SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                  FORM 10-KSB

(Mark One):

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE
     ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: September 30, 1996,

[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to .

Commission File No. 0-21113

                             AFSALA Bancorp, Inc.
-------------------------------------------------------------------------------
                (Name of Small Business Issuer in Its Charter)

           Delaware                                            14-1793890
--------------------------------                           ------------------
 (State or Other Jurisdiction of                            (I.R.S. Employer
Incorporation or Organization)                             Identification No.)


161 Church Street, Amsterdam, New York                                12010
----------------------------------------                            ----------
(Address of Principal Executive Offices)                            (Zip Code)

                                (518) 842-5700
-------------------------------------------------------------------------------
               (Issuer's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:                None
                                                                           ----

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

                    Common Stock, par value $0.10 per share
                    ---------------------------------------
                               (Title of Class)

     Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days.
  YES [X] NO [ ].

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the best of the  registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

      State issuer's revenues for its most recent fiscal year. $9,553,554

      As of December 2, 1996, there were issued and outstanding 1,454,750 shares
of the registrant's Common Stock.

      Registrant's  voting stock is listed on the Nasdaq  National  Market under
the symbol  "AFED."  The  aggregate  market  value of the  voting  stock held by
non-affiliates of the registrant,  based on the average bid and ask price of the
registrant's  Common Stock on December 2, 1996, was  $15,248,652  ($12 per share
based on 1,270,721 shares of Common Stock held by non-affiliates).

Transition Small Business Disclosure Format (check one) 
YES [ ] NO [X]

                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None.


<PAGE>



                                    PART I

Item 1.  Business
-----------------

General

      AFSALA  Bancorp,  Inc. (the "Company" or the  "Registrant")  is a Delaware
corporation  organized in June 1996 at the  direction of Amsterdam  Federal Bank
(the  "Bank") to acquire all of the capital  stock that the Bank issued upon the
Bank's conversion from the mutual to stock form of ownership (the  "Conversion")
on  September  30,  1996.  The Company is not an  operating  company and has not
engaged in any significant  business to date. As such,  references herein to the
Bank include the Company unless the context otherwise indicates.

      The Company is a unitary  savings and loan holding  company  which,  under
existing laws,  generally is not restricted in the types of business  activities
in which it may engage, provided that the Bank retains a specified amount of its
assets in housing-related  investments.  The Company does not employ any persons
other than  officers,  but utilizes  the support  staff of the Bank from time to
time.

      The Bank attracts  deposits from the general public and uses such deposits
primarily to originate  loans secured by first  mortgages on one- to four-family
residences in its market areas. The Bank has recently  increased its emphasis on
originating  home  equity  loans.  The  Bank  also  originates  consumer  loans,
consisting of personal loans, home improvement loans, and passbook loans, and to
a much lesser extent, the Bank originates commercial real estate loans and other
commercial  loans.  Although the total loan portfolio  still consists of a small
amount of education loans, the Bank ceased making such loans in June 1994.

      The  principal  sources of funds for the  Bank's  lending  activities  are
deposits,  the repayment and maturity of loans and sale,  maturity,  and call of
securities,  and Federal Home Loan Bank ("FHLB") advances.  The principal source
of income is interest  on loans and the  principal  expense is interest  paid on
deposits.

      The Bank is subject to  examination  and  comprehensive  regulation by the
Office  of Thrift  Supervision  ("OTS")  and its  deposits  have been  federally
insured by the Savings Association  Insurance Fund ("SAIF") and its predecessor,
the Federal Savings and Loan Insurance  Corporation  ("FSLIC"),  since 1937. The
Bank is a member of and owns capital stock in the FHLB of New York, which is one
of the 12 regional banks in the FHLB System.

Market Area and Competition

      The Bank operates four offices and an operations  center. The main office,
the operations center, and one branch office are located in Amsterdam, New York,
in Montgomery  County. One branch office which was opened in October 1994, is in
a Shop N Save Supermarket  located in Gloversville,  New York, in Fulton County,
and one  branch  office,  which  was  opened  in May  1995,  is in a Shop N Save
Supermarket located in Oneonta,  New York, in Otsego County. Based on the Bank's
branch  locations  and deposit  activity,  the Bank has two market  areas.  Both
market areas are defined by existing boundaries. One market area consists of the
Cities  of  Amsterdam,  Gloversville,  Johnstown,  and the  Towns of  Amsterdam,
Johnstown,  Florida, Mohawk,  Broadalbin,  Mayfield, and Perth. The other market
area consists of the City of Oneonta and Town of Oneonta.

                                      2


<PAGE>



      Economic  growth in the Bank's  market areas  remains  dependent  upon the
local  economy.  The  deposit  and loan  activity  of the Bank is  significantly
affected by economic conditions in its market areas. The economies of the Bank's
market areas have remained  stagnant for several years. The largest employers in
the Bank's market areas are smaller sized  manufacturers.  Trade,  service,  and
government  related  industries are other employers.  Because there are no major
employers in these market areas, many residents commute to Schenectady County or
the state capitol for employment.  The Bank has been able to increase its market
share in originating  first mortgage  loans on residential  property  within its
primary market areas,  even though total first mortgage loan originations in the
Bank's market areas have been declining.  The Bank has also increased its market
share of deposits and consumer loans for at least the last five years.

      The  Bank  has  been  able to  maintain  its  position  in  mortgage  loan
originations,  market share, and deposit accounts throughout its market areas by
virtue of its local presence,  competitive  pricing, and referrals from existing
customers.  The Bank is one of many  financial  institutions  serving its market
areas.

      The   competition   for  deposits  comes  from  other  insured   financial
institutions such as commercial banks, thrift  institutions,  credit unions, and
multi-state  regional  banks in the Bank's market areas.  Competition  for funds
also includes a number of insurance products sold by local agents and investment
products  such as mutual funds and other  securities  sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
other  insured  financial   institutions   such  as  commercial  banks,   thrift
institutions,  credit  unions,  and  multi-state  regional  banks,  and mortgage
bankers, many of whom have far greater resources than the Bank.

Lending Activities

      General.  The Bank's  loan  portfolio  predominantly  consists of mortgage
loans secured by one- to four-family residences.  The Bank has recently begun to
emphasize  home equity loans secured by first and second  mortgage loans on one-
to four-family  residences.  The Bank also originates consumer loans, consisting
of personal  loans,  home  improvement  loans,  and passbook  loans. To a lesser
extent,  the Bank originates  commercial real estate loans and other  commercial
loans. Although the loan portfolio still consists of a small amount of education
loans, the Bank ceased making such loans in June 1994.

      At  September  30,  1996,  loans  secured  by first  mortgages  on one- to
four-family  residences  totalled $44.0 million,  or 61.44%, of the Bank's total
loan  portfolio.  Prior to 1988, the Bank purchased  loans,  however,  it is the
current practice of the Bank not to purchase loans. Other than educational loans
which  were  recently  sold,  the  Bank  does not  sell  loans,  and the Bank is
primarily  a  portfolio  lender.  For its  mortgage  loan  portfolio,  the  Bank
originates fixed rate and adjustable-rate mortgage loans. At September 30, 1996,
adjustable-rate  residential mortgage loans totalled approximately 34.86% of the
Bank's residential mortgage loans.

      Loan originations are generally obtained from existing customers,  members
of the local  community,  and  referrals  from  real  estate  brokers,  lawyers,
accountants,  and current and past customers within the Bank's lending area. The
Bank  also  advertises  on an  extensive  basis in the  local  print  media  and
periodically  advertises on radio and television.  Mortgage loans  originated by
the Bank in its portfolio generally include due-on-sale clauses that provide the
Bank with the contractual  right to deem the loan immediately due and payable in
the event that the borrower  transfers  ownership  of the  property  without the
Bank's consent.

                                      3


<PAGE>



      Analysis of Loan  Portfolio.  The following  table sets forth  information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio as of the dates indicated.

<TABLE>
<CAPTION>

                                                      September 30,
                                       -----------------------------------------
                                             1996                       1995
                                       -------------------    ------------------
                                         $            %            $           %
                                                 (Dollars in Thousands)

Type of Loans:
Real Estate Loans:
<S>                                   <C>         <C>           <C>         <C>   
  Residential....................     $43,966      61.44%       $44,608      67.46%
  Commercial.....................       3,015       4.21          2,796       4.23
  Home equity ...................      14,666      20.50          9,771      14.78
                                       ------      -----         ------      -----
     Total real estate loans.....      61,647      86.15         57,175      86.47
                                       ------      -----         ------      -----
Consumer Loans:
  Personal secured(1)............       3,943       5.51          2,842       4.30
  Personal unsecured.............         432       0.60            407       0.62
  Education......................          91       0.13            307       0.46
  Home improvement...............       1,560       2.18          1,259       1.90
  Passbook.......................         779       1.09            834       1.26
                                       ------     ------         ------     ------
     Total consumer loans........       6,805       9.51          5,649       8.54
                                       ------     ------         ------     ------
Commercial Loans.................       3,104       4.34          3,301       4.99
                                       ------     ------         ------     ------
     Total loans.................      71,556     100.00%        66,125     100.00%
                                                  ======                    ======
Less:
  Allowance for loan losses......         879                       678
                                       ------                    ------
     Total loans receivable, net.     $70,677                   $65,447
                                       ======                    ======
</TABLE>

----------------------------
(1) Includes  loans  secured by, among other  things,  automobiles,  boats,  and
mobile homes.

                                      4


<PAGE>



      Loan  Maturity  Tables.  The  following  table  sets  forth the  estimated
maturity of the Bank's loan  portfolio at September 30, 1996. The table does not
include  the  effects of  possible  prepayments  or  scheduled  repayments.  All
mortgage loans are shown as maturing based on contractual maturities.

<TABLE>
<CAPTION>

                                                        At September 30, 1996
                                --------------------------------------------------------------------
                                 Residential    Commercial    Commercial     Consumer
                                Real Estate(1)  Real Estate     Loans         Loans           Total
                                --------------  -----------   ----------     --------         -----
                                                           (In thousands)

<S>                               <C>             <C>          <C>           <C>             <C>    
Non-performing ................   $   624         $    --      $    --       $   158         $   782
                                  =======         =======      =======       =======         =======
Amounts Due:                                                                                
Within 1 year .................   $   368         $    --      $ 1,321       $ 1,814         $ 3,503
1 to 5 years ..................     5,160             141          668         2,329           8,298
More than 5 years .............    53,103           2,874        1,115         2,663          59,755
                                  -------         -------      -------       -------         -------
Total due after one year.......    58,263           3,015        1,783         4,992          68,053
                                  -------         -------      -------       -------         -------
Total amount due ..............   $58,631         $ 3,015      $ 3,104       $ 6,806          71,556
                                  =======         =======      =======       =======         =======
                                                                                      
Less:
Allowance for loan loss ...............................................                          879
                                                                                             -------
  Loans receivable, net ...............................................                      $70,677
                                                                                             =======
</TABLE>

--------------------------
(1)   Includes home equity loans.


      The   following   table  sets  forth  the  dollar   amount  of  all  loans
contractually  due after  September 30, 1997, and shows the amount of such loans
which have  pre-determined  interest rates and which have floating or adjustable
interest rates.

                                       At September 30, 1996
                           ------------------------------------------
                           Fixed Rates    Adjustable Rates      Total
                           -----------    ----------------      -----
                                         (In Thousands)

Residential real estate(1)   $37,903          $20,360         $58,263
Commercial real estate..       2,706              309           3,015
Commercial loans........       1,783               --           1,783
Consumer loans..........       4,946               46           4,992
                              ------           ------          ------
  Total.................     $47,338          $20,715         $68,053
                              ======           ======          ======
                                                       
--------------------------
(1)   Includes home equity loans.

      One- to Four-Family Residential Loans. The Bank's primary lending activity
consists of the  origination of one- to four-family  residential  mortgage loans
secured by  property  located  in the  Bank's  primary  market  areas.  The Bank
generally  originates  owner-occupied one- to four-family  residential  mortgage
loans in amounts up to 80% of the lesser of the appraised value or selling price
of the mortgaged  property without requiring mortgage  insurance.  The Bank will
originate a mortgage  loan in an amount up to 95% of the lesser of the appraised
value or selling price of a mortgaged property,  however,  mortgage insurance is
required  for the  amount in excess of 80% of such  value.  Non-owner-  occupied
residential  mortgage  loans  are  originated  up to 75% of  the  lesser  of the
appraised value or

                                      5


<PAGE>



selling  price of the property on a fixed rate basis only.  The Bank,  on a very
limited  basis,  also  originates   construction  permanent  loans  on  one-  to
four-family residences.  The Bank retains all mortgage loans that it originates.
Adjustable-rate mortgage loans, which can adjust annually or every three or five
years  over the life of the loan  depending  on the terms of the loan,  can have
maturities of up to 30 years.  Fixed rate loans can have  maturities of up to 15
or 20 years depending on the terms of the loan. The Bank also originates a fixed
rate 8 year balloon loan with principal and interest payments calculated using a
30 year amortization.

      For all adjustable-rate  mortgage loans, the Bank requires the borrower to
qualify  at the  fully  indexed  rate  after the first  adjustment.  The  Bank's
adjustable-rate mortgage loans provide for periodic interest rate adjustments of
plus or minus 1% to 2% per year with a maximum  adjustment  over the term of the
loan as set forth in the loan agreement and usually ranges from 4% to 6.5% above
the initial  interest rate  depending on the terms of the loan.  Adjustable-rate
mortgage loans typically reprice every year, although some adjust every three or
five years, and provide for terms of up to 30 years with most loans having terms
of between 15 and 30 years. The Bank offers  adjustable-rate  loans with initial
interest rates set below the fully indexed rate.

      The Bank offers  adjustable-rate  mortgage  loans  indexed to the one year
U.S.  Treasury  bill  rate.   Interest  rates  charged  on  mortgage  loans  are
competitively  priced based on market  conditions  and the Bank's cost of funds.
Generally,  the Bank's  standard  underwriting  guidelines  for  mortgage  loans
conform to the Federal National  Mortgage  Corporation  ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC") guidelines and most of the Bank's loans
can be sold in the secondary  market.  However,  it is the current policy of the
Bank to remain a portfolio lender.

      Commercial  Loans. The Bank originates a limited amount of commercial real
estate and other commercial loans. Commercial real estate loans consist of loans
made for the purpose of purchasing the commercial real estate used as collateral
and includes  loans secured by mixed  residential  and  commercial use property,
professional  office buildings,  and restaurants.  Commercial loans,  other than
commercial real estate loans,  consist of, among other things,  commercial lines
of credit, commercial vehicle loans, and working capital loans and are typically
secured by residential or commercial property, receivables or inventory, or some
other  form of  collateral.  The Bank  requires a  personal  guarantee  from the
principal of the commercial enterprise on all commercial loans. Loans secured by
commercial  property  may be  originated  in amounts up to 75% of the  appraised
value for a maximum term of 15 years.

      Home Equity Loans.  The Bank originates home equity loans secured by first
and second  mortgages on  residential  real estate.  The loans are originated as
fixed rate loans with terms of 3 to 15 years. The loans are generally subject to
an 80% combined  loan-to-value ratio,  including any other outstanding mortgages
or liens. However, the Bank may occasionally permit a higher loan-to-value ratio
based on other factors, such as the strength and credit history of the applicant
and the terms of the loan. The Bank has recently begun to emphasize  these loans
as a means of supplementing its mortgage loan origination volume.

      Consumer Loans. The Bank offers consumer loans in order to provide a wider
range of financial services to its customers.  Federal savings  associations are
permitted  to make  secured  and  unsecured  consumer  loans  up to 35% of their
assets. In addition,  savings  associations have lending authority above the 35%
limitation for certain consumer loans,  such as home equity,  home  improvement,
mobile home, and savings account or passbook loans. The Bank originates  secured
and unsecured  consumer loans,  consisting of personal loans,  home  improvement
loans, and passbook loans.

                                      6


<PAGE>



      Loan Underwriting Risks. Adjustable-rate mortgage loans decrease the risks
associated with changes in interest rates by periodically repricing, but involve
other risks because as interest rates increase,  the underlying  payments by the
borrower increase,  thus increasing the potential for default. At the same time,
the  marketability  of the underlying  collateral  may be adversely  affected by
higher interest  rates.  Upward  adjustment of the contractual  interest rate is
also limited by the maximum periodic  interest rate adjustment  permitted by the
adjustable-rate  mortgage loan documents,  and, therefore is potentially limited
in  effectiveness  during periods of rapidly rising interest rates.  These risks
have not had an adverse effect on the Bank.

      While  commercial real estate and consumer or other loans provide benefits
to the Bank's asset/liability management program by reducing the Bank's exposure
to interest rate changes,  due to their generally  shorter terms,  and producing
higher  yields,  such  loans may  entail  significant  additional  credit  risks
compared to  owner-occupied  residential  mortgage  lending.  However,  the Bank
believes that the higher yields and shorter  terms  compensate  the Bank for the
increased credit risk associated with such loans. In addition, home equity loans
provide  certain  benefits   compared  to  longer  term,  fixed  rate,  one-  to
four-family  residential  loans; home equity loans provide reduced interest rate
risk due to their  shorter  terms and  provide  higher  yields.  However,  these
benefits may not compensate for the increased  credit risk that results from not
holding the first lien on the underlying collateral for home equity loans.

      Commercial lending entails significant additional risks when compared with
one- to four-family residential lending. For example, commercial loans typically
involve larger loan balances to single borrowers or groups of related borrowers,
the payment  experience on such loans  typically is dependent on the  successful
operation  of the project and these risks can be  significantly  impacted by the
cash flow of the  borrowers  and supply and demand  conditions in the market for
commercial  office,  retail,  and warehouse space. In periods of decreasing cash
flows, the commercial  borrower may permit a lapse in general maintenance of the
property causing the value of the underlying collateral to deteriorate.

      In addition,  due to the type and nature of the  collateral,  and, in some
cases the absence of collateral, consumer lending generally involves more credit
risk  when  compared  with one- to  four-family  residential  lending.  Consumer
lending  collections  are  typically  dependent  on  the  borrower's  continuing
financial  stability,  and thus, are more likely to be adversely effected by job
loss, divorce,  illness, and personal bankruptcy. In most cases, any repossessed
collateral for a defaulted  consumer loan will not provide an adequate source of
repayment of the outstanding loan balance.  The remaining  deficiency often does
not warrant further  substantial  collection efforts against the borrower and is
usually turned over to a collection agency.

      Loan Approval Authority and Underwriting. The Bank has established various
lending limits for its officers and maintains a Management Loan Committee and an
Executive Loan Committee. A report of all mortgage loans originated is presented
to the Board of Directors monthly.  Upon receipt of a completed loan application
from a prospective  borrower,  a credit report is generally ordered,  income and
certain other  information is verified and, if necessary,  additional  financial
information  is  requested.  An  appraisal  from  an  independent  licensed  fee
appraiser of the real estate intended to be used as security for a proposed loan
is  obtained.  For  construction/permanent  loans,  funds  advanced  during  the
construction  phase are held in a  loan-in-process  account and disbursed  based
upon various  stages of completion in accordance  with the results of inspection
reports that are based upon physical  inspection of the  construction  by a loan
officer.  For real estate loans,  each title is reviewed by the attorney for the
Bank to determine the necessity for title insurance.  Historically, the Bank has
not required title  insurance  except in those  instances where the attorney has
seen a need for title  insurance.  Borrowers  must also obtain fire and casualty
insurance  (for loans on property  located in a flood zone,  flood  insurance is
required) prior to the closing of the loan. The Bank is named as  mortgagee/loss
payee of this insurance.

                                      7


<PAGE>




      Loan  Commitments.  The Bank issues  written  commitments  to  prospective
borrowers on all approved  mortgage loans which generally  expire within 60 days
of the date of issuance.  The Bank charges no commitment  fees or points to lock
in rates or to  secure  commitments.  In some  instances,  after a review of the
rate,  terms, and  circumstances,  commitments may be renewed or extended beyond
the 60 day  limit.  At  September  30,  1996,  the  Bank  had  $1.0  million  of
outstanding   commitments  on   residential   mortgage  loans  and  $333,000  in
undisbursed funds related to construction  loans.  Management believes that less
than 5% of loan commitments expire. Furthermore, at September 30, 1996, the Bank
had $224,000 in unused  personal lines of credit and $106,000 in standby letters
of credit.

      Loans  to  One  Borrower.   Regulations  limit  loans-to-one  borrower  or
affiliated  group of borrowers in an amount equal to 15% of  unimpaired  capital
and  unimpaired  surplus of the Bank.  The Bank is  authorized  to lend up to an
additional 10% of unimpaired capital and unimpaired surplus if the loan is fully
secured  by  readily  marketable  collateral.  The  Bank's  maximum  loan-to-one
borrower limit as set by the Board of Directors is 10% of unimpaired capital and
surplus.

      At  September  30,  1996,  the Bank's  largest  lending  relationship  was
comprised of loans secured by commercial and residential  properties aggregating
approximately  $624,000  located in the Bank's market areas.  The second largest
lending  relationship  consisted  of  a  residential  loan  with  a  balance  of
approximately  $528,000 at September 30, 1996, secured by real estate located in
the Bank's market areas.  The third largest  lending  relationship  consisted of
loans  secured  by  publicly  traded   securities  and  residential   properties
aggregating  approximately  $484,000 at September 30, 1996 located in the Bank's
market  areas.  At September  30, 1996,  all of these loans were  performing  in
accordance with their terms.

      Loan  Delinquencies.  Loans are reviewed on a monthly basis and are placed
on  non-accrual  status when  considered  doubtful of collection by  management.
Generally,  loans past due 90 days or more as to principal  or interest  and, in
the opinion of management,  are not adequately  secured to ensure the collection
of the entire  outstanding  balance of the loan including  accrued  interest are
placed on non-accrual status.  Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income. Subsequent cash
payments,  if any, are  generally  applied to reduce the  outstanding  principal
balance.

                                      8


<PAGE>



      Non-Performing   Assets.   The  following  table  sets  forth  information
regarding  non-accrual loans,  accruing loans which are past due 90 days or more
as to principal or interest  payments,  and foreclosed  assets.  As of the dates
indicated, the Bank had no loans categorized as troubled debt restructuring.

                                                           At September 30,
                                                           ----------------
                                                            1996      1995
                                                           -------   ------
                                                         (Dollars in Thousands)

Non-accruing loans:
  Residential real estate(1) ........................... $   624  $   487
  Commercial real estate ...............................       0        0
  Consumer and commercial loans ........................      92       31
                                                          ------   ------ 
     Total ............................................. $   716  $   518
                                                          ------   ------ 

Accruing loans past due 90 days or more:
  Residential real estate(1) ........................... $     0  $   
  Commercial real estate ...............................       0        0
  Consumer and commercial loans ........................      66       79
                                                          ------   ------ 
     Total ............................................. $    66  $    79
                                                          ======   ====== 

Total non-performing loans ............................. $   782  $   597
                                                          ======   ====== 

Foreclosed assets:

  Residential real estate(1) ...........................       0        0
  Commercial real estate ...............................       0        0
  Consumer and commercial ..............................       0        0
                                                          ------   ------ 
     Total .............................................       0        0
                                                          ======   ====== 

Total non-performing assets ............................ $   782  $   597
                                                          ======   ====== 
Allowance for loan losses .............................. $   879  $   678
                                                          ======   ====== 
Coverage of non-performing loans(2) ....................  112.40%  113.57%
                                                          ======   ====== 
Non-performing assets as a percentage of total assets...    0.51%    0.47%
                                                          ======   ====== 

-------------------------
(1)  Includes home equity loans.
(2)  Calculated  as the period end  allowance for loan losses as a percentage of
     the period end non-performing loans.

      Interest  income that would have been recorded on loans accounted for on a
non-accrual basis under the original terms of such loans was $33,000 and $17,000
for the years ended  September 30, 1996 and 1995,  respectively  and $29,000 and
$27,000  was  collected  and  included  in  the  Bank's   interest  income  from
non-accrual loans for the years ended September 30, 1996 and 1995.

      Other Loans of Concern.  As of September 30, 1996,  there was one loan not
included  in the table  above  where known  information  about  possible  credit
problems of the borrower  caused  management to have doubts as to the ability of
the borrower to comply with the present loan repayment terms. This loan has been
considered by management in conjunction with the analysis of the adequacy of the
allowance for loan losses. This loan had an outstanding balance of approximately
$244,000 as of  September  30, 1996.  The  proceeds  from this loan were used to
purchase a  commercial  enterprise,  as well as  purchase  equipment  for use in
connection with such enterprise.  In May 1995, the borrower filed for bankruptcy
as a result of financial difficulties  associated with another property owned by
the borrower  for which the Bank  provided no  financing.  The borrower has made
timely loan payments since the bankruptcy  filing and at September 30, 1996, the
loan was current.

                                      9


<PAGE>




      Classified Assets. OTS regulations provide for a classification system for
problem  assets of  insured  institutions.  Under  this  classification  system,
problem  assets  of  insured   institutions  are  classified  as  "substandard,"
"doubtful," or "loss." An asset is considered  substandard if it is inadequately
protected  by the  current  equity and paying  capacity of the obligor or of the
collateral  pledged,  if any.  Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the  weaknesses  inherent in those  classified  as  substandard,  with the added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable  and  improbable."  Assets  classified as loss are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
may be designated  "special mention" because of potential weakness that does not
currently warrant classification in one of the aforementioned categories.

      When  an  insured   institution   classifies   problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets. When an insured  institution  classifies
problem assets as loss, it is required either to establish a specific  allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's  determination as to the classification of its
assets and the amount of its  valuation  allowances  is subject to review by the
OTS, which may order the  establishment  of additional  general or specific loss
allowances.  A portion of general loss allowances  established to cover possible
losses  related to assets  classified as substandard or doubtful may be included
in determining an institution's  regulatory  capital,  while specific  valuation
allowances for loan losses generally do not qualify as regulatory capital.

      In accordance with its classification of assets policy, the Bank regularly
reviews the problem  assets in its  portfolio  to  determine  whether any assets
require classification in accordance with applicable  regulations.  On the basis
of  management's  review of its assets,  at  September  30,  1996,  the Bank had
classified $632,000 of loans as substandard,  $334,000 of loans as doubtful, and
none as loss.

      Foreclosed  Real Estate.  Real estate  acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired, it is recorded at the fair value at
the date of foreclosure less estimated costs of disposition.

      The Bank records loans as in-substance  foreclosures if the Bank has taken
possession  of  the  collateral   regardless  of  whether   formal   foreclosure
proceedings have been instituted. In-substance foreclosures are accounted for as
real estate acquired through foreclosure,  however,  title to the collateral has
not been acquired by the Bank. There may be significant  other expenses incurred
such as legal and other servicing costs involved with in substance  foreclosures
and  foreclosed  real  estate.  The Bank had no  foreclosed  real  estate  or in
substance foreclosed properties at September 30, 1996 and 1995.

      Allowances for Loan Losses.  Management  regularly performs an analysis to
identify the inherent risk of loss in its loan portfolio. This analysis includes
evaluation of concentrations of credit,  past loss experience,  current economic
conditions,  amount and composition of the loan portfolio (including loans being
specifically  monitored  by  management),  estimated  fair  value of  underlying
collateral, loan commitments outstanding, delinquencies, and other factors.

                                      10


<PAGE>



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

      Analysis of Allowance  for Loan  Losses.  The  following  table sets forth
information  with respect to the Bank's  allowance  for loan losses at the dates
indicated:

<TABLE>
<CAPTION>


                                                             Year Ended September 30,
                                                             ------------------------
                                                                1996          1995
                                                             -----------   ----------
                                                               (Dollars in Thousands)

<S>                                                            <C>          <C>     
Total loans outstanding (end of period) ....................   $ 71,556     $ 66,125
                                                               ========     ========
Average total loans outstanding (period to date) ...........   $ 68,878     $ 63,000
                                                               ========     ========
Allowance for loan loss at beginning of period .............        678          625
Loan charge-offs:
  Residential real estate(1) ...............................        (11)          (5)
  Commercial real estate ...................................          0         (104)
  Consumer and commercial loans ............................        (18)          (3)
                                                               --------     --------
     Total charge-offs .....................................        (29)        (112)
                                                               --------     --------
Total recoveries ...........................................          0            0
                                                               --------     --------
Loan charge-offs, net of recoveries ........................        (29)        (112)
Provision charged to operations ............................        230          165
                                                               --------     --------
Allowance for loan losses at end of period .................   $    879     $    678
                                                               ========     ========
Ratio of net charge-offs during the period to average loans
  outstanding during the period ............................       0.04%        0.18%
                                                               ========     ========
Provision as a percentage of average loans .................       0.33%        0.26%
                                                               ========     ========
Allowance as a percentage of total loans (end of period)....       1.23%        1.03%
                                                               ========     ========
</TABLE>

--------------------------
(1)   Includes home equity loans.

                                      11


<PAGE>



      Allocation  of the Allowance  for Loan Losses.  The  following  table sets
forth the allocation of the allowance for loan losses by category as prepared by
the Bank.  In  management's  opinion,  the  allocation  has, at best,  a limited
utility.  It is based on management's  assessment as of a given point in time of
the  risk  characteristics  of each of the  component  parts of the  total  loan
portfolio  and is subject  to changes as and when the risk  factors of each such
component  part change.  The allocation is not indicative of either the specific
amounts or the loan  categories in which future  charge-offs  may be taken,  nor
should it be taken as an  indicator  of future  loss  trends.  In  addition,  by
presenting the allocation, management does not mean to imply that the allocation
is  exact  or  that  the  allowance  has  been  precisely  determined  from  the
allocation.  The allocation of the allowance to each category is not necessarily
indicative of future loss in any  particular  category and does not restrict the
use of the allowance to absorb losses in any category.

<TABLE>
<CAPTION>


                                                    September 30,
                                           1996                         1995
                                  -------------------------    -------------------------
                                               Percent of                   Percent of
                                  Amount of  Loans in Each     Amount of   Loans in Each
                                  Loan Loss   Category to      Loan Loss    Category to
                                  Allowance   Total Loans      Allowance    Total Loans
                                  ---------   -------------    ---------   -------------   
                                                   (Dollars in Thousands)

Allocation of allowance for loan
  losses(1):
<S>                                   <C>        <C>           <C>          <C>   
Residential real estate(2).....       $201        81.94%       $124          82.24%
Commercial real estate.........         23         4.21          34           4.23
Consumer and commercial loans .        232        13.85         195          13.53
Unallocated....................        423         0.00         325           0.00
                                       ---       ------         ---         ------
     Total.....................       $879       100.00%       $678         100.00%
                                       ===       ======         ===         ======

</TABLE>

-------------------------------
(1)   Percentages represent loans to gross loans in each category.
(2)   Includes home equity loans.


Investment Activities

      General.  The Bank is required  under  federal  regulations  to maintain a
minimum  amount of liquid  assets which may be invested in specified  short term
securities and certain other investments. See " Regulation of the Bank - Federal
Home Loan Bank System." The Bank has maintained a liquidity  portfolio in excess
of  regulatory  requirements.  Liquidity  levels may be  increased  or decreased
depending  upon the  yields on  investment  alternatives  and upon  management's
judgment as to the  attractiveness  of the yields then  available in relation to
other  opportunities  and its  expectation  of future yield  levels,  as well as
management's projections as to the short term demand for funds to be used in the
Bank's  loan  origination  and  other   activities.   The  Bank  classifies  its
investments as securities  available for sale or investments  securities held to
maturity in  accordance  with SFAS No. 115. At September  30,  1996,  the Bank's
investment  portfolio  policy allowed  investments  in instruments  such as U.S.
Treasury  obligations,   U.S.  federal  agency  or  federally  sponsored  agency
obligations,   municipal  obligations,   mortgage-backed  securities,   banker's
acceptances,  certificates of deposit,  federal funds,  including FHLB overnight
and term  deposits (up to six months),  as well as  investment  grade  corporate
bonds,  commercial paper and the mortgage  derivative  products described below.
The Board of Directors may authorize additional investments.

                                      12


<PAGE>



      The Bank's securities available for sale and investment securities held to
maturity  portfolios  at September  30, 1996 did not contain  securities  of any
issuer  with an  aggregate  book  value in excess of 10% of the  Bank's  equity,
excluding those issued by the United States Government or its agencies.

      Mortgage-Backed Securities. To supplement lending activities, the Bank has
invested in residential mortgage-backed  securities.  Mortgage-backed securities
can serve as collateral for borrowings and, through  repayments,  as a source of
liquidity.  Mortgage-backed  securities represent a participation  interest in a
pool of  single-family  or other type of  mortgages,  the principal and interest
payments  on  which  are  passed   from  the   mortgage   originators,   through
intermediaries (generally  quasi-governmental  agencies) that pool and repackage
the participation interests in the form of securities,  to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA.

      The Bank's mortgage-backed securities,  other than collateralized mortgage
obligations  ("CMOs"),  are classified as investment securities held to maturity
at  September  30,  1996  and  were  all  issued  by  GNMA,  FHLMC,  or FNMA and
represented  participating  interests in direct  pass-through pools of long-term
mortgage  loans  originated  and  serviced  by the  issuers  of the  securities.
Expected  maturities  will differ from  contractual  maturities due to scheduled
repayments  and  because  borrowers  may  have  the  right  to  call  or  prepay
obligations with or without prepayment penalties.

      Mortgage-backed  securities  typically  are issued with  stated  principal
amounts and the securities are backed by pools of mortgages that have loans with
interest  rates  that  are  within  a range  and have  varying  maturities.  The
underlying   pool  of  mortgages  can  be  composed  of  either  fixed  rate  or
adjustable-rate  mortgage  loans.   Mortgage-backed   securities  are  generally
referred to as mortgage participation certificates or pass-through certificates.
As a result,  the interest rate risk  characteristics  of the underlying pool of
mortgages (i.e., fixed rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed  pass-through
security  is  equal  to the life of the  underlying  mortgages.  Mortgage-backed
securities  issued  by  FHLMC,  FNMA,  and  GNMA  make  up  a  majority  of  the
pass-through certificates market.

      The Bank also invests in CMOs, a type of mortgage-backed  security, and as
of September 30, 1996  maintains  CMOs  classified  as securities  available for
sale.  Substantially all of the Bank's CMOs were issued by GNMA, FHLMC, or FNMA.
CMOs  have been  developed  in  response  to  investor  concerns  regarding  the
uncertainty  of  cash  flows  associated  with  the  prepayment  option  of  the
underlying mortgagor and are typically issued by government agencies, government
sponsored  enterprises,  and special purpose  entities  established by financial
institutions and other similar institutions.  Some CMO instruments are most like
traditional  debt  instruments  because they have stated  principal  amounts and
traditionally  defined  interest  rate terms.  Purchasers  of certain  other CMO
instruments  are entitle to the excess,  if any, of the issuer's  cash  inflows,
including reinvestment  earnings,  over the cash outflows for debt servicing and
administrative  expenses.  CMOs may include  instruments  designated as residual
interests,  which  represent  an equity  ownership  interest  in the  underlying
collateral,  subject to the first lien of the  investors in the other classes of
the CMO and may be riskier than many  regular CMO  interests.  At September  30,
1996, all of the Bank's CMOs consisted of regular  interests and did not include
any  residual  interests or  interest-only  or principal  only  securities.  The
securities  are backed by  mortgages  on one- to  four-family  residential  real
estate and have contractual  maturities up to 30 years in the case of adjustable
rate and 15 years in the case of fixed rate mortgage-backed securities.

                                      13


<PAGE>



      At September 30, 1996, the Bank held CMOs in its securities  available for
sale portfolio  with a fair value of $3.4 million  resulting in a net unrealized
loss of approximately  $64,000. The Bank held mortgage-backed  securities in its
investment securities held to maturity portfolio with an amortized cost of $12.2
million at September 30, 1996.  The average yield on CMOs available for sale and
mortgage-backed  securities held to maturity at September 30, 1996 was 6.19% and
6.96%, respectively.

      Securities Portfolio. The following table sets forth the carrying value of
the Bank's  securities  at the dates  indicated.  At  September  30,  1996,  the
approximate  fair value of the Bank's  securities  available  for sale was $17.1
million resulting in a net unrealized loss of $28,000, net of taxes.

                                                              At September 30,
                                                             -----------------
                                                              1996      1995
                                                             -------   -------
                                                               (In Thousands)

Securities available for sale, at fair value:

  U.S. Government and agency securities ..................   $ 8,779   $ 2,004
  States and political subdivisions ......................     4,993       559
  Collateralized mortgage obligations ....................     3,360         0
                                                             -------   -------
     Total securities available for sale .................   $17,132   $ 2,563

Investment securities held to maturity, at amortized cost:
  U.S. Government and agency securities ..................   $22,787   $25,213
  States and political subdivisions ......................        --     6,077
  Mortgage-backed securities .............................    12,172    12,348
  Collateralized mortgage obligations ....................        --     3,049
  Other ..................................................        41        36
                                                             -------   -------
     Total investment securities held to maturity.........   $35,000   $46,723
                                                             =======   =======

                                      14


<PAGE>



      The  following  table  sets  forth  information  regarding  the  scheduled
maturities,  carrying  values,  approximate  fair values,  and weighted  average
yields for the Bank's securities  portfolio at September 30, 1996 by contractual
maturity.  The following table does not take into  consideration  the effects of
scheduled repayments or the effects of possible prepayments.

<TABLE>
<CAPTION>


                                                                      At September 30, 1996
                             -----------------------------------------------------------------------------------------------------
                                   Less than             1 to           Over 5 to           Over 10                Total
                                    1 year              5 years          10 years             years              Securities
                             ------------------  ------------------ -----------------  ----------------- -------------------------
                             Amortized  Average  Amortized  Average Amortized Average  Amortized Average Amortized Average   Fair
                                Cost     Yield     Cost      Yield    Cost     Yield     Cost     Yield    Cost     Yield    Value
                             ---------- -------  ---------  ------- --------- -------  --------- ------- --------- -------   -----

                                                           (Dollars in Thousands)

Securities available for 
 sale:
  U.S. Government and
<S>                              <C>       <C>    <C>        <C>     <C>       <C>    <C>          <C>     <C>       <C>    <C>    
    agencies securities......    $5,254    6.13%  $ 3,009    5.93%   $  500    8.00%  $     --       --  % $ 8,763   6.17%  $ 8,779
  States and political
    subdivisions ............     1,777    4.37     3,210    4.10        --      --         --       --      4,987   4.20     4,993
  Collateralized mortgage
    obligations .............        --      --        --      --        --      --      3,424     6.19      3,424   6.19     3,360
     Total securities 
      available for sale ....    $7,031    5.69%  $ 6,219    4.99%   $  500    8.00%   $ 3,424     6.19%   $17,174   5.60   $17,132
                                 ======    ====   =======     ====   ======    ====    =======     ====    =======    ====  =======

Investment securities held to
  maturity:
  U.S. Government and
    agencies securities......    $1,000    4.88%  $15,025     5.91%  $5,262    7.16%   $ 1,500     7.75%   $22,787    6.27% $22,515
  Mortgaged-backed
    securities ..............       357    9.06       497     5.93    1,363    7.76      9,955     6.83     12,172    6.96   12,207
  Other .....................        --      --        --       --       --      --         41       --         41      --       41
                                 ------    ----   -------     ----   ------    ----    -------     ----    -------    ----  -------
     Total investment
       securities held to
       maturity .............    $1,357    5.98%  $15,522     5.91   $6,625    7.28%   $11,496     6.93%   $35,000    6.51% $34,763
                                 ======    ====   =======     ====   ======    ====    =======     ====    =======    ====  =======

</TABLE>



                                            15


<PAGE>



Sources of Funds

      General. Deposits are the major source of the Bank's funds for lending and
other investment purposes. The Bank also derives funds from the (1) amortization
and prepayment of loans, (2) sales, maturities, and calls of securities, and (3)
operations.  Scheduled loan principal  repayments are a relatively stable source
of  funds,   while  deposit  inflows  and  outflows  and  loan  prepayments  are
significantly  influenced by general interest rates and market  conditions.  The
Bank may also borrow funds from the FHLB as a source of funds.

      Deposits.  Consumer and commercial deposits are attracted principally from
within the Bank's  primary  market areas  through the offering of a selection of
deposit  instruments  including  savings  accounts,  NOW accounts,  money market
accounts, and time deposits or certificate of deposit accounts.  Deposit account
terms vary according to the minimum balance required,  the time period the funds
must remain on deposit, and the interest rate, among other factors.

      The  interest  rates  paid by the Bank on  deposits  are set weekly at the
direction of the asset/liability  management committee.  The Bank determines the
interest rate to offer the public on new and maturing  accounts by reviewing the
market interest rates offered by competitors, the Bank's need for funds, and the
current  cost of money.  The Bank  reviews,  weekly,  the  interest  rates being
offered by other financial institutions within its market areas.

      Regular savings, money market, and NOW accounts constituted $55.4 million,
or 43.8%,  of the Bank's deposit  portfolio at September 30, 1996.  Non-interest
bearing  deposits  constituted  $7.2  million  or  5.7%  of the  Bank's  deposit
portfolio at September  30, 1996.  Time  deposits  constituted  $63.8 million or
50.5% of the  deposit  portfolio  of which $6.8  million or 5.4% of the  deposit
portfolio  were time deposits with balances of $100,000 or more. As of September
30, 1996, the Bank had no brokered deposits.

      Time Deposits. The following table indicates the amount of the Bank's time
deposits of $100,000 or more by time  remaining  until  maturity as of September
30, 1996.

                                   Amount of
        Maturity Period          Time Deposits
        ---------------         --------------
                                (In Thousands)

Within three months...........       $2,269
Three through six months......          679
Six through twelve months.....        1,624
Over twelve months............        2,197
                                      -----
     Total....................       $6,769
                                      =====


      Borrowings.  The Bank  may  obtain  advances  from the FHLB of New York to
supplement its supply of lendable funds.  Advances from the FHLB of New York are
typically  secured by a pledge of the Bank's stock in the FHLB of New York and a
portion of the Bank's first  mortgage  loans.  Each FHLB  borrowing  has its own
interest  rate,  which may be fixed or variable,  and range of  maturities.  The
Bank,  if the need arises,  may also access the Federal  Reserve  Bank  discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements.  At September  30,  1996,  the Bank had $1.8 million in fixed rate
long-term  borrowings  outstanding  from the FHLB of New York.  At September 30,
1996, the Bank had no other borrowings outstanding.

                                      16


<PAGE>



Subsidiary Activity

      The Company has one wholly owned subsidiary,  the Bank, which is organized
under the laws of the United States and conducts  business as Amsterdam  Federal
Bank.  The Bank is  permitted  to invest up to 2% of its  assets in the  capital
stock of, or secured or unsecured  loans to,  subsidiary  corporations,  with an
additional  investment  of 1% of  assets  when  such  additional  investment  is
utilized primarily for community  development  purposes.  At September 30, 1996,
the Bank had one wholly-owned subsidiary, AFS Service Corp., organized under the
laws of New York.  AFS  Service  Corp.  was formed in October  1995 to act as an
agent for the sale of Savings Bank Life Insurance.  The Bank's investment in its
subsidiary  totalled $1,000 at September 30, 1996. As of September 30, 1996, AFS
Service Corp. had not conducted any business.

Personnel

      The Company has no employees  other than officers.  At September 30, 1996,
the  Bank  had 35  full-time  and 12  part-time  employees.  None of the  Bank's
employees are represented by a collective bargaining group.

Regulation

      Set forth below is a brief  description  of certain laws which  related to
the regulation of the Company and the Bank. The description  does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.

Company Regulation

      General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation  and  examination  by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries,  should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary  savings  association.  This  regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.

      Qualified  Thrift  Lender  Test.  As a unitary  savings  and loan  holding
company, the Company generally is not subject to activity restrictions, provided
the Bank  satisfies  the  Qualified  Thrift  Lender  ("QTL")  test or meets  the
definition of a domestic building and loan association  pursuant to section 7701
of the Internal Revenue Service of 1986, as amended (the "Code"). If the Company
acquires  control of another savings  association as a separate  subsidiary,  it
would become a multiple savings and loan holding company,  and the activities of
the  Company  and any of its  subsidiaries  (other  than the  Bank or any  other
SAIF-insured   savings   association)   would  become  subject  to  restrictions
applicable to bank holding  companies  unless the other  associations  each also
qualify  as a QTL or  meet  the  definition  of a  domestic  building  and  loan
association and were acquired in a supervisory acquisition. See "- Regulation of
the Bank - Qualified Thrift Lender Test."

      Federal  Securities  Law.  The Company is subject to filing and  reporting
requirements  by  virtue  of  having  its  common  stock  registered  under  the
Securities Exchange Act of 1934. Furthermore,  company stock held by persons who
are affiliates (generally officers,  directors,  and principal  stockholders) of
the Company may not be resold without  registration or unless sold in accordance
with

                                      17


<PAGE>



certain  resale  restrictions.  If the Company meets  specified  current  public
information  requirements,  each affiliate of the Company is able to sell in the
public  market,  without  registration,  a  limited  number  of  shares  in  any
three-month period.

Regulation of the Bank

      General. As a federally chartered,  SAIF-insured savings association,  the
Bank is subject  to  extensive  regulation  by the OTS and the  Federal  Deposit
Insurance  Corporation  ("FDIC").  Lending activities and other investments must
comply with various federal statutory and regulatory  requirements.  The Bank is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board.

      Insurance of Deposit Accounts.  The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation).  Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue  operations or has violated any applicable law,
regulation,  rule, order or condition  imposed by the FDIC or the  institution's
primary regulator.

      The FDIC charges an annual  assessment for the insurance of deposits based
on the risk a particular  institution poses to its deposit insurance fund. Under
this system as of  September  30,  1996,  SAIF members paid within a range of 23
cents  to  31  cents  per  $100  of  domestic   deposits,   depending  upon  the
institution's  risk  classification.  This  risk  classification  is based on an
institution's capital group and supervisory subgroup assignment. Pursuant to the
Economic  Growth  and  Paperwork  Reduction  Act of 1996 (the  "Act"),  the FDIC
imposed a one-time special  assessment on SAIF members to capitalize the SAIF at
the  designated  reserve level of 1.25% as of September  30, 1996.  Based on the
Bank's  deposits as of March 31, 1995,  the date for measuring the amount of the
special  assessment  pursuant to the Act, the  assessment  for the Bank totalled
approximately  $702,000. The FDIC is expected to lower the range of premiums for
deposit  insurance  to a level  necessary  to maintain  the SAIF at its required
reserve  level.  At September 30, 1996, a revised range of premiums had not been
determined.

      Pursuant to the Act, the Bank will pay, in addition to its normal  deposit
insurance  premium as a member of the SAIF, an amount equal to approximately 6.4
basis points toward the  retirement of the  Financing  Corporation  bonds ("Fico
Bonds")  issued in the 1980s to assist in the  recovery  of the savings and loan
industry.  Members of the Bank Insurance Fund ("BIF"), by contrast, will pay, in
addition to their normal  deposit  insurance  premium,  approximately  1.3 basis
points.  Based on total  deposits as of September 30, 1996,  had the Act been in
effect,  the Bank's Fico Bond premium would have been  approximately  $82,000 in
addition  to its  normal  deposit  insurance  premium.  Beginning  no later than
January  1,  2000,  the rate paid to  retire  the Fico  Bonds  will be equal for
members of the BIF and the SAIF.  The Act also  provides  for the merging of the
BIF and the SAIF by January 1, 1999 provided there are no financial institutions
still chartered as savings associations at that time. Should the insurance funds
be merged before  January 1, 2000, the rate paid by all members of this new fund
to retire the Fico Bonds would be equal.

      Regulatory Capital  Requirements.  OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets,  (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based  capital  requirement equal to
8.0% of total  risk-weighted  assets. The Bank's regulatory capital exceeded all
minimum  regulatory  capital  requirements  applicable to it as of September 30,
1996.

                                      18


<PAGE>



      Savings  associations  with a greater than "normal" level of interest rate
exposure  may, in the  future,  be subject to a  deduction  from  capital for an
interest  rate  risk  ("IRR")   component  for  purposes  of  calculating  their
risk-based capital requirement.

      Dividend  and Other  Capital  Distribution  Limitations.  OTS  regulations
require  the  Bank  to  give  the OTS 30 days  advance  notice  of any  proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.

      OTS  regulations  impose  limitations  upon all capital  distributions  by
savings  institutions,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out  merger and other  distributions  charged against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without the approval of
the OTS, make capital  distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the  calendar  year plus the amount
that would reduce by one-half its "surplus  capital  ratio" (the excess  capital
over its fully phased-in capital  requirements) at the beginning of the calendar
year,  or (ii) 75% of its net income over the most recent four  quarter  period.
Any additional  capital  distributions  require prior  regulatory  approval.  At
September 30, 1996, the Bank was a Tier 1  institution.  In the event the Bank's
capital fell below its fully  phased-in  requirement or the OTS notified it that
it was in need of more than  normal  supervision,  the  Bank's  ability  to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed  capital  distribution  by any  institution,  which would  otherwise be
permitted by the regulation,  if the OTS determines that such distribution would
constitute an unsafe or unsound practice.

      In  addition,  the  Bank may not  declare  or pay a cash  dividend  on its
capital stock if the effect thereof would be to reduce the regulatory capital of
the Bank below the amount  required for the liquidation  account  established in
connection with the Conversion.

      Qualified Thrift Lender Test.  Savings  institutions  must meet either the
QTL test pursuant to OTS  regulations or the  definition of a domestic  building
and loan  association  in section  7701 of the Code.  If the Bank  maintains  an
appropriate  level  of  certain  specified  investments  (primarily  residential
mortgages   and  related   investments,   including   certain   mortgage-related
securities)  and  otherwise  qualifies as a QTL or a domestic  building and loan
association,  it will continue to enjoy full borrowing  privileges from the FHLB
of New York. The required percentage of investments under the QTL test is 65% of
portfolio assets while the Code requires investments of 60% of portfolio assets.
An association must be in compliance with the QTL test or definition of domestic
building and loan association on a monthly basis in nine out of every 12 months.
As of September 30, 1996,  the Bank was in compliance  with its QTL  requirement
and met the definition of a domestic building and loan association. There can be
no assurance  that the Bank will  continue to meet the QTL  requirements  or the
definition of a domestic building and loan association in future periods.

      Liquidity Requirements.  All savings associations are required to maintain
an average daily  balance of liquid assets equal to a certain  percentage of the
sum of its  average  daily  balance of net  withdrawable  deposit  accounts  and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.

                                      19


<PAGE>



      Federal  Home  Loan Bank  System.  The Bank is a member of the FHLB of New
York,  which is one of 12 regional  FHLBs that  administers  the home  financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.

      Federal Reserve System.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW, and Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the liquidity  requirements that are imposed by the OTS. At September
30, 1996, the Bank was in compliance with these requirements.

Item  2.  Description of Property
---------------------------------

      (a) Properties.

      The Company  owns no real  property  but utilizes the offices of the Bank.
The Bank  operates from its main office and three branch  offices.  The Bank has
also leased space in the Amsterdam  Riverfront  Center. A majority of this space
is used as an  operations  center  and houses  the loan  servicing,  accounting,
bookkeeping,  and proof  departments,  marketing and business  development,  and
branch operations.  The remaining space is expected to be used as a small branch
office with an ATM.

      (b) Investment Policies.

      See  "Item 1.  Business"  above for a general  description  of the  Bank's
investment  policies and any  regulatory  or Board of  Directors'  percentage of
assets limitations regarding certain investments.

     (1)  Investments  in Real Estate or Interests in Real Estate.  See "Item 1.
Business - Lending Activities," "Item 1. Business - Regulation of the Bank," and
"Item 2. Description of Property. (a) Properties" above.

     (2) Investments in Real Estate  Mortgages.  See "Item 1. Business - Lending
Activities" and "Item 1. Business - Regulation of the Bank."

     (3) Investments in Securities of or Interests in Persons  Primarily Engaged
in Real Estate Activities. See "Item 1. Business - Lending Activities," "Item 1.
Business  -  Regulation  of the  Bank,"  and  "Item  1.  Business  -  Subsidiary
Activity."

      (c)  Description of Real Estate and Operating Data.

      Not Applicable.

Item  3.  Legal Proceedings
---------------------------

      The  Company  and the Bank,  from time to time,  are  parties to  ordinary
routine  litigation,  which  arises in the normal  course of  business,  such as
claims to enforce  liens,  condemnation  proceedings  on properties in which the
Bank holds security interests, claims involving the making and servicing of real
property loans, and other issues incident to the business of the Company and the
Bank. No claims or

                                      20


<PAGE>



lawsuits  were  pending  or  threatened  at  September  30,  1996 that  would be
considered material to the financial position of the Bank and the Company.

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

      No matters were submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended September 30, 1996.

                                    PART II

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

      The  Conversion  occurred on September 30, 1996 and no common stock of the
Company was publicly traded on or prior to that date.  Accordingly,  there is no
common stock price  information  available  for the past two fiscal  years.  The
common stock of the Company has been traded on the Nasdaq  National Market under
the trading symbol of "AFED" since it commenced trading on October 1, 1996.

      The number of shareholders of record of common stock is approximately 589.
This does not  reflect  the  number of  persons  or  entities  who held stock in
nominee or "street" name through various  brokerage  firms. On December 2, 1996,
there were 1,454,750 shares outstanding.  The Company's ability to pay dividends
to  stockholders  is dependent upon the dividends it receives from the Bank. The
Bank may not  declare or pay a cash  dividend  on any of its stock if the effect
thereof  would cause the Bank's  regulatory  capital to be reduced below (1) the
amount required for the liquidation  account  established in connection with the
Conversion,  or (2) the regulatory capital  requirements imposed by the OTS. The
Company did not pay any  dividends  during the fiscal years ended  September 30,
1995 and 1996.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------

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

General

        The Company has only  recently  been  formed  and,  accordingly,  has no
results  of  operations  at this time.  As a result,  the  following  discussion
principally  reflects  the  operations  of  the  Bank.  The  Bank's  results  of
operations  are  primarily  dependent on its net interest  income,  which is the
difference between the interest income earned on its assets, primarily loans and
investments, and the interest expense on its liabilities, primarily deposits and
borrowings.  Net  interest  income  may be  affected  significantly  by  general
economic  and  competitive  conditions  and  policies  of  regulatory  agencies,
particularly  those  with  respect  to market  interest  rates.  The  results of
operations  are also  significantly  influenced  by the  level  of  non-interest
expenses,  such  as  employee  salaries  and  benefits,  other  income,  such as
loan-related fees and fees on deposit-related services, and the Bank's provision
for loan losses.

        The Bank has been,  and intends to continue to be, a  community-oriented
financial  institution  offering a variety of financial  services.  Management's
strategy  has  been to try to  achieve  a high  loan to asset  ratio  and a high
proportion of lower-costing, non-time deposit accounts in the deposit portfolio.
At September  30, 1996,  the Bank's loans  receivable,  net, to assets ratio was
46.0%.  At September 30, 1996,  $62.6 million or 49.5% of total deposits were in
non-time deposit accounts.

        On  September  30,  1996,  the  Company  completed  its  initial  public
offering,  selling  1,454,750  shares  of common  stock at  $10.00  per share to
depositors and employees of the Bank. Net proceeds from the sale of stock, after
deducting conversion expenses of approximately $942,000, were $13.6 million. The
Company utilized  approximately  $6.8 million of the net proceeds to acquire all
the capital stock of the Bank.

Asset/Liability Management

        The Bank's  net  interest  income is  sensitive  to changes in  interest
rates, as the rates paid on its  interest-bearing  liabilities  generally change
faster than the rates earned on its  interest-earning  assets. As a result,  net
interest income will frequently  decline in periods of rising interest rates and
increase in periods of decreasing interest rates.

                                       21

<PAGE>


        To mitigate  the impact of changing  interest  rates on its net interest
income,  the Bank  manages its interest  rate  sensitivity  and  asset/liability
products through its asset/liability  management committee.  The asset/liability
management  committee  meets weekly to determine the rates of interest for loans
and deposits and consists of the President and Chief Executive Officer, the Vice
President and Chief  Lending  Officer,  and the  Treasurer  and Chief  Financial
Officer.  Rates on deposits are primarily based on the Bank's need for funds and
on a review of rates  offered  by other  financial  institutions  in the  Bank's
market areas.  Interest rates on loans are primarily based on the interest rates
offered by other  financial  institutions  in the Bank's primary market areas as
well as the Bank's cost of funds.

        In an effort to reduce  interest  rate risk and protect  itself from the
negative  effects of rapid or prolonged  changes in interest rates, the Bank has
instituted  certain  asset and  liability  management  measures,  including  (i)
originating,  for its  portfolio,  a large base of  adjustable-rate  residential
mortgage loans,  which, at September 30, 1996, totaled 28.56% of total loans, of
which  94.62%  reprice  annually,  and (ii)  maintaining  substantial  levels of
interest bearing  deposits,  federal funds, and securities with one to five year
terms to maturity.

        The Committee  manages the interest rate sensitivity of the Bank through
the  determination  and adjustment of  asset/liability  composition  and pricing
strategies. The Committee then monitors the impact of the interest rate risk and
earnings  consequences  of such  strategies  for  consistency  with  the  Bank's
liquidity needs, growth, and capital adequacy.  The Bank's principal strategy is
to reduce the interest rate  sensitivity  of its interest  earning assets and to
match,  as closely as possible,  the maturities of interest  earning assets with
interest bearing liabilities.

Net Portfolio Value

        In order to encourage savings associations to reduce their interest rate
risk,  the OTS  adopted a rule  incorporating  an  interest  rate  risk  ("IRR")
component  into the  risk-based  capital  rules.  The IRR  component is a dollar
amount that will be deducted from total  capital for the purpose of  calculating
an institution's  risk-based capital requirement and is measured in terms of the
sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV
is the  difference  between  incoming  and outgoing  discounted  cash flows from
assets,  liabilities,  and off-balance sheet contracts.  An institution's IRR is
measured as the change to its NPV as a result of a hypothetical  200 basis point
("bp") change in market interest  rates. A resulting  change in NPV of more than
2% of the  estimated  present  value of total  assets  ("PV")  will  require the
institution  to deduct from its capital  50% of that  excess  change.  The rules
provide  that  the OTS  will  calculate  the IRR  component  quarterly  for each
institution.  The Bank,  based on asset size and  risk-based  capital,  has been
informed  by the  OTS  that it is  exempt  from  this  rule.  Nevertheless,  the
following  table presents the Bank's NPV at September 30, 1996, as calculated by
the OTS, based on quarterly  information  voluntarily provided to the OTS by the
Bank.

<TABLE>
<CAPTION>
                                                                                                     NPV as % of PV
                                               Net Portfolio Value                                      of Assets
                                 --------------------------------------------------           ------------------------------
             Change                                                                              NPV
            in Rates             $Amount            $Change(1)           %Change(2)           Ratio(3)             Change(4)
            --------             -------            ----------           ----------           --------             ---------
                                     (Dollars in thousands)

<S>          <C>                    <C>                 <C>                <C>                <C>                  <C>   
             +400 bp                13,750              (4,661)            (25)%               9.08%               -254 bp
             +300 bp                15,170              (3,241)            (18)                9.89                -173 bp
             +200 bp                16,497              (1,914)            (10)               10.62                -100 bp
             +100 bp                17,605                (807)             (4)               11.21                 -41 bp
                0 bp                18,412                                                    11.62
             -100 bp                18,929                 517               3                11.86                  24 bp
             -200 bp                19,262                 850               5                12.00                  37 bp
             -300 bp                20,405               1,993              11                12.57                  94 bp
             -400 bp                21,923               3,511              19                13.32                 170 bp
</TABLE>

------------------------
(1)  Represents  the excess  (deficiency)  of the  estimated  NPV  assuming  the
     indicated  change in interest  rates minus the  estimated  NPV  assuming no
     change in interest rates.
(2)  Calculated  as the amount of change in the  estimated  NPV  dividend by the
     estimated NPV assuming no change in interest rates.
(3)  Calculated as the estimated NPV divided by present value of total assets.
(4)  Calculated  as the  excess  (deficiency)  of the  NPV  ratio  assuming  the
     indicated change in interest rates over the estimated NPV ratio assuming no
     change in interest rates.

                                       22

<PAGE>

        Although the OTS has informed the Bank that it is not subject to the IRR
component  discussed above, the Bank is still subject to interest rate risk and,
as can be seen above,  changes in interest  rates may reduce the Bank's NPV. The
OTS has the authority to require  otherwise  exempt  institutions to comply with
the rule concerning interest rate risk.

        At  September  30,  1996,  a change in interest  rates of a positive 200
basis  points  would have  resulted  in a 100 basis  point  decrease in NPV as a
percentage of the present value of the Bank's total assets. A change in interest
rates of a negative  200 basis  points  would have  resulted in a 37 basis point
increase in the NPV as a  percentage  of the present  value of the Bank's  total
assets.  Utilizing  the  OTS IRR  measurement  described  above,  the  Bank,  at
September 30, 1996,  would have been  considered by the OTS to have been subject
to "normal" IRR and no  additional  amount would be required to be deducted from
risk-based capital.

        Certain  assumptions  utilized by the OTS in assessing the interest rate
risk of savings  associations  were  employed in preparing  the previous  table.
These  assumptions  related to interest rates,  loan prepayment  rates,  deposit
decay rates,  and the market values of certain assets under the various interest
rate scenarios.  It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities  would perform as set
forth above.

        Certain  shortcomings are inherent in the preceding NPV tables since the
data reflect  hypothetical changes in NPV based upon assumptions used by the OTS
to  evaluate  the Bank as well as other  institutions.  Based on the above,  net
interest income should increase with an  instantaneous  100 basis point increase
in interest rates while net interest  income should  decline with  instantaneous
declines in interest  rates.  However,  the experience of the Bank has been that
net interest  income  declines  with  increases  in interest  rates and that net
interest income  increases with decreases in interest rates.  Generally,  during
periods of  increasing  interest  rates,  the  Bank's  interest  rate  sensitive
liabilities would reprice faster than its interest rate sensitive assets causing
a decline in the Bank's interest rate spread and margin.  This would result from
an increase in the Bank's cost of funds that would not be immediately  offset by
an  increase  in its yield on earning  assets.  An increase in the cost of funds
without an  equivalent  increase  in the yield on earning  assets  would tend to
reduce net interest  income.  The Bank's net interest rate spread  decreased for
the fiscal year ended  September  30, 1996 from the fiscal year ended  September
30, 1995 from 2.78% to 2.69%, respectively.

        In times of decreasing  interest rates, fixed rate assets could increase
in value and the lag in repricing  of interest  rate  sensitive  assets could be
expected to have a positive effect on the Bank's net interest income.

Average Balance Sheet, Interest Rates, and Yield

The  following  table sets forth certain  information  relating to the Company's
average  balance sheet and reflects the average yield on assets and average cost
of liabilities.  Such yields and costs are derived by dividing income or expense
by the average  balance of assets or  liabilities,  respectively,  for the years
presented.  Average  balances are derived  from daily  balances,  however,  some
balances are derived from month-end  balances where  management does not believe
the  use of  month-end  balances  has  caused  any  material  difference  in the
information presented. There have been no tax equivalent adjustments made to the
yields.


                                       24
<PAGE>


<TABLE>
<CAPTION>
                                                                   Years Ended September 30,
                                     ---------------------------------------------------------------------------------------------
                                                  1996                          1995                             1994
                                     ---------------------------  -------------------------------  -------------------------------
                                               Interest  Average              Interest    Average               Interest   Average
                                     Average    Income/  Yield/   Average     Income/     Yield/    Average     Income/    Yield/
                                     Balance    Expense   Rate    Balance     Expense      Rate     Balance     Expense     Rate
                                     -------    -------   ----    -------     -------      ----     -------     -------     ----
                                                                          (Dollars in Thousands)
Interest-earning assets:                                               
<S>                                 <C>        <C>        <C>     <C>        <C>           <C>     <C>         <C>           <C>  
    Federal funds sold              $  6,543        334   5.10%$  $  4,103        229      5.58%   $  2,826         94       3.33%
    Term deposits with Federal                                                                     
      Home Loan Bank of New York       2,369        131   5.53         508         30      5.91       3,376        118       3.50
    Securities available for sale     14,486        931   6.43       2,457        118      4.80        --           --        --
    Investment securities                                                                          
      held to maturity                34,888      1,996   5.72      44,028      2,460      5.59      42,394      2,141       5.05
    Federal Home Loan Bank of                                                                      
      New York stock, at cost            566         37   6.54         543         42      7.73         530         45       8.49
    Loans receivable, net (1)         68,127      5,736   8.42      62,303      5,162      8.29      54,955      4,488       8.17
                                    --------    ------- ------    --------   --------   -------    --------   --------     ------
           Total interest-                                                                         
             earning assets          126,979      9,165   7.22     113,942      8,041      7.06     104,081      6,886       6.62
                                                ------- ------               --------   -------               --------     ------
Non-interest earning assets            6,384                         5,813                            5,617
                                   ---------                      --------                         --------
           Total assets            $ 133,363                      $119,755                         $109,698
                                   =========                      ========                         ========
                                                                                                   
Interest-bearing liabilities:                                                                      
    Savings accounts                  35,560      1,067   3.00      36,313      1,089      3.00      41,484      1,244       3.00
    NOW accounts                       9,871        224   2.27       8,458        193      2.28       7,624        164       2.15
    Money market accounts              6,681        257   3.85       5,237        157      3.00       5,964        189       3.17
    Time deposit accounts             62,919      3,624   5.76      52,795      2,904      5.50      38,274      1,819       4.75
    Escrow accounts                      440          9   2.05         562         10      1.78         565          9       1.59
    Federal Home Loan Bank of                                                                      
      New York long term borrowings    2,047        144   7.03       2,534        176      6.95       2,494        167       6.70
                                                                                                   
           Total interest-                                                                         
             bearing liabilities     117,518      5,325   4.53     105,899      4,529      4.28      96,405      3,592       3.73
                                                  -----   ----                  -----      ----                  -----       ----
Non-interest bearing deposits          6,640                         5,459                            5,475
Other non-interest                                                                                 
  bearing liabilities                    924                           800                              844
Equity                                 8,281                         7,597                            6,974
                                   ---------                      --------                         --------
           Total liabilities                                                                       
             and equity            $ 133,363                      $119,755                         $109,698
                                   =========                      ========                         ========
                                                                                                   
Net interest income                            $  3,840                      $  3,512                          $  3,294
                                                =======                      ========                          ========
Interest rate spread                                      2.69%                             2.78   %                         2.89%
                                                         =====                            ======                             ====
Net interest margin                                       3.02%                             3.08   %                         3.16%
                                                         =====                            ======                             ====
Ratio of average interest-                                                                         
  earning assets to average                                                                        
  interest-bearing liabilities        108.05%                       107.59%                                      107.96%
                                                                    ======                                       ====== 
</TABLE>

--------------------------
(1)     Calculated net of allowance for loan losses. Includes non-accrual loans.

                                 25
<PAGE>

Rate/Volume Analysis

The table below sets forth  certain  information  regarding  changes in interest
income and interest expense of the Company for the periods  indicated.  For each
category  of  interest   earning  assets  and  interest   bearing   liabilities,
information  is  provided  on  changes  attributable  to (i)  changes  in volume
(changes in volume multiplied by old rate) and (ii) changes in rates (changes in
rate  multiplied  by old volume).  Increases  and decreases due to both rate and
volume, which cannot be segregated,  have been allocated  proportionately to the
change due to volume and the change due to rate.

<TABLE>
<CAPTION>
                                                   Year Ended September 30,                  Year Ended September 30,
                                               ------------------------------------     --------------------------------------
                                                        1996 vs. 1995                             1995 vs. 1994
                                               ------------------------------------     --------------------------------------
                                                  Increase (Decrease)                     Increase (Decrease)
                                                     Due to                                     Due to
                                               -----------------------                  -----------------------
                                                                           Total                                      Total
                                                                          Increase                                   Increase
                                               Volume          Rate      (Decrease)      Volume         Rate        (Decrease)
                                               ------          ----      ----------      ------         ----        ----------
Interest income:
<S>                                         <C>              <C>         <C>            <C>            <C>         <C>    
    Federal funds sold ..................   $  125,945       (20,623)      105,322        53,797        81,185       134,982
    Term deposits with Federal Home
      Loan Bank of New York .............      103,208        (1,779)      101,429      (138,478)       49,788       (88,690)
    Securities available for sale .......      760,373        52,316       812,689       118,080             0       118,080
    Investment securities ...............     (521,749)       57,838      (463,911)       84,839       234,418       319,257
    Federal Home Loan Bank of
      New York stock, at cost ...........        1,749        (6,560)       (4,811)        1,082        (4,485)       (3,403)
    Loans receivable, net ...............      489,221        84,259       573,480       608,018        66,702       674,720
                                            ----------    ----------    ----------    ----------    ----------    ----------
           Total interest-earnings assets      958,747       165,451     1,124,198       727,338       427,608     1,154,946
                                            ----------    ----------    ----------    ----------    ----------    ----------
Interest expense:
    Savings accounts ....................      (22,185)          406       (21,779)     (155,117)          487      (154,630)
    NOW accounts ........................       32,039          (774)       31,265        18,612        10,067        28,679
    Money market accounts ...............       49,240        50,775       100,015       (22,162)      (10,011)      (32,173)
    Time deposit accounts ...............      568,600       151,548       720,148       766,923       317,964     1,084,887
    Escrow accounts .....................       (2,456)        1,384        (1,072)          (54)        1,281         1,227
    Federal Home Loan Bank of
      New York long term borrowings .....      (34,133)        2,016       (32,117)        2,737         5,691         8,428
                                            ----------    ----------    ----------    ----------    ----------    ----------
           Total interest-bearing
             liabilities ................      591,105       205,355       796,460       610,939       325,479       936,418
                                            ----------    ----------    ----------    ----------    ----------    ----------
Net change in net interest income .......   $  367,642       (39,904)      327,738       116,399       102,129       218,528
                                            ==========    ==========    ==========    ==========    ==========    ==========
</TABLE>

Financial Condition

        Total assets  increased by $25.7  million or 20.1% to $153.7  million at
September 30, 1996 from $128.0  million at September 30, 1995,  primarily due to
an  increase in net loans  receivable  of $5.2  million or 8.0%,  an increase of
$15.9  million in federal  funds sold and an  increase  of $1.5  million in term
deposits  with the FHLB.  The increase in federal  funds sold and term  deposits
with the FHLB was primarily due to proceeds from the initial public  offering of
the  Company,  which was  effective as of  September  30,  1996,  as well as the
investment  of the proceeds  from the growth in deposits,  discussed  below,  in
federal  funds sold rather than  longer-term  securities  to increase the Bank's
liquidity  position.  The increase in net loans  receivable  was due to improved
loan activity,  primarily home equity loans, due primarily to the opening of two
supermarket branches in October 1994 and May 1995.

                                       26

<PAGE>


        The Company's  deposits  increased  by  $10.4 million  or 9.0% to $126.5
million  at  September 30, 1996.  This  increase was  primarily due to increased
deposits obtained as a result of the opening of  the  two  supermarket  branches
noted above.

        The Company's  securities  available for sale increased $14.6 million to
$17.1  million at  September  30,  1996 as the Bank  reassessed  its  securities
classifications  under  SFAS  No.  115.  As  of  December  31,  1995,  the  Bank
reclassified securities with an amortized cost of $16.6 million from the held to
maturity classification to the available for sale classification. See "Liquidity
and  Capital  Resources"  and note 1(f) of the Notes to  Consolidated  Financial
Statements.  The Company's  investment  securities held to maturity decreased by
$11.7 million to $35.0 million at September 30, 1996,  primarily because of this
same securities reclassification.

        Accrued expenses and other liabilities increased by $3.3 million to $4.4
million at September  30, 1996 from $1.2 at September  30, 1995.  This  increase
primarily relates to outstanding  cashier checks issued on September 30, 1996 to
refund the over-subscriptions  related to the Company's initial public offering.
Cashier checks are drawn upon deposit accounts at the Bank and are classified as
accrued expenses and other  liabilities until ultimately paid through the Bank's
Federal Reserve correspondent account.

     The Company's  equity increased by $12.7 million or 160.2% to $20.6 million
at September 30, 1996 from $7.9 million at September 30, 1995.  The increase was
primarily the result of the initial public offering  mentioned above, as well as
earnings for the year ended September 30, 1996. Equity at September 30, 1996 was
also effected by the Company's ESOP's borrowings from the Company,  the proceeds
from which were used to purchase shares of the Company's common stock offered in
its initial public offering noted above, as well as an approximately $28,000 net
unrealized loss on securities available for sale.

Comparison of Operating Results for the Years Ended September 30, 1996 and 1995.

        Net Income. Net income decreased by $397,000 or 65.2% for the year ended
September 30, 1996 to $211,000  from  $608,000 for the year ended  September 30,
1995. Net income for the year ended September 30, 1996 was reduced  primarily as
a result of  increased  non-interest  expenses  and  provision  for loan losses,
offset in part by an increase in net interest  income and  non-interest  income.
Non-interest  expenses  increased  by $993,000 or 36.4% to $3.7  million for the
year ended  September  30, 1996 as  compared to $2.7  million for the year ended
September 30, 1995.  This  increase was  primarily  due to the special  one-time
assessment  levied by the Federal Deposit  Insurance  Corporation  (FDIC) on all
institutions with Savings Association  Insurance Fund (SAIF) insured deposits to
contribute to the  recapitalization of the SAIF. On September 30, 1996, the Bank
accrued  approximately  $702,000  for the special  assessment.  The  increase in
non-interest  expenses was also due to the additional operating costs associated
with the two  supermarket  branches  opened in  October  1994 and May 1995.  The
provision  for loan losses  increased  $65,000 or 39.4% to $230,000 for the year
ended September 30, 1996,  primarily due to the loan growth noted above, as well
as increases in non-performing  loans. Net interest income increased $328,000 or
9.3% for the year ended September 30, 1996 to $3.8 million from $3.5 million for
the year ended September 30, 1995.  Non-interest  income  increased  $113,000 or
41.0% to $388,000 for the year ended  September 30, 1996 as compared to $275,000
for the year ended September 30, 1995. This increase was primarily the result of
an increase in the number of deposit  accounts,  as well as general increases to
the Bank's deposit account service fees.

        Net Interest  Income.  Net interest  income  increased by  approximately
$328,000 or 9.3% to $3.8  million for the year ended  September  30,  1996.  The
increase  was  primarily  due to an  increase  of $13.0  million or 11.4% in the
average balance of interest earning assets, offset by an increase in the average
balance of total  interest-bearing  liabilities  of $11.6 million or 11.0% and a
decrease in the interest rate spread from 2.78% for the year ended September 30,
1995 to 2.69% for the year ended September 30, 1996.

         Interest earning assets primarily consist of loans receivable,  federal
funds sold,  securities  (securities available for sale combined with investment
securities held to maturity),  and interest  bearing deposits in the FHLB of New
York.  Interest  bearing  liabilities  primarily  consist  of  interest  bearing
deposits and other borrowings from the FHLB of New York.

                                       27

<PAGE>

        The interest rate spread,  which is the difference  between the yield on
average  interest  earning  assets and the percentage  cost of average  interest
bearing  liabilities,  declined to 2.69% for the year ended  September  30, 1996
from 2.78% for the year ended  September  30, 1995.  The decline in the interest
rate spread is primarily the result of increases in the cost of interest bearing
liabilities  being  greater  than  increases  in the yields on interest  earning
assets during these periods.  In addition,  the disparity in insurance  premiums
between SAIF and BIF member  financial  institutions  has allowed BIF members to
reduce rates on loans and pay increased rates on deposits,  putting  competitive
pressure  on the Bank to do  likewise.  This  disparity  has been  significantly
reduced  as a  result  of the  Economic  Growth  and  Paperwork  Reduction  Act,
discussed below.

        Interest and Dividend Income.  Interest and dividend income increased by
approximately $1.1 million or 14.0% to $9.2 million for the year ended September
30, 1996 from $8.0 million for the year ended  September 30, 1995.  The increase
was largely  the result of an increase of $13.0  million or 11.4% in the average
balance  of  interest  earning  assets  to  $127.0  million  for the year  ended
September  30, 1996 as compared to $113.9  million for the year ended  September
30,  1995.  The  increase in the  average  balance of  interest  earning  assets
consisted  primarily of an increase in the average balance of loans  outstanding
of  approximately  $5.8 million or 9.3%,  an increase in the average  balance of
total securities (both securities  available for sale and investment  securities
held to  maturity)  of $2.9  million or 6.2%,  and an  increase  in the  average
balance  of  federal  funds sold of $2.4  million  or 5.9%.  Also  adding to the
increase in interest  and dividend  income was a 16 basis point  increase in the
average yield on all interest earning assets.

        Interest income on investment  securities held to maturity  decreased by
$464,000  or 18.9% to $2.0  million for the year ended  September  30, 1996 from
$2.5 million for the year ended  September  30,  1995.  The decrease in interest
income on investment  securities held to maturity is primarily due to a decrease
of $9.1 million or 20.8% in the average balance of investment securities held to
maturity for the year ended September 30, 1996  reflecting the  reclassification
in December  1995  previously  discussed,  partially  offset by a 13 basis point
increase  in the  average  yield  on  investment  securities  held to  maturity.
Interest income on securities  available for sale increased $813,000 to $931,000
for the year ended September 30, 1996 from $118,000 for the year ended September
30, 1995.  This  increase is primarily  the result of an increase in the average
balance of  securities  available  for sale of $12.0 million due to the December
1995  reclassification  previously  discussed,  combined  with a 163 basis point
increase in the average yield on these securities.

         Interest and fees on loans increased  $573,000 or 11.1% to $5.7 million
for the year  ended  September  30,  1996 from $5.2  million  for the year ended
September 30, 1995. This increase was primarily the result of an increase in the
average  balance of loans  receivable  of $5.8 million  combined with a 13 basis
point increase in the average yield on loans receivable.

        The yield on the average  balance of interest  earning  assets was 7.22%
and 7.06% for the years ended September 30, 1996 and 1995, respectively.

     Interest  Expense.  Interest on deposits and escrow  accounts  increased by
approximately $829,000 or 19.0% to $5.2 million for the year ended September 30,
1996 from $4.4 million for the year ended  September  30, 1995.  The increase in
interest on deposit  accounts and escrow accounts was  substantially  due to the
increase in interest  expense  related to time  deposit  accounts.  The interest
expense on average  time  deposit  accounts  was $3.6 million for the year ended
September  30, 1996,  compared to $2.9 million for the year ended  September 30,
1995. This increase is primarily due to an increase of $10.1 million or 19.2% in
the  average  balance  of time  deposit  accounts  along  with a 26 basis  point
increase in the rate paid on these deposits in fiscal 1996 as compared to fiscal
1995. Time deposits  increased as a result of the opening of the two supermarket
branches previously discussed. In addition, the 1996 interest expense on savings
accounts  decreased by $22,000 or 2.0% to $1.07  million  from $1.09  million in
fiscal 1995.  This  decrease was due primarily to a decrease of $753,000 or 2.1%
in the average balance of savings  accounts in fiscal 1996 as compared to fiscal
1995.  Offsetting this decrease was the Company's receipt of stock subscriptions
related to its initial public offering. The stock subscription  proceeds,  which
averaged approximately $332,000 in fiscal 1996, earned interest at the Company's
savings account rate and were classified with savings accounts.  As noted above,
over-subscriptions  related  to  the  Company's  initial  public  offering  were
refunded to subscribers on September 30, 1996.

                                       28

<PAGE>


        Interest on long term borrowings, which is a less significant portion of
interest  expense,  decreased by $32,000 or 18.3% to $144,000 for the year ended
September  30, 1996 when  compared to the year ended  September 30, 1995, as the
average amount of borrowing outstanding decreased by $487,000 or 19.2% partially
offset by an  increase in the rate paid by the  Company of 8 basis  points.  The
Company  uses FHLB  advances as a funding  source and  generally  uses long term
borrowings to supplement  deposits  which are the  Company's  primary  source of
funds.

        Provision for Loan Losses. The Company's management continually monitors
and adjusts its  allowance  for loan losses  based upon its analysis of the loan
portfolio.  The  allowance is increased  by a charge to the  provision  for loan
losses,  the amount of which  depends  upon an  analysis of the  changing  risks
inherent in the Bank's loan portfolio.  The Bank has historically  experienced a
limited  amount of loan  charge-offs.  However,  there can be no assurance  that
additions  to the  allowance  for loan  losses  will not be  required  in future
periods or that actual losses will not exceed estimated  amounts.  The Company's
ratio of  non-performing  loans to total assets was 0.51% and 0.47% at September
30, 1996 and September 30, 1995, respectively. The provision for loan losses for
the year ended  September 30, 1996  increased  $65,000 to $230,000 from $165,000
for the year ended  September  30, 1995.  The increase was  primarily due to the
growth  in the  loan  portfolio  discussed  above,  as  well as an  increase  in
non-performing loans.

        Non-Interest  Income.  Non-interest  income increased to $388,000 during
the year ended September 30, 1996 from $275,000 for the year ended September 30,
1995. The increase in non-interest income is primarily attributable to increased
service charges on deposit accounts of $121,000 for the year ended September 30,
1996 when compared to the year ended September 30, 1995. The increase in service
charges on deposit accounts is primarily the result of an increase in the number
of deposit  accounts,  as well as general  increases  to the  Company's  deposit
account service fees.

        Non-Interest  Expense.  Non-interest expense increased $993,000 or 36.4%
to $3.7 million for the year ended  September 30, 1996 from $2.7 million for the
year ended September 30, 1995. The increase in compensation and benefits expense
of $123,000 or 11.0% was caused by the additional  expense  associated  with the
supermarket  branch in May 1995  discussed  above,  as well as  general  cost of
living and merit raises to  employees.  Occupancy  and  equipment  expenses also
increased by $103,000 or 26.8% due to the new supermarket branch.

     FDIC deposit  insurance  premiums also  increased by $732,000 or 311.1% due
primarily to the SAIF one-time  special  assessment.  The FDIC charges an annual
assessment  for  the  insurance  of  deposits  based  on the  risk a  particular
institution poses to its deposit insurance fund. Under this system as of and for
the year ended  September 30, 1996, SAIF members paid within a range of 23 cents
to 31 cents per $100 of domestic deposits, depending upon the institution's risk
classification.  This risk  classification is based on an institution's  capital
group and supervisory subgroup  assignment.  Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Act"), the FDIC imposed a one-time special
assessment  on SAIF members to  capitalize  the SAIF at the  designated  reserve
level of 1.25% as of  September  30,  1996.  Based on the Bank's  deposits as of
March 31,  1995,  the date for  measuring  the amount of the special  assessment
pursuant to the Act, the assessment for the Bank totaled approximately $702,000.
The FDIC is expected to lower the range of premiums  for deposit  insurance to a
level necessary to maintain the SAIF at its required reserve level. At September
30, 1996, a revised range of premiums had not been determined.

                                       29

<PAGE>

         Data processing fees increased by $34,000 or 14.3% due primarily to the
opening of the  supermarket  branch in May 1995.  These increases were partially
offset by decreases of $25,000 or 36.1% in  advertising  expenses and $23,000 or
23.9% in supplies.

         Management  believes  that  compensation  and  benefits  expenses  will
increase in future periods as a result of the costs related to the Company's new
ESOP.  Furthermore,  the Company  expects that certain  operating  expenses will
increase as a result of the costs associated with being a public company.

         Provision  for Income Taxes.  Provision  for income taxes  decreased by
approximately $221,000 or 77.8% to $63,000 for the year ended September 30, 1996
from $284,000 for the year ended  September 30, 1995. The decrease was primarily
the result of the decrease in income before income tax expense.

Liquidity and Capital Resources

        The Bank is required by OTS  regulations to maintain,  for each calendar
month, a daily average  balance of cash and eligible  liquid  investments of not
less than 5% of the average  daily balance of its net  withdrawable  savings and
borrowings (due in one year or less) during the preceding  calendar month.  This
liquidity  requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10%. The Bank's average liquidity ratio was 47.02% and
35.89% at September 30, 1996 and 1995, respectively.

        The Company's  sources of liquidity  include cash flows from operations,
principal  and  interest  payments  and  prepayments  on loans,  maturities  and
prepayments of securities,  deposit inflows, and borrowings from the FHLB of New
York.  During fiscal 1996 and 1995,  the primary  source of funds was cash flows
from  deposit  growth.  During  fiscal  1996  and  1995,  the  Company  also had
significant  cash  flows  from  the  proceeds  from  the  maturity  and  call of
securities.  On September 30, 1996, the Company also had significant  cash flows
from its initial public offering on that date.

         Cash flow from net deposit  growth was $10.4  million and $14.1 million
for fiscal years ending  September  30, 1996 and 1995,  respectively.  Cash flow
from the proceeds from the sale,  maturity,  and call of securities  (securities
available  for sale and  investment  securities  held to maturity  combined) was
$15.0  million and $5.0 million for fiscal years ending  September  30, 1996 and
1995, respectively.

         In addition,  from time-to-time the Company borrows funds from the FHLB
of New York to supplement its cash flows. At September 30, 1996, the Company had
outstanding  borrowings from the FHLB of $1.8 million.  See note 10 of the Notes
to Consolidated Financial Statements.

        At the beginning of fiscal 1995, the Company  implemented  SFAS No. 115,
"Accounting  for  Certain  Investments  in  Debt  and  Equity  Securities,"  and
identified  the  securities  in the  portfolio  as either  "held to maturity" or
"available for sale."

        SFAS  No.  115  requires   classification   of  investments  into  three
categories. Debt securities that the Company has the positive intent and ability
to hold to maturity  must be reported at  amortized  cost.  Debt and  marketable
equity  securities  that are  bought  and held  principally  for the  purpose of
selling  them in the near term are  considered  trading  securities  and must be
reported at fair value,  with unrealized  gains and losses included in earnings.
All other debt and marketable equity securities must be considered available for
sale and must be  reported  at fair  value,  with  unrealized  gains and  losses
reported  as a separate  component  of total  stockholders'  equity  (net of tax
effects). The Company does not hold any trading securities.

                                       30

<PAGE>


        In November  1995,  the Financial  Accounting  Standards  Board ("FASB")
released its Special Report, "A Guide to the  Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." In accordance
with  the  Special   Report,   the  Company  was   permitted   to  reassess  the
appropriateness  of the  classifications of all its securities held at the time.
At December 31, 1995, the Company reclassified securities with an amortized cost
of $16.6 million and an approximate  fair value of $16.6 million from securities
held to maturity to securities available for sale.

         As of September  30, 1996,  the Company had $17.1 million of securities
classified  as available  for sale and $35.0  million of  investment  securities
classified  as held to  maturity.  The  stockholders'  equity of the  Company at
September 30, 1996 was reduced by $28,000 which  represents  the net  unrealized
loss, net of tax, on securities classified as available for sale. See notes 1, 3
and 4 of the Notes to Consolidated Financial Statements.

         The Bank is subject to federal  regulations that impose certain minimum
capital  requirements.  At  September  30, 1996,  the Bank had total  risk-based
capital of $14.6 million compared to its requirements of $5.1 million, an excess
of $9.5 million.  Each of the Bank's tangible and core capital was $13.8 million
at September 30, 1996, compared to the requirements of $2.3 million for tangible
capital  and  $4.6  million  for  core  capital.  See  note 16 of the  Notes  to
Consolidated Financial Statements.

         Liquidity  may be adversely  affected by unexpected  deposit  outflows,
excessive interest rates paid by competitors,  adverse publicity relating to the
savings and loan industry,  and similar matters.  Management  monitors projected
liquidity  needs  and  determines  the  level  desirable,  based  in part on the
Company's commitments to make loans and management's assessment of the Company's
ability to generate funds.

Recent Accounting Pronouncements

         Disclosures  About Fair Value of  Financial  Instruments.  In  December
1991, the Financial  Accounting  Standards  Board ("FASB")  issued  Statement of
Financial Accounting Standards No. 107. The Statement requires the disclosure of
the fair  value  of  financial  instruments  in the  notes  to the  consolidated
financial  statements.  The Company  adopted this  Statement as of September 30,
1996.

     Accounting by Creditors for Impairment of a Loan. In May 1993,  FASB issued
SFAS No. 114. SFAS No. 114 addresses the  accounting by creditors for impairment
of a loan by specifying  how  allowances  for credit  losses  related to certain
loans should be determined. A loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual  terms of the loan agreement.  SFAS
No. 114 generally requires creditors to account for impaired loans, except those
loans  that are  accounted  for at fair  value  or at the  lower of cost or fair
value, at the present value of the expected future cash flows  discounted at the
loan's  effective  interest rate. The Statement also addresses the accounting by
creditors  for loans  that are  restructured  in a troubled  debt  restructuring
involving a modification  of terms of a receivable  including  those involving a
receipt of assets in partial satisfaction of a receivable. In October 1994, FASB
amended  certain  provisions  of SFAS No.  114 by the  issuance  of SFAS No. 118
"Accounting  by Creditors  for  Impairment  of a Loan - Income  Recognition  and
Disclosures."  SFAS No.  118  amends  SFAS  No.  114 by  eliminating  provisions
describing  how a  creditor  should  report  income  on  an  impaired  loan  and
increasing disclosure  requirements as to information on recorded investments in
certain  impaired loans and how a creditor  recognizes  related interest income.
The Company adopted these Statements as of October 1, 1995. The adoption of SFAS
No. 114 and the amendment by SFAS No. 118 did not have a material  effect on the
Company's consolidated financial statements.

        Accounting  for the  Impairment of Long-Lived  Asset and for  Long-Lived
Assets to be Disposed  of. In March 1995,  FASB issued SFAS No. 121,  which will
become  effective  for fiscal years  beginning  after  December  15, 1995.  This
Statement requires that long-lived assets and certain  identifiable  intangibles
to be held and used by an entity be reviewed for impairment  whenever  events or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable. Recoverability is evaluated based upon the estimated future cash
flows expected to result from the use of the asset and its eventual disposition.
If  expected  cash  flows are less than the  carrying  amount of the  asset,  an
impairment  loss is  recognized.  Additionally,  this  Statement  requires  that
long-lived  assets and  certain  identifiable  intangibles  to be disposed of be
reported  at the  lower of  carrying  amount  or fair  value  less cost to sell.
However,  based on existing  conditions,  and a preliminary  review,  management
believes that the impact of adopting this  Statement will not be material to the
Company's consolidated financial statements.

                                       31

<PAGE>


        Accounting for Mortgage  Servicing Rights. In May 1995, FASB issued SFAS
No. 122, which will become effective,  on a prospective  basis, for fiscal years
beginning  after December 31, 1995.  This Statement  requires  mortgage  banking
enterprises to recognize as separate  assets rights to service  mortgage  loans,
however those  servicing  rights are acquired.  When  mortgage  loans,  acquired
either through a purchase transaction or by origination, are sold or securitized
with servicing rights retained,  an allocation of the total cost of the mortgage
loans should be made between the mortgage  servicing  rights and the loans based
on their relative fair values.  In subsequent  periods,  all mortgage  servicing
rights  capitalized  must be periodically  evaluated for impairment based on the
fair value of those rights,  and any impairments  recognized through a valuation
allowance.  However,  based on existing  conditions,  and a preliminary  review,
management  believes  that the impact of  adopting  this  Statement  will not be
material to the Company's consolidated  financial statements.  Effective January
1, 1997,  this  Statement will be superseded by SFAS No. 125, which is discussed
below.

     Accounting for Stock-Based Compensation.  In October 1995, FASB issued SFAS
No. 123. SFAS No. 123 defines a "fair value based  method" of accounting  for an
employee  stock option whereby  compensation  cost is measured at the grant date
based on the value of the award and is recognized over the service period.  FASB
encouraged all entities to adopt the fair value based method,  however,  it will
allow  entities  to  continue  the use of the  "intrinsic  value  based  method"
prescribed by  Accounting  Principles  Board  ("APB")  Opinion No. 25. Under the
intrinsic  value  based  method,  compensation  cost is the excess of the market
price of the stock at the grant  date over the  amount an  employee  must pay to
acquire the stock.  However,  most stock option plans have no intrinsic value at
the grant  date and,  as such,  no  compensation  cost is  recognized  under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma  disclosures as if the fair value
based method had been applied.  The accounting  requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years beginning after December
15, 1995. Pro forma  disclosures  must include the effects of all awards granted
in fiscal years  beginnings  after  December 15,  1994.  The Company  expects to
continue to use the "intrinsic  value based method" as prescribed by APB Opinion
No. 25. Accordingly,  the impact of adopting this Statement will not be material
to the Company's consolidated financial statements.

        Accounting   for   Transfers  of  Servicing  of  Financial   Assets  and
Extinguishment  of  Liabilities.  In June 1996,  FASB issued SFAS No. 125, which
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial  assets  and   extinguishment   of  liabilities  based  on  consistent
application of a financial-components approach that focuses on control. SFAS No.
125 extends the "available  for sale" and "trading"  approach of SFAS No. 115 to
non-security  financial  assets that can be  contractually  prepaid or otherwise
settled  in  such  a way  that  the  holder  of  the  asset  would  not  recover
substantially all of its recorded investment.  In addition,  SFAS No. 125 amends
SFAS No. 115 to prevent a security from being  classified as held to maturity if
the  security  can be prepaid or settled in such a manner that the holder of the
security would not recover  substantially  all of its recorded  investment.  The
extension of the SFAS No. 115 approach to certain non-security  financial assets
and the amendment to SFAS No. 115 are effective for financial  assets held on or
acquired  after January 1, 1997.  Effective  January 1, 1997,  SFAS No. 125 will
supersede SFAS No. 122, which is discussed above.  SFAS No. 125 is effective for
transfers and servicing of financial assets and  extinguishments  of liabilities
occurring after December 31, 1996.  Management believes the adoption of SFAS No.
125 will not have a  material  impact on the  Company's  consolidated  financial
statements.

                                       32

<PAGE>

        In December  1994,  the  Accounting  Standards  Division of the American
Institute  of  Certified  Public   Accountants   ("AICPA")  approved  SOP  94-6,
Disclosure of Certain  Significant  Risks and  Uncertainties.  SOP 94-6 requires
additional  disclosure in financial  statements about the risk and uncertainties
existing as of the date of those  financial  statements in the following  areas:
nature  of  operations,  use  of  estimates  in  the  preparation  of  financial
statements,  certain significant estimates, current vulnerability due to certain
concentrations.  The standard is effective for financial  statements  issued for
fiscal years ending after December 15, 1995.  The Company  adopted this standard
as of  September  30,  1996.  The  adoption  of SOP 94-6 did not have a material
impact on the financial position of the Company.

        In November 1993, the AICPA issued SOP 93-6,  Employers'  Accounting for
Employee Stock Ownership Plan. SOP 93-6 addresses accounting for shares of stock
issued to employees by an employee stock  ownership plan. SOP 93-6 requires that
the employer record compensation expense in an amount equal to the fair value of
shares  committed  to be  released  from  the  ESOP to  employees.  SOP  93-6 is
effective  for fiscal  years  beginning  after  December 15, 1993 and relates to
shares  purchased by an ESOP after December 31, 1992.  Management has determined
that,  assuming the Common Stock appreciates over time, the adoption of SOP 93-6
will likely increase compensation expense relative to the ESOP, as compared with
prior guidance that required  recognition of  compensation  expense based on the
cost of the  shares  acquired  by the ESOP.  The  amount  of any such  increase,
however,  cannot be determined at this time because the expense will be based on
the fair value of the shares committed to be released to employees, which amount
is not determinable.

Effect of Inflation and Changing Prices

        The  Company's   consolidated  financial  statements  and  related  data
presented  herein  have been  prepared in  accordance  with  generally  accepted
accounting  principles,  which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the  relative  purchasing  power of money  over  time due to  inflation.  Unlike
industrial companies, virtually all of the assets and liabilities of a financial
institution  are  monetary in nature.  As a result,  interest  rates have a more
significant impact on a financial institution's  performance than the effects of
general levels of inflation.  Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.

                        SELECTED FINANCIAL AND OTHER DATA

Set forth below are summaries of historical  financial and other data  regarding
the Company.  This  information  is derived in part from,  and should be read in
conjunction  with,  the  Consolidated  Financial  Statements  and  Notes  to the
Consolidated Financial Statements of the Company.

Selected Financial Data

The following  table sets forth  certain  information  concerning  the financial
position of the Company at the dates indicated:

<TABLE>
<CAPTION>

                                                                      At September 30
                                                 ----------------------------------------------------
                                                    1996      1995        1994       1993       1992
                                                    ----      ----        ----       ----       ----
                                                                  (Dollars in Thousands)

<S>                                              <C>         <C>        <C>        <C>         <C>   
Total assets                                     $153,677    127,962    113,882    105,038     93,578
Loans receivable, net                              70,677     65,447     58,623     52,813     51,274
Securities available for sale, at fair value:
           Collateralized mortgage obligations      3,361          0          0          0          0
           Other securities                        13,771      2,563          0          0          0
Investment securities held to maturity:
           Mortgage-backed securities              12,172     12,348     12,711     15,118     18,979
           Collateralized mortgage obligations          0      3,049      3,166      3,245      6,584
           Other securities                        22,828     31,326     30,223     21,478      8,823
Federal Home Loan Bank of New York stock              565        566        509        572        572
Deposits                                          126,460    116,073    102,016     94,672     84,591
Federal Home Loan Bank of New
  York long term borrowings                         1,816      2,303      2,791      2,728      2,122
Total equity                                       20,591      7,914      7,302      6,646      5,955


</TABLE>

                                       33


<PAGE>





Summary of Operations

The following table  summarizes the Company's  results of operations for each of
the years indicated:
<TABLE>
<CAPTION>
                                                                     Years Ended September 30
                                                             -----------------------------------------
                                                             1996     1995     1994     1993     1992
                                                             ----     ----     ----     ----     ----
                                                                              (Dollars in Thousands)

<S>                                                         <C>       <C>      <C>      <C>      <C>  
Interest and dividend income                                $9,165    8,041    6,886    6,764    7,109
Interest expense                                             5,325    4,528    3,592    3,741    4,589
                                                            ------   ------   ------   ------   ------
      Net interest income                                    3,840    3,513    3,294    3,023    2,520
                                                                                                ------
Provision  for loan losses                                     230      165      293      217      116
                                                            ------   ------   ------   ------   ------
      Net interest income after provision for loan losses    3,610    3,348    3,001    2,806    2,404
                                                            ------   ------   ------   ------   ------

Non-interest income                                            388      275      221      187      141
Non-interest expense                                         3,724    2,731    2,245    1,938    1,684
                                                            ------   ------   ------   ------   ------

      Income before income tax expense                         274      892      977    1,055      861

Income tax expense                                              63      284      321      364      291
                                                            ------   ------   ------   ------   ------
      Net income                                            $  211      608      656      691      570
                                                            ======   ======   ======   ======   ======
</TABLE>

                                       34

<PAGE>

Key Operating Ratios

The table  below sets forth  certain  performance  and  financial  ratios of the
Company for the years indicated:
<TABLE>
<CAPTION>
                                                                At or For the Years Ended September 30
                                                             --------------------------------------------
                                                             1996     1995      1994      1993     1992
                                                             ----     ----      ----      ----     ----
                                                                              (Dollars in Thousands)
Performance Ratios:
Return on average assets
  (net income divided by average
<S>                                                       <C>       <C>       <C>       <C>       <C>  
  total assets)                                             0.16%     0.51%     0.60%     0.69%     0.64%
Return on average equity (net
  income divided by average equity)                         2.55      8.00      9.41     10.97     10.05
Net interest rate spread                                    2.69      2.78      2.89      2.74      2.87
Net interest margin                                         3.02      3.08      3.17      3.19      2.99
Yield on average earning
  assets for the period ended                               7.22      7.06      6.62      7.13      8.44
Rate on average interest-
  bearing liabilities                                       4.53      4.28      3.73      4.39      5.58
Average interest-earning
  assets to average interest-
  bearing liabilities                                     108.05    107.59    107.96    111.41    102.27
Efficiency ratio (1)                                       88.03     72.15     63.58     60.00     62.94
Expense ratio (2)                                           2.79      2.28      2.01      1.91      1.89

Asset Quality Ratios:
Non-performing loans to total assets                        0.51      0.47      0.64      1.01      0.89
Non-performing loans to total loans                         1.09      0.90      1.23      2.00      1.61
Allowance for loan losses to non-performing loans         112.40    113.57     85.62     39.04     37.58
Allowance for loan losses to total loans receivable         1.23      1.02      1.05      0.78      0.61
Non-performing assets to total assets, at period end        0.51      0.47      0.64      1.08      0.89

Capital Ratios:
Equity to total assets at period end                       13.40      6.18      6.41      6.33      6.36
Average equity to average total assets                      6.21      6.34      6.36      6.29      6.39

</TABLE>


------------------------
(1)  Total non-interest expense, excluding other real estate owned expense, as a
     percentage of net interest income and total non-interest income,  excluding
     net gain (loss) on securities transactions.
(2)  Total non-interest expense, excluding other real estate owned expense, as a
     percentage of average total assets.


Time  Deposits.  The  following  table  indicates  the amount of the Bank's time
deposits of $100,000 or more by time  remaining  until  maturity as of September
30, 1996.


                                                              Amount of
                      Maturity Period                       Time Deposits
                      ---------------                       -------------

                  Within three months                         $   2,269
                  Three through six months                          679
                  Six through twelve months                       1,624
                  Over twelve months                              2,197
                                                              ---------
                        Total                                 $   6,769
                                                              =========

Item  7.  Financial Statements
------------------------------

Financial statements begin on the next page.

                                       35

<PAGE>


                         Independent Auditors' Report

The Board of Directors and Shareholders
AFSALA Bancorp, Inc.:


We have audited the accompanying  consolidated balance sheets of AFSALA Bancorp,
Inc. and  subsidiary  (the Company) as of September  30, 1996 and 1995,  and the
related consolidated  statements of income,  changes in stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of AFSALA Bancorp, Inc.
and  subsidiary  as of  September  30,  1996 and 1995,  and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.

As discussed in note 1 and note 5 to the consolidated  financial statements,  as
of October  1,  1995,  the  Company  adopted  the  provisions  of the  Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 114
"Accounting  by Creditors For  Impairment of a Loan," and Statement of Financial
Accounting  Standards No. 118, "Accounting by Creditors For Impairment of a Loan
- Income Recognition and Disclosures," which prescribe  recognition criteria for
loan  impairment and  measurement  methods for certain  impaired loans and loans
whose terms are  modified in a troubled  debt  restructuring  subsequent  to the
adoption  of  these  statements.  As  discussed  in  note 1 to the  consolidated
financial statements,  as of October 1, 1994, the Company adopted the provisions
of the Financial  Accounting Standards Board's Statement of Financial Accounting
Standards  No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities,"  which changed its method of accounting for certain  investments in
debt and equity securities.


/s/ KPMG Peat Marwick LLP


November 15, 1996

                                       36


<PAGE>



                      AFSALA BANCORP, INC. AND SUBSIDIARY

                          Consolidated Balance Sheets

                          September 30, 1996 and 1995

<TABLE>
<CAPTION>



                                                                  1996               1995
                                                                  ----               ----
      Assets

<S>                                                          <C>                <C>      
Cash and due from banks                                      $   4,816,392        4,823,328
Federal funds sold                                              19,200,000        3,350,000
Term deposits with the Federal Home Loan Bank                    3,000,000        1,500,000
                                                              ------------      -----------
         Total cash and cash equivalents                        27,016,392        9,673,328
                                                              ------------      -----------

Securities available for sale, at approximate fair value        17,131,802        2,563,266
Investment securities held to maturity 
  (approximate fair value of $34,763,256 in 1996 
  and $46,892,622 in 1995)                                      34,999,930       46,722,683
Federal Home Loan Bank of New York stock, at cost                  565,300          566,200
Loans receivable, net                                           70,677,291       65,447,528
Accrued interest receivable                                      1,156,466        1,130,654
Premises and equipment, net                                      1,703,491        1,613,668
Other assets                                                       426,015          244,510
                                                              ------------      -----------
         Total assets                                        $ 153,676,687      127,961,837
                                                              ============      ===========
   Liabilities and Stockholders' Equity

Liabilities:
   Deposits                                                    126,460,081      116,072,579
   Federal Home Loan Bank of New York long term borrowings       1,815,625        2,303,125
   Escrow accounts                                                 365,187          500,523
   Accrued expenses and other liabilities                        4,444,922        1,171,481
                                                              ------------      -----------
         Total liabilities                                     133,085,815      120,047,708
                                                              ------------      -----------

Commitments and contingent liabilities (note 13)

Stockholders' Equity:
   Preferred stock, $0.10 par value; authorized 
     500,000 shares; none issued                                        --               --
   Common stock, $0.10 par value; authorized 3,000,000 
     shares; 1,454,750 shares issued and outstanding 
     at September 30, 1996                                         145,475               --
   Additional paid-in capital                                   13,460,381               --
   Retained earnings, substantially restricted                   8,120,864        7,909,546
   Common stock acquired by ESOP (110,780 shares)               (1,107,800)              --
   Net unrealized (loss) gain on securities available
     for sale, net of tax                                          (28,048)           4,583
                                                              ------------      -----------

         Total stockholders' equity                             20,590,872        7,914,129
                                                              ------------      -----------

         Total liabilities and stockholders' equity          $ 153,676,687      127,961,837
                                                              ============      ===========


</TABLE>

See accompanying notes to consolidated financial statements.

                                       37

<PAGE>


                      AFSALA BANCORP, INC. AND SUBSIDIARY

                       Consolidated Statements of Income

                    Years ended September 30, 1996 and 1995

<TABLE>
<CAPTION>



                                                                  1996          1995
                                                                  ----          ----

Interest and dividend income:
<S>                                                            <C>           <C>      
   Interest and fees on loans                                  $5,736,071    5,162,593
   Interest on Federal funds sold                                 333,960      228,638
   Interest on FHLB term deposits                                 131,247       29,817
   Interest on securities available for sale                      930,770      118,080
   Interest on investment securities                            1,996,499    2,460,410
   Dividends on Federal Home Loan Bank of New York stock           36,972       41,783
                                                               ----------   ----------
         Total interest and dividend income                     9,165,519    8,041,321
                                                               ----------   ----------

Interest expense:
   Deposits and escrow accounts                                 5,181,414    4,352,837
   Federal Home Loan Bank of New York long term borrowings        143,647      175,764
                                                               ----------   ----------
         Total interest expense                                 5,325,061    4,528,601
                                                               ----------   ----------

         Net interest income                                    3,840,458    3,512,720
                                                               ----------   ----------

Provision for loan losses                                         230,000      165,000
                                                               ----------   ----------
         Net interest income after provision for loan losses    3,610,458    3,347,720
                                                               ----------   ----------

Non-interest  income:
   Service charges on deposit accounts                            365,658      244,410
   Net loss on security transactions                                   --       (3,151)
   Other                                                           22,377       33,943
                                                               ----------   ----------
         Total non-interest  income                               388,035      275,202
                                                               ----------   ----------

Non-interest expenses:
   Compensation and benefits                                    1,245,908    1,122,778
   Occupancy and equipment                                        488,971      385,591
   FDIC deposit insurance premium                                 967,467      235,360
   Data processing fees                                           268,295      234,713
   Professional service fees                                      111,500       90,971
   Advertising                                                     44,552       69,760
   Supplies                                                        71,651       94,165
   Other                                                          525,731      497,777
                                                               ----------   ----------
         Total non-interest expenses                            3,724,075    2,731,115
                                                               ----------   ----------

         Income before income tax expense                         274,418      891,807

Income tax expense                                                 63,100      283,882
                                                               ----------   ----------
         Net income                                           $   211,318      607,925
                                                               ==========   ==========

         Net income per share                                         N/A          N/A
                                                               ==========   ==========

</TABLE>


See accompanying notes to consolidated financial statements.

                                       38

<PAGE>


                       AFSALA BANCORP, INC. AND SUBSIDIARY

           Consolidated Statements of Changes in Stockholders' Equity

                     Years ended September 30, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                                       Net unrealized
                                                                                             Common    gain (loss) on
                                                               Additional                    stock       securities
                                        Shares      Common       paid-in      Retained      acquired    available for
                                        Issued       stock       capital      earnings       by ESOP   sale, net of tax     Total
                                        ------      ------     ----------     --------      --------   ----------------     -----


<S>                                  <C>        <C>          <C>             <C>          <C>            <C>             <C>
Balance at September 30, 1994               -   $       -             -      7,301,621             -           -          7,301,621

Net income                                  -           -             -        607,925             -           -            607,925

Net unrealized gain on securities 
 available for sale, net of tax             -           -             -              -             -       4,583              4,583
                                     ---------   --------    ----------     ----------    ----------     -------         ----------


Balance at September 30, 1995               -           -             -      7,909,546             -       4,583          7,914,129

Net income                                  -           -             -        211,318             -                        211,318

Common stock issued                 1,454,750   $ 145,475    13,460,381              -             -           -         13,605,856

Acquisition of common stock by 
 ESOP (110,780 shares)                     -            -             -              -    (1,107,800)          -         (1,107,800)

Change in net unrealized gain on 
 securities available for sale,
 net of tax                                -            -             -              -             -     (32,631)           (32,631)
                                    ---------    --------    ----------     ----------    ----------     -------         ----------

Balance at September 30, 1996        1,454,750  $ 145,475    13,460,381      8,120,864    (1,107,800)    (28,048)        20,590,872
                                     =========   ========    ==========      =========    ==========     =======         ==========



</TABLE>


See accompanying notes to consolidated financial statements.

                                       39


<PAGE>

                      AFSALA BANCORP, INC. AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

                    Years ended September 30, 1996 and 1995

<TABLE>
<CAPTION>



                                                                                      1996           1995
                                                                                      ----           ----
Increase  (decrease)  in cash and cash  equivalents:  
Cash flows from  operating activities:
<S>                                                                             <C>              <C>    
   Net income                                                                   $    211,318         607,925
   Adjustments to reconcile net income to net cash provided
    by (used in) operating activities:
         Depreciation                                                                166,705         145,594
         Provision for loan losses                                                   230,000         165,000
         Deferred tax benefit                                                        (21,715)        (55,756)
         Net loss on security transactions                                                --           3,151
         Increase in accrued interest receivable                                     (25,812)       (258,096)
         Increase in other assets                                                   (181,505)        (10,659)
         Increase (decrease) in accrued expenses and other liabilities             3,311,968          (2,667)
                                                                                 -----------    ------------ 
              Total adjustments                                                    3,479,641         (13,433)
                                                                                 -----------    ------------ 
              Net cash provided by operating activities                            3,690,959         594,492
                                                                                 -----------    ------------ 

Cash flows from investing activities:
   Proceeds from the sale of securities available for sale                                --         314,268
   Proceeds from the maturity and call of securities available for sale            4,484,510       1,015,725
   Purchases of securities available for sale                                     (2,500,000)       (783,519)
   Proceeds from the maturity and call of investment securities                   10,501,537       3,640,075
   Purchases of investment securities                                            (15,381,273)     (7,368,924)
   Purchase of Federal Home Loan Bank of New York stock                                   --         (57,400)
   Redemption of Federal Home Loan Bank of New York stock                                900              --
   Net loans made to customers                                                    (5,485,197)     (6,989,761)
   Proceeds from sale of real estate owned                                            25,434              --
   Capital expenditures                                                             (256,528)       (450,818)
                                                                                 -----------    ------------ 
              Net cash used in investing activities                               (8,610,617)    (10,680,354)
                                                                                 -----------    ------------ 

Cash flows from financing activities:
   Net increase in deposits                                                       10,387,502      14,056,210
   Net decrease in escrow accounts                                                  (135,336)        (45,311)
   Repayments on long term borrowings from the Federal Home Loan Bank               (487,500)       (487,500)
   Net proceeds from common stock issued in stock conversion                      13,605,856              --
   Acquisition of common stock by ESOP                                            (1,107,800)             --
                                                                                ------------    ------------
              Net cash provided by financing activities                           22,262,722      13,523,399
                                                                                 -----------    ------------ 

Net increase in cash and cash equivalents                                         17,343,064       3,437,537
Cash and cash equivalents at beginning of year                                     9,673,328       6,235,791
                                                                                 -----------    ------------ 
Cash and cash equivalents at the end of year                                    $ 27,016,392       9,673,328
                                                                                 ===========    ============
</TABLE>


(Continued)
                                       40

<PAGE>


                      AFSALA BANCORP, INC. AND SUBSIDIARY

                Consolidated Statements of Cash Flows, Continued

                    Years ended September 30, 1996 and 1995


<TABLE>
<CAPTION>


                                                                        1996              1995
                                                                        ----              ----


Additional Disclosures Relative to Cash Flows:
<S>                                                                <C>                  <C>      
   Interest paid                                                   $  5,321,830         4,518,515
                                                                   ============         =========

   Taxes paid                                                      $    205,460           327,569
                                                                   ============         =========

Supplemental schedules of non-cash investing and financing      
   activities:                                                  
                                                                
   Transfer of loans to real estate owned                          $     25,434                --
                                                                   ============         =========

   Investment securities transferred to securities available    
     for sale upon the adoption of Financial Accounting         
     Standard No. 115, fair value of securities transferred     
     $3,065,404                                                    $         --         3,105,947
                                                                   ============         =========

   Investment securities held to maturity transferred to        
     securities available for sale in accordance with the       
     FASB "Special Report," fair value of securities            
     transferred $16,604,244                                       $ 16,602,489                --
                                                                   ============         =========

   Change in net unrealized gain (loss) on securities           
      available for sale, net of tax                               $    (32,631)          (31,341)
                                                                   ============         =========
</TABLE>



See accompanying notes to consolidated financial statements.

                                       41

<PAGE>


                      AFSALA BANCORP, INC. AND SUBSIDIARY

                  Notes to Consolidated Financial Statements

                         September 30, 1996 and 1995


(1)  Summary of Significant Accounting Policies
     AFSALA Bancorp, Inc. (the Holding Company or the Company) was incorporated
       under Delaware law in June, 1996 as a holding company to purchase 100% of
       the common stock of Amsterdam Federal Bank (the Bank). The Bank converted
       from a mutual form to a stock form  institution,  and the Holding Company
       completed  its initial  public  offering on September  30, 1996, at which
       time the Holding Company  purchased all of the  outstanding  stock of the
       Bank. To date, the principal operations of AFSALA Bancorp, Inc. have been
       those of the Bank.

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

     (a) Basis of Presentation
         The accompanying consolidated financial statements include the accounts
           of the Holding Company and its wholly owned subsidiary, the Bank. All
           significant intercompany  transactions and balances are eliminated in
           consolidation.  The accounting and reporting  policies of the Company
           conform in all  material  respects to generally  accepted  accounting
           principles and to general  practice within the thrift  industry.  The
           Company  utilizes  the accrual  method of  accounting  for  financial
           reporting purposes.

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

     (b) Business
         A substantial portion of the Company's assets are loans secured by real
           estate  located in Montgomery  and  neighboring  counties in New York
           State.  Accordingly,  the ultimate  collectibility  of a  substantial
           portion of the  Company's  loan  portfolio is  dependent  upon market
           conditions  in these market  areas.  In  addition,  other real estate
           owned,   if  any,  is  also  generally   located  in  Montgomery  and
           neighboring counties in New York State.

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

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

                                       42

<PAGE>


                                     2

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




     (c)  Cash Equivalents
          For  purposes  of the  consolidated  statements  of  cash  flows,  the
               Company   considers  all  highly  liquid  debt  instruments  with
               original   maturities   of  three  months  or  less  to  be  cash
               equivalents.

     (d)  Cash Reserve Requirements
          The  Bank is required  to maintain  certain  cash  reserves  and other
               deposits  with the  Federal  Reserve  Bank.  The  amount  of this
               reserve  requirement,  included in cash and due from  banks,  was
               approximately  $767  thousand and $770  thousand at September 30,
               1996 and 1995, respectively.

     (e)  Securities Available for Sale, Investment Securities Held to Maturity,
          and Federal Home Loan Bank of New York Stock
          The  Company adopted Statement of Financial  Accounting  Standards No.
               115,  "Accounting  for  Certain  Investments  in Debt and  Equity
               Securities"  (SFAS No.  115),  on  October  1,  1994.  Management
               determines   the   appropriate   classification   of  securities,
               including mortgage-backed securities, at the time of purchase. If
               management  has the  positive  intent  and  ability  to hold debt
               securities  to  maturity,   they  are  classified  as  investment
               securities  held to maturity and are stated at amortized cost. If
               securities  are  purchased for the purpose of selling them in the
               near term,  they are  classified  as trading  securities  and are
               reported at fair value with  unrealized  holding gains and losses
               reflected  in  current  earnings.   All  other  debt  and  equity
               securities  are  classified as securities  available for sale and
               are reported at fair value,  with net unrealized  gains or losses
               reported  as a separate  component  of equity,  net of  estimated
               income taxes. The Company does not maintain a trading portfolio.

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

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

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

          Prior to the adoption of SFAS No. 115, all debt  securities, including
               mortgage-backed  securities,  were carried at amortized  cost and
               adjusted for  amortization  of premium and accretion of discount,
               which was calculated on an effective interest method.  Marketable
               equity securities, if any, were carried at the lower of aggregate
               cost or fair  value,  with any  unrealized  losses  reflected  in
               equity. Upon the adoption of SFAS No. 115 on October 1, 1994, the
               Company transferred $3,105,947 of securities to the available for
               sale  classification.  At the time of transfer,  these securities
               had a fair value of $3,065,404.

          Non-marketable  equity  securities,  such as Federal Home Loan Bank of
               New York Stock,  are stated at cost.  The  investment  in Federal
               Home Bank of New York  stock is  required  for  membership.  This
               investment  is  pledged to secure  Federal  Home Loan Bank of New
               York long term borrowings.

                                                                   (Continued)

                                       43

<PAGE>


                                        3

                       AFSALA BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued




     (f)  Reclassification of Investment Securities
          In  November 1995, the Financial  Accounting  Standards  Board (FASB)
               released  its  Special  Report,  "A  Guide to  Implementation  of
               Statement 115 on Accounting  for Certain  Investments in Debt and
               Equity  Securities."  The Special Report  contained,  among other
               things,  a unique  provision that allowed  entities to, as of one
               date either  concurrent with the initial  adoption of the Special
               Report  (November 15, 1995), but no later than December 31, 1995,
               reassess  the  appropriateness  of  the  classifications  of  all
               securities  held at that  time.  In  accordance  with the  FASB's
               Special  Report,  the  Company  reclassified  securities  with an
               amortized  cost of $16,602,489  and an approximate  fair value of
               $16,604,244  from  investment  securities  held  to  maturity  to
               securities available for sale as of December 31, 1995.

     (g)  Loans Receivable
          Loans receivable are stated at the unpaid principal amount, net of the
               allowance  for  loan  losses.  Interest  income  on  loans is not
               recognized when considered  doubtful of collection by management.
               Loans considered  doubtful of collection by management are placed
               on a non-accrual status for the recording of interest. Generally,
               loans past due 90 days or more as to  principal  or interest  are
               considered  to be in  non-accrual  status  except for those loans
               which, in management's  judgment,  are adequately secured and for
               which collection is probable.  Previously accrued income that has
               not been  collected is generally  reversed  from current  income.
               Fees received from and costs incurred for loan  originations  are
               recorded  to interest  income on loans as  received or  incurred.
               Based upon management's analysis, recording loan origination fees
               and costs on the cash basis  does not have a  material  impact on
               the Company's consolidated financial statements.

     (h)  Allowance for Loan Losses
          The allowance for loan losses is replenished  through a provision for
               loan losses charged to operations.  Loans are charged against the
               allowance   for  loan  losses  when   management   believes  that
               collectibility  of the  principal is unlikely.  The allowance for
               loan  losses  is  maintained  at a level  deemed  appropriate  by
               management based on an evaluation of the known and inherent risks
               in the  portfolio,  past loan loss exposure,  estimated  value of
               underlying  collateral,  and  current  and  prospective  economic
               conditions that may affect borrowers' ability to pay.

     (i)  Loan Impairment
          On  May 31, 1993,  the Financial  Accounting  Standards  Board issued
               Statement of Financial  Accounting Standards No. 114, "Accounting
               by Creditors for  Impairment of a Loan" (SFAS No. 114).  SFAS No.
               114 was amended by Statement of  Financial  Accounting  Standards
               No. 118,  "Accounting  by Creditors  for  Impairment  of a Loan -
               Income  Recognition  and  Disclosures,"  (SFAS  No.  118).  These
               Statements  were  adopted  by the  Company on October 1, 1995 and
               prescribe  recognition  criteria for loan  impairment,  generally
               related to commercial oriented loans, and measurement methods for
               impaired  loans and all loans whose terms are modified in trouble
               debt   restructurings   subsequent   to  the  adoption  of  these
               Statements.  A loan is  considered  impaired  when it is probable
               that the  borrower  will not  repay  the  loan  according  to the
               original contractual terms of the loan agreement. Under these new
               Statements  the  allowance  for loan  losses  related to impaired
               loans is based on discounted  cash flows using the loan's initial
               effective  interest rate or the fair value of the collateral less
               estimated  costs to sell for certain loans where repayment of the
               loan  is  expected  to  be  provided  solely  by  the  underlying
               collateral (collateral dependent loans).

                                                                   (Continued)

                                       44

<PAGE>


                                     4

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




          Other real estate owned, if any, includes both formally foreclosed and
               insubstance  foreclosed real properties.  In accordance with SFAS
               No. 114, a loan is classified as an insubstance  foreclosure when
               the Company has taken possession of the collateral  regardless of
               whether formal foreclosure proceedings have taken place.

 
          There was no  other  real  estate  owned  or in  substance  foreclosed
               properties at September 30, 1996 or 1995.

     (j)  Premises and Equipment
          Premises  and   equipment   are   stated  at  cost  less   accumulated
               depreciation.  Depreciation  is  computed  on  the  straight-line
               method over the  estimated  useful  lives of the related  assets.
               Leasehold  improvements  are  amortized  over the  shorter of the
               terms of the related leases or the useful lives of the assets.

     (k)  Employee Benefit Plans
          The  Company has a defined  contribution 401(k) plan covering all full
               time employees meeting age and service requirements. In addition,
               the  Company  has a  supplemental  employee  retirement  plan for
               certain executive officers.

          The  Company also has an employee  stock  ownership  plan (ESOP) which
               was  established  to provide  substantially  all employees of the
               Company the opportunity to also become stockholders.  The Company
               accounts for the ESOP in accordance  with the American  Institute
               of Certified Public Accountants  Statement of Position No. 93-6,
               "Employers' Accounting for Stock Ownership Plans."

     (l)  Income Taxes
          The  Company accounts for income taxes in accordance with Statement of
               Financial   Accounting   Standards   No.  109  (SFAS  No.   109),
               "Accounting  for  Income  Taxes."  SFAS  No.  109  requires  that
               deferred tax assets and  liabilities be 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.  Under SFAS
               No. 109, the effect on deferred tax assets and  liabilities  of a
               change in tax rates is  recognized  in income in the period  that
               includes  the  enactment  date.  The  Company's  policy  is  that
               deferred  tax assets are  reduced by a  valuation  allowance  if,
               based on the weight of available evidence, it is more likely than
               not  that  some or all of the  deferred  tax  assets  will not be
               realized.

                                                                   (Continued)

                                       45

<PAGE>


                                     5

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




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

     (n)  Fair Value of Financial Instruments
          In December 1991, the FASB  issued Statement of  Financial  Accounting
               Standards No. 107 (SFAS No. 107),  "Disclosures  about Fair Value
               of  Financial   Instruments."   SFAS  No.  107  requires  certain
               disclosures  about  fair  value  for all  financial  instruments,
               whether recognized or not recognized in the consolidated  balance
               sheet,  and is  effective  for the  Company's  fiscal  year ended
               September 30, 1996 consolidated financial statements.

     (o)  Earnings Per Share
          Earnings per share  will be  computed  based on the  weighted  average
               number of shares  outstanding,  less  unallocated  employee stock
               ownership plan shares, during the period.  Earnings per share are
               not presented for periods prior to the initial stock  offering as
               the  Bank  was a mutual  thrift  at the  time  and no  stock  was
               outstanding.  As the  conversion  of the Bank to  stock  form was
               effective  as of September  30,  1996,  earnings per share is not
               applicable for the years ended September 30, 1996 and 1995.

     (p)  Cashier Checks
          The  Company's  cashier  checks  (including   teller's  checks,   loan
               disbursement checks,  expense checks and money orders), are drawn
               upon deposit accounts at the Bank and are ultimately paid through
               the Bank's Federal Reserve correspondent account.  Cashier checks
               are classified as accrued  expenses and other  liabilities on the
               consolidated balance sheets.

     (q)  Transfers of Financial Assets and Extinguishment of Liabilities
          In   June  1996,  the  Financial  Accounting  Standards  Board  issued
               Statement of  Financial  Accounting  Standards  No. 125 (SFAS No.
               125),  which  provides  accounting  and  reporting  standards for
               transfers and servicing of financial assets and extinguishment of
               liabilities    based    on    consistent    application    of   a
               financial-components  approach that focuses on control.  SFAS No.
               125  amends  SFAS  No.  115 to  prevent  a  security  from  being
               classified  as held to maturity if the security can be prepaid or
               settled in such a manner  that the holder of the  security  would
               not recover  substantially  all of its recorded  investment.  The
               extension  of the SFAS No. 115  approach to certain  non-security
               financial  assets and the amendment to SFAS No. 115 are effective
               for financial  assets held on or acquired  after January 1, 1997.
               Effective  January 1, 1997,  SFAS No. 125 will supersede SFAS No.
               122.  SFAS No. 125 is effective  for  transfers  and servicing of
               financial  assets and  extinguishment  of  liabilities  occurring
               after December 31, 1996. Management believes the adoption of SFAS
               No.  125  will  not  have a  material  impact  on  the  Company's
               consolidated financial statements.

                                                                   (Continued)

                                       46

<PAGE>


                                     6

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




     (r)  Reclassifications
          Amounts in the prior period's  financial  statements are  reclassified
               whenever   necessary   to   conform  to  the   current   period's
               presentation.

(2)  Conversion to Stock Ownership
     On September  30,  1996,  the  Holding  Company  sold  1,454,750  shares of
          common stock at $10.00 per share to depositors, employees of the Bank,
          and employee  benefit plans of the Bank. Net proceeds from the sale of
          stock of the Holding Company,  after deducting  conversion expenses of
          approximately $942 thousand,  were approximately $13.6 million and are
          reflected  as  common  stock and  additional  paid-in  capital  in the
          accompanying   consolidated   balance  sheet.   The  Company  utilized
          approximately  $6.8  million of the net proceeds to acquire all of the
          capital stock of the Bank.

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

     The Bank's capital exceeds  all of the fully phased-in  capital  regulatory
          requirements.  The Office of Thrift  Supervision  ("OTS")  regulations
          provide that an institution  that exceeds all fully phased-in  capital
          requirements  before and after a proposed capital  distribution could,
          after prior notice but without the  approval by the OTS,  make capital
          distribution  during the calendar year of up to 100% of its net income
          to date during the calendar  year plus the amount that would reduce by
          one-half  its  "surplus  capital  ratio" (the excess  capital over its
          fully phased-in capital requirements) at the beginning of the calendar
          year.  Any  additional  capital   distributions  would  require  prior
          regulatory approval.

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

(3)  Securities Available for Sale
     The  amortized cost and approximate fair value of securities  available for
          sale at September 30, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>

                                                                    September 30, 1996
                                                   -----------------------------------------------------
                                                                  Gross           Gross      Approximate
                                                   Amortized    Unrealized      Unrealized      Fair
                                                      Cost         Gains          Losses        Value
                                                   ---------    -----------     ----------   -----------

<S>                                               <C>                <C>          <C>       <C>      
         U.S. Government and agency securities    $ 8,762,717        27,436        11,470     8,778,683
         States and political subdivisions          4,987,667        22,640        17,707     4,992,600
         Collateralized mortgage obligations        3,423,917        30,808        94,206     3,360,519
                                                  -----------   -----------   -----------   -----------
            Total securities available for sale   $17,174,301        80,884       123,383    17,131,802
                                                  ===========   ===========   ===========   ===========

</TABLE>

                                                                   (Continued)
                                       47
<PAGE>
                                     7

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued

<TABLE>
<CAPTION>


                                                                 September 30, 1995
                                                  ---------------------------------------------------
                                                                  Gross        Gross      Approximate
                                                  Amortized     Unrealized   Unrealized      Fair
                                                     Cost         Gains        Losses        Value
                                                  ----------    ----------   ----------   -----------

<S>                                               <C>               <C>          <C>      <C>      
         U.S. Government and agency securities    $2,002,078        4,020        1,720    2,004,378
         States and political subdivisions           554,244        4,644           --      558,888
                                                  ----------   ----------   ----------   ----------
            Total securities available for sale   $2,556,322        8,664        1,720    2,563,266
                                                  ==========   ==========   ==========   ==========
</TABLE>

 

     The amortized cost and approximate fair  value of securities  available for
          sale at September  30, 1996 and 1995,  by  contractual  maturity,  are
          shown below (collateralized mortgage obligations are included by final
          contractual   maturity).   Expected   maturities   will   differ  from
          contractual  maturities  because certain issuers may have the right to
          call  or  prepay  obligations  with  or  without  call  or  prepayment
          penalties.

                                                          September 30, 1996
                                                       ------------------------
                                                       Amortized    Approximate
                                                         Cost       Fair Value
                                                       ----------   -----------

        Due within one year                         $  7,030,632     7,053,744
        Due one year to five years                     6,219,752     6,213,009
        Due five years to ten years                      500,000       504,530
        Due after ten years                            3,423,917     3,360,519
                                                      ----------     ---------
           Total securities available for sale      $ 17,174,301     17,131,802
                                                      ==========     ==========

     Substantially all of the collateralized  mortgage  obligations at September
          30, 1996  consist of Federal  National  Mortgage  Association  (FNMA),
          Federal  Home  Loan  Mortgage   Corporation  (FHLMC),  and  Government
          National Mortgage Association (GNMA) securities.

     Therewere no sales of  securities  available for sale during the year ended
          September 30, 1996. Proceeds from the sale of securities available for
          sale were  approximately $314 thousand during the year ended September
          30, 1995,  which resulted in gross realized losses of approximately $3
          thousand with no gross realized gains.

(4)  Investment Securities Held to Maturity
     The amortized  cost and  approximate  fair  value of investment  securities
          held to maturity at September 30, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>

                                                                           September 30, 1996
                                                            ----------------------------------------------------
                                                                           Gross         Gross       Approximate
                                                            Amortized    Unrealized    Unrealized       Fair
                                                               Cost         Gains        Losses         Value
                                                            ---------    ----------    ----------    -----------

<S>                                                        <C>               <C>           <C>        <C>       
         U.S. Government and agency securities             $22,786,722        25,823       297,575    22,514,970
         Mortgage-backed securities                         12,172,235       128,219        93,141    12,207,313
         Other                                                  40,973          --            --          40,973
                                                           -----------   -----------   -----------   -----------
            Total investment securities held to maturity   $34,999,930       154,042       390,716    34,763,256
                                                           ===========   ===========   ===========   ===========
</TABLE>

                                                                   (Continued)

                                       48
<PAGE>


                                     8

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued

<TABLE>
<CAPTION>


                                                                            September 30, 1995
                                                            ------------------------------------------------------
                                                                             Gross         Gross      Approximate
                                                             Amortized    Unrealized     Unrealized       Fair
                                                                Cost         Gains         Losses         Value
                                                            -----------   ----------     -----------  ------------

<S>                                                         <C>               <C>           <C>        <C>       
         U.S. Government and agency securities              $25,212,733        91,892       208,082    25,096,543
         Mortgage-backed securities                          12,347,680       210,937        13,909    12,544,708
         States and political subdivisions                    6,076,897       127,535        23,904     6,180,528
         Collateralized mortgage obligations                  3,049,399        16,253        30,783     3,034,869
         Other                                                   35,974            --            --        35,974
                                                            -----------   -----------   -----------   -----------
             Total investment securities held to maturity   $46,722,683       446,617       276,678    46,892,622
                                                            ===========   ===========   ===========   ===========
</TABLE>

     The amortized  cost and  approximate  fair  value of investment  securities
          held to  maturity  at  September  30,  1996 and 1995,  by  contractual
          maturity,   are   shown   below   (mortgage-backed    securities   and
          collateralized  mortgage obligations are included by final contractual
          maturity). Expected maturities will differ from contractual maturities
          because  certain  issuers  may  have  the  right  to  call  or  prepay
          obligations with or without call or prepayment penalties.

                                                 September 30, 1996
                                              --------------------------
                                              Amortized      Approximate
                                                Cost         Fair Value
                                              ---------      -----------

           Due within one year              $ 1,356,955       1,359,080
           Due one year to five years        15,522,024      15,345,804
           Due five years to ten years        6,624,874       6,547,679
           Due after ten years               11,496,077      11,510,693
                                             ----------      ----------
               Total                       $ 34,999,930      34,763,256
                                             ==========      ==========

     Substantially  all of the  mortgage-backed  securities  and  collateralized
          mortgage  obligations  at  September  30,  1996,  consist  of  Federal
          National  Mortgage  Association  (FNMA),  Federal  Home Loan  Mortgage
          Corporation  (FHLMC),  and Government  National  Mortgage  Association
          (GNMA) securities.

     There were no sales of  nvestment  securities  held to maturity  during the
          years ended September 30, 1996 and 1995, respectively.

                                                                   (Continued)
                                       49

<PAGE>


                                     9

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




(5)  Loans Receivable, Net
     A summary  of loans  receivable  at  September  30,  1996  and  1995  is as
          follows:

                                                           1996          1995
                                                           ----          ----
      Loans secured by real estate:
        Conventional one-to-four family mortgages      $42,912,395   43,076,165
        Commercial                                       3,015,220    2,796,597
        Home equity                                     14,665,911    9,770,549
        FHA insured                                        386,048      526,354
        VA guaranteed                                      667,225    1,005,639
                                                        ----------   ----------
                                                        61,646,799   57,175,304
                                                        ----------   ----------
      Other loans:
        Personal secured                                 3,942,824    2,842,050
        Personal unsecured                                 432,707      406,630
        Commercial                                       3,103,577    3,300,957
        Home improvement                                 1,560,032    1,258,587
        Passbook                                           779,494      834,285
        Education                                           91,321      307,396
                                                        ----------   ----------
                                                         9,909,955    8,949,905
                                                        ----------   ----------

                                                        71,556,754   66,125,209
      Less: Allowance for loan losses                     (879,463)    (677,681)
                                                        ----------   ----------
            Loans receivable, net                      $70,677,291   65,447,528
                                                        ==========   ==========

                                                                   (Continued)

                                       50

<PAGE>


                                     10

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




     Certain  conventional  mortgage  loans held in the Company's loan portfolio
          are used to  secure  Federal  Home  Loan  Bank of New York  long  term
          borrowings.

     A summary of the allowance for loan losses is as follows:

                                                            1996       1995
                                                            ----       ----

        Balance at beginning of year                    $  677,681    624,855
        Provision for loan losses                          230,000    165,000
        Charge-offs                                        (28,218)  (112,174)
        Recoveries                                               -          -
                                                          --------   --------
        Balance at end of year                          $  879,463    677,681
                                                          ========   ========

     The following table sets forth  information  with regard to  non-performing
          loans:

                                                            1996        1995
                                                            ----        ----

        Loans in non-accrual status                     $  716,461    518,247
        Loans contractually past due 90 days 
         or more and still accruing interest                65,953     78,656
                                                          --------   --------
            Total non-performing loans                  $  782,414    596,903
                                                          ========   ========

     There were no troubled debt restructurings at September 30, 1996 or 1995.

     Accumulated interest on non-accrual loans, as shown above, of approximately
          $33 thousand and $17 thousand was not  recognized  in interest  income
          during the years  ended  September  30,  1996 and 1995,  respectively.
          Approximately $29 thousand and $27 thousand of interest on non-accrual
          loans, as shown above, was collected and recognized as interest income
          during the years ended September 30, 1996 and 1995, respectively.

     Certain directors  and  executive  officers of the Company are customers of
          and have other transactions with the Company in the ordinary course of
          business.  Loans to these parties were made in the ordinary  course of
          business at the Company's normal credit terms, including interest rate
          and   collateralization.   The   aggregate   of  such  loans   totaled
          approximately  $301  thousand and $328  thousand at September 30, 1996
          and 1995, respectively.  Total advances to the directors and executive
          officers  during the years ended  September  30, 1996 and 1995 were $0
          and $31  thousand,  respectively.  Total  payments made on these loans
          were  approximately $27 thousand and $169 thousand for the years ended
          September 30, 1996 and 1995, respectively.

     As of September  30,  1996,  the  recorded  investment  in  loans  that are
          considered  to be  impaired  under SFAS No. 114 totaled  $40,275,  for
          which the related allowance for loan loss was $4,028.  During the year
          ended  September 30, 1996,  the average  balance of impaired loans was
          $40,275. No interest income was collected on the impaired loans during
          the year ended September 30, 1996.

                                                                   (Continued)

                                       51
<PAGE>


                                     11

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




(6)  Accrued Interest Receivable
     A  summary of accrued  interest  receivable  as  of  September 30, 1996 and
          1995 is as follows:

                                                            1996        1995
                                                            ----        ----

         Term deposits with the Federal Home Loan Bank  $   43,900       7,690
         Securities available for sale                     186,706      37,394
         Investment securities held to maturity            432,787     617,944
         Loans receivable                                  493,073     467,626
                                                         ---------   ---------
             Total accrued interest receivable          $1,156,466   1,130,654
                                                         ==========  =========

(7)  Premises and Equipment, Net
     Premises and  equipment at September  30, 1996 and 1995 are  summarized  by
          major classification as follows:                 1996         1995
                                                           ----         -----

         Land and land improvements                    $   388,044     388,044
         Office buildings                                1,128,801   1,128,801
         Leasehold improvements                            370,511     226,845
         Furniture, fixtures and equipment                 929,751     816,889
                                                        ----------   ---------
           Total                                         2,817,107   2,560,579

         Less accumulated depreciation                  (1,113,616)   (946,911)
                                                        ----------   ---------
           Premises and equipment, net                 $ 1,703,491   1,613,668
                                                         =========   =========

     Depreciation  included  in  occupancy  and  equipment  expense  amounted to
          approximately  $167  thousand and $146  thousand,  for the years ended
          September 30, 1996 and 1995, respectively.

(8)  Deposits
     Deposit account  balances at September 30, 1996 and 1995 are  summarized as
          follows:
<TABLE>
<CAPTION>

                                          Stated
                                           rate             1996           1995
                                           ----             ----           ----
                                  
<S>                                    <C>             <C>              <C>       
        Savings accounts                      3.00%    $ 36,916,478     34,468,922
        N.O.W. accounts                2.25 - 2.75       10,779,847      8,953,569
        Money market                
          accounts                     2.75 - 4.87        7,728,854      5,436,649
        Time deposit accounts:      
                                       3.00 - 3.99               --        666,824
                                       4.00 - 4.99       14,505,461      4,811,456
                                       5.00 - 5.99       30,823,393     27,768,045
                                       6.00 - 6.99       15,491,537     23,679,666
                                       7.00 - 7.99        3,012,883      3,884,362
                                       8.00 - 8.99               --        320,095
                                                        -----------     ----------
        Total time deposit accounts                      63,833,274     61,130,448
                                                        -----------     ----------
                                       
        Non-interest bearing           
          accounts                                        7,201,628      6,082,991
                                                        -----------     ----------
            Total deposits                             $126,460,081    116,072,579
                                                        ===========    ===========
</TABLE>

                                                                    (Continued)
                                     52
                                     
<PAGE>                               
                                     
                                     
                                       12
                                     
                       AFSALA BANCORP, INC. AND SUBSIDIARY
                                   
              Notes to Consolidated Financial Statements, Continued
                                
                              


     The  approximate amount of contractual  maturities of time deposit accounts
          for the years subsequent to September 30, 1996 are as follows:

           Years ended September 30,
           -------------------------
                 1997                                $ 40,907,072
                 1998                                  14,586,538
                 1999                                   2,478,666
                 2000                                   4,616,328
                 2001                                   1,244,670
                                                       ----------
                                                     $ 63,833,274

     At   September  30, 1996 and 1995,  the  aggregate  amount of time  deposit
          accounts  with  balances  equal to or in excess of $100  thousand  was
          approximately $6.8 million and $7.4 million, respectively. Deposits in
          excess of $100 thousand are not Federally insured.

     Interest  expense on  deposits  and  escrow  accounts  for the years  ended
          September 30, 1996 and 1995, is summarized as follows:

                                                          1996          1995
                                                          ----          ----

      Savings accounts                               $  1,057,512    1,089,256
      N.O.W. accounts                                     223,737      192,471
      Money market accounts                               256,736      156,722
      Time deposits                                     3,634,103    2,903,991
      Escrow accounts                                       9,326       10,397
                                                       ----------    ---------
         Total                                       $  5,181,414    4,352,837
                                                       ==========    =========

      Weighted average interest rate at 
        end of period                                        4.11%        4.30%
                                                       ==========    =========

(9)  Income Taxes

     The following is a summary of the  components of income tax expense for the
          years ended September 30, 1996 and 1995:

                                                              1996       1995
                                                              ----       ----

      Current tax expense:
         Federal                                          $   71,181   287,572
         State                                                13,634    52,066
      Deferred tax benefit                                   (21,715)  (55,756)
                                                            --------  --------
         Income tax expense                               $   63,100   283,882
                                                            ========  ========

                                                                   (Continued)

                                       53
<PAGE>


                                     13

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




     Income tax expense for financial reporting purposes is less than the amount
          computed by applying the statutory  federal  income tax rate of 34% to
          income before taxes for the reasons noted in the table below:

                                                             1996       1995
                                                             ----       ----

      Expense at statutory federal tax rate               $ 93,302     303,214
      Tax-exempt income                                    (49,137)    (81,193)
      State income taxes, net of federal tax benefit        16,708      56,064
      Effect of graduated tax rates                         (2,438)          -
      Other, net                                             4,665       5,797
                                                         ---------    --------
         Income tax expense                            $    63,100     283,882
                                                         =========    ========

      Effective tax rate                                      23.0%       31.8%
                                                         ==========   =========

     The  tax effects of  temporary  differences  that give rise to  significant
          portions of the deferred tax assets and  liabilities  at September 30,
          1996 and 1995 are as follows:

                                                            1996        1995
                                                            ----        ----

         Deferred tax assets:
           Differences in reporting the provision 
            for loan losses and loan charge-offs        $  334,539     296,011
           Other                                            34,516      12,503
                                                         ---------   ---------
               Total gross deferred tax assets             369,055     308,514

               Less valuation allowance                   (200,000)   (200,000)
                                                         ---------   ---------
               Net deferred tax assets                     169,055     108,514
                                                         ---------   ---------

         Deferred tax liabilities:
           Depreciation                                    (26,986)    (12,718)
           Prepaid expenses                                (24,558)          -
               Total deferred tax liabilities              (51,544)    (12,718)

               Net deferred tax asset at end of year       117,511      95,796

               Net deferred tax asset at beginning 
                of year                                     95,796      40,040

           Deferred tax benefit for the year               (21,715)    (55,756)
                                                         =========   =========

     In addition to the deferred tax amounts  described above,  the Company also
          had a deferred tax asset of approximately  $14.5 thousand at September
          30, 1996 related to the net  unrealized  loss on securities  available
          for sale and a deferred tax liability of  approximately $2 thousand at
          September  30, 1995 related to the net  unrealized  gain on securities
          available for sale.

                                                                   (Continued)

                                       54
<PAGE>


                                     14

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




     The valuation  allowance for deferred  tax assets as of October 1, 1994 was
          $200 thousand.  There was no change in the total  valuation  allowance
          for the years ended  September 30, 1996 and 1995. In  maintaining  the
          valuation  allowance,  the Company takes into consideration the nature
          and timing of the  deferred  tax asset  items as well as the amount of
          available open tax carrybacks.  The Company has fully reserved its New
          York State  deferred tax asset,  which is a  significant  component of
          deferred  tax assets,  due to the lack of carryback  and  carryforward
          provisions  available  in New York State.  Any changes in the deferred
          tax asset valuation  allowance is based upon the Company's  continuing
          evaluation of the level of such allowance and the realizability of the
          temporary differences creating the deferred tax asset.

     As a thrift  institution  the Bank is allowed a special bad debt  deduction
          which has not been subject to deferred taxes through December 31, 1987
          in  accordance  with  SFAS  No.  109.  Accordingly,  no  deferred  tax
          liability  has been  recorded for the tax bad debt reserve at December
          31, 1987.  This  reserve,  along with the  "supplemental"  reserve was
          approximately  $2.5 million at December 31, 1987,  will not be subject
          to tax as long as the Bank  doesn't  (i) redeem  stock or have  excess
          distributions  to  stockholders  or (ii) fail to  maintain a specified
          qualifying  assets ratio or meet other thrift definition tests for New
          York State tax purposes.

(10) Federal Home Loan Bank of New York Long Term Borrowings

     The long term  borrowings  from the Federal Home Loan  Bank of New York are
          secured by  conventional  mortgage  loans held in the  Company's  loan
          portfolio  as well as Federal  Home Loan Bank of New York  stock.  The
          rates on the various advances ranged from 5.07% to 10.30% and 4.50% to
          10.30% at  September  30, 1996 and 1995,  respectively.  The  weighted
          average rate on the  borrowings  was 6.83% and 6.64% at September  30,
          1996 and  1995,  respectively.  The  following  table  sets  forth the
          maturities of the term advances at September 30, 1996:

           Years ended September 30,

                     1997                       $  400,000
                     1998                          350,000
                     1999                          337,500
                     2000                          321,875
                     2001                          181,250
                    2002-2004                      225,000
                                                 ---------
                                                $1,815,625
                                                 =========

(11) Retained Earnings

     As a qualifying  thrift  institution,  the Bank has been  eligible to claim
          special Federal tax deductions  substantially in excess of actual loss
          experience  as a tax  bad  debt  reserve.  Such  reserve,  aggregating
          approximately  $2.5 million at December 31, 1995,  is included  within
          stockholders' equity in the accompanying  consolidated balance sheets.
          Federal tax law  restricts the use of such reserves to charges for bad
          debts.  If this  reserve is charged for amounts  other than bad debts,
          taxable  income of an identical  amount is created.  Since  ineligible
          charges to the reserve are not anticipated, no provision has been made
          for Federal income taxes thereon.

                                                                   (Continued)

                                       55
<PAGE>


                                     15

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




(12) Related Party Transactions
     The  law firm of a Director of the  Company  provides  the  majority of the
          Company's  legal  services.  The Company  expensed  approximately  $62
          thousand and $57 thousand, in fees to this law firm for legal services
          for the years ended September 30, 1996 and 1995, respectively.

     The  Company  leases  certain  branch  facilities  and office space from an
          entity  controlled by a member of the Board of  Directors.  The leases
          expire in February 2001. The terms of the leases provide for increased
          payments  each year  ranging in total from $20  thousand  in the first
          year to $30 thousand in the last year.  Management  believes the terms
          of these leases to be consistent with normal market terms.

     See  also note 5.

(13) Commitments and Contingent Liabilities
     Off-Balance Sheet Financing and  Concentrations  of Credit
     The  Company is a party to certain  financial  instruments with off-balance
          sheet  risk in the normal  course of  business  to meet the  financing
          needs  of  its  customers.  These  financial  instruments  consist  of
          commitments to extend  credit,  unused  personal lines of credit,  and
          standby  letters  of credit.  These  instruments  involve,  to varying
          degrees, elements of credit risk in excess of the amount recognized on
          the  consolidated   balance  sheet.  The  contract  amounts  of  these
          instruments reflect the extent of involvement by the Company.

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

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

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

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

                                                                   (Continued)

                                       56
<PAGE>


                                     16

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




Contract  amounts of  financial  instruments  that  represent  credit risk as of
     September  30, 1996 and 1995, at fixed and variable  interest  rates are as
     follows:

<TABLE>
<CAPTION>


                                                                                  September 30, 1996
                                                                            -----------------------------
                                                                            Fixed      Variable     Total
                                                                            -----      --------     -----
            Commitments outstanding:
<S>                                                                       <C>           <C>       <C>      
             Residential mortgages                                        $ 386,700     629,000   1,015,700
             Unadvanced portion of construction loans                       208,584     124,018     332,602
                                                                          ---------   ---------   ---------
                                                                            595,284     753,018   1,348,302
                                                                          ---------   ---------   ---------

            Unused lines and standby letters of credit:
             Personal lines of credit                                       224,263          --     224,263
             Standby letters of credit                                           --     106,000     106,000
                                                                          ---------   ---------   ---------
                                                                            224,263     106,000     330,263
                                                                          ---------   ---------   ---------
                                                                          $ 819,547     859,018   1,678,565
                                                                          =========   =========   =========

                                                                                  September 30, 1995
                                                                            ------------------------------
                                                                            Fixed      Variable      Total
                                                                            -----      --------      -----
            Commitments outstanding:
             Residential mortgages                                        $ 260,500          --     260,500
             Unadvanced portion of construction loans                       572,051          --     572,051
                                                                          ---------   ---------   ---------
                                                                            832,551          --     832,551
                                                                          ---------   ---------   ---------
            Unused lines and standby letters of credit:
             Personal lines of credit                                       114,409          --     114,409
             Standby letters of credit                                           --      57,000      57,000
                                                                          ---------   ---------   ---------
                                                                            114,409      57,000     171,409
                                                                          ---------   ---------   ---------
                                                                          $ 946,960      57,000   1,003,960
                                                                          =========   =========   =========

</TABLE>

     The range  of  interest  rates  on  fixed  rate  residential  mortgage  and
          unadvanced  construction  loan  commitments  was  7.625%  to 8.625% at
          September  30, 1996.  The interest  rate on unused  personal  lines of
          credit was 15.00% at September 30, 1996.


     Commitments on residential  mortgage loans generally  expire within 60 days
          of the date of  issuance.  Funds for  construction  loans are advanced
          during the construction  phase based upon various stages of completion
          in accordance  with the results of inspection  reports.  All funds for
          construction loans are generally advanced within 180 days.

     The  Company does not engage in investments in futures contracts, forwards,
          swaps,  or  option  contracts  or other  derivative  investments  with
          similar characteristics.

     The  Company  grants  residential,   consumer,   and  commercial  loans  in
          Montgomery and neighboring counties in New York State. Accordingly,  a
          substantial  portion of its debtors'  ability to honor their contracts
          is dependent upon the economy of this region.

                                                                   (Continued)

                                       57
<PAGE>


                                     17

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




     Lease Commitments
     The Company  leases  certain  branch  facilities  and  office  space  under
          noncancelable  operating leases. Total expenses under these leases for
          the years ended September 30, 1996 and 1995, were $97 thousand and $51
          thousand, respectively.

     A summary of  the future  minimum  commitments required under noncancelable
          operating leases as of September 30, 1996 are as follows:

          Years ending September 30,
          --------------------------
                     1997                          $   105,762
                     1998                              109,337
                     1999                              112,362
                     2000                               54,499
                     2001                               12,375
                  Thereafter                                 -
                                                       -------
                                                   $   394,335
                                                       =======

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

(14) Employee Benefit Plans
     The Company's  defined  401(k)  contribution  plan  covers  all  full  time
          employees  meeting age and service  requirements.  The Company matches
          participant  contributions  up to a maximum of 4.5%.  Costs associated
          with this plan were $35 thousand and $31 thousand, for the years ended
          September 30, 1996 and 1995, respectively.

     The  Company also has a supplemental  employee  retirement  plan (SERP) for
          certain executive officers.  The expense associated with this plan was
          approximately  $21 thousand of each of the years ended  September  30,
          1996 and 1995. The SERP is funded annually.

     Employee Stock Ownership Plan
     As part of the conversion discussed  in note 2, an employee stock ownership
          plan (ESOP) was established to provide  substantially all employees of
          the Company the  opportunity  to also  become  stockholders.  The ESOP
          borrowed  $1,107,800  from the  Company and used the funds to purchase
          110,780  shares  of the  common  stock of the  Company  issued  in the
          conversion.  The loan will be repaid  principally  from the  Company's
          discretionary contributions to the ESOP over a period of ten years. At
          September 30, 1996, the loan had an outstanding  balance of $1,107,800
          and an  interest  rate of  8.0%.  Both  the  loan  obligation  and the
          unearned  compensation  are  reduced by the amount of loan  repayments
          made by the ESOP.  Shares purchased with the loan proceeds are held in
          a suspense  account for allocation  among  participants as the loan is
          repaid.  Contributions  to the  ESOP  and  shares  released  from  the
          suspense  account are  allocated  among  participants  on the basis of
          compensation in the year of allocation.

                                                                   (Continued)
                                       58

<PAGE>


                                     18

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




     The Company   accounts  for  the  ESOP  in  accordance  with  the  American
          Institute of Certified Public  Accountants'  Statement of Position No.
          93-6  "Employers'  Accounting For Stock  Ownership  Plans" (SOP 93-6).
          Accordingly,  the shares  pledged as collateral are reported as common
          stock acquired by ESOP in stockholders' equity. As shares are released
          from collateral, the Company reports compensation expense equal to the
          average market price of the shares,  and the shares become outstanding
          for earnings per share  computations.  Unallocated ESOP shares are not
          included in the  earnings per share  computations.  The Company had no
          compensation  expense  under the ESOP during the year ended  September
          30, 1996.

     The  ESOP shares as of September 30, 1996 were as follows:

           Allocated shares                                       -
           Shares released for allocation                         -
           Unallocated shares                               110,780
                                                         ----------
                                                            110,780
                                                         ==========

           Market value of unallocated shares 
            at September 30, 1996                       $ 1,107,780
                                                         ==========

(15) Fair Value of Financial Instruments
     SFAS No.  107,  "Disclosure  about  Fair  Value of  Financial  Instruments"
          requires  the  Company  to  disclose  estimated  fair  values  for its
          financial  instruments.  SFAS No. 107 defined  fair value of financial
          instruments as the amount at which the  instrument  could be exchanged
          in a current  transaction  between  willing  parties  other  than in a
          forced  or  liquidation   sale.  SFAS  No.  107  defines  a  financial
          instrument as cash,  evidence of ownership interest in an entity, or a
          contract  that  imposes  on one  entity a  contractual  obligation  to
          deliver cash or another financial  instrument to a second entity or to
          exchange other financial instruments on potentially  unfavorable terms
          with a second  entity and conveys to that second  entity a contractual
          right to receive cash or another  financial  instrument from the first
          entity or to  exchange  other  financial  instruments  on  potentially
          favorable terms with the first entity.

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

                                                                   (Continued)
                                       59

<PAGE>


                                     19

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




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

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

     The  following  table  presents the  carrying  amounts and  estimated  fair
          values of the Company's financial instruments at September 30, 1996:

                                                          September 30, 1996
                                                        -----------------------
                                                        Carrying      Estimated
                                                         Amount      Fair Value
                                                        --------     ----------
                                                             (in thousands)

      Cash and cash equivalents                     $     27,016        27,016
      Securities available for sale                       17,132        17,132
      Investment securities held to maturity              35,000        34,763
      Federal Home Loan Bank of New York stock               565           565
      Loans                                               71,556        71,631
         Less:  Allowance for loan losses                   (879)            -
            Loans receivable, net                         70,677        71,631
      Accrued interest receivable                          1,156         1,156
                                                      ----------     ---------
               Total financial assets               $    151,546       152,263
                                                      ==========     =========

      Savings, N.O.W, money market and non-
        interest bearing accounts                         62,627        62,627
      Time deposit accounts                               63,833        64,232
      Federal Home Loan Bank of New York long 
        term borrowings                                    1,816         1,842
      Escrow accounts                                        365           365
      Accrued interest payable                                19            19
                                                      ----------     ---------
               Total financial liabilities          $    128,660       129,085
                                                      ==========     =========


     Financial Instruments with Carrying Amount Equal to Fair Value
     The carrying  amount of cash  and due from banks,  federal funds sold, term
          deposits  with the  Federal  Home Loan Bank  (collectively  defined as
          "cash and cash  equivalents"),  accrued  interest  receivable,  escrow
          accounts,  and accrued  interest  payable is considered to be equal to
          fair value as a result of their short-term nature.

                                                                   (Continued)

                                       60
<PAGE>


                                     20

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




     Securities Available for Sale,  Investment  Securities Held to Maturity and
          Federal Home Loan Bank of New York Stock
     Securities  available for sale and investment  securities  held to maturity
          are financial  instruments  which are usually traded in broad markets.
          Fair  values  are  based  upon bid  quotations  received  from  either
          quotation services or securities dealers.  The estimated fair value of
          stock in the  Federal  Home Loan Bank of New York is assumed to be its
          cost given the lack of a public market available for this investment.

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

     The  fair value of performing loans is calculated by discounting  scheduled
          cash flows  through the  estimated  maturity  using  estimated  market
          discount rates that reflect the credit and interest rate risk inherent
          in the loan. The estimate of maturity is based on the contractual term
          of the loans to maturity, adjusted for estimated prepayments.

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

     Deposit Liabilities
     UnderSFAS No.  107,  the fair value of  deposits  with no stated  maturity,
          such as savings deposits,  N.O.W deposits,  money market deposits, and
          non-interest bearing deposits, must be stated at the amount payable on
          demand as of September  30, 1996.  The fair value of time  deposits is
          based on the discounted  value of contractual cash flows. The discount
          rate is estimated  using the rates  currently  offered for deposits of
          similar  remaining  maturities.  The fair  value  estimate  of deposit
          liabilities  in the foregoing  table does not include the benefit that
          results from the low cost funding provided by the deposit  liabilities
          compared to the cost of borrowing funds in the market.

     Federal Home Loan Bank of New York Long Term Borrowings
     Fair value is  estimated  by  discounting  scheduled  cash  flows  based on
          current rates  available to the Company for similar types of borrowing
          arrangements.

     Commitments to Extend Credit and Standby Letters of Credit
     The  fair value of commitments to extend credit is estimated using the fees
          currently  charged  to enter  into  similar  agreements,  taking  into
          account  the  remaining  terms  of  the  agreements  and  the  present
          creditworthiness   of  the   counterparties.   For  fixed   rate  loan
          commitments,  fair value also considers the difference between current
          level of interest  rates and the  committed  rates.  The fair value of
          commitments to extend credit and standby letters of credit is based on
          fees  currently  charged  for  similar  agreements  or on the  cost to
          terminate  them  or  otherwise   settle  the   obligations   with  the
          counterparties.  Fees  such  as  these  are  not a  major  part of the
          Company's  business and in the  Company's  business  territory are not
          currently a normal business practice.

                                                                   (Continued)

                                       61
<PAGE>


                                     21

                      AFSALA BANCORP, INC. AND SUBSIDIARY

            Notes to Consolidated Financial Statements, Continued




(16) Regulatory Capital Requirements
     OTS capital regulations  require  savings  institutions to maintain minimum
          levels  of  regulatory  capital.  Under the  regulations  in effect at
          September 30, 1996,  the Bank was required to maintain a minimum ratio
          of tangible  capital to tangible  assets of 1.5%;  a minimum  leverage
          ratio of core (Tier 1) capital to total  adjusted  tangible  assets of
          3.0%;  and  a  minimum  ratio  of  total  capital  (core  capital  and
          supplementary  capital) to risk-weighted assets of 8.0%, of which 4.0%
          must be core (Tier 1) capital.

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

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

     Management  believes  that,  as of September  30, 1996,  the Bank meets all
          capital  adequacy  requirements to which it is subject.  Further,  the
          most   recent   OTS   notification   categorized   the   Bank   as   a
          well-capitalized   institution  under  the  prompt  corrective  action
          regulations.  There  have  been no  conditions  or events  since  that
          notification that management  believes have changed the Bank's capital
          classification.

     The  following is a summary of the Bank's actual capital amounts and ratios
          as of  September  30,  1996,  compared to the OTS minimum bank capital
          adequacy requirements and the OTS requirements for classification as a
          well-capitalized  institution.  Although  the OTS capital  regulations
          apply at the Bank  level  only,  the  Company's  consolidated  capital
          amounts and ratios are also presented. The OTS does not have a holding
          company capital requirement.

                                                                   (Continued)

  
                                     62
<PAGE>


                                     22




                      AFSALA BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued


<TABLE>
<CAPTION>


                                                                   OTS Bank Capital Requirements
                                                             -------------------------------------------
                                                               Minimum Capital       For Classification
                                         Actual                   Adequacy           as Well Capitalized
                                 --------------------        ------------------      -------------------
                                 Amount         Ratio        Amount      Ratio       Amount        Ratio
                                 ------         -----        ------      ------      ------        -----
                                                            (Dollars in thousands)

Tangible capital:
<S>                            <C>              <C>       <C>             <C>      <C>              <C>
   Bank only                   $ 13,816         8.99%     $  2,306        1.50%
   Consolidated                  20,619        13.41           N/A         N/A

Core (Tier 1) capital:
   Bank only                     13,816         8.99         4,612        3.00     $  6,635          5.00%
   Consolidated                  20,619        13.41           N/A         N/A         N/A            N/A

Risk-based capital:
   Core (Tier 1):
      Bank only                  13,816        21.68                                  3,824          6.00
      Consolidated               20,619        32.35                                   N/A            N/A

   Total:
      Bank only                  14,573        22.86         5,099        8.00        6,374         10.00
      Consolidated               21,376        33.54           N/A         N/A         N/A            N/A


</TABLE>


                                       63

                                                                   (Continued)


<PAGE>
                      AFSALA BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued


     (17) Parent  Company Only Financial  Statements  The following  information
          presents  the  financial  position  of AFSALA  Bancorp,  Inc.  (Parent
          Company) at September 30, 1996. The results of its operations and cash
          flows  for the year  then  ended  are not  applicable  as there was no
          activity prior to its initial public offering on September 30, 1996.

                  Balance Sheet                             September 30, 1996
                  -------------                             ------------------

           Assets:
              Loan receivable from subsidiary bank             $  5,695,128
              Loan receivable from ESOP                           1,107,800
              Investment in equity of bank subsidiary            13,787,944
                                                                 ----------
                    Total assets                               $ 20,590,872
                                                                 ==========

           Stockholders' Equity:
              Preferred stock, $0.10 par value; 
               authorized 500,000 shares; none issued                     -
              Common stock, $0.10 par value; authorized
                3,000,000 shares; 1,454,750 shares issued 
                and outstanding at September 30, 1996               145,475
              Additional paid-in capital                         13,460,381
              Retained earnings, substantially restricted         8,120,864
              Common stock acquired by ESOP (110,780 shares)     (1,107,800)
              Net unrealized loss on securities available
                for sale, net of tax                                (28,048)
                                                                 ---------- 
                    Total stockholders' equity                 $ 20,590,872
                                                                 ==========





                                       64

<PAGE>





Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------

Previously reported in a Registration Statement on Form S-1 (File No. 333-06399)
filed with the Securities  and Exchange  Commission on June 20, 1996 and amended
on August 1, 1996.


                                   PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
--------------------------------------------------------------------------------
with Section 16(b) of the Exchange Act
--------------------------------------

      The following  table sets forth  information  with respect to each nominee
for director  and director  continuing  in office as well as all  directors  and
executive officers as a group.

<TABLE>
<CAPTION>

                                                                             Shares of
                                                                  Current  Common Stock
                                                     Director      Term    Beneficially   Percent of
Name                  Age(1)         Position        Since(2)     Expires   owned(1)(3)     Class
-------------------  ---------  ------------------  -----------  --------  -------------  --------

                                NOMINEES FOR TERMS TO EXPIRE IN 2000

<S>                     <C>                            <C>         <C>      <C>             <C>
John M. Lisicki         50      President, Chief       1984        1997     10,063           --(5)
                                Executive Officer,
                                and Director
Dr. Daniel J. Greco     68      Director               1980        1997      6,500(4)        --(5)

                                   DIRECTORS CONTINUING IN OFFICE

Dr. Ronald S. Tecler    57      Director               1994        1998     15,000(4)       1.0%
John A. Tesiero, Jr.    69      Director               1994        1998     15,000          1.0%
John A. Kosinski, Jr.   69      Director               1959        1999     10,090           --(5)
Joseph G. Opalka        56      Director               1975        1999      7,500(4)        --(5)
Florence B. Opiela      81      Director               1984        1999      2,500           --(5)
All directors and
executive officers as                                                       73,249(4)       5.0%
a group (9 persons)

</TABLE>

---------------------------------------
(1)  At September 30, 1996.
(2)  Refers to the year the individual first became a director of the Company or
     the Bank.  All  directors of the Bank became  directors of the Company upon
     its formation.
(3)  Includes  shares of Common  Stock  held  directly  as well as by spouses or
     minor children,  in trust, and other indirect ownership,  over which shares
     the individuals  effectively  exercise sole or shared voting and investment
     power, unless otherwise indicated.
(4)  Excludes  110,780  shares of  Common  Stock  held  under the ESOP for which
     individuals  serve as members of the ESOP  Committee or Trustee  Committee.
     Such individuals  disclaim beneficial ownership with respect to such shares
     held in a  fiduciary  capacity.  See "Item  10.  Executive  Compensation  -
     Benefits - Employee Stock Ownership Plan."
(5)  Less than 1.0%.

                                       65

<PAGE>



      The  following  individuals  are  non-director  executive  officers of the
Company  and hold the offices in the  Company  set forth  below  opposite  their
names.

Name                      Age (1)     Positions Held With the Company
----                      -------     -------------------------------

James J. Alescio             35       Treasurer and Chief Financial Officer

Benjamin W. Ziskin           38       Vice President


-------------------------
(1)   At September 30, 1996.


Biographical Information

      The business experience of each director and executive officer of the Bank
is set forth below. All directors and executive officers have held their present
positions for a minimum of five years unless otherwise stated.

      John M. Lisicki has been the President and Chief Executive  Officer of the
Bank since  1978 and of the  Company  since its  formation.  Mr.  Lisicki is the
Chairman of the Board of Amsterdam Memorial  Hospital,  a former President and a
board member of Industries for Amsterdam, Inc., the president and a board member
of Foundation Liberty  Enterprises,  a board member and former Vice President of
the  Amsterdam  Free  Library,  a board  member of the Sarah J. Sanford Home for
Elderly Women, and a former board member of the Hospice Foundation.

     Dr.  Daniel  J.  Greco has been a  director  of the Bank  since  1980 and a
director  of the  Company  since its  formation.  Dr.  Greco is a former  school
teacher and the retired superintendent of the Greater Amsterdam School District.
Dr. Greco serves on the Board of Directors of the  Amsterdam  Memorial  Hospital
and  Industries  for Amsterdam and is active in the Rotary Club,  the Elks Club,
and the Boy Scouts of America.

     Dr.  Ronald S. Tecler has been a director of the Bank since 1994 and of the
Company  since its  formation.  Dr.  Tecler  is the  majority  stockholder  of a
professional  corporation engaged in the practice of dentistry in Amsterdam, New
York and has practiced  dentistry  since 1971. Dr. Tecler is the Chairman of the
Board of the Amsterdam  Urban Renewal  Agency,  a board member of Industries for
Amsterdam, Inc., the Vice President of the Twin Rivers Boy Scout Council, and is
active in the  Amsterdam  Rotary Club and the St.  Mary's  Hospital at Amsterdam
Foundation.

     John A. Tesiero,  Jr. has been a director of the Bank since 1994 and of the
Company since its formation.  Mr. Tesiero is the sole owner of Cranesville Block
Co., Inc., a construction supply business supplying ready mix concrete, concrete
block, sand, gravel, and stone, located in Amsterdam, New York.

     John A.  Kosinski,  Jr.,  has been a director of the Bank since 1959 and of
the Company since its formation.  Mr. Kosinski is an attorney in Amsterdam,  New
York and has practiced law since 1953.  Mr.  Kosinski  serves as counsel for the
Bank.  Mr.  Kosinski  is a  Director  Emeritus  of the St.  Mary's  Hospital  at
Amsterdam  Foundation  and is active in the Liberty  House,  the Elks Club,  the
Montgomery   County  Chamber  of  Commerce,   the  Montgomery   County  Economic
Development Corp., the American and Montgomery County Bar Associations,  and the
New York Trial Association.

                                      66


<PAGE>



     Joseph G.  Opalka  has been a  director  of the Bank  since 1975 and of the
Company since its formation. Mr. Opalka is a certified public accountant and the
sole owner of Joseph G. Opalka C.P.A., a public accounting firm. Mr. Opalka also
serves as an adjunct faculty member of the Schenectady  County Community College
and from 1969 to 1993 was the Vice President of Finance for Amsterdam Printing &
Litho  Corp.,  a  mail  order  company.  Mr.  Opalka  serves  as a  director  of
Rehabilitation Support Services, Inc. and is active in the American Institute of
Certified Public  Accountants and the New York State Society of Certified Public
Accountants.

     Florence  B.  Opiela has been a director  of the Bank since 1984 and of the
Company since its formation. Ms. Opiela is a retired Executive Vice President of
the Bank.  Ms. Opiela is a member of the St.  Mary's  Hospital  volunteers,  St.
Mary's Hospital Auxiliary, Inc., and St. Stanislaus Rosary Auxiliary. Ms. Opiela
is also active in the Amsterdam Free Library and the Walter-Elwood Museum.

      James J. Alescio  served as the Assistant  Treasurer of the Bank from 1984
to 1987 and was appointed  Treasurer and Chief Financial  Officer of the Bank in
1993 and of the Company upon its formation. From 1987 to 1993, Mr. Alescio was a
senior  accountant  with  John  G.  Gilooly,  C.P.A.'s,  an  independent  public
accounting firm. Mr. Alescio in a member of the American  Institute of Certified
Public Accountants and the New York Society of Certified Public Accountants.

      Benjamin W. Ziskin  served as the  Treasurer of the Bank from 1985 to 1993
and was appointed Vice President of the Bank in 1989 and of the Company upon its
formation.  Mr.  Ziskin is a board  member  and past  Treasurer  of the  Capital
District  League of Savings  Institutions,  a board member and  President of the
Montgomery  Transitional Services, a board member and Secretary of the Amsterdam
Housing  Authority,  a past President and Treasurer of the Montgomery County Big
Brothers/Big  Sisters,  and a past board member of The Amsterdam City Center and
the St. Mary's Hospital at Amsterdam Foundation.

Section 16(a) Beneficial Ownership Reporting Compliance

      The Common Stock is registered  pursuant to Section 12(g) of the 1934 Act.
The officers and directors of the Company and beneficial  owners of greater than
10% of the Common Stock ("10%  beneficial  owners") are required to file reports
on Forms  3, 4,  and 5 with  the  Securities  and  Exchange  Commission  ("SEC")
disclosing  changes in beneficial  ownership of the Common  Stock.  Based on the
Company's review of such ownership reports, to Company's knowledge,  no officer,
director,  or 10% beneficial  owner of the Company failed to file such ownership
reports on a timely basis for the fiscal year ended September 30, 1996.

Item 10.  Executive Compensation
--------------------------------

Director Compensation

      Members of the Board of Directors of the Company are not  compensated  for
service on the Board of Directors. Members of the Board of Directors of the Bank
received  fees of $1,000 per month  during the fiscal year ended  September  30,
1996 for  attendance  at  meetings  of the Board of  Directors  of the Bank.  No
additional fees are paid to board members for attendance at committee  meetings.
The Bank paid a total of $84,000 in director  fees for the year ended  September
30, 1996.

                                      67


<PAGE>



Executive Compensation

      Summary  Compensation  Table.  The following table sets forth the cash and
non-cash  compensation awarded to or earned by the President and Chief Executive
Officer  of the  Company.  All  compensation  was  paid by the  Bank.  No  other
executive  officer of the Company  had a salary and bonus  during the year ended
September  30,  1996  that  exceeded  $100,000  for  services  rendered  in  all
capacities to the Company.

<TABLE>
<CAPTION>


                                               Annual Compensation
                                 -------------------------------------------------------
Name and Principal                                       Other Annual       All Other
Position               Year(1)   Salary(2)    Bonus     Compensation(3)  Compensation(4)
------------------     -------   ---------    -----     ---------------  ---------------
<S>                     <C>      <C>          <C>        <C>                <C>    
John M. Lisicki         1996     $ 127,000    $  --      $  19,105          $ 6,479
President and Chief
Executive Officer       1995       110,452    3,000         18,390            5,522
</TABLE>



-------------
(1)   The Company  first issued Common Stock  registered  under ss. 12(g) of the
      1934 Act  effective  September 30, 1996;  therefore,  less than 3 years of
      compensation data is presented.
(2)   Includes board of director's fees.
(3)   Consists  of the  accrual  of  $17,355  and  $16,640  of salary  under the
      Supplemental Retirement Plan for the fiscal years ended September 30, 1996
      and  1995,  respectively.  See "-  Supplemental  Retirement  Plan."  Also,
      includes  the value of  automobile  use  during  the  fiscal  years  ended
      September 30, 1996 and 1995.
(4)   Includes Bank contribution of $1,188 and $1,008 to term life insurance and
      matching  contribution  of $5,291 and  $4,514 to the  401(k)  Plan for the
      fiscal years ended September 30, 1996 and 1995, respectively.

      Employment  and Severance  Agreements.  In February 1996, the Bank entered
into employment  agreements with John M. Lisicki,  President and Chief Executive
Officer and certain other officers of the Bank. Mr.  Lisicki's  salary under the
employment  agreement  was  based  on his then  current  salary,  $115,000.  Mr.
Lisicki's  employment agreement is for a term of three years. The agreements are
terminable  by the Bank for "just  cause" as defined in the  agreements.  If the
Bank terminates the employee  without just cause,  the employee will be entitled
to a continuation of the employee's salary from the date of termination  through
the remaining term of the agreement. Mr. Lisicki's employment agreement contains
a  provision  stating  that in the event of the  termination  of  employment  in
connection  with any future  change in  control  of the Bank,  as defined in the
agreement,  Mr. Lisicki will be paid in a lump sum an amount equal to 2.99 times
Mr. Lisicki's five year average annual cash compensation.  In addition, the Bank
has entered into severance agreements with three key employees,  which provide a
severance  payment upon termination  without just cause in the event of a change
in control,  as defined in the agreements.  If such payments were made under the
agreements to the above  officers and key employees at September 30, 1996,  such
payments would equal approximately  $686,000.  The aggregate payments that would
be made to such  individuals  would be an expense to the Bank,  thereby reducing
net income and the Bank's capital by that amount,  adjusted as  appropriate  for
income tax  effects.  The  agreements  may be renewed  annually  by the Board of
Directors upon a determination  of satisfactory  performance  within the Board's
sole discretion.

      Supplemental   Retirement  Plan.  The  Bank  has  adopted  a  supplemental
retirement  plan ("SERP") for the benefit of John M. Lisicki,  President and one
other  officer  of the Bank in  connection  with the  termination  of a  defined
benefit  retirement  plan in fiscal 1994.  The purpose of the SERP is to furnish
the participants with supplemental post-retirement benefits in addition to those
which will be provided  under the Bank's  401(k) Plan.  After an analysis of the
retirement  benefits  provided to all employees,  the Bank  determined that most
employees would benefit more from a 401(k) savings plan than the defined

                                      68


<PAGE>



benefit  retirement plan. The SERP was adopted to compensate Mr. Lisicki and the
other officer so that when the benefits under the SERP are added to the benefits
under the 401(k) Plan, the retirement  benefits are  approximately  equal to the
retirement benefits these same officers would have received under the terminated
defined benefit retirement plan. The targeted level of retirement benefits under
the SERP are calculated as 60% of the Mr.  Lisicki's final average  compensation
(as  defined  in the SERP),  as  adjusted  to take into  account  certain  other
retirement  benefits.  Annually,  a sum equal to 16.99% of Mr.  Lisicki's annual
salary is expensed by the Bank for the benefit of Mr. Lisicki. The SERP provides
that the Bank can pay the  benefits  under the SERP  either as a single lump sum
payment,  by  purchasing a straight  life or joint and survivor  annuity,  or in
monthly  installments over five, ten, or fifteen years.  Payments under the SERP
will be accrued for financial reporting purposes based upon the yearly credit by
the Bank to the account of the officer. Upon receipt of payment of benefits, the
participant  will  recognize  taxable  ordinary  income  in the  amount  of such
payments  received and the Bank will be entitled to  recognize a  tax-deductible
compensation  expense at that time for tax return  purposes.  Benefits under the
SERP are  immediately  payable upon death or disability of the  participant,  or
upon involuntary  termination of the participant  prior to the officer obtaining
the age of 55 or obtaining 20 years of credited  service under the SERP. For the
fiscal year ended September 30, 1996,  expenses associated with the SERP totaled
approximately $21,000.

Benefits

      Employee Stock  Ownership Plan. The Bank has established an employee stock
ownership plan, the ESOP, for the exclusive benefit of participating  employees.
Participating  employees are  employees  who have  completed one year of service
with the Bank and have  attained  the age 21. The Bank will submit to the IRS an
application for a letter of determination as to the tax-qualified  status of the
ESOP.  Although no assurances can be given,  the Bank expects that the ESOP will
receive a favorable letter of determination from the IRS.

      The ESOP is funded  by  tax-deductible  contributions  made by the Bank in
cash or the Common  Stock.  Benefits  may be paid either in shares of the Common
Stock or in cash.  The ESOP  borrowed  funds  from  the  Company  with  which it
acquired  110,780  shares.  The  loan is for a term of ten  years  at an  annual
interest  rate equal to the prime rate as published in The Wall Street  Journal.
Shares of Common  Stock are held in a  suspense  account  for  allocation  among
participants  as  the  loan  is  repaid.   The  Bank  anticipates   contributing
approximately  $110,780 annually to the ESOP to meet principal obligations under
the ESOP loan.

      The Board of Directors  has appointed  non-employee  directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees.  The
Board of  Directors  or the  ESOP  Committee  may  instruct  the  ESOP  Trustees
regarding  investments of funds  contributed to the ESOP. The ESOP Trustees must
vote all allocated  shares held in the ESOP in accordance with the  instructions
of the  participating  employees.  Unallocated  shares and allocated  shares for
which no timely  direction  is  received  will be voted by the ESOP  Trustees as
directed  by the  Board of  Directors  or the  ESOP  Committee,  subject  to the
Trustees'  fiduciary  duties.  As of  September  30,  1996,  no shares  had been
allocated under the ESOP.

      401(k)   Savings  Plan.   The  Bank  sponsors  a   tax-qualified   defined
contribution  savings  plan  ("401(k)  Plan") for the benefit of its  employees.
Employees  become  eligible to participate  under the 401(k) Plan after reaching
age 21 and completing one year of service.

                                      69


<PAGE>



Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

      (a)   Security Ownership of Certain Beneficial Owners

      Persons and groups owning in excess of 5% of the Common Stock are required
to file certain  reports  regarding  such  ownership  pursuant to the Securities
Exchange  Act of 1934,  as amended (the "1934 Act").  The  following  table sets
forth,  as of September 30, 1996,  persons or groups who own more than 5% of the
Common Stock. Other than as noted below,  management knows of no person or group
that owns more than 5% of the  outstanding  shares of Common  Stock at September
30, 1996.

<TABLE>
<CAPTION>


                                                                   Percent of Shares of
                                           Amount and Nature of         Common Stock
Name of Beneficial Owner                   Beneficial Ownership         Outstanding
---------------------------                --------------------    --------------------
<S>                                               <C>                       <C> 
Amsterdam Federal Bank Employee Stock             110,780                   7.6%
Ownership Plan
161 Church Street, Amsterdam, New York

</TABLE>

      (b)   Security Ownership of Management

      Security  ownership  of the  directors  and named  executive  officers  is
included herein in response to Item 9.

      (c)   Management of the Corporation  knows of no  arrangements,  including
            any  pledge by any  person of  securities  of the  Corporation,  the
            operation  of which may at a  subsequent  date result in a change in
            control of the Registrant.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

      Director John A. Kosinski, Jr., is an attorney in Amsterdam, New York, and
performs  legal work for the Bank,  consisting  of  mortgage  title  reviews and
closings on loans. During the fiscal year ended September 30, 1996, Mr. Kosinski
collected  fees of $62,000 from the Bank,  in  connection  with this legal work,
which fees were in excess of 5% of the total gross  revenues  of Mr.  Kosinski's
firm.

      Director  Tesiero is a principal  and  substantial  owner of the Amsterdam
Riverfront Center (the "Center").  The Bank has recently entered into two leases
with the Center to lease space to house  portions of the Bank's  operations  and
possibly a small  branch  office with an ATM.  The leases are for a term of five
years with an option to renew the leases for another five years. The leases with
the Center are at a rent that was  equivalent to the market rate at the time the
leases were entered into and the Bank will pay  approximately  $125,000 in lease
payments  over five years for the use of  approximately  7,000 square feet.  The
spaces leased by the Bank make up two of the 64 spaces available in the Center.

      The  Bank  had  no  "interlocking"  relationships  existing  on  or  after
September 30, 1996 in which (i) any  executive  officer is a member of the Board
of  Directors/Trustees  of another entity,  one of whose executive officers is a
member of the Bank's Board of Directors,  or where (ii) any executive officer is
a member of the compensation committee of another entity, one of whose executive
officers is a member of the Bank's Board of Directors.

                                      70


<PAGE>



      The Bank,  like many  financial  institutions,  has  followed  a policy of
granting  various types of loans to officers and  directors.  Such loans a) have
been made in the ordinary course of business,  b) were made on substantially the
same terms and conditions,  including  interest rates and  collateral,  as those
prevailing  at the time  for  comparable  transactions  with  the  Bank's  other
customers,  and c) do not involve more than the normal risk of collectibility or
present other unfavorable  features.  All loans by the Bank to its directors and
executive  officers are subject to OTS regulations  restricting  loans and other
transactions with affiliated persons of the Bank.

Item 13.  Exhibits, List and Reports on Form 8-K
------------------------------------------------

      (a)   The following documents are filed as a part of this report:

            1. The following consolidated financial statements and the report of
independent accountants of the Registrant included under Item 7 are incorporated
herein by reference.

      Report of Independent Auditors

      Consolidated Balance Sheets as of September 30, 1996 and 1995.

      Consolidated  Statements of Income for the Years Ended  September 30, 1996
      and 1995.

      Consolidated  Statements of Changes in Stockholders'  Equity for the Years
      Ended September 30, 1996 and 1995.

      Consolidated  Statements  of Cash Flows for the Years Ended  September 30,
      1996 and 1995.

      Notes to Consolidated Financial Statements.

          2. Financial  Statement  Schedules for which  provision is made in the
applicable accounting  regulations of the SEC are not required under the related
instructions or are inapplicable and therefore have been omitted.

          3. The following  exhibits are included in this Report or incorporated
herein by reference:

            (a)   List of Exhibits:

            3.1   Articles of Incorporation of AFSALA Bancorp, Inc.*

            3.2   Bylaws of AFSALA Bancorp, Inc.*

            10.1  Employment contract with John M. Lisicki

            10.2. Supplemental  Retirement  Benefit  Agreement  with  John  M.
                  Lisicki*

            21    Subsidiaries of the Registrant**

            27    Financial Data Schedule

                                      71


<PAGE>

            (b)   Reports on Form 8-K.

            None.

---------------------------
*    Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-1 (File No. 333- 06399)  declared  effective by the SEC on August 9,
     1996.

**   See  information   provided  herein  at  "Item  1.  Business  -  Subsidiary
     Activity."

                                      72


<PAGE>




                                  SIGNATURES

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

                                                 AFSALA BANCORP, INC.

Dated:  December 24, 1996                  By:   /s/ John M. Lisicki
                                                 -------------------
                                                 John M. Lisicki
                                                 President, Chief Executive
                                                 Officer and Director (Duly
                                                  Authorized Representative)

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

By:   /s/ John M. Lisicki                  By:
      --------------------------------           ------------------------------
      John M. Lisicki                            Dr. Daniel J. Greco
      President, Chief Executive Officer         Director
      and Director (Principal Executive
      Officer)

Date: December 24, 1996                    Date: December ____, 1996


By:   /s/ Dr. Ronald S. Tecler             By:
      -------------------------------           -------------------------------
      Dr. Ronald S. Tecler                      John A. Tesiero, Jr.
      Director                                  Director

Date: December 24, 1996                    Date: December ____, 1996


By:   /s/ Joseph G. Opalka                 By:
      ------------------------------            -------------------------------
      Joseph G. Opalka                          Florence B. Opiela
      Director                                  Director

Date: December 24, 1996                   Date: December ____, 1996


By:   /s/ James J. Alescio                By:   /s/ John A. Kosinski, Jr.
      -----------------------------             -------------------------------
      James J. Alescio                          John A. Kosinski, Jr.
      Treasurer and Chief Financial             Director
        Officer     
      (Principal Financial and Accounting 
        Officer)

Date: December 24, 1996                   Date: December 24, 1996