<TABLE>
<CAPTION>
                                                                      EXHIBIT 13

SELECTED CONSOLIDATED FINANCIAL INFORMATION

                                                                                          September 30,
                                                                 ----------------------------------------------------------
                                                                    1999        1998       1997        1996        1995
                                                                 ----------------------------------------------------------
                                                                                          (In thousands)
<S>                                                                 <C>        <C>         <C>         <C>        <C>
Selected Consolidated Financial Condition Data:
----------------------------------------------

Total assets...................................................     $338,796   $314,752    $289,619    $283,759   $230,102
Cash and cash equivalents......................................        3,025      2,795       2,274      39,712     38,064
Loans receivable, net..........................................      150,821    137,785     124,337     122,533    118,364
Securities available for sale..................................      165,833    164,983     148,114      97,041        ---
Securities held to maturity....................................          ---      2,060       8,055      19,077     67,090
Deposits.......................................................      219,064    209,977     200,912     196,753    197,230
Borrowings.....................................................       56,100     31,840      11,385         ---        ---
Shareholders' equity...........................................       59,212     67,831      71,777      82,381     28,667

<CAPTION>
                                                                                    Years Ended September 30,
                                                                 ----------------------------------------------------------
                                                                    1999        1998       1997        1996        1995
                                                                 ----------------------------------------------------------
                                                                                           (In thousands)
<S>                                                                  <C>        <C>         <C>         <C>        <C>
Selected Consolidated Operating Data:
------------------------------------
Interest income................................................      $21,699    $21,132     $20,247     $17,962    $15,623
Interest expense...............................................       10,542      9,960       8,801       9,022      8,009
                                                                     -------    -------     -------     -------    -------
   Net interest income.........................................       11,157     11,172      11,446       8,940      7,614
Provision for loan losses......................................          190        189         300         195        255
                                                                     -------    -------     -------     -------    -------
Net interest income after provision for loan losses............       10,967     10,983      11,146       8,745      7,359
Non-interest income............................................          866        580         482         966        231
Non-interest expense...........................................        6,184      5,662       5,187       4,258      4,665
                                                                     -------    -------     -------     -------    -------
Income before taxes............................................        5,649      5,901       6,441       5,453      2,925
Income tax expense.............................................        1,424      2,019       2,534       2,136      1,201
                                                                     -------    -------     -------     -------    -------
   Net income..................................................      $ 4,225    $ 3,882     $ 3,907     $ 3,317    $ 1,724
                                                                     =======    =======     =======     =======    =======

Basic earnings per common share................................     $1.13         $.95       $.84        $.38*           *
Diluted earnings per common share..............................     $1.10         $.93       $.83        $.38*           *
Cash dividends per common share................................     $.405         $.333      $.21          ---         ---
</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. Post conversion net income
during the fiscal year ended September 30, 1996 was approximately  $2.0 million.
Certain reclassifications have been made to prior years' amounts to conform with
current year's presentation.


                                       3
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION - CONTINUED

                                                                                       Year Ended September 30,
                                                                     --------------------------------------------------------------
                                                                         1999         1998        1997        1996        1995
                                                                     --------------------------------------------------------------
<S>                                                                     <C>           <C>         <C>         <C>         <C>
   Selected Financial Ratios and Other Data:
   -----------------------------------------

   Performance Ratios:
     Return on average assets.......................................      1.30%         1.30%       1.40%       1.25%        .76%
     Return on average equity.......................................      6.42          5.60        5.22        6.33        6.15
     Net interest rate spread.......................................      3.09          2.91        2.95        2.54        2.99
     Net interest margin(1).........................................      3.94          4.00        4.18        3.44        3.47
     Ratio of non-interest expense to average total assets..........      1.90          1.90        1.86        1.60        1.77(2)
     Efficiency ratio(3)...........................................      47.08         46.32       43.80       45.56       51.05
     Ratio of average interest-earning assets to average
         interest-bearing liabilities...............................    124.90        131.97      138.60      125.79      112.97

   Asset Quality Ratios:
    Non-performing loans to total loans at end of period............       .36%          .42%        .73%       1.10%        .86%
    Non-performing assets to total assets at end of period..........       .16           .20         .40         .61         .66
    Allowance for loan losses to non-performing loans...............    384.74        329.95      206.00      133.89      188.41
    Allowance for loan losses to total loans at end of period.......      1.37          1.40        1.50        1.47        1.61
    Net charge-offs to average loans................................       .03           .10         .19         .26         .04

   Capital Ratios:
    Equity to total assets at end of period.........................     17.48%        21.55%      24.78%      29.03%      12.46%
    Average equity to average assets................................     20.19         23.20       26.86       19.73       12.44

   Other Data:
    Number of full-service branch offices...........................      6             5           4           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.


                                       4
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF UNAUDITED CONSOLIDATED QUARTERLY FINANCIAL INFORMATION

                                                                            Year Ended September 30, 1999
                                                                -----------------------------------------------------
                                                                  First      Second     Third    Fourth     Fiscal
                                                                 Quarter    Quarter    Quarter   Quarter     Year
                                                                -----------------------------------------------------
                                                                      (In thousands, except per share amounts)
<S>                                                                <C>        <C>       <C>       <C>       <C>
Interest income...............................................     $ 5,353    $ 5,279   $ 5,397   $ 5,670   $ 21,699
Interest expense..............................................       2,626      2,548     2,561     2,807     10,542
                                                                   -------    -------   -------   -------   --------
   Net interest income........................................       2,727      2,731     2,836     2,863     11,157
Provision for loan losses.....................................          45         45        50        50        190
                                                                   -------    -------   -------   -------   --------
Net interest income after provision for loan losses...........       2,682      2,686     2,786     2,813     10,967
Non-interest income...........................................         157        254       259       196        866
Non-interest expense..........................................       1,465      1,542     1,577     1,600      6,184
                                                                   -------    -------   -------   -------   --------
Income before taxes...........................................       1,374      1,398     1,468     1,409      5,649
Income tax expense............................................         393        357       369       305      1,424
                                                                   -------    -------   -------   -------   --------
   Net income.................................................       $ 981    $ 1,041   $ 1,099   $ 1,104     $4,225
                                                                   =======    =======   =======   =======   ========
Per share data
--------------
Basic earnings per common share...............................   $ .26      $ .27      $ .29     $ .31     $1.13
Diluted earnings per common share.............................     .25        .27        .28       .30      1.10
Cash dividends per common share...............................     .0925      .0925      .11       .11       .4050

Performance data
----------------
Return on average assets......................................    1.24%      1.31%      1.35%     1.29%     1.30%
Return on average equity......................................    5.79       6.23       6.55      7.19      6.42
Efficiency ratio..............................................   46.97      47.52      46.78     47.04     47.08

<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>
Interest income...............................................     $ 5,271    $ 5,223   $ 5,295   $ 5,343   $ 21,132
Interest expense..............................................       2,425      2,390     2,507     2,638      9,960
                                                                   -------    -------   -------   -------   --------
   Net interest income........................................       2,846      2,833     2,788     2,705     11,172
Provision for loan losses.....................................          54         45        45        45        189
                                                                   -------    -------   -------   -------   --------
Net interest income after provision for loan losses...........       2,792      2,788     2,743     2,660     10,983
Non-interest income...........................................         111        133       155       181        580
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
                                                                   =======    =======   =======   =======   ========
Per share data
--------------
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

Performance data
----------------
Return on average assets......................................      1.31%      1.35%      1.29%     1.25%     1.30%
Return on average equity......................................      5.32       5.57       5.73      5.81      5.60
Efficiency ratio..............................................     45.30      45.84      47.31     46.83     46.32
</TABLE>

                                       5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

Catskill  Financial  Corporation (the "Parent 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.  Collectively,  the Parent Company and the Bank are referred
to herein as the "Company". 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 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
principally 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 and  Schoharie  Counties and southern  Albany
County in New York,  which are serviced  through six banking  offices,  the most
recent having opened in August 1999. 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  Company'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.

General economic conditions, competition and the monetary and fiscal policies of
the federal  government  also  significantly  affect  financial  institutions in
general,   including  the  Company.  The  demand  for  and  supply  of  housing,
competition among lenders,  interest rate conditions and funds  availability all
impact  lending   activities,   while  prevailing   market  rates  on  competing
investments,  customer  preference and the levels of personal income and savings
in the Bank's primary market area affect deposit inflows and outflows.

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.

                                       6
<PAGE>
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:

o    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;

o    the effect of certain customers and vendors of critical systems or services
     failing  to  adequately  address  issues  relating  to  becoming  Year 2000
     compliant;

o    changes in market  interest  rates or changes in the speed at which  market
     interest rates adjust;

o    changes in laws and regulations affecting the financial services industry;

o    changes in competition; and

o    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.

FINANCIAL CONDITION

The Company expects, as part of its capital management  strategies,  to continue
to aggressively  manage its capital through a combination of stock  repurchases,
balance sheet  leveraging and additional  branching in contiguous  markets.  The
Company's  branching  strategies  include  expanding  in small  towns  and rural
communities,  where  it  can  provide  high  quality  personal  service  to  the
under-served middle market.

Total  assets were $338.8  million at September  30, 1999,  an increase of $24.0
million,  or 7.6% from the $314.8 million at September 30, 1998. The increase in
assets was primarily in loans and corporate-owned  life insurance and was funded
principally by increases in short-term borrowings and deposits.

                                       7
<PAGE>
Cash and cash  equivalents  were $3.0  million at  September  30,  1999,  up $.2
million from  September 30, 1998, due  principally to the Company's  strategy of
growing its checking  accounts,  which increases the amount of checks in process
of collection.

Total  securities,  which  include  securities  held to maturity and  securities
available for sale, excluding Federal Home Loan Bank stock, were $165.8 million,
a decrease of $1.2 million,  or .7% from the $167.0  million as of September 30,
1998.  The  lower  interest  rate  environment  in  late  1998  and  early  1999
accelerated the rate of prepayments on the Company's mortgage-backed  securities
("MBS")  portfolio,  consequently,  MBS's now represent  only 43.0% of the total
investment  portfolio as compared to 54.3% as of September 30, 1998. The Company
replaced  MBS  run-offs,  as  well  as  calls  on  its  agency  portfolio,  with
non-callable  corporates and municipals with longer call protection.  The change
in portfolio mix was also made to reduce the Company's cash flow uncertainty, as
the securities purchased have more defined cash flows than the MBS's the Company
replaced.  The  Company  also  used  some  of the MBS  paydowns,  as well as the
proceeds  from   security   sales,   to  fund  a  $10.0   million   purchase  of
corporate-owned life insurance ("COLI") as a financing vehicle for pre- and post
retirement  employee benefits.  The COLI's investment returns and death benefits
are not taxable to the Company,  and the insurance premiums are  non-deductible.
The insurance  policy provides that the initial lump sum premium,  after certain
deductions,  is maintained in a separate account,  which minimizes the Company's
exposure to insurance  carrier credit risk and allows the Company to select both
the investment manager and the investment portfolio strategy.

Loans  receivable  were $152.9  million as of September 30, 1999, an increase of
$13.2  million  or 9.4% over the $139.7  million  at  September  30,  1998.  The
following  table  shows  the loan  portfolio  composition  as of the  respective
balance sheet dates:
<TABLE>
<CAPTION>
                                                          September 30,                             September 30,
                                                              1999                                      1998
                                               ---------------------------------            ------------------------------
                                               (In thousands)         % of Loans            (In thousands)      % of Loans
<S>                                                    <C>                <C>                    <C>                <C>
Real Estate Loans
    One-to-four family                                 $ 121,151           79.2%                 $ 113,423           81.0%
    Multi-family and commercial                            7,940            5.2                      6,389            4.6
    Construction                                           3,176            2.1                      1,182            0.8
                                                       ---------          -----                  ---------          -----
        Total real estate loans                          132,267           86.5                    120,994           86.4
Consumer Loans                                            19,729           12.9                     18,399           13.2
Commercial Loans                                             994            0.6                        602            0.4
                                                       ---------          -----                  ---------          -----
        Gross Loans                                      152,990          100.0%                   139,995          100.0%
                                                                          =====                                     =====
Less:  Net deferred loan fees                               (76)                                     (260)
                                                       ---------                                 ---------
        Total loans receivable                         $ 152,914                                 $ 139,735
                                                       =========                                 =========
</TABLE>

One-to-four  family real estate loans  increased  $7.8 million,  or 6.9%, as the
Company has  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.  Loans to finance  mobile home
parks,  a  convenience  store  and a  multi-family  dwelling  were  the  primary
contributors  to an increase in  multi-family  and commercial real estate loans.
All of  these  loans  were  made  within  the  Company's  primary  market  area.
Construction loans are up due to several  commercial  projects under development
as well as  seasonal  one-to-four  family  residential  construction,  with  the
Company providing both construction and permanent financing.

                                       8
<PAGE>
Total  deposits  were $219.1  million at September 30, 1999, an increase of $9.1
million,  or 4.3% from the $210.0  million at September 30, 1998.  The following
table shows the deposit composition as of the dates shown:
<TABLE>
<CAPTION>
                                                     September 30, 1999                     September 30, 1998
                                                     ------------------                     ------------------
                                             (In thousands)      % of Deposits      (In thousands)     % of Deposits
                                             --------------      -------------      --------------     -------------
<S>                                                  <C>              <C>                  <C>              <C>
         Savings                                     $ 81,894          37.4%               $ 78,075          37.2%
         Money market                                   6,435           2.9                   5,949           2.8
         NOW                                           14,833           6.8                  12,396           5.9
         Non-interest demand                            8,918           4.1                   6,009           2.9
         Certificates of deposits                     106,984          48.8                 107,548          51.2
                                                     --------         -----                --------         -----
                                                     $219,064         100.0%               $209,977         100.0%
                                                     ========         =====                ========         =====
</TABLE>

The Company's new branches, the most recent of which opened in August 1999, were
the principal  contributors to the growth in deposits. In addition,  the Company
continues  its  strategy of growing its core  deposits  (defined as all deposits
except for certificates of deposits ("CD")), principally checking accounts. Core
deposits  now  represent  over  51% of total  deposits,  and  checking  accounts
represent almost 11.0% of deposits.

The Company's borrowings,  which are principally with the Federal Home Loan Bank
of New York  ("FHLB"),  were $56.1 million at September 30, 1999, an increase of
$24.3  million from the $31.8 million at September 30, 1998. As of September 30,
1999,  the Company still had additional  available  credit of $2.5 million under
its overnight line and $7.6 million under its one-month advance program with the
FHLB.

Shareholders' equity at September 30, 1999 was $59.2 million, a decrease of $8.6
million or 12.7% from the $67.8  million at September  30, 1998.  The  Company's
repurchase of 466,034 shares of its stock at a cost of $7.6 million,  and a $4.7
million adverse change in the Company's net unrealized gain (loss) on securities
available for sale,  net of taxes were the  principal  causes for the decline in
equity.  The  adverse  change in the  unrealized  gain  (loss)  was caused by an
increase in interest rates during the fiscal year. The reductions in equity were
partially  offset  by  the  $2.7  million  of net  income  retained  after  cash
dividends.  In  addition,  the  Company  recorded  a $1.0  million  increase  to
shareholders'  equity  due to  the  amortization  of  restricted  stock  awards,
proceeds  from the exercise of stock options and the release of shares under the
Company's ESOP.  Shareholders'  equity as a percentage of total assets was 17.5%
at September 30, 1999  compared to 21.6% at September  30, 1998.  Book value per
common share was $15.15.

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,  when compared to 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.

                                       9
<PAGE>
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, 1999, the Company had 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  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, 1999, which
the Company anticipates,  based upon certain assumptions, will 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 Company assumes that one to four family mortgage loans
will  be  prepaid  at a  constant  rate  of 10% per  annum  and  mortgage-backed
securities  will be  prepaid at 18%,  which  approximates  the last three  month
prepayment  performance.   Callable  securities,   principally  U.S.  Government
agencies,  corporates and  municipals,  are shown  principally by their maturity
date, since most of the securities would not be called based on current interest
rates.  Savings  deposit  accounts  are shown with a decay rate of 9%  annually.
Money  Market  deposits  are  assumed to  immediately  reprice,  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,  1999,  had a
one-year  cumulative  negative gap of $47.4  million,  or 14.2% of total assets.
Consequently,  if interest  rates were to increase over a one-year  period,  the
Company's net interest income could be adversely impacted.  However, if interest
rates were to decrease,  the  Company's  net  interest  income might not benefit
correspondingly   since  prepayments  on  mortgage  loans  and  mortgage  backed
securities  could  increase,  and  certain  securities  with calls might then be
called,  both of which  could  accelerate  the  downward  repricing  of  assets.
Although  the  Company's  net  interest  income  may be  vulnerable  to a rising
interest  rate  environment,  management  expects  its  stable  deposit  base to
minimize this risk, as deposits  repricing  within one year total $91.1 million.
Management  does  expect  to  reduce  its  negative  GAP over  the next  year by
selectively  extending  maturities  of  its  short-term  borrowings,  purchasing
adjustable rate MBS and pursuing growth of its core deposits.

                                       10
<PAGE>
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 following table.

                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                                                    At September 30, 1999
                                                                                    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......      $ 12,655       $ 9,274     $29,243      $20,842      $32,461     $104,475
Adjustable rate one- to four-family, multi-family
 and commercial real estate and construction loans..        13,963         7,081       6,028          674           46       27,792
Commercial loans....................................           994           ---         ---          ---          ---          994
Consumer loans......................................         5,670         4,487       5,915        2,237        1,420       19,729
Mortgage-backed securities..........................        13,663        15,296      16,513        9,271       16,775       71,518
Other securities(*).................................         8,031           999       7,832        7,914       76,623      101,399
Federal funds and other.............................           126           ---         ---          ---          ---          126
                                                          --------       -------     -------      -------      -------     --------
     Total interest-earning assets..................        55,102        37,137      65,531       40,938      127,325      326,033
                                                          --------       -------     -------      -------      -------     --------

Savings deposits....................................         4,196         3,419      12,230       10,208       51,841       81,894
Money market........................................         6,435           ---         ---          ---          ---        6,435
Certificate accounts................................        48,879        28,188      25,959        3,614          344      106,984
NOW deposits........................................           ---           ---         ---          ---       14,833       14,833
Other deposits......................................         2,449           ---         ---          ---          363        2,812
Short-term borrowings...............................        31,100           ---         ---          ---          ---       31,100
Long-term borrowings................................        10,000         5,000       5,000        5,000          ---       25,000
                                                          --------       -------     -------      -------      -------     --------
     Total interest-bearing liabilities.............       103,059        36,607      43,189       18,822       67,381      269,058
                                                          --------       -------     -------      -------      -------     --------
Interest-earning assets less interest-bearing
 liabilities........................................     $(47,957)       $   530    $ 22,342     $ 22,116     $ 59,944     $ 56,975
                                                         =========       =======    ========     ========     ========     ========

Cumulative interest-rate sensitivity gap............     $(47,957)     $(47,427)  $ (25,085)    $ (2,969)     $ 56,975

Cumulative interest-rate gap as a percentage of
 interest-earning assets at September 30, 1999......      (14.71)%      (14.55)%     (7.70)%      (0.91)%       17.48%

Cumulative interest-rate gap as a percentage of
 total assets at September 30, 1999.................      (14.16)%      (14.00)%     (7.40)%      (0.88)%       16.82%
</TABLE>

(*)Includes   all   securities   available   for  sale  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 OTS also evaluates the Bank's  interest rate  sensitivity  quarterly using a
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 NPV divided by the market value of assets. The OTS
model uses financial data that the Bank submits,  but the OTS determines many of
the assumptions such as loan and securities prepayments and deposit decay rates.
The  following  are the  estimated  impact at September  30, 1999,  of immediate
changes in interest rates as calculated by the OTS model:

                                       12
<PAGE>
<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>
      +300            $ 32,241            $ (25,486)           (44.1)%              10.21%            (654bp)
      +200              40,894              (16,833)           (29.2)               12.56             (419bp)
      +100              49,621               (8,106)           (14.0)               14.79             (196bp)
    static            * 57,727                                                      16.75
     (100)              64,409                 6,682            11.6                18.27              152bp
     (200)              71,275                13,548            23.5                19.76              301bp
     (300)              78,420                20,693            35.8                21.24              449bp
</TABLE>

         * Represents Bank only. The Company has additional  portfolio equity of
approximately  $9.9 million not shown in the OTS  analysis.  If included,  the %
changes would be less, because of the larger capital base.

As is the case with the gap table,  certain  shortcomings  are  inherent  in the
methodology  used in NPV  measurements.  Estimating  changes in NPV requires 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 interest rates change uniformly, regardless of the maturity
of the asset.  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.  The Company places loans 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 the Company designates a loan as non-accrual, the Company
reverses  all accrued  but unpaid  interest  as a  reduction  of current  period
interest income and subsequent cash receipts generally are applied to reduce the
unpaid principal balance.

                                       13
<PAGE>
Non-performing  assets at September 30, 1999, were $.5 million, or .16% of total
assets,  compared to the $.6 million or .20% of total  assets at  September  30,
1998.  The table below sets forth the amounts and  categories  of the  Company's
non-performing assets. The Company had no troubled debt restructurings on any of
the dates set forth below.
<TABLE>
<CAPTION>
                                                                                    September 30,
                                                       ------------------------------------------------------------------
                                                              1999         1998         1997         1996          1995
                                                       ------------------------------------------------------------------
                                                                                (Dollars in thousands)
<S>                                                           <C>          <C>        <C>            <C>          <C>
    Non-performing loans:
      One- to four-family real estate................         $ 396        $ 520        $ 780        $1,008         $784
      Multi-family and commercial real estate........           ---          ---          ---            78          ---
      Consumer.......................................           148           71          137           283          251
                                                              -----        -----      -------        ------       ------
         Total.......................................           544          591          917         1,369        1,035
                                                              -----        -----      -------        ------       ------
    Foreclosed assets, net:
      One- to four-family real estate................           ---           53          225           334          326
      Multi-family and commercial real estate........           ---          ---           23            23          158
                                                              -----        -----      -------        ------       ------
         Total.......................................           ---           53          248           357          484
                                                              -----        -----      -------        ------       ------
    Total non-performing assets......................         $ 544        $ 644      $ 1,165        $1,726       $1,519
                                                              =====        =====      =======        ======       ======

    Total non-performing loans as a % of total loans.          .36%         .42%         .73%         1.10%         .86%
                                                               ===          ===          ===          ====          ===

    Total as a percentage of total assets............          .16%         .20%         .40%          .61%         .66%
                                                               ===          ===          ===           ===          ===
</TABLE>

The  decrease  in  non-performing  loans at  September  30,  1999 as compared to
September 30, 1998 was  principally  from the improved  payment  performance  of
several  mortgage  borrowers,  as  well as the  foreclosure  of one  loan  which
resulted in the  Company  acquiring  title to the  mortgaged  property.  The net
realizable  value of the property,  totaling  $32,000,  was transferred to other
real estate,  and since the net  realizable  value  approximated  the  Company's
carrying  value,  there was no loss  recorded.  The  increase in  non-performing
consumer loans in 1999 was  principally in home equity lines,  which  management
does not expect to cause a material  loss due to underlying  collateral  values.
During the year ended September 30, 1999, the Company sold its remaining parcels
of other real estate; consequently, it currently has no other real estate owned.
The following table summarizes the activity in other real estate for the periods
presented:
<PAGE>
<TABLE>
<CAPTION>
                                                                       Years Ended September 30,
                                                                           ----------------
                                                                            1999       1998
                                                                           -----       ----
                                                                          (In thousands)
<S>                                                                         <C>       <C>
Other real estate at the beginning of year                                  $ 53      $ 248
Transfer of loans to other real estate owned                                  32        252
Sales of other real estate, net                                             (85)      (447)
                                                                           -----       ----
Other real estate at the end of year                                       $ ---       $ 53
                                                                           =====       ====
</TABLE>

Additionally,  at September 30, 1999, the Company had  identified  approximately
$299,000 in loans having more than normal credit risk, principally, all of which
are  secured by real  estate.  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.

                                       14
<PAGE>
The allowance for loan losses was $2.1 million,  or 1.37% of period end loans at
September 30, 1999,  and provided  coverage of  non-performing  loans of 384.7%,
compared to an  allowance  of 1.40% of loans and coverage of 329.9% at September
30, 1998. The following summarizes the activity in the allowance for loan losses
for the past five years:
<TABLE>
<CAPTION>
                                                                           Years Ended September 30,
                                                        ----------------------------------------------------------------
                                                              1999        1998         1997         1996         1995
                                                        ----------------------------------------------------------------
                                                                            (Dollars in thousands)
<S>                                                          <C>         <C>          <C>           <C>          <C>
     Balance at beginning of year....................        $ 1,950     $ 1,889      $ 1,833       $1,950       $1,746
     Charge-offs:
       One- to four-family real estate...............            (6)        (58)        (162)        (237)         (12)
       Multi-family and commercial real estate.......            ---         ---         (30)          ---          ---
       Consumer......................................           (89)        (90)         (90)         (86)         (50)
                                                             -------     -------      -------       ------       ------
                Total charge-offs....................           (95)       (148)        (282)        (323)         (62)
                                                             -------     -------      -------       ------       ------
     Recoveries:
       One- to four-family real estate...............              2         ---            4          ---            1
       Consumer......................................             46          20           34           11           10
                                                             -------     -------      -------       ------       ------
                Total recoveries.....................             48          20           38           11           11
                                                             -------     -------      -------       ------       ------
     Net charge-offs.................................           (47)       (128)        (244)        (312)         (51)
     Provision charged to operations.................            190         189          300          195          255
                                                             -------     -------      -------       ------       ------
     Balance at end of year..........................         $2,093      $1,950       $1,889       $1,833       $1,950
                                                             =======     =======      =======       ======       ======

     Ratio of net charge-offs to average loans
     outstanding for the year........................           .03%        .10%         .19%         .26%         .04%
                                                             =======     =======      =======       ======       ======

     Allowance for loan losses as a % of loans.......          1.37%       1.40%        1.50%        1.47%        1.61%
                                                             =======     =======      =======       ======       ======
</TABLE>

COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1999 AND 1998

GENERAL

For the fiscal year ended September 30, 1999, the Company recorded net income of
$4,225,000,  an increase of $343,000, or 8.8%, compared to the fiscal year ended
September 30, 1998.  Basic  earnings per share were $1.13,  an increase of 18.9%
compared to basic earnings per share of $.95 for the fiscal year ended September
30, 1998. Diluted earnings per share were $1.10 for the fiscal year, an increase
of 18.3%  compared to $.93 for the  comparable  fiscal year. For the fiscal year
ended September 30, 1999, weighted average common shares - basic were 3,752,448,
down 314,523, or 7.7%, due to the Company's share repurchase programs.

Return on average assets for both the fiscal years ended  September 30, 1999 and
1998, was 1.30% and return on average equity was 6.42% and 5.60%, respectively.

NET INTEREST INCOME

The Company's net income is primarily  dependent  upon its 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 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.

                                       15
<PAGE>
Net interest  income for the fiscal year ended  September  30,  1999,  was $12.3
million on a tax  equivalent  basis,  an increase  of  $626,000,  or 5.4%,  when
compared  to the  fiscal  year  ended  September  30,  1998.  The  increase  was
principally  volume related as the Company  increased its average earning assets
$20.2 million,  or 6.9%, more than  offsetting the increase in interest  expense
from the borrowings used to fund its share repurchases and corporate-owned  life
insurance ("COLI"). The Company funded the share repurchases,  the COLI purchase
and its  earning  asset  growth  principally  with  borrowings  and, to a lesser
extent, deposit growth.

Interest  income for the fiscal year ended September 30, 1999, was $22.8 million
on a tax  equivalent  basis,  an  increase  of  $1,208,000,  or  5.6%,  over the
comparable  period.  The $20.2  million,  or 6.9%,  increase in average  earning
assets  had a  positive  effect  on  interest  income as the  Company  sought to
leverage its excess  capital.  This positive  effect was offset somewhat by a 10
basis point drop in the yield on its average earning assets, principally loans.

The increase in average earning assets consisted principally of a 12.3% increase
in the loan  portfolio and a 2.6%  increase in the  securities  portfolio.  Loan
growth was  principally  due to the  promotion of a 15 year fixed rate  mortgage
product, which increased volume, but had an adverse impact on the loan portfolio
yield since the loans were  originated at rates below the average loan portfolio
yield.  In addition,  the Company,  due to lower  market  interest  rates at the
beginning  of  the  fiscal  year,   experienced   higher  loan  prepayments  and
refinancing  of its  existing  portfolio  which,  together  with a high level of
originations  related  to the  loan  promotion,  caused  the  yield  on the loan
portfolio to decrease 30 basis points to 7.70%.

Average MBS were $76.8  million for the fiscal year ended  September  30,  1999,
down $12.6 million,  or 14.1%, from the comparable  period. The average yield on
MBS was  6.44%,  down 30 basis  points  from the  comparable  period,  primarily
because the Company has been  purchasing  adjustable rate MBS's with low initial
interest  rates to balance  its asset mix,  since most of its loan  originations
have been at fixed rates.  These MBS's were purchased  during the initial teaser
rate period of the underlying  mortgage loans when the initial  interest rate on
the loans is less than the fully indexed rate and yield.  Management expects the
average  yield of these  MBS's to  increase  as the loans  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. In fiscal 1999,
28.0% of the average MBS  portfolio  represented  teaser rate ARM's  compared to
less than 18.7% in the comparable period.

Average other  securities  increased  $16.8  million,  or 23.4%,  as the Company
purchased  longer call  protected bank  qualified  municipals  and  non-callable
corporate  securities to increase yields and reduce  reinvestment  risk if rates
decline. The average yield on the other securities portfolio for the fiscal year
ended  September  30, 1999,  was 7.48%,  an increase of 27 basis points from the
comparable  period,  as the Company replaced  securities  called or matured with
tax-free  municipal   securities  with  a  higher  after-tax  yield.   Municipal
securities  now represent  47.7% of average other  securities,  compared to less
than 23.4% in the comparable period.

                                       16
<PAGE>
Interest  expense  for the  fiscal  year ended  September  30,  1999,  was $10.5
million, an increase of $582,000,  or 5.8%. The change was principally due to an
increase in the average volume of interest bearing  liabilities  offset somewhat
by a  decrease  in  the  Company's  cost  of  funds.  Average  interest  bearing
liabilities  were $249.4  million,  an increase of $28.7 million,  or 13.0%,  as
deposits increased and the Company borrowed in order to fund the Company's stock
repurchases,  its COLI  purchase and earning  asset  growth.  Average  long-term
borrowings  were up $17.2 million,  as the Company funded its stock  repurchases
and its earning asset growth,  as well as converted a portion of its  short-term
borrowings  to  long-term  borrowings,   principally  through  FHLB  convertible
(callable)  advances.  Average short-term  borrowings were $13.0 million for the
fiscal year ended September 30, 1999, up $1.6 million from the comparable fiscal
year. In addition,  the Company's average CD's increased $5.0 million,  or 4.8%,
as the  Company  in fiscal  1998  promoted  a special  15 month CD  program at a
premium rate due to competitive pressures.  The cost of funds decreased 28 basis
points to 4.23% as the  Company  has  generally  lowered  its  deposit  rates in
response to lower market interest rates.

The Company's net yield on average  earning assets was 3.94% for the fiscal year
ended  September 30, 1999,  down 6 basis points  compared to 4.00% for the prior
fiscal year.  The decrease was  principally  caused by the Company's  funding of
both the stock repurchase  program and COLI purchase.  For the fiscal year ended
September 30, 1999, the Company had $62.1 million of average earning assets with
no funding costs, a decrease of $8.5 million,  or 12.0%,  from the $70.6 million
for the fiscal year ended September 30, 1998. The Company did, however, increase
its net interest  spread 18 basis points as the cost of funds decreased 28 basis
points,  principally due to the lower deposit costs,  while the yield on earning
assets only  decreased 10 basis  points as increases in the yield on  securities
somewhat offset the decline in the loan portfolio yield.

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.

                                       17
<PAGE>
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 $1.1
million in 1999,  $472,000 in 1998 and $14,000 in 1997.  Non-accruing loans have
been included in the table as loans with interest recognized generally on a cash
basis. MBS are primarily  classified as available for sale.  Securities  include
all  securities,  other than MBS,  from both the  securities  available for sale
portfolio and the held to maturity portfolio.  Securities available for sale are
included at amortized cost.
<TABLE>
<CAPTION>
                                                                                     Years Ended September 30,
                                    -----------------------------------------------------------------------------------------------
                                                 1999                           1998                            1997
                                    -----------------------------------------------------------------------------------------------
                                      Average   Interest             Average   Interest              Average   Interest
                                    Outstanding Earned/            Outstanding Earned/             Outstanding Earned/
                                       Balance   Paid   Yield/Rate    Balance    Paid   Yield/Rate    Balance    Paid   Yield/Rate
                                    -----------------------------------------------------------------------------------------------
                                                                        (Dollars in thousands)
<S>                                    <C>      <C>         <C>       <C>      <C>           <C>      <C>      <C>          <C>
Interest-Earning Assets:
 Loans receivable..................    $145,685 $11,213     7.70%     $129,737 $ 10,373      8.00%    $125,146 $ 10,113     8.08%
 Mortgage-backed securities........      76,818   4,946     6.44        89,400    6,030      6.74       75,069    5,319     7.09
 Securities........................      88,890   6,646     7.48        72,058    5,197      7.21       63,521    4,283     6.74
 Federal funds sold and other......          65       7    10.77            68        4      5.88       10,214      546     5.35
                                       -------- -------               -------- --------               -------- --------
  Total interest-earning assets....    $311,458  22,812     7.32      $291,263   21,604      7.42     $273,950   20,261     7.40
                                                -------                        --------                        --------
Non-interest earning assets........      14,276                          7,437                           4,982
                                       --------                       --------                        --------
     Total Assets..................    $325,734                       $298,700                        $278,932
                                       ========                       ========                        ========

Interest-Bearing Liabilities:
 Savings deposits..................    $ 80,887 $ 2,428     3.00%     $ 78,903  $ 2,620      3.32%     $80,697  $ 2,821     3.50%
 Certificates of deposit...........     107,384   5,611     5.23       102,431    5,768      5.63       95,215    5,309     5.58
 Money market......................       6,269     191     3.05         6,341      198      3.12        7,418      242     3.26
 NOW deposits......................      14,232     276     1.94        11,650      268      2.30        9,667      237     2.45
 Other.............................       2,627      64     2.44         2,252       51      2.26        2,065       43     2.08
 Short-term borrowings.............      12,962     667     5.15        11,317      650      5.74        2,590      149     5.75
 Long-term borrowings..............      25,000   1,305     5.22         7,802      405      5.19          ---      ---
                                       -------- -------               -------- --------               -------- --------
    Total interest-bearing
      liabilities..................     249,361  10,542     4.23       220,696    9,960      4.51      197,652    8,801     4.45
                                                -------                        --------                        --------
 Non-interest bearing liabilities..      10,598                          8,710                           6,372
 Shareholders' equity..............      65,775                         69,294                          74,908
                                       --------                       --------                        --------
  Total liabilities and equity.....    $325,734                       $298,700                        $278,932
                                       ========                       ========                        ========

Net interest income................             $ 12,270                       $ 11,644                        $ 11,460
                                                ========                       ========                        ========

Net interest rate spread...........                         3.09%                            2.91%                          2.95%
                                                            =====                            =====                          =====
Net earning assets.................    $ 62,097                       $ 70,567                        $ 76,298
                                       ========                       ========                        ========
Net yield on average
interest-earning assets............                         3.94%                            4.00%                          4.18%
                                                            =====                            =====                          =====

Average interest-earning assets to
 average interest-bearing
 liabilities.......................     124.90%                        131.97%                         138.60%
                                        ======                         ======                          ======
</TABLE>


                                       18
<PAGE>
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>
                                                                      Years Ended September 30,
                                               -------------------------------------------------------------------------
                                                           1999 vs 1998                        1998 vs 1997
                                               -------------------------------------------------------------------------
                                                      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........................        $1,208   $ (368)        $ 840         $ 377   $(117)        $ 260
      Mortgage-backed securities..............         (824)     (260)      (1,084)           959    (248)          711
      Securities..............................         1,248       201        1,449           601      313          914
      Federal funds sold and other............           ---         3            3         (602)       60        (542)
                                                      ------   ------       -------        ------     ----       ------
        Total interest-earning assets.........        $1,632   $ (424)      $ 1,208        $1,335     $  8       $1,343
                                                      ======   =======      =======        ======     ====       ======

     Interest-bearing liabilities:

      Savings deposits........................          $ 68   $ (260)       $(192)         $(61)  $ (140)       $(201)
      Certificate accounts....................           334     (491)        (157)           410       49          459
      Money market............................           (2)       (5)          (7)          (34)     (10)         (44)
      NOW deposits............................            28      (20)            8            45     (14)           31
      Other...................................             9         4           13             4        4            8
      Short-term borrowings...................            59      (42)           17           501      ---          501
      Long-term borrowings....................           898         2          900           405      ---          405
                                                      ------   ------       -------        ------     ----       ------
        Total interest-bearing liabilities....        $1,394   $ (812)        $ 582        $1,270  $ (111)       $1,159
                                                      ------   ------       -------        ------     ----       ------
     Net change in net interest income........                                $ 626                               $ 184
                                                                              =====                               =====
</TABLE>

PROVISION FOR LOAN LOSSES

The Company  establishes  an  allowance  for loan losses based on an analysis of
risk factors in its 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.

The provision for loan losses was $190,000,  or .13% of average  loans,  for the
fiscal year ended September 30, 1999,  essentially  unchanged from $189,000,  or
 .15% of average loans,  in the comparable  year. The decrease as a percentage of
loans is principally  attributable to a reduction in net charge-offs to $47,000,
or .03% of average  loans,  for the fiscal year ended  September  30,  1999,  as
compared  to  $128,000,  or .10% of average  loans,  in the  comparable  period.
Despite the  decrease  in net  charge-offs,  the  Company's  provision  remained
relatively  constant  due to the 12.3%  growth  in  average  loans  outstanding.
Non-performing  loans were  $544,000 at  September  30,  1999,  or .36% of total
loans,  a decrease of $47,000 from  September  30, 1998,  when they were .42% of
total loans. At September 30, 1999, the allowance for loan losses was $2,093,000
or 1.37% of period end loans, and provided coverage of  non-performing  loans of
384.7%,  compared  to an  allowance  of 1.40%  of  total  loans  and  329.9%  of
non-performing loans at September 30, 1998.

                                       19
<PAGE>
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 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 the OTS's judgment of the information  available
to it at the time of the examination.

NON-INTEREST INCOME

Non-interest  income was $866,000 for the fiscal year ended  September 30, 1999,
an increase of $286,000, or 49.3% from the fiscal year ended September 30, 1998.
The increase was principally due to the investment  performance on the Company's
corporate  owned life  insurance  which  increased its cash  surrender  value by
$381,000,  more than offsetting the $188,000  reduction in net securities  gains
(losses).  In addition,  service fees on deposit accounts increased $75,000,  or
25.5%, as the Company continues to promote checking related products to increase
core deposits and diversify its revenues.

NON-INTEREST EXPENSE

Non-interest  expense  for  the  fiscal  year  ended  September  30,  1999,  was
$6,184,000,  an increase of $522,000,  or 9.2%, over the comparable  period. The
increase was principally  the cost of our new branches,  as well as higher other
real estate expenses,  other  professional fees, and higher data processing fees
due to a contract termination charge to switch ATM service providers.

Salaries  and employee  benefits  were up $170,000,  or 4.9%,  principally  from
staffing new branches which opened in April 1998 and August 1999 and the cost of
an Executive  Supplemental  Retirement Plan  implemented in the third quarter of
fiscal  1998.  Net  occupancy  increased  $71,000  or  20.1%,  principally  from
renovation  expenses at the Company's  main office,  and the cost of the two new
branches.  Other real estate expenses net, increased $81,000, as the Company had
losses on sales of other real estate during the fiscal year ended  September 30,
1999,  compared to gains on sales in the comparable  period.  Other professional
fees were  $284,000,  an increase of $52,000,  or 22.4% as the Company  incurred
higher costs  principally  due to its COLI purchase.  Data  processing fees were
higher due to  increased  transactional  volume  and Y2K  related  expenses.  In
addition,  the Company also paid a contract  termination  charge and  conversion
costs  of  approximately  $32,000  during  the  period  to  switch  ATM  service
providers.  Management  expects the change to improve customer  service,  reduce
operating  costs,  and  increase  service fee income by allowing  the Company to
charge fees on non-customer ATM transactions.

                                       20
<PAGE>
INCOME TAX EXPENSE

Income tax expense for the fiscal year ended September 30, 1999, was $1,424,000,
a decrease of $595,000,  or 29.5%,  from the  comparable  period.  The Company's
effective tax rates for the fiscal year ended  September 30, 1999 and 1998, were
25.21%  and  34.21%,   respectively.   The  Company's   purchase  of  tax-exempt
securities,  primarily bank  qualified  municipals,  as well as the  non-taxable
increase in cash surrender  value of the COLI were the principal  causes for the
decline in both the effective tax rate and income tax expense.

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
$.95 and $.93  respectively  for the year ended September 30, 1998,  compared to
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

Net interest  income on a tax equivalent  basis for the year ended September 30,
1998, was $11.6 million, an increase of $184,000,  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 $1,343,000, 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 benefited 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

                                       21
<PAGE>
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 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  FHLB  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 4.00% for the year ended
September 30, 1998,  down 18 basis points  compared to 4.18% 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 4 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.

PROVISION FOR LOAN LOSSES

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  35.6%  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.

                                       22
<PAGE>
NON-INTEREST INCOME

Non-interest  income was $580,000  for the year ended  September  30,  1998,  an
increase of $98,000,  or 20.3%,  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 the cost of implementing an executive supplemental
retirement  plan.  Furthermore,  results for the fiscal year ended September 30,
1997,  benefited 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  $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 $453,000,  an increase of $55,000, or 13.8%, over the
$398,000 for fiscal 1997. The increases were principally volume related,  as the
Company's new branches  increased its customer base, as well as certain start-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.

                                       23
<PAGE>
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.

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 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 Company's primary sources of funds for operations are deposits,  borrowings,
principal and interest payments on loans,  mortgage-backed  securities and other
securities.   The  Company's  $165.8  million  securities   available  for  sale
portfolio,  which  represents  48.9% of  total  assets,  is  another  source  of
liquidity.

Net cash provided by operating  activities  was $5.4 million for the fiscal year
ended  September  30,  1999,  an increase of $2.0  million  from the  comparable
period. The increase was principally the change in other liabilities caused by a
decrease in official bank checks  outstanding  in the prior year.  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 1999.

Investing  activities  used $31.4 million in the fiscal year ended September 30,
1999, as the Company increased its assets  principally from the $13.3 million in
loan growth,  a $10.0 million  purchase of COLI, and a $6.5 million  increase in
the Company's securities portfolio. Financing activities provided $26.2 million,
as the Company experienced a $24.3 million increase in short-term borrowings,  a
$9.1 million  increase in deposits,  and a $1.8 million  increase in mortgagors'
escrow deposits,  somewhat offset by the cost to purchase treasury stock of $7.6
million and the payment of cash  dividends of $1.6 million 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 $219.1 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, 1999,  deposit  accounts  having  balances in
excess of $100,000 totaled $22.8 million, or 10.4%, 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% measured on a monthly  basis and for  September  1999,  the Bank far exceeded
that,  maintaining  an average  liquidity  ratio of 37.8%,  primarily due to the
large percentage of assets represented by AFS securities.

                                       24
<PAGE>
The Company  anticipates  that it will have sufficient funds to meet its current
commitments.  At September 30, 1999,  the Company had  commitments  to originate
mortgage loans of $4.6 million. In addition, the Company had undrawn commitments
of $3.9  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,
1999, totaled $77.1 million, and management believes,  based on past experience,
that a significant portion of such deposits will remain with the Company.

Although there are no minimum capital ratio  requirements  for the Company,  OTS
regulations require that the Bank maintain minimum regulatory capital ratios. As
of  September  30,  1999,  the Bank met all capital  adequacy  requirements  and
qualifies as a well-capitalized  institution under OTS regulations.  For further
information on regulatory capital including ratios, refer to Note 2 of the Notes
to Consolidated Financial Statements.

Beginning  on April 18,  1999,  the Company  was no longer  subject to any stock
repurchase  restrictions of the OTS and shortly thereafter announced a 10% share
repurchase  program for 436,034  shares.  From April 18 through August 10, 1999,
the Company  repurchased  those shares at a cost of $7.1 million,  or $16.29 per
common share. On August 18, 1999, the Company  announced an additional 10% share
repurchase  program for approximately  394,000 shares. As of September 30, 1999,
the Company had repurchased  30,000 shares under that program at an average cost
of $15.11 per share. At September 30, 1999, the Company had  approximately  $5.6
million in available  resources to pursue stock  repurchases  without  dividends
from  the  Bank.  Dividends  from  the  Bank are  permitted  without  notice  or
application to the OTS, under revised regulations  effective April of this year,
if total  dividends  for a year do not exceed  current  period  net income  plus
retained net income for the two previous  years and certain other  standards are
met.  Dividends  from the Bank to the Company  this  calendar  year to date have
already exceeded that level, and hence the Bank cannot pay additional  dividends
to the Company at this time without  prior OTS approval  other than a $1 million
dividend to be paid in December 1999, which the OTS has already approved.

YEAR 2000

The following  disclosure is a Year 2000  Readiness  Disclosure  and a Year 2000
Statement, as defined in the Year 2000 Information and Readiness Disclosure Act.
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 equipment provided by, vendors.

                                       25
<PAGE>
The  Company's  progress on its Year 2000  readiness is continuing as scheduled.
The Company has completed the testing of all of its mission critical systems. In
addition,  the  testing of other  customers  of the  Company's  data  processing
service provider, disclosed no Year 2000 issues,  consequently,  as of September
30,  1999,  all  production  systems  are  now  operating  in  a  Y2K  compliant
environment.  Furthermore,  since  substantially  all of the Company's loans are
residential  mortgages,  the ability of the  Company's  borrowers  to become Y2K
compliant is not expected to be a significant  concern.  The Company  expects to
continue to monitor all of its systems, and will test upgrades,  if any, for Y2K
compliance as well.

The  Company's  total Y2K project cost is  estimated  to be  $100,000,  of which
$50,000 is expected to be hardware  and software  upgrades.  So far, the Company
has expensed  approximately $36,000 of the project cost, and expects to amortize
the hardware  and software  upgrades,  which have already been  purchased,  over
their estimated useful lives of three to five years.

The Company  expects that when the century  changes,  disruption  in service may
come not from a failure of its systems or the systems of the providers with whom
it interfaces,  but possibly 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.

The Company has written a Disaster  Recovery Plan, a Year 2000 Contingency Plan,
and a Y2K Liquidity  Plan, all of which  management  expects to test through the
end of the year.  The Company is also  undertaking  various  customer  awareness
programs,  such as posted  statements,  mailing of FDIC brochures and publishing
information on its website.

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 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 1998, FASB issued SFAS No. 133,  "Accounting for Derivative  Instruments
and Hedging  Activities," which establishes  accounting and reporting  standards
for derivative instruments, including certain derivative instruments embedded in
other  contracts,  and for hedging  activities.  In May 1999, this Statement was
delayed  by the FASB;  consequently,  it will now be  effective  for all  fiscal
quarters of fiscal years beginning after June 15, 2000.  Management is currently
evaluating the impact of this Statement on the Company's  consolidated financial
statements.

                                       26
<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,  1999  and  1998,  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, 1999. 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, 1999 and 1998,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  September  30,  1999,  in  conformity  with  generally   accepted
accounting principles.



October 20, 1999
Albany, New York


                                       27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except for share amounts)

                                                                                September 30
                                                                         -------------------------
                                                                           1999            1998
                                                                         ---------       ---------
<S>                                                                      <C>             <C>
                          Assets

Cash and due from banks ...........................................      $   3,025       $   2,795
Securities available for sale, at fair value ......................        165,833         164,983
Investment securities held to maturity (estimated fair value of
    $2,106 at September 30, 1998) .................................           --             2,060
Federal Home Loan Bank of NY stock, at cost .......................          2,634           1,954
Loans receivable, net .............................................        150,821         137,785
Corporate-owned life insurance ....................................         10,381            --
Accrued interest receivable .......................................          2,576           2,398
Premises and equipment, net .......................................          3,297           2,522
Other real estate owned ...........................................           --                53
Other assets ......................................................            229             202
                                                                         ---------       ---------
              Total assets ........................................      $ 338,796       $ 314,752
                                                                         =========       =========

    Liabilities and Shareholders' Equity

Liabilities:
    Due to depositors:
    Non-interest bearing ..........................................      $   8,918       $   6,009
    Interest bearing ..............................................        210,146         203,968
                                                                         ---------       ---------
              Total deposits ......................................        219,064         209,977
    Short-term borrowings .........................................         31,100           6,840
    Long-term borrowings ..........................................         25,000          25,000
    Mortgagors' escrow deposits ...................................          2,449             673
    Other liabilities .............................................          1,971           4,431
                                                                         ---------       ---------
              Total liabilities ...................................        279,584         246,921
                                                                         ---------       ---------

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, 1999 and 1998 .....             57              57
    Additional paid-in capital ....................................         55,114          54,974
    Retained earnings, substantially restricted ...................         39,997          37,374
    Unallocated common stock held by ESOP .........................         (3,753)         (3,981)
    Unearned management recognition plan ..........................         (1,011)         (1,433)
    Treasury stock, at cost (1,778,342 shares at September 30, 1999
       and 1,328,416 shares at September 30, 1998) ................        (28,521)        (21,223)
    Accumulated other comprehensive
       income (loss) ..............................................         (2,671)          2,063
                                                                         ---------       ---------
              Total shareholders' equity ..........................         59,212          67,831
                                                                         ---------       ---------
              Total liabilities and shareholders' equity ..........      $ 338,796       $ 314,752
                                                                         =========       =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME

Years ended September 30, 1999, 1998 and 1997
(in thousands, except for per share amounts)

                                                           1999           1998           1997
                                                         --------       --------       --------
<S>                                                      <C>            <C>            <C>
Interest and dividend income:
    Loans .........................................      $ 11,213       $ 10,373       $ 10,113
    Securities available for sale:
       Taxable ....................................         7,991          9,347          8,747
       Non-taxable ................................         2,304          1,016             58
    Investment securities held to maturity ........            41            255            688
    Federal funds sold and other ..................             7              4            546
    Federal Home Loan Bank of NY stock ............           143            137             95
                                                         --------       --------       --------
       Total interest and dividend income .........        21,699         21,132         20,247

Interest expense:
    Deposits ......................................         8,570          8,905          8,652
    Short-term borrowings .........................           667            650            149
    Long-term borrowings ..........................         1,305            405           --
                                                         --------       --------       --------
       Total interest expense .....................        10,542          9,960          8,801
                                                         --------       --------       --------

       Net interest income ........................        11,157         11,172         11,446

Provision for loan losses .........................           190            189            300
                                                         --------       --------       --------
       Net interest income after provision for loan
       losses .....................................        10,967         10,983         11,146
                                                         --------       --------       --------
Non-interest income:
    Corporate-owned life insurance ................           381           --             --
    Recovery of Nationar loss contingency .........          --             --              100
    Service fees on deposit accounts ..............           369            294            243
    Net securities gains (losses) .................           (45)           143             19
    Other income ..................................           161            143            120
                                                         --------       --------       --------
       Total non-interest income ..................           866            580            482
                                                         --------       --------       --------

Non-interest expenses:
    Salaries and employee benefits ................         3,622          3,452          2,996
    Advertising and business promotion ............           129            126            200
    Net occupancy on premises .....................           425            354            329
    Federal deposit insurance premium .............            24             24             20
    Postage and supplies ..........................           332            297            239
    Data processing fees ..........................           541            453            398
    Equipment .....................................           167            173            177
    Professional fees .............................           284            232            262
    Other real estate expenses, net ...............            24            (57)           (54)
    Other .........................................           636            608            620
                                                         --------       --------       --------
       Total non-interest expense .................         6,184          5,662          5,187
                                                         --------       --------       --------
Income before taxes ...............................         5,649          5,901          6,441
Income tax expense ................................         1,424          2,019          2,534
                                                         --------       --------       --------
       Net income .................................      $  4,225       $  3,882       $  3,907
                                                         ========       ========       ========

Basic earnings per share ..........................      $   1.13       $    .95       $    .84
                                                         ========       ========       ========
Diluted earnings per share ........................      $   1.10       $    .93       $    .83
                                                         ========       ========       ========
</TABLE>

See accompanying notes to consolidated financial statements

                                       29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 1999, 1998 and 1997
(dollars in thousands, except for share and per share amounts)

                                                                                              Unallocated
                                                                                  Retained       common      Unearned
                                                                  Additional      earnings,      stock       management   Treasury
                                                        Common      paid-in     substantially     held      recognition    stock,
                                                        stock       capital      restricted     by ESOP        plan        at cost
                                                      ----------- ------------  -------------  ----------- -------------  ----------
<S>                                                   <C>         <C>           <C>            <C>         <C>            <C>
               Balance at September 30, 1996              57       54,864       $ 31,984       $ (4,436)         --       $    --
Comprehensive income:
     Net income                                           --           --          3,907             --          --            --
     Other comprehensive income, net of tax:
       Unrealized net gains on AFS securities
         (pre-tax $1,700)                                 --           --             --             --          --            --
       Reclassification adjustment for gains
         realized in Net income (pre-tax $19)
     Other comprehensive income

Comprehensive income

Dividends paid on common stock ($.21 per share)           --           --           (976)            --          --            --
Purchases of common stock (1,029,476 shares)              --           --             --             --          --         (15,305)
Allocation of ESOP stock (22,722 shares)                  --          115             --            227          --            --
Grant of restricted stock (181,232 shares)                --         (168)            --             --      (2,275)          2,443
Amortization of unearned MRP compensation                 --           --             --             --         419            --
                                                      ----------- ------------  -------------  ----------- -------------  ----------
               Balance at September 30, 1997              57       54,811         34,915       (4,209)       (1,856)       (12,862)
Comprehensive income:
     Net income                                           --           --          3,882           --            --          --
     Other comprehensive income, net of tax:
       Unrealized net gains on AFS securities
         (pre-tax $2,047)                                 --           --             --           --            --          --
       Reclassification adjustment for gains
         realized in net income (pre-tax $143)

     Other comprehensive income

Comprehensive income

Dividends paid on common stock ($.33 per share)           --           --         (1,394)          --            --          --
Purchases of common stock (486,573 shares)                --           --             --           --            --       (8,459)
Allocation of ESOP stock (22,747 shares)                  --          161             --          228            --          --
Grant of restricted stock  (2,000 shares)                 --            2             --           --           (33)         31
Exercise of stock options (4,401 shares issued, net)      --           --            (29)          --            --          67
Amortization of unearned MRP compensation                 --           --             --           --           456          --
                                                      ----------- ------------  -------------  ----------- -------------  ----------
               Balance at September 30, 1998         $    57       54,974         37,374       (3,981)       (1,433)      (21,223)

Comprehensive income:

     Net income                                           --           --          4,225           --            --          --
     Other comprehensive income, net of tax:
       Unrealized net losses on AFS securities
         (pre-tax $7,935)                                 --           --             --           --            --          --
       Reclassification adjustment for losses
         realized in net income (pre-tax $45)

     Other comprehensive loss

Comprehensive loss

Dividends paid on common stock ($.405 per share)          --           --         (1,551)          --            --          --
Purchases of common stock (466,034 shares)                --           --             --           --            --       (7,556)
Allocation of ESOP stock (22,755 shares)                  --          114             --          228            --          --
Grant of restricted stock (2,500 shares)                  --            1             --           --           (41)         40
Exercise of stock options (13,608 shares issued, net)     --           25            (51)          --            --         218
Amortization of unearned MRP compensation                 --           --             --           --           463          --
                                                      ----------- ------------  -------------  ----------- -------------  ----------
               Balance at September 30, 1999          $    57       55,114      $   39,997     $ (3,753)       (1,011)    $ (28,521)
                                                      =========== ============  =============  =========== =============  ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                         Accumulated
                                                            other
                                                        comprehensive   Comprehensive
                                                        income (loss)       income
                                                        --------------  ---------------
<S>                                                     <C>             <C>
               Balance at September 30, 1996            $       (88)
Comprehensive income:
     Net income                                                  --             $  3,907
     Other comprehensive income, net of tax:
       Unrealized net gains on AFS securities
         (pre-tax $1,700)                                                          1,020
       Reclassification adjustment for gains
         realized in Net income (pre-tax $19)                                        (11)
     Other comprehensive income                               1,009                1,009
                                                                          ===============
Comprehensive income                                                            $  4,916
                                                                          ===============
Dividends paid on common stock ($.21 per share)                  --
Purchases of common stock (1,029,476 shares)                     --
Allocation of ESOP stock (22,722 shares)                         --
Grant of restricted stock (181,232 shares)                       --
Amortization of unearned MRP compensation                        --
                                                        --------------  ---------------
               Balance at September 30, 1997                  921
Comprehensive income:
     Net income                                                --             $  3,882
     Other comprehensive income, net of tax:
       Unrealized net gains on AFS securities
         (pre-tax $2,047)                                                        1,228
       Reclassification adjustment for gains
         realized in net income (pre-tax $143)                                     (86)
                                                                        ---------------
     Other comprehensive income                             1,142                1,142
                                                                        ===============
Comprehensive income                                                          $  5,024
                                                                        ===============
Dividends paid on common stock ($.33 per share)                --
Purchases of common stock (486,573 shares)                     --
Allocation of ESOP stock (22,747 shares)                       --
Grant of restricted stock  (2,000 shares)                      --
Exercise of stock options (4,401 shares issued, net)           --
Amortization of unearned MRP compensation                      --
                                                        --------------  ---------------
               Balance at September 30, 1998         $      2,063

Comprehensive income:

     Net income                                                --             $  4,225
     Other comprehensive income, net of tax:
       Unrealized net losses on AFS securities
         (pre-tax $7,935)                                                      (4,761)
       Reclassification adjustment for losses
         realized in net income (pre-tax $45)                                      27
                                                                        ---------------
     Other comprehensive loss                              (4,734)             (4,734)
                                                                        ===============
Comprehensive loss                                                            $  (509)
                                                                        ===============
Dividends paid on common stock ($.405 per share)               --
Purchases of common stock (466,034 shares)                     --
Allocation of ESOP stock (22,755 shares)                       --
Grant of restricted stock (2,500 shares)                       --
Exercise of stock options (13,608 shares issued, net)          --
Amortization of unearned MRP compensation                      --
                                                        --------------
               Balance at September 30, 1999            $    (2,671)
                                                        ==============
</TABLE>

See accompanying notes to financial statements.

                                       30
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended September 30, 1999, 1998 and 1997 (in thousands)

                                                                         1999              1998               1997
                                                                      ---------       ---------       ---------
<S>                                                                   <C>             <C>             <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
   Net income ..................................................      $   4,225       $   3,882       $   3,907
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Depreciation ............................................            214             222             183
       Provision for loan losses ...............................            190             189             300
       Recovery of Nationar loss contingency ...................           --              --              (100)
       MRP compensation expense ................................            463             456             419
       ESOP compensation expense ...............................            342             389             342
       Increase in cash surrender value on COLI ................           (381)           --              --
       Losses (gains) on sale of other real estate owned .......             20             (70)           (140)
       Losses (gains) on sales and calls of securities .........             45            (143)            (19)
       Net accretion on securities .............................           (226)            (43)           (157)
       Deferred tax benefit ....................................           (237)           (188)           (156)
       Collection of deposits held at Nationar .................           --              --               183
       Net increase in other assets ............................           (205)           (138)           (551)
       Net increase (decrease) in other liabilities ............            933          (1,154)          1,502
                                                                      ---------       ---------       ---------
             Net cash provided by operating activities .........          5,383           3,402           5,713
                                                                      ---------       ---------       ---------
Cash flows from investing activities:
   Proceeds from maturity, paydowns, and
       calls of investment securities held to maturity .........          2,065           6,007          11,023
   Proceeds from maturity, paydowns, and calls of AFS securities         43,895          50,728          64,415
   Proceeds from sales of AFS securities .......................         11,348          15,446           5,959
   Purchase of corporate-owned life insurance ..................        (10,000)           --              --
   Purchase of Federal Home Loan Bank stock ....................           (680)           (192)           (603)
   Purchase of AFS securities ..................................        (63,807)        (80,966)       (119,590)
   Net increase in loans .......................................        (13,258)        (13,889)         (2,642)
   Capital expenditures, net ...................................           (989)           (377)           (664)
   Proceeds from sale of other real estate owned ...............             65             517             787
                                                                      ---------       ---------       ---------
             Net cash used by investing activities .............        (31,361)        (22,726)        (41,315)
                                                                      ---------       ---------       ---------
Cash flows from financing activities:
   Net increase in deposits ....................................          9,087           9,065           4,159
   Increase (decrease) mortgagors' escrow deposits .............          1,776             140          (1,099)
   Cash dividends paid on common stock .........................         (1,551)         (1,394)           (976)
   Proceeds from the exercise of stock options .................            192              38            --
   Purchase of common stock for treasury .......................         (7,556)         (8,459)        (15,305)
   Net increase (decrease) in short-term borrowings ............         24,260          (4,545)         11,385
   Increase in long-term borrowings ............................           --            25,000            --
                                                                      ---------       ---------       ---------
            Net cash (used) provided by financing activities ...         26,208          19,845          (1,836)
                                                                      ---------       ---------       ---------
Net increase (decrease) in cash and cash equivalents ...........            230             521         (37,438)
Cash and cash equivalents at beginning of year .................          2,795           2,274          39,712
                                                                      ---------       ---------       ---------
Cash and cash equivalents at end of year .......................      $   3,025       $   2,795       $   2,274
                                                                      =========       =========       =========
Supplemental cash flow information:
            Interest paid ......................................      $  10,491       $   9,731       $   8,800
            Income taxes paid ..................................          1,574           2,062           2,770
Non-cash investing activities:
   Transfer of loans to other real estate owned ................      $      32       $     252       $     538
   Change in net unrealized gain (loss) on AFS securities,
       net of deferred tax expense (benefit) of ($3,156)
       $761 and $673, respectively .............................      $  (4,734)          1,142           1,009
</TABLE>

See accompanying notes to consolidated financial statements.

                                       31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

NOTE 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:

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.

Use of Estimates

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.

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 and other real estate  owned,  if any. 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.

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 in shareholders' equity
as a component of accumulated other  comprehensive  income, net of income taxes.
the Company does not maintain a trading portfolio.

                                       32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

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, the Federal Home Loan Mortgage Corporation, or the Federal
National  Mortgage  Association,  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.

Cash Surrender Value of Life Insurance

The Company  maintains  life  insurance  contracts on  substantially  all of its
employees and directors. The Company is the beneficiary of the policies and pays
all the costs  related  thereto.  The cash  surrender  value on the  policies is
recorded  as an asset on the  Company's  consolidated  statements  of  financial
condition.  Increases  in cash  surrender  value,  representing  the  investment
performance on the assets in the  underlying  insurance  contract,  net of asset
based  charges  and  related   insurance   premium  costs,  is  shown  as  other
non-interest income.

Loans Receivable, Net

A significant portion of the Company's loans is secured by real estate in Greene
and Albany Counties 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.

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

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 in the process
of collection. 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 and there has been a period of
payment performance. Amortization of related deferred fees or costs is suspended
when a loan is placed on non-accrual status.

                                       33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

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 economic conditions.  The
allowance is increased by provisions for loan losses charged to operations.

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.  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 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.

Other Real Estate Owned

Other  real  estate  owned  includes  assets   received  from   foreclosure  and
in-substance  foreclosures.  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.

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.

The  Company  had no other real  estate  owned at  September  30,  1999,  and at
September 30, 1998,  other real estate owned consisted  primarily of residential
one to four family properties.  The Company had no in-substance  foreclosures at
September 30, 1999 and 1998.

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 10  years  for
furniture, fixtures and office equipment.

                                       34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

Income Taxes

Income taxes are provided on income reported in the  consolidated  statements of
income regardless of when such taxes are payable. The Company utilizes the asset
and  liability  method  of  accounting  for  income  taxes.  Under the asset and
liability  method,  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.  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.

Pension Plan

The Company has a defined  benefit pension plan covering all full time employees
meeting age and service  requirements.  The plan is accounted  for in accordance
with SFAS No. 87 "Employers Accounting for Pensions." In February 1998, the FASB
issued  SFAS  No.  132,   "Employers'   Disclosures   About  Pension  and  Other
Post-retirement  Benefits." SFAS No. 132 only addresses  disclosure and does not
change any of the measurement or recognition provisions provided for in SFAS No.
87.  The  Company  adopted  SFAS No.  132 in  fiscal  1999,  and  prior  periods
disclosures were revised accordingly.

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.

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.

Stock Based Compensation Plans

Compensation  expense in connection with the Company's  Employee Stock Ownership
Plan ("ESOP") is recorded based on average market value of the Company's  common
stock and the number of shares allocated and released.

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.

                                       35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

Segment Information

During  fiscal  1999,  the  Company  adopted  SFAS No. 131,  "Disclosures  about
Segments of an Enterprise and Related Information." SFAS No. 131 requires public
companies   to  report   certain   financial   information   about   significant
revenue-producing  segments  of the  business  for  which  such  information  is
available  and  utilized  by  the  chief  operating   decision-maker.   Specific
information to be reported for individual  operating segments includes a measure
of profit and loss,  certain revenue and expense items,  and total assets.  As a
community-oriented  financial  institution,  substantially  all of the Company's
operations  involve  the  delivery of loan and  deposit  products to  customers.
Management  makes  operating  decisions  and  assesses  performance  based on an
ongoing  review of these  community  banking  operations,  which  constitute the
Company's only operating segment for financial reporting.

Comprehensive Income

The Company  adopted SFAS No. 130,  "Reporting  Comprehensive  Income" in fiscal
1999. All comparative financial statements have been reclassified to reflect the
provisions of this statement.  Comprehensive  income includes net income and all
other items that are currently accounted for as direct entries to equity,  which
for the Company represents the mark to market adjustment on securities available
for  sale.  The  Company  has  reported  comprehensive  income  (loss)  and  its
components in the  consolidated  statement of changes in  shareholders'  equity.
Comprehensive  income (loss) and accumulated other  comprehensive  income (loss)
are reported net of related income taxes. Accumulated other comprehensive income
(loss)  for the  Company  consists  solely  of  unrealized  gains or  losses  on
available for sale securities.

Earnings per Share

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.  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.

Reclassifications

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

NOTE 2 REGULATORY MATTERS

Regulatory Capital

The  Company is subject to various  regulatory  capital  regulations.  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  banks  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%.

                                       36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

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, 1999 and 1998, 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.

The following is a summary of the Bank's actual capital amounts and ratios as of
September 30, 1999 and 1998,  compared to the minimum  capital  adequacy and the
requirements for classification as a well-capitalized institution.  Although the
OTS  does  not  have  a  holding  company  capital  requirement,  the  Company's
consolidated capital amounts and ratios are also presented.
<TABLE>
<CAPTION>
                                                                              1999
                                         -------------------------------------------------------------------------
                                                                       Minimum capital          For classification
                                                  Actual                  adequacy            as well capitalized
                                         ---------------------        ------------------      --------------------
                                            Amount       Ratio        Amount       Ratio        Amount       Ratio
                                            ------       -----        ------       -----        ------       -----
              Bank                                            (dollars in thousands)
<S>                                      <C>            <C>         <C>            <C>        <C>           <C>
              Tier 1 (core) capital      $   51,892     15.18%      $  13,669      4.00%      $   17,087     5.00%
              Tier 1 risk-based capital      51,892     30.52           6,802      4.00           10,202     6.00
              Total risk-based capital       53,985     31.75          13,603      8.00           17,004    10.00

<CAPTION>
                                                  Actual
                                            ------------------
                                            Amount       Ratio
                                            ------       -----
              Consolidated
<S>                                      <C>            <C>
              Tier 1 (core) capital      $   61,883     17.89%
              Tier 1 risk-based capital      61,883     35.51
              Total risk-based capital       63,976     36.71

<CAPTION>
                                                                              1998
                                         -------------------------------------------------------------------------
                                                                       Minimum capital          For classification
                                                  Actual                  adequacy            as well capitalized
                                         ---------------------        ------------------      --------------------
                                            Amount       Ratio        Amount       Ratio        Amount       Ratio
                                            ------       -----        ------       -----        ------       -----
              Bank                                            (dollars in thousands)
<S>                                      <C>            <C>         <C>            <C>        <C>           <C>
              Tier 1 (core) capital      $   58,286     18.79%      $  12,408      4.00%      $   15,511     5.00%
              Tier 1 risk-based capital      58,286     48.67           4,791      4.00            7,186     6.00
              Total risk-based capital       59,713     49.86           9,581      8.00           11,977    10.00

<CAPTION>
                                                  Actual
                                            ------------------
                                            Amount       Ratio
                                            ------       -----
              Consolidated
<S>                                      <C>            <C>
              Tier 1 (core) capital      $   65,768     21.13%
              Tier 1 risk-based capital      65,768     53.54
              Total risk-based capital       67,185     54.69
</TABLE>

                                       37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

Liquidation Account

In accordance with regulatory  requirements,  the Bank established a liquidation
account  at the time of its  conversion  to stock  form,  in the amount of $28.7
million,  representing  its total equity at September 30, 1995. The  liquidation
account is maintained for the benefit of eligible  account  holders who continue
to maintain  their  accounts  at the Bank.  The  liquidation  account is reduced
annually  to the  extent  that  eligible  account  holders  have  reduced  their
qualifying deposits as of each anniversary date.  Subsequent  increases will not
restore an eligible account holder's interest in the liquidation account. In the
unlikely  event of a complete  liquidation  of the Bank,  each eligible  account
holder will be entitled to receive a distribution  from the liquidation  account
in the amount  proportionate  to the current  adjusted  qualifying  balances for
accounts then held.

Capital Distributions

Under OTS regulations which became effective April 1, 1999, savings associations
such as the Bank  generally  may declare  annual cash  dividends up to an amount
equal to net  income  of the  current  year plus  retained  net  income  for the
preceding  two years.  Dividends in excess of such amount  require OTS approval.
The Bank paid $11.0 million and $5.0 million of dividends to the Parent  Company
during fiscal 1999 and 1998,  respectively.  No dividends  were paid by the Bank
during fiscal 1997.

NOTE 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>
                                                       1999            1998            1997
                                                    ----------      ----------      ----------
                                                  (In thousands, except share and per share data)
<S>                                                 <C>             <C>             <C>
Net income ...................................      $    4,225      $    3,882      $    3,907
                                                    ==========      ==========      ==========

Weighted average common shares ...............       3,752,448       4,066,971       4,629,697

Dilutive effect of potential common shares
     related to stock based compensation plans          76,861         120,762          71,731
                                                    ----------      ----------      ----------
Weighted average common shares including
     potential dilution ......................       3,829,309       4,187,733       4,701,428
                                                    ==========      ==========      ==========

Basic earnings per share .....................      $     1.13      $      .95      $      .84

Diluted earnings per share ...................      $     1.10      $      .93      $      .83
</TABLE>

NOTE 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   $643,000  and   $493,000  at   September   30,  1999  and  1998,
respectively.

                                       38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

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.

NOTE 5 SECURITIES AVAILABLE FOR SALE

The amortized cost and the related estimated fair values of securities available
for sale at September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
                                                        1999
                                 ----------------------------------------------------
                                                 Gross         Gross        Estimated
                                 Amortized     unrealized    unrealized        fair
(in thousands)                      Cost          gains        losses          value
                                  --------      --------      --------       --------
<S>                               <C>           <C>           <C>            <C>
U.S. Government and agencies      $  7,987      $     38      $    (34)      $  7,991
Mortgage-backed securities .        71,518           317          (561)        71,274
Corporate bonds ............        34,895            43        (1,176)        33,762
Obligations of states and
  political subdivisions ...        53,354             3        (3,144)        50,213
Equity securities ..........         2,532           118           (57)         2,593
                                  --------      --------      --------       --------
  Total securities
    available for sale .....      $170,286      $    519      $ (4,972)      $165,833
                                  ========      ========      ========       ========
<CAPTION>
                                                        1998
                                 ----------------------------------------------------
                                                 Gross         Gross        Estimated
                                 Amortized     unrealized    unrealized        fair
(in thousands)                      Cost          gains        losses          value
                                  --------      --------      --------       --------
<S>                               <C>           <C>           <C>            <C>
U.S. Government and 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
Equity securities ..........         2,242           202          --            2,444
                                  --------      --------      --------       --------
  Total securities
    available for sale .....      $161,546      $  3,774      $   (337)      $164,983
                                  ========      ========      ========       ========
</TABLE>

During the years ended September 30, 1999, 1998 and 1997, proceeds from sales of
securities available for sale were $11.3, $15.4 and $6.0 million,  respectively.
Gross gains realized on these transactions were approximately $85 thousand, $150
thousand and $19 thousand,  respectively.  There were gross  realized  losses of
$130  thousand  and $7  thousand in 1999 and 1998,  respectively.  There were no
gross realized losses in 1997.

                                       39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

The amortized cost and estimated fair value of securities  available for sale at
September 30, 1999, by contractual  maturity,  are shown below (mortgage  backed
securities are included by final contractual  maturity).  Actual 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>
                                                           September 30, 1999
                                                        -------------------------
                                                        Amortized       Estimated
                                                          Cost         fair value
                                                        --------        --------
                                                            (in thousands)
<S>                                                     <C>             <C>
Due within one year ............................        $   --          $   --
Due one year to five years .....................           7,203           7,113
Due five years to ten years ....................          22,840          22,484
Due after ten years ............................         140,243         136,236
                                                        --------        --------
     Total securities available for sale .......        $170,286        $165,833
                                                        ========        ========
</TABLE>

NOTE 6 INVESTMENT SECURITIES HELD TO MATURITY

The following  table shows the  amortized  cost and the related  estimated  fair
value of  investment  securities  held to maturity at September  30,  1998.  The
Company had no securities held to maturity at September 30, 1999.
<TABLE>
<CAPTION>
                                                                1998
                                           ---------------------------------------------
                                                         Gross       Gross     Estimated
                                           Amortized   unrealized  unrealized   fair
                                             Cost       gains       losses      value
                                            ------      ------      ------      ------
                                                          (in thousands)
<S>                                         <C>         <C>         <C>         <C>
U.S. Government agencies .............      $1,964      $   46      $ --        $2,010
Mortgage-backed securities ...........          96        --          --            96
                                            ------      ------      ------      ------
Total investment securities ..........      $2,060      $   46      $ --        $2,106
                                            ======      ======      ======      ======
</TABLE>

There were no sales of investment  securities  held to maturity during the years
ended September 30, 1999, 1998 or 1997.

                                       40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

NOTE 7 LOANS RECEIVABLE, NET

Loans receivable consist of the following at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
                                                              September 30,
                                                        ------------------------
                                                          1999            1998
                                                        --------        --------
                                                             (in thousands)
<S>                                                     <C>             <C>
Loans secured by real estate:
     Conventional one- to four-family ..........        $121,151        $113,423
     Commercial and multi-family ...............           7,940           6,389
     Construction ..............................           3,176           1,182
                                                        --------        --------
         Total loans secured by real estate ....         132,267         120,994
                                                        --------        --------

Commercial loans ...............................             994             602
                                                        --------        --------
Consumer loans:
     Student loans .............................           2,707           2,795
     Automobile loans ..........................           7,947           6,301
     Secured/unsecured .........................           3,783           3,339
     Mobile home ...............................             367             535
     Passbook loans ............................           1,043           1,091
     Home improvement ..........................             818             848
     Home equity-lines of credit ...............           3,064           3,490
                                                        --------        --------
         Total consumer loans ..................          19,729          18,399
                                                        --------        --------
Total loans ....................................        $152,990        $139,995
         Less:
            Net deferred loan fees .............              76             260
            Allowance for loan losses ..........           2,093           1,950
                                                        --------        --------
                                                           2,169           2,210
                                                        --------        --------
Loan receivable, net ...........................        $150,821        $137,785
                                                        ========        ========
</TABLE>
<PAGE>
Activity in the allowance for loan losses is summarized as follows for the years
ended:
<TABLE>
<CAPTION>
                                                        September 30,
                                            -----------------------------------
                                              1999          1998          1997
                                            -------       -------       -------
                                                      (in thousands)
<S>                                         <C>           <C>           <C>
Balance at beginning of period .......      $ 1,950       $ 1,889       $ 1,833
Provision charged to operations ......          190           189           300
Charge-offs ..........................          (95)         (148)         (282)
Recoveries ...........................           48            20            38
                                            -------       -------       -------
Balance at end of period .............      $ 2,093       $ 1,950       $ 1,889
                                            =======       =======       =======
</TABLE>

The following  table sets forth the  information  with regard to  non-performing
loans:
<TABLE>
<CAPTION>
                                                              September 30,
                                                      --------------------------
                                                      1999       1998       1997
                                                      ----       ----       ----
                                                            (in thousands)
<S>                                                   <C>        <C>        <C>
Loans in a non-accrual status .................       $396       $520       $780
Loans past due 90 days and still accruing .....        148         71        137
Restructured loans ............................        --         --         --
                                                      ----       ----       ----
     Total non-performing loans ...............       $544       $591       $917
                                                      ====       ====       ====
</TABLE>

                                       41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

For the years ended  September  30, 1999,  1998 and 1997,  interest  income that
would have been recorded on  non-performing  loans had they remained  performing
amounted  to  approximately  $31  thousand,   $28  thousand  and  $50  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  shareholders'  equity at September 30, 1999
and 1998.

As of September  30, 1999 and 1998,  there was no recorded  investment  in loans
that were  considered to be impaired under SFAS No. 114.  During 1999,  1998 and
1997,  the  average  balance of  impaired  loans was  approximately  $0, $0, and
$3,000,  respectively.  There was no interest  income recorded on impaired loans
during fiscal 1999, 1998 or 1997.

NOTE 8 ACCRUED INTEREST RECEIVABLE

Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
                                                              September 30,
                                                        ------------------------
                                                         1999              1998
                                                        ------            ------
                                                             (in thousands)

<S>                                                     <C>               <C>
Investment securities ......................            $ --              $   21
Securities available for sale ..............             1,664             1,521
Loans ......................................               912               856
                                                        ------            ------
                                                        $2,576            $2,398
                                                        ======            ======
</TABLE>

NOTE 9 PREMISES AND EQUIPMENT, NET

A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
                                                               September 30,
                                                           1999            1998
                                                          ------          ------
                                                              (in thousands)
<S>                                                       <C>             <C>
Banking house and land .........................          $3,334          $2,580
Furniture, fixtures and equipment ..............             760             817
                                                          ------          ------

                                                           4,094           3,397
Less accumulated depreciation ..................             797             875
                                                          ------          ------
     Premises and equipment, net ...............          $3,297          $2,522
                                                          ======          ======
</TABLE>

Amounts charged to depreciation  expense were approximately $214 thousand,  $222
thousand and $183  thousand,  for the years ended  September 30, 1999,  1998 and
1997, respectively.


                                       42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

NOTE 10  DUE TO DEPOSITORS

Due to depositors are summarized as follows as of September 30, 1999 and 1998:
<TABLE>
<CAPTION>
                                                             September 30,
                                                      --------------------------
                                                        1999               1998
                                                      --------          --------
                                                            (in thousands)
<S>                                                   <C>               <C>
Savings accounts ...........................          $ 81,894          $ 78,075
Certificates of deposit ....................           106,984           107,548
Money market accounts ......................             6,435             5,949
NOW accounts ...............................            14,833            12,396
Non-interest bearing accounts ..............             8,918             6,009
                                                      --------          --------

     Total deposits ........................          $219,064          $209,977
                                                      ========          ========
</TABLE>

The approximate amounts of contractual maturities of certificates of deposit for
the years subsequent to September 30, 1999 are as follows:

                                          (in thousands)
     Years ended September 30,
                2000                         $ 77,067
                2001                           19,417
                2002                            6,542
                2003                            1,737
                2004                            1,877
                Thereafter                        344
                                             --------
                                             $106,984
                                             ========

The aggregate amount of time deposit accounts with a balance of $100,000 or more
(not federally  insured beyond  $100,000) were  approximately  $12.5 million and
$12.3 million at September 30, 1999 and 1998, respectively.

Interest expense on deposits and mortgagors' escrow deposits for the years ended
September 30, 1999, 1998 and 1997, is summarized as follows:
<TABLE>
<CAPTION>
                                                         September 30,
                                              ----------------------------------
                                               1999          1998          1997
                                              ------        ------        ------
                                                       (in thousands)
<S>                                           <C>           <C>           <C>
Savings ..............................        $2,428        $2,620        $2,821
Certificates of deposit ..............         5,611         5,768         5,309
Money market .........................           191           198           242
NOW ..................................           276           268           237
Mortgagors' escrow deposits ..........            64            51            43
                                              ------        ------        ------
       Total interest expense ........        $8,570        $8,905        $8,652
                                              ======        ======        ======
</TABLE>

                                       43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

NOTE 11  INCOME TAXES

The  components  of income  tax  expense  are as  follows  for the  years  ended
September 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
                                                        September 30,
                                            -----------------------------------
                                              1999         1998          1997
                                            -------       -------       -------
                                                      (in thousands)
<S>                                         <C>           <C>           <C>
         Current tax expense:
              Federal ................      $ 1,210       $ 1,720       $ 2,111
              State ..................          451           487           579
                                            -------       -------       -------
                                              1,661         2,207         2,690
         Deferred tax benefit ........         (237)         (188)         (156)
                                            -------       -------       -------
              Total income tax expense      $ 1,424       $ 2,019       $ 2,534
                                            =======       =======       =======
</TABLE>

Actual tax expense for the years ended September 30, 1999, 1998 and 1997 differs
from expected tax expense,  computed by applying the Federal corporate statutory
tax rate of 34% to income before taxes is as follows:
<TABLE>
<CAPTION>
                                                                    September 30,
                                             1999                       1998                    1997
                                    ---------------------       ---------------------   ----------------------
                                                 % Pretax                  % Pretax                  % Pretax
                                      Amount      income         Amount     income       Amount       income
                                      ------      ------         ------     ------       ------       ------
                                                                   (in thousands)
<S>                              <C>              <C>         <C>           <C>        <C>             <C>
Expected federal tax expense     $     1,921       34.0%      $    2,006     34.0%     $    2,190       34.0%
State taxes, net of federal
     income tax benefit                  336        5.9              351      5.9             380        5.9
Tax-exempt interest income              (670)     (11.9)            (289)     (4.9)           -           -
Corporate-owned life insurance          (152)      (2.7)               -        -               -         -

Other items, net                         (11)       (.1)             (49)      (.8)           (36)       (.6)
                                   ----------    ------         --------    ------       ---------    -------
                                 $     1,424       25.2%      $    2,019      34.2%    $    2,534       39.3%
                                   =========     ======         ========    ======       ========     ======
</TABLE>

                                       44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

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>
                                                      1999        1998
                                                     ------      ------
                                                       (in thousands)
<S>                                                  <C>         <C>
Deferred tax assets:
    Allowance for loan losses .................      $  601      $  447
    Post-retirement benefits ..................         264         240
    Nonqualified deferred compensation ........         210         142
    Loan accounting differences ...............          54          78
    MRP compensation expense ..................         181         184
    Other items ...............................          33          25
                                                     ------      ------
           Total deferred tax assets ..........       1,343       1,116
    Valuation reserve .........................         150         150
                                                     ------      ------
    Deferred tax asset net of valuation reserve       1,193         966
                                                     ------      ------
Deferred tax liabilities:
    Bond accretion ............................          27          57
    Prepaid pension ...........................          29          40
    Other items ...............................         133         102
                                                     ------      ------
           Total deferred tax liabilities .....         189         199
                                                     ------      ------

    Net deferred tax assets at end of year ....       1,004         767
    Net deferred tax asset at beginning of year         767         579
                                                     ------      ------
    Deferred tax benefit for year .............      $  237      $  188
                                                     ======      ======
</TABLE>

In addition to the deferred tax amounts  described  above,  the Company also had
deferred tax asset of approximately $1,781 thousand and a deferred tax liability
of $1,374 thousand at September 30, 1999 and 1998,  respectively  related to the
net unrealized gains and losses on securities available for sale.

The valuation  allowance for deferred tax assets at September 30, 1999 and 1998,
was $150 thousand.  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.  Any changes in the deferred tax
asset valuation allowance are based upon the Company's continuing  evaluation of
the level of such allowance 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.

                                       45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

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,  1999,  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, 1999, with
respect to the Federal and state  base-year  reserves  were  approximately  $1.2
million and $446 thousand (net of Federal benefit), respectively.

NOTE 12  EMPLOYEE BENEFIT PLANS

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 one
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 changes in the pension benefit obligation for
the years ended September 30:
<TABLE>
<CAPTION>
                                                       1999              1998
                                                      -------           -------
                                                           (in thousands)
<S>                                                   <C>               <C>
Obligation at beginning of year ............          $ 3,638           $ 3,041
    Service cost ...........................              119                96
    Interest cost ..........................              238               230
    Actuarial (gain) loss ..................             (385)              374
    Benefits paid ..........................             (111)             (103)
                                                      -------           -------
Obligation at end of year ..................          $ 3,499           $ 3,638
                                                      =======           =======
</TABLE>

                                       46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

Changes in the fair value of plan assets for the years ended September 30:
<TABLE>
<CAPTION>
                                                        1999              1998
                                                      -------           -------
                                                           (in thousands)
<S>                                                   <C>               <C>
Fair value at beginning of year ............          $ 4,153           $ 4,263
    Actual return on plan assets ...........              734                (7)
    Employer contributions .................             --                --
    Benefits paid ..........................             (111)             (103)
                                                      -------           -------
Fair value at end of year ..................          $ 4,776           $ 4,153
                                                      =======           =======
</TABLE>

The  reconciliation  of the  funded  status  of  the  plan  to the  consolidated
statements of financial condition as of September 30, is as follows:
<TABLE>
<CAPTION>
                                                         1999             1998
                                                       -------          -------
                                                            (in thousands)
<S>                                                    <C>              <C>
Funded status at beginning of year ...........         $ 1,277          $   515
    Unrecognized transition asset ............             (26)             (43)
    Unrecognized net gain ....................          (1,074)            (283)
    Unrecognized prior service cost ..........              43               56
                                                       -------          -------
Prepaid pension cost at end of year ..........         $   220          $   245
                                                       =======          =======
</TABLE>

Components of net periodic  pension cost (credit) for the years ended  September
30, is as follows:
<TABLE>
<CAPTION>
                                                 1999         1998         1997
                                                -----        -----        -----
                                                       (in thousands)
<S>                                             <C>          <C>          <C>
Service cost ............................       $ 119        $  96        $  83
Interest cost ...........................         238          230          214
Expected return on plan assets ..........        (328)        (337)        (283)
Amortization of net transition asset ....         (17)         (17)         (17)
Amortization of past service costs ......          13           13           13
Amortization of net gains ...............        --            (56)         (25)
                                                -----        -----        -----
Net periodic pension cost (credit) ......       $  25        $ (71)       $ (15)
                                                =====        =====        =====
</TABLE>

Significant  assumptions used in determining the actuarial  present value of the
projected benefit obligation at September 30 are as follows:
<TABLE>
<CAPTION>
                                                    1999         1998         1997
                                                    ----         ----         ----
<S>                                                 <C>          <C>          <C>
Weighted average discount rate ..........           7.75%        6.75%        7.50%
Increase in future compensation .........           5.50%        4.50%        5.00%
Expected long-term rate of return .......           8.00%        8.00%        8.00%
</TABLE>

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 have worked 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 the years ended September 30, 1999, 1998
and 1997 was $48 thousand, $47 thousand, and $37 thousand, respectively.

                                       47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

Executive Supplemental Retirement Plan

During fiscal 1998,  the Company  adopted an Executive  Supplemental  Retirement
Plan for the Chief Executive Officer to restore benefits he would be due if they
were not limited under the Internal Revenue Code. An expense of $80 thousand and
$40 thousand was recorded in fiscal 1999 and 1998, respectively.

Post-retirement Benefits

The Company  provides  post-retirement  medical and life  insurance  benefits to
eligible retirees.  The plans are noncontributory except that most retirees 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).

Effective October 1, 1999, the Company ceased offering  post-retirement  medical
benefits  to  employees  hired  after  that  date.  In  addition,   the  Company
implemented a service based coverage  benefit of 3% per year of service,  with a
maximum service benefit of 90%. The Company also added an employer cap of $3,500
per participant.  Consequently,  as a result of these changes,  the employee now
pays at  least  10% of the  cost of  medical  coverage,  in  addition  to  being
responsible  for any costs over the cap. The impact of these  changes  decreased
the  accumulated  benefit  obligation by $202  thousand,  and the impact of this
unrecognized  service  credit will be amortized  beginning in fiscal 2000,  over
approximately 12 years.

The following table sets forth the changes in the pension benefit obligation for
the years ended September 30:
<TABLE>
<CAPTION>
                                                       1999              1998
                                                      -------           -------
                                                            (in thousands)
<S>                                                   <C>               <C>
Obligation at beginning of year ............          $   903           $ 1,179
    Service cost ...........................               18                52
    Interest cost ..........................               60                89
    Actuarial (gain) loss ..................             (107)             (377)
    Benefits paid ..........................              (43)              (40)
    Plan amendments ........................             (202)             --
                                                      -------           -------
Obligation at end of year ..................          $   629           $   903
                                                      =======           =======
</TABLE>

The  reconciliation  of the  funded  status  of  the  plan  to the  consolidated
statements of financial condition as of September 30 is as follows:
<TABLE>
<CAPTION>
                                                           1999            1998
                                                          -----           -----
                                                              (in thousands)
<S>                                                       <C>             <C>
Funded status at beginning of year .............          $(629)          $(903)
    Unrecognized transition obligation .........            849             903
    Unrecognized gains .........................           (630)           (556)
    Unrecognized past service credit ...........           (202)           --
                                                          -----           -----
Accrued post-retirement benefit cost ...........          $(612)          $(556)
                                                          =====           =====
</TABLE>

                                       48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

Net  periodic  post-retirement  benefit cost for the years ended  September  30,
1999, 1998 and 1997 include the following components:
<TABLE>
<CAPTION>
                                                1999          1998          1997
                                               -----         -----         -----
                                                        (in thousands)
<S>                                            <C>           <C>           <C>
Service cost ..........................        $  18         $  52         $  52

Interest cost .........................           60            89           103

Amortization of net transition
             obligation ...............           54            54            54
Amortization of net gains .............          (33)           (4)         --
                                               -----         -----         -----
Net periodic post-retirement
             benefit cost .............        $  99         $ 191         $ 209
                                               =====         =====         =====
</TABLE>

The discount rate used in determining  the accumulated  post-retirement  benefit
obligation was 7.75% and 6.75% at September 30, 1999 and 1998, respectively. For
measurement  purposes at  September  30, 1999, a 6.5% annual rate of increase in
the per capital  cost of covered  health care  benefits  was assumed for medical
coverage for fiscal 1999; the rate was assumed to decrease  gradually to 5.0% by
2003 and to remain at that level  thereafter.  The  health  care cost trend rate
assumption  has a significant  effect on the amounts  reported.  To  illustrate,
changing  the assumed  health care cost trend rates by one  percentage  point in
each year would  increase or decrease the  accumulated  post-retirement  benefit
obligation  as of September  30,  1999,  by  approximately  $13 thousand and $18
thousand,  respectively,  and the  aggregate  of the service and  interest  cost
components  of the net  periodic  post-retirement  benefit  cost would change by
approximately $14 thousand and $11 thousand.

NOTE 13  STOCK-BASED COMPENSATION PLANS

Employee Stock Ownership Plan

As part of the conversion  discussed in note 2, an employee stock ownership plan
was established to provide  substantially  all employees who are at least 21 and
have been  credited  with at least one year of service 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, 1999
and 1998, the loan had an outstanding  balance of $4.1 million and $4.2 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  $342
thousand, $389 thousand and $342 thousand, respectively, of compensation expense
under the ESOP during the years ended September 30, 1999, 1998 and 1997.

                                       49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

The ESOP shares as of September 30, 1999, were as follows:
<TABLE>
<CAPTION>
<S>                                                                <C>
Allocated shares                                                       79,598
Unallocated shares                                                    375,342
                                                                   ----------
         Total ESOP shares                                            454,940
                                                                   ----------
Market value of unallocated shares at September 30, 1999           $5,654,000
                                                                   ==========
</TABLE>

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.  Each of these  options has a ten-year term
and vest at a rate of 20% per year from their respective grant dates.

A summary of the status of the Company's  stock option plans as of September 30,
1999, and 1998 and changes during the year is presented below:
<TABLE>
<CAPTION>
                                                            1999                            1998
                                                ------------------------------   ----------------------------
                                                                      Weighted                       Weighted
                                                                       Average                        Average
                                                                      Exercise                       Exercise
                                                     Shares             Price          Shares          Price
                                                ---------------     ----------   --------------    ----------
<S>                                             <C>                 <C>          <C>               <C>
Options:
    Outstanding at beginning of year                    426,675     $   12.69          426,333     $     12.59
    Granted                                                   -          -               8,000           17.56
    Exercised                                           (14,466)        12.50           (7,658)          12.50
    Cancelled                                                 -          -                   -            -
                                                ---------------                  -------------
    Outstanding at year-end                             412,209         12.69          426,675     $       12.69
                                                ---------------                  -------------

    Exercisable at year-end                             150,002     $   12.66           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 (there were
no options granted in fiscal 1999):  dividend yield of 1.8%; expected volatility
of 25.0%; risk free interest rates of 5.72% for the April 21, 1998, grant; 6.25%
for the August 19,  1997,  grant and 6.50% for the October 24,  1996,  grant and
expected lives of 7 years. Based on the aforementioned assumptions,  the Company
has  estimated  that the fair value of the  options  granted in fiscal  1998 was
$5.64 and were $5.47 and $4.25 for the fiscal 1997 grants. Pro forma disclosures
for the Company for the years ending September 30, were as follows:

                                       50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                           1999            1998          1997
                                          ------          ------       ---------
                                           (in thousands except per share data)
<S>                                       <C>             <C>          <C>
Net income:
    As reported ................          $4,225          $3,882       $   3,907
    Pro forma ..................           3,934           3,596           3,614
Basic earnings per share:
    As reported ................          $ 1.13          $  .95       $     .84
    Pro forma ..................            1.05             .88             .79
Diluted earnings per share:
    As reported ................            1.10             .93             .83
    Pro forma ..................            1.05             .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.

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,  1999,  1998 and 1997,  grants of 2,500
shares,  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 $463,000, $456,000 and $419,000 was recorded in fiscal 1999, 1998 and
1997  respectively,  with the remaining  unearned  compensation  cost shown as a
reduction of shareholders' equity.

NOTE 14  COMMITMENTS AND CONTINGENT LIABILITIES

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.

                                       51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

Lease Commitments

The  Company  in fiscal  1998,  entered  into a  noncancelable  operating  lease
agreement for a branch  facility  which expires in 2013.  Rental expense for the
years ended  September  30, 1999 and 1998,  were $12  thousand  and $6 thousand,
respectfully.  A summary of the future  minimum  commitments  required under the
agreement for the years ending September 30, are as follows:

       Years                           Dollars in thousands
       -----                           --------------------
       2000                            $         14
       2001                                      19
       2002                                      21
       2003                                      21
       2004                                      21
       Thereafter                               193
                                         ---------------
                                       $        289
                                         ===============

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.

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.

                                       52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

Contract amounts of financial instruments that represent the future extension of
credit as of September 30, 1999 and 1998, at fixed and variable  interest  rates
are as follows:
<TABLE>
<CAPTION>
                                                          1999
                                        ----------------------------------------
                                        Fixed           Variable          Total
                                        ------           ------           ------
                                                     (in thousands)
<S>                                     <C>              <C>              <C>
Mortgages ...................           $4,345           $  254           $4,599
Consumer ....................             --               --               --
Lines of credit .............              840            1,077            1,917
Home Equity .................               50            1,898            1,948
                                        ------           ------           ------
                                        $5,235           $3,229           $8,464
                                        ======           ======           ======
<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
                                        ======           ======           ======
</TABLE>

The range of interest on fixed rate commitments was 6.75% to 18.00% at September
30, 1999,  and 6.50% to 18.00% at September  30, 1998.  The range of interest on
adjustable rate commitments was 6.98% to 11.00% at September 30, 1999, and 8.00%
to 11.50% at September 30, 1998, respectively.

NOTE 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 $31.4  million and $28.6 million as of September
30,  1999 and 1998,  respectively.  Borrowings  under the  overnight  program at
September  30, 1999 and 1998,  which are priced at the  federal  funds rate plus
10.0 basis points and 12.5 basis points,  were $21.1 million, at a rate of 5.73%
and $6.8 million at a rate of 6.00%, 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:
<TABLE>
<CAPTION>
                                                        1999             1998
                                                      -------           -------
                                                        (dollars in thousands)
<S>                                                   <C>               <C>
Maximum month-end balance ..................          $31,100           $14,245
Average balance ............................           12,962            11,317
Weighted average interest rate .............             5.15%             5.74%
</TABLE>


                                       53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

NOTE 16  LONG-TERM BORROWINGS

The  Company  uses  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%                    October 16, 1999
July 2, 2008                             5,000                   5.46%                    July 2, 2003
July 23, 2008                            5,000                   5.10%                    October 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  $27.9  million.  The  securities  used as collateral  for the
convertible  advances are being held in safekeeping at the FHLB,  except for the
borrowing  that matures on June 16, 2008,  which is held by First Union  Capital
Markets.

NOTE 17  FAIR VALUES

SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments," requires
that  the  Company  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:

                                       54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

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  detailed  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.

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, 1999 and 1998.  The fair value of
certificates  of deposits 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,  mortgagors'  escrow deposits,  short term  borrowings,  and accrued
interest payable.

                                       55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

Table of Financial Instruments

The carrying  values and estimated  fair values of financial  instruments  as of
September 30, were as follows:
<TABLE>
<CAPTION>
                                                        September 30, 1999                    September 30, 1998
                                                  -------------------------------      -------------------------------
                                                                      Estimated                            Estimated
                                                      Carrying          fair             Carrying            fair
                                                        Value           value              value             value
                                                        -----           -----              -----             -----
                                                                              (in thousands)
<S>                                               <C>                  <C>              <C>               <C>
Financial assets:
      Cash and cash equivalents                   $    3,025               3,025            2,795             2,795
      Securities available for sale                  165,833             165,833          164,983           164,983
      Investment securities held to maturity               -                   -            2,060             2,106
      Federal Home Loan Bank Stock                     2,634               2,634            1,954             1,954
      Loans                                          152,990             152,138          139,995           141,867
        Less:  Allowance for loan losses               2,093                   -            1,950                -
               Net deferred loan fees                     76                   -              260                -
                                                   ---------           ---------        ---------         ---------
                  Net loans                          150,821             152,138          137,785           141,867
                                                   ---------           ---------        ---------         ---------

      Accrued interest receivable                      2,576               2,576            2,398             2,398

Financial liabilities:
      Deposits:
         Demand, statement, passbook,
         money market, and NOW accounts              112,080             112,080          102,429           102,429
         Certificates of deposit                     106,984             106,425          107,548           108,562
      short-term borrowings                           31,100              31,100            6,840             6,840
      Long-term borrowings                            25,000              24,823           25,000            25,500
      Accrued interest payable                           339                 339              288               288
      Mortgagors' escrow deposits                      2,449               2,449              673               673
</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.

                                       56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

NOTE 18  CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
<TABLE>
<CAPTION>
                   Condensed Statement of Financial Condition
                        as of September 30, 1999 and 1998

                                                              1999         1998
                                                            -------      -------
                                                                (in thousands)
<S>                                                         <C>          <C>
                                    Assets
Cash and cash equivalents ............................      $ 1,574      $ 1,144
Securities available for sale ........................        4,043        1,884
ESOP loan receivable from subsidiary .................        4,094        4,231
Equity in net assets of subsidiary ...................       49,273       60,304
Other assets .........................................          505          477
                                                            -------      -------

         Total assets ................................      $59,489      $68,040
                                                            =======      =======

              Liabilities and Shareholders' Equity

Other liabilities ....................................      $   277      $   209
Total shareholders' equity ...........................       59,212       67,831
                                                            -------      -------

         Total liabilities and shareholders' equity ..      $59,489      $68,040
                                                            =======      =======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                         Condensed Statements of Income
              For the Years ended September 30, 1999, 1998 and 1997

                                                      1999           1998           1997
                                                    --------       --------       --------
                                                                (in thousands)
<S>                                                 <C>            <C>            <C>
Dividends from subsidiary ....................      $ 11,000       $  5,000       $   --
Net interest income ..........................           527            596            475
                                                    --------       --------       --------
                                                      11,527          5,596            475

Non interest expense .........................           319            298            223
                                                    --------       --------       --------

Income before income taxes and equity in
   undistributed earnings of subsidiary ......        11,208          5,298            252
                                                    --------       --------       --------
Income tax expense ...........................            62            142             61
                                                    --------       --------       --------
Income before equity in undistributed
   earnings of subsidiary ....................        11,146          5,156            191
Change in undistributed earnings of subsidiary        (6,921)        (1,274)         3,716
                                                    --------       --------       --------
Net income ...................................      $  4,225       $  3,882       $  3,907
                                                    ========       ========       ========
</TABLE>

                                       57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                            Statements of Cash Flows
              For the Years Ended September 30, 1999, 1998 and 1997

                                                            1999           1998           1997
                                                          --------       --------       --------
                                                                      (in thousands)
<S>                                                       <C>            <C>            <C>
Cash flows from operating activities:
   Net income ......................................      $  4,225       $  3,882       $  3,907
   Adjustment to reconcile net income to net
     cash provided by operating activities:
   Net (increase) decrease in undistributed
     earnings of subsidiary ........................         6,921          1,274         (3,716)
   Net accretion on securities .....................          --             --              (42)
   Gain on sales of securities .....................          --              (77)          --
   Increase (decrease) in deferred income taxes ....            39             24            (10)
   Net (increase) decrease in other assets .........           (36)            23            (57)
   Net increase (decrease) in other liabilities ....            94            128             (6)
                                                          --------       --------       --------
   Net cash provided by operating activities .......        11,243          5,254             76
                                                          --------       --------       --------

Cash flows from investing activities:
   Purchase of AFS securities ......................        (2,320)        (2,376)       (25,000)
   Proceeds from the maturity of AFS securities ....          --            1,000         43,045
   Proceeds from the sale of AFS securities ........          --            3,642           --
   Investment in subsidiary ........................          (161)          (140)           (93)
   Net decrease in ESOP loan receivable ............           137            128            120
                                                          --------       --------       --------
   Net cash provided by (used in) investing
Activities .........................................        (2,344)         2,254         18,072
                                                          --------       --------       --------

Cash flows from financing activities:
   Net proceeds from the exercise of stock options .           168             38           --
   Purchase of common stock for treasury ...........        (7,556)        (8,459)       (15,305)
   Proceeds received from subsidiary for issuance of
      vested MRP shares ............................           470            446           --
   Cash dividends on common stock ..................        (1,551)        (1,394)          (976)
                                                          --------       --------       --------
   Net cash used in financing activities ...........        (8,469)        (9,369)       (16,281)
                                                          --------       --------       --------
Net increase (decrease) in cash and
   cash equivalents ................................           430         (1,861)         1,867


Cash and cash equivalents:
   Beginning of period .............................         1,144          3,005          1,138
                                                          --------       --------       --------
   End of period ...................................      $  1,574       $  1,144       $  3,005
                                                          ========       ========       ========

Supplemental cash flow information:
   Cash paid during year for income taxes ..........      $     55            107             91

Non-cash investing activities:
   Change in net unrealized gain (loss)
      on AFS securities, net of change in
      deferred tax expense (benefit) of ($65),            $    (97)            45             18
      $17 and $12, respectively
</TABLE>

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

                                       58
<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 15, 2000 at the Bank's  office at 341 Main Street,  Catskill,
New York

Annual Report on Form 10-K

For the 1999 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 LLP
515 Broadway
Albany, New York 12207


Market Information for Common Stock

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

At December 1, 1999,  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.


1999               High              Low              Dividend
----               ----              ---              --------
First Quarter     $15.00            $11.25           $ .0925
Second Quarter    $15.75            $13.81           $ .0925
Third Quarter     $16.75            $14.06           $ .11
Fourth Quarter    $16.75            $14.13           $ .11

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              Dividend
----               ----              ---              --------
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.


                                       59