EXHIBIT 13

                        1999 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
-------------------------
       ANNUAL REPORT 1999

                                                      Hudson River Bancorp, Inc.

[Full page Picture depicting Hudson River Bank & Trust Co.]

<PAGE>

             Hudson River Bancorp, Inc.
=========================================
                    HUDSON AT A GLANCE

Hudson River Bank &Trust Company,  formerly the Hudson City Savings Institution,
has been in existence for almost a century and a half.  Established in 1850, the
Bank primarily served the community of Hudson, New York for its first 120 years.
Starting in 1970,  branches were opened in other locations  throughout  Columbia
County and the  neighboring  counties  of Albany,  Rensselaer,  Schenectady  and
Dutchess. In 1998, the Hudson City Savings Institution,  with the support of its
depositors,  converted from a New York State chartered  mutual savings bank to a
New York State chartered stock savings bank.

         At the same time, the name of the Bank was changed to Hudson River Bank
& Trust Company.  All of the stock of the bank was then acquired by Hudson River
Bancorp,  Inc.,  a holding  company  formed by the Bank in  connection  with its
conversion.

                                               [Graphic of Company Logo omitted]

For nearly 135 years the Bank used various  versions of a logo. It was not until
the late 1980's,  as the Bank continued to grow and expand that it was decided a
recognizable symbol was needed for the Bank.

In celebrating Hudson City Saving's Institution's 110th Anniversary, the history
of the Bank is referred to as the story of two  symbols.  One was the Half Moon,
the ship of Henry  Hudson.  It was symbolic of the  courageous  and  far-sighted
explorer,  whose name is forever commemorated by our beautiful city and majestic
river.  The other was the Bank,  which  was a living  symbol of the  growth  and
prosperity  of the Upper  Hudson  River  Valley and a reminder  of the faith and
confidence her people have placed in the future.

Drawing  from  this  analogy  an  updated  version  of the  ship,  encased  in a
medallion,  was  created.  Remaining  through the Bank's name change from Hudson
City Savings  Institution  to Hudson River Bank and Trust  Company,  the ship is
symbolic of the Bank's eloquent past while it sets sail into a promising future.

<PAGE>

                Hudson River Bancorp, Inc.
=========================================
                    FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>

(In thousands, except per share data)        March 31,             1999             1998
=========================================================================================
<S>                                                           <C>              <C>
For the Year Ended

Net income                                                    $   3,807        $   2,831
Basic earnings per share                                           0.17               --
Diluted earnings per share                                         0.17               --
=========================================================================================
At Year End

Total assets                                                  $ 881,139        $ 671,214
Loans receivable                                                578,099          506,978
Deposits                                                        591,814          588,314
Shareholders' equity                                            219,341           68,304
Book value at year end                                            14.02               --
=========================================================================================
Significant Ratios

Return on average assets                                           0.47%            0.43%
Return on average equity                                           2.05             4.18
Net interest margin                                                4.82             4.68
Net interest spread                                                3.63             4.11
Efficiency ratio                                                  51.12            57.25
=========================================================================================
Asset Quality Ratios

Non-performing loans to total loans                                1.72%            3.10%
Non-performing assets to total assets                              1.41             2.57
Allowance for loan losses to:
  Loans receivable                                                 2.47             1.62
  Non-performing loans                                           143.77            52.32
=========================================================================================
</TABLE>

CONTENTS

Hudson at a Glance                 Inside Front Cover

Letter to Shareholders             Page 2

Financial Section                  Page 8

Corporate Information              Inside Back Cover

[GRAPHIC -- 3 bar graphs  depicting Total Loans,  Net Interest Margin % and Non-
Performing Assets to Total Assets % omitted]

                                                                               1

<PAGE>
                Hudson River Bancorp, Inc.
=========================================
                      TO OUR SHAREHOLDERS

[GRAPHIC -- picture of Carl A. Florio, President and Chief Executive Officer and
Earl Schram, Jr., Chairman of the Board]

Hudson River  Bancorp,  Inc. ended its fiscal year,  but more  importantly,  its
first nine months as a public  company on March 31, 1999,  completing one of the
most exciting periods in the nearly 150 year history of the institution.

      During late 1997, the Board of Directors and the Bank's senior  management
determined that in order to continue our success as a community bank in the ever
changing  financial  services  industry,  we would need to make some significant
changes to remain  competitive.  The most  important  step was our  decision  to
convert the Bank to public  ownership.  Mutual ownership in the past had limited
the Bank's ability to grow through acquisitions, leaving branch expansion as our
only viable  alternative.  We have always been active in opening new branches to
meet the needs of our growing  customer base. From 1993 through 1997, our branch
network grew from 7 branches to 12. This growth,  however,  enabled us to expand
only  gradually,  as it  usually  takes  several  years  for a branch  to attain
profitability.  Our  conversion  raised  over $170  million in new  capital  and
provided us with the ability to compete  with other  financial  institutions  in
maintaining, and where appropriate, growing our market presence.

      In addition,  we have continued to find new ways to grow  internally.  The
Bank's Board recognized that with shrinking margins on traditional  savings bank
products (primarily residential mortgage loans and deposits), the Bank needed to
develop other  non-traditional  products to compete.  The formation of our trust
and  investment  management  department  and the  investment  in our  commercial
services department in recent years were two methods we identified to accomplish
our goals.  The capital raised in our initial public  offering has enabled us to
continue  our efforts in offering a wider  variety of products  and  services to
meet our  customers'  needs and  provides the Company  with the  foundation  for
future success.

FINANCIAL RESULTS

      During the year ended March 31, 1999,  we made  outstanding  progress in a
number of areas as follows:

o Net income for the year ended March 31, 1999 was $3.8 million, up $1.0 million
  from a year  earlier,  despite  a $5.2  million  ($3.1  million,  net of  tax)
  nonrecurring charge to establish the Bank's charitable foundation.

o The Company's net interest margin grew from 4.68% for the year ended March 31,
  1998 to 4.82% for the year just ended,  as a result of the  proceeds  received
  from the Company's initial public offering.

o Non-performing  assets  were  reduced to $12.5  million at March 31, 1999 from
  $17.3 million at March 31, 1998.

o Non-performing loans were reduced even more dramatically,  down 36.8% from the
  level at March 31, 1998,  ending the current  fiscal year at $9.9 million,  or
  1.72% of total  loans.

o The  allowance  for  loan  losses  as a  percentage  of  non-performing  loans
  increased  from  52.3% at March  31,  1998 to  143.8%  at March  31,  1999,  a
  reflection not only of the increase in the allowance for loan losses, but more
  importantly, the reduction of non-performing loans.

      A more  detailed  review of our financial  information  is included in the
Management's Discussion and Analysis section of this annual report.

2
<PAGE>
THE YEAR 2000

      Foremost  on our  minds,  as  well  as the  minds  of  our  customers  and
shareholders, has been the potential impact of the century date change, the Year
2000, or Y2K for short.  The Company  began  focusing on Y2K as long ago as 1995
when a decision was made to upgrade our mainframe technology that contained many
years of custom coding.  A full system  conversion of both hardware and software
was done in late 1996, dramatically reducing the potential impact of the century
date change.  During mid-1997, a team of employees  representing each department
of the  Company  was  organized  into  the  Y2K  Project  Team.  This  group  of
individuals met at least every other week to assess the potential  impact of the
Year 2000 on the Company and put into motion any  required  changes.  Throughout
the remainder of 1997 and early 1998, all operating systems or processes that we
determined  could be impacted by the Year 2000 were identified and  prioritized.
Third  party  service  providers  were  contacted  in order to assess  their Y2K
preparedness  and the  consequences  to the Company  should one or more of these
service  providers,  or the hardware or software they  provide,  fail to operate
after the century date change.

      During  the  last  half of 1998,  all  "mission-critical"  systems  (those
systems  in which the  inability  to perform  necessary  functions  would  cause
significant   disruptions  in  the  Company's  ability  to  complete  day-to-day
operations,  seriously  impacting the Company's  financial  results) were tested
with only minor problems identified.  These problems were easily corrected.  All
other systems not deemed to be mission-critical have been or are scheduled to be
tested by mid-1999.  Any necessary changes as well as detailed contingency plans
will also be completed by mid-1999.  We remain  dedicated to meeting our goal of
business as usual with no  interruptions in the high quality services we provide
to our customers when the calendar turns to January 1, 2000.

[SIDEBAR] Y2K "... the overwhelming majority of institutions remain on track for
being  prepared for the century date  change...the  Year 2000 date change is the
highest  safety and soundness  priority for the FDIC. No insured  depositor need
worry. The FDIC will protect insured deposits." --FDIC Chairman, Donna Tanoue

TECHNOLOGY ADVANCEMENTS

      In addition to ensuring that all our systems are Y2K compliant, we've made
several upgrades in technology that have increased our efficiency while enabling
us to improve our  customer  service.  During the recent  year,  the Company has
installed a new front-end system primarily for our branch network;  upgraded our
wide-area network connecting each employee, whether in the main office or in our
branch network;  placed into service a new check image  processing  system,  and
implemented new "cold storage" technology.

      Our new front-end  software utilizes  technology that greatly enhances the
user-friendliness and flexibility of this software. It features in-depth product
information  screens and cross selling prompts to support our efforts to promote
a sales  culture.  The new  front-end  system  has also  improved  the  speed of
processing transactions.

      Our upgraded  wide-area  network was  implemented  at the same time as the
front-end system,  and enhances the ability of our employees to access and store
vital information.  It has enabled the Company to provide E-mail capabilities as
well  as  Internet  access  to  our  employees.   These  capabilities  have  had
significant impact improving the speed and effectiveness of communication within
the

                                                                               3
<PAGE>
Company in addition to opening up all of the world's  information  resources  at
the click of a button.

      The Company's new check image processing system has resulted in savings in
both labor and postage.  This new system  takes each check or other  transaction
ticket processed through the Bank and creates a computerized  image of the item.
Key  information   such  as  amount  and  account  numbers  are  recognized  and
automatically  recorded by the software.  Manual  processing of the checks is no
longer  necessary.  In addition,  the system  provides  condensed  images of the
checks that are returned to our  customers in lieu of the physical  checks.  The
reduction  of the manual  efforts to process  daily work and return the physical
checks  to our  customers,  as well as the  reduced  postage  expenses  from not
mailing the checks is a significant benefit of this software.

      The Company began implementing cold storage  technology in mid-1998.  This
technology  is similar to the check image  system.  It takes all system  reports
utilized  by the  employees  each day and makes  them  available  in  electronic
format. These electronic files are then able to be stored and retrieved whenever
necessary at each employee's PC. Reducing reports to microfiche or hardcopy form
is no longer  necessary and the Company's  expenses have already been reduced in
these areas.

      Technology  has been and will  continue  to be an  important  facet of our
business.  As technology changes, our customers' demands change, and so must our
ability to provide  solutions to these demands.  Keeping pace with technology is
an important aspect of our business plan as we move into the next millennium.

[PICTURE WITH SIDEBAR]
Advancements  in  technology  are viewed as  critical  success  factors  for the
Company to  succeed.  During  fiscal  1999,  the Company  made great  strides in
improving technology and in laying the groundwork for the future.

NEW PRODUCTS AND SERVICES

      In November  1998, we unveiled our new  MasterMoney[TM]  Debit Card.  This
product enables a customer to have purchases  deducted  directly from his or her
checking  account,  avoiding the inconvenience of writing a check or utilizing a
credit card that can have high interest rates.  While our customers benefit from
the ease of using this  product,  the Company also  benefits  from fees received
from the merchants where the customer shops.  Usage of this product has steadily
increased and has proven to be very popular with our customers.

[PICTURE WITH SIDEBAR]
Bringing new products to market  during the last year has enabled the Company to
satisfy  existing  customers  as well as to  expand  its  market  presence.  The
MasterMoney[TM}  debit card is just one of a series of new  products  offered by
the Company.
<PAGE>

      In keeping with our focus to grow  non-traditional  savings bank products,
we have  introduced  three new products  which should  prove  beneficial  to our
commercial customers.

      The first is cash flow  manager,  a product  which  enables a business  to
improve its cash flows and reduce some of the  administrative  overhead involved
in billing and collections.  For a fee that is negotiated with the business, the
Company will provide the  business  immediate  cash up front in exchange for the
accounts  receivable due the business.  We will then perform monthly billing and
collection services to collect the outstanding accounts receivable.  The Company
also receives  interest on accounts which are not collected within a 60 day time
frame. This product is designed to assist businesses with potential liquidity or
cash flow problems in continuing to meet its customers'  demands while providing
additional fee income to our Company.

4
<PAGE>
      During the fourth  quarter of our fiscal year,  we introduced a commercial
leasing  product.  This product  provides a customer the advantages of leasing a
product  rather  than   purchasing  it.  It  is  geared  towards   agricultural,
manufacturing and  service-oriented  customers and provides the customer with an
alternative financing solution.

      A  final  product,  also  introduced  during  the  fourth  quarter,  is  a
commercial electronic sweep account. This product, provided through a securities
repurchase  agreement,  enables a  commercial  customer  to invest  funds from a
noninterest-bearing  demand account into an overnight  interest-bearing account.
This  product is critical  to the  success of the  Company as it  competes  with
larger national or regional banks.

      In  addition  to these new  products,  we  anticipate  rolling out on-line
banking capabilities accessed through our website www.hudsonriverbank.com during
our  first  fiscal  quarter  ending  June  30,  1999.   These  on-line   banking
capabilities  should attract both retail and commercial users.  Users will enjoy
the advantages of reviewing  account  activity,  making  transfers,  sending and
receiving  wires and paying bills on-line from the quiet  confines of their home
or office.  This product will serve as an alternative  delivery  channel,  which
will make  proximity to our branch  network less of a factor in the future.  Our
customers will enjoy some of the perceived  benefits a large super-regional bank
can provide while maintaining the community bank, customer service atmosphere we
promote every day.

[PICTURE  WITH  SIDEBAR]  The  Company's  new  website  offers a look inside the
Company,   outlining  its  products  and  services,   offers   on-line   banking
capabilities  and provides a direct line of  communication  to the Company about
the users' needs or questions.

      In recognizing  trends which have been developing for several years in the
banking  industry,  senior management and the Board identified an opportunity to
provide the full service brokerage  services that our customers demand through a
recognized and respected  brokerage  firm. In late 1998, the Company  reached an
agreement in which  customers of the Company would be given  complete  access to
the  resources of Salomon Smith Barney,  one of the nation's  largest  brokerage
firms, without  relinquishing our customer  relationships.  This service enables
our customers to address all of their financial needs, whether it is traditional
banking or access to the capital  markets,  without  having to leave our branch.
The Company receives a share of the commissions  earned by Salomon Smith Barney,
but more importantly, we maintain a contact with our customers.

[PICTURE WITH SIDEBAR] The Company's new relationship  with Salomon Smith Barney
offers full service  brokerage  services to its customers.  The  availability of
bonds, stocks, annuities,  mutual funds and other non-deposit products through a
recognized  broker  complement  the  Company's  existing  trust  and  investment
management services.

      Introducing  new products and services to our existing  business  would be
difficult if these products and services were not  adequately and  appropriately
presented  to our  customers.  To this end,  during 1998,  the Company  began to
emphasize a bank-wide  sales  culture.  An  extensive  training  program for our
employees and managers  throughout  the Company was developed to build  customer
relationships through improved listening and customer service skills. By the end
of our fiscal year,  cross-sale ratios had improved by 70%. While we acknowledge
that developing a sales culture is an ongoing process,  we feel that our efforts
in this area will strengthen customer relationships,  assist in loan and deposit
growth, improve the utilization of our trust,  investment management,  and other
non-traditional  services,  and above all, increase customer  satisfaction while
generating returns for our shareholders.
                                                                               5
<PAGE>
COMMUNITY FOCUS - COMMUNITY INVESTMENT

      A significant aspect of our conversion from a mutual to stock organization
was the establishment of the Hudson River Bank & Trust Company  Foundation.  The
Foundation was established with a stock  contribution of 3% of the shares issued
in the initial public  offering,  a value of $5.2 million.  As a community bank,
the Board of Directors felt strongly that the growth and success of Hudson River
Bank & Trust  Company  was tied to both its  employees  and the  communities  we
serve.  The  establishment  of the Foundation is the vehicle in which we will be
able to share the success of our progress and growth with those communities that
made it  happen.  The  Foundation's  purpose  is to  provide  funding to support
charitable causes and community development activities in our local communities.
Under IRS regulations  governing  charitable  foundations,  5% of the foundation
assets must be contributed each year to eligible recipients.  Using the value of
the stock at March 31, 1999,  this means  approximately  $275  thousand  will be
contributed to the  communities we serve during the next fiscal year. We believe
that over the long term, the Foundation will have a positive impact in promoting
the Company and fostering new customer relationships,  in addition to fulfilling
the  benevolent  purpose  originally  intended  with  the  establishment  of the
Foundation.

ENHANCING SHAREHOLDER VALUE

      The most  significant  objective of the Board and senior  management is to
improve shareholder value. Our focus is to provide for steady, long-term growth.
The decisions we make each day are designed to ensure that the plans we put into
place will support  both the  short-term  and  long-term  growth of  shareholder
value. In November 1998, we announced that we had acquired an equity interest in
Homestead  Funding Corp.,  upstate New York's largest mortgage broker.  In 1998,
Homestead  generated  over $650 million in mortgage  production.  This strategic
partnership provides a source of non-interest revenue through the recognition of
our share of Homestead's  profits. The alliance also provides access to a volume
of mortgage production that many community banks do not possess.

[PICTURE WITH SIDEBAR] Residential lending has always been a significant part of
the Company's profile.  We view our relationship with Homestead Funding Corp. as
a further  step in expanding  our  geographic  presence to deliver  products and
services familiar to us markets we serve.

      In December 1998, we announced the intention to open our thirteenth branch
in North  Greenbush,  NY. This branch  officially  opened in April 1999.  In May
1999, we announced  plans to open our fourteenth  branch in Clifton Park, NY. We
believe  that we have had success in opening  branches as  evidenced  by the two
branches we opened in early 1996 which each have over $22 million in deposits in
just  over  three  years.  We  anticipate  similar  results  for both our  North
Greenbush and Clifton Park locations.

[MAP WITH SIDEBAR] After the completion of our SFS Bancorp, Inc. acquisition and
the  opening of our Clifton  Park  branch,  we will have 18  branches  operating
throughout 6 counties in the New York Capital District area.

      In our  prospectus,  we stated  that one of our goals was to grow  through
mergers and acquisitions. After careful and thoughtful consideration, on May 17,
1999, we announced the signing of a definitive agreement to acquire SFS Bancorp,
Inc., the holding company for Schenectady Federal Savings Bank, a $176.1 million

6
<PAGE>
savings  bank  located  in  Schenectady,  NY.  This  acquisition,  valued at $32
million,  will  be a cash  transaction  and  is  anticipated  to be  immediately
accretive to earnings per share and return on shareholders'  equity. We are very
excited  about this  transaction  and we will  continue to focus on  acquisition
targets that will make economic sense to the Company and our shareholders.

[GRAPH WITH  SIDEBAR]  Using a $100  investment  as of July 1, 1998,  this chart
indicates how the total return on HRBT stock  compares with both the S&P 500 and
Nasdaq Bank Indexes for the periods shown.

      In  January  1999,  following  the  approval  by the  shareholders  of the
Recognition  and  Retention  Plan,  we  began a  program  to  acquire  4% of our
outstanding  shares to fund this plan.  In March 1999, we announced our plans to
acquire  an  additional  5% of the  outstanding  shares.  We intend to  continue
consideration of share repurchase  programs to the extent appropriate to enhance
shareholder value.

      Finally,  in April 1999, we announced our first quarterly dividend of $.03
per share.  It is  currently  the Board's  intention  to pay  regular  quarterly
dividends  that are a  reflection  of our  earnings  success and  dedication  to
returning value to our shareholders.

      We are very pleased with the accomplishments of the last twelve months. It
has been a very exciting period in the long history of Hudson River Bank & Trust
Company,  and we would be remiss to not recognize the hard work of our dedicated
officers and employees. We look forward to continuing along the path we have set
for the Company and  anticipate  that next year will be as exciting and eventful
as last year.

      /s/ Carl A. Florio
      ------------------
      Carl A. Florio
      President and Chief Executive Officer

      /s/ Earl Schram, Jr.
      --------------------
      Earl Schram, Jr.
      Chairman of the Board

      June 1, 1999

                                                                               7
<PAGE>
                Hudson River Bancorp, Inc.
=========================================
                        FINANCIAL SECTION

FIVE YEAR SELECTED FINANCIAL DATA                                9


MANAGEMENT'S DISCUSSION & ANALYSIS                               10

MANAGEMENT'S STATEMENT OF RESPONSIBILITY                         24

INDEPENDENT AUDITORS' REPORT                                     24


CONSOLIDATED BALANCE SHEETS                                      25


CONSOLIDATED INCOME STATEMENTS                                   26


CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY                                          27

CONSOLIDATED STATEMENTS OF CASH FLOWS                            28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                       29



8
<PAGE>
                Hudson River Bancorp, Inc.
=========================================
        FIVE YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except for share and per share data)

At or for the Years Ended March 31,              1999         1998          1997         1996         1995
===========================================================================================================
<S>                                          <C>          <C>           <C>          <C>          <C>
Earnings

Interest and dividend income                 $ 63,526     $ 55,387      $ 52,881     $ 49,082     $ 43,059
Interest expense                               26,000       25,977        25,426       24,086       19,309
-----------------------------------------------------------------------------------------------------------
Net interest income                            37,526       29,410        27,455       24,996       23,750
-----------------------------------------------------------------------------------------------------------
Provision for loan losses                       7,341        8,491         3,826        1,090        1,169
Other operating income                          2,418        2,845         1,825        1,635        1,532
Other operating expense                        26,612       19,030        16,187       14,199       15,223
-----------------------------------------------------------------------------------------------------------
Income before income tax expense                5,991        4,734         9,267       11,342        8,890
Income tax expense                              2,184        1,903         3,607        4,298        2,917
-----------------------------------------------------------------------------------------------------------
Net income                                    $ 3,807      $ 2,831       $ 5,660      $ 7,044      $ 5,973
===========================================================================================================
Per Share Data

Basic earnings per share(1)                       $ 0.17        --            --           --           --
Diluted earnings per share(1)                       0.17        --            --           --           --
Book value at year end                             14.02        --            --           --           --
Book value at year end, including
  unallocated ESOP shares and
  unvested RRP shares                              12.39        --            --           --           --
Closing market price                               10.9375      --            --           --           --
===========================================================================================================
Average Balances

Total assets                                 $809,385     $659,984      $640,867     $597,435     $566,443
Earning assets                                778,691      628,747       612,296      571,263      539,765
Loans                                         522,974      507,293       471,295      444,645      424,187
Securities available for sale                 156,405       39,357        53,445       26,889       12,307
Securities held to maturity                    47,738       71,966        83,343       92,243       94,001
Deposits                                      608,936      577,721       562,922      530,339      504,444
Other short-term borrowings                     2,916        3,699         4,459          745        2,145
Shareholders' equity                          185,770       67,780        63,322       56,261       49,511
Shares outstanding:
   Basic                                   16,302,268           --            --           --           --
   Diluted                                 16,302,268           --            --           --           --
===========================================================================================================
</TABLE>
<PAGE>
(continued)
<TABLE>
<CAPTION>
(In thousands, except for share and per share data)

At or for the Years Ended March 31,              1999         1998          1997         1996         1995
===========================================================================================================
<S>                                          <C>          <C>           <C>          <C>          <C>
Financial Ratios

Return on average assets                         0.47%        0.43%         0.88%        1.18%        1.05%
Return on average equity                         2.05         4.18          8.94        12.52        12.06
Net interest margin                              4.82         4.68          4.48         4.38         4.40
Efficiency ratio(2)                             51.12        57.25         54.34        52.07        56.81
Expense ratio(2)                                 2.52         2.80          2.48         2.32         2.54
Equity to assets at year end                    24.89        10.18         10.00         9.56         9.05
Allowance as a % of non-performing loans       143.77        52.32         29.37        32.57        43.36
Allowance as a % of loans                        2.47         1.62          1.19         0.79         0.73
===========================================================================================================
</TABLE>
(1) Earnings per share data only applies to periods since the Company's  initial
    public offering on July 1, 1998.

(2) Ratio does not include  other real  estate  owned and  repossessed  property
    expenses and net securities  transactions for each year. The 1999 ratio does
    not  include a  charitable  contribution  to the  Hudson  River Bank & Trust
    Company Foundation.

                                                                               9
<PAGE>
                           Hudson River Bancorp, Inc.

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


==================
GENERAL

The  financial  review  which  follows  focuses  on the  factors  affecting  the
consolidated  financial  condition  and results of  operations  of Hudson  River
Bancorp,  Inc. and subsidiary  (the  "Company")  during the year ended March 31,
1999 and, in summary form, the preceding two years. The  consolidated  financial
statements  and related notes as of and for the three years ended March 31, 1999
should be read in conjunction with this review.

On July 1, 1998,  Hudson River Bank & Trust  Company (the "Bank")  completed its
conversion   from  a  mutual   savings  bank  to  a  stock   savings  bank  (the
"Conversion").  Concurrent  with the  Conversion,  Hudson  River  Bancorp,  Inc.
completed its initial public offering of common stock,  receiving  approximately
$173.3 million in gross proceeds  ($170.0  million net of offering  expenses) in
exchange for 17,333,738  shares of its common stock.  The Company used a portion
of the proceeds to purchase  all of the common  stock of the Bank.  Prior to the
initial public  offering,  the Company had no results of  operations;  therefore
financial information prior to July 1, 1998 reflects the operations of the Bank.

The Company's  primary market area, with 13 full-service  branches,  consists of
the  New  York  counties  of  Columbia,  Rensselaer,  Albany,  Schenectady,  and
Dutchess.   The   Company   has  been,   and   intends  to  continue  to  be,  a
community-oriented   financial  institution  offering  a  variety  of  financial
services to the  communities  it serves.  The  Company's  principal  business is
attracting  deposits from customers  within its market area and investing  those
funds in primarily  loans,  and to a lesser  extent,  in  marketable  investment
securities.  The financial  condition  and operating  results of the Company are
dependent  on its net  interest  income  which  is the  difference  between  the
interest and dividend income earned on its assets,  and the interest  expense on
its liabilities,  primarily consisting of deposits and borrowings. Net income of
the  Company  is also  affected  by  provisions  for loan  losses  and its other
operating  income  which  includes  loan  servicing  income  and fees on deposit
related  services;  it is also  impacted by other  operating  expenses,  such as
compensation and occupancy expenses and Federal and state income taxes.

The  Company's  results of  operations  are  significantly  affected  by general
economic and  competitive  conditions  (particularly  changes in market interest
rates),  government  policies,  changes in  accounting  standards and actions of
regulatory  agencies.   Future  changes  in  applicable  laws,   regulations  or
government  policies  may  have  a  material  impact  on  the  Company.  Lending
activities are substantially influenced by the demand for and supply of housing,
competition  among lenders,  the level of interest rates and the availability of
funds.  The ability to gather  deposits and the cost of funds are  influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments, including mutual funds and stocks.

==================
MERGER AND
ACQUISTITION
ACTIVITY

On May 17, 1999, the Company entered into a definitive  agreement to acquire SFS
Bancorp,  Inc.  ("SFS")  for $25.10 in cash for each  share of SFS common  stock
outstanding.  The  total  deal is  valued  at  approximately  $32  million.  The
transaction will be accounted for under the purchase method of accounting and is
anticipated  to be accretive to earnings in the first year of  operations  after
consummation  of the  transaction.  SFS had total assets of $176.1 million as of
March 31, 1999 and operates four branches within Schenectady County.
<PAGE>

==================
OPERATING
RESULTS

COMPARISON OF THE YEARS ENDED MARCH 31, 1999 AND 1998

The Company's net income for the year ended March 31, 1999 was $3.8 million,  up
$976 thousand from the $2.8 million earned during the year ended March 31, 1998.
The  increase  was  primarily  a result of higher net  interest  income (up $8.1
million) and a lower  provision for loan losses (down $1.2  million),  partially
offset by higher other  operating  expenses (up $7.6 million),  including a $5.2
million  nonrecurring  expense  associated  with the  contribution of stock to a
charitable  foundation  and higher  income tax expense (up $281  thousand).  The
Company  earned $0.17 per share for the year ended March 31, 1999 and its return
on  average  assets  was 0.47%  compared  with  0.43% for the  prior  year.  The
Company's  return on average equity was 2.05% for the year ended March 31, 1999,
down from 4.18% for the prior  year,  primarily  a result of the  aforementioned
nonrecurring  charge as well as the  Company's  initial  public  offering  which
greatly increased the Company's capital.

10
<PAGE>
NET INTEREST INCOME

Net interest income for the year ended March 31, 1999 was $37.5 million, up from
the $29.4 million for the year ended March 31, 1998.  The increase was primarily
the result of the increase in average earning assets from $628.7 million for the
year ended March 31, 1998 to $778.7  million for the year ended March 31,  1999.
Average  interest-bearing  liabilities  also increased  during this same period,
rising $21.6  million to $574.1  million from $552.5  million for the year ended
March 31, 1998.  Most of the increase in earning  assets was  attributed  to the
proceeds  received by the Company in its initial public offering.  The impact of
these changes resulted in an increase in net interest income of $8.9 million due
to volume changes.  The average yield on earning assets  decreased from 8.81% to
8.16%, while the average rate paid on interest-bearing liabilities declined from
4.70% to 4.53%.  The net impact of these  lower  interest  rates  resulted  in a
decrease in net interest  income of $820  thousand.  As a result of these volume
and rate  fluctuations,  the  Company's  net interest  margin for the year ended
March 31, 1999 was 4.82%, up from 4.68% for the year ended March 31, 1998.

AVERAGE BALANCES, INTEREST, AND YIELDS
<TABLE>
<CAPTION>
Years Ended March 31,                                       1999                               1998                        1997
===============================================================================================================================
                                                         Average                           Average                      Average
                                     Average              Yield/    Average                 Yield/   Average             Yield/
(In thousands)                       Balance  Interest    Rate      Balance     Interest    Rate     Balance   Interest    Rate
===============================================================================================================================
<S>                                 <C>       <C>         <C>       <C>          <C>        <C>      <C>         <C>       <C>
Earning assets

Federal funds sold                  $ 18,805  $ 1,054     5.60%     $ 7,298      $  416     5.70%    $ 1,638     $  89     5.43%
Securities purchased under
  agreements to resell                29,727    1,662     5.59           --          --       --          --        --       --
Securities available for sale(1)     156,405    9,997     6.39       39,357       2,568     6.52      53,445     3,658     6.84
Securities held to maturity           47,738    3,095     6.48       71,966       4,727     6.57      83,343     5,385     6.46
Federal Home Loan Bank
  of New York stock                    3,042      215     7.07        2,833         194     6.85       2,575       164     6.37
Loans receivable(2)                  522,974   47,503     9.08      507,293      47,482     9.36     471,295    43,585     9.25
-----------------------------------------------------               -------------------              -----------------
Total earning assets                 778,691   63,526     8.16      628,747      55,387     8.81     612,296    52,881     8.64
-----------------------------------------------------               -------------------              -----------------

Cash and due from banks               12,774                         11,669                            6,860
Allowance for loan losses            (10,916)                        (6,768)                          (3,886)
Other non-earning assets              28,836                         26,336                           25,597
--------------------------------------------                       --------                         --------
Total assets                        $809,385                       $659,984                         $640,867
============================================                       ========                         ========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31,                                       1999                               1998                        1997
===============================================================================================================================
                                                         Average                           Average                      Average
                                     Average              Yield/    Average                 Yield/   Average             Yield/
(In thousands)                       Balance  Interest    Rate      Balance     Interest    Rate     Balance   Interest    Rate
===============================================================================================================================
<S>                                 <C>       <C>         <C>       <C>          <C>        <C>      <C>         <C>       <C>
Interest-bearing liabilities

Savings accounts                    $155,885  $ 5,039     3.23%    $138,074     $ 4,729     3.42%   $133,209   $ 4,523     3.40%
N.O.W. and money
  market accounts                     97,006    2,762     2.85       94,904       2,850     3.00      93,972     2,831     3.01
Time deposit accounts                313,269   17,930     5.72      311,014      18,085     5.81     307,757    17,727     5.76
Mortgagors' escrow deposits            4,986      113     2.27        4,850         108     2.23       4,579       106     2.31
Securities sold under
  agreements to repurchase                77        3     3.90           --          --       --          --        --       --
Other short-term borrowings            2,916      153     5.25        3,699         205     5.54       4,459       239     5.36
-----------------------------------------------------               -------------------              -----------------
Total interest-bearing liabilities   574,139   26,000     4.53      552,541      25,977     4.70     543,976    25,426     4.67
-----------------------------------------------------               -------------------              -----------------

Non interest-bearing deposits         42,776                         33,729                           27,984
Other non interest-bearing
  liabilities                          6,700                          5,934                            5,585
Shareholders' equity                 185,770                         67,780                           63,322
--------------------------------------------                       --------                         --------
Total liabilities and
  shareholders' equity              $809,385                       $659,984                         $640,867
================================================================================================================================
Net interest income                           $37,526                           $29,410                        $27,455
================================================================================================================================
Net interest spread                                       3.63%                             4.11%                          3.97%
================================================================================================================================
Net interest margin                                       4.82%                             4.68%                          4.48%
================================================================================================================================
</TABLE>
(1) Average balances include fair value adjustment.

(2) Average balances include non-accrual loans.
                                                                              11
<PAGE>
VOLUME AND RATE ANALYSIS
<TABLE>
<CAPTION>
                                                     1999 vs 1998                            1998 vs 1997
===========================================================================================================

                                     Due To       Due To      Net           Due To       Due To      Net
(In thousands)                       Volume        Rate     Change          Volume        Rate      Change
===========================================================================================================
<S>                                 <C>           <C>      <C>              <C>           <C>      <C>
Interest and dividend income

Federal funds sold                  $   645       $  (7)   $   638          $  322        $  5     $   327
Securities purchased under
  agreements to resell                1,662          --      1,662              --          --          --
Securities available for sale         7,482         (53)     7,429            (926)       (164)     (1,090)
Securities held to maturity          (1,572)        (60)    (1,632)           (746)         88        (658)
Federal Home Loan Bank
  of New York stock                      15           6         21              17          13          30
Loans receivable                      1,446      (1,425)        21           3,364         533       3,897
-----------------------------------------------------------------------------------------------------------
Total interest and dividend income    9,678      (1,539)     8,139           2,031         475       2,506
-----------------------------------------------------------------------------------------------------------

Interest expense

Savings accounts                        586        (276)       310             166          40         206
N.O.W. and money market accounts         62        (150)       (88)             28          (9)         19
Time deposit accounts                   130        (285)      (155)            189         169         358
Mortgagors' escrow deposits               3           2          5               6          (4)          2
Securities sold under agreements
  to repurchase                           3          --          3              --          --          --
Other short-term borrowings             (42)        (10)       (52)            (42)          8         (34)
-----------------------------------------------------------------------------------------------------------
Total interest expense                  742        (719)        23             347         204         551
-----------------------------------------------------------------------------------------------------------
Net interest income                 $ 8,936     $  (820)  $ 8,116          $1,684       $ 271     $ 1,955
===========================================================================================================
</TABLE>
Note:  Changes  attributable  to both volume and rate which cannot be segregated
have been allocated  proportionately  to the change due to volume and the change
due to rate.

INTEREST AND DIVIDEND INCOME

Interest  and  dividend  income  for the year  ended  March  31,  1999 was $63.5
million,  up from $55.4  million for the year ended March 31, 1998.  The largest
component  of interest  and  dividend  income is interest on loans.  Interest on
loans remained  unchanged at $47.5 million for each of the years ended March 31,
1999 and 1998, as an increase of $1.4 million in interest earned on loans due to
volume  growth was  offset by the effect of lower  interest  rates  earned.  The
average  balance  of loans  increased  $15.7  million,  while the yield on loans
decreased  from 9.36% to 9.08%.  The interest on  securities  available for sale
increased  $7.4  million  from $2.6 million for the year ended March 31, 1998 to
$10.0 million for fiscal 1999. This increase in interest on securities available
for sale was the result of an increase of $117.0 million in the average  balance
of  securities  available  for sale (from $39.4 million for the year ended March
31, 1998, to $156.4 million for the year ended March 31, 1999),  while the yield
on this portfolio declined from 6.52% to 6.39%.
<PAGE>
The  increase in the average  balance of  securities  available  for sale is the
result of the Company's initial public offering.  Management intends to redeploy
these  funds into  alternative  asset  categories,  including  acquisitions,  as
appropriate  opportunities present themselves.  A decrease in interest earned on
securities  held to  maturity,  from $4.7  million  for the year ended March 31,
1998, to $3.1 million for the year ended March 31, 1999, was almost entirely due
to reductions  in volume.  The average  balance of  securities  held to maturity
decreased  from $72.0 million for the year ended March 31, 1998 to $47.7 million
for the year ended  March 31,  1999,  resulting  in a $1.6  million  decrease in
interest  income.  Management  expects the average balance of securities held to
maturity to continue to decrease as new  purchases of  securities  are generally
classified as securities  available for sale.  Interest  income on federal funds
sold and securities  purchased under agreements to resell increased $2.3 million
from $416 thousand  earned for the year ended March 31, 1998 to $2.7 million for
the year ended March 31, 1999. This increase was due to higher average balances,
a combined $48.5 million for the year ended March 31, 1999, up from $7.3 million
in 1998.

12
<PAGE>
INTEREST EXPENSE

Interest  expense  remained  virtually  flat at $26.0 million for both the years
ended  March 31,  1999 and 1998.  Substantially  all of the  Company's  interest
expense is from the Company's interest-bearing deposits. The largest category of
interest-bearing  deposits is time  deposits.  Interest on time deposits for the
year  ended  March 31,  1999 was $17.9  million,  down  slightly  from the $18.1
million  recorded in the prior year.  This decrease was attributed to a decrease
in the average rates paid on time deposits,  from 5.81% for the year ended March
31, 1998 to 5.72% for 1999.  This decrease was somewhat offset by higher average
balances in fiscal year 1999  compared  with 1998.  Interest  expense on savings
accounts  increased  from $4.7 million for the year ended March 31, 1998 to $5.0
million for the year ended March 31, 1999.  The increase in interest  expense on
savings accounts was attributed to an increase in the average balance of savings
of approximately  $17.8 million,  offset by a decrease in the average rates paid
on these  accounts from 3.42% in the year ended March 31, 1998 to 3.23% in 1999.
Fluctuations  in  interest  expense  on  other  categories  of  interest-bearing
liabilities were not significant.

PROVISION FOR LOAN LOSSES

The  provision  for loan  losses  decreased  from $8.5  million  in 1998 to $7.3
million for the year ended March 31,  1999.  The decrease in the  provision  for
loan losses was principally related to the reduction in non-performing loans and
in net  charge-offs  experienced  during  the  year  ended  March  31,  1999  in
comparison with the prior year. The level of the Company's  non-performing loans
(1.72% of total loans at March 31, 1999) and  delinquencies  continue to require
the  current  level of  provision  for loan  losses.  In  addition,  the Company
continues to maintain certain  portfolios of loans with higher credit risk, such
as manufactured  housing loans,  commercial loans and financed insurance premium
loans. Net charge-offs,  risk elements of the Company's loan portfolio, economic
conditions in the Company's  market area,  loan growth and  non-performing  loan
balances are the primary  factors which are considered in determining the levels
of the Company's  provision for loan losses.  The Company  anticipates  that the
provision for loan losses will continue at current  levels to  accommodate  loan
growth,  although  there can be no  assurance  that loan  losses will not exceed
estimated  amounts or that the  provision  for loan losses will not  increase in
future periods.
<PAGE>
LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(In thousands)     Years Ended March 31,         1999         1998          1997         1996         1995
==========================================================================================================
Loans outstanding (end of year)              $578,099     $506,978      $493,019     $450,671     $438,875
==========================================================================================================
Average loans outstanding                    $522,974     $507,293      $471,295     $444,645     $424,187
==========================================================================================================
<S>                                                           <C>              <C>
Allowance for loan losses at
   beginning of year                          $ 8,227      $ 5,872       $ 3,546      $ 3,187      $ 2,917
Loan charge-offs:
   Residential real estate                       (251)        (440)         (162)        (111)         (88)
   Commercial real estate                         (95)      (1,298)         (454)         (95)         (36)
   Commercial loans                              (136)      (2,309)         (127)          --          (86)
   Manufactured housing                        (1,331)        (480)         (216)        (372)        (288)
   Consumer                                      (139)        (112)          (41)         (46)        (711)
   Financed insurance premiums                 (1,239)      (2,091)       (1,070)        (573)         (54)
----------------------------------------------------------------------------------------------------------
Total charge-offs                              (3,191)      (6,730)       (2,070)      (1,197)      (1,263)
----------------------------------------------------------------------------------------------------------
Loan recoveries:
   Residential real estate                        341            8             3           21           93
   Commercial real estate                         777           17            11           16            7
   Commercial loans                                17           10            74            6            4
   Manufactured housing                            73          105            45           70           33
   Consumer                                        25           38            51           49          161
   Financed insurance premiums                    686          416           386          261           66
----------------------------------------------------------------------------------------------------------
Total recoveries                                1,919          594           570          423          364
----------------------------------------------------------------------------------------------------------
Loan charge-offs, net of recoveries            (1,272)      (6,136)       (1,500)        (774)        (899)
Provision charged to operations                 7,341        8,491         3,826        1,090        1,169
Allowance acquired                                 --           --            --           43           --
----------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year     $ 14,296      $ 8,227       $ 5,872      $ 3,546      $ 3,187
==========================================================================================================
Ratio of net charge-offs during the year to
  average loans outstanding during the year      0.24%        1.21%         0.32%        0.17%        0.21%
==========================================================================================================
Provision as a percentage of average loans
  outstanding during the year                    1.40%        1.67%         0.81%        0.25%        0.28%
==========================================================================================================
Allowance as a percentage of loans
  outstanding (end of year)                      2.47%        1.62%         1.19%        0.79%        0.73%
==========================================================================================================
</TABLE>

                                                                            13
<PAGE>
OTHER OPERATING INCOME

Total other  operating  income  decreased $427 thousand for the year ended March
31,  1999  compared  with the prior  year.  Other  operating  income is composed
primarily  of service  charges on deposit  accounts and loan  servicing  income.
Income from service charges on deposit accounts  increased from $1.1 million for
the year ended March 31, 1998 to $1.3 million for fiscal 1999. This increase was
attributed to the increase in the  Company's  deposit  transaction  accounts and
fees on these accounts  during the current year as well as increased ATM service
charge income.  Loan servicing  income  decreased from $398 thousand in the year
ended March 31, 1998 to $199  thousand in 1999 as a direct result of a reduction
in the Company's  loan servicing  portfolio.  Other income was $844 thousand for
the year ended March 31, 1999,  down from $1.2 million for the prior year.  This
decrease  was  related  to a  recovery  recorded  in 1998 on an asset  which was
written down in a prior year as well as a gain of $452 thousand  recorded during
1998 relating to the sale of a building in which the  Company's  main branch was
formerly located.  Other income for the year ended March 31, 1999 was positively
impacted by income recognized from the Company's November 1998 equity investment
in Homestead Funding Corp., the largest  residential  mortgage originator in the
Capital District area.

OTHER OPERATING EXPENSES

Total other operating  expenses  increased $7.6 million to $26.6 million for the
year ended March 31,  1999,  up from $19.0  million for the year ended March 31,
1998.  The most  significant  increase  relates to a $5.2  million  nonrecurring
expense  associated with the  contribution of stock to a charitable  foundation.
The charitable foundation was formed as part of the Bank's Conversion. Increases
in  compensation  and  benefits (up $1.6  million),  other real estate owned and
repossessed  property  expenses (up $441 thousand),  and other expenses (up $614
thousand),  offset by a decrease in legal and other professional fees (down $350
thousand), were also contributors to the overall increase.

The increase in compensation  and benefits was primarily the result of the costs
associated  with the Employee  Stock  Ownership  Plan  ("ESOP")  established  in
connection  with the Bank's  Conversion,  and the Recognition and Retention Plan
("RRP")  approved  by the  Company's  shareholders  in January  1999 under which
awards of stock were made to  directors  and certain  officers.  During the year
ended March 31, 1999, the Company recorded $1.1 million in expense in connection
with the Bank's ESOP. Amortization expense associated with the Company's RRP for
the year  ended  March  31,  1999  was $217  thousand.  This  amount  represents
amortization  for three months.  Annual RRP expense for the year ended March 31,
2000 is expected to be approximately $875 thousand.

The  increase in other real  estate  owned  ("OREO")  and  repossessed  property
expenses  was due to an  increase  in the level of  repossessed  property in the
current year as well as a large commercial OREO property which was foreclosed on
and sold during the fourth  quarter ended March 31, 1999.  In addition,  a large
gain ($170  thousand)  recognized by the Company during the year ended March 31,
1998 related to the sale of an OREO property  reduced the overall expense in the
prior year and  contributed  to the increase in current year  expenses  compared
with the year ended March 31, 1998.

The increase in other  expenses was the result of general  increases  associated
with being a public company.  These costs include  Delaware  franchise tax fees,
printing costs  associated  with public  financial  reporting,  and costs of the
Company's  Special Meeting of  Shareholders  and related proxy expenses that was
held in  conjunction  with the approval of the Company's  1998  Recognition  and
Retention  Plan  and  1998  Stock  Option  and  Incentive   Plan.  In  addition,
<PAGE>
advertising  and  marketing  expenses  have  generally  been  higher  due to the
expansion of the  Company's  market area,  including  branch  expansion and loan
growth.  Other  expenses  in the  future  could be higher as a result of current
discussions at the Financial  Accounting Standards Board ("FASB") with regard to
stock options  issued to  non-employees.  The Company issued  approximately  375
thousand  stock options to outside  directors in January 1999 which could result
in  additional  expenses  for the Company  beginning  in  September  1999 if the
tentative decisions reached by the FASB become final.

The  decrease  in legal and other  professional  fees was the result of external
costs  associated with the Company's  consideration  and evaluation of strategic
options  during the prior year.  In  addition,  the Company  experienced  higher
consulting  expenses during 1998 compared with 1999.  These expenses  related to
assistance  provided to  management  in addressing  certain  strategic  planning
ideas, tax minimization solutions, and operational efficiencies.

INCOME TAX EXPENSE

Income tax expense increased from $1.9 million for the year ended March 31, 1998
to $2.2  million for the year ended March 31, 1999.  The increase was  primarily
the  result  of  higher  pre-tax  income  partially  offset  by an  increase  in
tax-exempt income realized by the Company.

14
<PAGE>
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
Three Months Ended                       Mar. 31,  Dec. 31,  Sept. 30,  June 30,Z` Mar. 31,  Dec. 31,  Sept. 30,  June 30,
(In thousands, except per share data)      1999      1998      1998      1998      1998      1997       1997      1997
===========================================================================================================================
<S>                                      <C>       <C>        <C>       <C>       <C>       <C>        <C>       <C>
Interest and dividend income             $15,785   $16,012    $16,675   $15,054   $13,934   $13,801    $13,838   $13,814
Interest expense                           6,018     6,339      6,480     7,163     6,437     6,571      6,518     6,451
---------------------------------------------------------------------------------------------------------------------------
Net interest income                        9,767     9,673     10,195     7,891     7,497     7,230      7,320     7,363
---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses                  1,500     1,681      1,944     2,216     2,083     2,003      2,045     2,360
Other operating income                       536       583        675       624       955       466        762       662
Other operating expense                    5,895     5,597     10,452     4,668     4,842     4,974      4,839     4,375
---------------------------------------------------------------------------------------------------------------------------
Income before income tax
  expense (benefit)                        2,908     2,978     (1,526)    1,631     1,527       719      1,198     1,290
Income tax expense (benefit)               1,045     1,098       (604)      645       582       302        503       516
---------------------------------------------------------------------------------------------------------------------------
Net income (loss)                        $ 1,863   $ 1,880     $ (922)   $  986    $  945    $  417     $  695    $  774
===========================================================================================================================
Basic earnings (loss) per share(1)        $ 0.12    $ 0.11     $(0.06)      --        --         --        --        --
Diluted earnings (loss) per share(1)        0.12      0.11      (0.06)      --        --         --        --        --
===========================================================================================================================
</TABLE>
(1)  Earnings per share data only applies to periods since the Company's initial
     public offering on July 1, 1998.

COMPARISON OF THE YEARS ENDED MARCH 31, 1998 AND 1997

Net income for the year ended  March 31, 1998 was $2.8  million,  down from $5.7
million for the year ended March 31, 1997.  This decrease was primarily a result
of a higher  provision  for loan  losses  (up $4.7  million)  and  higher  other
operating  expenses (up $2.8 million),  partially  offset by higher net interest
income (up $2.0 million),  higher other  operating  income (up $1.0 million) and
lower income tax expense (down $1.7  million).  The Company's  return on average
assets was 0.43% for the year ended March 31, 1998, down from 0.88% for the year
previous.  The Company's  return on average  equity was 4.18% for the year ended
March 31, 1998, down from 8.94% for the year ended March 31, 1997.

NET INTEREST INCOME

Net interest income for the year ended March 31, 1998 was $29.4 million, up from
the $27.5 million for the year ended March 31, 1997.  The increase was primarily
the result of the increase in average earning assets from $612.3 million in 1997
to $628.7 million in 1998.  Interest-bearing  liabilities  also increased during
the same period,  rising $8.6 million to $552.5 million for 1998. The net impact
of these volume increases resulted in an increase in net interest income of $1.7
million.  The yield on average  earning  assets  increased  from 8.64% to 8.81%,
while the rate paid on  interest-bearing  liabilities  increased  from  4.67% to
4.70%.  The net impact of these higher interest rates resulted in an increase in
net interest income of $271 thousand. Because of the above changes in volume and
rates,  the Company's net interest  margin for the year ended March 31, 1998 was
4.68%, compared with 4.48% for 1997.
<PAGE>
INTEREST AND DIVIDEND INCOME

Interest  and  dividend  income  for the year  ended  March  31,  1998 was $55.4
million,  up from $52.9  million for the year ended March 31, 1997.  Interest on
loans  increased  from $43.6  million for the year ended March 31, 1997 to $47.5
million for the year ended March 31,  1998.  This  increase of $3.9  million was
primarily the result of volume increases. The average balance of loans increased
$36.0  million,  while the average  yield on loans  increased to 9.36%,  up from
9.25% for the year ended March 31, 1997.  The interest on  securities  available
for sale  decreased  $1.1 million from $3.7 million for the year ended March 31,
1997 to $2.6  million  for the year  ended  March 31,  1998.  This  decrease  in
interest on  securities  available  for sale was the result of a decrease in the
average  balance of  securities  available  for sale (from $53.4 million for the
year ended  March 31, 1997 to $39.4  million for the year ended March 31,  1998)
and a decrease  in the  average  yield on this  portfolio  from 6.84% in 1997 to
6.52% in 1998.  A decrease in interest  earned on  securities  held to maturity,
from $5.4 million for the year ended March 31, 1997 to $4.7 million for the year
ended March 31, 1998,  was  primarily  the result of reductions in volume as the
average  balance  decreased from $83.3 million in 1997 to $72.0 million in 1998.
The rise in interest  income on federal  funds sold of $327 thousand to the $416
thousand in 1998 was primarily the result of higher average balances.

INTEREST EXPENSE

Interest  expense  increased  slightly  during the year ended  March 31, 1998 to
$26.0 million, up from $25.4 million for the year ended March 31, 1997. Interest
on time  deposits for the year ended March 31, 1998 was $18.1  million,  up from
$17.7 million for the year prior. This increase was the result of both increases
in the average  balance of time deposits,  from $307.8 million in 1997 to $311.0
million for the year ended March 31, 1998, as well as an increase in the average
rates  paid,  up 5 basis  points for the year  ended  March 31,  1998.  Interest
expense on savings  accounts  increased $206  thousand,  to $4.7 million for the
year ended March 31, 1998.  This increase was largely  attributed to an increase
in the average balance of savings  accounts (up $4.9 million).  Interest expense
on N.O.W.  and money market accounts was flat for the year ended March 31, 1998,
compared  with  the  prior  year.  Fluctuations  in  interest  expense  on other
categories of interest-bearing liabilities were not significant.

                                                                              15
<PAGE>
PROVISION FOR LOAN LOSSES

The  provision  for loan losses  increased  from $3.8 million for the year ended
March 31, 1997 to $8.5 million for the year ended March 31, 1998.  This increase
was  primarily the result of increases in net  charge-offs  from $1.5 million in
1997 to $6.1 million in 1998 principally due to one large lending  relationship.
This increase in net  charge-offs  combined with continued  growth in the higher
risk elements of the Company's loan portfolio,  continued  economic  weakness in
the Company's  market area,  declining  real estate values  securing much of the
loan  portfolio as well as  management's  evaluation  of the  prospects  for its
market area resulted in the increase in the provision recorded in the year ended
March 31, 1998.

OTHER OPERATING INCOME

Total other  operating  income  increased  from $1.8  million for the year ended
March  31,  1997 to $2.8  million  for the year  ended  March  31,  1998.  Other
operating  income is composed  primarily of service charges on deposit  accounts
and loan servicing  income.  Income from service charges on deposit accounts was
flat at $1.1  million for each of the years ended March 31, 1998 and 1997.  Loan
servicing  income decreased to $398 thousand in the year ended March 31, 1998 as
a result of a lower loan servicing portfolio, particularly at the Bank's premium
finance  subsidiary.  Other income was $1.2 million for the year ended March 31,
1998,  up from $237  thousand for the prior year.  The increase was related to a
recovery recorded in the year ended March 31, 1998 on an asset which was written
down in a prior year as well as a gain of $452 thousand recorded during the year
ended March 31, 1998  relating to the sale of a building in which the  Company's
main branch was formerly located.  The remainder of the increase in other income
was  generated  by  the  Company's  mortgage  brokerage  subsidiary  that  began
operations in the latter part of the year ended March 31, 1997.

OTHER OPERATING EXPENSES

Total other operating  expenses  increased $2.8 million to $19.0 million for the
year ended March 31, 1998, up from $16.2  million for the year prior.  Increases
in compensation  and benefits (up $802 thousand),  equipment (up $384 thousand),
other real estate owned and  repossessed  property  expenses (up $280 thousand),
legal and other professional fees (up $553 thousand) and other expenses (up $604
thousand) were the primary contributors to the overall increase.

The  increase  in  compensation  and  benefits  was the  result of  opening  the
Company's Hillsdale branch in May 1997, the growth of the Bank's premium finance
and mortgage  brokerage  subsidiaries as well as general merit increases paid to
the Company's employees during the year ended March 31, 1998.

The increase in equipment  expense was due to the acquisition and integration of
a new mainframe data processing system in November 1996, as well as the addition
of the new branch as referenced above.

The increase in OREO and repossessed property expenses were attributed to higher
levels of writedowns to estimated fair value of OREO and repossessed  properties
during the year ended March 31, 1998 and higher maintenance  expenses associated
with these properties. The overall expense for the year ended March 31, 1998 was
reduced by a large gain  recognized  by the Company  during the year relating to
the sale of an OREO property.
<PAGE>
The  increase  in legal and other  professional  fees was the result of external
costs  associated with the Company's  consideration  and evaluation of strategic
options,  including  merger and  acquisition  opportunities.  In  addition,  the
Company  experienced  higher consulting  expenses during fiscal 1998  compared
with 1997.  These  expenses  related to  assistance  provided to  management  in
addressing  certain strategic  planning ideas, tax minimization  solutions  and
operational efficiencies for the Company.

The increase in other  expenses was the result of general  increases  associated
with the opening the new branch referenced above, increased expenses relating to
the servicing and collection of non-performing and other delinquent loans, and a
one-time charge-off of an asset deemed  uncollectible.  The remaining categories
of other expenses and other  operating  expenses did not experience  significant
fluctuations.

INCOME TAX EXPENSE

Income tax expense decreased from $3.6 million for the year ended March 31, 1997
to $1.9  million for the year ended March 31, 1998.  The decrease was  primarily
the result of lower pre-tax income.

16
<PAGE>
================
FINANCIAL
CONDITION

COMPARISON OF MARCH 31, 1999 AND 1998

Total assets at March 31, 1999 were at $881.1 million up $209.9 million from the
$671.2 million at March 31, 1998.  Substantially  all of the increase was due to
the proceeds received as part of the Company's initial public offering,  as well
as increased  borrowings at March 31, 1999 to fund loan growth.  The increase in
assets  was  concentrated  in  the  securities   available  for  sale  and  loan
portfolios,  which increased $200.1 million and $71.1 million, respectively. The
growth in these asset  categories  was  partially  offset by a reduction  in the
securities held to maturity portfolio of $42.2 million. These changes as well as
fluctuations in other asset and liability categories are discussed below.

LENDING

Loans  receivable  increased $71.1 million from $507.0 million at March 31, 1998
to $578.1  million at March 31,  1999.  The  overall  growth in total  loans was
primarily  made up of increases in  residential  real  estate,  commercial  real
estate,  commercial loans and financed insurance premiums,  somewhat offset by a
decline  in  manufactured  housing.   Although  residential  real  estate  loans
increased  $24.5  million,  the  level of  residential  real  estate  loans as a
percentage  of total  loans  decreased  from 53.2% to 50.8%.  The growth in this
portfolio  was  primarily  a result of the  Bank's  decision  to hold fixed-rate
products for portfolio investment at a time when adjustable-rate loans were less
popular.  Commercial real estate loans increased from $76.6 million at March 31,
1998,  or 15.1% of total  loans,  to $91.5  million,  or 15.8% of total loans at
March 31, 1999.  Commercial  loans  increased  $10.5 million to $29.0 million at
March  31,  1999 from  $18.5  million  at March 31,  1998.  These  increases  in
commercial  real  estate  and  commercial  loans  are a result  of  management's
continuing  strategy of  increasing  these  portfolios  as a percentage of total
loans.  Financed  insurance  premiums  increased from $28.0 million,  or 5.5% of
total loans at March 31, 1998 to $57.9 million, or 10.0% of total loans at March
31, 1999.  This increase was seasonal in nature and was a result of management's
efforts  to  focus  on   commercial   insurance   lines  rather  than   personal
assigned-risk  insurance  lines.  The commercial  insurance  lines are primarily
policies on limousines and other commercial vehicles.  These policies are almost
entirely  written in late  February  and early March of each year and  typically
have 8 or 9 month terms. The Company's participation in financing these programs
significantly  increased as  management  made a concerted  effort to attract new
relationships  with  brokers and agents  during the current  year.  Manufactured
housing  loans  declined $7.1 million from $97.4 million or 19.2% of total loans
at March 31, 1998 to $90.4  million or 15.6% of total loans at March 31, 1999 as
a  result  of  management's  efforts  to  reduce  this  portfolio  and  focus on
commercial and commercial real estate loans.
<PAGE>
LOAN PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
March 31,                           1999               1998                 1997                1996                1995
===================================================================================================================================
(In thousands)                     Amount      %      Amount      %        Amount      %       Amount     %        Amount      %
===================================================================================================================================
<S>                              <C>          <C>     <C>         <C>     <C>          <C>    <C>         <C>     <C>          <C>
Loans secured by real estate:
   Residential                   $293,907     50.8%   $269,435    53.2%   $274,092     55.6%  $241,162    53.5%   $253,375     57.7%
   Commercial                      91,480     15.8      76,570    15.1      67,697     13.7     70,854    15.7      70,328     16.0
   Construction                     4,960      0.9       4,621     0.9       2,725      0.6      4,317     1.0       6,446      1.5
------------------------------------------------------------------------------------------------------------------------------------
Total loans secured
  by real estate                  390,347     67.5     350,626    69.2     344,514     69.9    316,333    70.2     330,149     75.2
------------------------------------------------------------------------------------------------------------------------------------
Other loans:

   Manufactured housing            90,354     15.6      97,426    19.2      92,651     18.8     80,399    17.8      72,184     16.5
   Commercial                      29,024      5.0      18,484     3.7      19,713      4.0     29,190     6.5      18,420      4.2
   Financed insurance
     premiums                      57,901     10.0      27,976     5.5      23,535      4.8     13,503     3.0       8,674      2.0
   Consumer                        12,440      2.2      11,857     2.3      11,577      2.3     10,155     2.3       8,448      1.9
------------------------------------------------------------------------------------------------------------------------------------
Total other loans                 189,719     32.8     155,743    30.7     147,476     29.9    133,247    29.6     107,726     24.6
------------------------------------------------------------------------------------------------------------------------------------

Unearned discount and
  net deferred loan
  origination costs                (1,967)    (0.3)        609     0.1       1,029      0.2      1,091     0.2       1,000      0.2
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable           $578,099    100.0%   $506,978   100.0%   $493,019    100.0%  $450,671   100.0%   $438,875    100.0%
Allowance for loan losses         (14,296)              (8,227)             (5,872)             (3,546)             (3,187)
------------------------------------------------------------------------------------------------------------------------------------
Net loans receivable             $563,803             $498,751            $487,147            $447,125            $435,688
====================================================================================================================================
</TABLE>

                                                                              17
<PAGE>
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
(In thousands)                 March 31,                  1999         1998          1997         1996          1995
=======================================================================================================================
<S>                                                      <C>          <C>           <C>          <C>           <C>

Non-accruing loans

Residential real estate                                  $ 2,253      $ 4,512       $ 4,553      $ 3,496       $1,900
Commercial real estate                                     2,669        5,253         3,239        1,587        1,884
Commercial loans                                              --           --         2,318           75           27
Manufactured housing                                       2,315        3,060         2,260        1,597        1,581
Financed insurance premiums                                2,549        2,768         2,867        1,527          819
Consumer                                                     158          114            45            4           10
-----------------------------------------------------------------------------------------------------------------------
Total                                                      9,944       15,707        15,282        8,286        6,221
-----------------------------------------------------------------------------------------------------------------------

Accruing loans past due 90-days or more
  and still accruing interest

Residential real estate                                       --           --           570        1,262          400
Commercial real estate                                        --           --         3,874        1,316          591
Commercial loans                                              --           --           244           --           --
Manufactured housing                                          --           16            --           22           16
Financed insurance premiums                                   --           --            --           --           --
Consumer                                                      --           --            23           --          122
-----------------------------------------------------------------------------------------------------------------------
Total                                                         --           16         4,711        2,600        1,129
-----------------------------------------------------------------------------------------------------------------------
Total non-performing loans                               $ 9,944      $15,723       $19,993      $10,886       $7,350
=======================================================================================================================
Foreclosed and repossessed assets

Residential real estate                                   $  258       $  145         $  48       $  160        $  49
Commercial real estate                                       474          299         2,860          921          726
Repossessed property                                       1,776        1,088           539          635          503
-----------------------------------------------------------------------------------------------------------------------
Total                                                      2,508        1,532         3,447        1,716        1,278
=======================================================================================================================
Total non-performing assets                              $12,452      $17,255       $23,440      $12,602       $8,628
=======================================================================================================================
Allowance for loan losses                                $14,296      $ 8,227       $ 5,872      $ 3,546       $3,187
=======================================================================================================================

Allowance as a percentage of non-performing loans        143.77%        52.32%        29.37%       32.57%       43.36%
Non-performing assets as a percentage of total assets      1.41          2.57          3.60         2.02         1.50
Non-performing loans as a percentage of total loans        1.72          3.10          4.06         2.42         1.67
=======================================================================================================================
</TABLE>
<PAGE>
ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses  increased  from $8.2 million at March 31, 1998 to
$14.3 million at March 31, 1999, an increase of $6.1 million.  This increase was
the result of the $7.3 million provision for loan losses taken in the year ended
March 31, 1999,  offset by $1.3  million in net  charge-offs  for the year.  The
adequacy of the  allowance  for loan losses is evaluated  monthly by  management
based  upon  a  review  of  significant  loans,  with  particular   emphasis  on
non-performing  and delinquent  loans that management  believes  warrant special
attention,  as well as an analysis of the higher risk  elements of the Company's
loan  portfolio.  At March  31, 1999, the  allowance  for loan  losses  provides
coverage of 143.77% of total  non-performing  loans, up from 52.32% at March 31,
1998.  The  balance  of the  allowance  is  maintained  at a level  that is,  in
management's judgment, representative of the amount of risk inherent in the loan
portfolio.

SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY

The total  balance  of  securities  available  for sale and  securities  held to
maturity  increased  from $107.7  million at March 31, 1998 to $265.7 million at
March 31, 1999.  This  increase was driven by purchases of  securities  totaling
$241.2  million  during  the year  ended  March 31,  1999,  partially  offset by
maturities,   calls  and  paydowns  of  securities   totaling   $82.0   million.
Management's  intention is to continue  allowing  securities held to maturity to
mature and paydown with the reinvestment of the proceeds primarily in securities
available for sale or the loan portfolio.

FEDERAL FUNDS SOLD

The  decrease  of $21.9  million  in  Federal  funds  sold was the result of the
reinvestment of these funds into higher yielding,  longer term assets, including
loans and securities available for sale.

18
<PAGE>
PREMISES AND EQUIPMENT

Premises and  equipment  increased  $1.5 million from $15.3 million at March 31,
1998 to $16.8  million  at March 31,  1999.  This  increase  was  related to the
Company's efforts to upgrade technology including a new front end system for its
branch  network,  new  image-technology  for its  backoffice  operations and new
computers for employees throughout the Company. These upgrades in technology are
intended to improve  the  employees'  ability to  efficiently  provide  superior
service to the Company's customers.

OREO AND REPOSSESSED PROPERTY

The balance of OREO and  repossessed  property  increased  from $1.5  million at
March 31, 1998 to $2.5 million at March 31, 1999, an increase of $976  thousand.
This increase relates primarily to management's  efforts to aggressively  reduce
the level of  non-performing  loans  during the year.  Repossessed  manufactured
homes make up the majority of the increase. Management believes that the current
trend in increased bankruptcies and consumer debt has contributed  significantly
to the decline in manufactured housing credit quality.

OTHER ASSETS

The net growth in other  assets  from $4.9  million  at March 31,  1998 to $10.6
million at March 31,  1999 was  attributed  primarily  to the  Company's  equity
investment in Homestead  Funding Corp.  during November 1998.  Homestead Funding
Corp.  is the  largest  residential  mortgage  originator  based in the  Capital
District area. This investment  reflects  management's  strategic  initiative to
increase  non-interest  income  from both  traditional  products  offered by the
Company as well as through new sources.

DEPOSITS

Total deposits increased $3.5 million,  from $588.3 million at March 31, 1998 to
$591.8 million at March 31, 1999. Increases in savings accounts of $3.4 million,
N.O.W.  and money  market  accounts  of $6.0  million  and non  interest-bearing
accounts of $10.9  million more than offset a decline in time  deposits of $16.8
million. The growth of N.O.W. and money market balances and non interest-bearing
balances  was in part a result of the  Company's  success in growing  commercial
services.  These sources of funds  traditionally  have lower  interest  costs in
comparison to time deposits or non-retail funding.

OTHER SHORT-TERM BORROWINGS

Other short-term  borrowings  increased $25.6 million from $2.0 million to $27.6
million.  These borrowings were necessary to supplement  deposit growth and fund
the increases in the loan and securities portfolios.

OTHER LIABILITIES

The balance of other liabilities  increased  significantly  from $8.9 million at
March 31, 1998 to $37.7 million at March 31, 1999. This increase was largely due
to the  timing  of  payments  from the  Bank's  premium  finance  subsidiary  to
insurance companies for premiums due under the terms of finance  agreements.  At
March 31,  1999,  a large  amount of premiums  were due and were funded  shortly
after the fiscal year end. This fluctuation is primarily  seasonal in nature and
mirrors the growth  experienced  within the loan portfolio  relating to financed
insurance premiums.
<PAGE>
SHAREHOLDERS' EQUITY

The balance of  shareholders'  equity  increased from $68.3 million at March 31,
1998 to $219.3 million at March 31, 1999. The Company's  initial public offering
which resulted in net proceeds received of $170.0 million was the primary factor
for this  increase.  Total  shareholders'  equity was  further  impacted  by the
establishment  of the Company's ESOP, the purchase of treasury stock,  the grant
of restricted stock awards and net income. Shareholders' equity will be impacted
in future periods as the Company continues its current share repurchase program.
The Company will also consider future share repurchase  programs if they enhance
shareholder  value. In addition,  in April 1999, the Company  declared its first
quarterly  cash  dividend of $.03 per share.  This  dividend,  as well as future
dividend declarations, will also impact shareholders' equity.

                                                                              19
<PAGE>
=====================
QUANTITIVE
AND
QUALITIVE
DISCLOSURES
ABOUT
MARKET RISK

Interest rate risk is the most  significant  market risk  affecting the Company.
Other types of market  risk,  such as foreign  currency  exchange  rate risk and
commodity  price  risk,  do not  arise in the  normal  course  of the  Company's
business activities.

Interest  rate risk is defined as an exposure  to a movement  in interest  rates
that could have an adverse  effect on the  Company's  net interest  income.  Net
interest  income  is  susceptible  to  interest  rate  risk to the  degree  that
interest-bearing liabilities mature or reprice on a different basis than earning
assets.  When  interest-bearing  liabilities mature or reprice more quickly than
earning  assets in a given  period,  a  significant  increase in market rates of
interest could adversely  affect net interest  income.  Similarly,  when earning
assets mature or reprice more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net interest income.

In an attempt to manage its  exposure to changes in interest  rates,  management
monitors  the  Company's  interest  rate  risk.   Management's   asset/liability
committee meets monthly to review the Company's  interest rate risk position and
profitability,  and to recommend  strategies for  consideration  by the Board of
Directors.  Management  also reviews loan and deposit  pricing and the Company's
securities portfolio,  formulates investment and funding strategies and oversees
the  timing and  implementation  of  transactions  to assure  attainment  of the
Board's objectives in the most effective manner.  Notwithstanding  the Company's
interest rate risk management  activities,  the potential for changing  interest
rates is an uncertainty that can have an adverse effect on net interest income.

In adjusting the Company's  asset/liability  position,  the Board and management
attempt to manage the Company's  interest rate risk while enhancing net interest
margin.  At  times,  depending  on the  level of  general  interest  rates,  the
relationship  between long- and short-term interest rates, market conditions and
competitive  factors,  the Board and  management  may  determine to increase the
Company's  interest  rate risk  position  somewhat in order to increase  its net
interest  margin.  The Company's  results of operations and net portfolio values
remain  vulnerable  to  changes in  interest  rates and to  fluctuations  in the
difference between long- and short-term interest rates.

Interest rate risk analyses  performed by the Company  indicate that the Company
is asset  sensitive,  or its earning  assets mature or reprice more quickly than
its  interest-bearing  liabilities.  As a result,  falling  interest rates could
result in a decrease in net interest income. Consistent with the asset/liability
management philosophy described above, the Company has taken steps to manage its
interest rate risk by  attempting to match the repricing  periods of its earning
assets to its  interest-bearing  liabilities.  The Company's recent purchases of
securities,  retention of certain  fixed-rate  residential  loan  products,  and
emphasis on lower cost, more stable non-certificate deposit accounts are methods
the  Company  has  utilized  to  manage  its  interest  rate  risk.   Management
continuously  evaluates  various  alternatives  to  address  interest  rate risk
including,  but not limited to, the purchase of interest rate swaps,  caps,  and
floors, leveraging scenarios, and changes in asset or funding mix.
<PAGE>
The primary  tool  utilized by  management  to measure  interest  rate risk is a
balance  sheet/income  statement  simulation model. The model is used to execute
simulations  of  the  Company's  net  interest  income  performance  based  upon
potential  changes in interest rates over a selected period of time. The model's
input data  includes  earning  assets and  interest-bearing  liabilities,  their
associated cash flow characteristics,  repricing  opportunities,  maturities and
current rates. In addition,  management makes certain assumptions in relation to
prepayment  speeds for all assets and  liabilities  which  possess  optionality,
including  loans,   mortgage-backed   securities  and  collateralized   mortgage
obligations. These assumptions are based on industry standards for prepayments.

The model is first run under an  assumption  of a flat rate  scenario  (i.e.  no
change in current  interest  rates) over a 12 month  period.  A second and third
model are run in which a gradual  increase and  decrease,  respectively,  of 200
basis points takes place over a 12 month period.  Under these scenarios,  assets
subject to repricing or prepayment  are adjusted to account for faster or slower
prepayment  assumptions.  The resultant  changes in net interest income are then
measured against the flat rate scenario.

20
<PAGE>
The following  table  summarizes  the percentage  change in interest  income and
interest  expense  by  major  earning  asset  and   interest-bearing   liability
categories as of March 31, 1999 in the rising and declining  rate scenarios from
the  forecasted  interest  income and  interest  expense  amounts in a flat rate
scenario.  Under the declining rate scenario, net interest income is expected to
decrease from the flat rate scenario by 1.28% over a 12 month period.  Under the
rising rate scenario,  net interest income is expected to increase by 2.57% from
the flat rate scenario over a 12 month period.  This level of variability places
the  Company's  interest  rate  risk  profile  well  within  acceptable  Company
guidelines.
<TABLE>
<CAPTION>
INTEREST RATE RISK                        Percentage Change in Net Interest Income From Flat Rate Scenario
===========================================================================================================================
                                                          Declining Rate Scenario     Rising Rate Scenario
===========================================================================================================================
<S>                                                                            <C>                       <C>
Investment securities (include all held to maturity,
  available for sale and money market investments)                             (4.54)%                   4.09%
Total loans                                                                    (2.74)                    3.92
---------------------------------------------------------------------------------------------------------------------------
Total interest income                                                          (3.21)                    3.97
---------------------------------------------------------------------------------------------------------------------------
Core deposits                                                                 (13.33)                   13.38
Time deposits                                                                  (2.31)                    2.42
---------------------------------------------------------------------------------------------------------------------------
Total deposits                                                                 (5.84)                    5.92

Borrowings                                                                    (22.40)                   17.20
---------------------------------------------------------------------------------------------------------------------------
Total interest expense                                                         (6.75)                    6.54
---------------------------------------------------------------------------------------------------------------------------
Net interest income                                                            (1.28)%                   2.57%
===========================================================================================================================
</TABLE>

===========================
LIQUIDITY
AND CAPITAL
RESOURCES



LIQUIDITY

Liquidity  is defined as the ability to generate  sufficient  cash flows to meet
all present and future funding commitments,  depositor withdrawals and operating
expenses.  Management monitors the Company's liquidity position on a daily basis
and evaluates  its ability to meet  depositor  withdrawals  or make new loans or
investments.

The Company's cash inflows result primarily from loan repayments, maturities and
calls of securities  held to maturity and  securities  available  for sale,  new
deposits, and to a lesser extent,  drawings upon the Company's credit lines with
the Federal Home Loan Bank of New York ("FHLB"). During the year ended March 31,
1999,   the  Company's   initial  public   offering   served  as  a  significant
non-recurring   source  of  cash  inflows.   The  Company's  cash  outflows  are
substantially new loan originations,  security purchases,  deposit  withdrawals,
operating expenses and treasury stock purchases.  The timing of cash inflows and
outflows is closely monitored by management  although changes in interest rates,
economic  conditions,  and competitive forces strongly impact the predictability
of these cash flows. The Company attempts to provide stable and flexible sources
of funding  through the  management of its  liabilities,  including core deposit
products   offered  through  its  branch  network  and  through  usage  of  FHLB
borrowings.  Management  believes that the level of the Company's  liquid assets
combined  with daily  monitoring of cash inflows and outflows  provide  adequate
liquidity  to  fund   outstanding  loan   commitments,   meet  daily  withdrawal
requirements of depositors and meet all other daily obligations of the Company.
<PAGE>
CAPITAL

Consistent  with  its  goals  to  operate  a  sound  and  profitable   financial
organization,  the  Company  actively  seeks  to  maintain  the Bank as a "well-
capitalized"  institution in accordance with regulatory standards.  Consolidated
shareholders'  equity was  $219.3  million  at March 31,  1999,  24.89% of total
assets on that date.  As of March 31, 1998,  total  equity was $68.3  million or
10.18% of total assets. This growth in the equity to assets ratio was the result
of the  Company's  stock  offering  that closed on July 1, 1998. As of March 31,
1999, the Bank exceeded all of the capital requirements of its regulators. For a
detailed  discussion of the Company's and Bank's capital  ratios,  see note 7 to
the consolidated financial statements.

                                                                              21
<PAGE>
====================
IMPACT OF
INFLATION
AND
CHANGING
PRICES

The Company's  consolidated financial statements are prepared in conformity 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
same direction, or to the same extent, as the prices of goods and services.

====================
YEAR 2000
READINESS
STATEMENT

The  Company  has  conducted  a  review  of its  computer  systems  to  identify
applications  that could be affected by the "Year 2000" issue, and has developed
an  implementation  plan to resolve the issue.  The Company's data processing is
performed almost entirely  in-house,  however software and hardware  utilized is
under maintenance agreements with third party vendors. Consequently, the Company
is very  dependent  on those  vendors  to  conduct  its  business.  The  Company
contacted each vendor during late 1997 and early 1998 to request  timetables for
Year 2000  compliance  and  expected  costs,  if any, to be passed  along to the
Company.  The Company began the testing phase to determine  whether its hardware
and  software is Year 2000  compliant  in  mid-1998.  Testing and any  necessary
modifications on all  mission-critical  systems were substantially  completed by
December 31, 1998 in accordance with regulatory  guidelines.  Testing of systems
that are not considered to be  mission-critical  is scheduled to be completed by
June 30,  1999.  The  Company's  testing  plans  provide a strict  time frame to
determine that the  reprogramming  efforts of its primary service  providers are
Year 2000 compliant and completed within the time  requirements  provided by its
regulators.  To date, the results of the Company's testing,  after all necessary
modifications, have indicated that the systems used by the Company are Year 2000
compliant.

In the normal course of keeping pace with changing  technology,  the Company has
performed  upgrades of its  hardware and  software in recent  years,  as well as
during the current  year.  The Company has spent less than $100 thousand to date
in making any necessary  upgrades to its systems  solely as a result of the Year
2000 issue.  Because of the Company's  investments  in technology  over the last
three years,  management does not anticipate that any additional costs to ensure
its  systems  are Year  2000  compliant  will have a  significant  impact on the
Company's  financial  position or the results of its operations.  These costs do
not include  internal  personnel time involved with the installation and testing
of the Company's systems.  The Company has funded, and intends to fund, its Year
2000 related  expenditures out of general  operating sources and expense them as
incurred.
<PAGE>
The risks  associated  with this issue go beyond the  Company's  own  ability to
solve  Year 2000  problems.  Should  significant  commercial  customers  fail to
address  Year 2000  issues  effectively,  their  ability  to meet  debt  service
requirements could be impaired, resulting in increased credit risk and potential
increases in loan charge-offs. Should significant depositors or other sources of
funds fail to address Year 2000 issues effectively,  the Company could be forced
to  utilize  alternative  funding  vehicles,  possibly  at higher  costs than it
currently  incurs.  In addition,  should suppliers of critical  services fail in
their  efforts to become  Year 2000  compliant,  or if  significant  third party
interfaces fail to be compatible  with the Company's  systems or fail to be Year
2000 compliant,  it could have significant adverse effects on the operations and
financial results of the Company.

The  Company  has taken steps to  identify  and  contact  significant  borrower,
depositor  and  supplier  relationships  in  order to  assess  their  Year  2000
readiness and the potential  for an adverse  impact to the Company  should their
systems not be  compliant  with Year 2000.  Based upon the  information  we have
received  to  date,  there  have  been no  significant  issues  that  have  been
identified  with respect to the Year 2000  readiness of  significant  borrowers,
depositors  or  suppliers.  The  Company  has  developed  contingency  plans and
strategies to address possible  instances in which a system or resource fails to
be  compliant.  The  contingency  plans vary with the  affected  systems.  These
contingency  plans  include  details  for  performing  some  key  procedures  or
functions manually,  utilizing alternative energy and/or communication  systems,
identifying Company  personnel to be on standby to address problems if, and when
they arise,  and drawing on  additional  liquidity  sources if the need for such
funds  arise.  Based  upon  testing  results,   communication  with  significant
borrowers,  depositors,  and  suppliers,  and  contingency  plans in place,  the
Company  believes that the failure of its critical  software systems as a result
of the Year 2000 is unlikely.

22
<PAGE>
====================
IMPACT
OF NEW
ACCOUNTING
STANDARDS

In June 1998, the FASB issued  Statement of Financial  Accounting  Standards 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.  This  Statement  currently  is  effective  for all  fiscal
quarters of fiscal years beginning after June 15, 1999.  Management is currently
evaluating  what  impact,  if any,  this  Statement  will have on the  Company's
consolidated financial statements.

====================
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
Litigation's   Reform  Act  of  1995.  In  addition,   certain  disclosures  and
information  customarily provided by financial institutions are inherently based
upon predictions of future events and circumstances.  Furthermore,  from time to
time, the Company may publish other forward-looking  statements relating to such
matters as anticipated  financial  performance,  business  prospects and similar
matters.

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

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

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

     c.   Changes  in laws and  regulations  affecting  the  financial  services
          industry;

     d.   Changes in competition;

     e.   Changes in consumer preferences; and

     f.   Uncertainties  relating to the impact of the Year 2000 on the Company,
          its suppliers, borrowers and depositors.
<PAGE>
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 obligations,  to
publicly  release  the  result  of  any  revisions  that  may  be  made  to  any
forward-looking   statements  to  reflect  the   occurrence  of  anticipated  or
unanticipated events or circumstances after the date of such statements.

                                                                              23
<PAGE>
               Hudson River Bancorp, Inc.
=========================================
 MANAGEMENT'S STATEMENT OF RESPONSIBILITY

The management of Hudson River Bancorp, Inc. is responsible for the preparation,
content and integrity of the consolidated  financial statements included in this
annual report. The consolidated financial statements and related notes have been
prepared in conformity with generally accepted accounting principles and, in the
judgment of management,  present fairly Hudson River Bancorp,  Inc.'s  financial
position,  results of operations and cash flows.  Management  also believes that
financial  information  presented  elsewhere in this annual report is consistent
with that in the consolidated financial statements.

Management  is  also  responsible  for  establishing  and  maintaining  internal
controls  designed to provide  reasonable  assurance of the  accountability  and
safeguarding  of the Company's  assets and of the integrity of the  consolidated
financial  statements.  These  corporate-wide  controls include  self-monitoring
mechanisms,  written policies and procedures, proper delegation of authority and
organizational  division  of  responsibility,  and  the  careful  selection  and
training  of  qualified  personnel.   There  are  inherent  limitations  in  the
effectiveness of any internal controls, including the possibility of human error
and the  circumvention or overriding of controls.  Management  believes that the
Company's  internal  controls  provide  reasonable   assurances  that  financial
transactions  are  recorded  properly  to permit  the  preparation  of  reliable
financial statements.

The  Board  of  Directors   discharges  its  responsibility  for  the  Company's
consolidated  financial  statements  through its Audit Committee.  The Company's
Audit  Committee,   composed   exclusively  of  outside   directors,   also  has
responsibility  for recommending the independent  auditors.  The Audit Committee
meets regularly with both the independent  auditors and the internal auditors to
review the scope of their audits and audit  reports and to discuss  action to be
taken.

/s/ Carl A. Florio                                      /s/ Timothy E. Blow
------------------                                      -------------------
Carl A. Florio                                          Timothy E. Blow
President and Chief Executive Officer                   Chief Financial Officer


=========================================
            INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
Hudson River Bancorp, Inc.

We have audited the  accompanying  consolidated  balance  sheets of Hudson River
Bancorp,  Inc. and  subsidiary  (the Company) as of March 31, 1999 and 1998, and
the  related   consolidated   income   statements,   statements  of  changes  in
shareholders'  equity,  and cash  flows for each of the years in the  three-year
period ended March 31, 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  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  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 Hudson  River
Bancorp,  Inc. and  subsidiary as of March 31, 1999 and 1998, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended March 31, 1999, in conformity  with generally  accepted  accounting
principles.

/s/ KPMG LLP
--------------
KPMG LLP


Albany, New York
May 14, 1999

24
<PAGE>
===============================
    CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share and per share data)              March 31,       1999                     1998
===========================================================================================================================
<S>                                                                      <C>                      <C>
Assets
Cash and due from banks                                                  $ 12,722                 $ 12,423
Federal funds sold                                                             --                   21,850
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents                                                  12,722                   34,273
---------------------------------------------------------------------------------------------------------------------------
Loans held for sale                                                            --                    1,286
Securities available for sale, at fair value                              242,611                   42,471
Securities held to maturity (fair value of $23,235 and $65,482)            23,041                   65,194
Federal Home Loan Bank of New York stock, at cost                           3,299                    3,035

Loans receivable                                                          578,099                  506,978
Allowance for loan losses                                                 (14,296)                  (8,227)
---------------------------------------------------------------------------------------------------------------------------
Net loans receivable                                                      563,803                  498,751
---------------------------------------------------------------------------------------------------------------------------

Accrued interest receivable                                                 5,701                    4,402
Premises and equipment, net                                                16,807                   15,331
Other real estate owned and repossessed property                            2,508                    1,532
Other assets                                                               10,647                    4,939
---------------------------------------------------------------------------------------------------------------------------
Total assets                                                             $881,139                 $671,214
===========================================================================================================================

Liabilities and Shareholders' Equity
Liabilities:

   Deposits                                                              $591,814                 $588,314
   Securities sold under agreements to repurchase                             845                       --
   Other short-term borrowings                                             27,600                    2,000
   Mortgagors' escrow deposits                                              3,869                    3,723
   Other liabilities                                                       37,670                    8,873
---------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                         661,798                  602,910
---------------------------------------------------------------------------------------------------------------------------

Shareholders' Equity:

   Preferred stock, $.01 par value, Authorized 5,000,000 shares                --                       --
   Common stock, $.01 par value, Authorized 40,000,000 shares;
     17,853,750 shares issued at March 31, 1999                               179                       --
   Additional paid-in capital                                             174,894                       --
   Unallocated common stock held by ESOP                                  (17,200)                      --
   Unvested restricted stock awards                                        (7,996)                      --
   Treasury stock, at cost  (157,500 shares at March 31, 1999)             (1,663)                      --
   Retained earnings, substantially restricted                             71,893                   68,308
   Accumulated other comprehensive loss                                      (766)                      (4)
---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity                                                219,341                   68,304
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                               $881,139                 $671,214
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                                                              25
<PAGE>

======================================
        CONSOLIDATED INCOME STATEMENTS

<TABLE>
<CAPTION>
(In thousands, except per share data)

           Years Ended March 31,                  1999                     1998                     1997
===========================================================================================================================
<S>                                              <C>                      <C>                      <C>
Interest and dividend income

Interest and fees on loans                       $47,503                  $47,482                  $43,585
Securities available for sale                      9,997                    2,568                    3,658
Securities held to maturity                        3,095                    4,727                    5,385
Federal funds sold                                 1,054                      416                       89
Securities purchased under agreements to resell    1,662                       --                       --
Federal Home Loan Bank of New York stock             215                      194                      164
---------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income                63,526                   55,387                   52,881
---------------------------------------------------------------------------------------------------------------------------

Interest expense

Deposits                                          25,844                   25,772                   25,187
Securities sold under agreements to repurchase         3                       --                       --
Other short-term borrowings                          153                      205                      239
---------------------------------------------------------------------------------------------------------------------------
Total interest expense                            26,000                   25,977                   25,426
---------------------------------------------------------------------------------------------------------------------------
Net interest income                               37,526                   29,410                   27,455
Provision for loan losses                          7,341                    8,491                    3,826
---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
  for loan losses                                 30,185                   20,919                   23,629
---------------------------------------------------------------------------------------------------------------------------

Other operating income

Service charges on deposit accounts                1,274                    1,103                    1,063
Loan servicing income                                199                      398                      480
Net securities transactions                           36                       15                       28
Net gain on sales of loans held for sale              65                       96                       17
Other income                                         844                    1,233                      237
---------------------------------------------------------------------------------------------------------------------------
Total other operating income                       2,418                    2,845                    1,825
---------------------------------------------------------------------------------------------------------------------------

Other operating expenses

Compensation and benefits                         10,982                    9,394                    8,592
Occupancy                                          1,498                    1,395                    1,285
Equipment                                          1,647                    1,614                    1,230
Other real estate owned and repossessed
  property expenses                                1,013                      572                      292
Legal and other professional fees                    600                      950                      397
Postage and item transportation                      718                      765                      655
Charitable foundation contribution                 5,200                       --                       --
Other expenses                                     4,954                    4,340                    3,736
---------------------------------------------------------------------------------------------------------------------------
Total other operating expenses                    26,612                   19,030                   16,187
---------------------------------------------------------------------------------------------------------------------------

Income before income tax expense                   5,991                    4,734                    9,267
Income tax expense                                 2,184                    1,903                    3,607
---------------------------------------------------------------------------------------------------------------------------
Net income                                       $ 3,807                  $ 2,831                  $ 5,660
===========================================================================================================================
Basic earnings per share                         $ 0.17                      --                       --
===========================================================================================================================
Diluted earnings per share                       $ 0.17                      --                       --
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

26
<PAGE>
================================================================
     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except share and per share data)

                                           Years Ended March 31, 1999            1998                    1997
===========================================================================================================================
<S>                                                             <C>             <C>                     <C>
Common stock

Balance at beginning of year                                $     --            $ --                    $ --
Issuance of 17,333,738 shares of $.01 par value
  common stock in initial public offering                        174              --                      --
Issuance of 520,012 shares of $.01 par value
  common stock to the Hudson River Bank & Trust
  Company Foundation                                               5              --                      --
------------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                      $    179              --                      --
------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital

Balance at beginning of year                                $     --              --                      --
Issuance of 17,333,738 shares of common stock in
  initial public offering, net of offering costs of $3,370   169,793              --                      --
Issuance of 520,012 shares of common stock to the
  Hudson River Bank & Trust Company Foundation                 5,195              --                      --
Adjustment for ESOP shares released for allocation               (94)             --                      --
------------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                      $174,894              --                      --
------------------------------------------------------------------------------------------------------------------------------

Unallocated common stock held by ESOP

Balance at beginning of year                                $     --              --                      --
Acquisition of 1,428,300 shares of common
  stock by ESOP                                              (18,428)             --                      --
Shares of ESOP stock released for allocation
  (95,843 shares)                                              1,228              --                      --
------------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                      $(17,200)             --                      --
------------------------------------------------------------------------------------------------------------------------------
Unvested restricted stock awards

Balance at beginning of year                                    $ --              --                      --
Grant of restricted stock awards (714,150 shares)             (8,213)             --                      --
Amortization of restricted stock awards                          217              --                      --
------------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                     $  (7,996)             --                      --
------------------------------------------------------------------------------------------------------------------------------

Treasury stock

Balance at beginning of year                                    $ --              --                      --
Purchase of 871,650 shares of common stock                   (10,098)             --                      --
Grant of restricted stock awards (714,150 shares)              8,435              --                      --
------------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                      $ (1,663)             --                      --
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                                                              27
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except share and per share data)

                                             Years Ended March 31,        1999                    1998                    1997
===================================================================================================================================
<S>                                                         <C>           <C>        <C>          <C>        <C>           <C>
Retained earnings

Balance at beginning of year                                $ 68,308                 $65,477                 $59,817
Net income                                                     3,807     $3,807        2,831      $2,831       5,660      $5,660
5,660 Adjustment for grant of restricted stock awards           (222)                     --                      --
-----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                      $ 71,893                 $68,308                 $65,477
-----------------------------------------------------------------------------------------------------------------------------------

Accumulated other comprehensive income (loss)

Balance at beginning of year                                    $ (4)                   (348)                   (211)
Unrealized net holding gains (loss) on securities
  available for sale arising during the year
  (pre-tax ($1,153), $586 and ($191), respectively)                        (739)                     353                    (115)
Reclassification adjustment for net gains realized
  in net income (pre-tax ($36), ($15) and ($36),
  respectively)                                                             (23)                      (9)                    (22)
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)                               (762)      (762)         344         344        (137)       (137)
-----------------------------------------------------------------------------------------------------------------------------------
   Comprehensive income                                                  $3,045                   $3,175                  $5,523
                                                                         ======                   ======                  ======
Balance at end of year                                          (766)                     (4)                   (348)
-----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity at March 31,                     $219,341                 $68,304                 $65,129
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                       27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)                 Years Ended March 31, 1999                     1998                     1997
===========================================================================================================================
Cash flows from operating activities
<S>                                             <C>                      <C>                      <C>
Net income                                      $  3,807                 $  2,831                 $  5,660
Adjustments to reconcile net income to net
  cash provided by operating activities:

   Depreciation                                    1,519                    1,359                    1,183
   Provision for loan losses                       7,341                    8,491                    3,826
   Deferred tax benefit                           (3,358)                  (2,004)                    (933)
   Charitable foundation contribution              5,200                       --                       --
   Amortization of restricted stock awards           217                       --                       --
   ESOP stock released for allocation              1,134                       --                       --
   Net securities transactions                       (36)                     (15)                     (28)
   Net gain on sales of loans held for sale          (65)                     (96)                     (17)
   Net loans originated for sale                  (7,730)                 (11,423)                  (2,539)
   Proceeds from sales of loans held for sale      9,081                   10,317                    2,673
   Net gain on sale of premises and equipment        (71)                    (452)                      --
   Adjustments of other real estate owned and
     repossessed property to fair value              213                      401                      169
   Net gain on sales of other real estate owned
     and repossessed property                       (522)                    (445)                    (556)
   Net (increase) decrease in accrued interest
     receivable                                   (1,299)                     478                      374
   Net (increase) decrease in other assets        (1,921)                    (611)                     905
   Net increase in other liabilities              28,797                    3,898                    1,323
---------------------------------------------------------------------------------------------------------------------------
Total adjustments                                 38,500                    9,898                    6,380
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities         42,307                   12,729                   12,040
---------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities

Proceeds from sales of securities available
  for sale                                            --                       --                    7,025
Proceeds from maturities, calls and paydowns
  of securities available for sale                39,867                   37,996                   21,564
Purchases of securities available for sale      (241,162)                 (34,258)                 (22,975)
Proceeds from sales of securities held
   to maturity                                        --                       --                    2,979
Proceeds from maturities, calls and paydowns
  of securities held to maturity                  42,153                   21,890                    8,860
Purchases of securities held to maturity              --                   (8,016)                  (7,911)
Purchase of FHLB of New York stock                  (264)                    (223)                    (309)
Redemption of FHLB of New York stock                  --                       --                       93
Net loans made to customers                      (78,694)                 (24,555)                 (49,875)
Proceeds from sales of and payments received on
  other real estate owned and repossessed
  property                                         5,634                    6,419                    4,817
Proceeds from sale of premises and equipment         471                    1,200                       --
Purchases of premises and equipment               (3,395)                  (2,473)                  (1,799)
---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities           (235,390)                  (2,020)                 (37,531)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
(In thousands)                 Years Ended March 31, 1999                     1998                     1997
===========================================================================================================================
<S>                                             <C>                      <C>                      <C>
Cash flows from financing activities

Net increase in deposits                           3,500                   23,715                    9,411
Net increase in securities sold under agreements
  to repurchase                                      845                       --                       --
Net increase (decrease) in other short-term
  borrowings                                      25,600                  (10,585)                  12,585
Net increase (decrease) in mortgagors'
  escrow deposits                                    146                      (23)                    (281)
Net proceeds from stock offering                 169,967                       --                       --
Purchases of treasury stock                      (10,098)                      --                       --
Acquisition of common stock by ESOP              (18,428)                      --                       --
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities        171,532                   13,107                   21,715
---------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
  equivalents                                    (21,551)                  23,816                   (3,776)
Cash and cash equivalents at beginning of year    34,273                   10,457                   14,233
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year        $ 12,722                 $ 34,273                 $ 10,457
===========================================================================================================================
Supplemental cash flow information

Interest paid                                   $ 25,998                 $ 25,980                 $ 25,305
Taxes paid                                      $  3,563                 $  4,012                 $  4,593
===========================================================================================================================

Supplemental disclosures of non-cash investing
  and financing activities

Loans transferred to other real estate owned
  and repossessed property                      $  6,301                 $  4,460                 $  6,027
Adjustment of securities available for sale
  to fair value, net of tax                     $   (762)                $    344                  $  (137)
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

28
<PAGE>
==================
NOTE 1.
SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES

The accounting and reporting  policies of Hudson River  Bancorp,  Inc.  ("Parent
Company") and its subsidiary  (referred to together as the "Company") conform to
generally accepted accounting principles and reporting practices followed by the
banking industry. The more significant policies are described below.

ORGANIZATION

The Company is a bank-based  financial  services  company.  The Parent Company's
subsidiary, Hudson River Bank & Trust Company (the "Bank") (formerly Hudson City
Savings Institution), provides a wide range of banking, financing, fiduciary and
other financial  services to corporate,  individual and institutional  customers
through  its branch  offices and  subsidiary  companies.  The Parent  Company is
regulated  by the Office of Thrift  Supervision  as a unitary  savings  and loan
holding  company.  The  Bank  is  regulated  by the  Federal  Deposit  Insurance
Corporation ("FDIC") and the New York State Banking Department.

The Bank completed its conversion  from a mutual savings bank to a stock savings
bank on July 1, 1998. Concurrent with the Bank's conversion,  the Parent Company
completed its initial  public  offering of common stock and purchased all of the
outstanding common stock of the Bank. Prior to its initial public offering,  the
Parent Company had no results of  operations;  therefore, financial  information
prior to July 1, 1998 reflects the operations of the Bank.

BASIS OF PRESENTATION

The  consolidated  financial  statements  include the  accounts of Hudson  River
Bancorp,  Inc.  and its  subsidiary.  All  material  intercompany  accounts  and
transactions  have been  eliminated.  The Company utilizes the accrual method of
accounting  for  financial  reporting  purposes.  Amounts  in the  prior  years'
consolidated  financial statements have been reclassified  whenever necessary to
conform with the current year's presentation.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

For  purposes  of the  consolidated  statements  of cash  flows,  cash  and cash
equivalents consists of cash on hand, due from banks, securities purchased under
agreements to resell and federal funds sold.
<PAGE>
SECURITIES FINANCING ARRANGEMENTS

Securities   purchased  under  agreements  to  resell  (resale  agreements)  and
securities  sold under  agreements to  repurchase  (repurchase  agreements)  are
generally carried as short-term investments or borrowings and are carried at the
amounts  at  which  the  securities  were  initially  acquired  or  sold.  These
transactions  are  usually  overnight,   fixed-coupon   agreements  and  require
collateral to be delivered to the Company's securities custodial account (resale
agreements)  or segregated at the Company's  third party  custodian  (repurchase
agreements).  In the case of resale  agreements,  the Company  requires that the
fair  value of the  underlying  securities  received  exceed  the  amount of the
agreement at all times.

SECURITIES

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 securities  held to maturity and
carried  at cost,  adjusted  for  amortization  of  premiums  and  accretion  of
discounts using an effective  interest  method.  If securities are purchased for
the purpose of selling  them in the near term,  they are  classified  as trading
securities  and are  reported at fair value with  unrealized  holding  gains and
losses  reflected  in current  earnings.  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,  net of income taxes,
in accumulated  other  comprehensive  income or loss. As a member of the Federal
Home Loan Bank of New York (the  "FHLB"),  the  Company is required to hold FHLB
stock which is carried at cost since there is no readily available market value.
At March 31, 1999 and 1998, the Company did not hold any  securities  considered
to be trading securities.

Gains or losses on the  disposition  of securities are based on the net proceeds
and the adjusted  carrying  amount of the  securities  sold,  using the specific
identification  method.  Unrealized losses on securities reflecting a decline in
value  which is other than  temporary  are  charged to income and  reported as a
component  of  "net  securities   transactions"  in  the   consolidated   income
statements.

                                                                              29
<PAGE>
NET LOANS RECEIVABLE

Loans are carried at the principal amount  outstanding net of unearned discount,
net deferred loan origination fees and costs, and the allowance for loan losses.
Certain  nonrefundable  loan fees and related direct loan costs are deferred and
amortized  over the  estimated  life of the loan as an  adjustment to the yield.
Non-performing  loans include  non-accrual  loans, loans which are contractually
past  due 90 days  or  more  and  still  accruing  interest  and  troubled  debt
restructurings. Generally, loans are placed on non-accrual status, either due to
the delinquency status of principal and/or interest  payments,  or a judgment by
management  that,  although  payments of principal  and/or interest are current,
such action is prudent.  Loans are generally  placed on non-accrual  status when
principal and/or interest payments are  contractually  past due 90 days or more.
When a loan is placed on non-accrual status, all interest previously accrued but
not collected is reversed against current year interest income.  Interest income
on non-accrual loans is recognized only when received, if considered appropriate
by  management.  Loans are  removed  from  non-accrual  status  when they become
current as to principal and interest or when, in the opinion of management,  the
loans are expected to be fully collectible as to principal and interest.

Loans are  considered  impaired  when it is probable  that the borrower will not
make principal and interest payments according to the original contractual terms
of the loan agreement. Smaller balance, homogeneous loans which are collectively
evaluated for impairment,  such as consumer and residential  mortgage loans, are
specifically  excluded  from the  classification  of impaired  loans unless such
loans are  restructured  in a troubled debt  restructuring.  Impaired  loans are
included in  non-performing  loans,  generally  as  non-accrual  commercial-type
loans.

The impairment of a  non-performing  loan is measured based on the present value
of the expected future cash flows,  discounted at the loan's effective  interest
rate, or on the underlying  value of collateral for collateral  dependent loans.
The  impaired  loan's  carrying  value  in  excess  of  expected  cash  flows or
collateral value is specifically reserved for or is charged to the allowance for
loan losses.  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
those  costs  are  expected  to  reduce  the cash  flows  available  to repay or
otherwise satisfy the loans.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is a reserve  available for losses inherent in the
loan portfolio. Additions are made to the allowance through periodic provisions,
which are  charged  to  expense.  All  losses of  principal  are  charged to the
allowance when incurred or when a determination is made that a loss is expected.
Subsequent recoveries, if any, are credited to the allowance.

The adequacy of the allowance for loan losses is determined  through a quarterly
review  of  outstanding  loans.  The  impact  of  economic   conditions  on  the
creditworthiness  of  the  borrowers  is  considered,   as  well  as  loan  loss
experience,  changes in the  composition  and volume of the loan  portfolio  and
management's  assessment of the risks inherent in the loan portfolio.  These and
other factors are considered in assessing the overall  adequacy of the allowance
for loan losses and the related provisions for loan losses.
<PAGE>
LOANS HELD FOR SALE

Loans are classified as held for  investment  purposes or held for sale when the
Company enters into interest rate lock agreements with the potential  borrowers.
Loans held for sale are recorded at the lower of  aggregate  cost or fair value,
with unrealized losses, if any, recorded in a valuation allowance by a charge to
income.  Fair value is  determined  based on quoted market rates or, in the case
where a firm  commitment  has been  made to sell the  loan,  the firm  committed
price. Gains and losses on the disposition of loans held for sale are determined
on the  specific  identification  method.  There  were no loans held for sale at
March  31,  1999.  Loans  held for sale at March  31,  1998  were  comprised  of
residential mortgage loans.

PREMISES AND EQUIPMENT

Premises  and  equipment  are carried at cost,  less  accumulated  depreciation.
Depreciation  is computed on a  straight-line  basis over the  estimated  useful
lives of the assets (up to fifty years for buildings  and  generally  five years
for furniture and equipment).  Leasehold  improvements  are depreciated over the
shorter of the term of the related  leases or the estimated  useful lives of the
assets.

30
<PAGE>
OTHER REAL ESTATE OWNED AND REPOSSESSED PROPERTY

Other real estate owned,  comprised of real estate acquired through  foreclosure
and  in-substance  foreclosures,  and  repossessed  property are recorded at the
lower  of  "cost"  (defined  as  the  fair  value  at  initial   foreclosure  or
repossession)  or fair  value of the asset  acquired,  less  estimated  disposal
costs. A loan is categorized as an in-substance foreclosure when the Company has
taken  possession of the  collateral,  regardless of whether formal  foreclosure
proceedings  have taken place.  At the time of foreclosure or  repossession,  or
when foreclosure occurs in-substance, the excess, if any, of the loan value over
the fair value of the  property  received is charged to the  allowance  for loan
losses.  Subsequent declines in the value of foreclosed and repossessed property
and net operating  expenses are charged  directly to other  operating  expenses.
Properties are reappraised,  as considered necessary by management,  and written
down to the  fair  value  less  the  estimated  cost to sell  the  property,  if
necessary.   Repossessed  property  consists  primarily  of  manufactured  homes
abandoned by their owners or repossessed by the Company.

INCOME TAXES

Deferred tax assets and  liabilities  are recognized for the expected future tax
consequences   attributable  to  temporary  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases. Deferred tax assets are recognized subject to management's
judgment  that those assets will more likely than not be  realized.  A valuation
allowance  is  recognized  if,  based  on an  analysis  of  available  evidence,
management believes that all or a portion of the deferred tax assets will not be
realized.  Adjustments  to increase  or decrease  the  valuation  allowance  are
charged or credited,  respectively,  to income tax expense.  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.

EMPLOYEE BENEFIT COSTS

The Company  maintains  a  non-contributory  retirement  pension  plan  covering
substantially  all  employees  as well as a benefit  restoration  plan  covering
certain executives. The costs of these plans, based on actuarial computations of
current and future  benefits  for  employees,  are charged to current  operating
expenses.  The Company also provides  certain  post-retirement  medical and life
insurance  benefits to  substantially  all employees  and  retirees,  as well as
dental  benefits  to a closed  group of  retirees.  The cost of  post-retirement
benefits  other than  pensions is  recognized  on an accrual  basis as employees
perform services to earn the benefits.

STOCK-BASED COMPENSATION

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.  Statement of Financial  Accounting  Standards ("SFAS")
No. 123,  "Accounting  for  Stock-Based  Compensation",  encourages  entities to
recognize the fair value of all  stock-based  awards on the date of the 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 apply the  provisions  of APB Opinion No. 25 and provide the pro
forma disclosures required by SFAS No. 123.
<PAGE>
The Company's Recognition and Retention Plan 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  component  of
shareholders' equity) and amortized to compensation expense as the shares become
vested.

Compensation  expense is recognized for the Company's  Employee Stock  Ownership
Plan ("ESOP") equal to the average fair value of shares committed to be released
for allocation to participant accounts.  Any difference between the average fair
value of the shares  committed  to be  released  for  allocation  and the ESOP's
original  acquisition  cost is  charged  or  credited  to  shareholders'  equity
(additional  paid-in  capital).  The cost of unallocated ESOP shares (shares not
yet  committed to be  released)  is  reflected  as a reduction of  shareholders'
equity.

EARNINGS PER SHARE

Basic  earnings per share is  calculated by dividing net income by the weighted-
average  number  of common  shares  outstanding  during  the  period.  Shares of
restricted  stock are not considered  outstanding  for the  calculation of basic
earnings per share until they become fully vested. Diluted earnings per share is
computed in a manner similar to that of basic earnings per share except that the
weighted-average number of common shares outstanding is increased to include the
number of  additional  common  shares  that would have been  outstanding  if all
potentially   dilutive  common  shares  (such  as  stock  options  and  unvested
restricted  stock) were issued during the reporting period.  Unallocated  common
shares  held by the ESOP are not  included  in the  weighted-average  number  of
common  shares  outstanding  for either the basic or diluted  earnings per share
calculations.

                                                                              31
<PAGE>
FINANCIAL INSTRUMENTS

In the normal  course of business,  the Company is a party to certain  financial
instruments  with  off-balance-sheet  risk such as commitments to extend credit,
unused lines of credit and standby letters of credit. The Company's policy is to
record such instruments when funded.

TRUST ASSETS

Assets held by the Company in a fiduciary or agency  capacity for its  customers
are not included in the  consolidated  balance  sheets since these items are not
assets of the Company.

COMPREHENSIVE INCOME

The Company has adopted SFAS No. 130,  "Reporting  Comprehensive  Income", which
establishes  standards for the reporting and display of comprehensive income and
its components in financial statements.  Comprehensive income represents the sum
of net  income and items of "other  comprehensive  income,"  which are  reported
directly  in  shareholders'  equity,  net of tax,  such as the change in the net
unrealized  gain or loss on securities  available  for sale.  While SFAS No. 130
does not require a specific reporting format, it does require that an enterprise
display an amount  representing total  comprehensive  income for each period for
which an income  statement is presented.  In  accordance  with SFAS No. 130, the
Company has reported  comprehensive  income and its  components  for each period
required in the  consolidated  statements  of changes in  shareholders'  equity.
Accumulated  other  comprehensive  income  or  loss,  which  is a  component  of
shareholders'  equity,  represents the net unrealized gain or loss on securities
available for sale, net of tax.

SEGMENT REPORTING

During  the year  ended  March 31,  1999,  the  Company  adopted  SFAS No.  131,
"Disclosures  about  Segments of an Enterprise  and Related  Information".  This
Statement requires the Company to report certain financial and other information
about  significant  revenue-producing  segments of the  business  for which such
information is available and is utilized by the chief operating decision makers,
if the  segment  meets  certain  quantitative  requirements  as  defined by this
Statement.  The  Company's  operations  are  solely  in the  financial  services
industry and include  providing to its customers  traditional  banking services.
The  Company  operates  primarily  in  the  geographical  regions  of  Columbia,
Rensselaer,  Albany,  Schenectady and Dutchess counties of New York.  Management
makes operating decisions and assesses performance based on an ongoing review of
its  traditional  banking  operations,   which  constitute  the  Company's  only
reportable segment under SFAS No. 131.
<PAGE>
================
NOTE 2.
SECURITIES



The amortized cost, gross unrealized gains and losses and approximate fair value
of securities at March 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                                      1999
===========================================================================================================================
                                                                        Gross         Gross    Approximate
                                                     Amortized     Unrealized    Unrealized           Fair
(In thousands)                                            Cost          Gains        Losses          Value
===========================================================================================================================
Securities Available for Sale
<S>                                                   <C>                <C>        <C>           <C>
U.S. Government and Agency securities                 $ 66,976           $ 47       $  (576)      $ 66,447
Corporate debt securities                               55,428            228          (644)        55,012
Tax-exempt securities                                   15,131             12           (90)        15,053
Collateralized mortgage obligations                     85,434            314          (343)        85,405
Mortgage-backed securities                              19,678             --          (180)        19,498
Equity securities                                        1,160             74           (38)         1,196
---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale                   $243,807           $675       $(1,871)      $242,611
===========================================================================================================================

Securities Held to Maturity

U.S. Government and Agency securities                 $  1,995           $ 17        $   --       $  2,012
Corporate debt securities                               17,931            158            --         18,089
Tax-exempt securities                                       10             --            --             10
Collateralized mortgage obligations                        968              3           (31)           940
Mortgage-backed securities                               2,137             50            (3)         2,184
---------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity                     $ 23,041           $228        $  (34)      $ 23,235
===========================================================================================================================
</TABLE>

32
<PAGE>
<TABLE>
<CAPTION>
                                                                                                      1998
==========================================================================================================
                                                                        Gross         Gross    Approximate
                                                     Amortized     Unrealized    Unrealized           Fair
(In thousands)                                            Cost          Gains        Losses          Value
==========================================================================================================
<S>                                                    <C>               <C>          <C>          <C>
Securities Available for Sale
U.S. Government and Agency securities                  $33,261           $ 41         $(115)       $33,187
Corporate debt securities                                8,200             65           (12)         8,253
Mortgage-backed securities                               1,018             13            --          1,031
----------------------------------------------------------------------------------------------------------
Total securities available for sale                    $42,479           $119         $(127)       $42,471
==========================================================================================================

Securities Held to Maturity

U.S. Government and Agency securities                  $18,977           $ 71         $ (16)       $19,032
Corporate debt securities                               41,779            285            (7)        42,057
Tax-exempt securities                                       10             --            --             10
Mortgage-backed securities                               4,428             59          (104)         4,383
----------------------------------------------------------------------------------------------------------
Total securities held to maturity                      $65,194           $415         $(127)       $65,482
==========================================================================================================
</TABLE>
During the years ended March 31, 1999 and 1998, the Company realized gross gains
of $36 thousand and $15 thousand, respectively,  related to calls of securities,
with no gross losses  realized.  No securities  were sold during the years ended
March 31, 1999 and 1998. The Company  received $7.0 million in proceeds from the
sale of securities available for sale, realizing gross gains of $36 thousand and
no gross  losses  during the year ended  March 31,  1997.  During the year ended
March 31, 1997, the Company received $3.0 million in proceeds from the sale of a
security held to maturity,  realizing a gross loss of $8 thousand. This security
was sold due to significant deterioration in the issuer's creditworthiness.

Securities  available for sale  (exclusive of equity  securities) and securities
held to  maturity  by  remaining  contractual  maturity as of March 31, 1999 are
presented below. Expected maturities will differ from contractual  maturities as
a result of prepayments and calls.
<PAGE>
<TABLE>
<CAPTION>
                                                 Securities Available for Sale     Securities Held to Maturity
==============================================================================================================
                                                                   Approximate                     Approximate
                                                Amortized Cost      Fair Value   Amortized Cost     Fair Value
==============================================================================================================
<S>                                                    <C>            <C>           <C>            <C>
Within one year                                        $ 1,999        $ 2,011       $ 8,989        $ 9,026
One through five years                                  18,196         18,269        11,126         11,264
Five through ten years                                  45,835         45,643         1,756          1,789
After ten years                                        176,617        175,492         1,170          1,156
--------------------------------------------------------------------------------------------------------------
Total                                                 $242,647       $241,415       $23,041        $23,235
==============================================================================================================
</TABLE>
The  carrying  value of  securities  pledged  as  required  by law and for other
purposes  amounted to $9.5  million and $5.0 million at March 31, 1999 and 1998,
respectively.
                                                                              33
<PAGE>
================
NOTE 3.
NET LOANS
RECIVABLE
<TABLE>
<CAPTION>
A summary of net loans receivable as of March 31 is as follows:
(In thousands)                                                               1999                     1998
============================================================================================================
<S>                                                                      <C>                      <C>
Loans secured by real estate

Residential one- to four-family                                          $293,907                 $269,435
Commercial                                                                 91,480                   76,570
Construction                                                                4,960                    4,621
------------------------------------------------------------------------------------------------------------
Total loans secured by real estate                                        390,347                  350,626
------------------------------------------------------------------------------------------------------------
Other loans

Manufactured housing                                                       90,354                   97,426
Commercial                                                                 29,024                   18,484
Financed insurance premiums                                                57,901                   27,976
Consumer                                                                   12,440                   11,857
------------------------------------------------------------------------------------------------------------
Total other loans                                                         189,719                  155,743
------------------------------------------------------------------------------------------------------------
Unearned discount and net deferred loan origination
  fees and costs                                                           (1,967)                     609
------------------------------------------------------------------------------------------------------------
Total loans receivable                                                    578,099                  506,978
Allowance for loan losses                                                 (14,296)                  (8,227)
------------------------------------------------------------------------------------------------------------
Net loans receivable                                                     $563,803                 $498,751
============================================================================================================
</TABLE>

Changes in the allowance for loan losses during the years ended March 31 were as
follows:
<TABLE>
<CAPTION>
(In thousands)                                      1999                     1998                     1997
============================================================================================================
<S>                                              <C>                      <C>                      <C>
Allowance for loan losses at beginning of year   $ 8,227                  $ 5,872                  $ 3,546
Provision charged to operations                    7,341                    8,491                    3,826
Loans charged-off                                 (3,191)                  (6,730)                  (2,070)
Recoveries on loans charged-off                    1,919                      594                      570
------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year         $14,296                  $ 8,227                  $ 5,872
============================================================================================================
</TABLE>
<PAGE>
The following table sets forth information with regard to  non-performing  loans
at March 31:
<TABLE>
<CAPTION>
(In thousands)                                      1999                     1998                     1997
============================================================================================================
<S>                                               <C>                     <C>                      <C>
Loans in non-accrual status                       $9,944                  $15,707                  $15,282
Loans contractually past due 90 days or more
  and still accruing interest                         --                       16                    4,711
------------------------------------------------------------------------------------------------------------
Total                                             $9,944                  $15,723                  $19,993
============================================================================================================
</TABLE>

At March 31, 1999, 1998 and 1997, there were no troubled debt  restructurings or
material  commitments to extend further credit to borrowers with  non-performing
loans.

Accumulated interest on non-accrual loans, as shown above, of approximately $411
thousand, $599 thousand and $586 thousand, was not recognized in interest income
during  the  years  ended  March  31,   1999,   1998  and  1997,   respectively.
Approximately  $572  thousand,  $920  thousand and $937  thousand of interest on
non-accrual  loans,  as shown above,  was collected  and  recognized in interest
income during the years ended March 31, 1999, 1998 and 1997, respectively.

At March 31, 1999 and 1998, the recorded investment in loans that are considered
to be  impaired  under SFAS No.  114  totaled  $2.7  million  and $5.3  million,
respectively,  for which the related allowance for loan losses was $842 thousand
and $1.0  million,  respectively.  As of March 31, 1999 and 1998,  there were no
impaired  loans which did not have an allowance  for loan losses  determined  in
accordance with SFAS No. 114. The average recorded  investment in impaired loans
during the years  ended March 31,  1999,  1998 and 1997 was $3.7  million,  $5.8
million and $1.6 million,  respectively.  The interest  income  accrued on those
impaired loans or recognized using the cash basis of income  recognition was not
significant for the years ended March 31, 1999, 1998 and 1997.

34
<PAGE>
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  Company's  normal
credit terms,  including interest rate and  collateralization.  The aggregate of
such loans totaled less than 5% of total shareholders'  equity at March 31, 1999
and 1998.

The Company has an unconsolidated  equity investment in Homestead Funding Corp.,
a  mortgage-banking  company.  The Company has a $20 million  warehouse  line of
credit  relationship  with  Homestead  which was made in the ordinary  course of
business at the  Company's  normal  credit  terms,  including  interest rate and
collateralization.  There was $9.6 million and $3.5 million  outstanding on this
line as of March 31, 1999 and 1998, respectively.

======================
NOTE 4.
PREMISES AND
EQUIPMENT

A summary of premises and equipment at March 31 is as follows:
<TABLE>
<CAPTION>
(In thousands)                                                               1999                     1998
=============================================================================================================
<S>                                                                       <C>                      <C>
Buildings and land                                                        $15,143                  $15,370
Furniture and equipment                                                     7,969                    5,208
Leasehold improvements                                                        817                      829
-------------------------------------------------------------------------------------------------------------
Total                                                                      23,929                   21,407
Accumulated depreciation                                                   (7,122)                  (6,076)
-------------------------------------------------------------------------------------------------------------
Premises and equipment, net                                               $16,807                  $15,331
=============================================================================================================
</TABLE>
Depreciation  expense was  approximately  $1.5  million,  $1.4  million and $1.2
million, for the years ended March 31, 1999, 1998 and 1997, respectively.

======================
NOTE 5.
DEPOSITS

Deposit account balances at March 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)                                                               1999                     1998
=============================================================================================================
<S>                                                                      <C>                      <C>
Savings                                                                  $145,985                 $142,569
N.O.W. and money market                                                    99,390                   93,400
Time deposits                                                             302,479                  319,299
Non interest-bearing                                                       43,960                   33,046
-------------------------------------------------------------------------------------------------------------
Total deposits                                                           $591,814                 $588,314
=============================================================================================================
</TABLE>

The aggregate amount of time deposit accounts with a balance of $100 thousand or
greater  was  $39.9  million  and  $42.1  million  at March  31,  1999 and 1998,
respectively.
<PAGE>
<TABLE>
<CAPTION>
The approximate  amounts of contractual  maturities of time deposit  accounts at
March 31, 1999 are as follows:

(In thousands)
=============================================================================================================
Years ending March 31,
<S>                                                                                               <C>
2000                                                                                              $187,315
2001                                                                                                76,880
2002                                                                                                11,097
2003                                                                                                22,798
2004                                                                                                 1,863
Thereafter                                                                                           2,526
-------------------------------------------------------------------------------------------------------------
Total                                                                                             $302,479
=============================================================================================================
</TABLE>
<PAGE>
==============
NOTE 6.
OTHER
SHORT-TERM
BORROWINGS

The Bank has a line of credit with the Federal Home Loan Bank of New York in the
amount of $99.4 million at March 31, 1999. This short-term borrowing facility is
based upon either an  overnight or  thirty-day  borrowing  period with  interest
based  generally upon a spread above the current Federal funds rate. As of March
31, 1999, there was  approximately  $27.6 million  outstanding under the line of
credit,  which carried an interest rate of 5.35%. As of March 31, 1998, the Bank
had $2.0 million of short-term borrowings from the Federal Home Loan Bank of New
York, which carried an interest rate of 5.88%.  Borrowings from the Federal Home
Loan Bank of New York are  secured  by  Federal  Home  Loan Bank  stock and real
estate mortgages.


==============
NOTE 7.
REGULATORY
CAPITAL

Regulations require banks to maintain a minimum leverage ratio of Tier 1 capital
to total adjusted quarterly average assets of 4.0%, and minimum ratios of Tier 1
capital  and  total   capital  to   risk-weighted   assets  of  4.0%  and  8.0%,
respectively.

Under their prompt corrective  action  regulations,  regulatory  authorities are
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 Tier 1 capital ratio of at least 5.0% (based on total  adjusted  quarterly
average assets); a Tier 1 risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.

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

As of March 31, 1999 and 1998, the Bank met all capital adequacy requirements to
which it was subject. Further, the most recent FDIC notification categorized the
Bank as a  well-capitalized  institution  under  the  prompt  corrective  action
regulations. There have been no conditions or events since the notification that
management believes have changed the Bank's capital classification.

The following is a summary of actual capital  amounts and ratios as of March 31,
1999 and 1998 for the Bank,  compared to the  requirements  for minimum  capital
adequacy  and for  classification  as  well-capitalized.  Although the Office of
Thrift  Supervision  does not  impose  minimum  capital  requirements  on thrift
holding companies,  the Company's  consolidated capital amounts and ratios as of
March 31, 1999 are also presented.
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999                                                                Required Ratios and Amounts
===============================================================================================================
                                                                        Minimum Capital       Classification as
                                                 Actual Capital                Adequacy        Well-Capitalized
===============================================================================================================

(In thousands)                            Amount         Ratio      Amount       Ratio     Amount       Ratio
===============================================================================================================
Tier 1 (Leverage) Capital
<S>                                      <C>             <C>       <C>           <C>      <C>            <C>
Hudson River Bank & Trust Company        $140,517        17.04%    $32,978       4.00%    $41,222        5.00%
Hudson River Bancorp, Inc.
  (consolidated)                          216,892        26.18

Tier 1 Risk-Based Capital

Hudson River Bank & Trust Company         140,517        23.18      24,244       4.00      36,367        6.00
Hudson River Bancorp, Inc.
  (consolidated)                          216,892        35.53

Total Risk-Based Capital

Hudson River Bank & Trust Company         148,176        24.45      48,489       8.00      60,611       10.00
Hudson River Bancorp, Inc.
  (consolidated)                          224,621        36.80
===============================================================================================================
</TABLE>

36
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999                                                                Required Ratios and Amounts
===============================================================================================================
                                                                        Minimum Capital       Classification as
                                                 Actual Capital                Adequacy        Well-Capitalized
===============================================================================================================
(In thousands)                             Amount        Ratio     Amount       Ratio     Amount      Ratio
===============================================================================================================
<S>                                       <C>            <C>       <C>           <C>      <C>            <C>
Tier 1 (Leverage) Capital
Hudson River Bank & Trust Company         $67,741        10.23%    $26,476       4.00%    $33,095        5.00%

Tier 1 Risk-Based Capital
Hudson River Bank & Trust Company          67,741        14.43      18,777       4.00      28,165        6.00

Total Risk-Based Capital
Hudson River Bank & Trust Company          73,638        15.69      37,553       8.00      46,941       10.00
===============================================================================================================
</TABLE>
===================
NOTE 8.
STOCK-BASED
COMPENSATION
PLANS

EMPLOYEE STOCK OWNERSHIP PLAN

The Company  established an ESOP to provide  substantially  all employees of the
Company the  opportunity  to also become  shareholders.  The ESOP borrowed $18.4
million from the Company and used the funds to purchase  1,428,300 shares of the
common  stock  of the  Company  in the open  market.  The  loan  will be  repaid
principally  from the  Bank's  discretionary  contributions  to the ESOP  over a
period of fifteen years. At March 31, 1999, the loan had an outstanding  balance
of $17.2 million and an interest rate of 8.00%. Both the loan obligation and the
unearned  compensation  are reduced by the amount of loan repayments made by the
ESOP. 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 allocated among  participants
on the basis of compensation in the year of allocation.

Unallocated  ESOP shares are pledged as  collateral on the loan and are reported
in shareholders'  equity.  As shares are released from  collateral,  the Company
reports  compensation  expense equal to the average  market price of the shares,
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  $1.1 million of compensation  expense under
the ESOP for the year ended March 31, 1999.
<PAGE>
The ESOP shares as of March 31, 1999 were as follows:
<TABLE>
<CAPTION>
==========================================================================================================
<S>                                                                                              <C>
Allocated shares                                                                                        --
Shares released for allocation                                                                      95,843
Unallocated shares                                                                               1,332,457

----------------------------------------------------------------------------------------------------------
Total ESOP shares                                                                                1,428,300
==========================================================================================================
Market value of unallocated shares at March 31, 1999 (In thousands)                              $  14,574
==========================================================================================================
</TABLE>
STOCK OPTION PLAN

On January 5,1999, the Company's shareholders approved the Hudson River Bancorp,
Inc. 1998 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 an incentive to encourage  such persons
to remain with the Company.

Under the Stock Option Plan,  1,785,375 shares of authorized but unissued common
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 January 5, 1999,  1,249,763
shares were awarded at an exercise price of $11.50 per share.  These shares have
a ten-year term and vest at a rate of 20% per year from the grant date.

                                                                              37
<PAGE>
A summary of the status of the Company's  Stock Option Plan as of March 31, 1999
and changes during the year ended March 31, 1999 is presented below:
<TABLE>
<CAPTION>
                                                                                             Weighted-Average
                                                                           Shares              Exercise Price
==============================================================================================================
<S>                                                                     <C>                            <C>
Options
Outstanding at beginning of year                                               --                      $   --
Granted                                                                 1,249,763                       11.50
Exercised                                                                      --                          --
Forfeited                                                                  (1,389)                      11.50
--------------------------------------------------------------------------------------------------------------
Outstanding at end of year                                              1,248,374                      $11.50
==============================================================================================================
Exercisable at end of year                                                     --                          --
==============================================================================================================
Estimated weighted-average fair value of options granted on
   January 5, 1999                                                                                     $ 2.98
==============================================================================================================
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its Stock Option Plan. Accordingly, no compensation cost has been recognized
for its Stock Option  Plan.  SFAS No. 123  requires  companies  not using a fair
value based method of accounting for 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  dates  of grant  using  the  Black-Scholes  option-pricing  model  with the
following  weighted-average  assumptions used for grants in the year ended March
31, 1999:  dividend  yield of 1.10%;  expected  volatility of 24.12%;  risk free
interest rate of 4.73%;  expected lives of five years. Pro forma disclosures for
the Company for the year ended March 31, 1999 utilizing the estimated fair value
of the options granted and an assumed 5% forfeiture rate are as follows:
<TABLE>
<CAPTION>
                                                                            Basic                  Diluted
                                                     Net                 Earnings                 Earnings
(In thousands, except per share data)             Income                Per Share                Per Share
==========================================================================================================
<S>                                               <C>                     <C>                      <C>
As reported                                       $3,807                  $0.17                    $0.17
Pro forma                                          3,685                   0.17                     0.17
==========================================================================================================
</TABLE>

Because the Company's 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 stock
options.  In addition,  the effect on reported net income and earnings per share
for the year ended  March 31, 1999 may not be  representative  of the effects on
reported net income or earnings per share for future years.
<PAGE>
RECOGNITION AND RETENTION PLAN

The  Company's  shareholders  also  approved  the  Hudson  River  Bancorp,  Inc.
Recognition  and Retention  Plan ("RRP") on January 5, 1999.  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 RRP,  714,150 shares of authorized but unissued shares
are reserved for issuance under the plan.  The Company also has the  alternative
to fund the RRP with treasury stock.

On January 5, 1999,  714,150  shares were awarded under the RRP. The shares vest
over a period of either five or ten equal installments  commencing one year from
the date of grant.  The fair market value of the shares  awarded  under the plan
was $8.2  million at the grant  date,  and is being  amortized  to  compensation
expense on a  straight-line  basis over the  vesting  periods of the  underlying
shares.  Compensation expense of $217 thousand was recorded in fiscal 1999, with
the remaining unearned compensation cost of $8.0 million shown as a reduction of
shareholders'  equity at March 31, 1999.  The shares  awarded under the RRP were
transferred  from treasury  stock at cost with the  difference  between the fair
market  value  on the  grant  date  and the  cost of the  shares  recorded  as a
reduction of retained earnings.

38
<PAGE>
====================
NOTE 9.
EMPLOYEE
BENEFIT
PLANS


PENSION PLAN

The  Company  maintains  a  non-contributory  pension  plan  ("the  Plan")  with
Retirement Systems Incorporated ("RSI") Retirement Trust, covering substantially
all of its employees meeting certain eligibility requirements.  The benefits are
computed as a percentage of the highest three-year  average annual earnings,  as
defined by the Plan,  multiplied by years of credited  service.  The Plan limits
credited  service for benefit  calculations  to a maximum of thirty  years.  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 those expected to be earned in the future.  Plan assets
consist   primarily  of  investments  in  RSI  Retirement   Trust   administered
fixed-income and equity funds.

The following  table sets forth the Plan's funded status and amounts  recognized
in the Company's consolidated financial statements at March 31:
<TABLE>
<CAPTION>
(In thousands)                                                               1999                     1998
===========================================================================================================
<S>                                                                       <C>                      <C>
Reconciliation of projected benefit obligation
Obligation at beginning of year                                           $ 9,028                  $ 8,183
Service cost                                                                  431                      344
Interest cost                                                                 619                      619
Actuarial loss                                                                381                      165
Benefits paid                                                                (421)                    (283)
-----------------------------------------------------------------------------------------------------------
Obligation at end of year                                                 $10,038                  $ 9,028
===========================================================================================================

Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year                            $10,422                  $ 9,272
Actual return on plan assets                                                1,157                    1,376
Employer contributions                                                         62                       57
Benefits paid                                                                (421)                    (283)
-----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year                                  $11,220                  $10,422
===========================================================================================================

Reconciliation of funded status
Funded status at end of year                                              $ 1,182                  $ 1,394
Unrecognized net transition asset                                              --                      (17)
Unrecognized net actuarial gain                                              (287)                    (299)
Unrecognized prior service cost                                                46                       55
-----------------------------------------------------------------------------------------------------------
Prepaid pension cost at end of year                                        $  941                  $ 1,133
===========================================================================================================
</TABLE>
<PAGE>

Net  periodic  pension  cost  included  in  the  Company's  consolidated  income
statements for the years ended March 31 included the following components:
<TABLE>
<CAPTION>

(In thousands)                                      1999                     1998                     1997
===========================================================================================================
Components of net periodic pension cost
<S>                                                <C>                      <C>                      <C>
Service cost                                       $ 431                    $ 344                    $ 353
Interest cost                                        619                      619                      573
Expected return on plan assets                      (819)                    (731)                    (668)
Amortization of net transition asset                 (17)                     (54)                     (54)
Net amortization and deferral                          9                        9                        9
-----------------------------------------------------------------------------------------------------------
Net periodic pension cost                          $ 223                    $ 187                    $ 213
===========================================================================================================
</TABLE>

39
<PAGE>
The actuarial assumptions used in determining the actuarial present value of the
projected benefit obligation as of March 31 were as follows:
<TABLE>
<CAPTION>
                                                       1999                     1998                     1997
==============================================================================================================
<S>                                                    <C>                      <C>                      <C>
Weighted-average assumptions
Discount rate                                          6.75%                    7.00%                    7.75%
Rate of compensation increase                          5.00                     5.00                     5.50
Expected return on plan assets                         8.00                     8.00                     8.00
==============================================================================================================
</TABLE>

POST-RETIREMENT BENEFITS

The Company  provides  certain  post-retirement  benefits to  substantially  all
employees and retirees.  Active  employees are eligible for retiree  medical and
life  insurance  coverage  upon  reaching  age 55 with 10 years of service.  The
medical portion of the plan is contributory, with retiree contributions based on
years of service and their  retirement  date.  The Company's  contributions  for
employees  retiring  on or after  September  1, 1995 are  limited to 150% of the
premium rates in effect at the time of retirement. The life insurance portion of
the plan is non-contributory, with the pre-retirement benefit equal to two times
annual earnings.  The post-retirement life insurance benefit is reduced based on
the  retiree's  age and the  length  of time  since  retirement,  with a maximum
retiree benefit of $50,000.  Post-retirement  dental coverage is in effect for a
closed group of retirees.  The dental  portion of the plan is  non-contributory.
The funding  policy of the plan is to pay claims  and/or  insurance  premiums as
they come due.

The  following   table   presents  the  amounts   recognized  in  the  Company's
consolidated financial statements at March 31:
<TABLE>
<CAPTION>
(In thousands)                                                               1999                     1998
============================================================================================================
<S>                                                                       <C>                      <C>
Reconciliation of accumulated post-retirement benefit obligation
Obligation at beginning of year                                           $ 2,764                  $ 2,579
Service cost                                                                   69                       53
Interest cost                                                                 191                      200
Actuarial loss                                                                176                      123
Benefits paid                                                                (152)                    (191)
Plan amendments                                                              (231)                      --
------------------------------------------------------------------------------------------------------------
Obligation at end of year                                                 $ 2,817                  $ 2,764
============================================================================================================
Reconciliation of funded status
Unfunded post-retirement benefit obligation at end of year                $(2,817)                 $(2,764)
Unrecognized net actuarial loss                                               341                      164
Unrecognized transition obligation                                          1,890                    2,008
Unrecognized prior service cost                                              (231)                      --
------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit liability                                 $  (817)                 $  (592)
============================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net periodic post-retirement benefit cost included in the Company's consolidated
income   statements  for  the  years  ended  March  31  included  the  following
components:

(In thousands)                                      1999                     1998                     1997
============================================================================================================
<S>                                                 <C>                      <C>                      <C>
Components of net periodic post-retirement
  benefit cost
Service cost                                        $ 69                     $ 53                     $ 60
Interest cost                                        191                      200                      188
Amortization of transition obligation                118                      118                      118
Amortization of unrecognized gain                     --                      (10)                     --
------------------------------------------------------------------------------------------------------------
Net periodic post-retirement benefit cost           $378                     $361                     $366
============================================================================================================
</TABLE>
The discount rate used in determining  the accumulated  post-retirement  benefit
obligation  was  6.75%,  7.00%  and  7.75% at March  31,  1999,  1998 and  1997,
respectively.

40
<PAGE>
For measurement purposes, a 6.50% annual rate of increase in the per capita cost
of covered health  benefits was assumed for medical  coverage for the year ended
March 31, 1999. This rate was assumed to decrease uniformly to 5.00% by 2002 and
to remain at that level  thereafter.  A 3.00% annual rate of increase in the per
capita cost of covered  dental  benefits  was assumed for dental  coverage.  The
health care cost trend rate assumptions have a significant effect on the amounts
reported. To illustrate,  increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated post-retirement
benefit  obligation  as of March 31,  1999 by $305  thousand  (or 10.8%) and the
aggregate  of  the  service  and  interest  cost   components  of  net  periodic
post-retirement benefit cost for the year ended March 31, 1999 would increase by
$22 thousand (or 8.5%).  Decreasing  the assumed health care cost trend rate one
percentage  point in each year would  decrease the  accumulated  post-retirement
benefit  obligation  as of March  31,  1999 by $265  thousand  (or 9.4%) and the
aggregate  of  the  service  and  interest  cost   components  of  net  periodic
post-retirement  benefit  cost for the year ended March 31, 1999 by $20 thousand
(or 7.7%).

401(K) SAVINGS PLAN

The Company also sponsors a defined  contribution  401(k)  Savings Plan covering
substantially  all  employees  meeting  certain  eligibility  requirements.  The
Company  matches  50%  of  employee  pre-tax   contributions  up  to  a  maximum
contribution by the Company of 4% of the employee's annual salary. The amount of
401(k) contribution  expense was $152 thousand,  $126 thousand and $117 thousand
for the years ended March 31, 1999, 1998 and 1997, respectively.

BENEFIT RESTORATION PLAN

During the year ended March 31, 1999, the Company adopted a Benefit  Restoration
Plan for  certain  executive  officers to restore  benefits  cut back in certain
employee benefit plans due to Internal Revenue Service regulations. The benefits
under this plan are unfunded,  and as of March 31, 1999,  the projected  benefit
obligation  was $72  thousand.  The Company  recorded an expense of $21 thousand
relating to this plan during the year ended March 31, 1999.

=================
NOTE 10.
EARNINGS
PER SHARE

The following table sets forth certain information  regarding the calculation of
basic and diluted earnings per share for the year ended March 31, 1999. Earnings
of the  Company  prior to its  initial  public  offering on July 1, 1998 are not
included in the  calculations of earnings per share for the year ended March 31,
1999.  Earnings per share  information for years prior to the Company's  initial
public offering is not applicable.
<TABLE>
<CAPTION>
                                                                                  Weighted-
                                                               Net                  Average                   Per Share
(In thousands, except share and per share amounts)          Income                   Shares                      Amount
=======================================================================================================================
<S>                                                         <C>                  <C>                              <C>
Basic earnings per share                                    $2,821               16,302,268                       $0.17
Effect of potential common shares outstanding                                            --
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share                                  $2,821               16,302,268                       $0.17
=======================================================================================================================
</TABLE>
<PAGE>
At March 31,  1999,  there  were 1.2  million  stock  options  and 714  thousand
unvested  restricted  stock  awards not included in the above table as potential
common shares outstanding because the effect was anti-dilutive.

=================
NOTE 11.
INCOME TAXES

The  components  of  income  tax  expense  for the years  ended  March 31 are as
follows:

<TABLE>
<CAPTION>
(In thousands)                                     1999                    1998                     1997
===========================================================================================================================
<S>                                              <C>                      <C>                       <C>
Current tax expense:
   Federal                                       $ 5,035                  $ 3,030                   $3,702
   State                                             507                      877                      838
Deferred tax benefit                              (3,358)                  (2,004)                    (933)
---------------------------------------------------------------------------------------------------------------------------
Income tax expense                               $ 2,184                  $ 1,903                   $3,607
===========================================================================================================================
</TABLE>

                                                                              41
<PAGE>
The  following is a  reconciliation  of the expected  income tax expense and the
actual income tax expense for the years ended March 31. The expected  income tax
expense has been computed by applying the  statutory  federal tax rate to income
before income tax expense:
<TABLE>
<CAPTION>
(In thousands)                                      1999                     1998                     1997
===========================================================================================================
<S>                                               <C>                      <C>                      <C>
Income tax at applicable federal statutory rate   $2,037                   $1,610                   $3,151
Increase (decrease) in income tax expense
  resulting from:
   Tax exempt interest income                       (157)                     (10)                     (14)
   State income taxes, net of federal tax benefit    232                      207                      459
   Other                                              72                       96                       11
-----------------------------------------------------------------------------------------------------------
Income tax expense                                $2,184                   $1,903                   $3,607
===========================================================================================================
</TABLE>
The tax effects of temporary  differences  and  carryforwards  that give rise to
significant  portions of the deferred tax assets and deferred tax liabilities at
March 31 are presented below:
<TABLE>
<CAPTION>
(In thousands)                                                               1999                     1998
===========================================================================================================
Deferred tax assets:
<S>                                                                       <C>                      <C>
   Allowance for loan losses                                              $ 5,553                  $ 3,632
   Other real estate owned and repossessed property                           235                      237
   Accrued post-retirement benefits                                           393                      289
   Deferred compensation                                                      245                      195
   Charitable contribution carryforward for tax purposes                    1,499                       --
   Unrealized loss on securities available for sale                           431                        3
   Other                                                                      471                      515
-----------------------------------------------------------------------------------------------------------
Total gross deferred tax assets                                             8,827                    4,871
Valuation allowance                                                          (141)                    (141)
-----------------------------------------------------------------------------------------------------------
Net deferred tax assets                                                     8,686                    4,730
-----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
   Depreciation                                                              (235)                    (250)
   Bond discount accretion                                                   (316)                    (222)
   Prepaid pension                                                           (388)                    (449)
   Other                                                                     (343)                    (191)
-----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                             (1,282)                  (1,112)
-----------------------------------------------------------------------------------------------------------
Net deferred tax asset at end of year                                     $ 7,404                  $ 3,618
===========================================================================================================
</TABLE>
<PAGE>
A corporation's annual tax deduction for charitable  contributions is subject to
a limitation based on a percentage of taxable income. Contributions in excess of
this  limitation  are carried  forward and may be deducted in one or more of the
succeeding  five tax  years.  As a result of the  contribution  of shares to the
Hudson River Bank & Trust Company Foundation, at March 31, 1999, the Company had
an unused  charitable  contribution  carryforward of approximately  $3.7 million
($1.5  million after tax),  which is available  for deduction  through March 31,
2004.

The valuation  allowance,  as  established  by the Company at March 31, 1999 and
1998, takes into  consideration  the nature and timing of the deferred tax items
as well as the amount of available open tax carrybacks.  The valuation allowance
relates to uncertainty  about the  realization  of certain  Federal and New York
State deferred tax assets.  Based on recent  historical and  anticipated  future
taxable income,  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.  Deferred tax liabilities
are recognized 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.
42
<PAGE>
In  accordance  with  SFAS  No.  109,  deferred  tax  liabilities  have not been
recognized  with  respect to the Federal  base-year  reserve of $2.7 million and
"supplemental"  reserve (as defined) of $10.5 million at both March 31, 1999 and
1998,  respectively,  and the state base-year reserve of $22.2 million and $21.9
million at March 31, 1999 and 1998, respectively, since the Bank does not expect
that  these  amounts  will  become  taxable  in  the  foreseeable   future.  The
unrecognized  deferred  tax  liability  with  respect to the  Federal  base-year
reserve  and   supplemental   reserve  was  $933   thousand  and  $3.5  million,
respectively,  at both March 31, 1999 and 1998.  The  unrecognized  deferred tax
liability with respect to the state  base-year  reserve was $1.3 million (net of
Federal benefit) at both March 31, 1999 and 1998.

=================
NOTE 12.
COMMITMENTS
AND CONTINGENT
LIABILITIES

A. 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 the Company's  commitments to
extend credit. These instruments involve, to varying degrees, elements of credit
risk  in  excess  of  the  amount  recognized  in  the  consolidated   financial
statements.  The  contract  amounts of those  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 those  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 financial instruments with credit risk.

Contract amounts of financial instruments that represent credit risk as of March
31 are as follows:
<TABLE>
<CAPTION>
(In thousands)                                                               1999                     1998
==========================================================================================================
<S>                                                                       <C>                      <C>
Commitments to extend credit                                              $49,681                  $28,552
Unused lines of credit                                                     35,183                   29,583
Standby letters of credit                                                   6,935                    3,298
----------------------------------------------------------------------------------------------------------
Total                                                                     $91,799                  $61,433
==========================================================================================================
</TABLE>
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  certain  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.
<PAGE>
Commitments  to extend credit may be written on a fixed-rate  basis exposing the
Company to interest rate risk given the possibility that market rates may change
between commitment and actual extension of credit.

Standby letters of credit are conditional  commitments  issued by the Company to
guarantee  payment on behalf of a customer and  guarantee the  performance  of a
customer to a third party. The credit risk involved in issuing these instruments
is essentially the same as that involved in extending loans to customers.  Since
a portion of these  instruments  will expire  unused,  the total  amounts do not
necessarily  represent  future cash  requirements.  Each  customer is  evaluated
individually for creditworthiness under the same underwriting standards used for
commitments to extend credit for on-balance sheet instruments.  Company policies
governing  loan  collateral  apply to  standby  letters of credit at the time of
credit extension.

Certain  mortgage  loans are  written on an  adjustable-rate  basis and  include
interest  rate caps,  which limit annual and lifetime  increases in the interest
rates on such loans.  Generally,  adjustable-rate  mortgages have an annual rate
increase  cap of 2% and a lifetime  rate  increase  cap of 5% to 6%.  These caps
expose the Company to interest  rate risk should  market  rates  increase  above
these limits.  As of March 31, 1999 and 1998,  approximately  $135.4 million and
$185.4 million, respectively, of residential real estate loans had interest rate
caps.
                                                                              43
<PAGE>
The  Company  generally  enters  into  rate  lock  agreements  at the time  that
residential real estate loan applications are taken.  These rate lock agreements
fix the interest rate at which the loan, if ultimately made, will be originated.
Such  agreements may exist with borrowers with whom  commitments to extend loans
have  been  made,  as well as with  individuals  who  have  not yet  received  a
commitment.  The Company makes its determination of whether or not to identify a
loan as held  for  sale at the time  rate  lock  agreements  are  entered  into.
Accordingly,  the Company is exposed to interest  rate risk to the extent that a
rate lock agreement is associated  with a loan  application or a loan commitment
which is intended to be held for sale, as well as with respect to loans held for
sale.

The Company had no rate lock agreements on loans intended to be held for sale or
conventional  mortgage loans held for sale at March 31, 1999. At March 31, 1998,
the  Company  had  rate  lock  agreements  (certain  of  which  relate  to  loan
applications  for which no formal  commitment  had been  made) and  conventional
mortgage loans held for sale amounting to approximately $1.4 million.

In order to reduce the  interest  rate risk  associated  with the  portfolio  of
conventional  mortgage  loans  held  for  sale,  as  well  as  outstanding  loan
commitments and uncommitted  loan  applications  with rate lock agreements which
are intended to be held for sale,  the Company  enters into  agreements  to sell
loans in the secondary  market to unrelated  investors on a loan-by-loan  basis.
The Company did not have any commitments to sell conventional  mortgage loans at
March  31,  1999.  At March  31,  1998,  the  Company  had  commitments  to sell
conventional  fixed-rate mortgage loans amounting to approximately $1.2 million.
The  remaining  conventional  mortgage  loans  held  for  sale,  as  well as the
outstanding loan commitments and uncommitted  loan  applications  with rate lock
agreements  which are  intended  to be held for sale,  exposed  the  Company  to
interest rate risk.

B. CONCENTRATIONS OF CREDIT

The Company originates residential loans (including home equity and construction
loans) and  commercial-related  loans primarily to customers  located in the New
York State counties of Columbia, Albany,  Rensselaer,  Dutchess and Schenectady.
Manufactured home loans are originated primarily in New York State and in states
contiguous to New York. Financed insurance premiums are originated  primarily in
New York,  New Jersey and  Pennsylvania.  Although the Company has a diversified
loan  portfolio,  a substantial  portion of its debtors'  ability to honor their
contracts is dependent upon economic conditions in these areas.

C. LEASES

The  Company  leases  certain  of  its  branches  and  equipment  under  various
noncancelable  operating  leases.  Rental expense for premises and equipment was
$243  thousand,  $236  thousand and $204  thousand for the years ended March 31,
1999, 1998 and 1997,  respectively.  The future minimum  payments by year and in
the aggregate under all significant  noncancelable operating leases with initial
or remaining terms of one year or more as of March 31, 1999 are as follows:
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
==========================================================================================================
<S>                                                                                                 <C>
Years ending March 31,
2000                                                                                                $  279
2001                                                                                                   283
2002                                                                                                   255
2003                                                                                                   239
2004                                                                                                   198
Thereafter                                                                                           1,975
----------------------------------------------------------------------------------------------------------
Total                                                                                               $3,229
==========================================================================================================
</TABLE>
D. SERVICED LOANS

The total amount of loans  serviced by the Company for  unrelated  third parties
was  approximately  $46.6  million and $61.7 million at March 31, 1999 and 1998,
respectively.

E. RESERVE REQUIREMENT

The  Company is  required  to  maintain  certain  reserves  of vault cash and/or
deposits with the Federal Reserve Bank. The amount of this reserve  requirement,
included in cash and due from banks,  was  approximately  $279 thousand and $388
thousand at March 31, 1999 and 1998, respectively.

44
<PAGE>
F. LIQUIDATION ACCOUNT

As part of the Bank's  conversion  from a mutual savings bank to a stock savings
bank, the Bank established a liquidation account in an amount equal to its total
equity as of December 31, 1997. The  liquidation  account will be maintained for
the benefit of eligible  depositors  who continue to maintain  their accounts at
the Bank after the conversion.  The liquidation account will be reduced annually
to the extent that eligible  depositors have reduced their qualifying  deposits.
Subsequent  increases will not restore an eligible account holder's  interest in
the liquidation account. In the event of a complete  liquidation,  each eligible
depositor  will be  entitled  to  receive a  distribution  from the  liquidation
account in an amount  proportionate to the current adjusted  qualifying balances
for accounts then held.  Neither the Company nor the Bank may pay dividends that
would  reduce  shareholders'  equity  below  the  required  liquidation  account
balance.

G. CONTINGENT LIABILITIES

In the ordinary course of business,  there are various legal proceedings pending
against the Company.  Based on  consultation  with outside  counsel,  management
believes that the aggregate  exposure if any, arising from such litigation would
not have a  material  adverse  effect on the  Company's  consolidated  financial
statements.

================
NOTE 13.
DISCLOSURES
ABOUT THE
FAIR VALUE
OF FINANCIAL
INSTRUMENTS

SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments", requires
that the Company disclose  estimated fair values for its financial  instruments.
The  definition  of a  financial  instrument  includes  many of the  assets  and
liabilities  recognized in the Company's consolidated balance sheets, as well as
certain off-balance sheet items.

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

SHORT-TERM FINANCIAL INSTRUMENTS

The fair value of certain  financial  instruments  is estimated  to  approximate
their  carrying  value  because  the  remaining  term to  maturity  or period to
repricing  of the  financial  instrument  is less than 90 days.  Such  financial
instruments  include cash and cash  equivalents,  accrued  interest  receivable,
securities sold under agreements to repurchase,  other short-term borrowings and
accrued interest payable.

LOANS HELD FOR SALE

The estimated  fair value of loans held for sale is based on quoted market rates
or, in the case where a firm commitment has been made to sell the loan, the firm
committed price.

SECURITIES

Securities  available  for sale and  securities  held to maturity are  financial
instruments which are usually traded in broad markets. Fair values are generally
based upon  market  prices.  If a quoted  market  price is not  available  for a
particular security,  the fair value is determined by reference to quoted market
prices for securities with similar characteristics.  The estimated fair value of
stock in the Federal Home Loan Bank of New York equals the carrying  value since
the stock is non-marketable but redeemable at its par value.

LOANS

Fair  values  are  estimated  for  portfolios  of loans with  similar  financial
characteristics. Loans are segregated by type including residential real estate,
commercial real estate, other commercial loans and consumer loans. The estimated
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  respective  loan
portfolio.

                                                                              45
<PAGE>
Estimated fair value for  non-performing  loans is based on estimated cash flows
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.

Management  has made  estimates of fair value discount rates that it believes to
be reasonable.  However,  because there is no market for many of these financial
instruments,  management  has no basis to determine  whether the estimated  fair
value would be indicative of the value negotiated in an actual sale.

DEPOSIT LIABILITIES

The estimated fair value of deposits with no stated  maturity,  such as savings,
N.O.W.,  money  market,  noninterest-bearing  accounts  and  mortgagors'  escrow
deposits,  is regarded to be the amount  payable on demand.  The estimated  fair
value of time deposit  accounts 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.  The fair value estimates for deposits
do not include the benefit that results  from the low-cost  funding  provided by
the deposit liabilities compared with the cost of borrowing funds in the market.

The  carrying  values  and  estimated  fair  values  of  financial   assets  and
liabilities  (none of which were held for trading  purposes) as of March 31 were
as follows:
<TABLE>
<CAPTION>
                                                                        1999                         1998
===========================================================================================================
                                                                    Estimated                    Estimated
                                                      Carrying           Fair      Carrying           Fair
(In thousands)                                           Value          Value         Value          Value
===========================================================================================================
<S>                                                   <C>            <C>           <C>            <C>
Financial assets
Cash and cash equivalents                             $ 12,722       $ 12,722      $ 34,273       $ 34,273
Loans held for sale                                         --             --         1,286          1,316
Securities available for sale                          242,611        242,611        42,471         42,471
Securities held to maturity                             23,041         23,235        65,194         65,482
Federal Home Loan Bank of New York stock                 3,299          3,299         3,035          3,035

Loans receivable                                       578,099        582,692       506,978        506,615
Allowance for loan losses                              (14,296)            --        (8,227)            --
-----------------------------------------------------------------------------------------------------------
Net loans receivable                                  $563,803       $582,692      $498,751       $506,615
-----------------------------------------------------------------------------------------------------------
Accrued interest receivable                              5,701          5,701         4,402          4,402

Financial liabilities
Deposits:
   Savings, N.O.W., money market and
     noninterest-bearing accounts                      289,335        289,335       269,015        269,015
   Time deposit accounts                               302,479        304,961       319,299        321,021
Securities sold under agreements to repurchase             845            845            --             --
Other short-term borrowings                             27,600         27,600         2,000          2,000
Mortgagors' escrow deposits                              3,869          3,869         3,723          3,723
Accrued interest payable                                   122            122           120            120
===========================================================================================================
</TABLE>
The fair  value of  commitments  to extend  credit,  unused  lines of credit and
standby letters of 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   creditworthiness  of  the  counterparties.   For
fixed-rate  commitments to extend credit and unused lines of credit,  fair value
also considers the difference  between  current levels of interest rates and the
committed  rates.  Based upon the estimated  fair value of commitments to extend
credit,  unused  lines of credit and  standby  letters  of credit,  there are no
significant   unrealized  gains  or  losses   associated  with  these  financial
instruments.

46
<PAGE>
====================
NOTE 14.
CONDENSED FINANCIAL
INFORMATION
OF THE
PARENT
COMPANY

The Parent  Company  began  operations on July 1, 1998 in  conjunction  with the
Bank's  mutual-to-stock  conversion  and the  Parent  Company's  initial  public
offering of its common stock.  The  following  represents  the Parent  Company's
balance  sheet as of March 31, 1999,  and its income  statement and statement of
cash flows for the period July 1, 1998 through March 31, 1999.

<TABLE>
<CAPTION>
BALANCE SHEET
(In thousands)                                                                              March 31, 1999
===========================================================================================================
<S>                                                                                               <C>
Assets
Interest-bearing deposit with subsidiary bank                                                       $  122
Securities purchased under agreements to resell to subsidiary bank                                  54,883
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents                                                                           55,005
-----------------------------------------------------------------------------------------------------------
Securities available for sale                                                                        1,196
Loan to ESOP                                                                                        17,200
Other assets                                                                                         5,907
Investment in equity of subsidiary bank                                                            140,123
-----------------------------------------------------------------------------------------------------------
Total assets                                                                                      $219,431
===========================================================================================================
Liabilities and Shareholders' Equity
Other liabilities                                                                                    $  90
Total shareholders' equity                                                                         219,341
-----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                                        $219,431
===========================================================================================================
                                                                                            For the Period
INCOME STATEMENT                                                                      July 1, 1998 through
(In thousands)                                                                              March 31, 1999
===========================================================================================================
Interest and dividend income
Interest-bearing deposit with subsidiary bank                                                        $   4
Securities purchased under agreements to resell to subsidiary bank                                   2,577
Securities available for sale                                                                           12
Loan to ESOP                                                                                         1,118
-----------------------------------------------------------------------------------------------------------
Total interest and dividend income                                                                   3,711
-----------------------------------------------------------------------------------------------------------
Other operating income                                                                                 111
-----------------------------------------------------------------------------------------------------------

Other operating expenses
Compensation and benefits                                                                              143
Legal and other professional fees                                                                      106
Postage and item transportation                                                                         15
Charitable foundation contribution                                                                   5,200
Other expenses                                                                                         341
-----------------------------------------------------------------------------------------------------------
Total other operating expenses                                                                       5,805
-----------------------------------------------------------------------------------------------------------
Loss before income tax benefit and equity in undistributed earnings of subsidiary bank              (1,983)
Income tax benefit                                                                                     812
Equity in undistributed earnings of subsidiary bank                                                  3,992
-----------------------------------------------------------------------------------------------------------
Net income                                                                                         $ 2,821
===========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                            For the Period
STATEMENT OF CASH FLOWS                                                               July 1, 1998 through
(In thousands)                                                                              March 31, 1999
===========================================================================================================
<S>                                                                                                  <C>
Cash flows from operating activities
Net income                                                                                         $ 2,821
Adjustments to reconcile net income to net cash used in operating activities:
   Charitable foundation contribution                                                                5,200
   Amortization of restricted stock awards                                                             217
   ESOP stock released for allocation                                                                1,134
   Net increase in other assets                                                                     (5,920)
   Net increase in other liabilities                                                                    90
   Equity in undistributed earnings of subsidiary bank                                              (3,992)
-----------------------------------------------------------------------------------------------------------
Total adjustments                                                                                   (3,271)
-----------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                                                 (450)
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Investment in equity of subsidiary bank                                                            (67,626)
Purchases of securities available for sale                                                          (1,160)
Net increase in loan receivable from ESOP                                                          (17,200)
-----------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                                              (85,986)
-----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from stock offering                                                                   169,967
Purchase of treasury stock                                                                         (10,098)
Acquisition of common stock by ESOP                                                                (18,428)
-----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                                          141,441
-----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents                                                           55,005
Cash and cash equivalents at beginning of period                                                        --
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                                        $ 55,005
===========================================================================================================
Supplemental   disclosures  of  non-cash  investing  and  financing   activities
Recognition of subsidiary bank's total equity on date of Parent Company's
 investment in equity of subsidiary bank                                                          $ 69,365
Adjustment of securities available for sale to fair value, net of tax                             $     23
Adjustment of subsidiary bank's securities available for sale to fair value, net of tax           $   (860)
===========================================================================================================
</TABLE>

48
<PAGE>
     Hudson River Bancorp, Inc.
===============================
          CORPORATE INFORMATION

HUDSON RIVER BANCORP, INC. AND
HUDSON RIVER BANK & TRUST COMPANY

BOARD OF DIRECTORS

Carl A. Florio, CPA        President and
                           Chief Executive Officer

Earl Schram, Jr.           Chairman of the Board
                           Attorney and President
                           Connor, Curran & Schram, P.C.

Stanley Bardwell, M.D.     Retired Physician
William E. Collins         Retired President and
                           Chief Executive Officer
                           Hudson City Savings Institution

John E. Kelly              Chairman of the Board
                           Berkshire Telephone Corp.

Joseph W. Phelan           President
                           Taconic Farms, Inc.

William H. (Tony) Jones    President and Publisher
                           Roe Jan Independent Publishing Co., Inc.

Marilyn A. Herrington      Vice President and Secretary
                           Herrington-Yaffe Auto Center

Marcia M. Race             Retired
                           Assistant to the President
                           Hudson City Savings Institution

Trustee Emeritus           Warren H. Bohnsack
                           Morton A. Ginsberg

EXECUTIVE OFFICERS

Carl A. Florio, CPA        President and
                           Chief Executive Officer

Timothy E. Blow, CPA       Chief Financial Officer

Sidney D. Richter          Senior Vice President, Lending

Pamela M. Wood             Senior Vice President, Operations

HUDSON RIVER BANK & TRUST COMPANY

OFFICERS

Daniel Cheeseman              Commercial Lending
Carol Dube                    Information Technology
Susan Hollister               Human Resources
Lawrence Longo, Jr.           Mortgage Originations
Michael Mackay                Loan Servicing
James Mackerer                Commercial Lending and Facilities
Ellen Miller                  Retail Banking
<PAGE>
ANNUAL MEETING OF SHAREHOLDERS

The annual meeting of Hudson River Bancorp, Inc. will
be held at 3:00 pm on August 19, 1999 at the St. Charles
Hotel & Restaurant, Hudson, NY.

STOCK TRANSFER AGENT & 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, NJ 07016-3572
(800) 368-5948

ANNUAL REPORT ON FORM 10K
For the 1999 fiscal year, Hudson River Bancorp,  Inc. will file an Annual Report
on Form  10K.  Shareholders  wishing  a copy may  obtain  one free of  charge by
writing:

Holly E. Rappleyea
Corporate Secretary
Hudson River Bancorp, Inc.
One Hudson City Centre
Hudson, NY 12534

STOCK LISTING
The common stock of Hudson River Bancorp, Inc. trades
on the Nasdaq Stock Market under the symbol HRBT.

<TABLE>
<CAPTION>
STOCK PRICE
Quarter Ending                  High          Low            Dividend
----------------------------------------------------------------------
<S>                           <C>            <C>              <C>
September 30, 1998            $13.75         $9.38            --
----------------------------------------------------------------------
December 31, 1998              11.75          8.75            --
----------------------------------------------------------------------
March 31, 1999                 12.00         10.06            --
----------------------------------------------------------------------
</TABLE>
<PAGE>
===========================
HUDSON RIVER BANCORP, INC.
ONE HUDSON CITY CENTRE
HUDSON, NY 12534
(518) 828-4600

www.hudsonriverbank.com




[GRAPHIC OMITTED]





BRANCH LOCATIONS

Albany
Chatham
Copake
East Greenbush
Greenport-Fairview Plaza
Greenport-Towne Center
Hillsdale
Hudson
Millerton
Nassau
North Greenbush
Rotterdam
Valatie