  portfolio,  estimated  fair  market  value  of  underlying
collateral, delinquencies and other factors. Accordingly, the calculation of the
adequacy of the  allowance  for loan losses is not based  solely on the level of
non-performing loans.

                                                            20

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


The  provision  for loan losses was  $189,000 for the year ended  September  30,
1998, a decrease of $111,000 from the  comparable  period of 1997.  The decrease
was primarily the result of a $116,000,  or 47.5%,  reduction in net charge-offs
to $128,000,  or .10% of average loans, compared to $244,000, or .19% of average
loans in 1997.  In addition,  the Company has reduced its  non-performing  loans
$326,000,  or  34.6%  since  September  30,  1997,  so that  the  allowance  now
represents 329.9% of non-performing  loans at September 30, 1998, as compared to
206.0% at September 30, 1997.

The Company  will  continue to monitor  its  allowance  for loan losses and make
future  additions  to the  allowance  through the  provision  for loan losses as
conditions dictate. Although the Company maintains its allowance for loan losses
at a level which it considers to be adequate to provide for the inherent risk of
loss in its loan  portfolio,  there can be no assurance  that future losses will
not exceed estimated amounts or that additional  provisions for loan losses will
not be required in future periods. In addition,  the Company's  determination as
to the amount of its  allowance for loan losses is subject to review by the OTS,
as part of its examination process,  which may result in the establishment of an
additional  allowance  based upon its judgment of the  information  available to
them at the time of their examination.

NON-INTEREST INCOME

Non-interest  income was $608,000  for the year ended  September  30,  1998,  an
increase of $96,000,  or 18.8%,  from the  comparable  period.  The increase was
principally  higher securities gains and service charge income,  offset somewhat
by the reduction in Nationar  recoveries.  The increase in  securities  gains of
$124,000 was principally  gains on securities called at a premium along with net
gains realized on securities sold for various balance sheet management purposes.
Service fees on deposit accounts increased $51,000,  or 21.0%,  principally from
the Company promoting checking accounts,  which has substantially  increased the
number of accounts.  In the fiscal year ended  September  30, 1997,  the Company
recovered $100,000 from its Nationar loss reserve. There were no such recoveries
in the fiscal year ended September 30, 1998.

NON-INTEREST EXPENSE

Non-interest  expense  for  the  fiscal  year  ended  September  30,  1998,  was
$5,662,000,  an increase of $475,000,  or 9.2%, over the comparable fiscal year.
Increases in personnel, data processing and supply costs were somewhat offset by
reductions in advertising and professional fees.

Salaries and employee  benefits  for the fiscal year ended  September  30, 1998,
increased $456,000,  or 15.2%,  principally from higher staffing and stock based
compensation  costs as well as cost of  implementing  an executive  supplemental
retirement  plan.  Furthermore,  results for the fiscal year ended September 30,
1997,  benefitted from an insurance refund,  which reduced that period's medical
insurance costs.  During that period, the Company changed insurance carriers and
received a refund of $95,000 due to favorable claims  experience.  There were no
such refunds in the comparable  period ended September 30, 1998.  Staffing costs
increased  approximately  $81,000 from hiring  additional staff for our new full
service  supermarket branch. In April 1998, the Company implemented an Executive
Supplemental  Retirement  Plan,  which restores  retirement  benefits  otherwise
capped by the Company's  qualified  pension  plan.  The cost of the new plan was
$40,000 in fiscal 1998. Stock based compensation costs increased

                                                            21

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


$84,000,  or 11.0%. ESOP  compensation  increased  $47,000,  or 13.7%, due to an
increase in the average market price of the Company's  common stock. The cost of
the MRP plan increased $37,000,  or 8.8%,  principally because the plan was only
outstanding  for a portion of the fiscal year ended  September  30, 1997, as the
plan was  approved  at a special  meeting of  shareholders  on October  24, 1996
("special meeting"), and became effective immediately thereafter.

Data processing costs were $404,000,  an increase of $47,000, or 13.2%, over the
$357,000 for fiscal 1997. The increases were principally volume related,  as the
Company's new branches  increased its customer  base, as well as certain  set-up
costs for the new branch. In addition, the Company expensed approximately $8,000
of its  contractual  commitment  of $25,000 to set up its Year 2000 test  sites.
Postage and  supplies  increased  $58,000,  or 24.3%,  as the  Company  incurred
start-up and other promotional costs related to its new supermarket branch.

Advertising  costs were  $126,000,  down $74,000,  or 37.0%,  as the Company has
migrated more of its marketing away from high cost  newsprint,  and more towards
radio  campaigns.  Professional  fees were $232,000,  a decrease of $30,000,  or
11.4%,  principally  from the costs  associated with the special meeting held in
the fiscal  year ended  September  30,  1997;  there was no such  meeting in the
fiscal year ended September 30, 1998.

INCOME TAX EXPENSE

Income tax expense for the fiscal year ended September 30, 1998, was $2,019,000,
a decrease  of  $515,000,  or 20.3%,  from the  comparable  period of 1997.  The
Company's  effective tax rates for the fiscal year ended  September 30, 1998 and
1997,  were 34.21% and 39.34%,  respectively.  The decrease in the effective tax
rate and  approximately  $289,000  of the  decrease  in income  tax  expense  is
attributable to the Company's purchase of tax exempt securities,  primarily bank
qualified municipal securities.  In addition, income tax expense was down due to
the  $540,000,  or 8.4%,  reduction in income  before income taxes in the fiscal
year ended September 30, 1998.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997
AND 1996.

GENERAL

For the year ended  September  30,  1997,  the  Company  recorded  net income of
$3,907,000,  an increase of  $590,000,  or 17.8% over the  comparable  period of
1996. Basic and dilutive  earnings per common share for the year ended September
30, 1997,  were $.84 and $.83,  respectively,  based on weighted  average common
shares  outstanding  of 4,629,697 for basic,  and  4,701,428  for dilutive.  The
Company  completed its initial public offering on April 18, 1996, so shares were
only outstanding for part of fiscal 1996 and,  therefore,  are not comparable to
fiscal 1997.  Return on average assets for the year ended September 30, 1997 and
1996 was 1.40% and 1.25%,  respectively,  and return on average equity was 5.22%
and 6.33%, respectively.



                                                            22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


NET INTEREST INCOME

Net interest  income on a tax equivalent  basis for the year ended September 30,
1997  was  $11.4  million,  an  increase  of $2.5  million,  or  28.1%  over the
comparable  period of 1996.  The  improvement  was  principally  an  increase in
average  earning  assets,  a shift in asset mix and the funding benefit from the
full year impact of the Company's public offering.

Interest income on a tax equivalent  basis for the year ended September 30, 1997
was $20.2 million,  an increase of $2.3 million,  or 12.8%,  over the comparable
period in fiscal 1996.  Average earning assets were $273.9 million,  an increase
of $14.9  million or 5.7% over fiscal 1996,  although  the primary  cause of the
improvement was a deliberate shift in the mix of the Company's  investments away
from  lower   yielding   federal   funds  sold  and  towards   higher   yielding
mortgage-backed  securities  in order to improve  average  yields  and  increase
interest  income.  The average  balance of federal  funds sold  decreased  $57.0
million  from $67.2  million  for the year  ended  September  30,  1996 to $10.2
million for the year ended September 30, 1997. In contrast,  the average balance
of mortgage-backed  securities  increased by $55.5 million from $19.5 million to
$75.0 million between the periods. Although the average yield on mortgage-backed
securities  declined  from 7.48% for the year ended  September 30, 1996 to 7.09%
for the year ended  September 30, 1997, the yield still far exceeded the average
yield on federal  funds sold,  which was 5.39% for the 1996 period and 5.35% for
the 1997 period.  In addition to increasing  yields,  the shift in the asset mix
also had the effect of decreasing  the  sensitivity  of the Company's  assets to
interest rate changes.

Interest  expense  for the year ended  September  30, 1997 was $8.8  million,  a
decrease of $221,000, or 2.4%. Approximately 77% was attributed to a decrease in
volume  with the  remainder  attributable  to a decline in rates paid on certain
types of deposits.  Average interest bearing  liabilities were $197.7 million, a
decrease  of $8.3  million  or 4.0%  from the  comparable  period  of 1996.  The
decrease in volume was principally in common stock  subscriptions as the Company
in the year ended September 30, 1996, held stock subscription deposits averaging
approximately  $9.1 million for its initial public offering.  There were no such
subscriptions  in fiscal 1997. The decline in certain rates paid was principally
caused by a reduction in the cost of  certificates  of deposits which  decreased
from 5.63% to 5.58%,  or 5 basis points,  primarily  from the decrease in market
rates since the Federal Reserve lowered the discount rate in January 1996.

The Company's net yield on average  earning assets was 4.17%,  compared to 3.44%
for the comparable  period of 1996. The  improvement was primarily the result of
the  investment of the Company's net offering  proceeds which caused an increase
in average  earning assets with no  corresponding  funding  costs,  although the
Company  also  improved  its net  interest  spread  to 2.93%,  a 39 basis  point
improvement  over the comparable  period of 1996, due to the change in asset mix
discussed previously.

PROVISION FOR LOAN LOSSES

The  provision  for loan losses was  $300,000 for the year ended  September  30,
1997, an increase of $105,000 from the  comparable  period of 1996. The increase
in the provision over 1996 was  principally to cover net charge-offs in 1997, as
well as to provide for loan growth so that the allowance as a

                                                            23

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


percentage of loans remained relatively stable. The allowance for loan losses at
September  30,  1997 was $1.9  million,  or 1.50% of total  loans  and  provided
coverage of non-performing loans of 206.0%.

NON-INTEREST INCOME

Non-interest  income was  $512,000  for the year ended  September  30,  1997,  a
decrease of $484,000 or 48.6% over the  comparable  period of 1996. The decrease
was principally due to the $460,000 net change in the Company's  recovery of its
Nationar  loss  reserve.  In the year ended  September  30,  1996,  the  Company
recovered  $560,000 of its original loss reserve of $660,000,  and recovered the
remaining $100,000 in fiscal 1997.

NON-INTEREST EXPENSE

Non-interest  expense for the year ended  September  30, 1997 was  $5,187,000 an
increase of $929,000,  or 21.8% over 1996.  Increases in  personnel  costs,  net
occupancy, supplies,  professional fees and other expenses, were offset somewhat
by reductions in other real estate expenses.

Salaries  and  employee  benefits  increased  $823,000,   or  37.9%  over  1996,
principally  from ESOP and MRP compensation  expenses,  both new plans since the
Company went public.  ESOP and MRP  expenses  for the year ended  September  30,
1997, were $342,000 and $419,000, respectively, compared to ESOP expense of only
$119,000 and no MRP expense during the  comparable  period in 1996. In addition,
the Company experienced increased personnel costs of approximately  $135,000 due
to opening its fourth full service  branch in late December  1996. Net occupancy
costs were $329,000,  an increase of $78,000, or 31.1% over 1996, as the Company
experienced  increased costs relating to its new branch, as well as depreciation
of renovations at another branch office. Postage and supplies increased $68,000,
or 39.8% over 1996,  principally  from the new  branch and  shareholder  related
costs such as annual  reports as well as special and annual meeting proxy costs.
Professional  fees were  $262,000,  an  increase of  $52,000,  or 24.8%,  as the
Company  experienced  increased legal and accounting costs of operating a public
company.  Other expenses increased $67,000,  or 11.3% over the comparable period
of 1996. The increases  included  higher OTS  assessments  because 1996 included
only  assessments for the two quarters after the January  conversion of the Bank
from a state mutual to a federal stock  savings  bank. In addition,  the Company
incurred higher director and officer insurance costs, transfer agent,  franchise
tax and other costs relating to operating a public company.

Other real estate expenses decreased $265,000,  as the Company realized $140,000
in gains on the sale of other real estate  during the year ended  September  30,
1997;  there were no gains during  fiscal 1996.  In addition,  in the year ended
September  30, 1996,  the Company,  as part of its periodic  valuations  of real
estate  owned,  recorded  write-downs  on certain  properties  and increased its
estimated  cost of the future  disposition  of property  owned by  approximately
$134,000. There were no write-downs in the comparable period of 1997.



                                                            24

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


INCOME TAXES

Income tax  expense for the year ended  September  30,  1997 was  $2,534,000  an
increase of $398,000,  or 18.6% over the  comparable  period of 1996. The change
was  principally  the 18.1%  improvement  in income  before  income  taxes.  The
Company's  effective  tax rates for the year ended  September 30, 1997 and 1996,
were 39.34% and 39.17%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity  is the ability to generate  cash flows to meet  present and  expected
future funding needs.  Management monitors the Company's liquidity position on a
daily basis to evaluate its ability to meet  expected and  unexpected  depositor
withdrawals  and to make  new  loans  and or  investments.  The  Company,  since
September 30, 1997,  has reduced its high level of  liquidity,  but continues to
manage its balance  sheet so there has been no need for  unanticipated  sales of
assets.

The primary sources of funds for operations are deposits, borrowings,  principal
and interest payments on loans,  mortgage backed securities and other securities
available for sale. If the Bank  requires  additional  funds beyond its internal
ability to generate,  it has additional borrowing capacity of $21.8 million with
the  FHLB  as  well  as  collateral  eligible  for  advances  and/or  repurchase
agreements.

Net cash provided by operating  activities  was $3.4 million for the fiscal year
ended September 30, 1998, a decrease of $2.3 million from the comparable  period
last year. The decrease was  principally  the reduction in accrued  expenses and
other  liabilities  caused by the change in official  bank  checks  outstanding.
Official bank checks decreased  principally as a result of the Company's payment
of real estate taxes for mortgage  borrowers  using  escrowed  funds  earlier in
September 1998, than in September 1997.

Investing  activities  used $22.7 million in the fiscal year ended September 30,
1998,  as the Company  continued  to leverage  its balance  sheet by  increasing
earning  assets,  principally  $9.0 million in securities,  and $13.9 million in
loans.  Financing  activities provided $19.8 million, as the Company experienced
increases  in  deposits  and  borrowings,  somewhat  offset by the  purchase  of
treasury  stock and  payment of cash  dividends  on its common  stock.  For more
details  concerning the Company's cash flows,  see  "Consolidated  Statements of
Cash Flows."

An  important  source  of the  Company's  funds  is the  Bank's  core  deposits.
Management  believes that a substantial  portion of the Bank's $210.0 million of
deposits   are  a  dependable   source  of  funds  due  to  long-term   customer
relationships.  The Company does not currently use brokered deposits as a source
of funds,  and as of September 30, 1998,  deposit  accounts  having  balances in
excess of $100,000 totaled $21.7 million, or less than 10.3%, of total deposits.
The Bank is required to maintain  minimum  levels of liquid assets as defined by
the OTS regulations.  The requirement,  which may be varied by the OTS depending
upon  economic  conditions  and deposit  flows,  is based upon a  percentage  of
deposits and short-term borrowings.  The OTS required minimum liquidity ratio is
currently  4% and for the  month of  September  1998,  the Bank  exceeded  that,
maintaining an average liquidity ratio of 10.52%.


                                                            25

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


The Company  anticipates  that it will have sufficient funds to meet its current
commitments.  At September 30, 1998,  the Company had  commitments  to originate
loans of $4.8 million. In addition,  the Company had undrawn commitments of $2.8
million on home equity and other lines of credit. Certificates of deposits which
are scheduled to mature in one year or less at September 30, 1998, totaled $78.6
million,  and  management  believes that a significant  portion of such deposits
will remain with the Company.

IMPACT OF THE YEAR 2000

The  Year  2000  ("Y2K")  issue  confronting  the  Company  and  its  suppliers,
customers,  customers'  suppliers  and  competitors  centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs and
systems  originally  were programmed with six digit dates that provided only two
digits to identify the calendar  year in the date field.  With the impending new
millennium,  these  programs and computers  will recognize "00" as the year 1900
rather than the year 2000.

Substantially,  all of the Company's  mission critical systems are outsourced or
are  purchased  software  packages.  As a result,  much of the  remediation  and
testing  process is dependent on the accuracy of work performed by, and the Year
2000  compliance of software,  hardware and firmware and equipment  provided by,
vendors.  The Company has initiated  discussions  with its vendors and monitored
their Year 2000  compliance  programs and the  compliance  of their  products or
services with required standards. The Company received guidance from its primary
service provider,  including a $25,000 cost to be passed along to the Company as
a "validation" fee. So far, the Company has expensed  approximately  $20,000, of
the estimated Y2K project cost of $100,000. The Company has written the majority
of its testing  scripts,  which are quite extensive and will involve  end-to-end
testing,  which is scheduled to begin in November 1998. In addition, the Company
has now  determined  that one of its modules will not be supported for Year 2000
compliance and will require  migrating to upgraded  versions.  Upgraded programs
are now available,  and the Company has already purchased and expects to install
the system, which will cost approximately $50,000, in February 1999. The Company
expects its  mission  critical  systems to be  compliant  by June 1999,  and all
others by September 1999.

The Company  expects that when the century  changes,  disruption in service will
come not from a failure of its systems or the systems of the providers with whom
it interfaces,  but rather from outside  agencies  (i.e.  electric and telephone
companies)  beyond its  control.  Therefore,  contingency  planning and business
resumption  planning will be based on the  Company's  formal  Disaster  Recovery
Program,  which includes using such things as spreadsheet  software or reverting
to manual systems until problems can be corrected.

IMPACT OF INFLATION AND CHANGING PRICES

The Company's  consolidated financial statements are prepared in accordance with
generally  accepted  accounting  principles  which  require the  measurement  of
financial  position and operating results in terms of historical dollars without
considering the changes in the relative  purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increasing cost of the
Company's operations.  Unlike most industrial  companies,  nearly all assets and
liabilities  of the Company are  monetary.  As a result,  interest  rates have a
greater  impact on the  Company's  performance  than do the  effects  of general
levels of inflation. In addition,  interest rates do not necessarily move in the
direction, or to the same

                                                            26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS


extent as the price of goods and services.  However, in general,  high inflation
rates are accompanied by higher interest rates, and vice versa.

IMPACT OF NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial  Accounting  Standard  No. 130,  "Reporting  Comprehensive  Income"
("SFAS  No.  130").  SFAS  No.  130  establishes  standards  for  reporting  and
displaying  comprehensive  income. SFAS No. 130 states that comprehensive income
includes  the  reported  net  income of a company  adjusted  for items  that are
currently  accounted for as direct entries to equity, such as the mark to market
adjustment on securities  available for sale, foreign currency items and minimum
pension  liability  adjustments.  This  statement is effective  for fiscal years
beginning  after  December  15,  1997.  Management  anticipates  developing  the
required  information  for inclusion in the 1999 annual  consolidated  financial
statements.

In June 1997,  the FASB issued  Statement of Financial  Accounting  Standard No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 establishes  standards for reporting by public companies
about  operating  segments  of their  business.  SFAS No.  131 also  establishes
standards for related disclosures about products and services,  geographic areas
and major  customers.  This statement is effective for periods  beginning  after
December 15, 1997.  Management  anticipates  developing the required information
for inclusion in the 1999 annual consolidated financial statements.

In February 1998, the FASB issued SFAS No. 132,  "Employers'  Disclosures  about
Pensions and Other Post-Retirement  Benefits," ("SFAS No. 132") which amends the
disclosure  requirements of SFAS No. 87,  "Employers'  Accounting for Pensions,"
SFAS No. 88, "Employers'  Accounting for Settlements and Curtailments of Defined
Benefit  Pension  Plans  and  for  Termination  Benefits,"  and  SFAS  No.  106,
"Employers'  Accounting for Post-Retirement  Benefits Other Than Pensions." SFAS
No. 132  standardizes  the disclosure  requirements of Statements No. 87 and No.
106 to the extent  practicable  and recommends a parallel  format for presenting
information about pensions and other post-retirement benefits. This statement is
applicable to all entities and addresses disclosure only. The statement does not
change  any  of  the  measurement  or  recognition  provisions  provided  for in
Statements  No. 87, No. 88, or No. 106. The  statement  is effective  for fiscal
years beginning after December 15, 1997. Management  anticipates  developing the
required  information  for inclusion in the 1999 annual  consolidated  financial
statements.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities." This statement  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity  recognize all derivatives as either assets or liabilities in the
statement of financial  condition and measure those  instruments  at fair value.
The  accounting  for  changes in the fair value of a  derivative  depends on the
intended use of the derivative and the resulting designation. Management will be
reviewing the statement to determine  what impact,  if any, this  statement will
have on its accounting or disclosures.


                                                            27

<PAGE>
INDEPENDENT AUDITORS' REPORT


The Board of Directors
Catskill Financial Corporation:

We have audited the accompanying  consolidated statements of financial condition
of Catskill  Financial  Corporation and subsidiary (the Company) as of September
30,  1998  and  1997,  and  the  related   statements  of  income,   changes  in
shareholders'  equity  and cash  flows for each of the  years in the  three-year
period ended September 30, 1998. These consolidated financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Catskill Financial
Corporation  and  subsidiary at September 30, 1998 and 1997,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  September  30,  1998,  in  conformity  with  generally   accepted
accounting principles.


                              KPMG Peat Marwick LLP

October 21, 1998
Albany, New York


                                                            28

<PAGE>
<TABLE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                 Consolidated Statements of Financial Condition
                    (in thousands, except for share amounts)
<CAPTION>
                                                                           September 30
                                                                      ----------------------
                                                                         1998         1997
                                                                      ---------    ---------
<S>                                                                   <C>              <C>  
                Assets

Cash and due from banks ...........................................   $   2,795        2,274
Securities available for sale, at fair value ......................     164,983      148,114
Investment securities held to maturity (estimated fair value of
    $2,106 in 1998 and $8,112 in 1997) ............................       2,060        8,055
Stock in Federal Home Loan Bank of NY, at cost ....................       1,954        1,762
Loans receivable, (net) ...........................................     137,785      124,337
Accrued interest receivable .......................................       2,398        2,303
Premises and equipment, net .......................................       2,522        2,367
Real estate owned .................................................          53          248
Other assets ......................................................         202          159
                                                                      ---------    ---------

          Total assets ............................................   $ 314,752      289,619
                                                                      =========    =========


<PAGE>
<CAPTION>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                 Consolidated Statements of Financial Condition
                    (in thousands, except for share amounts)

                                                                           September 30
                                                                      ----------------------
                                                                         1998         1997
                                                                      ---------    ---------
<S>                                                                   <C>              <C>  
    Liabilities and Shareholders' Equity

Liabilities:
    Due to depositors:
    Non-interest bearing ..........................................       6,009        4,370
    Interest bearing ..............................................     203,968      196,542
                                                                      ---------    ---------

          Total deposits ..........................................     209,977      200,912

Short-term borrowings .............................................       6,840       11,385
Long-term borrowings ..............................................      25,000         --
Advance payments by borrowers for taxes and insurance .............         673          533
Accrued interest payable ..........................................         288           59
Official bank checks ..............................................       1,986        3,861
Accrued expenses and other liabilities ............................       2,157        1,092
                                                                      ---------    ---------

          Total liabilities .......................................     246,921      217,842
                                                                      ---------    ---------

Commitments and contingent liabilities

Shareholders' Equity:
    Preferred stock, $.01 par value; authorized 5,000,000 shares ..        --           --
    Common stock, $.01 par value; authorized 15,000,000 shares;
       5,686,750 shares issued at September 30, 1998 and 1997 .....          57           57
    Additional paid-in capital ....................................      54,974       54,811
    Retained earnings, substantially restricted ...................      37,374       34,915
    Common stock acquired by ESOP .................................      (3,981)      (4,209)
    Unearned management recognition plan (MRP) ....................      (1,433)      (1,856)
    Treasury stock, at cost (1,328,416 shares at September 30, 1998
       and 848,244 shares at September 30, 1997) ..................     (21,223)     (12,862)
    Net unrealized gain (loss) on securities available for sale,
       net of tax .................................................       2,063          921
                                                                      ---------    ---------

          Total shareholders' equity ..............................      67,831       71,777
                                                                      ---------    ---------

          Total liabilities and shareholders' equity ..............   $ 314,752      289,619
                                                                      =========    =========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>
<TABLE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                        Consolidated Statements of Income

                  Years ended September 30, 1998, 1997 and 1996
                    (in thousands, except for share amounts)
<CAPTION>
                                                        1998        1997        1996
                                                      --------    --------    --------
<S>                                                   <C>           <C>          <C>  
Interest and dividend income:
    Loans .........................................   $ 10,345      10,083       9,783
    Securities available for sale:
       Taxable ....................................      9,347       8,747       2,201
       Non-taxable ................................      1,016          58        --
    Investment securities held to maturity ........        255         688       2,282
    Federal funds sold and other ..................          4         546       3,625
    Stock in Federal Home Loan Bank of NY .........        137          95          41
                                                      --------    --------    --------

       Total interest and dividend income .........     21,104      20,217      17,932

Interest expense:
    Deposits ......................................      8,905       8,652       9,022
    Short-term borrowings .........................        650         149        --
    Long-term borrowings ..........................        405        --          --
                                                      --------    --------    --------

       Total interest expense .....................      9,960       8,801       9,022
                                                      --------    --------    --------

       Net interest income ........................     11,144      11,416       8,910

Provision for loan losses .........................        189         300         195
                                                      --------    --------    --------
       Net interest income after provision for loan
          losses ..................................     10,955      11,116       8,715
                                                      --------    --------    --------

Noninterest income:
    Recovery of Nationar loss contingency .........       --           100         560
    Service fees on deposit accounts ..............        294         243         218
    Net securities gains ..........................        143          19          33
    Other income ..................................        171         150         185
                                                      --------    --------    --------

       Total noninterest income ...................        608         512         996
                                                      --------    --------    --------
<PAGE>
<CAPTION>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                        Consolidated Statements of Income

                  Years ended September 30, 1998, 1997 and 1996
                    (in thousands, except for share amounts)

                                                        1998        1997        1996
                                                      --------    --------    --------
<S>                                                   <C>           <C>          <C>  

Noninterest expenses:
    Salaries and employee benefits ................      3,452       2,996       2,173
    Advertising and business promotion ............        126         200         137
    Net occupancy on premises .....................        354         329         251
    Federal deposit insurance premium .............         24          20          21
    Postage and supplies ..........................        297         239         171
    Outside data processing fees ..................        404         357         337
    Equipment .....................................        173         177         153
    Professional fees .............................        232         262         210
    Other real estate expenses, net ...............        (57)        (54)        211
    Other .........................................        657         661         594
                                                      --------    --------    --------

       Total noninterest expense ..................      5,662       5,187       4,258
                                                      --------    --------    --------

Income before taxes ...............................      5,901       6,441       5,453
Income tax expense ................................      2,019       2,534       2,136
                                                      --------    --------    --------

       Net income .................................   $  3,882       3,907       3,317
                                                      ========    ========    ========

Basic earnings per share ..........................   $    .95         .84         .38
                                                      ========    ========    ========

Diluted earnings per share ........................   $    .93         .83         .38
                                                      ========    ========    ========

</TABLE>
For 1996,  earnings per share amounts are calculated  using post  conversion net
income (see note 1)

See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
                                             CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
                                        Consolidated Statements of Changes in Shareholders' Equity
                                             Years ended September 30, 1998, 1997 and 1996
                                            (dollars in thousands, except for share amounts)

                                                                                                                               
                                                                                                                               
                                                                                          Retained      Common      Unearned   
                                                                            Additional    earnings,     stock      management  
                                                  Shares        Common       paid-in    substantially  acquired    recognition 
                                                  issued        stock        capital     restricted    by ESOP        plan     
                                                ------------  -----------   ----------   -----------  -----------  ----------- 
<S>                                             <C>           <C>           <C>          <C>          <C>          <C>         
Balance at September 30, 1995                        --        $  --            --           28,667       --           --      

Net income                                           --           --            --            3,317       --           --      
Common stock issued                               5,686,750           57        54,858       --           --           --      
Acquisition of common stock by ESOP
   (454,940 shares)                                  --           --            --           --           (4,549)      --      
Allocation of ESOP stock (11,374 shares)             --           --                 6       --              113       --      
Change in net unrealized gain (loss) on securities
   available for sale, net of tax                    --           --            --           --           --           --      
                                                ------------  -----------   -----------  -----------  -----------  ----------- 

Balance at September 30, 1996                     5,686,750           57        54,864       31,984       (4,436)      --      

Net income                                           --           --            --            3,907       --           --      
Dividends paid on common stock ($.21 per share)      --           --            --             (976)      --           --      
Purchases of common stock (1,029,476 shares)         --           --            --           --           --           --      
Allocation of ESOP stock (22,722 shares)             --           --               115       --              227       --      
Change in net unrealized gain (loss) on
   securities available for sale, net of tax         --           --            --           --           --           --      
Grant of restricted stock under MRP
   (181,232 shares)                                  --           --              (168)      --           --           (2,275) 
Amortization of unearned MRP compensation            --           --            --           --           --              419  
                                                ------------  -----------   ------------------------  -----------  ----------- 

Balance at September 30, 1997                     5,686,750           57        54,811       34,915       (4,209)      (1,856) 

Net income                                           --           --            --            3,882       --           --      
Dividends paid on common stock ($.33 per share)      --           --            --           (1,394)      --           --      
Purchases of common stock (486,573 shares)           --           --            --           --           --           --      
Allocation of ESOP stock (22,747 shares)             --           --               161       --              228       --      
Change in net unrealized gain (loss) on
   securities available for sale, net of tax         --           --            --           --           --           --      
Grant of restricted stock under MRP
   (2,000 shares)                                    --           --                 2       --           --              (33) 
Exercise of stock options (4,401 shares
   issued, net)                                      --           --            --              (29)      --           --      
Amortization of unearned MRP compensation            --           --            --           --           --              456  
                                                ------------  -----------   -----------  -----------  -----------  ----------- 

Balance at September 30, 1998                     5,686,750   $       57        54,974       37,374       (3,981)      (1,433) 
                                                ============  ===========   ===========  ===========  ===========  =========== 
<PAGE>
<CAPTION>
                                             CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY
                                        Consolidated Statements of Changes in Shareholders' Equity
                                             Years ended September 30, 1998, 1997 and 1996
                                            (dollars in thousands, except for share amounts)

                                                               Net realized
                                                               gain (loss) on
                                                               securities
                                                   Treasury    available
                                                    stock,     for sale,
                                                   at cost     net of tax      Total
                                                  -----------  -----------  ------------
<S>                                               <C>          <C>          <C>
Balance at September 30, 1995                         --           --            28,667

Net income                                            --           --             3,317
Common stock issued                                   --           --            54,915
Acquisition of common stock by ESOP
   (454,940 shares)                                   --           --            (4,549)
Allocation of ESOP stock (11,374 shares)              --           --               119
Change in net unrealized gain (loss) on
   securities available for sale, net of tax          --              (88)          (88)
                                                  -----------  -----------  ------------

Balance at September 30, 1996                         --              (88)       82,381

Net income                                            --           --             3,907
Dividends paid on common stock ($.21 per share)       --           --              (976)
Purchases of common stock (1,029,476 shares)         (15,305)      --           (15,305)
Allocation of ESOP stock (22,722 shares)              --           --               342
Change in net unrealized gain (loss) on
   securities available for sale, net of tax          --            1,009         1,009
Grant of restricted stock under MRP
   (181,232 shares)                                    2,443       --            --
Amortization of unearned MRP compensation             --           --               419
                                                  -----------  -----------  ------------

Balance at September 30, 1997                        (12,862)         921        71,777

Net income                                            --           --             3,882
Dividends paid on common stock $.33 per share)        --           --            (1,394)
Purchases of common stock (486,573 shares)            (8,459)      --            (8,459)
Allocation of ESOP stock (22,747 shares)              --           --               389
Change in net unrealized gain (loss) on
   securities available for sale, net of tax          --            1,142         1,142
Grant of restricted stock under MRP
   (2,000 shares)                                         31       --            --
Exercise of stock options (4,401 shares
   issued, net)                                           67       --                38
Amortization of unearned MRP compensation             --           --               456
                                                  -----------  -----------  ------------

Balance at September 30, 1998                        (21,223)       2,063        67,831
                                                  ===========  ===========  ============

</TABLE>

See accompanying notes to financial statements.

<PAGE>
<TABLE>
                                      CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                                          Consolidated Statements of Cash Flows

                                      Years ended September 30, 1998, 1997 and 1996
                                                     (in thousands)
<CAPTION>
                                                                                     1998        1997        1996
                                                                                   --------    --------    --------
<S>                                                                                <C>            <C>         <C>  
Increase (decrease) in cash and cash equivalents:
    Cash flows from  operating activities:
       Net income ..............................................................   $  3,882       3,907       3,317
       Adjustments to reconcile net income to net
          cash provided by operating activities:
             Depreciation ......................................................        222         183         136
             Provision for loan losses .........................................        189         300         195
             Recovery of Nationar
                loss contingency ...............................................       --          (100)       (560)
             MRP compensation expense ..........................................        456         419        --
             ESOP compensation expense .........................................        389         342         119
             Writedown on real estate owned ....................................       --          --           134
             Loss (gain) on sale of other real
                estate owned ...................................................        (70)       (140)         85
             Gain on sales and calls of securities .............................       (143)        (19)        (33)
             Net accretion on securities .......................................        (43)       (157)       (308)
             Deferred tax benefit ..............................................       (188)       (156)       (151)
             Collection of deposits held at Nationar ...........................       --           183       3,083
             Net increase in other assets ......................................       (138)       (551)       (149)
             Net increase (decrease) in accrued
                expenses and other liabilities .................................     (1,154)      1,502          25
                                                                                   --------    --------    --------
                   Net cash provided by operating
                     activities ................................................      3,402       5,713       5,893

    Cash flows from investing activities:
       Proceeds from maturity, paydowns, and
          calls of investment securities held to maturity ......................      6,007      11,023      28,884
       Proceeds from maturity, paydowns, and
          calls of securities available for sale ...............................     50,728      64,415     126,656
       Proceeds from sales of securities available
          sale .................................................................     15,446       5,959        --
       Purchases of investment securities held to maturity .....................       --          --        (6,015)
       Purchase of Federal Home Loan Bank
          Stock ................................................................       (192)       (603)     (1,159)
       Purchases of securities available for sale ..............................    (80,966)   (119,590)   (198,359)
       Net increase in loans ...................................................    (13,889)     (2,642)     (4,570)
       Capital expenditures, net ...............................................       (377)       (664)       (290)
       Proceeds from sale of other real estate
          owned ................................................................        517         787         114
                                                                                   --------    --------    --------

                   Net cash used by investing activities .......................    (22,726)    (41,315)    (54,739)
<PAGE>
<CAPTION>
                                      CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                                          Consolidated Statements of Cash Flows

                                      Years ended September 30, 1998, 1997 and 1996
                                                     (in thousands)

                                                                                     1998        1997        1996
                                                                                   --------    --------    --------
<S>                                                                                <C>            <C>         <C>  
 Cash flows from financing activities:
    Net increase (decrease) in demand,
       statement, passbook, money market
       and NOW deposit accounts ................................................   $  1,058      (2,523)     (1,814)
    Net increase in certificates of deposit ....................................      8,007       6,682       1,337
    Increase (decrease) in advances from
       borrowers for taxes and insurance .......................................        140      (1,099)        605
    Net proceeds from sale of common stock .....................................       --          --        54,915
    Common stock acquired by ESOP ..............................................       --          --        (4,549)
    Cash dividends on common stock .............................................     (1,394)       (976)       --
    Net proceeds from the exercise of stock
       options .................................................................         38        --          --
    Purchase of common stock for treasury ......................................     (8,459)    (15,305)       --
    Net increase (decrease) in short-term ......................................     (4,545)     11,385        --
       borrowings
    Increase in long-term borrowings ...........................................     25,000        --          --
                                                                                   --------    --------    --------
          Net cash (used) provided by
             financing activities ..............................................     19,845      (1,836)     50,494

Net increase (decrease) in cash and cash
    equivalents ................................................................        521     (37,438)      1,648
Cash and cash equivalents at beginning
    of year ....................................................................      2,274      39,712      38,064
                                                                                   --------    --------    --------

Cash and cash equivalents at end of year .......................................   $  2,795       2,274      39,712
                                                                                   ========    ========    ========

Supplemental disclosures of cash flow information -
    cash paid during the year for:
          Interest .............................................................   $  9,731       8,800       9,018
                                                                                   ========    ========    ========

          Income taxes .........................................................   $  2,062       2,770       2,274
                                                                                   ========    ========    ========
<PAGE>
<CAPTION>
                                      CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                                          Consolidated Statements of Cash Flows

                                      Years ended September 30, 1998, 1997 and 1996
                                                     (in thousands)

                                                                                     1998        1997        1996
                                                                                   --------    --------    --------
<S>                                                                                <C>            <C>         <C>  

Noncash investing activities:
    Reduction in loans receivable, net resulting
        from the transfer to real estate owned .................................   $    252         538         206
                                                                                   ========    ========    ========

    Investment  securities  transferred  to  securities  available  for  sale in
       accordance  with the  Financial  Accounting  Standards  Board's  "Special
       Reports," fair value of securities transferred was $25,300 ..............   $   --          --        24,800
                                                                                   ========    ========    ========

    Change in net unrealized gain (loss) on
        securities available for sale, net of
       change in deferred tax of $761, $673
       and ($59) respectively ..................................................   $  1,142       1,009         (88)
                                                                                   ========    ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                        September 30, 1998, 1997 and 1996


(1)    Summary of Significant Accounting Policies

       Catskill  Financial  Corporation  (the Holding  Company) was incorporated
       under Delaware law in December 1995 as a holding company to purchase 100%
       of the  common  stock of  Catskill  Savings  Bank  (the  Bank).  The Bank
       converted  from a mutual to a stock  institution in January 1996, and the
       Holding Company  completed its initial public offering on April 18, 1996,
       at which time the Holding Company  purchased all of the outstanding stock
       of the Bank.  To date,  the principal  operations  of Catskill  Financial
       Corporation and subsidiary (the Company) have been those of the Bank.

       The following is a description of the more significant policies which the
       Company  follows in preparing and presenting its  consolidated  financial
       statements:

       (a)    Basis of Presentation

              The accompanying  consolidated  financial  statements  include the
              accounts of the Holding  Company and its wholly owned  subsidiary,
              the Bank. All significant  intercompany  transactions and balances
              are  eliminated in  consolidation.  The  accounting  and reporting
              policies  of the  Company  conform  in all  material  respects  to
              generally accepted  accounting  principles and to general practice
              within the thrift industry. In the "Parent Company Only" financial
              statements, the investment in the Bank is carried under the equity
              method of accounting.

              The  preparation  of  the  consolidated  financial  statements  in
              conformity with generally accepted accounting  principles requires
              management  to make  estimates  and  assumptions  that  affect the
              reported  amounts  of assets and  liabilities  and  disclosure  of
              contingent  assets and liabilities at the date of the consolidated
              financial  statements  and the  reported  amounts of revenues  and
              expenses during the reporting period.  Actual results could differ
              from those estimates.

              Material   estimates   that  are   particularly   susceptible   to
              significant change in the near-term relate to the determination of
              the  allowance  for loan losses and the  valuation  of real estate
              acquired in connection  with  foreclosures  or in  satisfaction of
              loans. In connection with the  determination  of the allowance for
              loan losses and the  valuation  of real estate  owned,  management
              obtained appraisals for significant properties.

       (b)    Business

              A significant  portion of the Company's  loans are secured by real
              estate in Greene and Albany  County in New York.  In  addition,  a
              substantial  portion of the real estate  owned is located in those
              same  markets.  Accordingly,  the  ultimate  collectibility  of  a
              substantial  portion  of the  Company's  loan  portfolio  and  the
              recovery of a substantial  portion of the carrying  amount of real
              estate owned are dependent  upon market  conditions in the upstate
              New York region.


                                       34
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


              Management believes that the allowance for loan losses is adequate
              and that real estate owned is properly  valued.  While  management
              uses available  information to recognize  losses on loans and real
              estate owned,  future  additions to the allowance or writedowns on
              real estate  owned may be  necessary  based on changes in economic
              conditions.  In  addition,  various  regulatory  agencies,  as  an
              integral part of their examination  process,  periodically  review
              the Bank's  allowance  for loan losses.  Such agencies may require
              the Bank to recognize  additions to the  allowance for loan losses
              or writedowns on real estate owned based on their  judgments about
              information  available  to them at the time of  their  examination
              which may not be currently available to management.

       (c)    Securities  Available  for  Sale,  Investment  Securities  Held to
              Maturity and Federal Home Loan Bank of New York Stock

              Management determines the appropriate classification of securities
              at the time of purchase. If management has the positive intent and
              ability to hold debt  securities to maturity,  they are classified
              as  investment  securities  held to  maturity  and are  stated  at
              amortized  cost. All other debt and marketable  equity  securities
              are  classified as securities  available for sale and are reported
              at fair value,  with net unrealized  gains or losses reported as a
              separate  component  of  shareholders'  equity,  net of  estimated
              income taxes. The Company does not maintain a trading portfolio.

              Realized  gains and losses on the sale of securities  are based on
              the net proceeds and the amortized  cost of the  securities  sold,
              using the specific  identification  method. The cost of securities
              is adjusted for amortization of premium and accretion of discount,
              which is calculated on an effective interest method.

              Mortgage backed securities, which are guaranteed by the Government
              National  Mortgage  Association  ("GNMA"),  the Federal  Home Loan
              Mortgage Corporation  ("FHLMC"),  or the Federal National Mortgage
              Association ("FNMA"),  represent participating interests in direct
              pass-through  pools of long-term  first mortgage loans  originated
              and serviced by the issuers of the securities.

              Unrealized  losses on securities  are charged to earnings when the
              decline  in fair  value of a  security  is judged to be other than
              temporary.

              Non-marketable  equity securities,  such as Federal Home Loan Bank
              of New York stock,  is stated at cost.  The  investment in Federal
              Home Bank of New York stock is required for membership.

       (d)    Loans Receivable, Net

              Loans  receivable are stated at unpaid  principal  amount,  net of
              deferred loan fees and allowance for loan losses. Loan origination
              fees net of certain  related costs are amortized  into income over
              the  estimated  term of the loan  using  the  interest  method  of
              amortization.  Interest  income  on loans is not  recognized  when
              considered doubtful of collection by management.

                                       35
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


              Loans  considered  doubtful of collection by management are placed
              on a nonaccrual  status for the  recording of interest.  Generally
              loans past due 90 days or more as to  principal  or  interest  are
              placed on nonaccrual  status  except for certain  loans which,  in
              management's  judgment,  are  adequately  secured  and  for  which
              collection  is probable.  Previously  accrued  income that has not
              been collected is reversed from current  income.  Thereafter,  the
              application  of  payments  received  (principal  or  interest)  is
              dependent on the expectation of ultimate repayment of the loan. If
              ultimate repayment of the loan is expected,  any payments received
              are applied in  accordance  with  contractual  terms.  If ultimate
              repayment of principal is not expected or management  judges it to
              be prudent,  any payment received on a non-accrual loan is applied
              to principal until ultimate repayment becomes expected.  Loans are
              removed  from  non-accrual  status when they are  estimated  to be
              fully  collectible as to principal and interest.  Amortization  of
              related  deferred fees or costs is suspended when a loan is placed
              on non-accrual status.

              The  allowance  for loan losses is  maintained  at a level  deemed
              appropriate by management  based on an evaluation of the known and
              inherent   risks  in  the   present   portfolio,   the   level  of
              non-performing  loans, past loan loss experience,  estimated value
              of underlying  collateral,  and current and  prospective  economic
              conditions.  The  allowance is increased  by  provisions  for loan
              losses charged to operations.

              Impaired  loans are  identified  and measured in  accordance  with
              Statement  of  Financial  Accounting  Standards  (SFAS)  No.  114,
              "Accounting  by Creditors for  Impairment of a Loan," and SFAS No.
              118,  "Accounting  by Creditors for  Impairment of a Loan - Income
              Recognition and Disclosures." These Statements were adopted by the
              Company on October 1, 1995. A loan is considered  impaired when it
              is  probable  that the  borrower  will be unable to repay the loan
              according to the original contractual terms of the loan agreement,
              or the  loan is  restructured  in a  troubled  debt  restructuring
              subsequent  to October 1, 1995.  These  standards  are  applicable
              principally  to  commercial  and  commercial  real  estate  loans,
              however,  certain  provisions  related to  restructured  loans are
              applicable to all loan types. The adoption of these Statements did
              not have a material effect on the Company's consolidated financial
              statements.

              Under these  Statements  the allowance for loan losses  related to
              impaired loans is based on discounted  cash flows using the loan's
              initial  effective   interest  rate  or  the  fair  value  of  the
              collateral  for  certain  loans  where  repayment  of the  loan is
              expected  to be  provided  solely  by  the  underlying  collateral
              (collateral  dependent  loans).  The Company's  impaired loans are
              generally  collateral  dependent.  The Company considers estimated
              costs to sell on a discounted  basis,  when  determining  the fair
              value of  collateral  in the  measurement  of  impairment if these
              costs are expected to reduce the cash flows  available to repay or
              otherwise satisfy the loans.

       (e)    Real Estate Owned

              Real estate owned includes  assets  received from  foreclosure and
              in-substance foreclosures. In accordance with SFAS No. 114, a loan
              is classified as an insubstance  foreclosure  when the Company has
              taken  possession of the  collateral  regardless of whether formal
              foreclosure proceedings have taken place.

                                       36
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


              Foreclosed  assets,  including  in-substance   foreclosures,   are
              recorded  on an  individual  asset basis at net  realizable  value
              which is the lower of fair value minus  estimated costs to sell or
              "cost" (defined as the fair value at initial foreclosure).  When a
              property is acquired or  identified as  in-substance  foreclosure,
              the excess of the loan  balance  over fair value is charged to the
              allowance  for loan losses.  Subsequent  write-downs  to carry the
              property  at fair  value  less  costs  to  sell  are  included  in
              noninterest   expense.   Costs  incurred  to  develop  or  improve
              properties  are  capitalized,  while  holding costs are charged to
              expense.

              At  September  30,  1998 and 1997,  real  estate  owned  consisted
              primarily  of  residential  one to  four  family  properties.  The
              Company had no in-substance foreclosures at September 30, 1998 and
              1997.

       (f)    Premises and Equipment, Net

              Premises  and  equipment  are  carried at cost,  less  accumulated
              depreciation  applied on a straight-line  basis over the estimated
              useful  lives of the assets.  Useful  lives are 10 to 40 years for
              banking house and 5 to 7 years for furniture,  fixtures and office
              equipment.

       (g)    Income Taxes

              Income taxes are provided on income  reported in the  consolidated
              statements  of income  regardless  of when such taxes are payable.
              The Company  accounts for income taxes in accordance with SFAS No.
              109,  "Accounting  for Income  Taxes."  SFAS No. 109  requires the
              asset and liability  method of accounting for income taxes.  Under
              the  asset and  liability  method of SFAS No.  109,  deferred  tax
              assets  and   liabilities   are  recognized  for  the  future  tax
              consequences   attributable  to  differences   between   financial
              statement  carrying amounts of existing assets and liabilities and
              their  respective tax bases.  Deferred tax assets and  liabilities
              are measured  using enacted tax rates expected to apply to taxable
              income  in the  years in which  those  temporary  differences  are
              expected  to be  recovered  or settled.  Under SFAS No.  109,  the
              effect on deferred tax assets and  liabilities  of a change in tax
              rates is  recognized  in income in the period  that  includes  the
              enactment  date. The Company's  policy is that deferred tax assets
              are  reduced by a  valuation  reserve  if,  based on the weight of
              available evidence, it is more likely than not that some or all of
              the deferred tax assets will not be realized. In considering if it
              is more  likely  than not  that  some or all of the  deferred  tax
              assets  will not be  realized,  the  Company  considers  temporary
              taxable  differences,  historical  taxes and  estimates  of future
              taxable income.

       (h)    Pension Plan

              The Company has a defined  benefit  pension plan covering all full
              time employees meeting age and service requirements.  This plan is
              accounted  for  in  accordance  with  SFAS  No.  87,   "Employers'
              Accounting for Pensions."

                                       37
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       (i)    Off-Balance-Sheet Risk

              The  Company  is a party to  certain  financial  instruments  with
              off-balance-sheet  risk such as commitments to extend credit.  The
              Company's policy is to record such instruments when funded.

       (j)    Cash Equivalents

              For purposes of the  consolidated  statements  of cash flows,  the
              Company  considers  all cash and due from banks and federal  funds
              sold to be cash equivalents.

       (k)    Official Bank Checks

              The Company's  official checks  (including  teller's checks,  loan
              disbursement  checks,  interest  checks,  expense checks and money
              orders)  are  drawn  upon  deposit  accounts  at the  Bank and are
              ultimately paid through the Bank's Federal  Reserve  correspondent
              account.

       (l)    Stock Based Compensation Plans

              Compensation  expense in connection  with the  Company's  Employee
              Stock  Ownership  Plan (ESOP) is recorded in  accordance  with the
              American Institute of Certified Public  Accountants'  Statement of
              Position No.
              93-6, "Employers' Accounting for Employee Stock Ownership Plans."

              The Company  accounts for its stock option plan in accordance with
              the provisions of Accounting  Principles Board ("APB") Opinion No.
              25,  "Accounting  for  Stock  Issued to  Employees."  Accordingly,
              compensation  expense is recognized  only if the exercise price of
              the option is less than the fair value of the underlying  stock at
              the  grant  date.  SFAS  No.  123,   "Accounting  for  Stock-Based
              Compensation,"  encourages entities to recognize the fair value of
              all  stock-based  awards  on the  date of  grant  as  compensation
              expense  over the  vesting  period.  Alternatively,  SFAS No.  123
              allows entities to continue to apply the provisions of APB Opinion
              No.  25 and  provide  pro  forma  disclosures  of net  income  and
              earnings per share as if the  fair-value-based  method  defined in
              SFAS No. 123 had been applied. The Company has elected to continue
              to apply the  provisions of APB Opinion No. 25 and provide the pro
              forma disclosures required by SFAS No. 123.

              The  Company's   Management   Recognition  Plan  ("MRP")  is  also
              accounted  for in  accordance  with APB  Opinion  No. 25. The fair
              value of the shares  awarded,  measured as of the grant  date,  is
              recognized   as   unearned    compensation   (a   deduction   from
              shareholders'  equity) and amortized to compensation  expense over
              the  respective  vesting  periods.  Any  difference in the cost of
              treasury   stock  used  to  fund  the  MRP  is  recorded   through
              shareholders' equity.

                                       38
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       (m)    Earnings per Share

              On December 31, 1997,  the Company  adopted the provisions of SFAS
              No. 128,  "Earnings  per Share," which  establishes  standards for
              computing  and  presenting   earnings  per  share.  SFAS  No.  128
              supercedes  Accounting  Principles Board Opinion No. 15, "Earnings
              per Share" and related interpretations. SFAS No. 128 requires dual
              presentation  of basic and diluted  earnings per share on the face
              of the income  statement for all entities  with a complex  capital
              structure and specifies additional disclosure requirements.  Basic
              earnings per share  excludes  dilution and is computed by dividing
              income  available to common  stockholders by the weighted  average
              number of  common  shares  outstanding  for the  period.  Unvested
              restricted  stock is  considered  outstanding  and included in the
              computation  of basic  earnings  per share as of the date they are
              fully vested.  Diluted  earnings per share  reflects the potential
              dilution  that could occur if  securities  or other  contracts  to
              issue common stock were  exercised or converted  into common stock
              or  resulted in the  issuance of common  stock that then shared in
              the earnings of the entity,  such as the  Company's  stock options
              and unvested  restricted stock. SFAS No. 128 requires  restatement
              of all prior period earnings per share data presented. Unallocated
              ESOP shares are not  included in the  weighted  average  number of
              common shares outstanding for either the basic or diluted earnings
              per share calculations.  The adoption of SFAS No. 128 did not have
              a material effect on the Company's consolidated financial position
              or results of operations.

              For 1996,  earnings  per  share are  compiled  on  estimated  post
              conversion  earnings of approximately $2.0 million,  and are based
              on the weighted average number of shares  outstanding  during this
              period,  less  unallocated  employee stock  ownership plan shares,
              during  the  period.  Earnings  per  share are not  presented  for
              periods  prior to the  initial  stock  offering  as the Bank was a
              mutual savings bank at the time and no stock was outstanding.

       (n)    Reclassifications

              Amounts in the prior years' consolidated  financial statements are
              reclassified  whenever  necessary to conform to the current year's
              presentations.

(2)    Conversion to Stock Ownership

       On April 18, 1996, the Holding  Company sold  5,686,750  shares of common
       stock at $10.00 per share to depositors  and  employees of the Bank.  Net
       proceeds from the sale of stock of the Holding  Company,  after deducting
       conversion  expenses of approximately  $1.9 million,  were $54.9 million.
       The Company  utilized $27.5 million of the net proceeds to acquire all of
       the capital stock of the Bank.

       As part of the conversion, the Bank established a liquidation account for
       the benefit of eligible depositors who continue to maintain their deposit
       accounts  in the  Bank  after  conversion.  In the  unlikely  event  of a
       complete  liquidation  of the  Bank,  each  eligible  depositor  will  be
       entitled  to  receive a  liquidation  distribution  from the  liquidation
       account, in the proportionate amount of the then current adjusted balance
       for deposit accounts held,  before  distribution may be made with respect
       to the  Bank's  capital  stock.  The Bank may not  declare  or pay a cash
       dividend to the Holding  Company  on, or  repurchase  any of, its capital
       stock if the effect thereof would cause the retained earnings of the Bank
       to be reduced  below the amount  required  for the  liquidation  account.
       Except for such  restrictions,  the existence of the liquidation  account
       does not restrict the use or application of retained earnings.

                                       39
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       The Bank's capital exceeds all of the fully phased-in capital  regulatory
       requirements.  The  Office  of  Thrift  Supervision  ("OTS")  regulations
       provide  that an  institution  that exceeds all fully  phased-in  capital
       requirements  before and after a  proposed  capital  distribution  could,
       after  prior  notice but without the  approval by the OTS,  make  capital
       distributions during the calendar year of up to 100% of its net income 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.
       Any  additional  capital  distributions  would require  prior  regulatory
       approval.  At September 30, 1998, the maximum amount that could have been
       paid by the Bank to the Holding Company was approximately $23.4 million.

       Unlike the Bank, the Holding  Company is not subject to these  regulatory
       restrictions on the payment of dividends to its stockholders.

(3)    Earnings Per Share

       The following sets forth certain information regarding the calculation of
       basic and diluted  earnings per share (EPS) for the years ended September
       30:
<TABLE>
<CAPTION>
                                                1998         1997          1996
                                             ----------   ----------   ----------
                                        (In thousands, except share and per share data)

<S>                                          <C>               <C>          <C>  
Net income ...............................   $    3,882        3,907        3,317
                                             ==========   ==========   ==========

Weighted average common shares ...........    4,066,971    4,629,697    5,231,810

Dilutive effect of potential common shares
     related to stock based compensation
     plans ...............................      120,762       71,731         --
                                             ----------   ----------   ----------

Weighted average common shares including
     potential dilution ..................    4,187,733    4,701,428    5,231,810
                                             ==========   ==========   ==========

Basic earnings per share .................   $      .95          .84          .38
Diluted earnings per share ...............          .93          .83          .38
</TABLE>

       For  1996,   earnings  per  share  were  compiled  using  estimated  post
       conversion net income of approximately $2.0 million.

(4)    Reserve Requirements

       The Bank is required to maintain certain reserves of cash and/or deposits
       with the Federal  Reserve Bank.  The amount of this reserve  requirement,
       which was covered by the Bank's vault cash  included in cash and due from
       banks, was approximately  $493,000 and $386,000 at September 30, 1998 and
       1997, respectively.

       The Bank as a member of the FHLB of New York,  is  required to maintain a
       minimum  investment  in the capital  stock of the FHLB,  in an amount not
       less than 1% of its  outstanding  home  loans or 1/20 of its  outstanding
       borrowings with the FHLB, whichever is greater, as determined at December
       31 of each year.  Any excess may be redeemed by the Bank or called by the
       FHLB at par.

                                       40
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(5)    Securities Available for Sale

       The amortized cost and estimated fair values of securities  available for
       sale at September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                                                                               1998
                                                              ----------------------------------------------------------------------
                                                                                     Gross              Gross              Estimated
                                                              Amortized            unrealized         unrealized              fair
                                                                 Cost                gains              losses                value
                                                               --------            --------            --------             --------
                                                                                          (in thousands)
<S>                                                            <C>                    <C>                  <C>               <C>    
U.S. Treasury and other
  U.S. Government
  agencies ........................................            $ 19,990                 479                --                 20,469
Mortgage backed
  securities ......................................              88,670               2,264                  (5)              90,929
Corporate bonds ...................................              16,230                 293                (297)              16,226
Obligations of states
  and political
  subdivisions ....................................              34,414                 536                 (35)              34,915
Other .............................................               2,242                 202                --                  2,444
                                                               --------            --------            --------             --------
  Total securities
     available for sale ...........................            $161,546               3,774                (337)             164,983
                                                               ========            ========            ========             ========
<PAGE>
<CAPTION>
                                                                                               1997
                                                              ----------------------------------------------------------------------
                                                                                     Gross              Gross              Estimated
                                                              Amortized            unrealized         unrealized              fair
                                                                 Cost                gains              losses                value
                                                               --------            --------            --------             --------
                                                                                          (in thousands)
<S>                                                            <C>                    <C>                  <C>               <C>    
U.S. Treasury and other
  U.S. Gov- ernment
  agencies ........................................            $ 54,875                 417                 (59)              55,233
Mortgage backed
  securities ......................................              83,786               1,069                 (61)              84,794
Corporate bonds ...................................               5,042                  40                 (12)               5,070
Obligations of states
  and political
  subdivisions ....................................                 194                   9                --                    203
Other .............................................               2,682                 132                --                  2,814
                                                               --------            --------            --------             --------
  Total securities
     available for sale ...........................            $146,579               1,667                (132)             148,114
                                                               ========            ========            ========             ========

       During the years ended  September 30, 1998 and 1997,  proceeds from sales
       of   securities   available   for  sale  were  $15.4  and  $6.0  million,
       respectively.   Gross   gains   realized  on  these   transactions   were
       approximately $150 thousand and $19 thousand, respectively. There were $7
       thousand in gross realized losses in 1998 and no gross realized losses in
       1997.  There were no sales of  securities  available  for sale during the
       year ended September 30, 1996.


                                       41
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       The amortized cost and estimated  fair value of securities  available for
       sale at September  30, 1998,  by  contractual  maturity,  are shown below
       (mortgage backed securities are included by final contractual  maturity).
       Expected  maturities  will differ  from  contractual  maturities  because
       certain issuers may have the right to call or prepay  obligations with or
       without call or prepayment penalties.

                                                           September 30, 1998
                                                         -----------------------
                                                         Amortized    Estimated
                                                            Cost      fair value
                                                         --------     ----------
                                                             (in thousands)
<S>                                                      <C>               <C>  
Due within one year ..............................       $  1,998          2,002
Due one year to five years .......................          7,646          7,730
Due five years to ten years ......................         20,376         21,037
Due after ten years ..............................        131,526        134,214
                                                         --------       --------
     Total securities available for sale .........       $161,546        164,983
                                                         ========       ========
</TABLE>

(6)    Investment Securities Held to Maturity

       The amortized cost and estimated fair value of investment securities held
       to maturity at September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
                                                                                                1998
                                                               ---------------------------------------------------------------------
                                                                                      Gross               Gross            Estimated
                                                               Amortized            unrealized         unrealized             fair
                                                                  Cost               gains               losses               value
                                                                 ------              ------              ------               ------
                                                                                            (in thousands)
<S>                                                              <C>                 <C>                 <C>                  <C>  
U.S. Treasury and other
  U.S. Government
  agencies ........................................              $1,964                  46                --                  2,010
Corporate bonds ...................................                --                  --                  --                   --
Mortgage backed
  securities ......................................                  96                --                  --                     96
                                                                 ------              ------              ------               ------
Total investment
  securities ......................................              $2,060                  46                --                  2,106
                                                                 ======              ======              ======               ======

<PAGE>
<CAPTION>
                                                                                                1997
                                                               ---------------------------------------------------------------------
                                                                                      Gross               Gross            Estimated
                                                               Amortized            unrealized         unrealized             fair
                                                                  Cost               gains               losses               value
                                                                 ------              ------              ------               ------
                                                                                            (in thousands)
<S>                                                              <C>                 <C>                 <C>                  <C>  
U.S. Treasury and other
  U.S. Government
  agencies ........................................              $6,958                  58                  (2)               7,014
Corporate bonds ...................................               1,000                   1                --                  1,001
Mortgage backed
  securities ......................................                  97                --                  --                     97
                                                                 ------              ------              ------               ------
Total investment
  securities ......................................              $8,055                  59                  (2)               8,112
                                                                 ======              ======              ======               ======

</TABLE>



                                       42
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       The amortized cost and estimated fair value of investment securities held
       to maturity at September 30, 1998,  by  contractual  maturity,  are shown
       below  (mortgage  backed  securities  are  included by final  contractual
       maturity).  Expected  maturities will differ from contractual  maturities
       because certain issuers may have the right to call or prepay  obligations
       with or without call or prepayment penalties.
<TABLE>
<CAPTION>
                                                         Amortized      Estimated
                                                            Cost        fair value
                                                            ----        ----------
                                                               (in thousands)
<S>                                                        <C>            <C>  
Due within one year ..............................         $1,964          2,010
Due one year to five years .......................           --             --
Due after five years to ten  years ...............           --             --
Due after ten years ..............................             96             96
                                                           ------         ------
    Totals .......................................         $2,060          2,106
                                                           ======         ======
</TABLE>

       There were no sales of investment  securities held to maturity during the
       years ended September 30, 1998, 1997 or 1996.

<PAGE>
(7)    Loans Receivable, Net

       Loans receivable consist of the following at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                September 30,
                                                          ----------------------
                                                            1998          1997
                                                          --------      --------
                                                               (in thousands)
<S>                                                       <C>            <C>    
Loans secured by real estate:
     Conventional one- to four-family ..............      $113,363       102,145
     Commercial and multi-family ...................         6,389         4,691
     FHA and VA insured loans ......................            60            87
     Construction ..................................         1,182         1,306
                                                          --------      --------
         Total loans secured by real estate ........       120,994       108,229
                                                          --------      --------

Commercial loans ...................................           602            63
                                                          --------      --------

Consumer loans:
     Student loans .................................         2,795         2,658
     Automobile loans ..............................         6,301         6,655
     Secured/unsecured .............................         3,165         2,698
     Mobile home ...................................           535           687
     Passbook loans ................................         1,091           952
     Home improvement ..............................           848           935
     Home equity ...................................         3,490         3,709
     Other .........................................           174           116
                                                          --------      --------
         Total consumer loans ......................        18,399        18,410
                                                          --------      --------
         Less:
            Net deferred loan fees .................           260           476
            Allowance for loan losses ..............         1,950         1,889
                                                          --------      --------
                                                             2,210         2,365
                                                          --------      --------
                                                          $137,785       124,337
                                                          ========      ========

</TABLE>

                                       43
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       Activity in the  allowance  for loan losses is  summarized as follows for
the years ended:
<TABLE>
<CAPTION>
                                                        September 30,
                                            -----------------------------------
                                              1998          1997          1996
                                            -------       -------       -------
                                                      (in thousands)
<S>                                         <C>            <C>           <C>  
Balance at beginning of period .......      $ 1,889         1,833         1,950
Provision charged to operations ......          189           300           195
Charge-offs ..........................         (148)         (282)         (323)
Recoveries ...........................           20            38            11
                                            -------       -------       -------
Balance at end of period .............      $ 1,950         1,889         1,833
                                            =======       =======       =======
</TABLE>

       The  following   table  sets  forth  the   information   with  regard  to
non-performing loans:
<TABLE>
<CAPTION>
                                                            September 30,
                                                   -----------------------------
                                                    1998        1997        1996
                                                   -----       -----       -----
                                                           (in thousands)

<S>                                                <C>         <C>         <C>  
Loans in a non-accrual status ..............       $ 520         780       1,086
Loans past due 90 days and still
     accruing ..............................          71         137         283
Restructured loans .........................        --          --          --
                                                   -----       -----       -----
     Total non-performing loans ............       $ 591         917       1,369
                                                   =====       =====       =====
</TABLE>

       For the years ended  September 30, 1998,  1997 and 1996,  interest income
       that would have been recorded on  non-performing  loans had they remained
       performing  amounted to approximately $28 thousand,  $50 thousand and $77
       thousand, respectively.

       Certain executive officers of the Company were customers of and had other
       transactions  with the Company in the ordinary course of business.  Loans
       to these  parties  were made in the  ordinary  course of  business at the
       Bank's    normal   credit    terms,    including    interest   rate   and
       collateralization.  The  aggregate of such loans  totaled less than 5% of
       total equity at September 30, 1998 and 1997.

       As of September  30, 1998 and 1997,  there was no recorded  investment in
       loans that were  considered  to be impaired  under SFAS No.  114.  During
       1998,   1997  and  1996,  the  average  balance  of  impaired  loans  was
       approximately  $0, $3,000,  and $78,000,  respectively.  Interest  income
       recorded on impaired loans during fiscal 1997 and 1996 was  approximately
       $0 and $2,000, respectively, all of which was collected.
<PAGE>
(8)    Accrued Interest Receivable

       Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
                                                               September 30,
                                                          ----------------------
                                                           1998            1997
                                                          ------          ------
                                                              (in thousands)
<S>                                                       <C>             <C>
Investment securities ..........................          $   21             111
Securities available for sale ..................           1,521           1,374
Loans ..........................................             856             818
                                                          ------          ------
                                                          $2,398           2,303
                                                          ======          ======
</TABLE>

                                       44
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(9)    Premises and Equipment, Net

       A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
                                                               September 30,
                                                          ----------------------
                                                           1998            1997
                                                          ------          ------
                                                              (in thousands)
<S>                                                       <C>             <C>
Banking house and land ...........................         $2,580          2,357
Furniture, fixtures and equipment ................            817            785
                                                           ------         ------
                                                            3,397          3,142
Less accumulated depreciation ....................            875            775
                                                           ------         ------
     Premises and equipment, net .................         $2,522          2,367
                                                           ======         ======
</TABLE>

       Amounts charged to depreciation expense were approximately $222 thousand,
       $183 thousand,  and $136 thousand for the years ended September 30, 1998,
       1997 and 1996, respectively.

(10)   Due to Depositors

       Due to depositors  are summarized as follows as of September 30, 1998 and
1997:
<TABLE>
<CAPTION>
                                               Approximate
                                                 Stated                            September 30,
                                                  Rates                          1998         1997
                                               -----------                      --------    -------
                                                                                  (in thousands)
<S>                                     <C>                                     <C>         <C>
         Passbook savings accounts      1998 - 3.20%                            $ 66,208     71,060
                                        1997 - 3.50%
         Statement savings accounts     1998 - 3.54%                              11,867      8,388
                                        1997 - 3.50%
         Certificates of deposit:
                                            3.00 - 3.99%                              -          20
                                            4.00 - 4.99%                           1,324         -
                                            5.00 - 5.99%                         105,666     88,416
                                            6.00 - 6.99%                             558      8,737
                                            7.00 - 7.99%                              -       2,368
                                                                                --------    -------
                                                                                 107,548     99,541
                                                                                --------    -------

         Money market accounts          1998 - 1.98-2.96%                          5,949      7,115
                                        1997 - 2.50-3.20%
         NOW accounts                   1998 - 1.98%                              12,396     10,438
                                        1997 - 2.50%
         Non-interest bearing accounts             --                              6,009      4,370
                                                                                --------    -------
              Total deposits                                                    $209,977    200,912
                                                                                ========    =======
</TABLE>

                                       45
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       The  approximate  amount of  contractual  maturities of  certificates  of
       deposit for the years subsequent to September 30, 1998 are as follows:

                                                         (in thousands)
                  Years ended September 30,
                             1999                          $ 78,646
                             2000                            15,544
                             2001                             8,738
                             2002                             1,509
                             2003                             1,546
                             Thereafter                       1,565
                                                           --------
                                                           $107,548
                                                           ========

       The aggregate  amount of time deposit accounts with a balance of $100,000
       or more (not federally-insured  beyond $100,000) were approximately $12.3
       million and $8.2 million at September 30, 1998 and 1997, respectively.

       Interest  expense on deposits and advances  from  borrowers  for property
       taxes and insurance  (escrow  balances) for the years ended September 30,
       1998, 1997 and 1996, is summarized as follows:
<TABLE>
<CAPTION>
                                                           September 30,
                                                   1998        1997        1996
                                                  ------      ------      ------
                                                          (in thousands)
<S>                                               <C>         <C>         <C>  
Passbook savings accounts ..................      $2,263       2,544       2,702
Statement savings accounts .................         357         277         260
Certificates of deposit ....................       5,768       5,309       5,218
Money market accounts ......................         198         242         289
NOW accounts ...............................         268         237         216
Escrow balances (including common
   stock subscriptions) ....................          51          43         337
                                                  ------      ------      ------
       Total interest expense ..............      $8,905       8,652       9,022
                                                  ======      ======      ======
</TABLE>

       Interest expense on escrow balances for the year ended September 30, 1996
       includes  interest  expense  on  common  stock   subscriptions   held  in
       connection with the Company's initial public offering.

(11)   Income Taxes

       The  components  of income tax expense are as follows for the years ended
       September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
                                                       September 30,
                                              1998          1997          1996
                                            -------       -------       -------
                                                      (in thousands)
<S>                                         <C>           <C>           <C>  
Current tax expense:
     Federal .........................      $ 1,720         2,111         1,605
     State ...........................          487           579           682
                                            -------       -------       -------
                                              2,207         2,690         2,287
Deferred tax benefit .................         (188)         (156)         (151)
                                            -------       -------       -------
     Total income tax expense ........      $ 2,019         2,534         2,136
                                            =======       =======       =======

</TABLE>


                                       46
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       Actual tax expense for the years ended  September 30, 1998, 1997 and 1996
       differs  from  expected  tax  expense,  computed by applying  the Federal
       corporate tax rate of 34% to income before taxes is as follows:
<TABLE>
<CAPTION>
                                                                     September 30,
                                              1998                       1997                    1996
                                              ----                       ----                    ----
                                                  % Pretax                  % Pretax                   % Pretax
                                     Amount        income       Amount        income       Amount        income
                                     -------        ----        -------        ----        -------        ----
                                                                    (in thousands)

<S>                                  <C>            <C>         <C>            <C>         <C>            <C>  
Expected tax expense ..........      $ 2,006        34.0%       $ 2,190          34.0%     $ 1,854          34.0%
State taxes, net of Federal
     income tax benefit .......          351         5.9           380            5.9          333           6.1
Tax-exempt interest income ....         (289)       (4.9)          --            --            --            --
Reduction in valuation
     allowance for deferred tax
     assets ...................         --            --           --            --           (131)       (2.4)
Other items ...................          (49)        (.8)           (36)        (.6)            80         1.5
                                     -------        ----        -------        ----        -------        ----
                                     $ 2,019        34.2%       $ 2,534        39.3%       $ 2,136        39.2%
                                     =======        ====        =======        ====        =======        ====
</TABLE>
<PAGE>
       The tax effects of temporary  differences  that give rise to  significant
       portions of the  deferred  tax assets and  deferred  tax  liabilities  at
       September 30, are as follows:
<TABLE>
<CAPTION>

                                                                1998       1997
                                                               ------     ------
                                                                 (in thousands)
<S>                                                            <C>        <C>
Deferred tax assets:
    Allowance for loan losses ............................     $  447        329
    Postretirement benefits ..............................        240        175
    Nonqualified deferred compensation ...................        142        100
    Loan accounting differences ..........................         78        103
    MRP compensation expense .............................        184        180
    Other items ..........................................         25         48
                                                               ------     ------
           Total deferred tax assets .....................      1,116        935
    Valuation reserve ....................................        150        150
                                                               ------     ------
    Deferred tax asset net of valuation reserve ..........        966        785
                                                               ------     ------

Deferred tax liabilities:
    Bond accretion .......................................         57         86
    Prepaid pension ......................................         40         14
    Other items ..........................................        102        106
                                                               ------     ------
           Total deferred tax liabilities ................        199        206
                                                               ------     ------

    Net deferred tax assets at end of period .............        767        579
    Net deferred tax asset at beginning of period ........        579        423
                                                               ------     ------
    Deferred tax benefit for year ........................     $  188        156
                                                               ======     ======
</TABLE>

       In addition to the deferred tax amounts described above, the Company also
       had deferred tax  liabilities of  approximately  $1,374 thousand and $614
       thousand at September 30, 1998 and 1997,  respectively related to the net
       unrealized gains and losses on securities available for sale.

                                       47
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       The valuation  allowance for deferred tax assets as of September 30, 1998
       and 1997 was $150 thousand. During the year ended September 30, 1996, the
       valuation  allowance  was reduced by $131  thousand.  This  reduction was
       primarily the result of the  realization of certain  deferred items which
       were previously  considered to be uncertain.  In evaluating the valuation
       allowance the Company takes into  consideration  the nature and timing of
       the deferred tax asset items as well as the amount of available  open tax
       carrybacks.  The Company has fully  reserved its New York State  deferred
       tax asset,  which is a significant  component of deferred tax assets, due
       to the lack of carryback  and  carryforward  provisions  available in New
       York State. Any changes in the deferred tax asset valuation  allowance is
       based  upon the  Company's  continuing  evaluation  of the  level of such
       allowance,  the amount of New York State  deferred  tax  assets,  and the
       realizability  of the  temporary  differences  creating  the deferred tax
       asset.   Based  on  recent  historical  and  anticipated  future  pre-tax
       earnings, management believes it is more likely than not that the Company
       will realize its net deferred tax assets.

       As a thrift institution, the Bank is subject to special provisions in the
       Federal and New York State tax laws  regarding its allowable tax bad debt
       deductions   and  related  tax  bad  debt  reserves.   These   deductions
       historically  have been determined using methods based on loss experience
       or a percentage of taxable  income.  Tax bad debt reserves are maintained
       equal to the excess of allowable  deductions  over actual bad debt losses
       and  other  reserve  reductions.  These  reserves  consist  of a  defined
       base-year amount, plus additional amounts ("excess reserves") accumulated
       after the base year.  SFAS No. 109 requires  recognition  of deferred tax
       liabilities with respect to such excess reserves,  as well as any portion
       of  the  base-year  amount  which  is  expected  to  become  taxable  (or
       "recaptured") in the foreseeable future.

       Certain  amendments to the Federal and New York State tax laws  regarding
       bad debt  deductions  were enacted in July and August  1996.  The Federal
       amendments include elimination of the percentage of taxable income method
       for tax years  beginning  after  December 31, 1995,  and  imposition of a
       requirement   to  recapture   into  taxable  income  (over  a  period  of
       approximately six years) the bad debt reserves in excess of the base-year
       amounts. The Bank previously established,  and will continue to maintain,
       a deferred tax liability  with respect to such excess  Federal  reserves.
       The New York  State  amendments  redesignate  the  Bank's  state bad debt
       reserves at December  31, 1995 as the  base-year  amount and also provide
       for future  additions to the base-year  reserve  using the  percentage of
       taxable income method.

       In accordance with SFAS No. 109,  deferred tax liabilities  have not been
       recognized  at  September  30, 1998 with respect to the Federal and State
       base-year reserves of $3.6 million and $7.5 million, respectively,  since
       the Bank does not expect that these  amounts  will become  taxable in the
       foreseeable future. Under New York State tax law, as amended, events that
       would  result in  taxation of these  reserves  include the failure of the
       Bank to maintain a specified qualifying assets ratio or meet other thrift
       definition  tests  for  tax  purposes.   The  unrecognized  deferred  tax
       liabilities  at September  30, 1998 with respect to the Federal and State
       base-year reserves were approximately $1.2 million and $446 thousand (net
       of Federal benefit), respectively.

                                       48
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(12)   Employee Benefit Plans

       (a)    Pension Plan

              The Company maintains a  non-contributory  defined benefit pension
              plan  with  RSI  Retirement  Trust,  covering   substantially  all
              employees  aged  21 and  over  with 1 year  of  service  with  the
              exception  of employees  who work less than 1,000 hours.  Benefits
              are  computed  as two percent of the  highest  three year  average
              annual earnings  during the last five years of service  multiplied
              by credited  service up to a maximum of 30 years and are paid as a
              life  annuity  or  actuarially   equivalent  alternative  form  of
              payment.  Full retirement benefits are available at age 65 with at
              least 5 years of  participation  or after  age 60 with at least 30
              years of service.  Reduced retirement benefits are available prior
              to age 60.  Employees are fully vested at 5 years of service.  The
              Plan also  provides  death and  disability  benefits  to  eligible
              employees.

              The amounts contributed to the plan are determined annually on the
              basis of (a) the maximum  amount that can be deducted  for Federal
              income tax  purposes or (b) the amount  certified  by a consulting
              actuary as necessary to avoid an accumulated funding deficiency as
              defined by the Employee  Retirement  Income  Security Act of 1974.
              Contributions  are  intended  to  provide  not only  for  benefits
              attributed  to service to date but also for those  expected  to be
              earned in the future. Assets of the plan are primarily invested in
              common and preferred stock,  investment grade corporate bonds, and
              U.S. government obligations.

              The  following  table  sets  forth the  plan's  funded  status and
              amounts  recognized  in the Company's  consolidated  statements of
              financial condition at September 30, 1998 and 1997:
<PAGE>
<TABLE>
<CAPTION>
                                                               1998       1997
                                                             -------    -------
                                                               (in thousands)
<S>                                                          <C>        <C>
Actuarial present value of benefit obligations:
  Accumulated benefit obligation, including vested
    benefits of $2,889 in 1998 and $2,387 in 1997 ........   $(2,896)    (2,389)
                                                             =======    =======

  Projected benefit obligation for service  rendered to
    date .................................................    (3,638)    (3,041)
  Plan assets at fair value ..............................     4,153      4,263
                                                             -------    -------
  Plan assets in excess of projected benefit obligation ..       515      1,222
  Unrecognized net gain from past experience different
    from that assumed and effects of changes in
    assumptions ..........................................      (283)    (1,056)
  Unrecognized prior service cost ........................        56         70
  Unrecognized net asset being recognized over 12.5
    years ................................................       (43)       (61)
                                                             -------    -------
  Prepaid pension cost ...................................   $   245        175
                                                             =======    =======
</TABLE>

                                       49
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


              Components  of net  periodic  pension  cost  for the  years  ended
              September 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
                                                1998         1997         1996
                                               -----        -----        -----
                                                       (in thousands)
<S>                                            <C>          <C>          <C>
Service cost-benefits earned
  during the period .....................      $  96           83           91
Interest cost on estimated
  projected benefit obligation ..........        230          214          215
Expected return on plan
  assets ................................       (337)        (283)        (452)
Net amortization and
  deferral ..............................        (60)         (29)         198
                                               -----        -----        -----
Net periodic pension cost
  (credit) ..............................      $ (71)         (15)          52
                                               =====        =====        =====

</TABLE>
              Significant  assumptions used in determining the actuarial present
              value of the projected  benefit  obligation at September 30, 1998,
              1997 and 1996 are as follows:
<TABLE>
<CAPTION>
                                                1998         1997         1996
                                               -----        -----        -----
<S>                                             <C>          <C>          <C>  
Weighted average discount
  rate ..................................       6.75%        7.50%        7.75%
Increase in future
  compensation ..........................       4.50%        5.00%        5.50%
Expected long-term rate of
  return ................................       8.00%        8.00%        8.00%
</TABLE>

       (b)    401(k) Savings Plan

              The Company also maintains a defined  contribution  401(k) savings
              plan,  covering all full time  employees  who have attained age 21
              and have  completed  one year of  service  in which they work more
              than  1,000   hours.   The   Company   matches   50%  of  employee
              contributions  that are less than or equal to 6% of the employee's
              salary.  Total expense recorded during 1998, 1997 and 1996 was $47
              thousand, $37 thousand, and $34 thousand, respectively.

       (c)    Executive Supplemental Retirement Plan

              During fiscal 1998, the Company adopted an Executive  Supplemental
              Retirement  Plan for the Chief  Executive  Officer.  An expense of
              approximately $40,000 was recorded in fiscal 1998.

       (d)    Postretirement Benefits

              The Company  accounts for  postretirement  benefits under SFAS No.
              106, "Employers' Accounting for Postretirement Benefits Other Than
              Pensions." Under SFAS No. 106, the cost of postretirement benefits
              other than  pensions  must be  recognized  on an accrual  basis as
              employees  perform  services  to earn  the  benefits.  Many of the
              provisions  and  concepts  of SFAS No. 106 are  similar to current
              standards on accounting for pensions. The Company adopted SFAS No.
              106 as of October  1, 1995 and opted to  amortize  the  transition
              obligation  into expense over the allowed twenty year time period.
              The adoption of SFAS No. 106 did not have a material effect on the
              Company's consolidated financial statements.

                                       50
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


              The Company  provides  postretirement  medical and life  insurance
              benefits  to  eligible  retirees.  The plans  are  noncontributory
              except that the retiree  must pay the full cost of spouse  medical
              coverage. Both of the plans are unfunded.

              Life  insurance  is provided in the amount of $5,000 (50% of final
              year  compensation  as an active  employee if compensation is less
              than $10,000).

              The following  table presents the plan's funded status  reconciled
              with amounts  recognized  in the  Company's  consolidated  balance
              sheets at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
                                                               1998       1997
                                                              ------     ------
                                                                (in thousands)
<S>                                                           <C>        <C>
Accumulated postretirement benefit obligation (APBO):
    Retirees .............................................    $ (482)      (598)
    Fully-eligible active plan participants ..............      (128)      (100)
    Other active plan participants .......................      (293)      (481)
                                                              ------     ------
         Total APBO ......................................      (903)    (1,179)
Unrecognized transition obligation .......................       903        957
Unrecognized (gain) loss .................................      (556)      (183)
                                                              ------     ------
Accrued postretirement benefit cost included in
  other liabilities ......................................    $ (556)      (405)
                                                              ======     ======
</TABLE>
              Net  periodic  postretirement  benefit  cost for the  years  ended
              September   30,  1998,   1997  and  1996  include  the   following
              components:

<TABLE>
<CAPTION>
                                                    1998        1997        1996
                                                    ----        ----        ----
                                                           (in thousands)
<S>                                                 <C>         <C>         <C>
Service cost ...............................        $ 52          52          42
Interest cost ..............................          89         103          90
Net amortization and deferral ..............          50          54          54
                                                    ----        ----        ----
Net periodic postretirement
    benefit cost ...........................        $191         209         186
                                                    ====        ====        ====
</TABLE>

              The   discount   rate   used  in   determining   the   accumulated
              postretirement  benefit  obligation was 6.75%,  7.50% and 7.75% at
              September 30, 1998, 1997 and 1996,  respectively.  For measurement
              purposes at September 30, 1998, an 6.5% annual rate of increase in
              the per capital cost of covered  health care  benefits was assumed
              for  medical  coverage  for fiscal  1998;  the rate was assumed to
              decrease  gradually  to 5.0% by 2002 and to remain  at that  level
              thereafter.  The  health  care cost trend  rate  assumption  has a
              significant  effect  on  the  amounts  reported.   To  illustrate,
              increasing  the  assumed  health  care  cost  trend  rates  by one
              percentage  point in each  year  would  increase  the  accumulated
              postretirement  benefit  obligation  as of  September  30, 1998 by
              approximately  14.1% and the aggregate of the service and interest
              cost components of the net periodic postretirement benefit cost by
              approximately 19.5%.

                                       51
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(13)   Stock-Based Compensation Plans

       (a)    Employee Stock Ownership Plan

              As part of the  conversion  discussed in note 2, an employee stock
              ownership plan (ESOP) was established to provide substantially all
              employees   of  the  Company  the   opportunity   to  also  become
              shareholders.  The ESOP  borrowed  $4.5  million  from the Holding
              Company and used the funds to purchase  454,940  shares,  or 8% of
              the common stock of the Holding  Company issued in the conversion.
              The shares are pledged as collateral  for the loan.  The loan will
              be repaid principally from the Bank's discretionary  contributions
              to the ESOP over a period of twenty  years.  At September 30, 1998
              and 1997, the loan had an outstanding  balance of $4.2 million and
              $4.4  million,  respectively.  The  interest  rate on the  loan is
              6.41%.  Shares  purchased  with  the loan  proceeds  are held in a
              suspense account for allocation among  participants as the loan is
              repaid.  Contributions  to the ESOP and shares  released  from the
              suspense account are generally allocated among participants on the
              basis of compensation in the year of allocation.

              The shares pledged as collateral are reported as unallocated  ESOP
              shares in  shareholders'  equity.  As  shares  are  released  from
              collateral,  the Company reports compensation expense equal to the
              average market price of the shares (during the applicable  service
              period),  and the shares become outstanding for earnings per share
              computations.  Unallocated  ESOP  shares are not  included  in the
              earnings   per   share   computations.    The   Company   recorded
              approximately  $389  thousand,  $342  thousand and $119  thousand,
              respectively,  of  compensation  expense under the ESOP during the
              years ended September 30, 1998, 1997 and 1996.

              The ESOP  shares as of  September  30,  1998 were as  follows  (in
              thousands, except share data):

                  Allocated shares                            56,843
                  Unallocated shares                         398,097
                                                            --------
                           Total ESOP shares                 454,940
                                                            ========
                  Market value of unallocated shares at
                      September 30, 1998                    $  5,623
                                                            ========

       (b)    Stock Option Plan

              On October 24,  1996,  the  Company's  shareholders  approved  the
              Catskill  Financial  Corporation  1996 Stock Option and  Incentive
              Plan ("Stock  Option  Plan").  The primary  objective of the Stock
              Option  Plan  is  to  provide   officers  and  directors   with  a
              proprietary  interest  in  the  Company  and  as an  incentive  to
              encourage such persons to remain with the Company. Under the Stock
              Option Plan,  568,675  shares of authorized but unissued stock are
              reserved for issuance upon option exercises.  The Company also has
              the alternative to fund the Stock Option Plan with treasury stock.
              Options under the plan may be either  non-qualified  stock options
              or incentive  stock  options.  Each option  entitles the holder to
              purchase one share of common  stock at an exercise  price equal to
              the fair  market  value on the date of  grant.  Options  expire no
              later than ten years following the date of grant.

              On October 24, 1996,  416,333  options were awarded at an exercise
              price of $12.50 per share; on August 19, 1997, 10,000 options were
              awarded at an exercise price of $16.38 per share; and on April 21,
              1998, 8,000 shares were awarded at an exercise price of $17.56 per
              share. These shares have a ten-year term and vest at a rate of 20%
              per year from their respective grant dates.

                                       52
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


              A summary of the status of the Company's  stock option plans as of
              September  30,  1998  and  1997  and  changes  during  the year is
              presented below:
<TABLE>
<CAPTION>
                                                                              1998                            1997
                                                                   -------------------------        ------------------------
                                                                                    Weighted                       Weighted
                                                                                     Average                        Average
                                                                                    Exercise                       Exercise
                                                                   Shares             Price          Shares          Price
                                                                   ------             -----          ------          -----
<S>                                                                 <C>             <C>             <C>            <C>
              Options:
                  Outstanding at beginning of year                  426,333         $ 12.59              -               -
                  Granted                                             8,000           17.56         426,333        $ 12.59
                  Exercised                                          (7,658)          12.50              -               -
                  Cancelled                                              -              -                -               -
                                                                    -------                         -------      
                  Outstanding at year-end                           426,675           12.69         426,333        $ 12.59
                                                                    -------                         -------      
                                                                                                                 
                  Exercisable at year-end                            77,605         $ 12.59              -               -
</TABLE>

              SFAS No.  123  requires  Companies  not using a fair  value  based
              method of accounting  for employee stock options or similar plans,
              to provide pro forma  disclosure  of net income and  earnings  per
              share as if that method of accounting  had been applied.  The fair
              value of each option grant is estimated on the date of grant using
              the   Black-Scholes   option-pricing   model  with  the  following
              weighted-average  assumptions  used for grants in fiscal  1998 and
              1997:  dividend yield of 1.8%;  expected volatility of 25.0%; risk
              free interest rates of 6.50% for the October 24, 1996 grant, 6.25%
              for the  August 19,  1997  grant and 5.72% for the April 21,  1998
              grant; and expected lives of 7 years.  Based on the aforementioned
              assumptions,  the Company has estimated that the fair value of the
              options granted on October 24, 1996, August 19, 1997 and April 21,
              1998,  were  $5.64,  $5.47  and  $4.25,  respectively.  Pro  forma
              disclosures for the Company for the year ending September 30, 1998
              and 1997 is as follows:
<TABLE>
<CAPTION>
                                                                            1998         1997
                                                                            ----         ----
                                                                   (in thousands except per share data)
<S>                                                                      <C>            <C>  
                Net income:
                    As reported                                          $3,882         3,907
                    Pro forma                                             3,596         3,614
                Basic earnings per share:
                    As reported                                             .96          .84
                    Pro forma                                               .88          .79
                Diluted earnings per share:
                    As reported                                             .93          .83
                    Pro forma                                               .88          .79
</TABLE>

              Because the Company's employee stock options have  characteristics
              significantly different from those of traded options for which the
              Black-Scholes  model was  developed,  and  because  changes in the
              subjective input  assumptions can materially affect the fair value
              estimate,  the existing models,  in management's  opinion,  do not
              necessarily provide a reliable single measure of the fair value of
              its employee stock options.

                                       53
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       (c)    Management Recognition Plan

              On October 24,  1996,  the  Company's  shareholders  approved  the
              Catskill Financial  Corporation  Management  Recognition Plan. The
              purpose of the plan is to promote the  long-term  interests of the
              Company  and  its   shareholders   by   providing  a  stock  based
              compensation program to attract and retain officers and directors.
              Under the MRP,  227,470 shares of authorized but unissued  shares,
              are reserved for issuance under the plan. The Company also has the
              alternative to fund the MRP with treasury stock.

              During the years  ended  September  30,  1998 and 1997,  grants of
              2,000 shares and 181,232 shares  respectively,  were awarded under
              the MRP. The shares vest in five equal installments commencing one
              year from the date of grant.  The fair market  value of the shares
              awarded under the plan was $2.3 million at the grant dates, and is
              being amortized to  compensation  expense on a straight line basis
              over  the five  year  vesting  periods.  Compensation  expense  of
              $456,000  and  $419,000  was  recorded  in  fiscal  1998  and 1997
              respectively,  with the remaining unearned compensation cost shown
              as a reduction of shareholders' equity.

(14)   Commitments and Contingent Liabilities

       (a)    Legal Proceedings

              The  Company  may,  from  time to time,  be a  defendant  in legal
              proceedings  relating to the conduct of its business.  In the best
              judgment of management, the consolidated financial position of the
              Company  will not be  affected  materially  by the  outcome of any
              pending legal proceedings.

       (b)    Lease Commitments

              In fiscal 1998, the Company entered into a noncancelable operating
              lease  agreement  for a branch  facility  which  expires  in 2013.
              Rental  expense  for the year ended  September  30,  1998,  was $6
              thousand.  A summary of the future  minimum  commitments  required
              under the  agreement  for the  years  ending  September  30 are as
              follows:

                             Years                   Dollars in thousands
                             -----                   --------------------
                             1999                    $         13
                             2000                              16
                             2001                              21
                             2002                              23
                             2003                              23
                             Thereafter                       233
                                                     ------------
                                                     $        329
                                                     ============

       (c)    Off-Balance-Sheet Financing and Concentrations of Credit

              The  Company  is a party to  certain  financial  instruments  with
              off-balance  sheet risk in the normal  course of  business to meet
              the financing needs of its customers.  These financial instruments
              include commitments to extend credit.  These instruments  involve,
              to  varying  degrees,  elements  of  credit  risk in excess of the
              amount  recognized  on the  consolidated  statement  of  financial
              condition.  The contract amounts of these instruments  reflect the
              extent of  involvement  the Company has in  particular  classes of
              financial instruments.


                                       54
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


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

              Unless otherwise noted, the Company does not require collateral or
              other security to support off-balance-sheet  financial instruments
              with credit risk.

              Commitments  to extend credit are agreements to lend to a customer
              as long as there is no violation of any condition  established  in
              the contract. Commitments generally have fixed expiration dates or
              other termination  clauses and may require payment of a fee. Since
              many of the commitments are expected to expire without being fully
              drawn  upon,  the  total  commitment  amounts  do not  necessarily
              represent  future cash  requirements.  The Company  evaluates each
              customer's creditworthiness on a case-by-case basis. The amount of
              collateral,  if any, required by the Company upon the extension of
              credit is based on management's credit evaluation of the customer.
              Mortgage  commitments  are secured by a first lien on real estate.
              Collateral on extensions of credit for commercial loans varies but
              may include  property,  plant and equipment,  and income producing
              commercial property.

              Contract  amounts of  financial  instruments  that  represent  the
              future  extension of credit as of  September  30, 1998 and 1997 at
              fixed and variable interest rates are as follows:
<TABLE>
<CAPTION>
                                                                                   1998
                                                   ------------------------------------------------------------
                                                           Fixed                 Variable              Total
                                                   --------------------    --------------------    ------------
                                                                              (in thousands)
<S>                                                <C>                     <C>                     <C>
                  Mortgages                         $     4,171                     582                   4,753
                  Consumer                                   72                      20                      92
                  Lines of credit                           721                     533                   1,254
                  Home Equity                                -                    1,556                   1,556
                                                   --------------------    --------------------    ------------
                                                   $     4,964                   2,691                   7,655
                                                   ====================    ====================    ============
<CAPTION>

                                                                                   1997
                                                   ------------------------------------------------------------
                                                           Fixed                 Variable              Total
                                                   --------------------    --------------------    ------------
                                                                              (in thousands)
<S>                                                <C>                     <C>                     <C>
                  Mortgages                        $      1,308                      -                    1,308
                  Consumer                                   18                      -                       18
                  Lines of credit                           535                     385                     920
                  Home Equity                                30                   1,553                   1,583
                                                   --------------------    --------------------    ------------
                                                   $      1,891                   1,938                   3,829
                                                   ====================    ====================    ============
</TABLE>

              The  range of  interest  on fixed  rate  commitments  was 6.50% to
              18.00% at September  30, 1998 and 7.13% to 18.00% at September 30,
              1997.  The range of interest on adjustable  rate  commitments  was
              8.00% to  11.50%  at  September  30,  1998 and  8.25% to 10.50% at
              September 30, 1997, respectively.

                                       55
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(15)   Short-Term Borrowings

       The Bank, as a member of the FHLB, has access to a line of credit program
       with a maximum  borrowing  capacity of $28.6 million and $26.2 million as
       of  September  30,  1998 and  1997,  respectively.  Borrowings  under the
       overnight program at September 30, 1998 and 1997, which are priced at the
       federal funds rate plus 12.5 basis points,  were $6.8 million,  at a rate
       of 6.00% and $11.4 million at a rate of 6.63%, respectively. The Bank has
       pledged mortgage loans and FHLB stock as collateral on these borrowings.

       The following table sets forth the maximum  month-end balance and average
       balance for the years ended September 30:

                                                         1998              1997
                                                         ----              ----
                                                         (dollars in thousands)
Maximum balance ..............................         $14,245           11,385
Average balance ..............................          11,317            2,590
Weighted average interest rate ...............            5.74%            5.75%

(16)   Long-Term Borrowings

       In fiscal 1998, the Company began using fixed rate long-term  borrowings,
       principally  convertible  advances  from the FHLB,  as a source of funds.
       Information on the borrowings is summarized as follows:

<TABLE>
<CAPTION>
         Maturity Date                     Amount                Rate             Call Date
         -------------                     ------                ----             ---------
                                       (in thousands)
<S>                                     <C>                     <C>               <C>
       January 8, 2008                    $ 5,000               5.07%             January 8, 2001
       June 16, 2008                        5,000               4.95%             June 16, 1999
       July 2, 2008                         5,000               5.46%             July 2, 2003
       July 23, 2008                        5,000               5.10%             July 23, 1999
       August 26, 2008                      5,000               5.16%             August 26, 2000
                                          -------
                                          $25,000
                                          =======
</TABLE>

       Interest on the  borrowings is calculated on an actual/360  day basis and
       is callable by the issuer on the dates  shown and  quarterly  thereafter,
       except  for the  borrowing  which  matures  on June  16,  2008,  which is
       callable monthly.

       The borrowings are secured by mortgage-backed  securities with a carrying
       value of approximately  $26.4 million.  The securities used as collateral
       for the convertible  advances are being held in safe keeping at the FHLB,
       except  the  maturity  of June 16,  2008,  which  is held by First  Union
       Capital Markets.

                                       56
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(17)   Fair Values

       SFAS No. 107,  "Disclosures  about Fair Value of Financial  Instruments,"
       requires  that  the Bank  disclose  estimated  fair  values  for  certain
       financial instruments.  Fair value estimates are made at a specific point
       in time, based on relevant market  information and information  about the
       financial  instrument.  These  estimates  do not  reflect  any premium or
       discount  that  could  result  from  offering  for  sale at one  time the
       Company's entire holdings of a particular financial  instrument.  Because
       no market  exists for a significant  portion of the  Company's  financial
       instruments, fair value estimates are based on judgments regarding future
       expected   net   cash   flows,   current   economic   conditions,    risk
       characteristics  of various  financial  instruments,  and other  factors.
       These  estimates are subjective in nature and involve  uncertainties  and
       matters of significant  judgment and therefore  cannot be determined with
       precision.   Changes  in  assumptions  could  significantly   affect  the
       estimates.

       Fair value  estimates  are based on  existing  on-and  off-balance  sheet
       financial  instruments  without  attempting  to  estimate  the  value  of
       anticipated  future business and the value of assets and liabilities that
       are  not  considered  financial   instruments.   Significant  assets  and
       liabilities  that are not  considered  financial  assets  or  liabilities
       include  the  deferred  tax asset and bank  premises  and  equipment.  In
       addition,  the  tax  ramifications  related  to  the  realization  of the
       unrealized  gains and losses can have a significant  effect on fair value
       estimates  and have not been  considered  in the  estimates of fair value
       under SFAS No. 107.

       In addition,  there are significant  intangible  assets that SFAS No. 107
       does not  recognize,  such as the value of "core  deposits,"  the  Bank's
       branch network and other items generally referred to as "goodwill."

       The  specific   estimation  methods  and  assumptions  used  can  have  a
       substantial  impact on the  resulting  fair values  ascribed to financial
       instruments.  Following is a brief summary of the significant methods and
       assumptions used:

       Securities
       The carrying  amounts for short-term  investments  approximate fair value
       because  they mature in 90 days or less and do not present  unanticipated
       credit concerns.  The fair value of longer-term  investments and mortgage
       backed  securities,  except  certain state and municipal  securities,  is
       estimated  based on bid prices  published in financial  newspapers or bid
       quotations  received from securities  dealers.  The fair value of certain
       state and municipal  securities is not readily  available  through market
       sources other than dealer  quotations,  so fair value estimates are based
       on quoted market prices of similar instruments,  adjusted for differences
       between the quoted  instruments  and the  instruments  being valued.  See
       notes 5 and 6 for detail disclosure of securities  available for sale and
       investment securities held to maturity,  respectively. The estimated fair
       value of stock in the Federal Home Loan Bank of New York is assumed to be
       its cost given the lack of a public market available for this investment.

       Loans
       Fair values are estimated for portfolios of loans with similar  financial
       characteristics.  Loans are  segregated  by type  such as  single  family
       loans, consumer loans and commercial loans. Each loan category is further
       segmented into fixed and adjustable rate interest terms and by performing
       and nonperforming categories.


                                       57
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       The fair value of performing loans is calculated by discounting scheduled
       cash flows through the estimated maturity using estimated market discount
       rates that  reflect  the credit and  interest  rate risk  inherent in the
       loan.  The estimate of maturity is based on the  contractual  term of the
       loans  to  maturity   taking  into   consideration   certain   prepayment
       assumptions.

       Fair  value  for  significant  non-performing  loans is  based on  recent
       external  appraisals  and/or  discounting  of cash flows.  Estimated cash
       flows are discounted using a rate  commensurate  with the risk associated
       with the estimated cash flows.  Assumptions  regarding  credit risk, cash
       flows,  and discount rates are  judgmentally  determined  using available
       market information and specific borrower information.

       Deposit Liabilities
       Under SFAS No. 107, the fair value of deposits  with no stated  maturity,
       such as non-interest  bearing demand deposit,  passbook savings accounts,
       statement savings accounts, NOW accounts, and money market accounts, must
       be stated at the amount  payable on demand as of  September  30, 1998 and
       1997.  The  fair  value  of  certificates  of  deposit  is  based  on the
       discounted  value  of  contractual  cash  flows.  The  discount  rate  is
       estimated  using the rates  currently  offered  for  deposits  of similar
       remaining  maturities.  These fair value  estimates  do not  include  the
       benefit that results  from the low-cost  funding  provided by the deposit
       liabilities compared to the cost of borrowing funds in the market.

       Long Term Borrowings
       The fair value for the Company's long-term  borrowings is estimated based
       on the quoted market prices for the same or similar issues.

       Other Items
       The following items are considered to have a fair value equal to carrying
       value due to the nature of the financial instrument and the period within
       which it will be settled:  cash and due from banks,  federal  funds sold,
       accrued  interest  receivable,  advances  from  borrowers  for  taxes and
       insurance, short term borrowings, and accrued interest payable.

                                       58
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       Table of Financial Instruments

       The carrying values and estimated fair values of financial instruments as
       of September 30, 1998 and September 30, 1997 were as follows:
<TABLE>
<CAPTION>

                                                        September 30, 1998                    September 30, 1997
                                                 ----------------------------------    -------------------------
                                                                      Estimated                            Estimated
                                                      Carrying          fair             Carrying            fair
                                                        value           value              value             value
                                                        -----           -----              -----             -----
                                                                              (in thousands)
<S>                                              <C>                 <C>                <C>               <C>
              Financial assets:
                  Cash and cash equivalents     $      2,795               2,795            2,274             2,274
                  Securities available for
                     sale                            164,983             164,983          148,114           148,114
                  Investment securities held
                     to maturity                       2,060               2,106            8,055             8,112
                  Federal Home Loan Bank Stock         1,954               1,954            1,762             1,762
                  Loans                              139,995             141,867          126,702           128,623
                  Less:   Allowance for loan
                     losses                            1,950                  -             1,889                -
                      Net deferred loan fees             260                  -               476                -
                                                 -----------         -----------        ---------         ---------
                             Net loans               137,785             141,867          124,337           128,623

              Accrued interest receivable              2,398               2,398            2,303             2,303

              Financial liabilities:
                  Deposits:
                     Demand, statement,
                     passbook, money market,
                     and NOW accounts                102,429             102,429          101,371           101,371
                     Certificates of deposit         107,548             108,562           99,541            99,701
                  Short-term borrowings                6,840               6,840           11,385            11,385
                  Long-term borrowings                25,000              25,500               -                 -
                  Accrued interest payable               288                 288               59                59
                  Advances from borrowers for
                     taxes and insurance                 673                 673              533               533
</TABLE>

       Commitments to Extend Credit and Financial Guarantees Written

       The fair value of  commitments  to extend  credit is estimated  using the
       fees  currently  charged to enter into  similar  agreements,  taking into
       account the  remaining  terms of the  agreements  and the present  credit
       worthiness of the counterparties.  For fixed rate loan commitments,  fair
       value also  considers the difference  between  current levels of interest
       rates and the  committed  rates.  The fair value of financial  guarantees
       written is based on fees currently  charged for similar  agreements or on
       the estimated cost to terminate them or otherwise  settle the obligations
       with the counterparties.  Fees, such as these are not a major part of the
       Bank's  business and in the Bank's  business  territory are not a "normal
       business  practice."  Therefore,  based upon the above  facts the Company
       believes  that book  value  equals  fair  value and the  amounts  are not
       significant.

                                       59
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(18)   Parent Company Financial Information

       The Holding  Company began  operations  on April 18, 1996 in  conjunction
       with the Bank's  mutual-to-stock  conversion  and the  Company's  initial
       public offering of its common stock.

<TABLE>
                   Condensed Statement of Financial Condition
                        as of September 30, 1998 and 1997
<CAPTION>
                                                               1998        1997
                                                             -------     -------
                                                               (in thousands)
<S>                                                          <C>         <C>
                                    Assets

Cash and cash equivalents ..............................     $ 1,144       3,005
Securities available for sale ..........................       1,884       4,030
ESOP loan receivable from subsidiary ...................       4,231       4,359
Equity in net assets of subsidiary .....................      60,304      59,933
Other assets ...........................................         477         500
                                                             -------     -------
      Total assets .....................................     $68,040      71,827
                                                             =======      ======

   Liabilities and Shareholders' Equity

Accrued expenses and other liabilities .................     $   209          50

Total shareholders' equity .............................      67,831      71,777
                                                             -------     -------

      Total liabilities and shareholders' equity .......     $68,040      71,827
                                                             =======     =======
</TABLE>

<TABLE>

                         Condensed Statements of Income
        For the Year Ended September 30, 1998 and 1997 and for the Period
           From Inception (April 18, 1996) Through September 30, 1996

<CAPTION>
                                                1998          1997         1996
                                              -------       -------      -------
                                                        (in thousands)
<S>                                           <C>           <C>          <C>
Dividends from subsidiary ..............      $ 5,000          --           --
Net interest income ....................          596           475          296
                                              -------       -------      -------
                                                5,596           475          296

Non interest expense ...................          298           223           70
                                              -------       -------      -------

Income before income taxes and
   equity in undistributed
   earnings of subsidiary ..............        5,298           252          226
                                              -------       -------      -------

Income tax expense .....................          142            61           91
                                              -------       -------      -------

Income before equity in
   undistributed earnings of
   subsidiary ..........................        5,156           191          135
Equity in undistributed earnings
   of subsidiary .......................       (1,274)        3,716        3,182
                                              -------       -------      -------
Net income .............................      $ 3,882         3,907        3,317
                                              =======       =======      =======

</TABLE>


                                       60
<PAGE>
<TABLE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


                            Statements of Cash Flows
       For the Years Ended September 30, 1998 and 1997 and for the Period
           From Inception (April 18, 1996) Through September 30, 1996

<CAPTION>
                                                                            1998        1997        1996
                                                                          --------    --------    --------
                                                                                   (in thousands)
<S>                                                                       <C>         <C>         <C>
Cash flows from operating activities:
  Net income ..........................................................   $  3,882       3,907       3,317
  Adjustment to reconcile net income
      to net cash provided by
      operating activities:
        Net (increase) decrease in
           equity in undistributed
           earnings of subsidiary .....................................      1,274      (3,716)     (3,182)
        Net accretion on securities ...................................       --           (42)       --
        Gain on sales of securities ...................................        (77)       --          --
        Net (increase) decrease in
           other assets ...............................................         23         (57)        (24)
        Net increase (decrease) in
           liabilities ................................................        152         (16)         53
                                                                          --------    --------    --------
        Net cash provided by
           operating activities .......................................      5,254          76         164
                                                                          --------    --------    --------

Cash flows from investing activities:
  Purchase of securities available for
      sale ............................................................     (2,376)    (25,000)   (122,347)
  Proceeds from the maturity of
      securities available for sale ...................................      1,000      43,045     100,345
  Proceeds from sales of securities
      available for sale ..............................................      3,642        --          --
  Investment in subsidiary ............................................       (140)        (93)    (27,460)
  Net decrease (increase) in ESOP loan
      receivable from subsidiary ......................................        128         120      (4,479)
                                                                          --------    --------    --------
  Net cash provided by (used in)
      investing activities ............................................      2,254      18,072     (53,941)
                                                                          --------    --------    --------

                                       61
<PAGE>
<CAPTION>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


                                                                            1998        1997        1996
                                                                          --------    --------    --------
                                                                                   (in thousands)
<S>                                                                       <C>         <C>         <C>
Cash flows from financing activities:
  Proceeds from issuance of common
      stock, net ......................................................       --          --        54,915
  Net proceeds from the exercise of
      stock options ...................................................         38        --          --
  Purchase of common stock for
      treasury ........................................................     (8,459)    (15,305)       --
  Proceeds from subsidiary for
      issuance of vested MRP shares ...................................        446        --          --
  Cash dividends on common stock ......................................     (1,394)       (976)       --
                                                                          --------    --------    --------
  Net cash (used in) provided by
      financing activities ............................................     (9,369)    (16,281)     54,915
                                                                          --------    --------    --------

Net increase (decrease) in cash and
      cash equivalents ................................................     (1,861)      1,867       1,138

Cash and cash equivalents:
  Beginning of period .................................................      3,005       1,138        --
                                                                          --------    --------    --------
  End of period .......................................................   $  1,144       3,005       1,138
                                                                          ========    ========    ========

Supplemental disclosures of cash flow information:
  Cash paid during year for income
      taxes ...........................................................   $    107          91        --
                                                                          ========    ========    ========

  Noncash investing activities:
  Change in net unrealized gain
      (loss) on securities available
      for sale, net of change in
      deferred tax of $17 and $12 .....................................   $     45          18        --
                                                                          ========    ========    ========
  Recording of subsidiary's equity,
      including retained  earnings,  common stock acquired by ESOP, and
      net  unrealized  loss on securities  available  for sale,  net of
      taxes, on date of investment in common stock of
      subsidiary ......................................................   $   --          --        24,149
                                                                          ========    ========    ========
</TABLE>

       These  financial  statements  should  be read  in  conjunction  with  the
       Company's consolidated financial statements and notes thereto.


                                       62
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(19)   Regulatory Capital Requirements

       OTS capital regulations require savings  institutions to maintain minimum
       levels  of  regulatory  capital.  Under  the  regulations  in  effect  at
       September 30, 1998 and 1997,  the Bank was required to maintain a minimum
       ratio of tangible  capital to total  tangible  assets of 1.5%;  a minimum
       leverage ratio of core (Tier 1) capital to total adjusted tangible assets
       of 4.0% for 1998 and 3.0% for 1997 and a minimum  ratio of total  capital
       (core capital and supplementary capital) to risk-weighted assets of 8.0%,
       of which 4.0% must be core (Tier 1) capital.

       Under the prompt  corrective action  regulations,  the OTS is required to
       take certain supervisory  actions (and may take additional  discretionary
       actions) with respect to an  undercapitalized  institution.  Such actions
       could  have  a  direct  material  effect  on an  institution's  financial
       statements.  The regulations establish a framework for the classification
       of  savings   institutions   into  five  categories:   well  capitalized,
       adequately capitalized, undercapitalized, significantly undercapitalized,
       and critically undercapitalized.  Generally, an institution is considered
       well capitalized if it has a core (Tier 1) capital ratio of at least 5.0%
       (based on quarterly  average  total  assets);  a core (Tier 1) risk-based
       capital ratio of at least 6.0%; and a total  risk-based  capital ratio of
       at least 10.0%.

       The foregoing  capital ratios are based in part on specific  quantitative
       measures of assets,  liabilities and certain  off-balance  sheet items as
       calculated under  regulatory  accounting  practices.  Capital amounts and
       classifications  are also  subject to  qualitative  judgments  by the OTS
       about capital components, risk weightings and other factors.

       Management  believes  that, as of September  30, 1998 and 1997,  the Bank
       meets all capital adequacy requirements to which it is subject.  Further,
       the   most   recent   OTS   notification   categorized   the  Bank  as  a
       well-capitalized   institution   under  the  prompt   corrective   action
       regulations.   There  have  been  no  conditions  or  events  since  that
       notification  that  management  believes have changed the Bank's  capital
       classification.

                                       63
<PAGE>
                  CATSKILL FINANCIAL CORPORATION AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       The  following  is a summary of the Bank's  actual  capital  amounts  and
       ratios as of  September  30,  1998 and 1997,  compared to the OTS minimum
       capital adequacy requirements and the OTS requirements for classification
       as a well-capitalized  institution.  Although the OTS capital regulations
       apply at the Bank level only, the Company's  consolidated capital amounts
       and ratios are also  presented.  The OTS does not have a holding  company
       capital requirement.
<TABLE>
<CAPTION>
                                                                              1998
                                        -------------------------------------------------------------------------
                                                                     Minimum capital          For classification
                                               Actual                   adequacy              as well capitalized
                                        ------------------          ----------------          -------------------
                                         Amount      Ratio          Amount      Ratio          Amount      Ratio
                                         ------      -----          ------      -----          ------      -----
                                                                  (dollars in thousands)
<S>                                     <C>          <C>            <C>          <C>           <C>          <C>
             Bank                                                
              Tangible capital          $58,286      18.79%         $ 4,653      1.50%         $     -          -
              Tier 1 (core) capital      58,286      18.79           12,408      4.00           15,511       5.00%
              Risk-based capital:                                                                            
                  Tier 1                 58,286      48.67               -          -            7,186       6.00
                  Total                  59,713      49.86            9,581      8.00           11,977      10.00
                                                                                                    
                                               Actual
                                         -----------------
                                         Amount      Ratio
                                         ------      -----
              Consolidated
              Tangible capital          $65,768      21.13%
              Tier 1 (core) capital      65,768      21.13
              Risk-based capital:
                  Tier 1                 65,768      53.54
                  Total                  67,185      54.69

<PAGE>
<CAPTION>
                                                                              1997
                                        -------------------------------------------------------------------------
                                                                     Minimum capital          For classification
                                               Actual                   adequacy              as well capitalized
                                        ------------------          ----------------          -------------------
                                         Amount      Ratio          Amount      Ratio          Amount      Ratio
                                         ------      -----          ------      -----          ------      -----
                                                                 (dollars in thousands)
<S>                                     <C>          <C>            <C>          <C>           <C>          <C>
              Bank                                                
              Tangible capital          $59,031      20.70%         $ 4,278      1.50%         $     -          -
              Tier 1 (core) capital      59,031      20.70            8,556      3.00           14,259       5.00%
              Risk-based capital:
                  Tier 1                 59,031      60.13                -         -            5,890       6.00
                  Total                  60,159      61.28            7,854      8.00            9,817      10.00

                                               Actual
                                         -----------------
                                         Amount      Ratio
                                         ------      -----
              Consolidated
              Tangible capital          $70,856      24.54%
              Tier 1 (core) capital      70,856      24.54
              Risk-based capital:
                  Tier 1                 70,856      69.27
                  Total                  71,984      70.38
</TABLE>

                                       64
<PAGE>
SHAREHOLDER INFORMATION

Corporate Offices

Catskill Financial Corporation
341 Main Street
Catskill, New York  12414-1450
(518) 943-3600

Annual Meeting of Shareholders

The annual  meeting of Catskill  Financial  Corporation  will be held 7:00 p.m.,
Tuesday,  February 16, 1999 at the Bank's  office at 341 Main Street,  Catskill,
New York

Annual Report on Form 10-K

For the 1998 fiscal year,  Catskill  Financial  Corporation  will file an Annual
Report on Form 10-K.  Shareholders  wishing a copy may obtain one free of charge
by writing:
     David L. Guldenstern
     Corporate Secretary
     Catskill Financial Corporation
     341 Main Street
     Catskill, New York  12414-1450


Stock Transfer Agent and Registrar

Shareholders wishing to change name, address or ownership of stock, or to report
lost certificates and or consolidate accounts are asked to contact the Company's
stock registrar and transfer agent directly at:
     Registrar & Transfer Company
     10 Commerce Drive
     Cranford, New Jersey  07016-3572
     (800) 368-5948

Counsel

Serchuk & Zelermyer, LLP
81 Main Street
White Plains, New York  10601

Independent Auditors

KPMG Peat Marwick LLP
515 Broadway
Albany, New York  12207
<PAGE>
Market Information for Common Stock

The common stock of Catskill  Financial  Corporation  trades on the Nasdaq Stock
Market under symbol CATB.

At December 2, 1998,  there were  approximately  900  shareholders of record not
including  the number of persons or entities  holding stock in nominee or street
names through various brokers and banks.

Catskill  Financial  Corporation  common stock was issued at $10.00 per share in
connection  with the Company's  initial public  offering  completed on April 18,
1996.  The following  table shows the range of high and low sale prices for each
quarterly period since the Company began trading in April.

1998                     High             Low          Dividend
---------------------  -------           ------        ---------
First Quarter          $19.63            $16.50           $ .08
Second Quarter         $19.00            $17.00           $ .08
Third Quarter          $18.50            $16.13           $ .08
Fourth Quarter         $17.50            $12.00          $ .0925

1997                     High             Low          Dividend
---------------------  -------           ------        ---------
First Quarter          $14.50            $12.13
Second Quarter         $16.50            $13.75           $ .07
Third Quarter          $16.50            $13.50           $ .07
Fourth Quarter         $17.25            $15.25           $ .07

1996                     High             Low 
---------------------  -------           ------
Third Quarter          $11.00            $10.00
Fourth Quarter         $12.38            $ 9.88

During the  second  quarter  of fiscal  1997,  the  Company  declared  its first
quarterly dividend.  The Company expects to continue to pay dividends,  however,
dividend payment  decisions are made with  consideration of a variety of factors
including earnings,  financial condition,  market  considerations and regulatory
restrictions.  Restrictions on dividend  payments are described in Note 2 of the
Notes to Consolidated Financial Statements included in this Annual Report.

                                       65