<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-K

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

                     THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998  Commission File Number: 0-19212

                            JEFFERSONVILLE BANCORP
            (Exact name of Registrant as specified in its charter)

           New York                             22-2385448
(State or other jurisdiction of     (I.R.S. Employer Identification No.)
 incorporation or organization)

                 P.O. Box 398, Jeffersonville, New York 12748
                   (Address of principal executive offices)

      Registrant's telephone number, including area code: (914) 482-4000

         Securities registered pursuant to Section 12(b) of the Act:

        Title of each class           Name of exchange on which registered
              NONE                                  NONE

         Securities registered pursuant to Section 12 (g) of the Act:

                        Common Stock, $0.50 Par Value
                               (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  report(s),  and (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [ ]

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

The  aggregate  market  value of the  registrant's  common stock (based upon the
average bid and asked  prices on February  9, 1999) held by  non-affiliates  was
approximately $32,101,169.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock:

                                            Number of Shares Outstanding
           Class of Common Stock               as of February 9, 1999
             $0.50 Par Value                         1,395,703

            DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the  Registrant's  Annual Report to shareholders  for the fiscal
    year ended December 31, 1998.

(2) Portions  of the  Registrant's  Proxy  Statement  for its Annual  Meeting of
    Stockholders to be held on April 27, 1999.
<PAGE>

Jeffersonville Bancorp
1998  Annual Report
and Form 10K

<PAGE>

To Our Stockholders and Customers

What a  difference  a year  makes!  Last  year we were  reporting  disappointing
earnings resulting from the "adverse economic climate of Sullivan County".  This
year we are very pleased to report net income of  $2,318,000,  a 31.5%  increase
over 1997's net income of $1,763,000.

     Several factors contributed to this improvement in earnings,  including the
reduction in our provision  for loan losses from  $1,150,000 in 1997 to $600,000
in 1998. We believe our allowance for loan loss balance of $2,310,000  (1.78% of
outstanding  loans) at the end of 1998 will be  adequate  to absorb  anticipated
loan  charge-offs.  An improvement in the local economy should be reflected in a
decline in our loan  delinquency  ratios  which  should  result in a  continuing
improvement in earnings.

     Although the local economy displayed lackluster performance in 1998, recent
events indicate a dawning of economic optimism in the county.  The Concord Hotel
was  purchased  at  foreclosure  sale with plans for  massive  refurbishing  and
Sheraton Hotel  affiliation.  The Grossinger  Hotel was purchased at foreclosure
sale,  the former  Laurels  Hotel is back on the tax rolls,  the Swan Lake Hotel
(formerly  Stevensville)  continues to be resurrected  and the Pines Hotel is in
transition to condos,  similar to the highly successful conversion of the Browns
Hotel (Grandview  Palace).  It appears as though investors have rediscovered the
recreational  beauty of our area and the potential for tapping the huge New York
City market only 11/2 hours away.

     We have  continued  to seek areas of  expansion to increase and improve our
level of service to our growing customer base. Our success has been reflected in
our widening market share  percentage over our  competitors.  In order to better
serve our many customers in the Wurtsboro area, we have filed an application for
a new branch  location in a proposed  I.G.A.  supermarket to be located on Route
209 near  Route 17. Not only will this  branch  provide  service to the  fastest
growing  area of Sullivan  County,  but it will also put us closer to the Orange
County  market.  We have also been  approved by  Wal-Mart  Inc. to open a branch
office in their new Superstore  near  Monticello.  We are very excited about the
potential for this location, however, due to archaic banking laws, State banking
department  approval could present a problem. A "home office" protection statute
may prevent an approval of our application.  In an age of internet banking, this
law seems outdated and  unnecessary.  We will continue our efforts to secure the
regulatory approvals.

     Quality,  convenience  and  service  are the  elements  that  differentiate
financial service  providers.  The dedicated staff of The First National Bank of
Jeffersonville makes the difference.  In addition to providing superior personal
service  to our  customers,  many of our staff have also been busy  testing  and
upgrading  all of our  computer  systems  to make  sure that we will be ready to
serve you in the new millennium.

     Thank you for your continued  confidence and support. Our commitment to you
is another successful and profitable year in 1999.

/s/ Arthur E. Keesler                   /s/ Raymond Walter
Arthur E. Keesler, President            Raymond Walter, President
Jeffersonville Bancorp                  First National Bank of Jeffersonville

Arthur E. Keesler                       Raymond Walter
<PAGE>

Selected Financial Information
<TABLE>
Five-Year Summary
<CAPTION>

                               1997              1996              1995             1994
  <S>                          <C>               <C>               <C>              <C>

  Results of Operations
  Net interest income          $  8,904,000      $  8,666,000      $  8,581,000     $  9,245,000
  Provision for loan losses       1,150,000           290,000           160,000          427,000
  Net income                      1,763,000         2,145,000         2,424,000        2,460,000

  Financial Condition
  Total assets                 $213,659,000      $196,113,000      $188,469,000     $188,118,000
  Deposits                      179,160,000       172,930,000       164,184,000      165,531,000
  Loans, net                    125,793,000       115,605,000       109,288,000      101,414,000
  Stockholders' equity           22,176,000        20,975,000        20,928,000       17,782,000

  Average Balances
  Total assets                 $211,034,000      $198,134,000      $193,568,000     $194,114,000
  Deposits                      180,635,000       173,139,000       169,209,000      165,368,000
  Gross loans                   122,567,000       113,981,000       107,567,000      100,517,000
  Stockholders' equity           21,539,000        20,751,000        19,871,000       18,483,000

  Financial Ratios
  Net income to
   average total assets                0.84%             1.08%             1.25%            1.27%
  Net income to average
   stockholders' equity                8.19%            10.34%            12.20%           13.31%
  Average stockholders'
   equity to average
   total assets                       10.21%            10.47%            10.27%            9.52%

  Per Share Data<F1>
  Earnings per share           $       1.24      $       1.49      $       1.61     $       1.59
  Dividends per share                  0.56              0.54              0.50             0.46
  Dividends per share to
   earnings per share                 45.20%            36.20%            31.10%           28.90%
  Book value at year end       $      15.62      $      14.78      $      14.16     $      11.50
  Total dividends paid              792,000           775,000           755,000          709,000
  Average number of
   shares outstanding             1,419,000         1,441,000         1,503,000        1,546,000
  Shares outstanding
   at year end                    1,419,000         1,419,000         1,478,000        1,546,000

<FN>

<F1> All share and per share  amounts  have been  adjusted for the effect of the
     20% stock dividend distributed in February 1998.
</FN>
</TABLE>
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
  Operations

The following is a discussion of the factors  which  significantly  affected the
consolidated  results of operations  and financial  condition of  Jeffersonville
Bancorp  ("the  Parent  Company")  and its  wholly-owned  subsidiary,  The First
National Bank of Jeffersonville  ("the Bank").  For purposes of this discussion,
references to the Company include both the Bank and Parent Company,  as the Bank
is the Parent  Company's  only  subsidiary.  This  discussion  should be read in
conjunction with the consolidated  financial  statements and notes thereto,  and
the other financial information appearing elsewhere in this annual report.

     In  addition  to  historical  information,  this  report  includes  certain
forward-looking  statements with respect to the financial condition,  results of
operations  and  business  of the Parent  Company  and the Bank based on current
management expectations.  The Company's ability to predict results or the effect
of future plans and  strategies  is  inherently  uncertain  and actual  results,
performance  or  achievements  could  differ  materially  from those  management
expectations.  Factors  that could  cause  future  results to vary from  current
management  expectations  include,  but are not  limited  to,  general  economic
conditions,  legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations,  changes
in interest rates,  deposit flows, the cost of funds,  demand for loan products,
demand  for  financial  services,   competition,   changes  in  the  quality  or
composition of the Bank's loan and securities portfolios,  changes in accounting
principles,  and other economic,  competitive,  governmental,  and technological
factors  affecting the Company's  operations,  markets,  products,  services and
prices.

General

The  Parent  Company  is  a  one-bank   holding  company  founded  in  1982  and
headquartered in  Jeffersonville,  New York. The Parent Company owns 100% of the
outstanding  shares of the Bank's common stock and derives  substantially all of
its income from the Bank's  operations.  The Bank is a commercial bank chartered
in 1913  serving  Sullivan  County,  New York with  offices  in  Jeffersonville,
Eldred, Liberty, Loch Sheldrake,  Monticello,  Livingston Manor, Narrowsburg and
Callicoon.

     The  Company's  mission  is to serve  the  community  banking  needs of its
borrowers and depositors,  who predominantly  are individuals,  small businesses
and local  municipal  governments.  The  Company is in tune with local  customer
needs and provides  quality service with a personal  touch.  This discussion and
analysis of financial  results should be reviewed with the Company's  philosophy
in mind.

Local Economy

The local economy displayed  continued  lackluster  performance in 1998. Some of
the Company's  borrowers  continued to struggle with their loan and tax payments
due to the local economy's poor performance, although there was modest growth in
most sectors of the Company's loan portfolio.  The Company will continue to seek
opportunities to provide fresh capital for the local economy,  while adhering to
prudent loan underwriting  standards.  Management of the Company does anticipate
some  improvement  in the  local  economy  in 1999.  If  efforts  by the  county
government and private  enterprise to stimulate  economic activity begin to bear
fruit in 1999, conditions in the local economy should begin to improve.

<PAGE>

Financial Condition

Total average assets in 1998 increased $19,921,000 over 1997 to $230,955,000, an
increase of 9.4%  compared to a 6.5%  increase in 1997 when average  assets were
$211,034,000  compared to $198,134,000 in 1996. Average assets increased in both
1998 and 1997 as deposit  growth and Federal Home Loan Bank ("FHLB")  borrowings
were  invested  primarily  into loans  that met our  underwriting  criteria  and
securities  available for sale. Asset growth in 1998 also included a purchase of
bank-owned life insurance which amounted to $6,183,000 at year end.

     Total average securities (securities available for sale and securities held
to maturity) increased $7,436,000 or 9.9% in 1998 to $82,336,000,  compared to a
4.6% increase in 1997.  Total average  securities  were  $74,900,000 in 1997 and
$71,604,000 in 1996. The increase in 1998 reflects continued use of a leveraging
strategy implemented in 1997, in which the Company funds security purchases with
FHLB  borrowings at a positive  interest  rate spread.  See notes 3 and 4 to the
consolidated   financial   statements  for  period-end  balances  of  securities
available for sale and securities held to maturity.

     Average   interest   bearing   deposits   increased   $7,767,000  to  reach
$163,335,000  in 1998, an increase of 5.0% compared to $155,568,000 in 1997 when
average  interest  bearing  deposits  increased 3.7% compared to $150,071,000 in
1996. The higher interest rates paid on time savings certificates resulted in an
increase  in these  deposits in both 1998 and 1997,  as funds  flowed from other
types of accounts  paying lower rates.  However,  on an overall basis,  interest
rates on interest bearing deposits  decreased from an average rate paid of 4.20%
in 1997 to 4.06% in 1998. The Escalator Account,  which is a savings certificate
product  introduced  in 1995,  has an 18 month term but gives the  depositor  an
option  during that term to increase the interest  rate one time to match market
rates.  The  Escalator  Account  has  proven  to be  very  popular,  growing  to
$25,389,000  at December 31, 1998 from year end balances of  $22,471,000 in 1997
and $15,800,000 in 1996.

     In 1998,  average demand deposit balances  increased 11.6% over 1997, after
increasing 8.7% in 1997 above the 1996 level.  The Company offers these accounts
on a highly  competitive basis and continues to attract a pool of low cost funds
for reinvestment in the community.

Loans

In 1998, average loans increased $7,187,000 to $129,754,000 from $122,567,000 in
1997,  after  increasing  $8,586,000 from  $113,981,000 in 1996. These increases
were  acceptable  considering the condition of the local economy during the past
few  years  and the  large  volume  of  mortgage  refinancing  in 1998.  Average
residential  and  commercial  real  estate  loans  continued  to make up a major
portion of the loan portfolio at 69.6% of total loans in 1998, compared to 71.0%
in 1997.  Home equity  loans,  which were  introduced  in 1996,  increased  from
$7,677,000  at year end 1997 to  $9,320,000  at year end 1998,  an  increase  of
21.4%.  Additional  growth is  anticipated in  residential  and commercial  real
estate loans during 1999.  Average  commercial time and demand loans and average
consumer loans showed  combined net growth of 4.3% in 1998 and 9.7% in 1997. The
overall loan portfolio is structured in accordance with management's belief that
loans secured by residential  and  commercial  real estate  generally  result in
lower loan loss levels compared to other types of loans, because of the value of
the underlying collateral.

Provision for Loan Losses

The  provision  for loan losses was $600,000 in 1998  compared to  $1,150,000 in
1997 and $290,000 in 1996. The substantial  decrease in 1998 primarily  reflects
lower net  charge-offs in each loan category and, to a lesser  extent,  a slower
portfolio growth rate and an overall decrease in nonaccrual loans.

<PAGE>

Summary of Loan Loss Experience

The following  table  indicates the amount of charge-offs  and recoveries in the
loan portfolio by category.

Analysis of the Changes in Allowance for Loan Losses

                                            1998           1997
Balance at beginning of year                $1,862,000     $1,711,000
Charge-offs:
  Commercial, financial and agricultural       (58,000)      (371,000)
  Real estate -- mortgage                      (57,000)      (580,000)
  Installment loans to individuals            (228,000)      (304,000)

    Total charge-offs                         (343,000)    (1,255,000)

Recoveries:
  Commercial, financial and agricultural        64,000         91,000
  Real estate -- mortgage                       42,000         84,000
  Installment loans to individuals              85,000         81,000

    Total recoveries                           191,000        256,000

Net charge-offs                               (152,000)      (999,000)

Provisions charged to operations               600,000      1,150,000

Balance at end of year                      $2,310,000     $1,862,000

Ratio of net charge-offs to
  average outstanding loans                       0.12%          0.82%

     Net charge-offs were 0.12% of average outstanding loans in 1998 compared to
0.82%  in 1997  and  0.18% in 1996,  reflecting  a lower  level of loan  losses.
Continuation   of  this  favorable   trend  in  net   charge-offs   will  depend
significantly  on  improvement in the local economy.  On a combined  basis,  net
charge-offs on residential and commercial  mortgages  decreased by $481,000 from
$496,000  in 1997 to  $15,000  in 1998.  Management  instituted  new tax  escrow
policies on renewing mortgages and upgraded the Bank's loan collection practices
in 1998,  which has helped to mitigate the problem of rising  delinquencies  and
loan losses.

     The net recovery on commercial loans was $6,000 in 1998 or 0.05% of average
commercial loans outstanding,  a substantial improvement compared to a 2.65% net
charge-off  percentage in 1997. The significantly  higher commercial loan losses
in 1997 were  concentrated in a few large loans that defaulted  during the year.
Efforts  continue  to  recover a portion of these  losses.  Net  charge-offs  on
consumer loans declined to $143,000 in 1998 from $223,000 in 1997.

     The Company  manages  asset quality with an intensive  review  process that
includes careful analysis of credit  applications and both internal and external
loan review of existing outstanding loans and delinquencies.  Management strives
to identify  potential  non-performing  loans early;  take charge-offs  promptly
based on a realistic  assessment  of probable  losses;  and maintain an adequate
allowance  for loan losses  based on the  inherent  risk of loss in the existing
portfolio.

<PAGE>

     The allowance for loan losses was  $2,310,000 at December 31, 1998 compared
to $1,862,000  and $1,711,000 at December 31, 1997 and 1996,  respectively.  The
allowance  as a  percentage  of total  loans was  1.70% at  December  31,  1998,
compared to 1.45% and 1.46% at December  31,  1997 and 1996,  respectively.  The
allowance's  coverage  of  non-performing  loans was  77.3%,  50.4% and 38.2% at
December 31, 1998, 1997 and 1996, respectively.

     No portion of the  allowance  for loan losses is  restricted to any loan or
group of loans,  as the entire  allowance is available to absorb  charge-offs in
any loan  category.  The amount and timing of future  charge-offs  and allowance
allocations  may vary from current  estimates and will depend on local  economic
conditions.  The following  table shows the allocation of the allowance for loan
losses to major portfolio  categories,  and the percentage of each loan category
to total loans outstanding.

Distribution of Allowance for Loan Losses at December 31, 1998

                          Allowance     Percentage of    Loan Balance by
                          Balance       Total Allowance  Type to Total Loans1

 Loan Category
 Residential Mortgages    $  681,000     29.5%            57.3%
 Commercial Mortgages        400,000     17.3             19.1
 Commercial Loans            544,000     23.5             10.4
 Consumer Loans              508,000     22.0             12.1
 Other Loans                 177,000      7.7              1.1

                          $2,310,000    100.0%           100.0%

1 Percentage  relationship between average loans outstanding by type compared to
  total average loans outstanding.

Distribution of Allowance for Loan Losses at December 31, 1997

                          Allowance     Percentage of    Loan Balance by
                          Balance       Total Allowance  Type to Total Loans1

Loan Category
Residential Mortgages     $  606,000     32.5%            59.7%
Commercial Mortgages         400,000     21.5             16.5
Commercial Loans             476,000     25.6             10.3
Consumer Loans               304,000     16.3             12.2
Other Loans                   76,000      4.1              1.3

                          $1,862,000    100.0%           100.0%

1 Percentage  relationship between average loans outstanding by type compared to
  total average loans outstanding.

     The total  allowance  for loan  losses at  December  31,  1998  includes an
allocation  of  $280,000,  or  12.1%  of  the  total  allowance,  to  classified
commercial mortgages and commercial loans. The comparable allocation at December
31, 1997 was $408,000 or 21.9% of the total allowance.

     Management  believes  that the  allowance  for  loan  losses  is  adequate;
however,  certain regulatory agencies,  as an integral part of their examination
process,  periodically  review the adequacy of the Company's  allowance for loan
losses.  Such  agencies  may require the Company to  recognize  additions to the
allowance based on their judgments  about  information  available to them at the
time of their  examination  which may not be currently  available to management.
<PAGE>

Nonaccrual and Past Due Loans

The Company places a loan on nonaccrual status when  collectability of principal
or interest is doubtful, or when either principal or interest is 90 days or more
past due and the loan is not well  secured  and in the  process  of  collection.
Interest payments received on nonaccrual loans are applied as a reduction of the
principal  balance  when  concern  exists  as  to  the  ultimate  collection  of
principal. A distribution of nonaccrual loans and loans 90 days or more past due
and still accruing interest is shown in the following table.

<TABLE>
<CAPTION>
December 31, 1998

                                     90 Days
                                     or More
                        Nonaccrual   Still Accruing   Total         Percentage<F1>  Percentage<F2>

<S>                     <C>          <C>              <C>           <C>             <C>
Loan Category
Residential Mortgages   $1,342,000   $  738,000       $2,080,000    2.7%             69.6%
Commercial Mortgages       500,000      383,000          883,000    3.6              29.6
Consumer Loans                  --       25,000           25,000    0.1               0.8

Total                   $1,842,000   $1,146,000       $2,988,000    2.2%            100.0%

<FN>
<F1> Percentage of gross loans outstanding for each loan category.
<F2> Percentage of total nonaccrual and 90 day past due loans.
</FN>
</TABLE>

<TABLE>
<CAPTION>
December 31, 1997

                                     90 Days
                                     or More
                        Nonaccrual   Still Accruing   Total         Percentage<F1>  Percentage<F2>

<S>                     <C>          <C>              <C>           <C>             <C>
Loan Category
Residential Mortgages   $2,012,000   $  330,000       $2,342,000    3.1%             63.4%
Commercial Mortgages     1,258,000           --        1,258,000    5.4              34.1
Commercial Loans            54,000           --           54,000    0.4               1.5
Consumer Loans                  --       38,000           38,000    0.2               1.0

Total                   $3,324,000   $  368,000       $3,692,000    2.8%            100.0%

<FN>
<F1> Percentage of gross loans outstanding for each loan category.
<F2> Percentage of total nonaccrual and 90 day past due loans.
</FN>
</TABLE>

     The decrease in total nonaccrual and 90 day past due loans is primarily due
to decreases in  nonaccrual  residential  mortgages  and  commercial  mortgages,
partially  offset by  increases  in 90 day past due  residential  mortgages  and
commercial  mortgages.  Total  nonaccrual  and 90 day past due  residential  and
commercial  mortgage loans  represent 2.7% and 3.6% of the respective  portfolio
totals, despite the borrowers doing their utmost to repay their loans to protect
their homes and businesses in a difficult economic environment.  The majority of
the  Company's  total  nonaccrual  and past due loans are secured  loans and, as
such,  management  anticipates  there  will be  limited  risk  of loss in  their
ultimate  resolution.   As  of  December  31,  1998,   management  believes  all
significant potential problem loans have been identified in the table above.

     From  time  to  time,   loans  may  be  renegotiated  in  a  troubled  debt
restructuring  when  the  Company  determines  that it will  ultimately  receive
greater   economic   value  under  the  new  terms  than  through   foreclosure,
liquidation,  or  bankruptcy.  Candidates for  renegotiation  must meet specific
guidelines. There were no restructured loans as of December 31, 1998 and 1997.

<PAGE>

Other Real Estate Owned

Other real estate owned represents  properties  acquired through foreclosure and
is  recorded  on an  individual-asset  basis at the lower of (1) fair value less
estimated costs to sell or (2) cost,  which represents the fair value at initial
foreclosure.  When a property is  acquired,  the excess of the loan balance over
the fair value of the  property  is charged to the  allowance  for loan  losses.
Subsequent write downs to reflect further declines in fair value are included in
non-interest expense.

     The  following  are the changes in other real estate  owned during the last
two years:

Years Ended December 31, 1998 and 1997

                     1998             1997

Beginning Balance    $ 301,000        $ 831,000
Additions              960,000          352,000
Sales                 (600,000)        (763,000)
Write downs           (126,000)        (119,000)

Ending Balance       $ 535,000        $ 301,000

Liquidity

Liquidity  is the  ability to  provide  sufficient  cash flow to meet  financial
commitments such as additional loan demand and withdrawals of existing deposits.
The  Company's   primary  sources  of  liquidity  are  its  deposit  base;  FHLB
borrowings;  repayments  and  maturities  on loans;  short-term  assets  such as
federal funds and short-term  interest bearing deposits in banks; and maturities
and sales of  securities  available  for sale.  These  sources are  available in
amounts  sufficient to provide  liquidity to meet the Company's  ongoing funding
requirements.  The Bank's membership in the FHLB of New York enhances  liquidity
in the form of overnight and 30 day lines of credit of approximately $22,000,000
which may be used to meet unforeseen  liquidity demands.  None of this available
credit was being used at December 31, 1998.  Four  separate  FHLB term  advances
totaling  $20,000,000  at December  31, 1998 were being used to fund  securities
leverage transactions.

     In 1998,  cash generated from operating  activities  amounted to $3,938,000
and cash generated  from financing  activities  amounted to  $27,697,000.  These
amounts were  substantially  offset by a use of cash in investing  activities of
$30,595,000,  resulting  in a net  increase  in cash  and  cash  equivalents  of
$1,040,000.  See the  Consolidated  Statements  of  Cash  Flows  for  additional
information.

Interest Rate Risk

Management of interest rate risk involves  continual  monitoring of the relative
sensitivity  of asset  and  liability  portfolios  to  changes  in rates  due to
maturities  or  repricing.  Interest  rate  sensitivity  is a  function  of  the
repricing of assets and liabilities  through maturity and interest rate changes.
The  objective of interest rate risk  management  is to maintain an  appropriate
balance between income growth and the risks  associated  with maximizing  income
through the mismatch of the timing of interest rate changes  between  assets and
liabilities.  Perfectly  matching the  repricing of assets and  liabilities  can
eliminate  interest rate risk, but net interest  income is not always  enhanced.
One measure of interest rate risk,  the so-called  "gap",  is illustrated in the
table below as of December 31, 1998.  This table  measures the  incremental  and
cumulative  gap,  or  difference  between  assets  and  liabilities  subject  to
repricing during the periods indicated.  The dollar amounts presented are stated
on the basis of "contractual gap" which measures

<PAGE>

the stated repricing and maturity of assets and liabilities.  The data presented
indicates that rate  sensitive  liabilities  are generally  subject to repricing
sooner than rate sensitive assets.  Management retains the ability to change, or
not change,  interest rates on certain deposit  products as general market rates
change in the future,  and is also in the position to liquidate a portion of its
securities  available  for sale  should  conditions  warrant  such  action.  The
following is one of several  different  analysis  tools  management  utilizes in
managing interest rate risk.

December 31, 1998 (Dollars in thousands)

                                      Period to Repricing

                           0-3        3-12       1-5        Over
                           Months     Months     Years      5 Years    Total

Loans, Net1                $ 17,147   $ 18,013   $ 85,205   $  9,666   $130,031
Taxable Securities          212,915     23,024     29,277      6,227     71,443
Non Taxable Securities2         255      1,284     12,829      6,054     20,422

Total Interest
Earning Assets             $ 30,317   $ 42,321   $127,311   $ 21,947   $221,896

NOW and Super NOW Accounts $ 12,617   $     --   $ 16,109   $     --   $ 28,726
Savings and Insured
 Money Market Deposits3      31,711         --     24,378         --     56,089
Time Deposits3               22,168     38,426     21,418         --     82,012
Long Term Debt1                  --         --     10,000         --     10,000
Short Term Debt1                334     10,000         --         --     10,334

Total Interest Bearing
Liabilities                $ 66,830   $ 48,426   $ 71,905   $     --   $187,161

Gap                        $(36,513)  $ (6,105)  $ 55,406   $ 21,947   $ 34,735
Cumulative Gap              (36,513)   (42,618)    12,788     34,735
Cumulative Gap as
  a Percentage of Total
  Interest Earning Assets    (16.46%)   (19.21%)     5.76%     15.65%

1 Based on contractual maturity or period to repricing.
2 Based on anticipated maturity. Includes Securities Available for Sale and
  Securities Held to Maturity, at their historical amortized cost.
3 Fixed rate deposits and deposits with fixed pricing intervals are included
  in the period of  contractual  maturity.  Deposits  withdrawable  on demand or
  within short notice  periods  (such as NOW and savings  accounts) are shown in
  repricing  periods  based  on  management's  estimate  of  the  interest  rate
  sensitivity  of  these  accounts,  based  in part on the  Company's  favorable
  historical  experience  of retaining a substantial  portion of these  balances
  during periods of changing interest rates.

Maturity Schedule of Time Deposits of $100,000 or More at December 31, 1998

Deposits
Due three months or less                        $ 6,570,000
Over three months through six months              3,676,000
Over six months through twelve months             2,451,000
Over twelve months                                2,223,000

                                                $14,920,000


<PAGE>

<TABLE>
Analysis of Securities by Type and by Period to Maturity at December 31, 1998 (Dollars in thousands)<F1>
<CAPTION>
                               Under 1 Year     1 to 5 Years      5 to10 Years      After 10 Years    Total

                               Balance  Rate    Balance  Rate     Balance   Rate    Balance   Rate    Balance

<S>                            <C>      <C>     <C>      <C>      <C>       <C>     <C>       <C>     <C>
U.S. Government Agency         $33,318  6.43%   $27,072  6.29%    $ 1,021   6.08%   $ 5,006   6.16%   $66,417
Municipal Securities --
 Tax Exempt<F2>                  1,539  5.24     12,826  5.55       5,622   5.39        245   5.66     20,232
Municipal Securities --
 Taxable                            --    --        190  6.00          --     --         --     --        190
Mortgage Backed Securities
 and Collateralized Mortgage       320  6.49      2,015  6.61         698   6.19         --     --      3,033
Obligations other than U.S.
 Government Agencies
Other Securities                 1,977  7.98         --    --         199   6.63         --     --      2,176

                               $37,154  6.44%   $42,103  6.08%    $ 7,540   5.59%   $ 5,251   6.14%   $92,048

<FN>
<F1> The analysis  shown above combines the Company's  Securities  Available for
     Sale  portfolio  and  the  Securities  Held  to  Maturity  portfolio.   All
     securities are included above at their historical amortized cost.
<F2> Yields on tax exempt securities have not been stated on tax equivalent basis.
</FN>
</TABLE>

The  following  table  indicates  the  amount  of  loans in  selected  portfolio
categories  according to their period to maturity.  The table also indicates the
dollar amount of these loans that have predetermined or fixed rates vs.
variable or adjustable rates.

<TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates at December 31, 1998
<CAPTION>

                           Under 1 Year  1 to 5 Years   After 5 Years    Total
<S>                        <C>           <C>            <C>              <C>
Loan Portfolio
Commercial, financial
  and agricultural         $ 7,972,000   $ 4,862,000    $   891,000      $13,725,000
Real estate construction       953,000        81,000        137,000        1,171,000

    Total                  $ 8,925,000   $ 4,943,000    $ 1,028,000      $14,896,000

Interest sensitivity
  of loans:
  Predetermined rate       $ 4,994,000   $ 4,943,000    $ 1,028,000      $10,965,000
  Variable rate              3,931,000            --             --        3,931,000

    Total                  $ 8,925,000   $ 4,943,000    $ 1,028,000      $14,896,000
</TABLE>

 Capital Adequacy

One of management's  primary objectives is to maintain a strong capital position
to merit the confidence of depositors, the investing public, bank regulators and
shareholders.  A strong  capital  position  should  help the  Company  withstand
unforeseen  adverse  developments  and take  advantage of profitable  investment
opportunities when they arise.  Stockholder's  equity increased $841,000 or 3.8%
in 1998 following an increase of 5.7% in 1997.

     In 1996, the Company  offered to repurchase and retire 50,000 common shares
through open-market and  privately-negotiated  purchases.  By December 31, 1996,
49,672 shares were acquired at $21.00 per share,  reducing  stockholders' equity
by $1,043,000.

<PAGE>

     In  1998,  the  Board  of  Directors  authorized  that  $1,000,000  be made
available to purchase and retire additional  shares on the open market.  Through
December 31, 1998, a total of 14,863 common  shares were  purchased and retired,
reducing  stockholders'  equity  by  $337,000.   Management  believes  that  the
repurchase of Company stock represents a prudent use of excess capital.

     The Company  retained  $1,468,000  from 1998 earnings,  while the after-tax
adjustment for the change in the net unrealized gain on securities available for
sale decreased  stockholders  equity by $290,000.  In accordance with regulatory
capital  rules,  the adjustment  for debt  securities  available for sale is not
considered in the computation of regulatory capital ratios.

     Under the Federal Reserve Bank's  risk-based  capital rules,  the Company's
Tier I risk-based  capital was 17.3% and total  risk-based  capital was 18.5% of
risk-weighted assets. These risk-based capital ratios are well above the minimum
regulatory  requirements  of 4.0% for Tier I capital and 8.0% for total capital.
The Company's  leverage ratio (Tier I capital to average assets) of 9.9% is well
above the 4.0% minimum  regulatory  requirement.  The following  table shows the
Company's  actual  capital  measurements  compared  to  the  minimum  regulatory
requirements.

At December 31, 1998 and 1997

                                          1998              1997

Tier I capital
Stockholders' equity, excluding
  the after-tax net unrealized gain
  on securities available for sale        $ 22,754,000      $ 21,623,000

Tier II capital
Allowance for loan losses1                   1,654,000         1,528,000

Total risk-based capital                  $ 24,408,000      $ 23,151,000

Risk-weighted assets2                     $131,703,000      $121,885,000

Average assets                            $230,955,000      $211,034,000

Ratios
Tier I risk-based capital (minimum 4.0%)          17.3%             17.7%
Total risk-based capital (minimum 8.0%)           18.5%             19.0%
Leverage (minimum 4.0%)                            9.9%             10.0%

1 The allowance for loan losses is limited to 1.25% of risk-weighted  assets for
  the purpose of this calculation.
2 Risk-weighted  assets have been reduced for the portion of the  allowance  for
  loan losses excluded from total risk-based capital.

Results of Operations

Net Income

Net  income  for 1998 of  $2,318,000  was up 31.5%  from the 1997 net  income of
$1,763,000,  following a 17.8%  decrease in 1997  compared to 1996 net income of
$2,145,000.  The higher level of earnings in 1998 reflects the  interaction of a
number of factors  including  increases in net interest income and  non-interest
income and a decrease  in the loan loss  provision,  partially  offset by higher
non-interest  expenses  including costs  associated with problem loans and other
real estate owned. The most  significant  factor which increased 1998 net income
was the increase in net interest  income to $9,610,000  from $8,904,000 in 1997,
an increase of $706,000 or 7.9%.  The  provision for loan losses was $600,000 in
1998,  compared to $1,150,000  in 1997, a decrease of $550,000 or 47.8%.  Salary
expense increased $233,000 or 8.4% in 1998, primarily due to the addition of new
employees and normal <PAGE>

salary  increases.  Other real estate  owned  expenses  increased by $154,000 or
86.5% due to an  increase  in the number of  properties  foreclosed  upon by the
Company.  Other  non-interest  expense  increased  by $174,000 or 10.2% in 1998,
primarily due to increases in postage, telephone and stationery costs.

Interest Income and Interest Expense

Throughout the following discussion,  net interest income and its components are
expressed on a tax equivalent  basis which means that,  where  appropriate,  tax
exempt income is shown as if it were earned on a fully taxable basis.

     The largest source of income for the Company is net interest income,  which
represents interest earned on loans, securities and short-term investments, less
interest paid on deposits and other interest bearing  liabilities.  Net interest
income of  $10,208,000  for 1998  represented  an increase  of 5.7%  compared to
$9,653,000  for 1997.  Net interest  income in 1997  represented a $148,000,  or
1.6%, increase over 1996.

     Total interest income for 1998 was  $17,700,000  compared to $16,596,000 in
1997 and  $15,783,000 in 1996. The increase in 1998 is the result of an increase
in the average balance of interest  earning assets from  $199,829,000 in 1997 to
$215,382,000  in 1998, an increase of 7.8%.  The increase in earning  assets was
partially  offset by an overall  decrease in average yield on earning  assets of
nine basis points in 1998. In the current  declining rate  environment,  average
yields  will  decline as loans are made and  securities  are  acquired at yields
below existing  portfolio rates.  Securities  increased more than loans in 1998,
due to a general  decline in loan  demand.  In 1999,  increases  in funding will
continue to be allocated  first to meet loan demand,  as necessary,  and then to
the securities portfolios.

     Total  interest  expense  in 1998  increased  $549,000  or 7.9% over  1997,
contrasted to a 10.6% increase in 1997 compared to 1996. The average  balance of
interest bearing liabilities increased from $162,414,000 in 1997 to $163,335,000
in 1998, an increase of 0.6%. Like rates on earning assets,  the cost of funding
is also closely tied to market rates.  During 1998, the average deposit rate and
the average cost of total  interest  bearing  liabilities  decreased by fourteen
basis points and five basis points,  respectively,  reflecting  the lower market
interest  rates during the year. Net interest  margin  declined to 4.74% in 1998
compared  to 4.83% in 1997 and  5.07% in  1996.  Although  the  effect  of a low
interest rate  environment  will continue to be a real  challenge in maintaining
the net interest  margin,  the Company intends to continue  efforts to stabilize
the margin in 1999.

Non-Interest Income and Expense

Non-interest income primarily consists of service charges,  commissions and fees
for  various  banking   services,   and  securities  gains  and  losses.   Total
non-interest  income in 1998 increased 27.0% or $337,000 over 1997. The increase
is attributable  to income earned on a new cashier's check program,  income from
ATM fees charged to nonbank customers,  increases in fees for NSF checks, higher
monthly service charges for commercial  checking  accounts,  and income recorded
for  the  increase  in  cash  surrender  value  of  bank-owned  life  insurance.
Non-interest  income in 1997 increased  $191,000 over the prior year,  primarily
from increased fee income.

     Non-interest  expense  increased  by $653,000 or 9.5% in 1998,  compared to
increases  of 2.0% in 1997 and 9.9% in 1996.  Salary and wage  expense  combined
with employee  benefit expense  increased 7.7% to $4,015,000 in 1998 compared to
$3,728,000 in 1997,  which  represented  an increase of 2.8% over  $3,628,000 in
1996.  Occupancy and equipment  expense  increased  3.1% to reach  $1,276,000 in
1998, up from $1,238,000 in 1997 and $1,049,000 in 1996. This increase  reflects
the Company's commitment to upgrade and expand computer network technology.  Net
other  real  estate  owned  expense  increased  86.5% to  $332,000  in 1998 from
$178,000 in 1997,  after decreasing from $283,000 in 1996. Only an upturn in the
local economy will decrease  foreclosure  activity and the associated  costs. In
the interim,  however, the Company will continue to follow its loan underwriting
and appraisal  standards to minimize  future  losses,  and will continue to make
every effort to liquidate  foreclosed  property in a fashion that will  minimize
loss.  Other  non-interest  expense  increased  by  $174,000 or 10.2% in 1998 to
$1,888,000  from  $1,714,000  in 1997,  which  represented  a 2.7% decrease from
$1,761,000 in 1996.

<PAGE>

Year 2000 Planning and Implementation

Year 2000 or "Y2K" issue  continues to be a top  priority  for the Company.  The
year 2000  issue  refers to  uncertainties  regarding  the  ability  of  various
software and hardware  systems to interpret  dates correctly after the beginning
of the Year 2000.  The Company  utilizes and is dependent  upon data  processing
systems and software in its normal course of business.

     In 1997,  management  of the Company  created a Y2K task  force.  This task
force consists of senior management and representatives of all processing areas.
A Y2K written plan was  established.  Goals of the Y2K Plan include  identifying
risks, testing data processing and other systems used by the Company,  informing
customers  of the Y2K issues  and risks,  establishing  a  Contingency  Plan for
operations  if  Y2K  issues  cause  important  systems  or  equipment  to  fail,
implementing  changes  necessary to achieve Y2K  compliance,  and verifying that
these  changes  are  effective.  The Board of  Directors  approved  the Plan and
reviews progress under the Plan at its regular meetings.

     The Company has met its Y2K goals to date and believes it will  continue to
meet the goals of the Plan. By December 31, 1998, the Company had performed risk
assessments,  assessed the Y2K  preparedness  of major  vendors and suppliers as
well as large  customers,  started  its  customer  awareness  program  and begun
development  of  the  Y2K  Contingency   Plan.   Testing  of  mission   critical
applications  is  substantially   complete  with  completion  of  final  testing
scheduled for June 30, 1999.

     The Y2K Contingency  Plan calls for the Company to manually process banking
transactions  and to use other  data  processing  methods  in the event that Y2K
efforts of the Company or its service  providers are not  successful.  Delays in
processing banking transactions would result if the Company were required to use
manual  processing or other methods  instead of its normal  computer  processes.
These delays could disrupt the normal business activities of the Company and its
customers.  The Company must assure that the computer systems it uses to process
transactions are Y2K ready to avoid these disruptions.

     Management  believes that the cost of resolving  Y2K issues  related to the
Company's hardware and software will not be material to the Company's  business,
operations,  liquidity,  capital  resources  or  financial  condition  based  on
information  developed to date.  At this time,  the Company  estimates  that its
total cash outlays in connection  with Y2K compliance  will not exceed  $50,000,
excluding  costs of Company  employees  involved in Y2K  compliance  activities.
Approximately $28,000 has been expended as of December 31, 1998.

     Although the Company has  completed an assessment of the Y2K effects on its
current commercial lending and other customers, the actual effect on individual,
corporate  and  governmental  customers  of  the  Company  and  on  governmental
authorities  that  regulate the Company and its  subsidiary,  and any  resulting
consequences  to the  Company,  cannot be  determined  with any  assurance.  The
Company's belief that it, and its primary  vendors,  will achieve Y2K compliance
is based on a number of  assumptions  and on  statements  made by third  parties
which are  subject  to  uncertainty.  The  Company  is not able to  predict  the
effects, if any, on the Company,  financial markets or society in general of the
public reaction to Y2K.  Because of this uncertainty and reliance on assumptions
and statements of third parties,  the Company cannot be assured that the results
of its Y2K Plan will be achieved.  Management presently believes,  however, that
the Company will be able to  accomplish  its Y2K goals and that the Company will
be able to continue providing financial services for its customers into the 21st
century.

Recent Accounting Standards

See  note  18 to the  consolidated  financial  statements  for a  discussion  of
recently  issued  accounting  standards  concerning  derivative  instruments and
hedging  activities,  and  certain  loan  securitization   transactions.   These
standards  are  not  expected  to  have  a  material  impact  on  the  Company's
consolidated financial statements.

<PAGE>

Inflation

The  Company's  operating  results are  affected by inflation to the extent that
interest  rates,  loan demand and deposit  levels adjust to inflation and impact
net interest  income.  Management  can best counter the effect of inflation over
the long term by managing net interest income and controlling expenses. The most
significant  item not  reflecting  the  effects  of  inflation  is  depreciation
expense, as it is determined based on the historical cost of the assets.

Management's Statement of Responsibility

The consolidated financial statements and related information in the 1998 Annual
Report  were  prepared by  management  in  conformity  with  generally  accepted
accounting   principles.   Management  is  responsible  for  the  integrity  and
objectivity of the consolidated  financial  statements and related  information.
Accordingly,   it  maintains  internal  controls  and  accounting  policies  and
procedures  designed to provide  reasonable  assurance of the accountability and
safeguarding of the Company's  assets and of the accuracy of reported  financial
information.  These controls and procedures  include  management  evaluations of
asset  quality and the impact of economic  events;  organizational  arrangements
that  provide  an  appropriate  division  of  responsibility;  and a program  of
internal audits to evaluate independently the effectiveness of internal controls
and the extent of ongoing  compliance  with the Company's  adopted  policies and
procedures.

     The  responsibility  of the Company's  independent  auditors,  KPMG LLP, is
limited  to the  expression  of an opinion  as to the fair  presentation  of the
consolidated  financial  statements based on their audit conducted in accordance
with generally accepted auditing standards.

     The Board of Directors, through its Examining Committee, is responsible for
insuring  that  both  management  and the  independent  auditors  fulfill  their
respective   responsibilities   with  regard  to  the   consolidated   financial
statements.  The Examining  Committee,  which is comprised entirely of directors
who are not  officers or  employees  of the  Company,  meets  periodically  with
management,  the internal  auditor and the  independent  auditors.  The internal
auditor and independent  auditors have full and free access to and meet with the
Examining  Committee,  without  management being present,  to discuss  financial
reporting and other relevant matters.

     The consolidated  financial  statements have not been reviewed or confirmed
for accuracy or relevance by the Office of the Comptroller of the Currency.

                 /s/ Arthur E. Keesler
                 Arthur E. Keesler
                 President-Jeffersonville Bancorp

                 /s/ Raymond Walter
                 Raymond Walter
                 President-First National Bank of Jeffersonville

                 /s/ K. Dwayne Rhodes
                 K. Dwayne Rhodes
                 Treasurer-Jeffersonville Bancorp
<PAGE>

Distribution of Assets, Liabilities & Stockholders' Equity: Interest Rates &
Interest Differential

The following  schedules  present the  consolidated  average  balance sheets for
1998,  1997 and 1996.  The total dollar  amount of interest  income from earning
assets and the resultant  yields are calculated on a tax equivalent  basis.  The
interest paid on interest-bearing  liabilities,  expressed in dollars and rates,
is also presented.

<TABLE>
Consolidated Average Balance Sheet 1998

<CAPTION>
                                   Average        Percentage of   Interest       Average
                                   Balance        Total Assets    Earned/Paid    Yield/Rate
<S>                                <C>            <C>             <C>            <C>
Assets
Securities available for sale
  and held to maturity:<F1>
   Taxable securities              $ 61,290,000    26.54%         $  3,904,000    6.37%
   Tax-exempt securities             21,046,000     9.11             1,758,000    8.35

TOTAL SECURITIES                     82,336,000    35.65             5,662,000    6.88

Short-term investments                3,292,000     1.43               177,000    5.38
Loans, net of unearned discount:
  Real estate mortgages              90,308,000    39.10             7,859,000    8.70
  Home equity loans                   8,627,000     3.74               757,000    8.77
  Time and demand loans              11,217,000     4.86             1,080,000    9.63
  Installment loans                  17,551,000     7.60             1,907,000   10.87
  Other loans                         2,051,000     0.89               258,000   12.58

TOTAL LOANS<F2>                     129,754,000    56.18            11,861,000    9.14

TOTAL INTEREST-EARNING ASSETS       215,382,000    93.26            17,700,000    8.22

Allowance for loan losses            (2,095,000)   (0.91)
Cash and due from banks               6,973,000     3.02
Premises and equipment, net           2,624,000     1.14
Other assets                          7,166,000     3.10
Net unrealized gain on
 securities available for sale          905,000     0.39

TOTAL ASSETS                       $230,955,000   100.00%

Liabilities and Stockholders'
  Equity
NOW and Super NOW deposits         $ 28,591,000    12.38%         $    766,000    2.68%
Savings and insured money
  market deposits                    55,222,000    23.91             1,688,000    3.06
Time deposits                        79,522,000    34.43             4,182,000    5.26

TOTAL INTEREST-BEARING DEPOSITS     163,335,000    70.72             6,636,000    4.06

Federal funds purchased
  and other short-term debt             478,000     0.21                24,000    5.02
  Federal Home Loan Bank advances    13,837,000     5.99               832,000    6.01

TOTAL INTEREST-BEARING LIABILITIES  177,650,000    76.92             7,492,000    4.22

Demand deposits                      27,987,000    12.12
Other liabilities                     2,566,000     1.11

TOTAL LIABILITIES                   208,203,000    90.15
Stockholders' equity                 22,752,000     9.85

TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY             $230,955,000   100.00%

Net interest income                                               $ 10,208,000

Net interest spread                                                               4.00%

Net interest margin<F3>                                                           4.74%

<FN>
<F1> Yields on securities available for sale are based on amortized cost.
<F2> For the purpose of this schedule,  interest on  nonaccruing  loans has been
     included only to the extent reflected in the consolidated income statement.
     However,  the  nonaccrual  loan balances are included in the average amount
     outstanding.
<F3> Computed by dividing net interest income by total interest earning assets.
</FN>
</TABLE>
<PAGE>

<TABLE>
Consolidated Average Balance Sheet 1997
<CAPTION>
                                       Average        Percentage of   Interest           Average
                                       Balance        Total Assets    Earned/Paid        Yield/Rate

<S>                                    <C>            <C>             <C>                <C>
Assets
Securities available for sale
  and held to maturity:<F1>
    Taxable securities                 $ 47,726,000    22.62%         $  3,153,000        6.61%
    Tax-exempt securities                27,174,000    12.88             2,202,000        8.10

TOTAL SECURITIES                         74,900,000    35.49             5,355,000        7.15

Short-term investments                    2,362,000     1.12               129,000        5.46
Loans, net of unearned discount:
  Real estate mortgages                  86,979,000    41.22             7,461,000        8.58
  Home equity loans                       6,000,000     2.84               518,000        8.63
  Time and demand loans                  10,582,000     5.01               997,000        9.42
  Installment loans                      16,988,000     8.05             1,871,000       11.01
  Other loans                             2,018,000     0.96               265,000       13.13

TOTAL LOANS<F2>                         122,567,000    58.08            11,112,000        9.07

TOTAL INTEREST-EARNING ASSETS           199,829,000    94.69            16,596,000        8.31

Allowance for loan losses                (1,674,000)   (0.79)
Cash and due from banks                   6,709,000     3.18
Premises and equipment, net               2,668,000     1.26
Other assets                              3,120,000     1.48
Net unrealized gain on
  securities available for sale             382,000     0.18

TOTAL ASSETS                           $211,034,000   100.00%

Liabilities and Stockholders' Equity
NOW and Super NOW deposits             $ 27,756,000    13.15%         $    843,000        3.04%
Savings and insured money
  market deposits                        52,949,000    25.09             1,726,000        3.26
Time deposits                            74,863,000    35.48             3,971,000        5.30

TOTAL INTEREST-BEARING DEPOSITS         155,568,000    73.72             6,540,000        4.20

Federal funds purchased
  and other short-term debt                 747,000     0.35                36,000        4.82
Federal Home Loan Bank advances           6,099,000     2.89               367,000        6.02

TOTAL INTEREST-BEARING LIABILITIES      162,414,000    76.96             6,943,000        4.27

Demand deposits                          25,067,000    11.88
Other liabilities                         2,014,000     0.95

TOTAL LIABILITIES                       189,495,000    89.79
Stockholders' equity                     21,539,000    10.21

TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                 $211,034,000   100.00%

Net interest income                                                   $  9,653,000

Net interest spread                                                                       4.04%

Net interest margin<F3>                                                                   4.83%

<FN>
<F1> Yields on securities available for sale are based on amortized cost.
<F2> For the purpose of this schedule,  interest on  nonaccruing  loans has been
     included only to the extent reflected in the consolidated income statement.
     However,  the  nonaccrual  loan balances are included in the average amount
     outstanding.
<F3> Computed by dividing net interest income by total interest earning assets.
</FN>
</TABLE>
<PAGE>

<TABLE>
Consolidated Average Balance Sheet 1996

<CAPTION>
                                       Average        Percentage of   Interest           Average
                                       Balance        Total Assets    Earned/Paid        Yield/Rate

<S>                                    <C>            <C>             <C>                <C>
Assets
Securities available for sale
  and held to maturity:<F1>
    Taxable securities                 $ 41,732,000    21.06%         $  2,699,000        6.47%
    Tax-exempt securities                29,872,000    15.08             2,468,000        8.26

TOTAL SECURITIES                         71,604,000    36.14             5,167,000        7.22

Short-term investments                    1,838,000     0.92               104,000        5.66
Loans, net of unearned discount:
  Real estate mortgages                  85,010,000    42.91             7,431,000        8.74
  Home equity loans                       1,973,000     1.00               148,000        7.50
  Time and demand loans                   9,108,000     4.60               900,000        9.88
  Installment loans                      16,024,000     8.09             1,798,000       11.22
  Other loans                             1,866,000     0.94               235,000       12.59

TOTAL LOANS<F2>                         113,981,000    57.53            10,512,000        9.22

TOTAL INTEREST-EARNING ASSETS           187,423,000    94.59            15,783,000        8.42

Allowance for loan losses                (1,619,000)   (0.82)
Cash and due from banks                   6,017,000     3.04
Premises and equipment, net               2,395,000     1.21
Other assets                              3,637,000     1.84
Net unrealized gain on
  securities available for sale             281,000     0.14

TOTAL ASSETS                           $198,134,000   100.00%

Liabilities and Stockholders' Equity
NOW and Super NOW deposits             $ 28,395,000    14.33%         $    862,000        3.04%
Savings and insured money
  market deposits                        55,670,000    28.10             1,810,000        3.25
Time deposits                            66,006,000    33.31             3,485,000        5.28

TOTAL INTEREST-BEARING DEPOSITS         150,071,000    75.74             6,157,000        4.10

Federal funds purchased
  and other short-term debt               1,096,000     0.55                63,000        5.75
Federal Home Loan Bank advances           1,133,000     0.57                58,000        5.12

TOTAL INTEREST-BEARING LIABILITIES      152,300,000    76.87             6,278,000        4.12

Demand deposits                          23,068,000    11.64
Other liabilities                         2,015,000     1.02

TOTAL LIABILITIES                       177,383,000    89.53
Stockholders' equity                     20,751,000    10.47

TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                 $198,134,000   100.00%

Net interest income                                                   $  9,505,000

Net interest spread                                                                       4.30%

Net interest margin<F3>                                                                   5.07%

<FN>
<F1> Yields on securities available for sale are based on amortized cost.
<F2> For the purpose of this schedule,  interest on  nonaccruing  loans has been
     included only to the extent reflected in the consolidated income statement.
     However,  the  nonaccrual  loan balances are included in the average amount
     outstanding.
<F3> Computed by dividing net interest income by total interest earning assets.
</FN>
</TABLE>
<PAGE>

Volume and Rate Analysis

The following  schedule sets forth,  for each major category of interest earning
assets and interest  bearing  liabilities,  the dollar amount of interest income
(calculated on a tax equivalent basis) and interest expense, and changes therein
for 1998 as compared to 1997, and 1997 as compared to 1996.

     The changes in interest  income and expense  attributable  to both rate and
volume have been allocated to rate on a consistent basis.

<TABLE>
Volume and Rate Analysis
<CAPTION>

                          1998 Compared to 1997                   1997 Compared to 1996
                          Increase (Decrease) Due to Change In    Increase (Decrease) Due to Change In

                          Volume       Rate         Total         Volume        Rate         Total
<S>                       <C>          <C>          <C>           <C>           <C>          <C>

Interest Income
Securities available
  for sale and held
  to maturity             $  532,000   $ (225,000)  $  307,000    $  238,000    $  (50,000)  $  188,000
Federal Funds Sold            51,000       (3,000)      48,000        30,000        (5,000)      25,000
Loans                        652,000       97,000      749,000       792,000      (192,000)     600,000

TOTAL INTEREST
  INCOME                   1,235,000     (131,000)   1,104,000     1,060,000      (247,000)     813,000

Interest Expense
NOW and Super
  NOW deposits                25,000     (102,000)     (77,000)      (19,000)           --      (19,000)
Savings and insured
  money market deposits       74,000     (112,000)     (38,000)      (88,000)        4,000      (84,000)
Time deposits                247,000      (36,000)     211,000       468,000        18,000      486,000
Federal funds sold and
  other short-term debt      (13,000)       1,000      (12,000)      (20,000)       (7,000)     (27,000)
Long-term debt               466,000       (1,000)     465,000       254,000        55,000      309,000

TOTAL INTEREST
  EXPENSE                    799,000     (250,000)     549,000       595,000        70,000      665,000

NET INTEREST INCOME       $  436,000   $  119,000   $  555,000    $  465,000    $ (317,000)  $  148,000

</TABLE>
<PAGE>

Independent Auditors' Report

(LOGO)

KPMG

The Board of Directors and Stockholders Jeffersonville Bancorp:

     We  have  audited  the   accompanying   consolidated   balance   sheets  of
Jeffersonville  Bancorp and subsidiary  (the  "Company") as of December 31, 1998
and  1997,  and the  related  consolidated  statements  of  income,  changes  in
stockholders'  equity,  and cash  flows for each of the years in the  three-year
period ended December 31, 1998. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,   in  all  material   respects,   the  financial   position  of
Jeffersonville  Bancorp and subsidiary as of December 31, 1998 and 1997, and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally  accepted
accounting principles.

/s/ KPMG LLP

Albany, New York
February 12, 1999
<PAGE>

Consolidated Balance Sheets
<TABLE>

December 31, 1998 and 1997
<CAPTION>
                                                                 1998           1997
<S>                                                              <C>            <C>
Assets
Cash and due from banks (note 2)                                 $  8,203,000   $  5,563,000
Federal funds sold                                                         --      1,600,000

  Cash and cash equivalents                                         8,203,000      7,163,000
Securities available for sale, at fair value (note 3)              88,891,000     70,793,000
Securities held to maturity (estimated fair value of
  $3,755,000 in 1998 and $3,821,000 in 1997) (note 4)               3,602,000      3,738,000
Loans, net of allowance for loan losses of $2,310,000
  in 1998 and $1,862,000 in 1997 (note 5)                         130,031,000    125,793,000
Accrued interest receivable                                         1,392,000      1,291,000
Premises and equipment, net (note 6)                                2,681,000      2,609,000
Federal Home Loan Bank stock                                        1,160,000        753,000
Other real estate owned                                               535,000        301,000
Cash surrender value of bank-owned life insurance                   6,183,000             --
Other assets                                                        1,175,000      1,218,000

TOTAL ASSETS                                                     $243,853,000   $213,659,000

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
  Demand deposits (non-interest bearing)                         $ 31,287,000   $ 23,545,000
  Now and Super NOW accounts                                       28,726,000     27,973,000
  Savings and insured money market deposits                        56,089,000     54,513,000
  Time deposits (note 7)                                           82,012,000     73,129,000

TOTAL DEPOSITS                                                    198,114,000    179,160,000
Federal Home Loan Bank borrowings (note 8)                         20,000,000     10,000,000
Short-term debt                                                       334,000        404,000
Accrued expenses and other liabilities                              2,388,000      1,919,000

TOTAL LIABILITIES                                                 220,836,000    191,483,000

Commitments and contingent liabilities (note 14) Stockholders' equity (notes 11,
12 and 13):
  Series A preferred stock, no par value;
    2,000,000 shares authorized; none issued                               --             --
  Common stock, $0.50 par value; 2,250,000
    shares authorized; 1,468,276 shares and 1,234,711
    shares issued in 1998 and 1997, respectively                      734,000        617,000
  Paid-in capital                                                   5,431,000        446,000
  Treasury stock, at cost; 62,381 shares and
    51,965 shares held in 1998 and 1997, respectively                (206,000)      (206,000)
  Retained earnings                                                16,795,000     20,766,000
  Accumulated other comprehensive income, net of
    taxes of $183,000 in 1998 and $382,000 in 1997                    263,000        553,000

TOTAL STOCKHOLDERS' EQUITY                                         23,017,000     22,176,000

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $243,853,000   $213,659,000

See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>

Consolidated Statements of Income
<TABLE>

Years Ended December 31, 1998, 1997 and 1996
<CAPTION>

                                        1998           1997          1996
<S>                                     <C>            <C>           <C>
Interest Income
Loan interest and fees                  $11,861,000    $11,112,000   $10,512,000
Securities:
  Taxable                                 3,904,000      3,153,000     2,699,000
  Non-taxable                             1,160,000      1,453,000     1,629,000
Federal funds sold                          177,000        129,000       104,000

TOTAL INTEREST INCOME                    17,102,000     15,847,000    14,944,000

Interest Expense
Deposits                                  6,636,000      6,540,000     6,157,000
Federal Home Loan Bank borrowings           817,000        367,000        58,000
Other                                        39,000         36,000        63,000

TOTAL INTEREST EXPENSE                    7,492,000      6,943,000     6,278,000

NET INTEREST INCOME                       9,610,000      8,904,000     8,666,000
Provision for loan losses (note 5)          600,000      1,150,000       290,000

NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES               9,010,000      7,754,000     8,376,000

Non-interest Income
Service charges                             839,000        728,000       651,000
Increase in cash surrender value
  of bank-owned life insurance              202,000             --            --
Net security gains (note 3)                  17,000         91,000        95,000
Other non-interest income                   529,000        431,000       313,000

TOTAL NON-INTEREST INCOME                 1,587,000      1,250,000     1,059,000

Non-interest Expenses
Salaries and wages                        3,019,000      2,786,000     2,794,000
Employee benefits (note 15)                 996,000        942,000       834,000
Occupancy and equipment expenses          1,276,000      1,238,000     1,049,000
Other real estate owned expenses, net       332,000        178,000       283,000
Other non-interest expenses (note 10)     1,888,000      1,714,000     1,761,000

TOTAL NON-INTEREST EXPENSES               7,511,000      6,858,000     6,721,000

Income before income taxes expense        3,086,000      2,146,000     2,714,000
Income tax expense (note 9)                 768,000        383,000       569,000

NET INCOME                              $ 2,318,000    $ 1,763,000   $ 2,145,000

Basic earnings per common share         $      1.64    $      1.24   $      1.49

See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>

Consolidated Statements of Changes in Stockholders' Equity

<TABLE>
Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
                                                                                               Accumulated
                                                                                               Other           Total
                                      Common        Paid-in       Treasury      Retained       Comprehensive   Stockholders'
                                      Stock         Capital       Stock         Earnings       Income          Equity

<S>                                   <C>           <C>           <C>           <C>            <C>             <C>
Balance at December 31, 1995          $  642,000    $ 1,450,000   $  (210,000)  $18,425,000    $ 621,000       $20,928,000
Net income                                    --             --            --     2,145,000           --        2,145,000
Change in unrealized gain on
  securities available for sale,
  net of tax (note 13)                        --             --            --            --     (299,000)         (299,000)

Comprehensive income                                                1,846,000
Cash dividends ($0.54 per share)              --             --            --      (775,000)          --          (775,000)
Purchases and retirements
  of common stock                        (25,000)    (1,018,000)           --            --           --        (1,043,000)
Treasury stock sold                           --         15,000         4,000            --           --            19,000

Balance at December 31, 1996             617,000        447,000      (206,000)   19,795,000      322,000        20,975,000
Net income                                    --             --            --     1,763,000           --         1,763,000
Change in unrealized gain on
  securities available for sale,
  net of tax (note 13)                        --             --            --            --      231,000           231,000

Comprehensive income                                                                                             1,994,000
Cash dividends ($0.56 per share)              --             --            --      (792,000)          --          (792,000)
Purchases and retirements
  of common stock                             --         (1,000)           --            --           --            (1,000)

Balance at December 31, 1997             617,000        446,000      (206,000)   20,766,000      553,000        22,176,000
Net income                                    --             --            --     2,318,000           --         2,318,000
Change in net unrealized gain
  on securities available for sale,
  net of tax (note 13                         --             --            --            --     (290,000)         (290,000)

Comprehensive income                                                2,028,000
Cash dividends ($0.60 per share)              --             --            --      (850,000)          --          (850,000)
Purchases and retirements
  of common stock                         (7,000)      (330,000)           --            --           --          (337,000)
Stock dividend (note 12)                 124,000      5,315,000            --    (5,439,000)          --                --

Balance at December 31, 1998          $  734,000    $ 5,431,000   $  (206,000)  $16,795,000    $ 263,000       $25,045,000

See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>

Consolidated Statements of Cash Flows

<TABLE>
Years Ended December 31, 1998, 1997 and 1996
<CAPTION>
                                                          1998           1997             1996
<S>                                                       <C>            <C>              <C>
Operating Activities
Net income                                                $  2,318,000   $  1,763,000     $  2,145,000
Adjustments to reconcile net income to net
  cash provided by operating activities:
    Provision for loan losses                                  600,000      1,150,000          290,000
    Write down of other real estate owned                      126,000        119,000           31,000
    Gain on sales of other real estate owned                   (83,000)      (137,000)         (52,000)
    Depreciation and amortization                              559,000        516,000          423,000
    Net increase in cash surrender value of bank-owned
      life insurance                                          (175,000)            --               --
    Deferred income tax benefit                               (192,000)      (199,000)        (102,000)
    Net security gains                                         (17,000)       (91,000)         (95,000)
    (Increase) decrease in accrued interest receivable        (101,000)      (123,000)          12,000
    Decrease (increase) in other assets                        434,000       (251,000)         461,000
    Increase in accrued expenses and other liabilities         469,000        240,000          219,000

NET CASH PROVIDED BY OPERATING ACTIVITIES                    3,938,000      2,987,000        3,332,000

Investing Activities Proceeds from maturities and calls:
  Securities available for sale                             42,978,000     10,443,000       10,873,000
  Securities held to maturity                                  858,000        770,000          983,000
Proceeds from sales of securities available for sale        11,586,000     17,345,000        3,812,000
Purchases:
  Securities available for sale                            (73,136,000)   (33,261,000)     (18,323,000)
  Securities held to maturity                                 (720,000)    (1,107,000)      (2,602,000)
Disbursements for loan originations, net
  of principal collections                                  (5,798,000)   (11,690,000)      (7,421,000)
(Purchase) redemption of Federal Home Loan Bank stock         (407,000)       (36,000)          19,000
Purchase of bank-owned life insurance                       (6,008,000)            --               --
Net purchases of premises and equipment                       (631,000)      (523,000)        (820,000)
Proceeds from sales of other real estate owned                 683,000        900,000          553,000

NET CASH USED IN INVESTING ACTIVITIES                      (30,595,000)   (17,159,000)     (12,926,000)

Financing Activities
Net increase in deposits                                    18,954,000      6,230,000        8,746,000
Proceeds from Federal Home Loan Bank borrowings             20,000,000     10,000,000               --
Repayments of Federal Home Loan Bank borrowings            (10,000,000)            --       (1,700,000)
Net (decrease) increase in short-term debt                     (70,000)       125,000)         332,000
Cash dividends paid                                           (850,000)      (792,000)        (775,000)
Purchases and retirements of common stock                     (337,000)        (1,000)      (1,043,000)
Proceeds from sales of treasury stock                               --             --           19,000

NET CASH PROVIDED BY FINANCING ACTIVITIES                   27,697,000     15,312,000        5,579,000

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         1,040,000      1,140,000       (4,015,000)
Cash and cash equivalents at beginning of year               7,163,000      6,023,000       10,038,000

Cash and cash equivalents at end of year                  $  8,203,000   $  7,163,000     $  6,023,000

Supplemental Information
Cash paid for:
  Interest                                                $  7,508,000   $  6,934,000     $  6,153,000
  Income taxes                                                 903,000        700,000          728,000
Transfer of loans to other real estate owned                   960,000        352,000          814,000

See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated  financial  statements of  Jeffersonville  Bancorp (the "Parent
Company")  include  its  wholly-owned  subsidiary,  The First  National  Bank of
Jeffersonville (the "Bank"). Collectively, these entities are referred to herein
as the "Company". All significant intercompany transactions have been eliminated
in consolidation.

     The Parent Company is a bank holding  company whose  principal  activity is
the  ownership  of all  outstanding  shares of the Bank's  stock.  The Bank is a
commercial  bank providing  community  banking  services to  individuals,  small
businesses  and  local  municipal  governments  in  Sullivan  County,  New York.
Management  makes  operating  decisions  and  assesses  performance  based on an
ongoing review of the Bank's community banking operations,  which constitute the
Company's only operating segment for financial reporting purposes.

     The consolidated  financial statements have been prepared,  in all material
respects,  in conformity  with  generally  accepted  accounting  principles.  In
preparing the consolidated financial statements,  management is required to make
estimates  and  assumptions   that  affect  the  reported   amounts  of  assets,
liabilities,  revenues and expenses.  Material  estimates that are  particularly
susceptible  to near-term  change  include the allowance for loan losses and the
valuation of other real estate owned, which are described below.  Actual results
could differ from these estimates.

     For  purposes of the  consolidated  statements  of cash flows,  the Company
considers Federal funds sold, if any, to be cash equivalents.

     Reclassifications   are  made  to  prior  years'   consolidated   financial
statements whenever necessary to conform to the current year's presentation.

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
are stated at amortized  cost.  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  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.  Net  unrealized
gains or losses on  securities  available  for sale are reported  (net of income
taxes)  in  stockholders'  equity as  accumulated  other  comprehensive  income.
Non-marketable  equity  securities are carried at cost. At December 31, 1998 and
1997, the Company had no trading securities.

     Gains and losses on sales of  securities  are based on the net proceeds and
the amortized cost of the  securities  sold,  using the specific  identification
method. The amortization of premium and accretion of discount on debt securities
is  calculated  using the  level-yield  interest  method  over the period to the
earlier of the call date or maturity date.  Unrealized losses on securities that
reflect a decline in value which is other than temporary, if any, are charged to
income.

Loans

Loans are stated at unpaid principal  balances,  less unearned discounts and the
allowance for loan losses.  Unearned discounts on installment loans are accreted
into income using a method which  approximates the level-yield  interest method.
Interest  income is recognized on the accrual basis of accounting.  When, in the
opinion of  management,  the  collection  of interest  is in doubt,  the loan is
classified  as  non-accrual.  Generally,  loans  past due more  than 90 days are
classified as non-accrual. Thereafter, no interest is recognized as income until
received in cash or until such time as the borrower  demonstrates the ability to
make scheduled payments of interest and principal. <PAGE>

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses
charged to expense.  Loans are charged-off against the allowance when management
believes  that  the  collectability  of all or a  portion  of the  principal  is
unlikely.  Recoveries  of  loans  previously  charged-off  are  credited  to the
allowance when realized.

     The Company  identifies  impaired  loans and measures  loan  impairment  in
accordance with Statement of Financial  Accounting  Standards  ("SFAS") No. 114,
"Accounting  by Creditors for Impairment of a Loan," as amended by SFAS No. 118.
Under SFAS No. 114, a loan is considered to be impaired  when,  based on current
information  and events,  it is  probable  that the  creditor  will be unable to
collect all principal and interest contractually due. Creditors are permitted to
measure  impaired  loans based on (i) the present value of expected  future cash
flows  discounted  at the  loan's  effective  interest  rate,  (ii)  the  loan's
observable market price or (iii) the fair value of the collateral if the loan is
collateral dependent. If the approach used results in a measurement that is less
than an impaired loan's recorded investment, an impairment loss is recognized as
part of the allowance for loan losses.

     The allowance  for loan losses is maintained at a level deemed  adequate by
management based on an evaluation of such factors as economic  conditions in the
Company's  market area, past loan loss  experience,  the financial  condition of
individual  borrowers,  and  underlying  collateral  values based on independent
appraisals.  While management uses available  information to recognize losses on
loans,  future additions to the allowance for loan losses may be necessary based
on changes in economic conditions, particularly in Sullivan County. In addition,
Federal regulatory  agencies,  as an integral part of their examination process,
periodically  review the Company's allowance for loan losses and may require the
Company to recognize  additions to the allowance  based on their judgments about
information available to them at the time of their examination, which may not be
currently available to management.

Premises and Equipment

Premises and equipment are stated at cost,  less  accumulated  depreciation  and
amortization.  Depreciation  and  amortization  are provided  over the estimated
useful lives of the assets using straight-line or accelerated methods.

Federal Home Loan Bank Stock

As a member  institution  of the Federal  Home Loan Bank  ("FHLB"),  the Bank is
required to hold a certain amount of FHLB stock.  This stock is considered to be
a non-marketable equity security and, accordingly, is carried at cost.

Other Real Estate Owned

Other real estate owned consists of properties  acquired through foreclosure and
is  stated on an  individual-asset  basis at the  lower of (i) fair  value  less
estimated costs to sell or (ii) cost which  represents the fair value at initial
foreclosure.  When a property is  acquired,  the excess of the loan balance over
the fair value of the property is charged to the allowance  for loan losses.  If
necessary,  subsequent write downs to reflect further declines in fair value are
included in non-interest expenses. Fair value estimates are based on independent
appraisals and other available information. While management estimates losses on
other  real  estate  owned  using  the  best  available  information,   such  as
independent appraisals,  future write downs may be necessary based on changes in
real estate market conditions,  particularly in Sullivan County, and the results
of regulatory examinations.

Bank-Owned Life Insurance

The investment in bank-owned  life insurance,  which covers certain  officers of
the Bank, is carried at the policies'  cash  surrender  value.  Increases in the
cash surrender value are recognized in non-interest income.

<PAGE>

Income Taxes

Deferred  tax  assets  and   liabilities  are  recognized  for  the  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 reduced by a valuation  allowance
when management determines that it is more likely than not that all or a portion
of the  deferred  tax  assets  will not be  realized.  Deferred  tax  assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which 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.

Earnings Per Common Share

Basic  earnings per share  ("EPS") is computed by dividing  income  available to
common  stockholders  (net income less dividends on preferred  stock, if any) by
the  weighted  average  number  of common  shares  outstanding  for the  period.
Entities with complex  capital  structures  must also present  diluted EPS which
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were  exercised or converted into common shares.
The Company does not have a complex  capital  structure  and,  accordingly,  has
presented only basic EPS.

     Basic earnings per common share was computed  based on average  outstanding
common shares of 1,415,000 in 1998, 1,419,000 in 1997 and 1,441,000 in 1996, all
of which have been adjusted for the effect of the 20% stock dividend distributed
in February 1998 (see note 12). Income available to common stockholders  equaled
net income for each of these years.

2. Cash and Due From Banks

The Bank is  required  to  maintain  certain  reserves in the form of vault cash
and/or  deposits  with the  Federal  Reserve  Bank.  The amount of this  reserve
requirement,  which is included in cash and due from  banks,  was  approximately
$1,000,000 at both December 31, 1998 and 1997.

3. Securities Available for Sale

The amortized cost and estimated fair value of securities available for sale are
as follows:
<TABLE>

December 31, 1998
<CAPTION>
                                                                   Gross            Gross           Estimated
                                                  Amortized        Unrealized       Unrealized      Fair
                                                  Cost             Gains            Losses          Value
<S>                                               <C>              <C>              <C>             <C>
U.S. Government agency securities                 $31,451,000      $   107,000      $  (272,000)    $31,286,000
Obligations of states and
  political subdivisions                           16,820,000          978,000           (2,000)     17,796,000
Mortgage-backed securities
  and collateralized
  mortgage obligations                             37,999,000           58,000         (442,000)     37,635,000
Corporate debt securities                             603,000            2,000           (3,000)        602,000

Total debt securities                              86,873,000        1,145,000         (699,000)     87,319,000
Equity securities                                   1,573,000           15,000          (16,000)      1,572,000

TOTAL SECURITIES
  AVAILABLE FOR SALE                              $88,446,000      $ 1,160,000      $  (715,000)    $88,891,000
</TABLE>
<PAGE>

<TABLE>
December 31, 1997
<CAPTION>
                                                  Gross            Gross            Estimated
                                                  Amortized        Unrealized       Unrealized      Fair
                                                  Cost             Gains            Losses          Value
<S>                                               <C>              <C>              <C>             <C>
U.S. Government agency securities                 $23,036,000      $    53,000      $   (58,000)    $23,031,000
Obligations of states and
  political subdivisions                           18,394,000          937,000           (2,000)     19,329,000
Mortgage-backed securities
  and collateralized
  mortgage obligations                             26,495,000           70,000          (83,000)     26,482,000
Corporate debt securities                             610,000            3,000               --         613,000

Total debt securities                              68,535,000        1,063,000         (143,000)     69,455,000
Equity securities                                   1,323,000           16,000           (1,000)      1,338,000

TOTAL SECURITIES
  AVAILABLE FOR SALE                              $69,858,000      $ 1,079,000      $  (144,000)    $70,793,000
</TABLE>

Proceeds from sales of securities  available for sale during 1998, 1997 and 1996
were  $11,586,000,  $17,345,000  and $3,812,000,  respectively.  Gross gains and
gross losses realized on these transactions were as follows:

Years ended December 31,    1998               1997               1996

Gross realized gains        $ 18,000           $155,000           $ 96,000
Gross realized losses         (1,000)           (64,000)            (1,000)

  Net security gains        $ 17,000           $ 91,000           $ 95,000

The amortized  cost and estimated  fair value of debt  securities  available for
sale at December 31, 1998,  by remaining  period to  contractual  maturity,  are
shown in the following  table.  Actual  maturities will differ from  contractual
maturities  because of security  prepayments and the right of certain issuers to
call or prepay their obligations.

December 31, 1998    Amortized            Estimated
                     Cost                 Fair Value

Within one year      $35,451,000          $35,238,000
One to five years     40,707,000           41,240,000
Five to ten years      5,481,000            5,775,000
Over ten years         5,234,000            5,066,000

TOTAL                $86,873,000          $87,319,000
<PAGE>

Substantially  all  mortgage-backed   securities  and  collateralized   mortgage
obligations  are  securities  guaranteed by Freddie Mac or Fannie Mae, which are
U.S. government-sponsored entities.

     Securities  available for sale with an estimated  fair value of $32,302,000
at December  31,  1998 were  pledged to secure  public  funds on deposit and for
other purposes.

4. Securities Held to Maturity

The amortized cost and estimated  fair value of securities  held to maturity are
as follows:

December 31, 1998
                                          Gross        Gross        Estimated
                             Amortized    Unrealized   Unrealized   Fair
                             Cost         Gains        Losses       Value

Obligations of states and
  political subdivisions     $3,602,000   $  153,000   $       --   $3,755,000

December 31, 1997
                                          Gross        Gross        Estimated
                             Amortized    Unrealized   Unrealized   Fair
                             Cost         Gains        Losses       Value

Obligations of states and
  political subdivisions     $3,738,000   $   86,000   $   (3,000)  $3,821,000

The amortized cost and estimated fair value of these  securities at December 31,
1998, by remaining  period to contractual  maturity,  are shown in the following
table. Actual maturities will differ from contractual maturities because certain
issuers have the right to call or prepay their obligations.

December 31, 1998       Amortized            Estimated
                        Cost                 Fair Value
Within one year         $  130,000           $  130,000
One to five years        1,396,000            1,436,000
Five to ten years        2,059,000            2,169,000
Over ten years              17,000               20,000

TOTAL                   $3,602,000           $3,755,000

There were no sales of securities held to maturity in 1998, 1997 or 1996.
<PAGE>

5. Loans

The major classifications of loans are as follows:

At December 31,                 1998                  1997

Real estate loans:
  Residential                   $ 66,029,000          $ 65,599,000
  Commercial                      22,961,000            21,921,000
  Home equity                      9,320,000             7,677,000
  Farm land                        1,488,000             1,550,000
  Construction                     1,171,000             1,348,000

                                 100,969,000            98,095,000
Other loans:
  Commercial loans                14,391,000            12,314,000
  Consumer installment loans      18,394,000            18,907,000
  Other consumer loans             1,795,000             1,437,000
  Agricultural loans                 412,000               446,000

                                  34,992,000            33,104,000

Total loans                      135,961,000           131,199,000
Unearned discounts                (3,620,000)           (3,544,000)
Allowance for loan losses         (2,310,000)           (1,862,000)

TOTAL LOANS, NET                $130,031,000          $125,793,000

The Company originates  residential and commercial real estate loans, as well as
commercial,  consumer and  agricultural  loans, to borrowers in Sullivan County,
New York. A substantial  portion of the loan portfolio is secured by real estate
properties located in that area. The ability of the Company's  borrowers to make
principal and interest payments is dependent upon, among other things, the level
of overall economic  activity and the real estate market  conditions  prevailing
within the Company's concentrated lending area.

     Non-performing loans are summarized as follows:

At December 31,                   1998        1997         1996
Non-accrual loans                 $1,842,000  $3,324,000   $2,572,000
Loans past due 90 days or more
  and still accruing interest      1,146,000     368,000    1,423,000
Restructured loans                        --          --      481,000

Total non-performing loans        $2,988,000  $3,692,000   $4,476,000

Non-performing loans
  as a percentage of total loans         2.2%        2.8%         3.7%
<PAGE>

Non-accrual and restructured loans had the following effect on interest income:

Years ended December 31,           1998        1997          1996

Interest contractually due at
  original rates                   $ 199,000   $ 285,000     $ 280,000
Interest income recognized          (118,000)   (124,000)     (200,000)

Interest income not recognized     $  81,000   $ 161,000     $  80,000

Changes in the allowance for loan losses are summarized as follows:

Years ended December 31,           1998         1997          1996

Balance at beginning of the year   $1,862,000  $ 1,711,000   $ 1,629,000
Provision for loan losses             600,000    1,150,000       290,000
Loans charged-off                    (343,000)  (1,255,000)     (346,000)
Recoveries                            191,000      256,000       138,000

Balance at end of the year         $2,310,000  $ 1,862,000   $ 1,711,000

SFAS No. 114 applies to loans that are individually evaluated for collectibility
in accordance  with the Company's  ongoing loan review  procedures  (principally
commercial  mortgage  loans and commercial  loans).  As of December 31, 1998 and
1997, the recorded investment in loans that were considered to be impaired under
SFAS No.  114  totaled  $965,000  and  $1,550,000,  respectively.  There  was no
allowance for loan impairment  under SFAS No. 114 at either date,  primarily due
to prior  charge-offs  and the  adequacy of  collateral  values on these  loans.
During 1998,  1997 and 1996, the average  recorded  investment in impaired loans
was  $978,000,  $1,564,000  and  $1,668,000,  respectively.  Interest  income of
$87,000,  $124,000 and $146,000 was  recognized  on impaired  loans during 1998,
1997 and 1996, respectively, using a cash-basis method of accounting.

6. Premises and Equipment

The major classifications of premises and equipment were as follows:

At December 31,                       1998               1997

Land                                  $  392,000         $  392,000
Buildings                              2,203,000          2,122,000
Furniture and fixtures                   421,000            414,000
Equipment                              4,050,000          3,588,000
Building and leasehold improvements      568,000            500,000

                                       7,634,000          7,016,000
Less accumulated depreciation and
  amortization                         4,953,000          4,407,000

TOTAL PREMISES AND EQUIPMENT, NET     $2,681,000         $2,609,000

Depreciation  and  amortization  expense was $559,000,  $516,000 and $423,000 in
1998, 1997 and 1996, respectively.
<PAGE>

7. Time Deposits

The following is a summary of time deposits by remaining  period to  contractual
maturity:

At December 31, 1998

Within one year                                       $60,594,000
One to two years                                       15,218,000
Two to three years                                      3,357,000
Three to four years                                     2,843,000

TOTAL TIME DEPOSITS                                   $82,012,000

Time deposits of $100,000 or more totaled  $14,920,000  at December 31, 1998 and
$9,109,000 at December 31, 1997.  Interest expense related to time deposits over
$100,000  was  $761,000,   $659,000  and  $422,000  for  1998,  1997  and  1996,
respectively.

 8. Federal Home Loan Bank Borrowings

The following is a summary of FHLB advances outstanding:

At December 31,                           1998                  1997

                                   Amount        Rate    Amount          Rate
Variable rate advances maturing
  within one year                  $10,000,000   5.61%   $10,000,000     5.70%
Fixed rate advances maturing
  in 2008                           10,000,000   5.02%            --       --

TOTAL FHLB ADVANCES                $20,000,000   5.31%   $10,000,000     5.70%

Borrowings  are secured by the Bank's  investment in FHLB stock and by a blanket
security  agreement.  This agreement requires the Bank to maintain as collateral
certain  qualifying  assets  (principally  securities and  residential  mortgage
loans) not otherwise pledged. The Bank satisfied this collateral  requirement at
December  31,  1998  and  1997.  In  addition  to  advances,  the  Bank may have
outstanding  FHLB  overnight  and  30  day  borrowings  of up  to  approximately
$22,000,000.  The Bank had no borrowings under these lines of credit at December
31, 1998. <PAGE>

9. Income Taxes

The components of income tax expense are as follows:

Years ended December 31,   1998               1997               1996

Current tax expense:
  Federal                  $ 690,000          $ 439,000          $ 470,000
  State                      270,000            143,000            201,000
Deferred tax benefit        (192,000)          (199,000)          (102,000)

TOTAL INCOME TAX EXPENSE   $ 768,000          $ 383,000          $ 569,000

The reasons for the differences between income tax expense and taxes computed by
applying the statutory Federal tax rate of 34% to income before income taxes are
as follows:

<TABLE>
<CAPTION>
Years ended December 31,                               1998               1997               1996

<S>                                                    <C>                <C>                <C>
Tax at statutory rate                                  $1,049,000         $  730,000         $  923,000
State taxes, net of Federal tax benefit                   134,000             81,000            123,000
Tax-exempt interest                                      (394,000)          (494,000)          (554,000)
Interest expense allocated to tax-exempt securities        47,000             62,000             63,000
Increase in cash surrender value of bank-owned
  life insurance                                          (69,000)                --                 --

Other adjustments                                           1,000              4,000             14,000

Income tax expense                                     $  768,000         $  383,000         $  569,000
</TABLE>

The tax  effects of  temporary  differences  and tax  credits  that give rise to
deferred tax assets and liabilities are presented below:

<TABLE>
<CAPTION>
At December 31,                                                 1998               1997

<S>                                                             <C>                <C>
Deferred tax assets:
  Allowance for loan losses in excess of tax bad debt reserve   $  687,000         $  487,000
  Interest on non-accrual loans                                    136,000            174,000
  Alternative minimum tax credit                                    95,000            183,000
  Postretirement benefits                                          149,000             56,000
  Other deductible temporary differences                             3,000                 --

Total deferred tax assets                                        1,070,000            900,000

Deferred tax liabilities:
  Prepaid expenses                                                (227,000)          (186,000)
  Net unrealized gain on available for sale securities            (183,000)          (382,000)
  Other taxable temporary differences                                   --            (63,000)

Total deferred tax liabilities                                    (410,000)          (631,000)

Net deferred tax asset                                          $  660,000         $  269,000
</TABLE>
<PAGE>

In assessing  the  realizability  of the  Company's  total  deferred tax assets,
management considers whether it is more likely than not that some portion or all
of those assets will not be realized.  Based upon management's  consideration of
historical and anticipated future pre-tax income, as well as the reversal period
for the  items  giving  rise to the  deferred  tax  assets  and  liabilities,  a
valuation  allowance  for  deferred tax assets was not  considered  necessary at
December 31, 1998 and 1997.

10. Other Non-Interest Expenses

The major components of other non-interest expenses are as follows:

Years ended December 31,             1998         1997        1996

Stationery and supplies              $  224,000   $  215,000  $  206,000
Director expenses                       228,000      230,000     254,000
ATM and credit card processing fees     323,000      222,000     178,000
Postage and freight                     159,000      148,000     145,000
Advertising expense                     122,000      137,000     136,000
Other expenses                          832,000      762,000     842,000

  Total non-interest expenses        $1,888,000   $1,714,000  $1,761,000

11. Regulatory Capital Requirements

National banks are required to maintain minimum levels of regulatory  capital in
accordance  with  regulations  of the Office of the  Comptroller of the Currency
("OCC").  The Federal  Reserve Board ("FRB") imposes  similar  requirements  for
consolidated  capital of bank  holding  companies.  The OCC and FRB  regulations
require a minimum  leverage ratio of Tier 1 capital to total adjusted  assets of
4.0%, and minimum ratios of Tier I and total capital to risk-weighted  assets of
4.0% and 8.0%, respectively.

     Under its prompt corrective action regulations, the OCC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an  undercapitalized  bank. Such actions could have a direct material
effect on a bank'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, a bank is considered well capitalized if
it has a leverage  (Tier I) capital  ratio of at least 5.0%, 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.

     Management  believes  that, as of December 31, 1998 and 1997,  the Bank and
the Parent  Company  met all  capital  adequacy  requirements  to which they are
subject.  Further,  the most recent OCC  notification  categorized the Bank as a
well-capitalized bank under the prompt corrective action regulations. There have
been no conditions or events since that  notification  that management  believes
have changed the Bank's capital classification.
<PAGE>

The  following  is a summary  of the  actual  capital  amounts  and ratios as of
December 31, 1998 and 1997 for the Bank and the Parent  Company  (consolidated),
compared  to  the  required  ratios  for  minimum   capital   adequacy  and  for
classification as well-capitalized:

<TABLE>

<CAPTION>
December 31, 1998                                           Required Ratios
                                    Actual
                                                    Minimum            Classification as
                             Amount         Ratio   Capital Adequacy   Well Capitalized
<S>                          <C>            <C>     <C>                <C>
Bank
Leverage (Tier I) capital    $19,984,000     8.2%   4.0%                5.0%
Risk-based capital:
  Tier I                      19,984,000    15.7    4.0                 6.0
  Total                       21,589,000    16.9    8.0                10.0

Consolidated
Leverage (Tier I) capital    $22,754,000     9.9%   4.0%
Risk-based capital:
  Tier I                      22,754,000    17.3    4.0
  Total                       24,408,000    18.5    8.0
</TABLE>

<TABLE>
<CAPTION>
December 31, 1997                                           Required Ratios
                                    Actual
                                                    Minimum            Classification as
                             Amount         Ratio   Capital Adequacy   Well Capitalized
<S>                          <C>            <C>     <C>                <C>
Bank
Leverage (Tier I) capital    $19,042,000     8.8%   4.0%                5.0%
Risk-based capital:
  Tier I                      19,042,000    16.0    4.0                 6.0
  Total                       20,506,000    17.2    8.0                10.0
Consolidated
Leverage (Tier I) capital    $21,623,000    10.0%   4.0%
Risk-based capital:
  Tier I                      21,623,000    17.7    4.0
  Total                       23,117,000    19.0    8.0
</TABLE>

12. Stockholders' Equity

Stock Dividend

On January 14, 1998, the Parent Company announced a 20% stock dividend which was
distributed on February 10, 1998 to common  stockholders of record as of January
27, 1998. Under the terms of the dividend,  stockholders  received a dividend of
one share of common  stock for every five  shares  owned as of the record  date,
plus cash in lieu of any  fractional  shares.  A total of 246,406  common shares
were issued in connection with the stock dividend. Retained earnings was reduced
by  $5,439,000,  with a  corresponding  combined  increase  in common  stock and
paid-in  capital,   representing  the  fair  value  of  the  additional   shares
outstanding after the stock dividend. <PAGE>

Dividend Restrictions

Dividends  paid by the Bank are the  primary  source of funds  available  to the
Parent  Company  for  payment of  dividends  to its  stockholders  and for other
working capital needs.  Applicable Federal statutes,  regulations and guidelines
impose restrictions on the amount of dividends that may be declared by the Bank.
Under these  restrictions,  the  dividends  declared and paid by the Bank to the
Parent Company may not exceed the total amount of the Bank's net profit retained
in the current  year plus its retained  net  profits,  as defined,  from the two
preceding years. The Bank's retained net profits (after dividend payments to the
Parent Company) for 1998 and 1997 totaled approximately $1,300,000.

Preferred Stock Purchase Rights

On July 9, 1996, the Board of Directors declared a dividend  distribution of one
purchase  right  ("Right") for each  outstanding  share of Parent Company common
stock ("Common  Stock"),  to  stockholders of record at the close of business on
July 9, 1996. The Rights have a 10-year term.

     The Rights become  exercisable (i) 10 days following a public  announcement
that a person  or  group  has  acquired,  or  obtained  the  right  to  acquire,
beneficial  ownership of 20% or more of the outstanding  shares of Common Stock,
or (ii) 10 days following the  commencement  of a tender offer or exchange offer
that, if successful,  would result in an acquiring person or group  beneficially
owning  30% or more of the  outstanding  Common  Stock  (unless  such  tender or
exchange offer is predicated upon the redemption of the Rights).

     When the Rights  become  exercisable,  a holder is entitled to purchase one
one-hundredth of a share, subject to adjustment,  of Series A Preferred Stock of
the Parent Company or, upon the occurrence of certain  events  described  below,
Common Stock of the Parent  Company or common  stock of an entity that  acquires
the Company.  The purchase  price per one  one-hundredth  of a share of Series A
Preferred Stock ("Purchase  Price") will equal the Board of Directors'  judgment
as to the "long-term  investment  value" of one share of Common Stock at the end
of the 10-year term of the Rights.

     Upon the occurrence of certain events  (including  certain  acquisitions of
more than 20% of the  Common  Stock by a person  or  group),  each  holder of an
unexercised  Right will be entitled to receive Common Stock having a value equal
to twice the Purchase  Price of the Right.  Upon the occurrence of certain other
events  (including  acquisition  of the  Parent  Company  in a  merger  or other
business   combination  in  which  the  Parent  Company  is  not  the  surviving
corporation),  each holder of an  unexercised  Right will be entitled to receive
common stock of the acquiring  person having a value equal to twice the Purchase
Price of the Right.

     The Parent  Company may redeem the Rights (to the extent not  exercised) at
any time, in whole but not in part, at a price of $0.01 per Right.

13. 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  stockholders'  equity,  such as 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 its  comprehensive  income for 1998, 1997 and 1996 in the  consolidated
statements of changes in stockholders' equity. <PAGE>

The  Company's  accumulated  other  comprehensive  income,  which is included in
stockholders' equity, represents the after-tax net unrealized gain on securities
available for sale at the balance sheet date. The Company's other  comprehensive
income,  which is attributable  to gains and losses on securities  available for
sale, consisted of the following components:

<TABLE>
<CAPTION>

Years ended December 31,                                 1998               1997               1996

<S>                                                      <C>                <C>                <C>
Net unrealized holding gains (losses) arising during
  the year, net of taxes of $192,000 in 1998,
  ($193,000) in 1997 and $167,000 in 1996                $(280,000)         $ 285,000          $(243,000)
Reclassification adjustment for net realized gains
  included in income, net of taxes of $7,000 in 1998,
  $37,000 in 1997 and $39,000 in 1996                      (10,000)           (54,000)           (56,000)

Other comprehensive income (loss), net of taxes
  of $199,000 in 1998, ($156,000) in 1997 and
  $206,000 in 1996                                       $(290,000)         $ 231,000          $(299,000)
</TABLE>

14. Related Party Transactions

Certain  directors  and  executive  officers of the Company,  as well as certain
affiliates of these  directors and officers,  have engaged in loan  transactions
with the Company. Such loans were made in the ordinary course of business at the
Company's normal terms,  including  interest rates and collateral  requirements,
and do not represent more than normal risk of collection.  Outstanding  loans to
these related parties are summarized as follows:

At December 31,                     1998               1997

Directors                           $1,636,000         $1,214,000
Executive officers (non-director)      139,000            135,000

                                    $1,775,000         $1,349,000

Total  advances to these  directors and officers  during the years 1998 and 1997
were $2,013,000 and $926,000,  respectively.  Total payments made on these loans
were  $1,587,000 in 1998 and $433,000 in 1997.  These directors and officers had
unused lines of credit with the Company of $846,000 at December 31, 1998. <PAGE>

15. Employee Benefit Plans

Pension and Other Postretirement Benefits

The  Company  has a  non-contributory  defined  benefit  pension  plan  covering
substantially  all of its employees.  The benefits are based on years of service
and the employee's average compensation during the five consecutive years in the
last ten years of employment  affording the highest such average.  The Company's
funding  policy is to  contribute  annually an amount  sufficient to satisfy the
minimum funding  requirements of ERISA,  but not greater than the maximum amount
that can be deducted for Federal income tax purposes. Contributions are intended
to provide not only for  benefits  attributed  to service to date,  but also for
benefits expected to be earned in the future.

     The Company also sponsors postretirement medical and life insurance benefit
plans for retirees in the pension plan. Effective in 1993, employees must retire
after  age 60 with at least  10 years of  service  to be  eligible  for  medical
benefits.  The plans are non-contributory,  except that the retiree must pay the
full cost of spouse  medical  coverage.  Both of the  plans  are  unfunded.  The
Company  accounts for the cost of these  postretirement  benefits in  accordance
with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions".  Accordingly,  the cost of these benefits is recognized on an accrual
basis as employees  perform  services to earn the benefits.  The Company adopted
SFAS No. 106 as of  January 1, 1993 and  elected  to  amortize  the  accumulated
benefit obligation at that date ("transition  obligation") into expense over the
allowed period of 20 years.

     The following is a summary of changes in the benefit  obligations  and plan
assets for the pension plan and the other postretirement benefits plan, together
with a reconciliation of each plan's funded status to the amounts  recognized in
the consolidated balance sheets:

<TABLE>
<CAPTION>
                                           Pension Benefits        Other Postretirement Benefits

                                       1998           1997         1998           1997
<S>                                    <C>            <C>          <C>            <C>
Change in benefit obligation:
  Beginning of year                    $ 2,732,000    $2,567,000   $   989,000    $  843,000
  Service cost                             124,000       118,000        78,000        52,000
  Interest cost                            203,000       181,000        79,000        60,000
  Actuarial loss                           361,000            --       202,000        63,000
  Benefits paid                           (130,000)     (134,000)      (33,000)      (29,000)

  End of year                            3,290,000     2,732,000     1,315,000       989,000

Change in fair value of plan assets:
  Beginning of year                      2,660,000     2,139,000            --            --
  Actual return on plan assets              71,000       460,000            --            --
  Employer contributions                   186,000       195,000        33,000        29,000
  Benefits and plan expenses              (148,000)     (134,000)      (33,000)      (29,000)

  End of year                            2,769,000     2,660,000            --            --

Funded status at end of year              (521,000)      (72,000)   (1,315,000)     (989,000)
Unamortized net transition
  (asset) obligation                       (31,000)      (35,000)      257,000       276,000
Unrecognized net loss subsequent
  to transition                            954,000       435,000       348,000       156,000
Unamortized prior service liability        (29,000)      (32,000)           --            --

Prepaid (accrued) benefit cost         $   373,000    $  296,000   $  (710,000)   $ (557,000)
</TABLE>
<PAGE>

     The  components  of the net  periodic  benefit cost for these plans were as
follows:

Pension Benefits                       1998       1997         1996

Service cost                           $ 123,000  $ 118,000    $ 112,000
Interest cost                            203,000    181,000      172,000
Expected return on plan assets          (228,000)  (184,000)    (168,000)
Amortization of prior service cost        (3,000)    (3,000)      (4,000)
Amortization of transition asset          (4,000)    (4,000)      (4,000)
Recognized net actuarial loss             19,000     33,000       41,000

Net periodic benefit expense           $ 110,000  $ 141,000    $ 149,000

Other Postretirement Benefits           1998       1997         1996

Service cost                            $ 78,000   $ 52,000     $ 34,000
Interest cost                             79,000     60,000       39,000
Amortization of transition obligation     18,000     18,000       18,000
Recognized net actuarial loss (gain)      11,000      1,000       (4,000)

Net periodic benefit expense            $186,000   $131,000     $ 87,000

The discount rates used to determine the benefit  obligations in 1998,  1997 and
1996 were 6.75%, 7.25% and 7.25%, respectively, for the pension plan; and 6.75%,
7.00% and 7.25%,  respectively,  for the other postretirement benefits plan. For
the pension  plan,  the expected rate of return on plan assets was 8.50% and the
rate of  increase  in future  compensation  was 5.0% for each of the years 1998,
1997 and 1996.  The assumed  health care cost trend rate used to  determine  the
benefit  obligation for the other  postretirement  benefits plan at December 31,
1998 was 7.0%,  declining  gradually to 4.0% in 2001 and remaining at that level
thereafter.  Increasing  the  assumed  health  care  cost  trend  rates  by  one
percentage point in each year would increase the benefit  obligation at December
31, 1998 by  approximately  $229,000 and the net  periodic  benefit cost for the
year by  approximately  $32,000;  a one percentage point decrease would decrease
the benefit  obligation and benefit cost by approximately  $180,000 and $25,000,
respectively.

Tax-Deferred Savings Plan

The Company  maintains a qualified 401(k) plan for all employees,  which permits
tax-deferred  employee  contributions  up to  15% of  salary  and  provides  for
matching  contributions  by the  Company.  The Company  matches 100% of employee
contributions  up to 4% of the  employee's  salary and 25% of the next 2% of the
employee's salary. The Company continues to match 25% of employee  contributions
beyond 6% of the employee's salary until the total matching contribution reaches
$1,500 or 15%. The Company contributed  approximately $111,000 in 1998, $117,000
in 1997 and $93,000 in 1996.

<PAGE>

16. Commitments and Contingent Liabilities

Legal Proceedings

The Parent  Company  and the Bank are,  from time to time,  defendants  in legal
proceedings  relating to the conduct of their business.  In the best judgment of
management,  the  consolidated  financial  position of the  Company  will not be
affected materially by the outcome of any pending legal proceedings.

Off-Balance-Sheet Financial Instruments

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 are limited to commitments to extend credit and standby letters
of credit which involve,  to varying degrees,  elements of credit risk in excess
of the amounts  recognized  in the  consolidated  balance  sheets.  The contract
amounts of these instruments reflect the extent of the Company's  involvement in
particular classes of financial instruments.

     The   Company's   maximum   exposure   to  credit  loss  in  the  event  of
non-performance by the other party to these instruments  represents the contract
amounts,  assuming that they are fully funded at a later date and any collateral
proves to be  worthless.  The Company  uses the same  credit  policies in making
commitments as it does for on-balance-sheet extensions of credit.

     Contract  amounts of financial  instruments  that  represent  agreements to
extend credit are as follows:

At December 31,                  1998                 1997

Loan origination commitments and unused lines of credit:

    Mortgage loans               $ 2,924,000          $ 1,475,000
    Commercial loans               7,518,000            6,544,000
    Credit card lines              5,152,000            2,606,000
    Home equity lines                414,000            1,902,000
    Other revolving credit         1,428,000            1,294,000

                                  17,436,000           13,821,000

Standby letters of credit            307,000              453,000

                                 $17,743,000          $14,274,000

These  agreements  to extend  credit have been granted to  customers  within the
Company's  lending area  described in note 5 and relate  primarily to fixed-rate
loans.

     Loan origination  commitments and lines of credit are agreements to lend to
a customer as long as there is no violation of any condition  established in the
contract.  These  agreements  generally  have  fixed  expiration  dates or other
termination  clauses and may  require  payment of a fee by the  customer.  Since
commitments  and lines of credit may expire  without being fully drawn upon, the
total contract amounts do not necessarily represent future cash requirements.

     The Company  evaluates each customer's  creditworthiness  on a case-by-case
basis.  The amount of  collateral,  if any,  required  by the  Company  upon the
extension of credit is based on management's  credit evaluation of the customer.
Mortgage  commitments are secured by a first lien on real estate.  Collateral on
extensions  of credit  for  commercial  loans  varies but may  include  accounts
receivable,  equipment,  inventory,  livestock and  income-producing  commercial
property. <PAGE>

     Standby letters of credit are conditional commitments issued by the Company
to guarantee the  performance of a customer to a third party.  These  guarantees
are primarily issued to support borrowing arrangements. The credit risk involved
in issuing standby letters of credit is essentially the same as that involved in
extending loan facilities to customers.

17. Fair Values of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",  requires
that   the   Company   disclose   estimated   fair   values   for  its  on-  and
off-balance-sheet financial instruments.  SFAS No. 107 defines fair value as the
amount  at  which  a  financial  instrument  could  be  exchanged  in a  current
transaction between parties other than in a forced sale or liquidation.

     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  holding  of a  particular
financial  instrument,  nor  do  they  reflect  possible  tax  ramifications  or
transaction  costs.  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  or the  value of  non-financial  assets  and  liabilities.  In
addition,  there are  significant  unrecognized  intangible  assets that are not
included in these fair value estimates, such as the value of "core deposits" and
the Company's branch network.

     The following is a summary of the net carrying  values and  estimated  fair
values of the Company's  financial  assets and  liabilities  (none of which were
held for trading purposes):

<TABLE>
<CAPTION>

At December 31,                              1998                            1997

                                 Net Carrying    Estimated       Net Carrying    Estimated
                                 Value           Fair Value      Value           Fair Value

<S>                              <C>             <C>             <C>             <C>
Financial Assets
Cash and cash equivalents        $  8,203,000    $  8,203,000    $  7,163,000    $  7,163,000
Securities available for sale      88,891,000      88,891,000      70,793,000      70,793,000
Securities held to maturity         3,602,000       3,755,000       3,738,000       3,821,000
Loans                             130,031,000     132,958,000     125,793,000     127,054,000
Accrued interest receivable         1,392,000       1,392,000       1,291,000       1,291,000
FHLB stock                          1,160,000       1,160,000         753,000         753,000

Financial Liabilities
Demand deposits
  (non-interest bearing)           31,287,000      31,287,000       23,545,000     23,545,000
Interest-bearing deposits         166,827,000     167,098,000      155,615,000    155,678,000
FHLB advances                      20,000,000      20,214,000       10,000,000     10,000,000
Short-term debt                       334,000         334,000          404,000        404,000
Accrued interest payable              640,000         640,000          610,000        610,000
</TABLE>
<PAGE>

The specific  estimation  methods and  assumptions  used can have a  substantial
impact  on  the  estimated  fair  values.  The  following  is a  summary  of the
significant  methods and  assumptions  used by the Company to estimate  the fair
values shown in the preceding table:

Securities

The carrying  values for securities  maturing  within 90 days  approximate  fair
values  because  there is little  interest rate or credit risk  associated  with
these instruments. The fair values of longer-term securities are estimated based
on bid prices published in financial  newspapers or bid quotations received from
securities  dealers.  The fair values of certain state and municipal  securities
are not  readily  available  through  market  sources;  accordingly,  fair value
estimates are based on quoted market prices of similar instruments, adjusted for
any significant  differences  between the quoted instruments and the instruments
being valued.

Loans

Fair  values  are  estimated  for  portfolios  of loans with  similar  financial
characteristics. Loans are segregated by type such as commercial, consumer, real
estate and other loans. Each loan category is further  segregated into fixed and
adjustable rate interest terms and by performing and non-performing  categories.
The fair values of performing loans are calculated by discounting scheduled cash
flows through  estimated  maturity using  estimated  market  discount rates that
reflect the credit and  interest  rate risks  inherent  in the loans.  Estimated
maturities are based on contractual terms and repricing opportunities.

     The fair  values of  non-performing  loans  are  based on  recent  external
appraisals  and  discounted  cash  flow  analyses.   Estimated  cash  flows  are
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market information and specific borrower
information.

Deposit Liabilities

The fair values of deposits with no stated  maturity (such as checking,  savings
and money market  deposits) equal the carrying  amounts  payable on demand.  The
fair values of time deposits are based on the  discounted  value of  contractual
cash  flows  (but are not less  than the net  amount at which  depositors  could
settle their  accounts).  The discount  rates are  estimated  based on the rates
currently offered for time deposits with similar remaining maturities.

FHLB Advances

The fair  value was  estimated  by  discounting  scheduled  cash  flows  through
maturity using current market rates.

Other Financial Instruments

The fair  values of cash and cash  equivalents,  FHLB  stock,  accrued  interest
receivable,  accrued  interest  payable and short-term debt  approximated  their
carrying values at December 31, 1998 and 1997.

     The fair values of the agreements to extend credit described in note 16 are
estimated based on 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 loan commitments,  fair
value  estimates also consider the difference  between  current market  interest
rates and the committed rates. At December 31, 1998 and 1997, the fair values of
these financial instruments  approximated the related carrying values which were
not significant. <PAGE>

18. Recent Accounting Standards

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133,  "Accounting  for Derivative  Instruments  and Hedging  Activities,"  which
requires  entities to recognize all  derivatives as either assets or liabilities
in the balance sheet at fair value. If certain  conditions are met, a derivative
may be  specifically  designated as a fair value hedge, a cash flow hedge,  or a
foreign currency hedge. A specific accounting  treatment applies to each type of
hedge. Entities may reclassify securities from the held-to-maturity  category to
the  available-for-sale  category at the time of adopting SFAS No. 133. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999,  although early
adoption is permitted.  The Company is not presently  engaged in derivatives and
hedging activities covered by the new standard and, accordingly, SFAS No. 133 is
not expected to have a material impact on the Company's  consolidated  financial
statements.

     In  October  1998,   the  FASB  issued  SFAS  No.  134,   "Accounting   for
Mortgage-Backed  Securities  Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking  Enterprise".  SFAS No. 134 provides for the
classification  of such retained  securities as held to maturity,  available for
sale, or trading in accordance  with SFAS No. 115.  Prior  accounting  standards
limited the classification of these securities to the trading category. SFAS No.
134 is effective for the fiscal quarter beginning after December 15, 1998 and is
not expected to affect the Company's consolidated financial statements.

19. Condensed Parent Company Financial Statements

The following are the condensed  parent  company only  financial  statements for
Jeffersonville Bancorp:

Balance Sheets (Parent Company Only)

As of December 31,                          1998              1997

Assets
Cash                                        $   106,000       $    95,000
Securities available for sale                 1,531,000         1,296,000
Investment in subsidiary                     20,347,000        19,586,000
Premises and equipment                        1,210,000         1,272,000
Other assets                                     28,000            21,000

TOTAL ASSETS                                $23,222,000       $22,270,000

Liabilities and Stockholders' Equity
Liabilities                                 $   205,000       $    94,000
Stockholders' equity                         23,017,000        22,176,000

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $23,222,000       $22,270,000
<PAGE>
<TABLE>

Statements of Income (Parent Company Only)
<CAPTION>

Years ended December 31,                            1998        1997         1996

<S>                                                 <C>         <C>          <C>
Dividend income from subsidiary                     $1,125,000  $1,375,000   $2,253,000
Dividend income on securities available for sale       125,000      72,000           --
Rental income from subsidiary                          246,000     245,000      246,000

                                                     1,496,000   1,692,000    2,499,000

Occupancy and equipment expenses                        62,000      62,000       63,000
Other non-interest expenses                             49,000      34,000      100,000

                                                       111,000      96,000      163,000

Income before income taxes and
  undistributed income of subsidiary                 1,385,000   1,596,000    2,336,000
Income tax expense                                     109,000      93,000       34,000

Income before undistributed income of subsidiary     1,276,000   1,503,000    2,302,000
Equity in undistributed income of subsidiary         1,042,000     260,000     (157,000)

NET INCOME                                          $2,318,000  $1,763,000   $2,145,000
</TABLE>

<TABLE>
Statements of Cash Flows (Parent Company Only)

<CAPTION>
Years ended December 31,                        1998           1997           1996

<S>                                             <C>            <C>            <C>
Operating Activities
Net income                                      $ 2,318,000    $ 1,763,000    $ 2,145,000
Equity in undistributed income of subsidiary     (1,042,000)      (260,000)       157,000
Depreciation and amortization                        62,000         62,000         63,000
Other adjustments, net                              110,000        (72,000)        27,000

NET CASH PROVIDED BY OPERATING ACTIVITIES         1,448,000      1,493,000      2,392,000

Investing Activities
Purchases of securities available for sale         (250,000)      (750,000)      (500,000)
Purchases of premises and equipment                      --        (10,000)       (90,000)

CASH USED IN INVESTING ACTIVITIES                  (250,000)      (760,000)      (590,000)

Financing Activities
Cash dividends paid                                (850,000)      (792,000)      (775,000)
Purchases and retirements of common stock          (337,000)        (1,000)    (1,043,000)
Proceeds from sales of treasury stock                    --             --         19,000

NET CASH USED IN FINANCING ACTIVITIES            (1,187,000)      (793,000)    (1,799,000)

NET INCREASE (DECREASE) IN CASH                      11,000        (60,000)         3,000
Cash at beginning of year                            95,000        155,000        152,000

Cash at end of year                             $   106,000    $    95,000    $   155,000

</TABLE>
<PAGE>

20. Summary of Unaudited Quarterly Financial Information

The following is a condensed summary of quarterly results of operations for 1998
and 1997:

<TABLE>
1998
<CAPTION>

                             March 31       June 30        September 30    December 31    Total

<S>                          <C>            <C>            <C>             <C>            <C>
Interest income              $ 4,102,000    $ 4,269,000    $ 4,326,000     $ 4,405,000    $17,102,000
Interest expense              (1,793,000)    (1,910,000)    (1,861,000)     (1,928,000)    (7,492,000)

Net interest income            2,309,000      2,359,000      2,465,000       2,477,000      9,610,000
Provision for loan losses       (150,000)      (125,000)      (175,000)       (150,000)      (600,000)
Non-interest income              302,000        405,000        446,000         434,000      1,587,000
Non-interest expenses         (1,774,000)    (1,721,000)    (1,902,000)     (2,114,000)    (7,511,000)

Income before taxes              687,000        918,000        834,000         647,000      3,086,000
Income taxes                    (177,000)      (284,000)      (255,000)        (52,000)      (768,000)

Net income                   $   510,000    $   634,000    $   579,000     $   595,000    $ 2,318,000

Basic earnings per share     $      0.36    $      0.45    $      0.41     $      0.42    $      1.64
</TABLE>

<TABLE>
1997
<CAPTION>

                             March 31       June 30        September 30    December 31    Total

<S>                          <C>            <C>            <C>             <C>            <C>
Interest income              $ 3,749,000    $ 3,881,000    $ 4,078,000     $ 4,139,000    $15,847,000
Interest expense              (1,610,000)    (1,748,000)    (1,729,000)     (1,856,000)    (6,943,000)

Net interest income            2,139,000      2,133,000      2,349,000       2,283,000      8,904,000
Provision for loan losses        (90,000)      (350,000)      (256,000)       (454,000)    (1,150,000)
Non-interest income              265,000        409,000        291,000         285,000      1,250,000
Non-interest expenses         (1,692,000)    (1,631,000)    (1,728,000)     (1,807,000)    (6,858,000)

Income before taxes              622,000        561,000        656,000         307,000      2,146,000
Income taxes                    (121,000)       (90,000)      (141,000)        (31,000)      (383,000)

Net income                   $   501,000    $   471,000    $   515,000     $   276,000    $ 1,763,000

Basic earnings per share     $      0.35    $      0.33    $      0.36     $      0.20    $      1.24
</TABLE>
<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-K

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

                     THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998  Commission File Number: 0-19212

                            JEFFERSONVILLE BANCORP
            (Exact name of Registrant as specified in its charter)

           New York                             22-2385448
(State or other jurisdiction of     (I.R.S. Employer Identification No.)
 incorporation or organization)

                 P.O. Box 398, Jeffersonville, New York 12748
                   (Address of principal executive offices)

      Registrant's telephone number, including area code: (914) 482-4000

         Securities registered pursuant to Section 12(b) of the Act:

        Title of each class           Name of exchange on which registered
              NONE                                  NONE

         Securities registered pursuant to Section 12 (g) of the Act:

                        Common Stock, $0.50 Par Value
                               (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  report(s),  and (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [ ]

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

The  aggregate  market  value of the  registrant's  common stock (based upon the
average bid and asked  prices on February  9, 1999) held by  non-affiliates  was
approximately $32,101,169.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock:

                                            Number of Shares Outstanding
           Class of Common Stock               as of February 9, 1999
             $0.50 Par Value                         1,395,703

            DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the  Registrant's  Annual Report to shareholders  for the fiscal
    year ended December 31, 1998.

(2) Portions  of the  Registrant's  Proxy  Statement  for its Annual  Meeting of
    Stockholders to be held on April 27, 1999.
<PAGE>

                            JEFFERSONVILLE BANCORP

                              INDEX TO FORM 10-K

                                    PART I

                                                                        PAGE

Item 1.        Business                                                47-53

Item 2.        Properties                                                 53

Item 3.        Legal Proceedings                                          53

Item 4.        Submission of Matters to a Vote of Security Holders        53

                                   PART II

Item 5.        Market for the Registrant's Common Equity
               and Related Stockholder Matters                            54

Item 6.        Selected Financial Data                                    54

Item 7.        Management's Discussion and Analysis of Financial
               Condition and Results of Operations                        54

Item 7A.       Quantitative and Qualitative Disclosures about
               Market Risk                                                54

Item 8.        Financial Statements and Supplementary Data                54

Item 9.        Changes in and Disagreements with Accountants
               on Accounting and Financial Disclosure                     54

                                  PART III

Item 10.       Directors and Executive Officers of the Registrant         54

Item 11.       Executive Compensation                                     54

Item 12.       Security Ownership of Certain Beneficial
               Owners and Management                                      54

Item 13.       Certain Relationships and Related Transactions             54

                                   PART IV

Item 14.       Exhibits, Financial Statement Schedules, and Reports
               on Form 8-K                                                55

               Signatures                                                 56
<PAGE>

                                   PART I

ITEM 1. Business

General

     Jeffersonville  Bancorp  (the  "Company")  was  organized  as  a  New  York
Corporation on January 12, 1982,  for the purpose of becoming a registered  bank
holding company under the Bank Holding Company Act of 1956, as amended (the "BHC
Act").  Effective June 30, 1982, the Company became the registered  bank holding
company for The First National Bank of Jeffersonville,  a bank chartered in 1913
and organized under the national banking laws of the United States (the "Bank").
The Company is engaged in the business of managing or controlling its subsidiary
bank and such other business  related to banking as may be authorized  under the
BHC Act

     The Bank is an independently owned bank based in Sullivan County, New York.
In addition to its main office and operations center in Jeffersonville, the Bank
has  seven  branch  office  locations  in  Eldred,   Liberty,   Loch  Sheldrake,
Monticello,  Livingston  Manor,  Narrowsburg  and Callicoon.  The Bank is a full
service institution  employing  approximately 100 people serving all of Sullivan
County,  New York as well as some  areas of  adjacent  counties  in New York and
Pennsylvania.

Deposit and Loan Products

     Deposit Products.  The Bank offers a variety of deposit products typical of
commercial banks and has designed product  offerings  responsive to the needs of
both   individuals  and  businesses.   Traditional   demand  deposit   accounts,
interest-bearing  transaction  accounts (NOW accounts) and savings  accounts are
offered on a competitive  basis to meet  customers'  basic banking needs.  Money
market  accounts,  time  deposits  in the form of  certificates  of deposit  and
IRA/KEOGH  accounts  provide  customers  with  price  competitive  and  flexible
investment  alternatives.  The Bank does not have a single  depositor or a small
group of related depositors whose loss would have a material adverse effect upon
the business of the Bank.

     Loan  Products.  The Bank  offers a broad  range of  residential  mortgage,
commercial  and consumer  loan  products  designed to meet the banking  needs of
individual customers,  businesses and municipalities.  Additional information is
set forth  below  relating  to the Bank's loan  products,  including  major loan
categories,   general  loan  terms,  credit  underwriting  criteria,  and  risks
particular  to each  category  of  loans.  The Bank  does not have a major  loan
concentration in any individual borrower or industry.

     Residential  Real Estate Loans.  The Company offers mortgage loan services,
originating a variety of mortgage loan products.  All mortgage loans  originated
are held in the Bank's  portfolio.  Residential  real estate loans  possess risk
characteristics  much the same as consumer  loans.  Stability of the  borrower's
employment  is a critical  factor in  determining  the  likelihood of repayment.
Market value risk, where the value of the underlying  collateral declines due to
economic conditions, is also a factor.

     Commercial and Commercial Real Estate Loans. The Bank also offers a variety
of  commercial  credit  products and services to its  customers.  These  include
secured and unsecured loan products specifically tailored to the credit needs of
the customers, underwritten with terms and conditions reflective of risk profile
objectives and corporate  earnings  requirements.  These products are offered at
all branch  locations.  Credit  decisions are generally made on a  decentralized
basis. All loans are governed by a commercial loan policy which was developed to
provide a clear  framework  for  determining  acceptable  levels of credit risk,
underwriting criteria,  monitoring existing credits, and managing problem credit
relationships.  Credit risk control  mechanisms  have been  established  and are
monitored  closely for  compliance by the internal  auditor and an external loan
review company.

     Risks  particular to  commercial  loans  include  borrowers'  capacities to
perform  according to  contractual  terms of loan  agreements  during periods of
unfavorable   economic   conditions  and  changing   competitive   environments.
Management   expertise  and  competency  are  critical  factors   affecting  the
customers'  performance  and ultimate  ability to repay their debt  obligations.
Commercial  real estate  loans  create  exposure to market  value risk where the
value of the underlying collateral decreases primarily as the result of regional
economic trends.

     Consumer  Loans.  The Bank also offers a variety of consumer loan products.
These products include both open-end credit (credit cards,  home equity lines of
credit,  unsecured revolving lines of credit) and closed-end credit (secured and
unsecured  direct  and  indirect  installment  loans).  Most of these  loans are
originated  at the branch  level.  This  delivery  mechanism  is supported by an
automated  loan  platform  delivery  system  and  a  decentralized  underwriting
process.  The  lending  process is  designed  to ensure  not only the  efficient
delivery  of credit  products,  but also  compliance  with  applicable  consumer
regulations while minimizing credit risk exposure.
<PAGE>

     Credit  decisions  are made under the guidance of a standard  consumer loan
policy,  with the  assistance  of senior  credit  managers.  The loan policy was
developed  to provide  definitive  guidance  encompassing  credit  underwriting,
monitoring  and  management.  The quality and  condition  of the  consumer  loan
portfolio,  as well as compliance with established standards,  is also monitored
closely.

     A borrower's ability to repay consumer debt is generally dependent upon the
stability of the income stream necessary to service the debt. Adverse changes in
economic conditions resulting in higher levels of unemployment increase the risk
of consumer  defaults.  Risk of default is also  impacted by a customer's  total
debt  obligation.  While the Bank can analyze a borrower's  capacity to repay at
the time a credit  decision is made,  subsequent  extensions  of credit by other
financial  institutions may cause the customer to become over-extended,  thereby
increasing the risk of default.

Supervision and Regulation

     Holding  Company  Regulation.  The  Company  is  a  bank  holding  company,
registered  with the Board Governors of the Federal Reserve System (the "Federal
Reserve")  under the BHC Act. As such, the Company and its  subsidiary  bank are
subject to the supervision,  examination,  and reporting requirements of the BHC
Act and the regulations of the Federal Reserve.  The BHC Act requires every bank
holding company to obtain the prior approval of the Federal Reserve before:  (i)
it may acquire  direct or indirect  ownership or control of any voting shares of
any bank if, after such  acquisition,  the bank holding company will directly or
indirectly own or control more than 5.0% of the voting shares of the bank;  (ii)
it or  any  of  its  subsidiaries,  other  than  a  bank,  may  acquire  all  or
substantially  all  of the  assets  of the  bank;  or  (iii)  it  may  merge  or
consolidate with any other bank holding company.

     The BHC Act  prohibits  the Federal  Reserve from  approving a bank holding
company's  application to acquire a bank or bank holding company located outside
the state in which the deposits of its banking subsidiaries were greatest on the
date the  company  became a bank  holding  company  (New York in the case of the
Company),  unless such acquisition is specifically  authorized by statute of the
state in which the bank or bank holding  company to be acquired is located.  New
York has adopted national reciprocal  interstate banking legislation  permitting
New York  based  bank  holding  companies  to  acquire  banks  and bank  holding
companies in other states and allowing bank holding  companies located in states
with  reciprocal  legislation  to  acquire  New  York  banks  and  bank  holding
companies.  Under the  provisions  of the  Riegle-Neal  Interstate  Banking  and
Branching  and  Efficiency  Act of 1994  (the  "Interstate  Banking  Act"),  the
existing  restrictions  on  interstate  acquisitions  of banks  by bank  holding
companies,  including the reciprocal  interstate banking  legislation adopted by
the state of New York, have been repealed. This allows the Company and any other
bank holding  company located in New York to acquire a bank located in any other
state,  and a bank holding  located  outside New York is able to acquire any New
York-based bank, in either case subject to certain deposit  percentage and other
restrictions.  The Interstate  Banking Act also generally provides that national
and state-chartered banks may branch interstate through acquisitions of banks in
other states.

     The Company is also subject to the  provisions  of Article III-A of the New
York State Banking Law. Among other things,  Article III-A requires the approval
of the New York Banking  Department  prior to the  acquisition by a bank holding
company of direct or indirect  ownership or control of 10% or more of the voting
stock of a banking  institution,  or the  acquisition by a bank holding  company
directly or indirectly  through a subsidiary of all or substantially  all of the
assets of a banking institution,  or a merger or consolidation with another bank
holding company.

     The BHC Act  generally  prohibits  the Company from  engaging in activities
other  than  banking  or  managing  or  controlling  banks or other  permissible
subsidiaries  and from acquiring or retaining  direct or indirect control of any
company engaged in any activities other than those activities  determined by the
Federal  Reserve to be so closely  related to banking or managing or controlling
banks as to be a proper incident  thereto.  In determining  whether a particular
activity  is  permissible,   the  Federal  Reserve  must  consider  whether  the
performance of such an activity  reasonably can be expected to produce  benefits
to the public, such as greater convenience,  increased competition,  or gains in
efficiency,  that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest, or unsound
banking  practices.  The BHC Act  does  not  place  territorial  limitations  on
permissible  non-banking  activities  of bank holding  companies.  Despite prior
approval,  the Federal  Reserve has the power to order a holding  company or its
subsidiaries  to terminate any activity or to terminate its ownership or control
of any subsidiary when it has reasonable  cause to believe that  continuation of
such  activity or such  ownership or control  constitutes  a serious risk to the
financial  safety,  soundness,  or stability of any bank subsidiary of that bank
holding company.
<PAGE>

     Bank Regulation.  The Bank, the single subsidiary bank of the Company, is a
member of the Federal Deposit Insurance  Corporation (the "FDIC"),  and as such,
its deposits are insured by the FDIC to the extent  provided by law. The Bank is
also subject to numerous state and federal  statutes and regulations that affect
its business,  activities,  and operations, and it is supervised and examined by
one or more federal bank regulatory agencies.

      Because  the Bank is a national  bank,  it is subject to  supervision  and
regulation by the Office of the Comptroller of the Currency (the "OCC"). The OCC
regularly  examines the  operations  of the Bank and has authority to approve or
disapprove mergers,  consolidations,  the establishment of branches, and similar
corporate  actions.  The OCC also has the power to prevent  the  continuance  or
development of unsafe or unsound banking practices or other violations of law.

      Community  Reinvestment  Act. The Bank is subject to the provisions of the
Community  Reinvestment  Act (the  "CRA").  Under  the  terms  of the  CRA,  the
appropriate  federal bank regulatory agency is required,  in connection with its
examination of a subsidiary institution,  to assess such institution's record in
meeting the credit needs of the community served by that institution,  including
those  of  low  and  moderate-income  neighborhoods.   The  regulatory  agency's
assessment of the institution's record is made available to the public. Further,
such assessment is required of any institution which has applied to: (i) charter
a national bank;  (ii) obtain deposit  insurance  coverage for a newly chartered
institution; (iii) establish a new branch office that will accept deposits; (iv)
relocate an office;  or (v) merge or consolidate  with, or acquire the assets or
assume the liabilities of, a federally regulated financial  institution.  In the
case of a bank holding company  applying for approval to acquire a bank or other
bank  holding  company,  the  Federal  Reserve  will  assess the records of each
subsidiary  institution of the applicant bank holding company,  and such records
may be the basis for denying the application.

      An institution's  CRA rating will continue to be taken into account by its
regulator  in  considering  various  types  of  applications.  In  addition,  an
institution  receiving  a rating of  "substantial  noncompliance"  is subject to
civil money penalties or a cease and desist order under Section 8 of the Federal
Deposit  Insurance  Act (the  "FDIA").  CRA remains a critical  component of the
regulatory  examination  process.  CRA examination  results and related concerns
have been  cited as a reason  to  reject  and or  modify  branching  and  merger
applications by various federal and state banking agencies.

      Payment of Dividends.  The Company is a legal entity separate and distinct
from the Bank. The principal source of cash flow of the Company,  including cash
flow to pay dividends to its stockholders,  is dividends from the Bank. The Bank
is required by the OCC to obtain prior  approval for the payment of dividends to
the Company if the total of all  dividends  declared  the Bank in any year would
exceed  the total of the Bank's net  profits  (as  defined  and  interpreted  by
regulation)  for that year and the  retained  net profits (as  defined)  for the
preceding two years, less any required transfers to surplus. The Bank's retained
net  profits  (after  payment of  dividends  to the  Company)  for 1998 and 1997
totaled approximately $1,300,000.  There are also other statutory and regulatory
limitations  on the payment of dividends by the Bank to the Company,  as well as
by the Company to its stockholders. Federal bank regulatory authorities have the
general  authority to limit the dividends paid by insured banks if such payments
may be deemed to  constitute  an unsafe and sound  practice.  Without  receiving
dividends from the Bank, the Company would not be in a position to pay dividends
to its stockholders.

      If, in the opinion of a federal  regulatory  agency,  an institution under
its  jurisdiction  is  engaged  in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the institution,  could
include the payment of dividends),  such agency may require,  after notice and a
hearing, that such institution cease and desist from such practice.  The Federal
Reserve,  the OCC,  and the FDIC,  have  indicated  that paying  dividends  that
deplete an institution's  capital base to an inadequate level would be an unsafe
and unsound banking practice.  Under the Federal Deposit  Insurance  Corporation
Improvement  Act of 1991  ("FDICIA"),  an  insured  institution  may not pay any
dividend if it is undercapitalized,  or if such payment would cause it to become
undercapitalized. See "Prompt Corrective Action". Moreover, the Federal Reserve,
the OCC,  and the FDIC have issued  policy  statements  which  provide that bank
holding  companies and insured banks should  generally only pay dividends out of
current operating earnings.
<PAGE>

     Transactions With Affiliates.  There are various regulatory restrictions on
the extent to which the Company can borrow or otherwise  obtain  credit from the
subsidiary  bank.  The Bank's  ability to engage in borrowing and other "covered
transactions" with non-bank affiliates is limited to the following amounts:  (i)
in the case of any such affiliate,  the aggregate amount of covered transactions
of the subsidiary  bank and its  subsidiaries  may not exceed 10% of the capital
stock  and  surplus  of  such  subsidiary  bank;  and  (ii)  in the  case of all
affiliates,  the aggregate amount of covered transactions of the subsidiary bank
and its subsidiaries may not exceed 20% of the capital stock and surplus of such
subsidiary bank. "Covered transactions" are defined by statute to include a loan
or  extension  of  credit,  as well as a  purchase  of  securities  issued by an
affiliate,  a purchase  of assets  (unless  otherwise  exempted  by the  Federal
Reserve), the acceptance of securities issued by the affiliate as collateral for
a loan and the  issuance  of a  guarantee,  acceptance,  or  letter of credit on
behalf  of an  affiliate.  Covered  transactions  are also  subject  to  certain
collateralization  requirements.   Further,  a  bank  holding  company  and  its
subsidiaries  are  prohibited  from engaging in certain tie-in  arrangements  in
connection  with  any  extension  of  credit,  lease,  or  sale of  property  or
furnishing of services.

      Capital Adequacy. The Company and the Bank are required to comply with the
capital  adequacy  standards  established  by the  Federal  Reserve and the OCC,
respectively.  There are two basic measures of capital adequacy for bank holding
companies  that have been  promulgated  by the  Federal  Reserve:  a  risk-based
measure  and a  leverage  measure.  All  applicable  capital  standards  must be
satisfied for a bank holding company to be considered in compliance.

      The risk-based  capital standards are designed to make regulatory  capital
requirements  more sensitive to differences in risk profile among banks and bank
holding  companies,  to account for off-balance sheet exposure,  and to minimize
disincentives for holding liquid assets.  Assets and off-balance sheet items are
assigned to broad risk categories,  each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total  risk-weighted  assets
and off-balance sheet items.

      As to the holding  company,  the minimum  guideline for the ratio of total
capital  ("Total   Capital")  to   risk-weighted   assets   (including   certain
off-balance-sheet  items,  such as standby  letters of credit) is 8.0%. At least
half of the Total Capital must be composed of common stock,  minority  interests
in the equity accounts of  consolidated  subsidiaries,  noncumulative  perpetual
preferred stock, and a limited amount of cumulative  perpetual  preferred stock,
less  goodwill and certain  other  intangible  assets  ("Tier 1  Capital").  The
remainder may be subordinated  debt, other preferred stock, and a limited amount
of loss  reserves.  At December  31, 1998,  the  Company's  consolidated  Tier 1
Capital and Total Capital ratios were 17.3% and 18.5%, respectively.

      In addition,  the Federal Reserve has established  minimum  leverage ratio
guidelines for bank holding  companies.  These guidelines  provide for a minimum
ratio of Tier 1 Capital to average  assets,  less  goodwill  and  certain  other
intangible assets (the "leverage ratio") of 3.0% for bank holding companies that
meet certain specified criteria, including having the highest regulatory rating.
All other bank holding  companies  generally are required to maintain a leverage
ratio of at least 3.0% plus an  additional  cushion of 100 to 200 basis  points.
The Company's  leverage ratio at December 31, 1998 was 9.9%. The guidelines also
provide  that bank  holding  companies  experiencing  internal  growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant  reliance on intangible
assets.  Furthermore,  the Federal Reserve has indicated that it will consider a
banking  institution's  "tangible Tier 1 Capital leverage ratio"  (deducting all
intangible  assets) and other  indications  of capital  strength  in  evaluating
proposals for expansion or new activities.

      The Bank is  subject  to  risk-based  and  leverage  capital  requirements
adopted by the OCC which substantially mirror the requirements applicable to the
holding company. The Bank's capital ratios are substantially similar to those of
the Company and, as such,  the Bank is also in  compliance  with all  applicable
minimum capital requirements.

      Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business. See "Prompt Corrective
Action".
<PAGE>

     Support of Subsidiary  Bank.  Under Federal Reserve policy,  the Company is
expected to act as a source of financial strength to, and to commit resources to
support,  the Bank.  This  support may be  required  at times when,  absent such
Federal  Reserve  policy,  the  Company  may not be  inclined  to provide it. In
addition, any capital loans by a bank holding company to the subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company's  bankruptcy,  any
commitment by the bank holding  company to a federal bank  regulatory  agency to
maintain  the  capital of a  subsidiary  bank will be assumed by the  bankruptcy
trustee and entitled to a priority of payment.

      Under the FDIA, a depository  institution  insured by the FDIC can be held
liable for any loss incurred by, or  reasonably  expected to be incurred by, the
FDIC after  August 9, 1989 in  connection  with:  (i) the  default of a commonly
controlled FDIC-insured depository institution;  or (ii) any assistance provided
by the FDIC to any commonly  controlled FDIC insured depository  institution "in
danger of  default."  The  FDIC's  claim for  damages is  superior  to claims of
stockholders of the insured depository  institution or its holding company,  but
is  subordinate  to claims of  depositors,  secured  creditors,  and  holders of
subordinated  debt (other than  affiliates) of the commonly  controlled  insured
depository institution. The Bank is subject to these cross-guarantee provisions.
As a result,  any loss  suffered by the FDIC in respect of the Bank would likely
result in assertion of the cross-guarantee  provisions superior to the claims of
the parent holding company.

      Prompt Corrective Action. FDICIA established a system of prompt corrective
action to resolve the  problems  of  undercapitalized  institutions.  Under this
system,  the federal  banking  regulators  established  five capital  categories
("well    capitalized,"    "adequately     capitalized,"     "undercapitalized,"
"significantly   undercapitalized,"  and  "critically  undercapitalized").   The
regulators are required to take certain mandatory  supervisory  actions, and are
authorized to take other discretionary  actions, with respect to institutions in
the three  undercapitalized  categories,  the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized.  The federal
banking  agencies have  specified by regulation  the relevant  capital level for
each category.

      An  institution  that is categorized  as  undercapitalized,  significantly
undercapitalized,  or  critically  undercapitalized,  is  required  to submit an
acceptable capital  restoration plan to its appropriate  federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meet its capital  restoration plan, subject to certain  limitations.
The  obligation  of a  controlling  bank holding  company under FDICIA to fund a
capital restoration plan is limited to the lesser of 5.0% of an undercapitalized
subsidiary's   assets  or  the  amount  required  to  meet  regulatory   capital
requirements.

      The  severity  of the  actions  required  to be taken  by the  appropriate
federal  banking  authorities  increases as an  institution's  capital  position
deteriorates.  Among other actions,  the mandates  could include,  under certain
circumstances,  requiring recapitalization of or a capital restoration plan by a
depository institution,  such as requiring the sale of new shares; a merger with
(or sale to) another  institution  (or  holding  company);  restricting  certain
transactions with banking affiliates;  otherwise  restricting  transactions with
bank or non-bank  affiliates;  restricting  interest rates that the  institution
pays on deposits;  restricting asset growth or reducing total assets;  altering,
reducing,  or  terminating  activities;  holding a new  election  of  directors;
dismissing  any  director or senior  executive  officer who held office for more
than  180 days  immediately  before  the  institution  became  undercapitalized;
employing  qualified  senior executive  officers;  or ceasing to accept deposits
from correspondent depository institutions.

      Not  later  than  90  days  after  an   institution   becomes   critically
undercapitalized,  the  appropriate  federal  banking agency for the institution
must appoint a receiver  or, with the  concurrence  of the FDIC, a  conservator,
unless the agency, with the concurrence of the FDIC, determines that the purpose
of the prompt  corrective  action  provisions  would be better served by another
course of action.  Thereafter,  an  institution's  regulator  must  periodically
reassess its  determination to permit a particular  critically  undercapitalized
institution  to continue to operate and must appoint a  conservator  or receiver
for the institution at the end of an approximately one year period following the
institution's  initial  classification as critically  undercapitalized  unless a
number  of  stringent  conditions  are met,  including  a  determination  by the
regulator  and the FDIC  that the  institution  has  positive  net  worth  and a
certification  by such agencies that the  institution is viable and not expected
to fail.  At December 31, 1998,  the Bank had the  requisite  capital  levels to
qualify as well capitalized.
<PAGE>

     FDIC Insurance.  Under the FDIC's risk related insurance assessment system,
insured depository institutions may be required to pay annual assessments to the
FDIC.  An  institution's  risk  classification  is  based on  assignment  of the
institution  by the  FDIC to one of  three  capital  groups  and to one of three
supervisory   subgroups.   The  three  supervisory   subgroups  are  Group  "A",
financially  solid  institutions  with only a few minor  weaknesses;  Group "B",
institutions  with weaknesses  which, if  uncorrected,  could cause  substantial
deterioration  of the  institution and increased risk to the insurance fund; and
Group  "C",  institutions  with a  substantial  probability  of loss to the fund
absent  effective  corrective  action.  The three  capital  categories  are well
capitalized,   adequately   capitalized,   and  undercapitalized.   These  three
categories are substantially the same as the prompt corrective action categories
previously described,  with the undercapitalized category including institutions
that  are  undercapitalized,   significantly  undercapitalized,  and  critically
undercapitalized for prompt corrective action purposes.

      On September 30, 1996,  legislation was passed  recapitalizing the Savings
Association  Insurance  Fund.  Included  in  that  legislation  were  provisions
requiring members of the Bank Insurance Fund (such as the Bank) to assist in the
repayment of Financing  Corporation  bonds issued in the 1980s to resolve failed
savings  and  loans.  The cost to the Bank as a result of this  legislation  was
$22,000 in 1998.

      Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices,  is in
an unsafe or unsound  condition  to continue  operations,  or has  violated  any
applicable law, regulation, rule, order, or condition imposed by the FDIC.

      Safety and Soundness Standards. Federal banking agencies promulgate safety
and soundness  standards relating to internal controls,  information systems and
internal audit systems, loan documentation,  credit underwriting,  interest rate
exposure,  asset  growth,  compensation,  fees,  and  benefits.  With respect to
internal  controls,   information  systems,  and  internal  audit  systems,  the
standards describe the functions that adequate internal controls and information
systems  must  be  able to  perform,  including:  (i)  monitoring  adherence  to
prescribed policies;  (ii) effective risk management;  (iii) timely and accurate
financial, operational, and regulatory reporting; (iv) safeguarding and managing
assets;  and (v) compliance with applicable laws and regulations.  The standards
also  include  requirements  that:  (i)  those  performing  internal  audits  be
qualified and  independent;  (ii) internal  controls and information  systems be
tested and reviewed; (iii) corrective actions be adequately documented; and (iv)
that results of an audit be made available for review of management actions.

      Legislative Proposals. Because of concerns relating to the competitiveness
and the safety and soundness of the industry,  Congress  continues to consider a
number of  wide-ranging  proposals for altering the structure,  regulation,  and
competitive  relationships  of the  nation's  financial  institutions  and other
financial  services  companies.  Among  such  bills are  proposals  to  prohibit
depository institutions and bank holding companies from conducting certain types
of activities;  to subject depository  institutions to increased  disclosure and
reporting  requirements;  to alter the statutory  separation  of commercial  and
investment banking; and to further expand the powers of depository institutions,
bank holding companies, and competitors of depository institutions. It cannot be
predicted  whether or in what form any of these proposals will be adopted or the
extent to which the business of the Company may be affected thereby.

Monetary Policy and Economic Conditions

      The  earnings of the Company and the Bank are  affected by the policies of
regulatory  authorities,  including the Federal Reserve System.  Federal Reserve
System monetary policies have had a significant  effect on the operating results
of  commercial  banks in the past and are  expected  to continue to do so in the
future.  Because of the changing  conditions in the national  economy and in the
money  markets,  as a result of actions  by  monetary  and  fiscal  authorities,
interest  rates,  credit  availability  and  deposit  levels  may  change due to
circumstances beyond the control of the Company and the Bank.

Competition

      The Bank faces strong competition for local business in the communities it
serves from other financial  institutions.  Throughout Sullivan County there are
31 branches of commercial  banks,  savings banks,  savings and loan associations
and other financial organizations. <PAGE>

For  most  of  the  services  which  the  Bank  provides,  there  is  increasing
competition from financial  institutions  other than commercial banks due to the
relaxation of regulatory restrictions.  Money market funds actively compete with
banks for deposits.  Savings  banks,  savings and loan  associations  and credit
institutions,  as well as consumer finance  companies,  insurance  companies and
pension trusts are important competitors. Competition for loans is also a factor
the Bank faces in maintaining profitability.

Employees

      At December 31, 1998,  there were 109 persons  employed by the Company and
the Bank.

ITEM 2. Properties

In addition  to the main  office of the Company and the Bank in  Jeffersonville,
New York,  the Bank has seven branch  locations  and an operations  center.  Set
forth below is a description of the offices of the Company and the Bank.

Main Office

The main office of the Bank is located at Main Street, Jeffersonville, New York.
The premises  occupied by the Bank consists of approximately  6,700 total square
feet of office space in a two-story office building.  The Bank owns the building
and underlying land.

Operations Center

The Operations Center is located on Main Street,  Jeffersonville,  New York. The
premises  consists of  approximately  10,788  square feet in a two-story  office
building. The Company owns the building and underlying land.

Eldred Branch

The Eldred Branch of the Bank is located at 561 Route 55, Eldred,  New York. The
premises consists of approximately  2,016 total square feet of office space in a
1-story office building. The Bank owns the building and underlying land.

Liberty Branch

The  Liberty  Branch of the Bank is  located at Church  Street  and Darby  Lane,
Liberty,  New York. The premises  consists of  approximately  4,320 total square
feet of office  space in a  two-story  office  building.  The  Company  owns the
building and underlying land.

Loch Sheldrake Branch

The Loch  Sheldrake  Branch of the Bank is located on Route 52, Loch  Sheldrake,
New York.  The  premises  consists of  approximately  1,440 total square feet of
office space. The Company owns the building and underlying land.

Monticello Branch

The Monticello Branch of the Bank is located at 15 Forestburgh Road, Monticello,
New York.  The premises  consists of  approximately  2,500 square feet of office
space. The Company owns the building and underlying land.

Supermarket Branches

The Bank leases space in Pecks Supermarkets in Livingston Manor, Narrowsburg and
Callicoon,  New York.  The branch  facilities  occupy between 650 and 800 square
feet each.

ITEM 3. Legal Proceedings

     The Company and the Bank are not parties to any material legal  proceedings
which may have a material  adverse effect on consolidated  results of operations
or financial condition.

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

     None.
<PAGE>

                                   PART II

ITEM 5. Market for the Registrant's Common Equity and Related
        Stockholder Matters

     The information required by this item is furnished under the heading "Stock
Information," included in the 1998 Annual Report to shareholders.

ITEM 6. Selected Financial Data

     The  information  required  by this item is  furnished  under  the  heading
"Selected  Financial  Information  -- Five-Year  Summary,"  included in the 1998
Annual Report to shareholders.

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

     "Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in the 1998 Annual Report to shareholders.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     The  information  required  by this item is  furnished  under  the  heading
"Interest Rate Risk," included in the 1998 Annual Report to shareholders.

ITEM 8. Financial Statements and Supplementary Data

     The required  financial  statements are furnished in the 1998 Annual Report
to shareholders.

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

     None.

                                   PART III

ITEM 10. Directors and Executive Officers of the Registrant

     See  "Nomination  of  Directors"  and  "Election of Directors" in the proxy
statement, which is incorporated herein by reference.

ITEM 11. Executive Compensation

    See "Remuneration of Management and Others" in the proxy statement, which is
incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

     See "Security Ownership of Certain Beneficial Owners and Management" in the
proxy statement, which is incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions
<PAGE>

     See  "Director  and  Executive  Officer  Information",  "Transactions  with
Management", and "Remuneration of Management and Others" in the proxy statement,
which is incorporated herein by reference.

                                   PART IV

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

(a)    1. The  following are the  financial  statements  referenced in Item 8 of
       this Form 10-K:

       Independent Auditors' Report

       Consolidated Balance Sheets as of December 31, 1998 and 1997

       Consolidated Statements of Income for the Years Ended December 31,
       1998, 1997 and 1996

       Consolidated  Statements of Changes in Stockholders' Equity for the Years
       Ended December 31, 1998, 1997 and 1996

       Consolidated Statements of Cash Flows for the Years Ended December
       31, 1998, 1997 and 1996

       Notes to Consolidated Financial Statements

(a)    2. All schedules are omitted since the required information is either not
       applicable,  not  required or contained  in the  respective  consolidated
       financial statements or in the notes thereto.

(a)    3.  Exhibits  (numbered in accordance  with Item 601 of  Regulation  S-K)
       Exhibits not indicated  below are omitted  because the information is not
       applicable or is contained elsewhere within this report.

3.1        Certificate  of  Incorporation  of  the  Company   (Incorporation  by
           Reference  to Exhibit 3.1,  3.2,  3.3 and 3.4 to Form 8  Registration
           Statement,effective June 29, 1991)

3.2        The Bylaws of the Company  (Incorporated  by Reference to Exhibit 3.5
           and 3.6 to Form 8 Registration Statement, effective June 29, 1991)

4.1        Instruments defining the Rights of Security Holders. (Incorporated by
           Reference to Exhibit 4 to Form 8  Registration  Statement,  effective
           June 29, 1991)

21.1       Subsidiaries of the Company. The Company owns 100% of the outstanding
           common stock of the Bank, which is its sole subsidiary.

(b)     Reports on Form 8-K

        No  reports  on Form 8-K were filed by the  Company  during the  quarter
        ended December 31, 1998.
<PAGE>

                                  SIGNATURES

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

Dated: March 19, 1999                   By: /s/ Arthur E. Keesler

                                        Chairman of the Board and President

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

Signatures                   Title                           Date

/s/ Arthur E. Keesler        Chairman of the Board and       March 19, 1999
Arthur E. Keesler            President-Director

/s/ K. Dwayne Rhodes         Principal Accounting Officer    March 19, 1999
K. Dwayne Rhodes             and Principal Financial Officer

/s/ John K. Gempler          Director                        March 19, 1999
John K. Gempler

/s/ Edward T. Sykes          Director                        March 19, 1999
Edward T. Sykes

/s/ Raymond Walter           Director                        March 19, 1999
Raymond Walter

/s/ Earle A. Wilde           Director                        March 19, 1999
Earle A. Wilde

/s/ James F. Roche           Director                        March 19, 1999
James F. Roche

/s/ Frederick W.V. Schadt    Director                        March 19, 1999
Frederick W.V. Schadt

/s/ John W. Galligan         Director                        March 19, 1999
John W. Galligan
<PAGE>

The First National Bank of Jeffersonville

Officers

Arthur E. Keesler
Chairman of the Board

Raymond Walter
President and Chief Executive Officer

K. Dwayne Rhodes
Executive Vice President and Cashier

John M. Riley
Senior Vice President--Loans

Theodore Bertot
Auditor

Charles E. Burnett
Controller

Wayne V. Zanetti
Vice President--Operations Division Manager

June B. Tegeler
Vice President and Branch Manager

Claire Pecsi
Vice President--Human Resources

Tatiana Hahn
Vice President

Susan A. Bodenstein
Assistant Vice President--Operations

Jacqueline M. Gieger
Operations Manager

Pearl L. Gain
Assistant Cashier--Accounting

Rhonda Decker
Branch Manager

Raymond W. Browne
Branch Manager

Tanja McKerrell
Branch Manager

Kathleen Beseth
Branch Manager

Edith Houghtaling
Assistant Branch Manager

Janet R. Siano
Assistant Branch Manager

Stacey Stephenson
Assistant Branch Manager

JoAnn Girardi
Assistant Branch Manager

Linda Fisk
Sales Manager

Sandra S. Sipple
Sales Manager

Florence Horecky
Sales Manager

Loreen Gebelein
Mortgage Administrator

Andrew McKean
Commercial Loan Officer

Barbara Hahl
Marketing Manager

Staff

Terri Bagailuk
Dianne Banks
Geri Bennett
Amy Bernhardt
Dawn Berst
Eleida Black
Jerilynn Brock
Michelle Brockner
Nancy Brown
Christine Carlson
Alana Conklin
Mary Ellen Connors
Nancy Crumley
Lydia D'Antoni
Charles DelGenovese,  Sr. Susan DeVito Denise Diehl Barbara Donnelly Lisa Dreher
Kelly Ellsworth Rosemarie Finkle Deborah Forsblom Helen Forster Lorraine Gabriel
Karen Gabriel Susan Gabriel Dawn Gandy Vivian  Grabek  Cynthia  Gregson  Justine
Hageman Eugene Hahn Kerline Harman Alisa Horan Cathy Horan Carolyn Hubert Martha
Huebsch Heidi Hulse Betty Johaneman  Marilyn Kaempfe Helen Karkkainen Jean Kelly
Carol Kennedy  Jessica  Kenyon Lauren  Kickuth  Trishia  Kinney Brandy  Leonardo
Patricia  Leonardo Dana LeRoy Shirley  Lindsley  Michele  Lupardo  Merrily Lynch
Linda Mall JoAnn Malley Gladys  Manzolillo  Jamie McAteer Diane McGrath Jonathan
McGruder  Mariann  McKay Toni  McKay  Tina  Millis  Deborah  Muzuruk  Gale Myers
Lorraine  Niemann Kelli Pagan George Lewis Palmer  Kimberly Peck Kimberly  Pecsi
Barbara  Pietrucha Jimmy Porter Margaret Porter Denice Price Alice Reisen Sherri
Rhyne Andrew  Richardson  Damaris Rios Mandy Roberts Sandra Ross John Rudy Helen
Sherman  Crystal Smith Theresa  Specht Jon Speed Kristie  Stauch  Barbara Walter
Janet  Warden Jayne  Wartell  Carol Welton  Everett  Williams  Jean Wood Heather
Worzel Luz Young <PAGE>

Jeffersonville Bancorp
     Board of Directors

Arthur E. Keesler
Chairman of the Board
Retired Chief Executive Officer
First National Bank of Jeffersonville
Jeffersonville, New York

Douglas A. Heinle
Postmaster Cochecton Center
Cochecton Center, New York

Honorable Lawrence H. Cooke
Chief Judge of the State of New York
Retired

Solomon Katzoff
President
Katzoff Realty, Inc.
Jeffersonville, New York
Real Estate Sales

John W. Galligan
Owner
John Galligan, Land Surveyor
Monticello, New York
Surveyor

Gibson McKean
President
McKean Real Estate, Inc.
Barryville, New York
Real Estate Sales

John K. Gempler
Secretary/Treasurer
Callicoon Co-op
Insurance Company
Jeffersonville, New York
Insurance Company
<PAGE>

Raymond Walter
President
First National Bank of Jeffersonville
Jeffersonville, New York

James F. Roche
President
Roche's Garage Inc.
Callicoon, New York
Automobile Dealer

Gilbert E. Weiss
Retired Chief Executive Officer
First National Bank of Jeffersonville
Jeffersonville, New York

Frederick W. V. Schadt, Jr.
Schadt and Schadt
Jeffersonville, New York
Attorneys

Earl A. Wilde
Retired
Sullivan County Cooperative Extension
Liberty, New York

Edward T. Sykes
President
Mike Preis Inc.
Callicoon, New York
Insurance Agency

Officers

Arthur E. Keesler
President

Raymond Walter
Vice President

John K. Gempler
Secretary

K. Dwayne Rhodes
Treasurer
<PAGE>

Corporate Information

Corporate Headquarters
Jeffersonville Bancorp
300 Main Street
P.O. Box 398
Jeffersonville, New York 12748

Tel. (914) 482-4000
www.jeffbank.com
EMAIL jeffbank @jeffbank.com

Description of Business

Jeffersonville  Bancorp is a one-bank  holding company formed in June 1982 under
the laws of the State of New York.  Its subsidiary is The First National Bank of
Jeffersonville,  which  serves  customers  in  Sullivan  County,  New  York  and
surrounding  communities  in  Southeastern,  New York through eight  offices.  A
full-service  commercial bank, it provides a broad range of financial  products,
including demand and time deposits and mortgage, consumer and commercial loans.

Annual Meeting

The Annual Meeting of  stockholders  will be held on Tuesday,  April 27, 1999 at
3:00 p.m., in the Company's Board Room at Jeffersonville, New York.

Stock Information

The Company's common stock has traded in the  Over-the-Counter  market under the
symbol JFBC since January  1997.  The  following  investment  firms are known to
handle  Jeffersonville  Bancorp stock  transactions:  Barriger & Barriger  Inc.,
Monticello, NY (914) 794-6600,  Monroe Securities,  Rochester, NY (716) 546-5560
and Ryan,  Beck & Co.,  Livingston,  NJ (800)  342-8985.  On January  14,  1998,
Jeffersonville  Bancorp  announced a 20% stock dividend  payable on February 10,
1998 to common  stockholders  of record as of  January  27,  1998.  Stockholders
received a dividend of one share of common  stock for every five shares owned as
of the record date.  Cash was paid in lieu of  fractional  shares.  Shareholders
participating in our Dividend Reinvestment Plan were credited for the fractional
shares.

     The  following  table  shows the range of high and low bid  prices  for the
Company's stock for the quarters indicated. Data for the quarter ended March 31,
1997 is from  January  20, 1997 when the  Company's  stock began to trade in the
Over-the-Counter  market.  Prices have been adjusted for the 20% stock dividend,
for periods prior to the payment date.

Bid Price

                            Low      High

Quarter Ended
March 31, 1997              $21.50   $22.50
June 30, 1997               $22.00   $23.25
September 30, 1997          $25.25   $25.50
December 31, 1997           $24.50   $24.75
March 31, 1998              $25.20   $25.50
June 30, 1998               $24.00   $24.75
September 30, 1998          $22.50   $22.50
December 31, 1998           $21.50   $23.00

     Cash  dividends of $0.32 and $0.35 per share were declared in June 1997 and
December  1997,  respectively  (or  $0.267  and  $0.292,   respectively,   after
adjustment  for the stock  dividend).  During 1998,  the Company paid three cash
dividends:  $0.30 in June; $0.15 in September;  and $0.15 in December. The Board
of Directors  intends to continue the payment of dividends on a quarterly basis,
subject to its ongoing  consideration of the Company's  financial  condition and
operating results; market and economic conditions; and other factors. <PAGE>

Jeffersonville Bancorp

Subsidiary:
The First National Bank of Jeffersonville

Offices

Main Office
300 Main Street
Jeffersonville, New York 12748
(914) 482-4000

Callicoon Office
45 Main Street
Callicoon, New York 12723
(914) 887-4866

Eldred Office
561 Route 55
Eldred, New York 12732
(914) 557-8513

Liberty Office
Church & Darbee Lane
Liberty, New York 12754
(914) 292-6300

Livingston Manor
Office 45 Main Street
Livingston Manor, New York 12758
(914) 439-8123

Loch Sheldrake Office
Route 52
Loch Sheldrake, New York 12759
(914) 434-1180

Monticello Office
15 Forestburgh Road
Monticello, New York 12701
(914) 791-4000

Narrowsburg Office
122 Kirk Road
Narrowsburg, New York 12764
(914) 252-6570

Stock Transfer Agent
American Stock Transfer Company
40 Wall Street
46 Floor
New York, New York 10005
(212) 936-5100
<PAGE>

                                    (LOGO)

                            Jeffersonville Bancorp
                                 P.O. Box 398

                        Jeffersonville, New York 12748

                          http://www.jeffbank.com