DESCRIPTION OF BUSINESS

CNY  FINANCIAL   CORPORATION   IS  A  PUBLICLY   TRADED  BANK  HOLDING   COMPANY
HEADQUARTERED IN CORTLAND,  NEW YORK. WITH ASSETS OF $281.2 MILLION, THE COMPANY
SERVES ITS COMMUNITY THROUGH ITS WHOLLY OWNED SUBSIDIARY, CORTLAND SAVINGS BANK.
THE BANK  OPERATES  THREE  FULL-SERVICE  OFFICES IN  CORTLAND  COUNTY AND A LOAN
PRODUCTION  OFFICE IN ITHACA,  IN NEIGHBORING  TOMPKINS COUNTY.  CNY FINANCIAL'S
COMMON  STOCK IS TRADED ON THE NASDAQ  NATIONAL  MARKET  SYSTEM UNDER THE SYMBOL
"CNYF".



                                    CNY FINANCIAL CORPORATION
                                  Selected Financial Highlights

<TABLE>
<CAPTION>
<S>                               <C>       <C>         <C>        <C>        <C>     
                                                      DECEMBER 31,
                                  ----------------------------------------------------
SELECTED BALANCE SHEET DATA:        1998       1997       1996       1995       1994
                                  ----------------------------------------------------
                                             (In thousands, except share data)
Total assets                      $281,186  $ 233,729   $238,100   $235,681   $230,339
Loans receivable, net              159,207    155,422    158,611    158,507    152,476
Allowance for loan losses            2,494      2,143      1,952      2,002      1,752
Loans held-for-sale                     --      2,541         --         --         --
Securities available-for-sale       88,437     44,140     45,594     41,777      2,519
Securities held-to-maturity         10,318     12,550     11,757     11,188     61,716
Cash & cash equivalents             14,536      8,079     12,536     14,176      4,912
Real estate owned                      260        964        563        374        572
Deposits                           196,014    199,770    204,640    203,110    200,310
Borrowings                           1,000         --         --         --         --
Total stockholders' equity        $ 79,070  $  30,740   $ 30,345   $ 29,030   $ 26,876
Book value per share (1)          $  15.06        N/A        N/A        N/A        N/A
Book value per share, excluding
  unallocated ESOP shares (2)     $  16.38        N/A        N/A        N/A        N/A

                                                                Continued page 1
</TABLE>


                                 ON OUR COVER
                                 POISED FOR GROWTH
                                 From a position  of  recognized  leadership  in
                                 community  banking  that  spans  more  than 130
                                 years, a strong, new financial services company
                                 was  created in Central  New York on October 6,
                                 1998 when the  oldest and  largest  independent
                                 bank  in   Cortland,   NY   converted   from  a
                                 state-chartered  mutual savings bank to a stock
                                 savings  bank.  On that day, CNY  Financial was
                                 launched.

<PAGE>


                                                                             CNY
                                                                       Financial

                           CNY FINANCIAL CORPORATION
                    Selected Financial Highlights, Continue

<TABLE>
<CAPTION>

<S>                                                   <C>          <C>           <C>          <C>          <C>       
                                                                              YEAR ENDED DECEMBER 31
                                                      ---------------------------------------------------------------
                                                         1998         1997          1996        1995         1994
                                                      ---------------------------------------------------------------
SELECTED OPERATIONS DATA:                                             (In thousands, except share data)
Interest income                                       $   18,003   $   17,667    $   17,787   $   17,811   $   15,855
INTEREST EXPENSE                                           7,986        8,328         8,758        8,613        7,915
---------------------------------------------------------------------------------------------------------------------
Net interest income                                       10,017        9,339         9,029        9,198        8,940
PROVISION FOR LOAN LOSSES                                    325        3,300         1,380          600          300
---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses        9,692        6,039         7,649        8,598        8,640
OTHER NON-INTEREST INCOME                                  1,583          889           770          671          478
---------------------------------------------------------------------------------------------------------------------
                                                          11,275        6,928         8,419        9,269        9,118
OTHER NON-INTEREST EXPENSE                                 8,326        6,872         6,201        5,945        5,586
---------------------------------------------------------------------------------------------------------------------
Income before income taxes                                 2,949           56         2,218        3,324        3,532
INCOME TAX EXPENSE (BENEFIT)                               1,270          (16)          853        1,400        1,361
---------------------------------------------------------------------------------------------------------------------
Net Income                                            $    1,679   $       72    $    1,365   $    1,924   $    2,171
=====================================================================================================================
Basic earnings per share (3)                          $       --          N/A           N/A          N/A          N/A
=====================================================================================================================
Earnings per share, excluding contribution
to Foundation (4)                                     $     0.13          N/A           N/A          N/A          N/A
=====================================================================================================================
Weighted average shares outstanding                    4,928,044          N/A           N/A          N/A          N/A
=====================================================================================================================

</TABLE>

<TABLE>
<CAPTION>

<S>                                              <C>      <C>      <C>       <C>      <C>  
SELECTED FINANCIAL RATIOS AND OTHER DATA:          AT OR FOR THE YEAR ENDED DECEMBER 31    
                                               --------------------------------------------
                                                 1998      1997     1996     1995      1994
                                               --------------------------------------------
PERFORMANCE RATIOS:
Return on average assets                         0.64%    0.03%    0.58%     0.82%    0.92%
Return on average assets, excluding
  contribution to Foundation (4)                 0.87%    0.03%    0.58%     0.82%    0.92%
Return on average equity                         3.21%    0.23%    4.64%     6.85%    8.41%
Return on average equity, excluding
  contribution to Foundation (4)                 4.38%    0.23%    4.64%     6.85%    8.41%
Net interest rate spread                         3.52%    3.58%    3.48%     3.70%    3.62%
Net interest margin                              4.28%    4.17%    4.02%     4.18%    4.03%
Efficiency ratio                                72.00%   67.49%   63.38%    60.34%   59.52%
Efficiency ratio, excluding
 contribution to Foundation (4)                 63.15%   67.49%   63.38%    60.34%   59.52%

STOCKHOLDERS' EQUITY AND ASSET
QUALITY RATIOS:
Average equity to average total assets          19.86%   13.04%   12.40%    12.00%   10.96%
Total equity to assets end of period            28.12%   13.15%   12.74%    12.32%   11.67%
Non-performing assets to total assets            0.42%    2.04%    1.78%     1.00%    1.32%
Non-performing loans to total loans              0.58%    2.37%    2.28%     1.24%    1.60%
Allowance for loan losses to total loans         1.54%    1.34%    1.22%     1.25%    1.14%
Allowance for loan losses to
 non-performing loans                          266.74%   56.48%   53.23%   100.40%   71.13%

OTHER DATA:
Full service offices                                 3        3        3         3        3
Full-time equivalent employees                      91       93       95        96       99
----------------------------------------

</TABLE>

(1)   Book value per share is equal to total equity divided by the common shares
      outstanding at December 31, 1998.

(2)   Equal to stockholders'  equity divided by common shares outstanding,  less
      423,175 unallocated ESOP shares.

(3)   Earnings per share calculated on earnings from date of conversion (October
      6, 1998) to December 31, 1998.

(4)   Excludes  contribution  expense  to the  Cortland  Savings  Foundation  of
      $1,023,000, or $614,000 after taxes.

                                       1
<PAGE>


CNY
Financial

A MESSAGE TO OUR SHAREHOLDERS

         I am  pleased  to present  to you the  inaugural  annual  report of CNY
Financial.  Creation of your new public  holding  company and  conversion of its
sole  subsidiary,  Cortland  Savings  Bank,  to a stock bank have enabled us to
reach  historic  levels  of  profitability  and  position.   CNY  Financial  for
leadership within the industry, as evidenced by the following:

o        Net  income  for 1998 was $2.3  million,  excluding  the  expense  of a
donation to the  Company's  charitable  foundation,  compared with net income in
1997  of  $72,000.  This  improvement  occurred  primarily  as the  result  of a
reduction in the costs associated with nonperforming assets.

NET INCOME
$ in Millions
1996        1997                      1998
---------------------------------------------------------
                      $2.3 Before Foundation Contribution
                      -----------------------------------
                       Net Income After      After-Tax   
                       Foundation            Foundation  
                       Contribution          Contribution
=========================================================
$1.4       $0.1           $1.7                 $0.6
=========================================================

o        Nonperforming assets totaled $1.2 million on December 31, 1998, or .42%
of total assets, compared to $4.8 million or 2.04% of total assets at the end of
1997. This reduction reflects the successful sale of problem assets in the first
quarter of 1998 and our loan staff's continued attention to asset quality.

NON-PERFORMING ASSETS/TOTAL ASSETS
1996                     1997                1998
---------------------------------------------------------
1.78%                    2.04%               0.42%
=========================================================

o        Stockholders'  equity  totaled  $79.1  million  on  December  31,  1998
reflecting  a $48.3  million  increase  during the year.  The Company is well in
excess of regulatory requirements to be "well capitalized" and, as such, is well
positioned  to benefit  from  strategic  expansion  opportunities.  We will work
diligently with our financial advisors to identify appropriate avenues to deploy
this new capital.

         The  conversion has also been  beneficial in other ways.  While we have
always been  mindful  that our  employees  and the  communities  we serve have a
direct impact on our success, creation of CNY Financial enabled us to launch two
initiatives that will underscore their continuing  importance in the future. The
first is  development  of an  employee  stock  ownership  plan  which  gives our
employees a vested interest in their Company. This translates into our employees
working  towards an even higher level of productivity  as  employee-owners.  The
second is creation of a  charitable  entity,  the Cortland  Savings  Foundation,
which is  endowed  with $1  million of common  stock  from the  conversion.  The
Foundation,  which  is  endowed  with  $1  million  of  common  stock  from  the
conversion.  The Foundations's  purpose will be to support significant  housing,
community  development and charitable  projects that will enhance the quality of
life for people in the communities we serve.

         As evidence of our  commitment  to  enhancing  shareholder  value,  the
Company was the first in New York State to receive  approval to repurchase 5% of
its common stock less than six months after our conversion. Furthermore, we were
pleased to  announce  the  initial  quarterly  cash  dividend  of the Company in
February of 1999. As we continue to focus on shareholder  value we are currently
considering  fee  income  enhancements  and  efficiency   improvements   through
increased  utilization  of  existing  systems  and  personnel,   both  of  which
initiatives should increase the return to shareholders.

         Amid  consolidations  of monumental  proportions  in our industry,  CNY
Financial stands as a refreshing alternative. Your new company possesses a clear
vision for strong community banking  throughout Central New York. It is a vision
that will  offer a superior  delivery  system  but will not  sacrifice  personal
attention and service to the customer.

                                       2
<PAGE>

                                                                             CNY
                                                                       Financial

"THE  EARLY  SUCCESS  OF OUR  ITHACA  LPO HAS  ENABLED  US TO DEVELOP A BUSINESS
STRATEGY THAT INCLUDES THE ADDITION OF SEVERAL MORE LOAN  PRODUCTION  OFFICES IN
SURROUNDING  CITIES...THEY  WILL GIVE CNY FINANCIAL A STRONG PRESENCE IN SEVERAL
NEW MARKETS WITHOUT ADDING COSTLY BRICK AND MORTAR FACILITIES."

         The means  toward  realizing  our  vision is  already in place with the
creation  of  $50.3  million  of  additional  capital  from the  initial  public
offering.  We stand poised to benefit from strategic growth  opportunities  with
access to a new consumer base in a larger market area.

         How will we grow?  In 1999,  our primary  focus will be on expansion of
our residential and commercial lending capabilities.  During 1998, of total loan
closings of $39.4 million,  we originated $5.4 million of residential  loans and
$700,000 of commercial  loans from a new loan production  office in Ithaca.  The
early  success of our Ithaca LPO has  enabled us to develop a business  strategy
that  includes  the  addition  of  several  more  loan  production   offices  in
surrounding cities. These offices will emphasize excellent turnaround and a high
degree of  attention  to the  customer.  They will give CNY  Financial  a strong
presence  in  several  new  markets  without  adding  costly  brick  and  mortar
facilities.

         This is an ambitious agenda.  The creation of a publicly traded company
has necessitated a major  restructuring of the organization in order to meet the
challenges  that will  result  from  expansion.  During the past  year,  we have
enhanced our senior management team to include seasoned  professionals noted for
their successful careers in community banking. I am pleased to welcome them.

         Chief  Operating  Officer F. Michael  Stapleton  brings to your company
significant  operational  and retail  banking  experience  as well as  extensive
knowledge of local  markets.  Chief  Financial  Officer  Steven A.  Covert,  who
directed the  successful  conversion,  adds  substantial  financial and investor
relations expertise. They join Senior Vice President Kerry D. Meeker who in 1996
brought breadth to our lending programs, both commercial and residential.

         They, and the remainder of CNY Financial's 90 dedicated employees, have
had a busy  inaugural  quarter.  We are  already  out in front  of our  peers on
implementation of a comprehensive Year 2000 readiness plan. While many companies
are  incurring  major  costs  to  ensure  a  smooth  transition  into  the  next
millennium,  we believe  we can avoid any  significant  interruption  of regular
business on January 1, 2000. This, along with a recently completed comprehensive
technology  study,  will  position us to better serve the needs of our customers
far beyond the Year 2000.

         Throughout  our transition to a public  holding  company,  we have been
judicious  in  continuing  to work  closely  with our  directors  who have  been
responsible  for  bringing  us to this  place.  Three of them,  with whom I have
worked for over 30 year, have retired.  Harwood Spaulding,  Ed Burgess and Peter
Potter are to be applauded for their combined wisdom in helping us make possible
the future success of CNY Financial. We wish them well.

         As we approach our first full year as a publicly  traded  company,  our
mission will  remain:  to  profitably  serve your needs and those of your fellow
shareholders and to address the needs of the customers in the communties we call
home.  We will also work to continue to earn our  reputation  as a  responsible,
community-minded corporate citizen.

         On behalf of our Directors and Management Team, CNY Financial  welcomes
you. I look forward to a long and mutually profitable partnership together.

Sincerely,


/s/ Wesley D. Stisser
---------------------
Wesley D. Stisser
President, CNY Financial Corporation
[photo omitted]
                                       3
<PAGE>

CNY
Financial

A STRONG COMMUNITY......
A STRONGER FUTURE

CNY  Financial  has built  lasting ties to the  communities  it serves,  through
Cortland  Savings  Bank's  efforts  as  a  dedicated  corporate  citizen.   This
involvement  is one of the  primary  contributors  to our status as the  largest
independent bank in Cortland County.  We continue to manifest our involvement in
two  important  ways;  solid  financial  services to enhance the  viability  and
profitability  of local businesses and industry;  and civic  leadership  through
innovative  educational,  cultural  and  volunteer  efforts  that  have  spanned
generations.

CNY  Financial  shares  Cortland  Savings  Bank's  strong  belief that a healthy
business  environment is an integral part of a growing economy.  The Company has
enhanced its ability to provide even better service to the business  customer by
extending its product line and hiring  additional  experienced  commercial  loan
officers.

Below are two examples of Cortland  Savings  Bank's  flexibility  in meeting the
financial needs of varied types of business.

Financial  support  to Olde Homer  House is just one  illustration  of  Cortland
Savings  Bank's   partnership   with  local   businesses  to  support   economic
revitalization.  Lisa Lindhorst and Jackie May, owners of Olde Homer House,  are
shown at their Main Street  business  which sells  traditional  furnishings  and
gifts.

Assistance  from  Cortland  Savings Bank to the 1890 House Museum and Center for
Victorian  Arts  will  make  it  possible  for  the  Museum  to  expand  through
acquisition  of additional  property.  An increase in visitors is anticipated as
the Museum becomes an official New York State tourism  destination.  This should
help improve business for a variety of downtown merchants.

In addition to helping make a financial  difference for businesses and families,
the Bank also makes a visible  contribution  with its  involvement  in community
events and sponsorships. This participation and exposure has made us the bank of
choice in the area.  A sampling of the civic  events and  campaigns in which the
Bank has  participated  are; Chamber of Commerce Annual Business  Showcase,  the
June  Dairy  Parade,  Downtown  Business  Association  and  Board  of  Realtors'
activities.  This involvement provides  opportunities for Bank personnel to meet
with  existing and potential  customers in a friendly,  community  arena,  while
building  community  pride and  assisting  in  promoting  our  attractive  local
communities to a much larger market area.

CNY  Financial's  commitment  to build a strong  community  through  lending and
community  involvement  assists in  creating a healthy  business  climate and an
attractive community in which to live and work.

                                       4
<PAGE>

                                                                             CNY
                                                                       Financial

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

The following  discussion should be read in conjunction with "Selected Financial
Highlights"  and  the  Consolidated   Financial   Statements  of  CNY  Financial
Corporation (the "Company"),  including the accompanying  notes,  each appearing
elsewhere in this Annual Report.

GENERAL

The Company's  principal  business is conducted by its wholly-owned  subsidiary,
Cortland  Savings  Bank (the  "Bank")  and  consists of full  service  community
banking. The Bank's results of operations depend principally on its net interest
income,  which is the  difference  between  the  income  earned on its loans and
securities  and its cost of funds,  principally  interest paid on deposits.  Net
interest  income is  dependent  on the amounts  and yields of  interest  earning
assets as compared to the amounts of and rates on interest bearing  liabilities.
Net interest  income is sensitive to changes in market rates of interest and the
Company's  asset/liability  management  procedures  in coping with such changes.
Results of operations  are also  affected by the provision for loan losses,  the
volume of  non-performing  assets and the  levels of  non-interest  income,  and
non-interest expense.

Sources of non-interest  income include  categories such as deposit account fees
and other service charges,  gains on the sale of securities and fees for banking
services  such as safe  deposit  boxes.  The largest  category  of  non-interest
expense is compensation  and benefits  expense.  Other  principal  categories of
non-interest expense are occupancy expense and real estate owned expense,  which
represents expenses in connection with real estate acquired in foreclosure or in
satisfaction of a debt owed to the Company.

SPECIAL MATTERS AFFECTING FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONVERSION. 

The Company  commenced  operations on October 6, 1998,  when the Bank  converted
from a state  chartered  mutual savings bank to a state  chartered stock savings
bank(the  "Conversion").  On that date,  the Company  sold  5,251,629  shares of
common stock in its initial  public  offering and received  $50.3 million of net
proceeds from the sale,  which have been invested  primarily in  mortgage-backed
securities  and  investment  grade  corporate  bonds.  The shares sold  included
428,532 shares purchased by the Company's  Employee Stock Ownership Plan (ESOP),
which  was  funded  by a loan  from the  Company.  The  Company  contributed  an
additional  105,033  shares to the Cortland  Savings  Foundation  as part of the
Conversion and an expense of $1.0 million or approximately $614,000 after taxes,
was recorded in October 1998 due to this  donation.  References  to the business
activities,  financial  condition and operations of the Company prior to October
6, 1998 refer to the Bank, while references to the Company on or after that date
refer to both the  Company  and the Bank as  consolidated,  unless  the  context
indicates otherwise.

Since late 1996, two interrelated  problems have had a substantial direct effect
on the  Company's  results of  operations.  Management  worked  aggressively  to
identify the scope of these problems, resolve them and recognize their financial
consequences,  so that management could focus its attention on future operations
and the implementation of its strategy. The two problems are as follows:

OFFICER  DEFALCATION.  During the fourth quarter of 1996, the Company discovered
that its then  Senior  Loan  Officer  had been  involved  in various  schemes to
defraud  the  Company.  Upon the  discovery  of these  matters,  the officer was
dismissed  and  subsequently  convicted  of criminal  charges as a result of his
actions.  Immediately after the discovery of this matter,  the Company undertook
an investigation to identify uncollectable assets resulting from his activities.
As a result of this  investigation  the Company  charged  off  $607,000 of loans
during the fourth  quarter of 1996  which the  Company  believed  either did not
exist or were  otherwise  uncollectable.  In  addition,  the Company  identified
approximately $349,000 of improper expenses and other losses attributable to the
actions of the officer  which,  because  they had already  been  recognized  for
financial   statement   purposes,   did  not  require  any  additional  expense.
Furthermore,  poor  supervision  while the officer in question  was in charge of
lending  operations  is  believed  to have  contributed  to the large  volume of
non-performing loans which were designated for sale during the fourth quarter of
1997 as described in the following discussion.  The Company made a claim against
its  fidelity  bond  carrier in the amount of  approximately  $1.0  million as a
result of this matter, and received $658,000 in settlement in 1998, bringing the
matter to a close.

SALE OF PROBLEM LOANS.  During the fourth  quarter of 1997, the Company  decided
that its  non-performing  loans were  creating too great a strain on  management
resources  and  the  work  necessary  to  collect  those  assets  was  diverting
management  from its core goal of running  the Company in a  profitable  manner.
Therefore,  in order to improve  overall asset quality and free

                                       5
<PAGE>

CNY
Financial

management from less productive  tasks associated with the resolution of problem
loans,  the  Company  decided  to  seek  to sell a  substantial  portion  of its
non-performing loans to a single unrelated  purchaser.  During December of 1997,
the Company  identified  $4.3  million of loans as  candidates  for such a sale.
These  loans  were all either  non-performing  or were  performing  but had been
identified by management as potential problem loans.  Approximately  half of the
loans were commercial  mortgage loans and  approximately  half were  residential
mortgage loans.

When these loans were designated for prompt disposition, the Company charged off
$1.7 million  against its allowance for loan losses to reflect the fair value of
the loans. This charge-off represented the difference between the carrying value
of the loans and the amount which the Company believed,  after consultation with
loan brokers, could be realized upon a bulk sale of the loans.

During the first  quarter of 1998,  while  identifying  a purchaser for the loan
package and negotiating the terms of the sale, the Company  designated  $661,000
of  additional  loans  to  include  in  the  package  being  sold.  The  Company
consummated  the sale during the first quarter of 1998 with the proceeds of $3.1
million approximating the carrying value of the loans.

INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES

The following table sets forth the average daily balances,  net interest income,
and expense and average  yields and rates for the Company's  earning  assets and
interest  bearing  liabilities  for the  indicated  periods.  No  tax-equivalent
adjustments were made.

<TABLE>
<CAPTION>

                                                       Year Ended December 31,
                                 ------------------------------------------------------------
                                                  1998                          1997
                                 ------------------------------------------------------------
                                                         Average                       Average
                                              Average     Yield/  Average               Yield/
                                   Interest   Balance      Cost   Interest   Balance     Cost
                                 ------------------------------------------------------------
                                                      (Dollars in thousands)
<S>                                <C>       <C>          <C>     <C>      <C>          <C>  
Loans (1)                        $  13,420   $ 156,649    8.57%   $13,582  $  157,713   8.61%
Securities (2)                       4,016      66,228    6.06%     3,769      60,226   6.26%
Other short-term investments           567      11.387    4.98%       316       6,019   5.25%
---------------------------------------------------------------------------------------------
Total interest-earning assets       18,003     234,264    7.68%    17,667     223,958   7.89%
Non-interest-earning assets                     29,141                         12,254
---------------------------------------------------------------------------------------------
Total assets                                 $ 263,405                     $  236,212
=============================================================================================

Savings accounts (3)                 1,851   $  66,709    2.77%     1,936  $   64,576   3.00%
Money market accounts                  220       8,176    2.69%       243       8,643   2.81%
NOW accounts                           167      10,015    1.67%       166       9,457   1.76%
Certificates of deposit              5,723     106,860    5.36%     5,983     110,728   5.40%
Borrowings                              25         430    5.81%        --          --      --
---------------------------------------------------------------------------------------------
Total interest-bearing liabilities   7,986     192,190    4.16%     8,328     193,404   4.31%
Non-interest-bearing liabilities                18,900                         12,002
---------------------------------------------------------------------------------------------
Total liabilities                              211,090                        205,406
Stockholders' equity                            52,315                         30,806
---------------------------------------------------------------------------------------------
Total liabilities and equity                 $ 263,405                     $  236,212
=============================================================================================


Net interest income/spread         $ 10,017               3.53%   $ 9,339               3.58%

Net earning assets/ net
  interest margin                            $  42,074    4.28%            $   30,554   4.17%

Ratio of average interest-
  earning assets to interest-
  bearing liabilities                             1.22 x                         1.16 x
</TABLE>
----------------------
(1)  Average balances  include loans held for sale and nonaccrual  loans, net of
     the allowance for loan losses.  Interest is recognized on nonaccrual  loans
     only as and when received.

(2)  Securities are included at amortized  cost,  with net  unrealized  gains or
     losses  on  securities   available-for-sale  included  as  a  component  of
     non-earning assets. Securities include Federal Home Loan Bank stock.

(3)  Includes  advance  payments  for  taxes  and  insurance   (mortgage  escrow
     deposits).


CHANGES IN INTEREST INCOME AND EXPENSE

One method of  analyzing  net  interest  income is to  consider  how  changes in
average  balances  and  average  rates  from one  period to the next  affect net
interest  income.  The  following  table  shows the dollar  amount of changes in
interest  income and expense by major  categories of interest income and expense
by major categories of interest earning assets and interest bearing  liabilities
attributable to changes in volume or rate or both, for the periods indicated.

Volume  variances  are  computed  using the change in volume  multiplied  by the
previous  year's rate.  Rate  variances  are computed  using the changes in rate
multiplied  by the previous  year's  volume.  The change in interest due to both
rate and volume has been  allocated  between  the factors in  proportion  to the
relationship of the absolute dollar amounts of the change in each.

<TABLE>
<CAPTION>

                                                       Year Ended December 31,
                                 ------------------------------------------------------------
                                      1998 vs. 1997                        1997 vs. 1996
                                 -------------------------------  ---------------------------
                                   Increase (Decrease) Due To:     Increase (Decrease) Due To:
                                    Volume     Rate     Total       Volume     Rate    Total
                                 ------------------------------------------------------------
                                                         (In thousands)

INTEREST-EARNING ASSETS: 
<S>                               <C>       <C>       <C>          <C>       <C>      <C>    
Loans                             $ (91)    $ (71)    $ (162)      $ (94)    $ (129)  $ (223)
Securities                          367      (120)       247         102         47      149
Other short-term investments        268       (17)       251         (66)        20      (46)
---------------------------------------------------------------------------------------------
Total interest-earning assets     $ 544     $(208)    $  336         (58)    $  (62)  $ (120)
=============================================================================================


INTEREST-BEARING LIABILITIES:
Savings accounts                  $  62     $(147)    $ (85)           4     $   10   $   14
Money market accounts               (13)      (10)      (23)         (29)       (16)     (45)
NOW accounts                          9        (8)        1            3        (31)     (28)
Certificates of deposit            (207)      (53)     (260)        (171)      (200)    (371)
Borrowings                           25        --        25           --         --       --
---------------------------------------------------------------------------------------------
Total interest-bearing 
  liabilities                     $(124)    $(218)    $(342)       $(193)    $ (237)  $ (430)
=============================================================================================
Net change in net 
  interest income                 $ 668     $  10     $ 678        $ 135     $  175   $  310
=============================================================================================
</TABLE>

                                        6
<PAGE>

                                                                             CNY
                                                                       Financial

COMPARISONS OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997

Total assets at December 31, 1998 were $281.2 million compared to $233.7 million
at December 31, 1997.  The primary cause of the $47.5  million  increase was the
investment of the $50.3  million  received  from the  Company's  initial  public
offering.  The  majority  of the  proceeds  were  invested in  investment  grade
mortgage-backed securities, corporate bonds and commercial paper, resulting in a
$44.3 million  increase in  securities  available for sale from the end of 1997.
The  Company   generally   classifies   its  new   securities   investments   as
available-for-sale  in  order  to  maintain  flexibility  in  satisfying  future
investment  and  lending  requirements.  The  remainder  of the  net  conversion
proceeds were invested in interest-bearing deposits at other banks, resulting in
a $5.5  million  increase  in those  assets.  Net loans were  $159.2  million at
December 31, 1998, an increase of $3.8 million from the end of 1997. This growth
occurred as the Company  maintained  its  emphasis  in  residential  lending and
increased its level of loan originations.  Loan closings,  including undisbursed
funds and refinancings, totaled $39.4 million in 1998, an increase of 19.8% from
the 1997 total of $32.9 million.

LOAN ORGANIZATIONS
$in Millions
<TABLE>
<CAPTION>

             1996                               1997                               1998
-------------------------------    -------------------------------    -------------------------------
Residential    Other   Consumer    Residential    Other   Consumer    Residential    Other   Consumer
-----------    -----   --------    -----------    -----   --------    -----------    -----   --------
<S>            <C>      <C>          <C>          <C>      <C>          <C>          <C>      <C>  
   $12.4       $8.1     $11.2        $14.7        $5.2     $13.0        $19.7        $6.0     $13.7
===========    =====   ========    ===========    =====   ========    ===========    =====   ========
</TABLE>

Total  deposits  were  $196.0  million  at the end of 1998,  compared  to $199.8
million  at  December  31,  1997.  This  $3.8  million  reduction  is  primarily
attributable  to the  withdrawal  of  approximately  $7.0  million  deposits  to
purchase stock in the Company's  initial public  offering,  partially  offset by
interest credited to deposits.

Stockholders'  equity  increased $48.3 million during 1998 and was $79.1 million
at  December  31,  1998.  This  increase  reflects  the net  proceeds  from  the
conversion  and earnings for the year,  offset by the 4.2 million  contra-equity
account related to unallocated ESOP shares.  Book value per share outstanding at
December 31, 1998 was $15.06

COMPARISON  OF  OPERATING  RESULTS  FOR THE YEARS  ENDED  DECEMBER  31, 1998 AND
DECEMBER 31, 1997

GENERAL.  Net income for 1998 was $1.7 million compared to net income of $72,000
in 1997. The primary reason for the  improvement  was the reduction in the costs
incurred to resolve  the  Company's  problem  assets,  including a $3.0  million
reduction  in the  provision  for loan  losses and a $572,000  reduction  in the
expense of real estate owned.  Also affecting the  improvement in net income was
an  improvement  in net  interest  income of  $678,000,  a $694,000  increase in
non-interest income and a $1.5 million increase in other operating expenses.

NET INTEREST INCOME. Net interest income increased by $678,000 or 7.3% from 1997
to 1998. This improvement  occurred primarily due to a $10.3 million increase in
average total  earning  assets as a result of the  Company's  stock  offering on
October 6, 1998 offset  partially  by a reduction  in the average rate earned on
assets of 21 basis points.  The reduction in rate is attributable to an increase
in securities and other short-term investments and the overall decline in market
interest rates.  Securities and other  short-term  investments  increased as the
Company invested the proceeds of its stock offering in such investments  pending
redeployment in loans as appropriate  opportunities  arise. Loans generally have
higher yields than the Company's other investments.

The  Company  also  experienced  a  decline  in  the  cost  of  interest-bearing
liabilities  to 4.16% in 1998  compared to 4.31% in 1997.  The decline in market
interest rates allowed the Company to reduce its deposit pricing while remaining
competitive  in its market.  The  infusion of capital from the  Company's  stock
offering, and related increase in average net earning assets of $11.5 million in
1998,  resulted in a improvement  in the Company's net interest  margin to 4.28%
for 1998, compared to 4.17% in 1997.  However,  the investment of stock offering
proceeds in lower-yielding  securities rather than loans was the principal cause
of a 6 basis point decline in the Company's interest rate spread.

PROVISION  FOR  LOAN  LOSSES.   The  provision  for  loan  losses  results  from
management's  analysis  of the  adequacy  of the  Company's  allowance  for loan
losses. If management determines that an increase in the allowance is warranted,
then the increase is accomplished  through a provision for loan losses, which is
charged as an expense on the Company's income statement.  The provision for loan
losses was  $325,000  for the year ended  December  31,  1998  compared  to $3.3
million  in  1997.  A  lower  provision  was  appropriate  in  1998  due  to the
significant  improvement in the Company's asset quality as previously discussed.
Despite the decrease in the provision,  the allowance for loan losses  increased
from $2.1  million at year end 1997 to $2.5  million  at year end 1998,  when it
represented 1.54% of total loans.

                                       7

<PAGE>

CNY
Financial

NON-INTEREST  INCOME.  The Company's  primary  source of recurring  non-interest
income is service  charges,  principally on deposit  accounts.  Service  charges
increased by $87,000 in 1998 versus 1997,  which increase  related  primarily to
fee changes on products and an increase in loan-related fees.

During 1998,  the Company also received  $658,000 in settlement of its insurance
claim related to the officer defalcation, discussed previously.

NON-INTEREST  EXPENSE.  Non-interest expense increased $1.5 million from 1997 to
1998. The primary reasons for the increase were a $918,000  increase in salaries
and employee  benefits and a $1.0 million  contribution to the Cortland  Savings
Foundation.  The increase in salaries and employee  benefits included a $406,000
expense  related to the  termination of the Company's  defined  benefit  pension
plan, $113,000 of severance expense for employee terminations, increased medical
claims of $82,000, $51,000 of expense related to the Company's ESOP representing
ESOP  expense  for  approximately  one  quarter of the year,  and  normal  merit
increases.  During the fourth quarter of 1998, the Company donated 105,033 share
of its common stock to the Cortland Savings Foundation,  a charitable foundation
created in  connection  with the  Conversion.  The  donation  resulted in a $1.0
million financial statement expense during 1998.

Professional fees increased by $164,000 from 1997 to 1998,  reflecting  $210,000
of expenses  related to the Company's  unsuccessful  attempt to acquire  another
financial institution during the fourth quarter of 1998.

Directors'  fees increased  $189,000,  primarily due to the effect of a $150,000
retirement benefit to be paid to three directors who retired in 1998.

The Company  recorded net revenues of $72,000 from its real estate owned in 1998
compared with a net expense of $500,000 in 1997.  This  improvement  occurred as
the level of real estate owned declined significantly during 1998 as the Company
continued its efforts to resolve and reduce  non-performing  assets. The Company
recorded a gain of $209,000 on the sale of one property, which gain exceeded the
aggregate other expenses incurred on real estate owned.

INCOME  TAXES.  Income tax expense  increased  $1.3  million  from 1997 to 1998,
reflecting  the improved  earnings of the Company,  as well as an $80,000 excise
tax recorded for the termination of the defined benefit plan.

COMPARISON  OF  OPERATING  RESULTS  FOR THE YEARS  ENDED  DECEMBER  31, 1997 AND
DECEMBER 31, 1996

GENERAL.  Net income for 1997 was $72,000 compared to net income of $1.4 million
in 1996.  The  primary  reason for the  decline  was a  substantial  increase in
expenses related to the resolution of the Company's problem assets,  including a
$1.9 million  increase in the provision for loan losses and a $240,000  increase
in the expense of real estate owned.  These factors more than offset an increase
in net interest income of $310,000.

NET INTEREST INCOME.  Net interest income  increased by $310,000,  or 3.4%, from
1996 to 1997.

The increase  reflects a decline in interest  expense  which was only  partially
offset by a smaller decline in interest income.

INTEREST  INCOME.  Interest  income  declined by $120,000 form 1996 to 1997. The
decline  resulted from a decline in the average balance of loans,  the Company's
highest yielding asset category, and a decline in the average yield on loans.

The  average  yield  on  loans  declined  by  eight  basis  points  due to lower
residential   mortgage  loan  rates  which  affected  refinances  and  new  loan
originations. Borrowers were motivated by low market interest rates to refinance
their higher  fixed-rate  mortgages while borrowers with  adjustable-rate  loans
also refinanced to lock in lower rates.

The  decline in the  average  balance of loans was offset by an  increase in the
average  balance of loans was offset by an increase  in the  average  balance of
securities.  Management invested available funds which might otherwise have been
used to make loans in securities investments.

INTEREST  EXPENSE.  Interest expense declined by $430,000 from 1996 to 1997. The
decline  resulted  from the  combined  effect of a $3.8  million  decline in the
average balance of interest-bearing  liabilities and a 13 basis point decline in
the  average  cost of funds.  Most of the  activity  was in the  certificate  of
deposit  category,  with the average  balance  declining by $3.2 million and the
average  cost  declining  by 18  basis  point.  These  declines  were due to the
combined effect of competitive  pressures from  non-deposit  investment  sources
which offered  customers the potential for high yields,  coupled with a decision
by management

                                       8

<PAGE>

                                                                             CNY
                                                                       Financial

to offer rates on deposits which, although competitive,  were not the highest in
the local market.

PROVISION FOR LOAN LOSSES. The provision for loan losses was $3.3 million during
1997, compared to $1.4 million in 1996. During the 1997, the Company charged off
$3.3 million of loans,  compared to recoveries of $170,000.  Approximately  $2.0
million of the  charge-offs  were taken on the loan package which was ultimately
sold during the first  quarter of 1998 while the  remainder  of the  charge-offs
resulted from an aggressive  review of the Company's  entire loan portfolio,  in
light of the credit  administration  problems  discovered in connection with the
officer defalcation  discussed above. Based on local economic conditions and the
status of the Company's loan portfolio,  during the 1997 management  revised the
Company's  method of  calculating  its allowance for loan losses to increase the
percentages used to determine the appropriate  allowance for certain  performing
loans for which no problems  had been  identified.  The  adjustment  was made to
reflect  management's  estimate  of  probable  losses  inherent  in loans in the
Company's  portfolio.  Taking these factors into account, the Company determined
it needed to provide  $3.3  million  for loan  losses  during  1997 to bring the
allowance to its year-end level of $2.1 million.

NON-INTEREST  EXPENSE.  Non-interest  expense increased by $671,000 from 1996 to
1997.  The  principal  causes of the  increase  were a $240,000  increase in the
expense  of real  estate  owned  and a  $303,000  increase  in  other  operating
expenses.  Real estate owned is required to be carried on the Company's books at
the lower of cost or fair value,  representing market value less estimated costs
of sale. During the 1997, the Company decided that general economic  conditions,
difficulties  in disposing of real estate  owned and expected  operating  costs,
justified  carrying those properties at 65% of appraised value which resulted in
a $365,000 charge to the expense of real estate owned. Approximately $270,000 of
this charge related to properties  acquired in 1997.  Other  operating  expenses
increased  principally  because of increases in the cost of collecting  past due
loans and increases in other loan related expenses.

INCOME  TAXES.  Income  tax  expense  declined  by  $869,000  from an expense of
$853,000 in 1996 to a tax benefit of $16,000 in 1997.  The decline was caused by
the decline in pre-tax income.

ASSET/LIABILITY MANAGEMENT MARKET RISK

As a continuing part of its financial  strategy,  the Company attempts to manage
the impact of fluctuations in market interest rates on its net interest  income.
This effort entails  providing a reasonable  balance between interest rate risk,
credit risk, liquidity risk and maintenance of yield. Asset/liability management
policies are  established  and monitored by management in  conjunction  with the
Board of Directors of the Bank,  subject to general  oversight by CNY  Financial
Corporations's  Board  of  Directors.  The  policies  establish  guidelines  for
acceptable  limits  on the  sensitivity  of  the  market  value  of  assets  and
liabilities to changes in interest rates.

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

The  following  table   illustrates  the  Company's   estimated   interest  rate
sensitivity  and periodic and  cumulative  gap  positions  as  calculated  as of
December 31, 1998.

<TABLE>
<CAPTION>
                                                      Amounts Estimated to Mature or Reprice Within:
                                     --------------------------------------------------------------------------------
                                     Less Than
                                       Three         3-6        6 Months        1-2       3-5      Over 5
                                       Month        Months      to 1 Year      Years     Years      Years      Total
---------------------------------------------------------------------------------------------------------------------
                                                             (Dollars in thousands)
<S>                                   <C>         <C>        <C>           <C>        <C>                   <C>      
INTEREST-EARNING ASSETS:
Short-term investments                $ 10,104    $     --   $     --      $     --   $     --   $     --   $  10,104
Securities, including FHLB stock        13,677       5,976      9,599        17,237     25,403     28,166     100,058
Loans                                   16,483      10,685     15,978        18,246     36,289     61,526     159,207
---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets           40,264      16,661     25,577        35,483     61,692     89,692     269,369
---------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts, including escrow       1,506       3,013      4,519         9,039     27,116     18,077      63,270
Money market accounts                      332         665        997         1,994      3,987         --       7,975
NOW accounts                               371         741      1,112         2,224      6,674         --      11,122
Certificates of deposit                 11,678      21,277     30,758        24,383     16,221         --     104,317
Borrowings                                  --          --         --            --      1,000         --       1,000
---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities      13,887      25,696     37,386        37,640     54,998     18,077     187,684
---------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap              $ 26,377    $ (9,035)  $(11,809)     $ (2,157)  $  6,694   $ 71,615   $  81,685
=====================================================================================================================
Cumulative interest sensitivity gap   $ 26,377    $ 17,342   $  5,533      $  3,376   $ 10,070   $ 81,685
=========================================================================================================
Ratio of cumulative gap to total
  interest-earning assets                 9.79%       6.44%      2.05%         1.25%      3.74%     30.32%
=========================================================================================================
Ratio of interest-earning assets
  to interest-bearing liabilities       289.94%      64.84%     68.41%        94.27%    112.17%    496.17%     143.52%
=====================================================================================================================
</TABLE>

                                       9

<PAGE>

CNY
Financial

While the gap position  illustrated is a useful tool that  management can assess
for general  positioning  of the Company's  balance  sheet,  management  uses an
additional  measurement tool to evaluate its  asset/liability  sensitivity which
determines  exposure to changes in interest  rates by  measuring  the  estimated
future  percentage  change in net interest income due to changes in rates over a
one-year time horizon.  Management  measures such percentage  change assuming an
instantaneous  permanent  parallel shift in the yield curve of 100 and 200 basis
points,  both  upward  and  downward.  The model  uses an  option-based  pricing
approach to estimate the  sensitivity of mortgage  loans.  The most  significant
embedded  option  in these  types of  assets  is the  prepayment  option  of the
borrowers. The model uses various prepayment assumptions depending upon the type
of   mortgage   instrument   (residential   mortgages,   commercial   mortgages,
mortgage-backed  securities,  etc.).  Prepayment rates for mortgage  instruments
ranged from 6% to 50% CPR  (Constant  Prepayment  Rate) as of December 31, 1998.
For administered rate core deposits (e.g. NOW and savings  accounts),  the model
utilizes  interest  rate floors equal to 100 basis  points  below their  current
levels.

Utilizing  this  measurement  concept,  the estimated  interest rate risk of the
Company,  expressed as a percentage change in projected net interest income over
a one-year time horizon due to changes in interest  rates, at December 31, 1998,
was as follows:

--------------------------------------------------------------------------------
Percentage change in net interest                 Basis Point Change
income due to an immediate                   -------------------------------
change in interest rate over a               +200     +100    -100    -200
one-year time horizon                        -------------------------------
                                             3.12%    1.60%   0.26%  (3.45%)
--------------------------------------------------------------------------------

Actual results may differ from simulated results due to the inherent uncertainty
of the  assumptions,  including  the timing,  magnitude  and  frequency  of rate
changes,   customer  buying  patterns,   economic  conditions,   and  management
strategies.

The Company does not currently  engage in trading  activities or use  derivative
instruments to control  interest rate risk.  Even though such  activities may be
permitted  with the  approval of the Board of  Directors,  the Company  does not
intend to engage in such activities in the immediate future.

Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's  market risk arises  primarily from interest rate risk inherent in
its lending and deposit activities.  Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities.

YEAR 2000 CONSEQUENCES

The  information  contained  in this section  represents  a Year 2000  Readiness
Disclosure under the Year 2000 Information and Readiness Disclosure Act.

The  operations of the Company are  substantially  dependent  upon computer data
processing for its deposit accounts, loans, financial records and other matters.
Many computer systems and other equipment containing  microchips may not operate
accurately  after January 1, 2000.  The Company has  undertaken a  comprehensive
review of all systems  believed to create  potential risks in order to eliminate
any Year 2000 operating difficulties.

The Company  retained the services of an  independent  consultant,  at a cost of
$13,000 to evaluate  the  Company's  Year 2000  risks.  The  Company's  Board of
Directors  reviewed  and  approved  the  consultant's  plan.  The plan calls for
comprehensive  review and  testing of all the  Company's  systems  that could be
affected by Year 2000 problems.

The Company has completed a review of all major non-computer based systems, such
as vaults,  building  environmental  systems and telephone systems,  without any
significant  problems being discovered.  The Company's principal data processing
is performed by a Company-owned  mini-computer operating software provided by an
outside vendor. The hardware has been successfully tested. The software has been
tested and modules requiring  modification  have been identified.  The vendor is
making necessary modifications.  The Company expects that all modifications will
be in place,  and all testing  completed,  by mid-year  1999.  The Company  will
continue to test minor systems,  and replace them, if necessary,  throughout the
first three quarters of 1999.

The Company  estimates  that its total cost of Year 2000  compliance,  excluding
internal staffing costs will not exceed $100,000.  The Company has not needed to
hire additional staff to address Year 2000 compliance issues. The Company's cost
estimate assumes that a

                                       10

<PAGE>

                                                                             CNY
                                                                       Financial

complete  replacement of the Company's  principal  computer software will not be
necessary.  If a complete  replacement  is necessary,  the Company will identify
replacement software which is Year 2000 compliant during 1999 and convert to the
new software.  The Company has not  evaluated the costs of complete  replacement
because the possibility that it will be necessary is considered to be remote. If
complete replacement is necessary,  the Company anticipates that it will be able
to locate  acceptable  commercially-available  software  because  the  Company's
mini-computer is commonly used by financial institutions.  If interim operations
are necessary before a new system is operational, the Company expects to utilize
existing personal  computers,  commonly  available  business software and manual
entries to bridge any gap. However,  based upon the results of testing thus far,
the Company believes that this "most  reasonably  likely worst case scenario" is
unlikely to occur.

The Company has developed  back-up or contingency  plans for each of its mission
critical  systems.  Virtually all of the Company's  mission critical systems are
dependent upon third party vendors or service providers; therefore,  contingency
plans include selecting a new vendor or service provider and converting to their
system.  In the event a current  vendor's  system fails during testing and it is
determined  that the vendor is unable or unwilling  to correct the failure,  the
Company will  convert to a new system from a  pre-selected  list of  prospective
vendors.  In each such case,  realistic  trigger dates have been  established to
allow for orderly and successful conversion. For some systems, contingency plans
consist of using  spreadsheet  software or  reverting  to manual  systems  until
system  problems can be  corrected.  Although the Company has been informed that
each of its primary vendors anticipates that all mission critical systems either
are or will timely be Year 2000 compliant, no warranties have been received from
such vendors.

The Company's  customers  may also  experience  Year 2000  problem,  which could
adversely affect the ability of these customers to comply with their obligations
to the Company.  The Company has  contacted  all  commercial  loan  customers to
assess whether their Year 2000 compliance efforts are satisfactory.  The Company
currently  requires  all  new  commercial  loan  customers  to  complete  a Year
2000-readiness  questionnaire as part of the loan underwriting  process in order
to limit  further  exposure.  Although  Year  2000  readiness  varies  among the
Company's  customers,  the Company does not expect that Year 2000  problems will
have  such a  substantial  effect  on the  Company's  customers  as to cause the
Company to suffer material adverse financial consequences.

Furthermore,  substantial recent media publicity  regarding  potential Year 2000
problems has increased  public  awareness of the problem,  but may cause certain
deposit  customers to over-react and withdraw funds prior to the end of 1999 for
fear that ATM machines and teller  systems will not be operating  after December
31,  1999.  The Company  intends to address  this issue by  increasing  customer
awareness of the Company's Year 2000 compliance  program and also by maintaining
sufficient liquidity to allow the Company to address any unusual cash demands in
a timely fashion. The additional liquidity and cash could have an adverse effect
on the Company's level of and average yield on earning  assets,  but the Company
does not  believe the adverse  effect  will be  anything  more than  transitory.
However, if major utilities, governmental functions or other local, statewide or
national  infrastructure  components do not function properly,  such as electric
utilities,  telephone  service or the mail  system,  the adverse  effects on the
ability of the Company to continue to operate could be  substantial.  This could
also increase  customer panic and thus increase the outflow of funds even if the
Company itself is fully Year 2000 compliant.

LIQUIDITY AND CAPITAL

The  Company's  primary  sources of funds are deposits and payments  received on
loans and securities.  While scheduled payments on loans and securities,  either
installment payments or payments at maturity, are relatively predictable sources
of funds, deposit outflows and loan prepayments can fluctuate and are influenced
by market interest rates, economic conditions and competition.

The Company's primary investing  activities are the origination of loans and the
purchase  of  securities.   The  Company's   loans,   net,  after  payments  and
charge-offs,  increased by $4.1 million  during 1998,  decreased by $3.1 million
during 1997 and increased by only $8,000 during 1996. Securities,  excluding the
effect of unrealized  gains and losses,

                                       11

<PAGE>

CNY
Financial

increased by $41.0 million  during 1998,  decreased by $1.2 million  during 1997
and  increased by $4.5  million  during 1996.  In general,  the Company  invests
available  funds in securities,  federal funds sold and  short-term  investments
pending the investment of those funds in loans.  Generally,  the regular flow of
deposits  and  loan  repayments,  along  with  payments  on  and  maturities  of
securities,  provide sufficient funds for new loan originations. The Company can
also regulate the level of deposits and hence the flow of funds by adjusting the
rates it offers on deposits,  especially certificates of deposit.  Federal funds
sold and other short-term  investments are transitory and also provide available
funds when needed for other purposes.  Furthermore, as part of its management of
the  loan  origination   process,  the  Company  tracks  the  progress  of  loan
applications  and  commitments  so that the volume and timing of new  securities
purchases can be adjusted as funds are needed for other purposes.  Finally,  the
Company has  available  lines of credit and  borrowing  capabilities  to provide
additional  funds if the need  arises.  At December  31,  1998,  the Company had
available lines of credit and borrowing  capabilities with the Federal Home Loan
Bank of New York of $27.9 million.

At  December  31,  1998,  the Company and the Bank  substantially  exceeded  all
regulatory  capital  requirements  of the Federal Reserve Board of Governors and
the FDIC applicable to them.  Compliance with minimum capital  requirements does
not currently  have a material  effect on the Bank or the Company.  The Bank was
classified as "well capitalized" at December 31, 1998 under FDIC regulations.

IMPACT OF INFLATION AND CHANGING PRICES

The Company  prepares its financial  statements and other financial  disclosures
according  to  Generally  Accepted  Accounting  Principles,  which in most cases
require the measurement of financial condition and operating results in terms of
historical  dollar  amounts  without  considering  the  changes in the  relative
purchasing  power of money over time due to  inflation.  Inflation  can increase
operating  costs and affect the value of  collateral  for loans in general,  and
real estate collateral in particular. Unlike industrial companies, nearly all of
the  Company's  assets and  liabilities  are  monetary  in nature.  As a result,
interest  rates  have a greater  impact on net  income  than do the  effects  of
general levels of inflation.  Interest rates do not necessarily move in the same
direction  or to the same  extent as the price of goods and  services.  However,
interest rates  generally  increase during periods when the rate of inflation is
increasing and decrease during periods of decreasing inflation.  Periods of high
inflation are ordinarily  accompanied by high interest rates, which could have a
negative  effect  on net  income.  Inflation  can  also  increase  the  cost  of
operations.

RECENT ACCOUNTING PRONOUNCEMENTS
In June,  1998, the Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "accounting for Derivative  Instruments
and Hedging Activities" ("SFAS 133"), SFAS 133 requires an entity to measure all
derivarives at fair value and to recognize them in the balance sheet as an asset
or  liability,  depending  on the  entity's  rights  or  obligations  under  the
applicable  derivative  contract.  The recognition of changes in fair value of a
derivative  that affect the income  statement will depend on the intended use of
the derivative. If the derivative does not qualify as a hedging instrument,  the
gain or loss on the derivative will be recognized currently in earnings.  If the
derivative  qualifies  for  special  hedge  accounting,  the gain or loss on the
derivative  will either (1) be  recognized  in income  along with an  offsetting
adjustment  to the basis of the item being  hedged,  or (2) be deferred in other
comprehensive  income and reclassified to earnings in the same period or periods
during  which  the  hedged  transaction  affects  earnings.  This  statement  is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
SFAS 133 may not be  applied  retroactively  to  financial  statements  of prior
periods.  SFAS 133 is not  expected  to have  material  impact on the  Company's
consolidated  results of operations,  financial position or cash flows. SFAS No.
133 also permits  certain  reclassifications  of  securities  among the trading,
available-for-sale  and  held-to-maturity  classifications.  The  Company has no
current intention to reclassify any securities pursuant to SFAS No. 133

FORWARD-LOOKING STATEMENTS

In this annual report,  the Company,  when discussing the future,  may use words
like

                                       12

<PAGE>

                                                                             CNY
                                                                       Financial

"will  probably  result",  "are  expected to",  "may cause",  "is  anticipated",
"estimate",  "project", or similar words. These words represent  forward-looking
statements.  In addition, any analysis of the adequacy of the allowance for loan
losses or the interest rate sensitivity of the Company's assets and liabilities,
represent attempts to predict future events and circumstances and also represent
forward-looking statements.

Many factors could cause future  results to differ from what is  anticipated  in
the forward-looking  statements.  For example, future financial results could be
affected by (i)  deterioration in local,  regional,  national or global economic
conditions  which could cause an increase in loan  delinquencies,  a decrease in
property  values,  or a change in the housing  turnover  rate;  (ii)  changes in
market  interest  rates or changes in the speed at which market  interest  rates
change;  (iii) changes in laws and regulations  affecting the financial  service
industry; (iv) changes in competition;  (v) changes in consumer preferences; and
(vi) Year 2000 compliance problems of the Company's customers and suppliers.

Please do not place  unjustified  or excessive  reliance on any  forward-looking
statements. They speak only as of the date made and are not guarantees, promises
or assurances of what will happen in the future.  Remember that various factors,
including  those  described   above,   could  affect  the  Company's   financial
performance and could cause the Company's  actual results or  circumstances  for
future  periods to be materially  different  from what has been  anticipated  or
projected.

[PHOTO OMITTED]
SENIOR MANAGEMENT TEAM
LEFT TO RIGHT:
Wesley D. Stisser,
Kerry D. Meeker,
Steven A. Covert
F. Michael Stapleton

                                       13
<PAGE>
KPMG  [GRAPHIC LOGO OMITTED]

     113 South Salina Street
     Syracuse, NY  13202


                          Independent Auditors' Report


The Board of Directors and Stockholders
CNY Financial Corporation


We  have  audited  the  accompanying  consolidated  balance  sheets  of the  CNY
Financial  Corporation and subsidiary as of a December 31, 1998 and 1997 and the
related   consolidated   statements   of   income,   stockholders'   equity  and
comprehensive  income  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  consolidated  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 CNY  Financial
Corporation  and  subsidiary  at 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


Syracuse, New York
January 15, 1999


[LOGO OMITTED]    [KPMG LLP, KPMG LLP, a U.S. limited liability partnership,  is
                  a member of KPMG International, a Swiss association.

                                       14
<PAGE>

                    CNY Financial Corporation and Subsidiary
                          Consolidated Balance Sheets
                           December 31, 1998 and 1997
                       (In thousands, except share data)

<TABLE>
<CAPTION>
<S>                                                              <C>                     <C>
                                                                     1998              1997
----------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks                                          $   4,432          $   4,093
Interest-bearing balances at financial institutions                  6,104                586
Federal Funds sold                                                   4,000              3,400
Securities available-for-sale, at fair value                        88,437             44,140
Securities held-to-maturity (fair value of $10,404 in 1998 and
  $12,569 in 1997)                                                  10,318             12,550
Loans held for sale                                                     --              2,541
Loans, net of deferred fees                                        161,701            157,565
Less allowance for loan losses                                       2,494              2,143
----------------------------------------------------------------------------------------------
  Net loans                                                        159,207            155,422
Premises and equipment, net                                          3,243              3,447
Federal Home Loan Bank stock, at cost                                1,303              1,291
Other assets                                                         4,142              6,259
----------------------------------------------------------------------------------------------
                                                                 $ 281,186          $ 233,729
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
  Non-interest bearing demand accounts                           $  10,780          $  10,641
  Savings accounts                                                  61,820             62,732
  Certificates of Deposit                                          104,317            108,258
  Money Market accounts                                              7,975              8,435
  NOW accounts                                                      11,122              9,704
----------------------------------------------------------------------------------------------
Total deposits                                                     196,014            199,770
Advance payments by borrowers for property taxes and insurance       1,450              1,329
Borrowings                                                           1,000                 --
Other liabilities                                                    3,652              1,890
----------------------------------------------------------------------------------------------
  Total liabilities                                                202,116            202,989
----------------------------------------------------------------------------------------------
Commitments and contingencies (note 11)
Stockholders' equity
  Common Stock, $0.01 per value, 8,500,000 shares authorized,
    5,356,662 shares issued and outstanding in 1998                     54                 --
  Additional paid-in capital                                        51,289                 --
  Retained earnings                                                 31,848             30,169
  Accumulated other comprehensive income                             1,178                571
  Treasury stock, at cost; 105,625 shares in 1998                   (1,067)                --
  Unallocated shares of Employee Stock Ownership Plan (ESOP)
    423,175 shares in 1998                                          (4,232)                --
----------------------------------------------------------------------------------------------
Total Stockholders' Equity                                          79,070             30,740
----------------------------------------------------------------------------------------------
                                                                 $ 281,186          $ 233,729
==============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>

                                       15

<PAGE>

                    CNY Financial Corporation and Subsidiary
                        Consolidated Statements of Income
                       Years Ended December 31, 1998, 1997
                   and 1996 (In thousands, except share data)

<TABLE>
<CAPTION>

<S>                                                     <C>            <C>            <C>        
                                                            1998            1997          1996
-------------------------------------------------------------------------------------------------
Interest income
      Loans                                             $    13,420    $    13,582    $    13,805
      Securities                                              4,016          3,769          3,620
      Other short-term investments                              567            316            362
-------------------------------------------------------------------------------------------------
Total interest income                                        18,003         17,667         17,787
Interest expense
      Deposits                                                7,961          8,328          8,758
      Borrowings                                                 25             --             --
-------------------------------------------------------------------------------------------------
Total interest expense                                        7,986          8,328          8,758
-------------------------------------------------------------------------------------------------
Net interest income                                          10,017          9,339          9,029
Provisions for loan loss                                        325          3,300          1,380
-------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses           9,692          6,039          7,649
Non-interest income
      Service charges                                           723            636            662
      Net gain on sale of securities                              6             46             15
      Gain on loan sales                                         30             --             --
      Insurance proceeds                                        658             --             --
      Nationar recovery                                          --             45             --
      Other                                                     166            162             93
-------------------------------------------------------------------------------------------------
  Total non-interest income                                   1,583            889            770
  Non-interest expenses
      Salaries and employee benefits                          3,846          2,928          2,862
      Building, occupancy and equipment                         905            981            990
      Postage and supplies                                      349            323            306
      Professional fees                                         525            361            394
      Directors Fees                                            311            122            107
      Real estate owned                                         (72)           500            260
      Contribution to charitable foundation                   1,023             --             --
      Other                                                   1,439          1,657          1,282
-------------------------------------------------------------------------------------------------
  Total non-interest expenses                                 8,326          6,872          6,201
-------------------------------------------------------------------------------------------------
  Income before income tax expense (benefit)                  2,949             56          2,218
  Income tax expense (benefit)                                1,270            (16)           853
-------------------------------------------------------------------------------------------------
  Net income                                            $     1,679    $        72    $     1,365
=================================================================================================
Basic earnings per share (for 1998 calculated using
      post conversion net income) (see note 2)          $        --            N/A            N/A
=================================================================================================
Weighted average shares outstanding                       4,928,044            N/A            N/A
=================================================================================================

</TABLE>

See accompanying notes consolidated financial statements.

                                            16
<PAGE>

                    CNY Financial Corporation and Subsidiary
     Consolidated Statement of Stockholders' Equity and Comprehensive Income
                       Years Ended December 31, 1998, 1997
                    and 1996 (In thousand, except share data)

<TABLE>
<CAPTION>
                                                                              Accumulated
                                                      Additional                Other                  Unallocated
                                            Common     Paid-In     Retained  Comprehensive  Treasury      ESOP
                                             Stock     Capital     Earnings     Income       Stock       Shares     Total
----------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>        <C>         <C>          <C>         <C>         <C>         <C>     
Balance at December 31, 1995               $     --   $     --    $ 28,732     $    298    $     --    $     --    $ 29,030
Comprehensive income:
  Change in net unrealized gain
    (loss) on securities, net of tax             --         --          --          (50)         --          --         (50)
  Net income                                     --         --       1,365           --          --          --       1,365
----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                       --         --       1,365          (50)         --          --       1,315
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                     --         --      30,097          248          --          --      30,345
Comprehensive income:
  Change in net unrealized gain
    (loss) on securities, net of tax             --         --          --          323          --          --         323
  Net income                                     --         --          72           --          --          --          72
----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                       --         --          72          323          --          --         395
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997                     --         --      30,169          571          --          --      30,740
Net proceeds from issuance of
  5,251,629 shares of common stock               53     50,294          --           --          --          --      50,347
Common Stock acquired by ESOP
  (428,532 shares)                               --         --          --           --          --      (4,285)     (4,285)
Charitable contribution of common
  stock to Cortland Savings
  Foundation (105,033 shares)                     1        997          --           --          --          --         998
Treasury stock purchased (105,625
  shares)                                        --         --          --           --      (1,067)         --      (1,067)
ESOP shares released for allocation
  (5,357 shares)                                 --         (2)         --           --          --          53          51
Comprehensive income
  Change in net unrealized gain
    (loss) on securities, net of tax             --         --          --          607          --          --         607
  Net income                                     --         --       1,679           --          --          --       1,679
----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                       --         --       1,679          607          --          --       2,286
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998               $     54   $ 51,289    $ 31,848     $  1,178    $ (1,067)   $ (4,232)   $ 79,070
============================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                                             17
<PAGE>

                    CNY Financial Corporation and Subsidiary
                        Consolidated Cash Flow Statements
                  Years Ended December 31, 1998, 1997 and 1996
                                 (In thousands)

<TABLE>
<CAPTION>
<S>                                                           <C>         <C>         <C>     
                                                                  1998       1997        1996
-----------------------------------------------------------------------------------------------
Cash flow from operating activity:
Net income                                                    $  1,679    $     72    $  1,365
Adjustments to reconcile net income to net cash provided by
 operating activities:
  Depreciation and amortization                                    487         579         507
  (Increase) decrease in accrued interest receivable              (306)        233         431
  Provision for loan losses                                        325       3,300       1,380
  Write-down of real estate owned                                   50         365          59
  Net gains on sales of securities                                  (6)        (46)        (15)
  Nationar recovery                                                 --         (45)         --
  Net (gains) losses on sale of real estate owned                 (192)        (11)         37
  Net amortization of premiums and discounts                        55         104         251
  Net gain on sale of loans held for sale                          (30)         --          --
  Proceeds from sale of loans held for sale                      3,131          --          --
  Increase (decrease) in other liabilities                         807         148         (70)
  Deferred income taxes                                            277        (869)       (342)
  Decrease (increase) in other assets                            1,032        (709)      1,597
  Donation to charitable foundation                                997          --          --
  ESOP shares released for allocation                               51          --          -- 
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities                        8,357       3,121       5,200
-----------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Net increase in loans                                         (4,744)     (3,746)     (2,064)
  Proceeds from recovery on Nationar                                --          45          --
  Proceeds from sales of securities available-for-sale           2,006       3,121       1,057
  Proceeds from maturities and principle reductions of
    securities available-for-sale                               18,337      18,040      21,959
  Purchases of securities available-for-sale                   (63,237)    (19,237)    (27,139)
  Purchases of securities held-to-maturity                      (2,484)     (3,847)     (2,964)
  Proceeds from maturities and principle reductions
    of securities held-to-maturity                               4,780       3,054       2,382
  Proceeds from sale of real estate owned                          920         340         274
  Additions to premises and equipment                             (283)       (371)       (291)
  Purchase of FHLB stock                                           (12)        (63)     (1,228)
-----------------------------------------------------------------------------------------------
Net cash used in investing activities                          (44,717)     (2,664)     (8,014)
-----------------------------------------------------------------------------------------------
Cash flows from financing activities:
(Decrease) increase in deposits                                 (3,756)     (4,870)      1,530
Borrowings                                                       1,000          --          --
Increase (decrease) in advance payments by borrowers for
  property taxes and insurance                                     121         (44)       (356)
Net Proceeds from issuance of common stock                      50,347          --          --
Purchase of shares of common stock by ESOP                      (4,285)         --          --
Par value of donation of stock to charitable foundation              1          --          --
Treasury stock purchases                                          (611)         --          -- 
-----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities             42,817      (4,914)      1,174
-----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents             6,457      (4,457)     (1,640)
Cash and cash equivalents at beginning of year                   8,079      12,536      14,176
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                      $ 14,536    $  8,079    $ 12,536
===============================================================================================

</TABLE>

                                       18
<PAGE>

                    CNY Financial Corporation and Subsidiary
                        Consolidated Cash Flow Statements
                  Years Ended December 31, 1998, 1997 and 1996
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                   1998       1997      1996
-----------------------------------------------------------------------------------------------
  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Non-cash investing activities:
<S>                                                                <C>        <C>         <C>  
     Purchases of securities-available-for-sale not settled      $   499    $    --     $    --
     Treasury stock purchases not settled                            456         --          --
     Transfer of loans held-to-maturity to loans held-for-sale       661      2,541          --
     Transfer of loans held-for-sale to loans held-to-maturity       101         --          --
     Additions to real estate owned                                   74      1,095         711
  Cash paid during the year for:
     Interest                                                      7,991      8,321       8,761
     Income taxes                                                $   105    $ 1,125     $ 1,644
===============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>

                                       19

<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(1)      BUSINESS

         CNY Financial  Corporation (the "Company") is a registered bank holding
         company, organized under the laws of Delaware and is the parent company
         of Cortland  Savings  Bank and  subsidiary  (the  "Bank").  The Company
         commenced operations on October 6, 1998, when the Bank converted from a
         state chartered  mutual savings bank to a state chartered stock savings
         bank (the  "Conversion").  On that date,  the  Company  sold  5,251,629
         shares of common  stock in its initial  public  offering  and  received
         $50.3 million of net proceeds  from the sale.  The shares sold included
         428,532 shares purchased by the Company's Employee Stock Ownership Plan
         (ESOP),  which  was  funded  by a loan from the  Company.  The  Company
         contributed  an  additional  105,033  shares  to the  Cortland  Savings
         Foundation as part of the  Conversion and an expense of $1.0 million or
         approximately $614,000 after taxes, was recorded in October 1998 due to
         this donation.  The Company  operates solely in the financial  services
         industry and includes the provision of  traditional  community  banking
         services primarily for individuals and small-to medium-sized businesses
         concentrated in Cortland  County,  New York and surrounding  areas. The
         financial  services  subsidiary of the Bank has been inactive since its
         formation in 1986. The Company and its subsidiary financial institution
         are subject to the  regulations  of certain  Federal and State agencies
         and undergo periodic examinations by those regulatory agencies.

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The consolidated  financial statements have been prepared in conformity
         with  generally  accepted  accounting  principles.  Certain  prior year
         amounts  have  been  reclassified  to  conform  to the  current  year's
         classifications.  A description of the significant  accounting policies
         is presented below. In preparing the consolidated financial statements,
         management is required to make  estimates and  assumptions  that affect
         the  reported  amounts  of assets and  liabilities  and  disclosure  of
         contingent  assets and  liabilities as of the date of the balance sheet
         and revenues and expenses for the period.  Actual  results could differ
         from those estimates.

         (a)     PRINCIPLES OF CONSOLIDATION

                 The consolidated  financial  statements include the accounts of
                 the Company and its  wholly-owned  subsidiary.  All significant
                 intercompany  balances and transactions have been eliminated in
                 consolidation.

         (b)     CASH AND CASH EQUIVALENTS

                 Cash and cash equivalents  include vault cash, amounts due from
                 banks and Federal funds sold which represent  short-term highly
                 liquid investments.

         (c)     SECURITIES

                 The  Company   classifies   its  debt   securities   as  either
                 available-for-sale  or held-to-maturity as the Company does not
                 hold any securities considered to be trading. Equity securities
                 are   classified   as   available-for-sale.    Held-to-maturity
                 securities  are  those  debt  securities  the  Company  has the
                 ability  and  intent to hold  until  maturity.  All other  debt
                 securities are classified as available-for-sale.

                 Available-for-sale  securities  are  recorded  at  fair  value.
                 Held-to-maturity  securities  are recorded at  amortized  cost.
                 Unrealized  holding  gains and  losses,  net of the related tax
                 effect  on  available-for-sale  securities  are  excluded  from
                 earnings  and  reported as a  component  of  accumulated  other
                 comprehensive income in stockholders' equity until realized.

                 A  decline  in  the  fair  value  of an  available-for-sale  or
                 held-to-maturity  security  that is  deemed  to be  other  than
                 temporary  results  in a charge to  earnings  resulting  in the
                 establishment of a new cost basis for that security.

                                       20

<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(2)     SUMMARY OF SIGNIFICANT ACCOUNT POLICIES, CONTINUED

        (c)      SECURITIES, CONTINUED

                 Purchases  and sales are  recorded  on a trade  date basis with
                 settlement occurring shortly thereafter. Premiums and discounts
                 are  amortized  or  accredited  over  the  life of the  related
                 security as an adjustment  to yield using the interest  method.
                 Dividend  and  interest  income  are  recognized  when  earned.
                 Realized  gains  and  losses  on  securities  are  included  in
                 earnings and are calculated  using the specific  identification
                 method, for determining the cost of the securities sold.

        (d)      LOANS

                 Loans are reported at the principal amount outstanding,  net of
                 deferred  fees.  Fees  and  certain  direct  origination  costs
                 related to lending  activities  are recognized as an adjustment
                 of yield using the interest method over the lives of the loans.
                 The  Company  has the  ability  and intent to hold its loans to
                 maturity  except for education  loans which are sold to a third
                 party upon reaching repayment status.

                 Interest  on  loans  is  accrued  and  included  in  income  at
                 contractual rates applied to principal outstanding. The accrual
                 of interest on loans  (including  impaired  loans) is generally
                 discontinued  and previously  accrued interest is reversed when
                 loan  payments  are 90 days or more  past due or  when,  by the
                 judgement  of  management,  collectibility  becomes  uncertain.
                 Subsequent recognition of income occurs only to the extent that
                 payment is received.  Loans are  returned to an accrual  status
                 when both  principal  and  interest are current and the loan is
                 determined to be performing in accordance  with the  applicable
                 loan terms.

        (e)      ALLOWANCE FOR LOAN LOSSES

                 The allowance for loan losses consists of the provision charged
                 to   operations   based   upon  past   loan  loss   experience,
                 management's  evaluation  of the loan  portfolio  under current
                 economic conditions and such other factors that require current
                 recognition  in  estimating   loan  losses.   Loan  losses  and
                 recoveries  of loans  previously  written-off  are  charged  or
                 credited   to  the   allowance   as   incurred   or   realized,
                 respectively.

                 The allowance for loan losses is maintained at a level believed
                 by management to be sufficient to absorb probable future losses
                 related to loans  outstanding  as of the  balance  sheet  date.
                 Management  uses presently  available  information to recognize
                 losses on loans; however, future additions to the allowance may
                 be  necessary  based on  changes  in  economic  conditions.  In
                 addition,  various regulatory agencies,  as an integral part of
                 their examination  process,  periodically  review the Company's
                 allowance  for loan  losses  and may  require  the  Company  to
                 recognize  additions to the allowance  based on their judgement
                 of  information   available  to  them  at  the  time  of  their
                 examination.

                 The Company  estimates  losses on  impaired  loans based on the
                 present value of expected future cash flows  (discounted at the
                 loan's  effective  interest  rate)  or the  fair  value  of the
                 underlying collateral if the loan is collateral  dependent.  An
                 impairment  loss exists if the  recorded  investment  in a loan
                 exceeds the value of the loan as measured by the aforementioned
                 methods.  Impairment  losses are included as a component of the
                 allowance for loan losses.  A loan is considered  impaired when
                 it is probable  that the Company  will be unable to collect all
                 amounts  due  according  to the  contractual  terms of the loan
                 agreement.   Generally,   all  commercial  mortgage  loans  and
                 commercial  loans in a  delinquent  payment  status (90 days or
                 more delinquent) are considered impaired.  Residential mortgage
                 loans,   consumer  loans,  home  equity  lines  of  credit  and
                 education  loans  are  evaluated  collectively  since  they are
                 homogenous and generally carry smaller individual balances. The
                 Company recognizes  interest income on impaired loans using the
                 cash basis of income  recognition.  Cash  receipts  on impaired
                 loans are generally  applied according to the terms of the loan
                 agreement,   or  as  a  reduction  of  principal,   based  upon
                 management judgment and the related factors discussed above.

                                       21

<PAGE>
                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

        (f)      PREMISES AND EQUIPMENT

                 Land is  carried at cost and  buildings  and  improvements  and
                 furniture and  equipment  are carried at cost less  accumulated
                 depreciation.  Depreciation  is computed  on the  straight-line
                 method  over the  estimated  useful  lives of the assets  (3-39
                 years for building and  improvements;  3-7 years for  furniture
                 and equipment.)

        (g)      REAL ESTATE OWNED

                 Real estate  acquired in  settlement of loans is carried at the
                 lower of the unpaid loan  balance or fair value less  estimated
                 costs to sell. Write-downs from the unpaid loan balance to fair
                 value at the time of  foreclosure  are charged to the allowance
                 for loan losses.  Subsequent  write-downs to fair value, net of
                 disposal costs, are charged to other expenses.

        (h)      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 and liabilities are measured using enacted tax rates
                 expected to apply to taxable income in the years in which those
                 temporary  differences are expected to be recovered or settled.
                 The effect on deferred tax assets and  liabilities  of a change
                 in tax rates isrecognized in income in the period that includes
                 the enactment date.

        (i)      PENSION AND OTHER POSTRETIREMENT PLANS

                 On January 1, 1998, the Company adopted  Statement of Financial
                 Accounting  Standards ("SFAS") No.132,  EMPLOYERS'  DISCLOSURES
                 ABOUT  PENSION AND OTHER  POSTRETIREMENT  BENIFITS SFAS No. 132
                 revises   employers'   disclosure   about   pension  and  other
                 postretirement  benefit plans, SFAS No. 132 does not change the
                 method of accounting for such plans.  The Company  maintained a
                 non-contributory  defined  benefit  pension  plan that  covered
                 substantially all employees,  but terminated the plan effective
                 December  31, 1998.  The  benefits  under the pension plan were
                 based on the employee's years of service and compensation.  The
                 cost of this program was funded currently.

                 The Company  also  sponsors a defined  benefit  health care and
                 life  insurance plan that provides  postretirement  benefits to
                 current and retired  employees and certain eligible  dependents
                 who meet minimum age and service  requirements.  The  estimated
                 costs of  providing  benefits  are  accrued  over the years the
                 employees render services necessary to earn those benefits.

        (j)      OTHER EMPLOYEE BENEFIT PLANS

                 The  Company  sponsors a defined  contribution  401 (k) Savings
                 Plan  covering  substantially  all  employees.   Employees  are
                 permitted  to  contribute  up to 6% of base pay to the  Savings
                 Plan, subject to certain  limitations.  The Company matches 50%
                 of each  employees  contribution  up to 6%.

                 The Company also  sponsors a  non-contributory  Employee  Stock
                 Ownership Plan (ESOP) covering substantially all employees. The
                 number of shares  allocable to Plan  participants is determined
                 by  the  Board  of   Directors.   Allocations   to   individual
                 participant accounts are based on participant compensation. The
                 Company  accounts for ESOP shares  purchased in accordance with
                 Statement of Position No. 93-6, EMPLOYEE STOCK OWNERSHIP PLANS.
                 Accordingly,   as  shares  are  committed  to  be  released  to
                 participants, the Company reports compensation expense equal to
                 the current  market  price of the shares and the shares  become
                 outstanding for earnings per share computations.

                                       22
<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

        (k)      COMPREHENSIVE INCOME

                 On January, 1, 1998, the Company adopted the provisions of SFAS
                 No.  130,  REPORTING   COMPREHENSIVE   INCOME.  This  statement
                 establishes    standards   for   reporting   and   display   of
                 comprehensive  income  and  its  components.  At  the  Company,
                 comprehensive   income   represents   net  income   plus  other
                 comprehensive  income,  which  consists  of the net  change  in
                 unrealized gains or losses on securities available-for-sale for
                 the period,  net of the related tax effect.  Accumulated  other
                 comprehensive  income  represents  the net  unrealized  holding
                 gains or  losses  on  securities  available  for sale as of the
                 balance sheet dates, net of the related tax effect.  Prior year
                 consolidated  financialstatements  have  been  reclassified  to
                 conform to the requirements of SFAS No. 130.

        (l)      FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

                 The Company does not engage in the use of derivative  financial
                 instruments.  The Company's  only  financial  instruments  with
                 off-balance  sheet risk are  limited to  commitments  to extend
                 credit and commitments under unused lines of credit.

        (m)      EARNINGS PER SHARE

                 Basic  earnings per share is  calculated by dividing net income
                 available to common shareholders by the weighted average number
                 of shares  outstanding during the year. Prior to the conversion
                 to a stock savings bank,  earnings per share are not applicable
                 as the mutual savings bank had no shares outstanding. After the
                 conversion,  earnings per share is  determined  from October 6,
                 1998,  the  date of  conversion,  to the  end of the  reporting
                 period  based  upon  the  weighted  average  number  of  shares
                 outstanding  for  the  period.   The  income  included  in  the
                 computation is based on the actual  results of operations  only
                 for the post-conversion period.  Unallocated shares held by the
                 Company's ESOP are not included in the weighted  average number
                 of shares outstanding.

        (n)      SEGMENT REPORTING

                 Effective  January 1, 1998, the Company  adopted the provisions
                 of SFAS No. 131 DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
                 RELATED INFORMATION. SFAS No.131 requires the Company to report
                 financial  and other  information  about key revenue  producing
                 segments of the Company for which such information is available
                 and is utilized by the chief operating decision maker. Specific
                 information  to be reported  for  individual  segments  include
                 profit and loss,  certain revenue and expense items,  and total
                 assets.  Reconciliation  of segment  financial  information  to
                 amounts reported in the financial  statements is also provided.
                 The Company has determined that it has no reportable  segments,
                 and as  such,  adoption  of SFAS  No.  131 did  not  result  in
                 significant changes in the Company's reporting.

                                       23

<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(3)      SECURITIES

         Securities are summarized as follows (in thousands):

                                                    December 31, 1998
                                      ------------------------------------------
                                                   Gross        Gross
                                      Amortized  Unrealized   Unrealized  Fair
                                        Cost       Gain         Losses    Value
--------------------------------------------------------------------------------
Available-for-sale:
  U.S. Government and sponsored
    enterprise securities            $ 13,037    $   128     $     1   $ 13,164
  Mortgage-backed securities           42,801        265          25     43,041
  State and municipal sub-divisions       917         10          --        927
  Corporate debts securities           27,649        178           5     27,822
--------------------------------------------------------------------------------
Total debt securities                  84,404        581          31     84,954
Equity securities                       2,072      1,470          59      3,483
--------------------------------------------------------------------------------
                                     $ 86,476    $ 2,051     $    90   $ 88,437
================================================================================
Held-to-maturity:
  U.S. Government and sponsored
    enterprise securities             $ 1,505    $     2     $    --   $  1,507
  Mortgage-backed securities            5,208         69          22      5,255
  State and municipal sub-division        747         l7          --        764
  Corporate debt securities             2,858         21           1      2,878
--------------------------------------------------------------------------------
                                      $10,318    $   109     $    23   $ 10,404
================================================================================

                                                  December 31, 1997
                                   ---------------------------------------------
                                                 Gross        Gross
                                   Amortized   Unrealized   Unrealized  Fair
                                     Cost        Gains        Losses    Value
--------------------------------------------------------------------------------
Available-for-sale:
  U.S. Government and sponsored
    enterprise securities          $ 16,041     $   105     $    --   $ 16,146
  Mortgage-backed securities         12,144         120          53     12,211
  Corporate debt securities          13,819          46           4     13,861
--------------------------------------------------------------------------------
Total debt securities                42,004         271          57     42,218
Equity securities                     1,192         748          18      1,922
--------------------------------------------------------------------------------
                                   $ 43,196     $ 1,019     $    75   $ 44,140
================================================================================
Held-to-maturity:
  U.S. Government and sponsored
    enterprise securities           $ 1,992     $     3     $    --   $  1,995
  Mortgage-backed securities          8,279          87          92      8,274
  State and municipal sub-divisions     425           5          --        430
  Corporate debt securities           1,854          16          --      1,870
--------------------------------------------------------------------------------
                                    $12,550     $   111     $    92   $ 12,569
================================================================================

                                       24

<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(3)  SECURITIES, CONTINUED

     The  following  table  presents the  carrying  value and fair value of debt
     securities  at December 31, 1998,  based on the earlier of call or maturity
     date.  Expected  maturities may differ from contractual  maturities because
     issuers  may have the right to call or prepay  obligations  with or without
     call or prepayment penalties. (in thousands):

                                                    Amortized
                                                      Cost          Fair Value
--------------------------------------------------------------------------------
     Available-for-sale:
       Due within one year                          $  18,011       $  18,078
       Due after one year through five years           22,675          22,908
       Due after five years through ten years             917             927
       Due after ten years                                 --              --
       Mortgage-backed securities                      42,801          43,041
--------------------------------------------------------------------------------
                                                    $  84,404       $  84,954
================================================================================
     Held-to-Maturity:
       Due within one year                          $   1,501       $   1,503
       Due after one year through five years            3,348           3,378
       Due after five years though ten years              261             268
       Due after ten years                                 --              --
       Mortgage-backed securities                       5,208           5,255
--------------------------------------------------------------------------------
                                                    $  10,318       $  10,404
================================================================================

     Gross  gains of $6,000,  $46,000  and  $15,000  were  realized  on sales of
     securities in 1998, 1997 and 1996, respectively. There were no gross losses
     realized on sales of securities in 1998, 1997 and 1996.

     Securities  carried at $2.5  million at December  31, 1998 were pledged for
     other purposes required by law.

(4)  LOANS

     Loans are summarized as follows (in thousands):

                                                            December 31,     
                                                     ---------------------------
                                                        1998           1997 
--------------------------------------------------------------------------------
     Mortgage loans:
       Residential                                   $  100,976     $  96,328
       Partially guaranteed by VA                           337           444
       Insured by FHA                                       717           847
       Commercial                                        29,224        30,867
--------------------------------------------------------------------------------
                                                        131,254       128,486
--------------------------------------------------------------------------------
     Other loans:
       Commercial                                         6,588         7,049
       Automobile                                        10,854         8,902
       Home equity line of credit                         6,804         5,924
       Property improvement                                 709           907
       Guaranteed student                                 1,016         1,507
       Other consumer                                     4,597         5,031
--------------------------------------------------------------------------------
                                                         30,568        29,320
--------------------------------------------------------------------------------
     Total loans                                        161,822       157,806
--------------------------------------------------------------------------------
     Less:  Net deferred origination fees                   121           241
--------------------------------------------------------------------------------
                                                     $  161,701     $ 157,565
================================================================================

                                       25
<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(4)  LOANS, CONTINUED

     In an effort to accelerate  resolution of certain of its problem assets, in
     December 1997 the Company  identified certain loans for bulk sale. Prior to
     December 31, 1997 the carrying  value of the loans  anticipated  to be sold
     was approximately  $4.2 million,  of which  approximately $3.5 million were
     then non-performing and approximately $763,000 were then performing.

     In anticipation of the bulk sale, the loans to be sold in such  transaction
     were  included on the Company's  consolidated  balance sheet as of December
     31, 1997 as loans held for sale at their fair value,  based on an estimated
     sales price. The Company  charged-off  $1,698,000 against the allowance for
     loan  losses to reflect  the fair value of the loans.  The  proceeds of the
     sale approximated the carrying value of the loans.

     Changes in the  allowances  for loan losses are  summarized  as follows (in
     thousands).


                                                 Years Ended December 31
                                        ----------------------------------------
                                            1998         1997          1996
     ---------------------------------------------------------------------------
     Balance at beginning of year       $   2,143     $   1,952     $   2,002
     Provision charged to operations          325         3,300         1,380
     Recoveries                               206           170           283
     Loans charged off                       (180)       (3,279)       (1,713)
     ---------------------------------------------------------------------------
     Balance at end of year             $   2,494     $   2,143     $   1,952
     ===========================================================================

     At December 31, 1998 and 1997,  impaired  loans  totaled  $736,000 and $2.7
     million (of which $1.2 million were loans held for sale), respectively.  At
     December 31, 1998,  impaired loans included $736,000 of loans for which the
     related  allowance  for loan losses was  $194,000.  At December  31,  1997,
     impaired loans included  $895,000 of loans for which the related  allowance
     for loan losses was $234,000.  The average recorded  investment in impaired
     loans was $1.1  million,  $2.7  million and $3.5  million  during the years
     ended  December  31,  1998,  1997 and 1996, respectively.  Interest  income
     recognized on impaired loans was $147,000, $290,000 and $223,000 during the
     years ended December 31, 1998,  1997 and 1996,  respectively,  all of which
     was recognized using the cash basis of income recognition.

     The  principal   balances  of  loans  not  accruing  interest  amounted  to
     approximately $920,000, $3.8 million (of which $2.3 million were loans held
     for sale) at December 31, 1998 and 1997, respectively. Interest income that
     would have been recorded if the  non-accruing  loans had been performing in
     accordance with their original terms was approximately  $115,000,  $402,000
     and  $307,000  during the years ended  December  31,  1998,  1997 and 1996,
     respectively.

     In the ordinary  course of business,  the Company makes loans to directors,
     officers  and   employees,   as  well  as  to  other  related   parties  on
     substantially the same terms,  including  interest rate and collateral,  as
     those  prevailing at the same time for  comparable transactions  with other
     customers  and do not involve  more than normal risk of  collectibility  or
     present other unfavorable features.

     A summary of the  changes  in these  outstanding  loans is as  follows  (in
     thousands):

                                                             Years Ended
                                                             December 31,
                                                      --------------------------
                                                        1998            1997
     ---------------------------------------------------------------------------
     Balance at beginning of year                     $  2,207       $  2,459
     New loans and increase in existing loans              521            459
     Loan principal repayments                            (577)          (711)
     ---------------------------------------------------------------------------
     Balance at end of year                           $  2,151       $  2,207
     ===========================================================================

                                       26

<PAGE>
                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(5)  PREMISES AND EQUIPMENT

     Premises and equipment are summarized as follows (in thousands):

                                                               December 31,
                                                          ----------------------
                                                            1998        1997
     ---------------------------------------------------------------------------
     Land                                                 $   886     $   836
     Buildings and furniture                                2,901       2,937
     Furniture and equipment                                1,962       2,825
     ---------------------------------------------------------------------------
                                                            5,749       6,598
     Less accumulated depreciation and amortization         2,506       3,151
     ---------------------------------------------------------------------------
                                                          $ 3,243     $ 3,447
     ===========================================================================

     Depreciation  and amortization  expense amounted to $487,000,  $579,000 and
     $507,000  during  the  years  ended  December  31,  1998,  1997  and  1996,
     respectively.

(6)  DEPOSITS

     At December 31, 1998 and 1997,  the  aggregate  amounts of time deposits in
     denominations  of $100,000  or more were  approximately  $13.0  million and
     $10.2 million, respectively.

     Contractual  maturities  of  certificates  of deposit at  December  31, are
     summarized as follows (in thousands):


                                                        1998
     ---------------------------------------------------------
     Within one year                               $   58,441
     One through two years                             21,736
     Two through three years                           11,094
     Three through four years                           6,426
     Four though five years                             6,613
     Five years and over                                    7
     ---------------------------------------------------------
     Total certificates of deposit                 $  104,317
     =========================================================

     Interest expense on deposits is summarized as follows (in thousands):

     
                                            Years Ended December 31,
                                       ---------------------------------
                                           1998      1997       1996 
     -------------------------------------------------------------------
     Savings accounts                  $  1,861    $  1,936     $  1,922
     Certificates of deposit              5,713       5,983        6,354
     Money market accounts                  220         243          288
     NOW accounts                           167         166          194
     -------------------------------------------------------------------
                                       $  7,961    $  8,328     $  8,758
     ===================================================================

                                       27
<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(7)  BORROWINGS

     The Company is a member of the Federal Home Loan Bank (FHLB).  As a member,
     the Company is required to own capital  stock in the FHLB and is authorized
     to apply for advances from the FHLB.

     At December 31, 1998 and 1997,  advances  from the FHLB were as follows (in
     thousands):

                                                            Advance Amount
                                                          ------------------
     Maturity Date   Interest Rate    Fixed or Variable     1998       1997
     -----------------------------------------------------------------------
       7/30/01           5.52%             Fixed          $ 1,000     $   -
     =======================================================================
     
     Under the  terms of a blanket  collateral  agreement  with the FHLB,  these
     outstanding  balances are  collateralized by certain  qualifying assets not
     otherwise  pledged  (primarily first mortgage loans).  At December 31, 1998
     the Company may borrow up to an additional $27.9 million from the FHLB.

(8)      INCOME TAXES

     Income taxes were allocated as follows (in thousands):

                                                      Years Ended December 31,
                                                     --------------------------
                                                        1998     1997    1996
     --------------------------------------------------------------------------
     Income before income tax expense (benefit)      $  1,270  $  (16) $  853
     Changes in stockholders' equity, for 
     changes in unrealized gains on securities            410     206     (33)
     --------------------------------------------------------------------------
                                                     $  1,680  $  190  $  820
     ==========================================================================

     The components of income tax expense (benefit)  attributable to income from
     operations are (in thousands):

                                                                     
                                               Years Ended December 31,
                                            ----------------------------
                                              1998      1997       1966
     -------------------------------------------------------------------
     Current:
       Federal                              $   799    $  672    $  989
       State                                    194       181       206
     -------------------------------------------------------------------
                                                993       853     1,195
     Deferred:
       Federal                                  207      (698)     (298)
       State                                     70      (171)      (44)
     -------------------------------------------------------------------
                                                277      (869)     (342)
     -------------------------------------------------------------------
                                            $ 1,270    $  (16)   $  853
     ===================================================================

                                       28

<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(8)  INCOME TAXES, CONTINUED

     Actual tax expense  (benefit)  attributable  to income  before income taxes
     differed from  "expected" tax expense  benefits),  computed by applying the
     U.S.  Federal  statutory  tax rate of 34% to income  before  income  tax as
     follows (in thousands):


                                                       Years Ended December 31,
                                                     --------------------------
                                                       1998      1997     1996
     --------------------------------------------------------------------------
     Computed "expected" tax expense                 $ 1,003   $   19   $  754
     Increase (decrease) in income taxes resulting from:
       State taxes, net of Federal tax benefits          175        7      107
       Non-taxable interest income                       (21)     (35)     (48)
       Non-deductible expenses                            48       16       20
       Pension termination excise tax                     80       --       --
       Other items, net                                  (15)     (23)      20
     --------------------------------------------------------------------------
                                                     $ 1,270   $  (16)  $  853
     ==========================================================================

     The tax  effects of  temporary  differences  that give rise to  significant
     portions of the deferred tax assets and  deferred tax  liabilities  are (in
     thousands):

                                                              December 31,
                                                         -----------------------
                                                            1998        1997
     ---------------------------------------------------------------------------
     Deferred tax assets:
       Non-deductible reserves                           $     --    $     25
       Non-accrual interest                                    14         126
       Losses on real estate owned                             27         124
       Loan bulk sale                                          --         666
       Allowance for loan losses                              986       1,118
       Net deferred loan fees                                  98         127
       Postretirement benefit obligation                      669         638
       Deferred trustee fees                                   92          30
       Foundation contribution carryforward                   329          --
       Other                                                   15          31
     ---------------------------------------------------------------------------
     Total gross deferred tax assets                        2,230       2,885
     ---------------------------------------------------------------------------
     Deferred tax liabilities:
       Accumulated depreciation on premises and equipment    (101)        (97)
       Prepaid pension cost                                    --        (321)
       Unrealized gains on securities                        (783)       (373)
       Securities discount accretion                          (20)        (62)
       Tax allowance for loan losses in excess 
         of base year amount                                 (105)       (124)
     ---------------------------------------------------------------------------
     Total gross deferred tax liabilities                  (1,009)       (977)
     ---------------------------------------------------------------------------
     Net deferred tax assets                             $  1,221    $  1,908
     ===========================================================================

                                       29

<PAGE>
                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(8)  INCOME TAXES, CONTINUED

     Realization  of deferred tax assets is  dependent  upon the  generation  of
     future taxable income or the existence of sufficient  taxable income within
     the  carryback  period.  A valuation  allowance is provided when it is more
     likely than not that some  portion of the  deferred  tax assets will not be
     realized.  In  assessing  the need for a  valuation  allowance,  management
     considers the scheduled reversal of the deferred tax liabilities, the level
     of historical  taxable income and projected  future taxable income over the
     periods in which the  temporary  differences  comprising  the  deferred tax
     assets will be deductible.  Management believes that no valuation allowance
     is necessary.

     Included in retained  earnings at December 31, 1998 is  approximately  $3.7
     million  representing  aggregate provisions for loan losses taken under the
     Internal  Revenue Code. Use of these reserves to pay dividends in excess of
     earnings and profits or to redeem  stock,  or if the  institution  fails to
     qualify as a bank for Federal income tax purposes,  would result in taxable
     income to the Company.

(9)  PENSION AND OTHER POSTRETIREMENT PLANS

     The  following  table  presents  changes  in  the  Company's   pension  and
     postretirement  plans' accumulated  benefit obligations and plan assets and
     the plans funded status reconciled with amounts recognized in the Company's
     consolidated balance sheet at December 31, 1998, 1997 (in thousands):

<TABLE>
<CAPTION>

<S>                                                   <C>         <C>         <C>         <C>    
                                                         Pension Benefits       Other Benefits
                                                      --------------------    -------------------
                                                        1998        1997       1998         1997
     ---------------------------------------------------------------------------------------------
     Change in benefit obligations:
     Benefit obligation at beginning of year          $ 3,490     $ 3,296     $ 1,597     $ 1,507
     Service cost                                          84          87          42          37
     Interest cost                                        244         242         108         107
     Amendments                                            60          --          --          --
     Curtailment                                         (591)         --          --          --
     Contribution to qualifying replacement plan          216          --          --          --
     Actuarial loss                                       938           9         238          17
     Benefits paid                                       (150)       (144)        (95)        (71)
     ---------------------------------------------------------------------------------------------
     Benefit obligation at end of year                $ 4,291     $ 3,490     $ 1,890     $ 1,597
     =============================================================================================
     Change in plan assets:
     Fair value of plan assets at beginning of year   $ 5,083     $ 4,194     $    --     $    --
     Actual return on plan assets                           7         970          --          --
     Employer contribution                                 --          63          95         122
     Benefits paid                                       (150)       (144)        (95)       (122)
     ---------------------------------------------------------------------------------------------
     Fair value of plan assets at end of year         $ 4,940     $ 5,083     $    --     $    --
     =============================================================================================
     Funded status                                    $   649     $ 1,593     $(1,890)    $(1,597)
     Unrecognized net actuarial (gain) loss                --        (788)        235          (2)
     ---------------------------------------------------------------------------------------------
     Prepaid (accrued) benefit cost                   $   649     $   805     $(1,655)    $(1,599)
     =============================================================================================
     Weighted average assumptions:
       Discount rate                                     5.00%       7.25%       6.50%       7.25%
       Expected return on plan assets                    7.00%       8.00%         --          --
       Rate of compensation increase                     4.00%       5.00%       4.50%       5.00%

</TABLE>

                                       30
<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996


(9)  PENSION AND OTHER POSTRETIREMENT PLANS, CONTINUED

     For measurement purposes, a 6.50% annual rate of increase in the per capita
     cost of covered  health care  benefits  was assumed for 1999.  The rate was
     assumed  to  decrease  gradually  to 5% for 2003 and  remain at that  level
     thereafter.  A one-percentage  point increase or decrease in assumed health
     care cost  trend  rates  does not have a  material  effect  on the  benefit
     obligation.

<TABLE>
<CAPTION>
<S>                                        <C>         <C>      <C>     <C>      <C>      <C>   
                                                  Pension Benefits           Other Benefits
                                           ---------------------------  ------------------------
                                             1998       1997     1996     1998     1997     1996
     -------------------------------------------------------------------------------------------
     Components of net periodic benefit cost:                    (in thousands)
     Service cost                          $   84      $  87    $  84   $   42   $   37   $   41
     Interest cost                            244        242      236      108      107      111
     Expected return on plan assets          (391)      (350)    (284)      --       --       --
     Recognized net actuarial gain            (32)        --      (37)      --       --       --
     Curtailment charge                        35         --       --       --       --       --
     -------------------------------------------------------------------------------------------
     Net periodic benefit cost             $  (60)     $ (21)   $  (1)  $  150   $  144   $  152
     ===========================================================================================
</TABLE>

     The pension  plan was  terminated  effective  December 31, 1998 and related
     expense of $406,000 was recorded for the termination. Additionally, $80,000
     of excise taxes were recorded in income tax expense for 1998.

(10) OTHER EMPLOYEE BENEFIT PLANS

     Contributions  to  the  defined   contribution  401(k)  Savings  Plan  were
     approximately $60,000,  $64,000 and $63,000 during the years ended December
     31, 1998, 1997 and 1996, respectively.

     In connection with establishing the Employee Stock Ownership Plan (ESOP) in
     1998,  the ESOP borrowed $4.3 million from the Company to purchase  428,532
     common  shares of the  Company.  The loan  bears  interest  at 8.25% and is
     payable in twenty equal annual  installments.  At December 31, 1998,  5,357
     shares were  released or committed  to be released and 423,175  remained as
     unallocated  shares.  The fair value of the unallocated  shares on December
     31, 1998 was $4.2 million.  The Company recognized  compensation expense of
     $51,000 in 1998.

(11) COMMITMENTS AND CONTINGENCIES

     The Company is a party to financial instruments with off-balance sheer risk
     in the  normal  course  of  business  to meet  the  financing  needs of its
     customers.  These  financial  instruments  consist of commitments to extend
     credit and  involve,  to varying  degrees,  elements of credit,  market and
     interest rate risk in excess of the amounts  recognized in the consolidated
     balance sheet.  Credit risk  represents  the accounting  loss that would be
     recognized  at  the  reporting  date  if  obligated  counterparties  failed
     completely  to perform as  contracted.  Market  risk  represents  risk that
     future changes in market prices make financial instruments less valuable.

     Commitments  to extend credit are  agreements to lend to a customer as long
     as there is no  violation of any  condition  established  in the  contract.
     Commitments  generally  have fixed  expiration  dates or other  termination
     clauses and may require payment of a fee. Since some of the commitments are
     expected to expire without being drawn upon, the total  commitment  amounts
     do  not  necessarily  represent  future  cash  requirements.   The  Company
     evaluates each customer's  creditworthiness  on a case-by-case  basis.  The
     amount of  collateral  obtained,  if deemed  necessary  by the Company upon
     extension of credit, is based on management's  evaluation of the customer's
     financial  position.  Collateral  held varies,  but may include real estate
     accounts   receivable,   inventory,   property,   plan  and  equipment  and
     income-producing  commercial  properties.  Substantially all commitments to
     extend credit, if exercised, will represent loans secured by real estate.

                                       31
<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996


(11)     COMMITMENTS AND CONTINGENCIES, CONTINUED

         The  Company was  committed  to  originate  fixed and  adjustable  rate
         mortgages  of  approximately  $3.9 million and $3.7 million at December
         31, 1998 and 1997, respectively. Unused lines of credit, which includes
         home equity,  consumer,  commercial and credit cards, amounted to $10.7
         million and $9.2 million at December 31, 1998 and 1997, respectively.

         The Company's exposure to credit loss in the event of nonperformance by
         the other party to the financial  instrument  for loan  commitments  is
         represented by the contractual or notional amount of these instruments.
         The Company uses the same credit  policies in making  commitments as it
         does for on-balance sheet instruments.  The Company controls its credit
         risk through credit approvals, limits, and monitoring procedures.

         In the normal course of business,  there are various  outstanding legal
         proceedings.  In  the  opinion  of  management,  the  aggregate  amount
         involved in such proceedings is not material to the financial condition
         or results of operations of the Company.

(12)     CONCENTRATIONS OF CREDIT

         A substantial  portion of the Company's loans are mortgage and consumer
         loans  in  Central   New  York   State.   Accordingly,   the   ultimate
         collectibility of a substantial portion of the Company's loan portfolio
         is susceptible to changes in market conditions in this area. A majority
         of the Company's loan portfolio is secured by real estate.

         The  Company's  concentrations  of  credit  risk are  disclosed  in the
         schedule of loan  classifications.  Other than general  economic risks,
         management is not aware of any material  concentrations  of credit risk
         to any industry or individual borrower.

(13)     COMPREHENSIVE INCOME

         The following  summarizes the components of other comprehensive  income
         (in thousands):

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                                 -------------------------------
                                                                                   1998       1997       1996
       ---------------------------------------------------------------------------------------------------------
      <S>                                                                         <C>        <C>        <C>     
       Other comprehensive income, before tax:
         Net unrealized holding gain (loss) on securities                        $ 1,023    $   575    $   (98)
         Reclassification adjustment for (gains) losses included in net income        (6)       (46)       (15)
       ---------------------------------------------------------------------------------------------------------
       Other comprehensive income, before tax                                      1,017        529        (83)
       Income tax expense related to items of other comprehensive income             410        206        (33)
       ---------------------------------------------------------------------------------------------------------
       Other comprehensive income, net of tax                                    $   607    $   323    $   (50)
       =========================================================================================================
</TABLE>

(14)     STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS

         The Company and the Bank are subject to various regulatory requirements
         administered  by the federal  banking  agencies and the Bank is further
         regulated by the New York State Banking Department.

         Under  capital  adequacy  guidelines  the  Company  and Bank  must meet
         specific  guidelines  that  involve  quantitative  measures  of assets,
         liabilities,  and certain  off-balance  sheet items as calculated under
         regulatory  accounting  practices.  Capital amounts are also subject to
         qualitative   judgments  by  the  regulators  about  components,   risk
         weightings,   and  other  factors.  Failure  to  meet  minimum  capital
         requirements can initiate certain  mandatory,  and possibly  additional
         discretionary,  actions by the regulators  that, if  undertaken,  could
         have a direct  material  effect on the Company's  and Bank's  financial
         statements.

                                       32
<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(14) STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS, CONTINUED

     The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
     established  capital levels for which insured  institutions are categorized
     as   well   capitalized,    adequately    capitalized,    undercapitalized,
     significantly undercapitalized, or critically undercapitalized.

     As of December  31, 1998 and 1997,  the most recent  notification  from the
     FDIC  categorized  the  Bank  as  well  capitalized  under  the  regulatory
     framework  for  prompt  corrective  actions.  To  be  categorized  as  well
     capitalized,  the Bank  must  meet the  minimum  ratios as set forth in the
     table. There have been no conditions or events since that notification that
     management believes have changed the Bank's category.  Management believes,
     as of  December  31,  1998,  that the  Company  and Bank  meet all  capital
     adequacy requirements to which they are subject.

     The  following  is a summary of the  Company's  and Bank's  actual  capital
     amounts and ratios  compared to the  regulatory  minimum  capital  adequacy
     requirements  and  the  FDIC  requirements  for  classification  as a  well
     capitalized  institution under prompt corrective action provisions (dollars
     in thousands):

<TABLE>
<CAPTION>
                                                                                          To be classfied as
                                                                       Minimum capital  well capitalized under
                                                                          adequacy        prompt corrective
                                                       Actual           requirements      action provisions
                                               ---------------------------------------------------------------
                                                Amount       Ratio     Amount   Ratio      Amount    Ratio 
--------------------------------------------------------------------------------------------------------------
     At December 31, 1998:
<S>                                            <C>          <C>       <C>        <C>      <C>         <C>   
     TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
       Company                                 $80,333      48.91%    $13,140   >8.00%        N/A 
                                                                                -
       Bank                                    $60,078      38.82%    $12,381   >8.00%     $15,476   >10.00%
     TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):                                  -                    -
       Company                                 $77,892      47.42%    $ 6,571   >4.00%        N/A 
                                                                                -
       Bank                                    $57,751      37.32%    $ 6,191   >4.00%     $ 9,286    >6.00%
     TIER 1 CAPITAL (TO AVERAGE ASSETS):                                        -                     -
       Company                                 $77,892      29.57%    $10,536   >4.00%        N/A 
                                                                                -
       Bank                                    $57,751      23.40%    $ 9,873   >4.00%     $12,341    >5.00%
     At December 31, 1997:                                                      -                     -
     TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
       Bank                                    $31,938      22.56%    $11,325   >8.00%     $14,156   >10.00%
     TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):                                  -                    -
       Bank                                    $30,169      21.31%    $ 5,662   >4.00%     $ 8,493    >6.00%
     TIER 1 CAPITAL (TO AVERAGE ASSETS):                                        -                     -
       Bank                                    $30,169      12.89%    $ 9,363   >4.00%     $11,704    >5.00%
                                                                                -                     -
</TABLE>

     On August 14, 1995,  the FDIC  performed a review of the Bank's  compliance
     with governing  consumer and civil rights laws, the Community  Reinvestment
     Act  (CRA) and the Bank  Secrecy  Act.  The  review  encompassed:  Truth in
     Lending, Truth in Savings; Real Estate Settlement  Procedures;  Fair Credit
     Reporting; Electronic Fund Transfers; Right to Financial Privacy; Expedited
     Funds  Availability;  Equal  Credit  Opportunity;  Credit  Practices  Rule,
     Preservation of Consumer Claims and Defenses; Flood Insurance;  Interest on
     Deposits;  and Fair  Housing.  On December 26, 1995,  the Bank received the
     FDIC's  written  report  on the  examination  and a related  Memorandum  of
     Understanding.

                                       33
<PAGE>

(14)    STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS, CONTINUED

         As  recommended  in the  Memorandum  of  Understanding,  the  Board  of
         Directors  of the Bank  developed  a written  compliance  policy  which
         included  appropriate  training  of  personnel  in all  Bank  functions
         related compliance,  implementing  internal review procedures to ensure
         ongoing  compliance,  providing  financial  training for the compliance
         officer,   and   instituting  a  formal  review  process  whereby  loan
         disclosure  statements are reviewed  prior to issuance.  As a result of
         the  examination,  the Bank is  required  to  submit  progress  reports
         describing  specific  actions taken with regard to each  violation on a
         quarterly  basis,  until further notice.  No enforcement  action by the
         FDIC is contemplated,  however,  nothing contained in the Memorandum of
         understanding  prevents the FDIC from taking further supervisory action
         it deems  appropriate.  The Memorandum of Understanding  did not have a
         material impact on the Company's consolidated financial statements.

         In  order  to  grant   priority  in  the  Conversion  to  the  eligible
         depositors,  the Bank  established  a  special  account  at the time of
         conversion  in an amount equal to its total net worth at September  30,
         1998. In the event of a future  liquidation  of the converted bank (and
         only in such event),  eligible account holders who continue to maintain
         accounts shall be entitled to receive a  distribution  from the special
         account.  The total amount of the special account will be decreased (as
         the balances of eligible accounts are reduced) on annual  determination
         dates.  No  cash  dividends  may be paid  to the  stockholders  if such
         dividends  reduce  the  Bank's  stockholders'  equity  below the amount
         required for that  special  account.  At December 31, 1998,  the amount
         remaining in this liquidation account was $19.4 million.

(15)    FAIR VALUE OF FINANCIAL INSTRUMENTS

         The  following  methods  and  assumptions  were used by the  Company in
         estimating fair values of financial instruments:

                 CASH AND CASH  EQUIVALENTS:  The fair values are  considered to
                 approximate  the  carrying  values,  as reported in the balance
                 sheet.

                 SECURITIES:  Fair  values of  securities  are based on exchange
                 quoted market prices, where available.  If quoted market prices
                 are not  available,  fair  values  are based on  quoted  market
                 prices of similar instruments.

                 LOANS AVAILABLE FOR SALE: The fair value of loans available for
                 sale on an aggregate basis, are based on quoted market prices.

                 LOANS   RECEIVABLE:   For  variable  rate  loans  that  reprice
                 frequently and loans due on demand with no  significant  change
                 in credit  risk,  fair  values are  considered  to  approximate
                 carrying  values.  The fair values for certain  mortgage  loans
                 (e.g., one-to-four family residential) and other consumer loans
                 are based on quoted  market prices of similar loans sold on the
                 secondary   market,    adjusted   for   differences   in   loan
                 characteristics.   The  fair  values  for  other  loans  (e.g.,
                 commercial real estate and rental property  mortgage loans) are
                 estimated using  discounted cash flow analyses,  using interest
                 rates  currently  being offered for loans with similar terms to
                 borrowers of similar  credit  rating.  The  carrying  amount of
                 accrued interest approximates its fair value.

                 FHLB STOCK:  The carrying  value of this  instrument,  which is
                 redeemable at par, approximates fair value.

                                       34
<PAGE>
                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996


(15)     FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

         OFF-BALANCE-SHEET   INSTRUMENTS:   Fair   values   for  the   Company's
         off-balance-sheet  instruments (lines of credit and commitments to fund
         loans)  are  based on fees  currently  charged  to enter  into  similar
         agreements,  taking into account the remaining  terms of the agreements
         and the  counterparties'  credit  standing.  The  fair  value  of these
         financial  instruments  is immaterial  and has therefore  been excluded
         from the table below.

         DEPOSITS: The fair values of demand deposits (interest and non-interest
         checking), passbook, statements savings, club and money market accounts
         are,  by  definition,  equal to the  amount  payable  on  demand at the
         reporting   date(i.e.,   their  carrying  amounts).   Fair  values  for
         fixed-rate  certificates of deposits and individual retirement accounts
         are estimated  using a discounted  cash flow  calculation  that applies
         interest rates  currently being offered on these products to a schedule
         of aggregated expected monthly maturities on time deposits.

         BORROWINGS:  The fair value of term advances from the Federal Home Loan
         Bank is estimated  using  discounted  cash flow  analysis  based on the
         Company's  current  incremental  borrowing  rate for similar  borrowing
         arrangements.

         The  estimated  carrying  values  and  fair  values  of  the  Company's
         financial instruments are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   December 31,              
                                             ---------------------------------------------------
                                                       1998                        1997    
                                             ---------------------------------------------------
                                             Carrying         Fair        Carrying        Fair
                                              Amount          Value        Amount         Value
         ---------------------------------------------------------------------------------------
             <S>                             <C>            <C>          <C>           <C>      
           Financial assets:
              Cash and cash equivalents      $  14,536      $ 14,536     $   8,079     $   8,079
              Securities                        98,755        98,841        56,690        56,709
              Loans held for sale                   --            --         2,541         2,541
              Loans, net                       159,207       166,435       155,422       155,657
              FHLB stock                         1,303         1,303         1,291         1,291
           Financial liabilities:                                                                                              
                Deposits:
                  Demand accounts               10,780        10,780        10,641        10,641
                  Savings accounts              61,820        61,820        62,732        62,732
                  Certificates of deposit      104,317       104,575       108,258       108,099
                  Money market accounts          7,975         7,975         8,435         8,435
                  NOW accounts                  11,122        11,122         9,704         9,704
                Borrowings                   $   1,000      $    997     $      --     $      --
         =======================================================================================
</TABLE>

         Fair value  estimates  are made at a specific  point in time,  based on
         relevant  market   information  and  information  about  the  financial
         instrument.  These  estimates  are  subjective  in nature  and  involve
         uncertainties  and matters of  significant  judgement  and,  therefore,
         cannot be  determined  with  precision.  Changes in  assumptions  could
         significantly affect the estimates.

                                       35
<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(16) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

     Presented below is the condensed  balance sheet as of December 31, 1998 and
     statement of income and statement of cash flows for the year ended December
     31, 1998 for CNY Financial Corporation (in thousands):

<TABLE>
<CAPTION>
       Condensed Balance Sheet                                                   1998
---------------------------------------------------------------------------------------
<S>                                                                          <C>     
       Assets:
       Cash and due from banks                                               $ 11,929
       Securities available-for-sale, at fair value                             8,238
       Investment in bank subsidiary                                           58,939
       Other assets                                                               712
---------------------------------------------------------------------------------------
                                                                             $ 79,818
=======================================================================================
       Liabilities:
       Other liabilities                                                     $    748
---------------------------------------------------------------------------------------
       Total liabilities                                                          748
---------------------------------------------------------------------------------------
       Total stockholders' equity                                              79,070
---------------------------------------------------------------------------------------
       Total Liabilities and Stockholders' Equity                            $ 79,818
=======================================================================================

       Condensed Statement of Income                                             1998 
---------------------------------------------------------------------------------------
       Interest from available-for-sale investments                          $     -- 
---------------------------------------------------------------------------------------
       Total operating income                                                      --
       Donation to charitable foundation                                       (1,023)
       Other operating expenses                                                  (192)
---------------------------------------------------------------------------------------
       Total operating expenses                                                (1,215)
---------------------------------------------------------------------------------------
       Income before undistributed income of subsidiary                        (1,215)
       Applicable income taxes                                                   (485)
       Equity in undistrituted income of Bank                                   2,409
---------------------------------------------------------------------------------------
       Net income                                                            $  1,679
=======================================================================================

       Condensed Statement of Cash Flows                                         1998 
---------------------------------------------------------------------------------------
         Operating activities:
         Net Income                                                          $  1,679
         Adjustments to reconcile net income to cash provided by operating
           activities:
             Equity in undistributed earnings of Bank                          (2,409)
             Increase in other assets                                            (712)
             Increase in other liabilities                                        292
             ESOP shares release for allocation                                    51
             Donation to charitable foundation                                    997
---------------------------------------------------------------------------------------
       Net cash used by operating activities                                     (102)
       Investing activities;
       Purchase of securities                                                 (33,421)
---------------------------------------------------------------------------------------
       Net cash used in investing activities                                  (33,421)
       Financing activities
       Par value of donation of stock to charitable foundation                      1
       Purchase of shares of common stock by ESOP                              (4,285)
       Treasury stock purchases                                                  (611)
       Net proceeds from issuance of common stock                              50,347
---------------------------------------------------------------------------------------
       Net cash provided by financing activities                               45,452
---------------------------------------------------------------------------------------
       Cash at December 31                                                   $ 11,929
=======================================================================================
</TABLE>

                                       36
<PAGE>

                    CNY Financial Corporation and Subsidiary
                   Notes to Consolidated Financial Statements
                  Years Ended December 31, 1998, 1997 and 1996

(17) UNAUDITED INTERIM FINANCIAL INFORMATION

     The following  table  summarizes  the Company's  quarterly  results for the
     years ended December 31, 1998 and 1997 (in thousands, except share data):

<TABLE>
<CAPTION>
                                                                           1998 
                                                       ------------------------------------------
                                                        First      Second      Third     Fourth
-------------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>        <C>        <C>    
       Interest income                                 $ 4,311    $ 4,337    $ 4,442    $ 4,913
       Interest expense                                  2,010      2,003      2,064      1,909
-------------------------------------------------------------------------------------------------
       Net interest income                               2,301      2,334      2,378      3,004
       Provision for loan losses                            75         75        100         75
       Other operating income                              245        278        817        253
       Other operating expenses                          1,645      1,693      1,953      3,045
-------------------------------------------------------------------------------------------------
       Income before income taxes                          826        844      1,142        137
-------------------------------------------------------------------------------------------------
       Net Income                                      $   493    $   561    $   566    $    59(2)
=================================================================================================
       Net income per common share (basic)                  (1)        (1)        (1)   $    --
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                           1997 
                                                       ------------------------------------------
                                                         First     Second      Third     Fourth
-------------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>        <C>        <C>    
       Interest income                                 $ 4,417    $ 4,468    $ 4,434    $ 4,348
       Interest expense                                  2,064      2,086      2,109      2,069
-------------------------------------------------------------------------------------------------
       Net interest income                               2,353      2,382      2,325      2,279
       Provision for loan losses                           225        225        200      2,650
       Other operating income                              219        189        236        255
       Other operating expenses                          1,625      1,555      1,604      2,098
-------------------------------------------------------------------------------------------------
       Income (loss) before income taxes                   722        791        757     (2,214)
-------------------------------------------------------------------------------------------------
       Net income (loss)                               $   411    $   436    $   545    $(1,320)
=================================================================================================
       Net income per common share (basic)                  (1)        (1)        (1)        (1)
=================================================================================================
</TABLE>

(1)Not  applicable  because the Company  converted  from mutual to stock form of
   ownership in October 1998.  Income per common share is presented from October
   6, 1998, the date of the conversion,  based upon the weighted  average number
   of shares issued and outstanding  since that date. The income included in the
   computation  is  based  on  the  actual   operating   results  only  for  the
   post-conversion period.

(2)The  decrease  in net  income in the  fourth  quarter is related to the stock
   contribution to the Cortland Savings Foundation of $614,000 after taxes.

                                       37

<PAGE>

                    CNY FINANCIAL CORPORATION AND SUBSIDIARY
                             DIRECTORS AND OFFICERS

DIRECTORS OF CNY FINANCIAL CORPORATION

WESLEY D. STISSER,
President and Chief Executive Officer
HARVEY KAUFMAN,
Chairman
JOSEPH H. COMPAGNI
PATRICK J. HAYES, M.D.
ROBERT S. KASHDIN, CPA
DONALD P. REED
TERRACE D. STALDER

OFFICERS OF CNY FINANCIAL CORPORATION

WESLEY D. STISSER,
President and Chief Excutive Officer
STEVEN A. COVERT,
Executive Vice President and Chief Financial Officer
SANDY F. SAMSON
Corporate Secretary
F. MICHAEL STAPLETON,
Assistant Corporate Secretary

DIRECTORS OF CORTLAND SAVINGS BANK

WESLEY D. STISSER,
President and Chief Executive Officer
HARVEY KAUFMAN,
Chairman, Superintendent Emeritus Cortland City Schools
JOSEPH H. COMPAGNI,
President, Economy Paving Co., Inc.
ROLAND FRAGNOLI,
President, Homer Men & Boys Store
EDWARD E. HATTER, JR.,
Investor
PATRICK J. HAYES, M.D.,
Physician
ROBERT S. KASHDIN, CPA
Managing Partner, Port, Kashdin & McSherry, CPA
DONALD P. REED,
Owner, Reed's Seeds
JUDITH F. RIEHLMAN
Cortland County Clerk
TERRANCE D. STALDER,
Associate Vice President for Finance & Management,
State University College at Cortland

OFFICERS OF CORTLAND SAVINGS BANK

WESLEY D. STISSER,
President and Chief Executive Officer
STEVEN A. COVERT,
Executive Vice President and Chief Financial Officer
F. MICHAEL STAPLETON,
Executive Vice President and Chief Operating Officer
KERRY D. MEEKER,
Senior Vice President, Senior Loan Officer

OFFICERS OF CORTLAND SAVINGS BANK, CONTINUED

KEVIN J. BERKLEY,
Vice President and Residential Loan Officer
JOHN A. MASON,
Vice President and Commercial Loan Officer
R. DAVID PATZ,
Vice President
MARILYN S. BENTRUP,
Assistant Vice President and Banking Floor Officer
THOMAS M. CARR,
Assistant Vice President and Controller
DEBBIE M. LUCHSINGER,
Assistant Vice President and Human Resources Officer
SANDY F. SAMSON,
Assistant Vice President and Corporate Secretary
DANIEL L. WILLIAMS,
Assistant Vice President and EDP Manager
KATHERYN M. COTTERILL,
Marketing Officer
DONALD L. HAY,
Compliance Officer and Bank Secrecy Act Officer
PAUL A. MAZZONE,
Bank Security Officer
PATRICIA M. WALTER,
Homer Branch Manager

================================================================================
                           EQUAL OPPORTUNITY EMPLOYER

It is the  policy of CNY  Financial  Corporation  to provide  equal  opportunity
employment  to all  employees  and  applicants  without  regard  to  race,  age,
religion, color, sex, national origin, marital status or status as an individual
with a disability and/or status as a disabled and/or Vietnam Era veteran or any
other legally  protected  class.  This policy is  implemented  in all aspects of
personnel  policies,  programs,  practices  and  operations  and in all working
conditions and relationships  with employees and applicants for employment;  and
to promote the full realization of equal opportunity in employment.

================================================================================
MEMBER                                                            [LOGO OMITTED]
FDIC

                                       38
<PAGE>

CORPORATE OFFICE
One North Main Street
Cortland, New York
Tel: (607) 756-5643 Fax: (607) 756-5839

ANNUAL REPORT ON FORM 10-K
A copy of CNY Financial  Corporations's Annual Report on Form 10-K as filed with
the  Securities  and Exchange  Commission  may be obtained  without  charge upon
written request to Steven A. Covert,  Executive Vice President & Chief Financial
Officer, CNY Financial  Corporation,  One North Main Street,  Cortland, New York
13045, or by calling 607-758-2227.

REGISTRAR/TRANSFER AGENT
Communications  regarding  change  of  address,   transfer  of  stock  and  lost
certificates should be sent to:

Registrar and Transfer Co.
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948

CORPORATE COUNSEL
Serchuk and Zelermyer, LLP
81 Main Street
White Plains, New York 10601

ACCOUNTANTS
KPMG, LLP
113 South Salina Street
Syracuse, New York 13202

DIVIDENDS

 There were no dividends  declared in 1998.  However,  the company  declared its
inital quarterly cash dividend of $0.04 per share in the first quarter of 1999.

STOCK LISTING
CNY Financial Corporation's common stock is traded on the Nasdaq National Market
System under the symbol CNYF. At December 31, 1998,  there were 5,251,037 shares
of CNY Financial Corporation common stock issued and outstanding, and there were
approximately  1,610  holders of record.  The table below shows the high and low
bid price on the  common  stock for each  month  since the  common  stock  began
trading on October 6, 1998.  These prices do not represent  actual  transactions
and do not include retail markups, markdowns or commissions.


                                                                 Bid 
                                                       ----------------------
   Month Ended                                          High            Low
-----------------                                      ------          ------
October  31, 1998 (1)                                  $10.00           $8.88
November 30, 1998                                      $10.19           $9.00
December 31, 1998                                      $10.06           $9.44

(1)Reflects the period from October 6 through October 31, 1998.

The stock price  information  set forth in the table  above was  provided by the
National  Association of Securities  Dealers,  Inc. High, low and closing prices
and daily trading volume are reported in the most major newspapers.


MARKET MAKERS
CIBC Oppenhimer & Co. Inc.
Trident Securities, Inc.
Friedman Billings Ramsey & Co.
Tucker Anthony, Inc.

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<PAGE>

DIRECTORS


Joseph H. Compagni
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]

Patrick J. Hayes
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]

Donald P. Reed
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]

Roland Fragnoli
Cortland Savings Bank
[photo omitted]

Robert S. Kashdin
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]

Judith F. Riehlman
Cortland Savings Bank

Wesley D. Stisser, President & CEO
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]

Edward E. Hatter, Jr.
Cortland Savings Bank
[photo omitted]

Harvey Kaufman, Chairman
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]

Terrance D. Stalder
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]

                                       40