EXHIBIT 13
<PAGE>
Stock Market Information


The Company's  common stock has been traded on The Nasdaq Stock Market under the
trading  symbol of "AFED"  since it  commenced  trading  in  October  1996.  The
following  table  reflects the stock sales prices as published in a  statistical
report by The Nasdaq Stock Market.

                                                                    Dividends
                                          High           Low        Declared
                                          ----           ---        --------

First Quarter Ending
12/31/96                                $12 1/4        $11 1/4        $0.00

Second Quarter Ending
3/31/97                                  14 3/8         11 3/4         0.00

Third Quarter Ending
6/30/97                                  14 7/8         12 1/2         0.04

Fourth Quarter Ending
9/30/97                                  17 7/8         14 11/16       0.04


The number of shareholders of record of common stock is approximately 511.  This
does not reflect the number of persons or entities  who held stock in nominee or
"street" name through various  brokerage firms. On December 12, 1997, there were
1,388,440  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.
<PAGE>


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

General

AFSALA Bancorp,  Inc. (the Company) 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.  On September  30,  1996,  the Company  completed  its
initial public stock offering, issuing 1,454,750 shares of $.10 par value common
stock at $10.00 per share.  Net proceeds to the Company were $13.6 million after
conversion  costs.  Approximately  $1.1 million of the proceeds were utilized to
fund a loan by the Company to the Company's Employee Stock Ownership Plan (ESOP)
which  purchased  110,780  shares  of the  Company's  common  stock  during  the
offering.  The  Company is not an  operating  company and has not engaged in any
significant business to date. As such,  references herein to the Bank subsequent
to  September  30,  1996  include  the  Company  unless  the  context  otherwise
indicates.

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, 1997, the Bank's loans  receivable,  net, to assets ratio was 47.3%, up from
46.0% at September 30, 1996.  At September  30, 1997,  $65.6 million or 48.5% of
total deposits were in non-time deposit accounts.



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.

<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, 1997,  totaled  27.9% of  total loans,  of which 90.8%
reprice annually,  and (ii) maintaining  substantial  levels of interest bearing
term  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, 1997,
as calculated by the OTS, based on quarterly information voluntarily provided to
the OTS by the Bank.


<PAGE>
<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           13,264              (7,482)               (36)%         8.59%           -404 bp
         +300 bp           15,394              (5,352)               (26)          9.80            -283 bp
         +200 bp           17,419              (3,326)               (16)         10.90            -173 bp
         +100 bp           19,221              (1,524)                (7)         11.86             -77 bp
            0 bp           20,745                                                 12.63
         -100 bp           22,003               1,258                  6          13.24              61 bp
         -200 bp           23,865               3,120                 15          14.15             152 bp
         -300 bp           26,322               5,576                 27          15.32             269 bp
         -400 bp           29,235               8,489                 41          16.67             404 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.

Although the OTS has informed the Bank that 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, 1997, a change in interest rates of a positive 200 basis points
would have resulted in a 173 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 152 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,
1997, 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.
<PAGE>

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. In addition, 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.  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  interest rate spread  increased for the fiscal year ended  September 30,
1997 from the fiscal year ended September 30, 1996 from 2.69% to 2.89%.

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.


<PAGE>
<TABLE>
<CAPTION>
                                                                                Year Ended September 30,
                                                         ----------------------------------------------------------------
                                                                      1997                             1996
                                                         ------------------------------      --------------------------------   
                                                         Average  Interest    Average        Average   Interest     Average
                                                         Balance Earned/Paid Yield/Cost      Balance  Earned/Paid  Yield/Cost
                                                         ------------------------------      -------  -----------  ----------
                                                                                (Dollars in Thousands)       
<S>                                                     <C>      <C>           <C>          <C>      <C>             <C>  
Interest-earning assets:                                                                   
   Federal funds sold                                   $  7,625 $     406       5.32       $  6,543 $     334         5.10%
   Term deposits with FHLB of NY                           2,603       142       5.46          2,369       131         5.53
   Securities available for sale (1)                      23,147     1,415       6.11         13,640       742         5.44
   Investment securities held to maturity                 40,360     2,636       6.53         35,734     2,185         6.11
   FHLB of NY stock, at cost                                 565        37       6.55            566        37         6.54
   Net loans receivable(2)                                72,675     6,133       8.44         68,127     5,736         8.42
                                                         -------- ---------  ---------       -------- ---------  -----------
        Total interest-earning assets                    146,975    10,769       7.33        126,979     9,165         7.22
                                                                  ---------  ---------                ---------  -----------
Non-interest earning assets                                6,906                               6,384
                                                         --------                            --------
        Total assets                                    $153,881                            $133,363
                                                         ========                            ========
                                                                                           
Interest-bearing liabilities:                                                              
   Savings accounts                                     $ 36,047     1,081       3.00       $ 35,560     1,067         3.00
   NOW accounts                                           11,174       258       2.31          9,871       224         2.27
   Money market accounts                                   9,002       364       4.04          6,681       257         3.85
   Time deposit accounts                                  65,982     3,689       5.59         62,919     3,624         5.76
   Escrow accounts                                           305         8       2.62            440         9         2.05
   FHLB of NY long term borrowings                         1,627       115       7.07          2,047       144         7.03
                                                         -------- ---------  ---------       -------- ---------  -----------
        Total interest-bearing liabilities               124,137     5,515       4.44        117,518     5,325         4.53
                                                                  ---------  ---------                ---------  -----------
Non-interest bearing deposits                              7,845                               6,640
Other non-interest bearing liabilities                       842                                 924
Equity                                                    21,057                               8,281
                                                         --------                            --------
        Total liabilities and equity                    $153,881                            $133,363
                                                         ========                            ========
                                                                                           
Net interest income                                              $   5,254                           $   3,840
                                                                  =========                           =========
                                                                                           
Interest rate spread                                                             2.89 %                                2.69%        
                                                                             =========                           ===========
                                                                                           
Net interest margin                                                              3.57 %                                3.02%  
                                                                             =========                           ===========
                                                                                           
Ratio of average interest-earning assets to                                                
   average interest-bearing liabilities                   118.40%                              108.05% 
                                                         ========                            ========
</TABLE>
                                                          
---------------------                    
(1)  Average  securities  available  for sale are included at  approximate  fair
     value.   The  adjustment  to  approximate  fair  value  is  not  considered
     significant.
(2)  Calculated net of allowance for loan losses. Includes non-accrual loans.
<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,
                                                                  -------------------------------------------
                                                                                   1997 vs.
                                                                                     1996
                                                                  -------------------------------------------
                                                                      Increase (Decrease)
                                                                            Due to
                                                                  ---------------------------
                                                                                                   Total
                                                                                                 Increase
                                                                     Volume          Rate       (Decrease)
                                                                --------------   ------------   ------------
<S>                                                             <C>              <C>            <C>   
Interest and dividend income:
   Federal funds sold                                           $       56,699         14,782         71,481
   Term deposits with FHLB of NY                                        12,503         (1,713)        10,790
   Securities available for sale                                       571,824        101,043        672,867
   Investment securities held to maturity                              294,772        156,514        451,286
   FHLB of NY stock, at cost                                              (203)           (99)          (302)
   Net loans receivable                                                383,508         13,646        397,154
                                                                  -------------  ------------- --------------
       Total interest and dividend income                            1,319,103        284,173      1,603,276
                                                                  -------------  ------------- --------------
Interest expense:
   Savings accounts                                                     13,623              0         13,623
   NOW accounts                                                         30,577          4,082         34,659
   Money market accounts                                                93,578         13,291        106,869
   Time deposit accounts                                               173,392       (108,794)        64,598
   Escrow accounts                                                      (3,138)         2,170           (968)
   FHLB of NY long term borrowings                                     (29,790)           812        (28,978)
                                                                  -------------  ------------- --------------
       Total interest expense                                          278,242        (88,439)       189,803
                                                                  -------------  ------------- --------------

Net change in net interest income                               $    1,040,861        372,612      1,413,473
                                                                  =============  ============= ==============
</TABLE>

<PAGE>

Financial Condition

Total assets  increased  by $6.7 million or 4.4% to $160.4  million at September
30, 1997 from $153.7  million at September 30, 1996,  primarily due to increases
in net loans  receivable of $5.1 million or 7.3%, and  securities  available for
sale of $20.6  million or 120.1%  which were  partially  offset by  decreases in
federal  funds sold and term  deposits  with the Federal Home Loan Bank of $16.5
million or 86.1%,  and $3.0 million or 100.0%,  respectively.  These shifts were
primarily the result of the re-investment of the proceeds from the offering into
higher yielding instruments.  The increase in net loans receivable was primarily
due to increased loan activity in residential mortgage and home equity loans.

The Company's  deposits  increased by $8.9 million or 7.0% to $135.3  million at
September 30, 1997 from $126.5  million at September  30, 1996  primarily due to
various marketing  promotions offered in the supermarket branches along with the
opening of a new branch in May 1997.  Offsetting this increase in deposits was a
decrease in accrued  expenses and other  liabilities of $1.7 million or 37.2% to
$2.8 million at September 30, 1997 from $4.4 million at September 30, 1996. This
decrease  primarily relates to outstanding  cashier checks of $2.6 million which
were   issued   and   outstanding   on   September   30,   1996  to  refund  the
over-subscriptions  related to the Company's  initial  public  offering,  offset
partially by a $1.5 million liability for securities  purchases which are due to
brokers at September 30, 1997.

Stockholders'  equity remained consistent at $20.6 million at both September 30,
1997 and 1996.  An increase in retained  earnings of $928 thousand was offset by
purchases of treasury  stock and the grant of stock under the  Restricted  Stock
Plan of $238  thousand and $733 thousand  (net of  amortization),  respectively.
Equity  during the  period was also  effected  by 2,770  shares of common  stock
committed to be released by the  Company's  ESOP as of December 31, 1996 and the
change in the net unrealized  gain (loss) on securities  available for sale, net
of tax.

Comparison  of Operating  Results for the Fiscal Years Ended  September 30, 1997
and 1996.

Net Income.  Net income  increased  by $978  thousand  for the fiscal year ended
September  30, 1997 to $1.2 million from $211 thousand for the fiscal year ended
September  30,  1996.  Net income for the fiscal year ended  September  30, 1997
increased   primarily  as  a  result  of  increased  net  interest   income  and
non-interest  income along with a decrease in non-interest  expenses,  offset in
part by an increase in the provision  for loan losses and  increased  income tax
expense.  Net interest income increased by $1.4 million or 36.8% to $5.3 million
for the fiscal year ended September 30, 1997 as compared to $3.8 million for the
fiscal year ended September 30, 1996. Non-interest income increased $18 thousand
or 4.5% to $406  thousand  for the  fiscal  year  ended  September  30,  1997 as
compared  to $388  thousand  for the  fiscal  year  ended  September  30,  1996.
Non-interest  expense decreased by $127 thousand or 3.4% to $3.6 million for the
fiscal year ended September 30, 1997 from $3.7 million for the fiscal year ended
September  30,  1996.  This  decrease  was  primarily  the result of 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
<PAGE>

30,  1996,  the  Bank  accrued  approximately  $702  thousand  for  the  special
assessment.  The  provision  for loan  losses  increased  $20  thousand  to $250
thousand for the fiscal year ended September 30, 1997, primarily due to the loan
growth noted above, and local economic trends. Income tax expense increased $560
thousand  to $624  thousand  due to an  increase  in income  before  income  tax
expense.


Net Interest Income. Net interest income increased by approximately $1.4 million
or 36.8% to $5.3 million for the fiscal year ended  September 30, 1997 from $3.8
million  for the fiscal  year ended  September  30,  1996.  The  increase in net
interest  income  was  primarily  the  result of the  increase  in the amount of
average  interest  earning  assets  exceeding  the increase in average  interest
bearing liabilities.  Likewise,  the interest rate spread increased to 2.89% for
the fiscal year ended  September 30, 1997 from 2.69% for the previous year. This
increase in the interest rate spread is due to a 11 basis point  increase in the
average yield on interest  earning assets combined with a 9 basis point decrease
in the average cost of interest bearing liabilities.

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 long term borrowings from the FHLB of New York.


Interest  and  Dividend  Income.  Interest  and  dividend  income  increased  by
approximately  $1.6 million or 17.5% to $10.8  million for the fiscal year ended
September  30, 1997 from $9.2  million for the fiscal year ended  September  30,
1996. The increase in interest and dividend  income was largely the result of an
increase of $20.0  million or 15.7% in the average  balance of interest  earning
assets to $147 million for the fiscal year ended  September 30, 1997 as compared
to $127 million for the fiscal year ended  September 30, 1996. This increase was
primarily due to the Company's  initial  public  offering on September 30, 1996,
which  generated  approximately  $13.6  million in net proceeds  which have been
redeployed by management into various earning asset  categories.  Also adding to
the increase in interest and dividend  income was an 11 basis point  increase in
the average yield on all interest  earning  assets.  The increase in the average
balance of interest  earning  assets  consisted  primarily of an increase in the
average  balance of total  securities  (both  securities  available for sale and
investment  securities  held to maturity) of $14.1 million or 28.6%, an increase
in the average balance of net loans receivable of approximately  $4.5 million or
6.7%, an increase in the average balance of term deposits with the FHLB of NY of
$234 thousand or 9.9%,  and an increase in the average  balance of federal funds
sold of $1.1 million or 16.5%.


Interest  income on  securities  available for sale  increased  $673 thousand or
90.7% to $1.4  million  for the fiscal year ended  September  30, 1997 from $742
thousand for the previous  year.  The increase in interest  income on securities
available  for sale is  primarily  due to an  increase  of $9.5  million  in the
average  balance,  as well as a 67 basis point  increase in the average yield on
these  securities.  Interest  income on investment  securities  held to maturity
increased  $451  thousand  or 

<PAGE>

20.7% to $2.6  million  for the fiscal year ended  September  30, 1997 from $2.2
million  for the  fiscal  year  ended  September  30,  1996 . This  increase  is
primarily  the result of an  increase  in the  average  balance of $4.6  million
combined  with  a 42  basis  point  increase  in  the  average  yield  on  these
securities.


Interest and fees on loans  increased  $397 thousand or 6.9% to $6.1 million for
the fiscal year ended  September  30, 1997 from $5.7 million for the fiscal year
ended  September 30, 1996. This increase was primarily the result of an increase
in the average balance of net loans receivable of $4.5 million combined with a 2
basis point increase in the average yield on net loans receivable.

The yield on the average balance of interest  earning assets was 7.33% and 7.22%
for the fiscal years ended September 30, 1997 and 1996, respectively.

Interest  Expense.  Interest  on  deposits  and  escrow  accounts  increased  by
approximately  $219  thousand or 4.2% to $5.4  million for the fiscal year ended
September  30, 1997 from $5.2  million for the fiscal year ended  September  30,
1996. The increase in interest on deposits and escrow accounts was substantially
due to the  increase  in  interest  expense  related to money  market  accounts.
Interest  expense on money market accounts was $364 thousand for the fiscal year
ended  September  30, 1997,  compared to $257 thousand for the fiscal year ended
September  30,  1996.  This  increase was  primarily  due to an increase of $2.3
million or 34.7% in the average balance of money market accounts along with a 19
basis point  increase in the average rate paid on these  deposits in fiscal year
1997 as compared to fiscal 1996. Likewise,  interest expense on time deposit and
NOW accounts was $3.7 million and $258  thousand,  respectively,  for the fiscal
year ended  September  30,  1997,  compared to $3.6  million and $224  thousand,
respectively, for the fiscal year ended September 30, 1996. These increases were
primarily  due to increases in the average  balances of the  respective  deposit
types offset  somewhat by a 17 basis point  decrease in the average rate paid on
time deposit accounts.

Interest on FHLB of NY long term borrowings, which is a less significant portion
of interest expense, decreased by $29 thousand or 20.2% to $115 thousand for the
fiscal  year ended  September  30,  1997 when  compared to the fiscal year ended
September 30, 1996, as the average amount of borrowings outstanding decreased by
$420 thousand or 20.5%, partially offset by an increase in the average rate paid
by the Company of 4 basis points.  The Company uses FHLB advances as a secondary
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  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 loans was 0.61% and 1.09% at September 30, 1997 and September 30, 1996,
respectively.  The provision for loan 

<PAGE>

losses for the fiscal year ended  September  30, 1997  increased $20 thousand to
$250 thousand  from $230 thousand for the fiscal year ended  September 30, 1996.
The increase was  primarily  due to the growth in the loan  portfolio  discussed
above, as well as local economic  trends,  including the general decline in real
estate values in the Bank's market areas.



Non-Interest Income.  Non-interest income increased during the fiscal year ended
September 30, 1997 to $406  thousand  compared with $388 thousand for the fiscal
year ended September 30, 1996.  Increases in service charges on deposit accounts
of $6 thousand  and other  non-interest  income of $12  thousand  comprised  the
increase from the previous year.

Non-Interest Expenses.  Non-interest expenses decreased $127 thousand or 3.4% to
$3.6 million for the fiscal year ended  September 30, 1997 from $3.7 million for
the fiscal year ended September 30, 1996. The decrease in non-interest  expenses
was  primarily  due to the  one-time  special  assessment  levied by the Federal
Deposit Insurance Corporation (FDIC) as discussed above.

The increase in compensation  and benefits expense of $332 thousand or 26.6% was
primarily  the result of costs  related to the  Company's new ESOP totaling $151
thousand for fiscal 1997, the  establishment of the Restricted Stock Plan, which
resulted in $52 thousand in expense for fiscal 1997, the opening of a new branch
in May 1997, as well as general cost of living and merit raises to employees.

Occupancy and equipment expenses increased by $45 thousand or 9.2% due primarily
to the new  operations  center  opened in July 1996 and the new branch opened in
May 1997.

FDIC  deposit  insurance  premiums  decreased  by $851  thousand  or  87.9%  due
primarily to the one-time  special  assessment of $702 thousand noted above,  as
well as reduced  deposit  insurance  premium rates during the year.  The reduced
rates  are the  result of the  capitalization  of the SAIF  through  a  one-time
special assessment during September 1996.

Professional  service  fees  for the  fiscal  year  ended  September  30,  1997,
increased  $190 thousand or 170.8% as a result of additional  legal,  accounting
and other fees related to being a publicly traded company.

Other non-interest  expenses increased $91 thousand or 17.3% from fiscal 1996 to
fiscal 1997 primarily as a result of general  expense  increases  related to the
new branch opened in May 1997 and expenses related to being a public company for
items such as Delaware franchise taxes, stock registrar and transfer agent fees,
annual report preparation, and annual meeting expenses.

Management  believes that  compensation  and benefits  expenses will increase in
future periods as a result of the costs related to the Company's ESOP as well as
the  Restricted  Stock  Plan,  which was adopted in May 1997.  Furthermore,  the
Company expects that certain operating expenses will increase as a result of the
costs associated with being a public company, as noted above.
<PAGE>

Income Tax Expense. Income tax expense increased to $624 thousand for the fiscal
year ended  September  30,  1997 from $63  thousand  for the  fiscal  year ended
September  30, 1996.  The increase was  primarily  the result of the increase 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 45.18% and 47.02% at
September 30, 1997 and 1996, respectively.



 The  Company's  sources  of  liquidity  include  cash  flows  from  operations,
principal  and interest  payments on loans,  maturities of  securities,  deposit
inflows,  and borrowings from the FHLB of New York. During fiscal 1997 and 1996,
the primary source of funds was cash flows from deposit growth. On September 30,
1996,  the  Company  also had  significant  cash flows from its  initial  public
offering on that date which provided  investable  cash flows for the fiscal year
ended September 30, 1997.

While  maturities and scheduled  amortization  of loans and  securities  are, in
general, a predictable  source of funds,  deposit flows and prepayments on loans
and  securities  are greatly  influenced  by general  interest  rates,  economic
conditions  and  competition.  In  addition,  the Bank  invests  excess funds in
overnight deposits which provide liquidity to meet lending requirements.

In addition to deposit growth,  from time-to-time the Company borrows funds from
the FHLB of New York to  supplement  its cash flows.  At September  30, 1997 and
1996, the Company had  outstanding  borrowings from the FHLB of $1.4 million and
$1.8 million, respectively.

As of  September  30, 1997 and 1996,  the  Company had $37.7 and $17.1  million,
respectively, of securities classified as available for sale and $35.3 and $35.0
million,  respectively,  of  securities  classified  as  held to  maturity.  The
liquidity of the securities  available for sale portfolio provides the Bank with
additional potential cash flows to meet loan growth and deposit flows.

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.
<PAGE>

The Bank is subject to federal  regulations  that impose certain minimum capital
requirements.  At September 30, 1997,  the Bank's  capital  exceeded each of the
regulatory  capital  requirements of the OTS. The Bank is "well  capitalized" at
September  30, 1997  according to the  regulatory  definition.  At September 30,
1997,  the  Company's  consolidated  tangible and core capital  levels were both
$20.6 million (13.0% of total adjusted assets) and its total risk-based  capital
level was $21.4  million  (30.9% of total  risk-weighted  assets).  The  minimum
regulatory capital ratio requirements of the Bank are 1.5% for tangible capital,
3.0% for core capital, and 8.0% for risk based capital.

During  fiscal  1997,  the  stockholders  approved  the  Amsterdam  Federal Bank
Restricted  Stock  Plan,  which  allows  for a  stock  repurchase  of 4% of  the
Company's  outstanding  common  stock.  Under  this  plan,  58,190  shares  were
repurchased by the Company in open-market  transactions  at a total cost of $939
thousand or $16.14 per share.  In addition,  the Company was approved by the OTS
to  repurchase  up to 5% of its common  stock to be used for  general  corporate
purposes.  Under this repurchase  plan, as of September 30, 1997,  15,000 shares
had been repurchased by the Company in open-market  transactions at a total cost
of $238 thousand or $15.88 per share.

 Recent Accounting Pronouncements

In June  1996,  the FASB  issued  SFAS No. 125  "Accounting  for  Transfers  and
Servicing  of  Financial  Assets  and  Extinguishments  of  Liabilities,"  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.  The
Company adopted SFAS No. 125 as of January 1, 1997. The adoption of SFAS No. 125
did  not  have  a  material  impact  on  the  Company's  consolidated  financial
statements.

In February  1997,  the FASB issued SFAS No. 128,  "Earnings  per Share,"  which
establishes  standards for computing  and  presenting  earnings per share (EPS).
This Statement supersedes  Accounting Principles Board Opinion No. 15, "Earnings
per Share," and related interpretations.  SFAS No. 128 replaces the presentation
of  primary  EPS with the  presentation  of basic  EPS.  It also  requires  dual
presentation  of basic and diluted EPS on the face of the income  statement  for
all entities with complex capital  structures and requires a  reconciliation  of
the numerator and  denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.

Basic EPS  excludes  dilution  and is computed by dividing  income  available to
common stockholders by the weighted-average  number of common shares outstanding
for the period.  Diluted EPS reflects the potential dilution that could occur if
securities or other  contracts to issue common stock were exercised or converted
into common  stock or resulted in the  issuance of common stock that then shared
in the  earnings  of the entity.  This  Statement  is  effective  for  financial
statements issued for periods ending after December 15, 1997,  including interim
periods.   Earlier  application  is  not  permitted.   This  Statement  requires
restatement  of all prior period EPS data  presented.  As required,  the Company
will adopt SFAS No. 128 in the first quarter of fiscal 1998, and will report and
display EPS in accordance with the new Statement.
<PAGE>

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income,"
which  establishes  standards for reporting and display of comprehensive  income
and  its  components  in  financial   statements.   SFAS  No.  130  states  that
comprehensive  income  includes  reported net income of a company,  adjusted for
items that are currently  accounted for as direct entries to equity, such as the
net unrealized gain or loss on securities  available for sale. This Statement is
effective for both interim and annual periods beginning after December 15, 1997.
As required, the Company will adopt the reporting requirements of this Statement
in the second quarter of fiscal 1998.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information," which establishes  standards for reporting
by public  companies  about operating  segments of their business.  SFAS No. 131
also establishes  standards for related disclosures about products and services,
geographic  areas, and major customers.  This Statement is effective for periods
beginning  after  December  15, 1997.  As  required,  the Company will adopt the
reporting requirements of this statement in the second quarter of fiscal 1998.

 Impact  of  The Year 2000

The  Company  is aware of the issues  associated  with the  programming  code in
existing  computer systems as the millennium (year 2000)  approaches.  The "year
2000" problem is pervasive  and complex as virtually  every  computer  operation
will be affected in some way by the  rollover of the two digit year value to 00.
The issue is whether  computer  systems will properly  recognize  date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.

The Company is  utilizing  both  internal  and  external  resources to identify,
correct or  reprogram,  and test its  systems  for year 2000  compliance.  It is
anticipated  that all  reprogramming  efforts  will be complete by December  31,
1998,  allowing  adequate  time for testing.  To date,  confirmations  have been
received  from the  Company's  primary  processing  vendors that plans are being
developed to address processing of transactions in the year 2000. Management has
not yet assessed the year 2000 compliance  expense and related  potential effect
on the Company's earnings.

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.
<PAGE>
                              AFSALA Bancorp, Inc.

The  table  below  sets  forth  certain  performance  and  financial  ratios  of
the Company for the years indicated:

--------------------------------------------------------------------------------
Key Operating Ratios
At or for the Year Ended September 30,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  1997          1996         1995         1994          1993
                                                                  ----          ----         ----         ----          ----
<S>                                                             <C>           <C>          <C>          <C>           <C>   
Performance ratios:
Return on average assets
 (net income divided by average total assets)                     0.77%         0.16%        0.51%        0.60%         0.69%

Return on average equity
 (net income divided by average equity) .  .  .  .                5.65          2.55         8.00         9.41         10.97

Net interest rate spread  .  .  .  .  .  .  .  .  .  .  .         2.89          2.69         2.78         2.89          2.74

Net interest margin  .  .  .  .  .  .  .  .  .  .  .  .           3.57          3.02         3.08         3.17          3.19
 .

Yield on average earning assets
 for the period ended  .  .  .  .  .  .  .  .  .  .  .            7.33          7.22         7.06         6.62          7.13
 .

Rate on average interest-bearing liabilities  .  .                4.44          4.53         4.28         3.73          4.39

Average interest-earning assets to average
 interest-bearing liabilities  .  .  .  .  .  .  .  .           118.40        108.05       107.59       107.96        111.41
 .  .

Efficiency ratio (1)  .  .  .  .  .  .  .  .  .  .  .            63.21         88.06        72.15        63.58         60.00
 .  .

Expense ratio (2)  .  .  .  .  .  .  .  .  .  .  .  .             2.32          2.79         2.28         2.01          1.91
 .  .

Asset Quality Ratios:
Non-performing loans to total assets  .  .  .  .  .               0.29          0.51         0.47         0.64          1.01

Non-performing loans to total loans  .  .  .  .  .                0.61          1.09         0.90         1.23          2.00

Allowance for loan losses to
 non-performing loans  .  .  .  .  .  .  .  .  .  .  .  .       236.09        112.40       113.57        85.62         39.04

Allowance for loan losses to total
 loans receivable  .  .  .  .  .  .  .  .  .  .  .  .             1.44          1.23         1.02         1.05          0.78
 .  .

Non-performing assets to total assets,
 at period end  .  .  .  .  .  .  .  .  .  .  .  .  .             0.31          0.51         0.47         0.64          1.08
 .  .

Capital Ratios:
Equity to total assets at period end  .  .  .  .  .              12.85         13.40         6.18         6.41          6.33

Average equity to average total assests  .  .  .                 13.68          6.21         6.34         6.36          6.29

Dividend payout .  .  .  .  .  .  .  .  .  .  .  .  .  .          8.99           N/A          N/A          N/A           N/A 

Book value per share (3)  .  .  .  .  .  .  .  .  .  .          $16.19         15.32          N/A          N/A           N/A

</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.  Excluding  the  affect of a
     special  one-time  SAIF  assessment, this  ratio would have been 71.45% for
     1996.
(2)  Total non-interest expense, excluding other real estate owned expense, as a
     percentage of total assets. Excluding the affect of a special one-time SAIF
     assessment, this ratio would have been 2.27% for 1996.
(3)  Excludes unallocated ESOP shares and unvested Restricted Stock Plan shares.




<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, 1997 and 1996,  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 Companys 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,  1997 and 1996,  and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.


                                        /s/KPMG Peat Marwick LLP

Albany, New York
November 14, 1997


<PAGE>


                      AFSALA BANCORP, INC. AND SUBSIDIARY

                          Consolidated Balance Sheets

                          September 30, 1997 and 1996

<TABLE>
<CAPTION>

                                                                                                    1997             1996
                                                                                                    ----             ----
        Assets

<S>                                                                                           <C>             <C>           
Cash and due from banks                                                                       $   5,127,320   $    4,816,392
Federal funds sold                                                                                2,675,000       19,200,000
Term deposits with the Federal Home Loan Bank                                                         --           3,000,000
                                                                                              -------------      -----------
                        Total cash and cash equivalents                                           7,802,320       27,016,392
                                                                                              -------------      -----------

Securities available for sale, at fair value                                                     37,705,373       17,131,802
Investment securities held to maturity                                                           35,263,826       34,999,930
Federal Home Loan Bank of New York stock, at cost                                                   565,300          565,300

Loans receivable                                                                                 76,927,350       71,556,754
Less:  Allowance for loan losses                                                                 (1,108,080)        (879,463)
                                                                                              -------------      -----------
                Net loans receivable                                                             75,819,270       70,677,291
                                                                                              -------------      -----------

Accrued interest receivable                                                                       1,405,687        1,156,466
Premises and equipment, net                                                                       1,659,444        1,703,491
Other assets                                                                                        186,066          426,015
                                                                                              -------------      -----------
                        Total assets                                                          $ 160,407,286      153,676,687
                                                                                              =============      ===========

        Liabilities and Stockholders Equity

Liabilities:
        Deposits                                                                              $ 135,316,322      126,460,081
        Federal Home Loan Bank of New York long term borrowings                                   1,415,625        1,815,625
        Escrow accounts                                                                             266,656          365,187
        Accrued expenses and other liabilities                                                    2,789,562        4,444,922
                                                                                              -------------      -----------
                        Total liabilities                                                       139,788,165      133,085,815
                                                                                              -------------      -----------

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         145,475          145,475
        Additional paid-in capital                                                               13,465,092       13,460,381
        Retained earnings, substantially restricted                                               9,048,824        8,120,864
        Common stock acquired by ESOP (108,010 shares in 1997 and 110,780 shares in 1996)        (1,080,105)      (1,107,800)
        Unearned Restricted Stock Plan                                                             (733,194)           --
        Treasury stock, at cost (15,000 shares in 1997)                                            (238,125)           --
        Net unrealized gain (loss) on securities available for sale, net of tax                      11,154          (28,048)
                                                                                              -------------      -----------
                        Total stockholders equity                                                20,619,121       20,590,872
                                                                                              -------------      -----------
                        Total liabilities and stockholders equity                             $ 160,407,286      153,676,687
                                                                                              =============      ===========
</TABLE>



See accompanying notes to consolidated financial statements.


<PAGE>


                      AFSALA BANCORP, INC. AND SUBSIDIARY

                       Consolidated Statements of Income

                    Years ended September 30, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                  1997           1996
                                                                                  ----           ----

<S>                                                                           <C>             <C>      
Interest and dividend income:
        Interest and fees on loans                                            $ 6,133,225     5,736,071
        Interest on federal funds sold                                            405,441       333,960
        Interest on FHLB term deposits                                            142,037       131,247
        Interest on securities available for sale                               1,414,978       742,111
        Interest on investment securities                                       2,636,444     2,185,158
        Dividends on Federal Home Loan Bank of New York stock                      36,670        36,972
                                                                              -----------     ---------
                        Total interest and dividend income                     10,768,795     9,165,519
                                                                              -----------     ---------

Interest expense:
        Deposits and escrow accounts                                            5,400,195     5,181,414
        Federal Home Loan Bank of New York long term borrowings                   114,669       143,647
                                                                              -----------     ---------
                        Total interest expense                                  5,514,864     5,325,061
                                                                              -----------     ---------

                        Net interest income                                     5,253,931     3,840,458

Provision for loan losses                                                         250,000       230,000
                                                                              -----------     ---------
                        Net interest income after provision for loan losses     5,003,931     3,610,458
                                                                              -----------     ---------

Non-interest  income:
        Service charges on deposit accounts                                       371,652       365,658
        Other                                                                      34,018        22,377
                                                                              -----------     ---------
                        Total non-interest  income                                405,670       388,035
                                                                              -----------     ---------

Non-interest expenses:
        Compensation and benefits                                               1,577,427     1,245,908
        Occupancy and equipment                                                   533,833       488,971
        FDIC deposit insurance premium                                            116,917       967,467
        Data processing fees                                                      279,056       268,295
        Professional service fees                                                 301,910       111,500
        Advertising                                                                58,311        44,552
        Supplies                                                                  112,664        71,651
        Other                                                                     616,903       525,731
                                                                              -----------     ---------
                        Total non-interest expenses                             3,597,021     3,724,075
                                                                              -----------     ---------

                        Income before income tax expense                        1,812,580       274,418

Income tax expense                                                                623,551        63,100
                                                                              -----------     ---------
                        Net income                                            $ 1,189,029       211,318
                                                                              ===========     =========

                        Net income per share                                  $      0.89           N/A
                                                                              ===========     =========         
</TABLE>


See accompanying notes to consolidated financial statements.



                                       3

<PAGE>


                      AFSALA BANCORP, INC. AND SUBSIDIARY

           Consolidated Statements of Changes in Stockholders' Equity

                    Years ended September 30, 1997 and 1996

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

<S>                       <C>       <C>         <C>          <C>         <C>        <C>             <C>                <C>  
Balance at September 
  30, 1995                $   -        -        7,909,546        -           -           -           4,583              7,914,129

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

Common stock issued        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 (loss) on
  securities available
  for sale, net of tax        -        -             -           -           -           -          (32,631)              (32,631)
                           -------- ----------  ---------   ----------   --------     --------      -------            ----------

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

Net income                    -        -        1,189,029        -           -           -             -                1,189,029

Dividends paid on
  common stock ($0.08 per
  share)                      -        -         (107,738)       -           -           -             -                 (107,738)

Allocation of ESOP stock 
  (2,770 shares)              -          4,711       -          27,695       -           -             -                   32,406

Grant of restricted stock 
  under Restricted Stock 
  Plan (58,190 shares)        -        785,565       -           -       (785,565)       -             -                      -

Treasury stock purchased 
  (73,190 shares)             -         -            -           -           -      (1,177,021)        -               (1,177,021)

Funding of Restricted 
  Stock Plan (58,190 
  shares)                     -       (785,565)  (153,331)       -           -         938,896         -                     -

Amortization of Unearned
  Restricted Stock            -         -            -           -         52,371        -             -                   52,371

Change in net unrealized
  gain (loss) on securities 
  available for sale, net 
  of tax                      -         -            -           -           -           -           39,202                39,202
                           -------- ----------  ---------   ----------   --------     --------      -------            ----------

Balance at September 
  30, 1997                 $145,475 13,465,092  9,048,824   (1,080,105)  (733,194)    (238,125)      11,154            20,619,121
                           ======== ==========  =========   ==========   ========     ========      =======            ==========
</TABLE>


See accompanying notes to consolidated financial statements.



                                       4


<PAGE>


                      AFSALA BANCORP, INC. AND SUBSIDIARY

                     Consolidated Statements of Cash Flows

                    Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>


                                                                                                          1997              1996
                                                                                                          ----              ----
<S>                                                                                                   <C>              <C>    
(Decrease) increase in cash and cash equivalents:

Cash flows from operating activities:
        Net income                                                                                    $  1,189,029         211,318
        Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                        Depreciation                                                                       170,270         166,705
                        Provision for loan losses                                                          250,000         230,000
                        Allocation of ESOP stock                                                            32,406            --
                        RSP compensation expense                                                            52,371            --
                        Deferred tax benefit                                                              (165,416)        (24,308)
                        Increase in accrued interest receivable                                           (249,221)        (25,812)
                        Decrease (increase) in other assets                                                239,949        (181,505)
                        (Decrease) increase in accrued expenses and other liabilities                   (3,156,538)      3,314,561
                                                                                                      ------------      ----------
                                Total adjustments                                                       (2,826,179)      3,479,641
                                                                                                      ------------      ----------
                                Net cash (used in) provided by operating activities                     (1,637,150)      3,690,959
                                                                                                      ------------      ----------

Cash flows from investing activities:
        Proceeds from the maturity and call of securities available for sale                            14,325,277       4,484,510
        Purchases of securities available for sale                                                     (33,339,448)     (2,500,000)
        Proceeds from the maturity and call of investment securities held to maturity                   11,221,165      10,501,537
        Purchases of investment securities held to maturity                                            (11,485,061)    (15,381,273)
        Redemption of Federal Home Loan Bank of New York stock                                                --               900
        Net loans made to customers                                                                     (5,391,979)     (5,485,197)
        Proceeds from sale of other real estate owned                                                         --            25,434
        Capital expenditures                                                                              (126,223)       (256,528)
                                                                                                      ------------      ----------
                                Net cash used in investing activities                                  (24,796,269)     (8,610,617)
                                                                                                      ------------      ----------

Cash flows from financing activities:
        Net increase in deposits                                                                         8,856,241      10,387,502
        Net decrease in escrow accounts                                                                    (98,531)       (135,336)
        Repayments on long term borrowings from the Federal Home Loan Bank                                (400,000)       (487,500)
        Purchases of treasury stock                                                                     (1,030,625)           --
        Cash dividends paid on common stock                                                               (107,738)           --
        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                                7,219,347      22,262,722
                                                                                                      ------------      ----------

Net (decrease) increase in cash and cash equivalents                                                   (19,214,072)     17,343,064
Cash and cash equivalents at beginning of year                                                          27,016,392       9,673,328
                                                                                                      ------------      ----------
Cash and cash equivalents at the end of year                                                          $  7,802,320      27,016,392
                                                                                                      ============      ==========
</TABLE>


                                                                     (Continued)

<PAGE>


                      AFSALA BANCORP, INC. AND SUBSIDIARY

                Consolidated Statements of Cash Flows, Continued

                    Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>


                                                                                               1997          1996
                                                                                               ----          ----


<S>                                                                                         <C>             <C>      
Additional disclosures relative to cash flows:
        Interest paid                                                                       $ 5,525,197     5,321,830
                                                                                            ===========   ===========

        Taxes paid                                                                          $   374,528       205,460
                                                                                            ===========   ===========

Supplemental schedule of non-cash investing and financing activities:

        Transfer of loans to other real estate owned                                        $    31,389        25,434
                                                                                            ===========   ===========

        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   $    39,202       (32,631)
                                                                                            ===========   ===========

        Increase in amounts due to broker from purchases of securities available for sale   $ 1,500,000          --
                                                                                            ===========   ===========

        Increase in amounts due to broker from purchases of treasury stock                  $   146,396          --
                                                                                            ===========   ===========
</TABLE>



See accompanying notes to consolidated financial statements.



                                       6




<PAGE>

                      AFSALA BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                          September 30, 1997 and 1996

(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  accounts and transactions  have
            been  eliminated.  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.

        (b) Use of Estimates

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

            Material estimates that are particularly  susceptible to significant
            change in the near term relate to the determination of the allowance
            for loan  losses  and the  valuation  of  other  real  estate  owned
            acquired   in   connection   with    foreclosures   or   insubstance
            foreclosures.  In connection with the determination of the allowance
            for loan  losses  and the  valuation  of other  real  estate  owned,
            management generally 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 Companys 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.

            A  substantial  portion of the Companys  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,  is also  generally  located in  Montgomery  and
            neighboring counties in New York State.

                                       7
<PAGE>


(1), 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) Securities  Available  for  Sale,   Investment  Securities  Held  to
            Maturity, and Federal Home Loan Bank of New York Stock

            Management determines the appropriate  classification of securities,
            at the time of purchase.  If management has the positive  intent and
            ability to hold debt securities to maturity,  they are classified as
            investment  securities  held to maturity and are stated at amortized
            cost. 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 stockholders  equity, net of tax. 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.

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

            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.

        (e) Reclassification of Investment Securities

            In November  1995, the staff of 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 provisions of this 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.

                                       8
<PAGE>


(1), Continued

        (f) Net Loans Receivable

            Loans receivable are stated at the unpaid principal  amount,  net of
            the  allowance  for  loan  losses.   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.

        (g) Allowance for Loan Losses

            The allowance  for loan losses is increased  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.

        (h) Loan Impairment

            As of October 1, 1995,  the Company  adopted  Statement of Financial
            Accounting  Standards  (SFAS) No. 114,  Accounting  by Creditors for
            Impairment of a Loan, and SFAS No. 118,  Accounting by Creditors for
            Impairment of a Loan - Income  Recognition  and  Disclosures.  Under
            these  Statements,  a  loan  (generally  commercial-type  loans)  is
            considered  impaired  when it is probable that the borrower will not
            make  principal  and  interest  payments  according  to the original
            contractual  terms  of the  loan  agreement,  or when a loan (of any
            type) is restructured in a troubled debt restructuring subsequent to
            the  adoption  of  these  Statements.   These  Statements  prescribe
            recognition criteria for loan impairment and measurement methods for
            impaired loans. Impaired loans are included in non-performing loans,
            generally as non-accrual commercial type loans.

            The allowance for loan losses  related to impaired loans is based on
            the discounted cash flows using the loans initial  effective rate or
            the fair value of the collateral  for certain loans where  repayment
            of the loan is  expected  to be  provided  solely by the  underlying
            collateral (collateral dependent loans). The Companys impaired loans
            are generally collateral dependent.  The Company considers estimated
            costs to sell,  on a discounted  basis,  when  determining  the fair
            value of collateral in the  measurement of impairment if those costs
            are  expected  to  reduce  the  cash  flows  available  to  repay or
            otherwise  satisfy the loans.  The adoption of SFAS Nos. 114 and 118
            did not  have a  significant  effect  on the  Companys  consolidated
            financial statements.

            Other real  estate  owned  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.


<PAGE>


(1), Continued

            At  September  30, 1997,  other real estate  owned  consisted of one
            residential    one-to-four   family   property   and   amounted   to
            approximately $31 thousand.  There was no other real estate owned at
            September 30, 1996.

        (i) 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.

        (j) 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.

            The Company  accounts for its stock option plan in  accordance  with
            the provisions of Accounting  Principles Board (APB) Opinion No. 25,
            Accounting for Stock Issued to Employees. Accordingly,  compensation
            expense is  recognized  only if the exercise  price of the option is
            less than the fair value of the underlying  stock at the grant date.
            SFAS No. 123,  Accounting for Stock-Based  Compensation,  encourages
            entities to recognize  the fair value of all  stock-based  awards on
            the date of grant as  compensation  expense over the vesting period.
            Alternatively, SFAS No. 123 allows entities to continue to apply the
            provisions  of APB Opinion No. 25 and provide pro forma  disclosures
            of net income  and net  income per share as if the  fair-value-based
            method  defined  in SFAS No. 123 had been  applied  to stock  option
            grants  made in 1995 and later  years.  The  Company  has elected to
            continue to apply the  provisions  of APB Opinion No. 25 and provide
            the pro forma disclosures required by SFAS No. 123.

            The  Company  also  accounts  for  its  restricted   stock  plan  in
            accordance  with APB  Opinion  No.  25. The fair value of the shares
            awarded,  measured as of the grant date,  is  recognized as unearned
            compensation (a deduction from stockholders equity) and amortized to
            compensation expenses as the shares become vested. Any excess of the
            cost to fund  purchases  of  restricted  stock plan  shares over the
            grant date fair value is charged to retained earnings.

                                       10

<PAGE>


(1), Continued

        (k) Income Taxes

            The Company  accounts for income taxes in  accordance  with SFAS No.
            109,  Accounting  for Income  Taxes.  Under the asset and  liability
            method of SFAS No.  109,  deferred  tax assets and  liabilities  are
            recognized  for  the  future  tax   consequences   attributable   to
            differences  between the  financial  statement  carrying  amounts of
            existing  assets and  liabilities  and their  respective  tax bases.
            Deferred tax assets are recognized  subject to managements  judgment
            that those assets will more likely than not be realized. A valuation
            allowance  is  recognized  if,  based on an  analysis  of  available
            evidence,  management believes that all or a portion of the deferred
            tax assets will not be realized. Adjustments to increase or decrease
            the valuation  allowance are charged or credited,  respectively,  to
            income tax expense. Deferred tax assets and liabilities are measured
            using enacted tax rates  expected to apply to taxable  income in the
            years  in which  those  temporary  differences  are  expected  to be
            recovered  or  settled.  The  effect  on  deferred  tax  assets  and
            liabilities  of a change in tax rates is recognized in income in the
            period that includes the enactment date.

        (l) 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 Companys policy is to record such instruments
            when funded.

        (m) Net Income Per Share

            Net  income  per share is  computed  based on the  weighted  average
            number of shares outstanding,  less unallocated ESOP shares,  during
            the period. The effect of outstanding stock option awards and shares
            granted  under the  restricted  stock plan are not  material  to the
            calculation  of net income  per  share.  Net income per share is 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,  net income per share is not  applicable for the
            year ended September 30, 1996. See also note 1(o).

        (n) Cashier Checks

            The  Companys  cashier  checks  (including   tellers  checks,   loan
            disbursement  checks,  expense checks and money  orders),  are drawn
            upon deposit  accounts at the Bank and are  ultimately  paid through
            the Banks Federal Reserve correspondent account. Outstanding cashier
            checks are classified as accrued  expenses and other  liabilities on
            the consolidated balance sheets.

                                       11

<PAGE>


(1), Continued

        (o) Recent Accounting Pronouncements

            In June 1996,  the FASB issued SFAS No. 125 Accounting for Transfers
            and   Servicing  of   Financial   Assets  and   Extinguishments   of
            Liabilities,  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.  The Company
            adopted SFAS No. 125 as of January 1, 1997. The adoption of SFAS No.
            125 did not have a  material  impact  on the  Companys  consolidated
            financial statements.

            In February 1997, the FASB issued SFAS No. 128,  Earnings per Share,
            which  establishes  standards for computing and presenting  earnings
            per share (EPS).  This Statement  supersedes  Accounting  Principals
            Board   Opinion   No.   15,   Earnings   per  Share,   and   related
            interpretations.  SFAS No. 128 replaces the  presentation of primary
            EPS with  the  presentation  of basic  EPS.  It also  requires  dual
            presentation  of basic  and  diluted  EPS on the face of the  income
            statement  for all entities  with  complex  capital  structures  and
            requires a  reconciliation  of the numerator and  denominator of the
            basic  EPS  computation  to the  numerator  and  denominator  of the
            diluted EPS computation.

            Basic EPS  excludes  dilution  and is computed  by  dividing  income
            available to common stockholders by the  weighted-average  number of
            common shares  outstanding for the period.  Diluted EPS reflects the
            potential dilution that could occur if securities or other contracts
            to issue common stock were  exercised or converted into common stock
            or resulted in the  issuance of common stock that then shared in the
            earnings of the entity.  This  Statement is effective  for financial
            statements  issued for  periods  ending  after  December  15,  1997,
            including  interim  periods.  Earlier  application is not permitted.
            This  Statement  requires  restatement  of all prior period EPS data
            presented.  As required,  the Company will adopt SFAS No. 128 in the
            first  quarter of fiscal  1998,  and will  report and display EPS in
            accordance with the new Statement.

            In June 1997, the FASB issued SFAS No. 130, Reporting  Comprehensive
            Income,  which  establishes  standards  for reporting and display of
            comprehensive  income and its  components  in financial  statements.
            SFAS No. 130 states that comprehensive  income includes reported net
            income of a company, adjusted for items that are currently accounted
            for as direct entries to equity,  such as the net unrealized gain or
            loss on securities  available for sale.  This Statement is effective
            for both interim and annual  periods  beginning  after  December 15,
            1997. As required, the Company will adopt the reporting requirements
            of this Statement in the second quarter of fiscal 1998.

            In June  1997,  the FASB  issued  SFAS No.  131,  Disclosures  about
            Segments of an Enterprise and Related Information, which establishes
            standards for reporting by public companies about operating segments
            of their  business.  SFAS No.  131 also  establishes  standards  for
            related  disclosures about products and services,  geographic areas,
            and  major  customers.  This  Statement  is  effective  for  periods
            beginning  after  December 15, 1997.  As required,  the Company will
            adopt the  reporting  requirements  of this  Statement in the second
            quarter of fiscal 1998.

                                       12

<PAGE>


(1), Continued

        (p) Reclassifications

            Amounts in the prior periods  consolidated  financial statements are
            reclassified  whenever  necessary to conform to the current  periods
            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  sheets.   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 the 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 Banks  capital  stock.  The Bank may not declare or pay a
        cash dividend to the Holding  Company,  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 Banks capital exceeds all of the fully phased-in  regulatory capital
        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 of the OTS,  make  capital
        distributions  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)     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 $867
        thousand and $767 thousand at September 30, 1997 and 1996, respectively.

                                       13
<PAGE>


(4)     Securities Available for Sale

        The amortized cost and  approximate  fair value of securities  available
        for sale at September 30, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                                                 1997
                                                     -----------------------------------------------------------
                                                                        Gross           Gross      Approximate
                                                       Amortized      Unrealized      Unrealized       Fair
                                                          Cost           Gains         Losses         Value
                                                          ----           -----         ------         -----
        
<S>                                                   <C>               <C>           <C>            <C>       
        U.S. Government and agency securities         $29,056,416       107,678         6,280        29,157,814
        States and political subdivisions               3,536,236         6,846         6,338         3,536,744
        Collateralized mortgage obligations             5,095,820        14,055        99,060         5,010,815
                                                      -----------       -------       -------        ----------
                Total securities available for sale   $37,688,472       128,579       111,678        37,705,373
                                                      ===========       =======       =======        ==========
</TABLE>

<TABLE>
<CAPTION>
       
                                                                                 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>

        
        Substantially  all  of  the  collateralized   mortgage   obligations  at
        September  30, 1997 and 1996  consist of Fannie Mae,  Freddie  Mac,  and
        Government National Mortgage Association (GNMA) securities.

        The amortized cost and  approximate  fair value of securities  available
        for sale at September 30, 1997, by contractual maturity, are shown below
        (collateralized  mortgage  obligations are included by final contractual
        maturity).  Expected  maturities may differ from contractual  maturities
        because certain issuers may have the right to call or prepay obligations
        with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                                  Amortized         Approximate
                                                                                     Cost            Fair Value
                                                                                  ---------         -----------
        
<S>                                                                               <C>                <C>      
        Due within one year                                                       $ 3,445,917         3,451,641
        Due one year to five years                                                 15,640,535        15,689,193
        Due five years to ten years                                                13,506,200        13,553,725
        Due after ten years                                                         5,095,820         5,010,814
                                                                                  -----------        ----------
                Total securities available for sale                               $37,688,472        37,705,373
                                                                                  ===========        ==========
</TABLE>

        
        There were no sales of  securities  available  for sale during the years
        ended September 30, 1997 and 1996.
        
                                       14
<PAGE>


(5)     Investment Securities Held to Maturity

        The amortized cost and approximate  fair value of investment  securities
        held to maturity at September 30, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                                                         1997
                                                               ------------------------------------------------------
                                                                                   Gross        Gross     Approximate
                                                               Amortized        Unrealized    Unrealized      Fair
                                                                  Cost             Gains        Losses       Value
                                                                  -----            -----        ------       -----
<S>                                                            <C>                <C>           <C>       <C>       
        U.S. Government and agency securities                  $24,035,484        86,125        47,805    24,073,804
        Mortgage-backed securities                              11,182,369       229,776        62,388    11,349,757
        Other                                                       45,973            --            --        45,973
                                                               -----------       -------       -------    ----------
                Total investment securities held to maturity   $35,263,826       315,901       110,193    35,469,534
                                                               ===========       =======       =======    ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                                         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>
        
        Substantially  all of the  mortgage-backed  securities  at September 30,
        1997 and 1996, consist of Fannie Mae, Freddie Mac, and GNMA securities.

        The amortized cost and approximate  fair value of investment  securities
        held to maturity at September 30, 1997,  by  contractual  maturity,  are
        shown  below   (mortgage-backed   securities   are   included  by  final
        contractual  maturity).  Expected maturities may differ from contractual
        maturities  because certain issuers may have the right to call or prepay
        obligations with or without call or prepayment penalties.

                                       Amortized      Approximate
                                          Cost        Fair Value
                                          ----        ----------
        
        Due within one year           $ 6,336,053     6,320,142
        Due one year to five years     11,554,527    11,549,920
        Due five years to ten years     6,741,945     6,793,561
        Due after ten years            10,631,301    10,805,911
                                      -----------    ----------
        Total                         $35,263,826    35,469,534
                                      ===========    ==========
        

        There were no sales of investment securities held to maturity during the
        years ended September 30, 1997 and 1996.

                                       15
<PAGE>


(6)     Net Loans Receivable

        A summary of net loans  receivable  at September 30, 1997 and 1996 is as
        follows:
<TABLE>
<CAPTION>

                                                           1997             1996
                                                           ----             ----
<S>                                                    <C>               <C>       
        Loans secured by real estate:
        Conventional one-to-four family mortgages      $ 44,081,646      42,912,395
        Commercial                                        3,665,186       3,015,220
        Home equity                                      17,676,832      14,665,911
        FHA insured                                         302,477         386,048
        VA guaranteed                                       523,316         667,225
                                                        ------------     ----------
                                                         66,249,457      61,646,799
                                                       ------------      ----------
        
        Other loans:
        Personal secured                                  3,874,609       3,942,824
        Personal unsecured                                  475,415         432,707
        Commercial                                        3,513,204       3,103,577
        Home improvement                                  1,789,938       1,560,032
        Passbook                                            938,440         779,494
        Education                                            86,287          91,321
                                                       ------------      ----------
                                                         10,677,893       9,909,955
                                                       ------------      ----------
        
                                                         76,927,350      71,556,754
        Less: Allowance for loan losses                  (1,108,080)       (879,463)
                                                       ------------      ----------
                                Net loans receivable   $ 75,819,270      70,677,291
                                                       ============      ==========
</TABLE>

        
        Certain conventional  mortgage loans held in the Companys 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:

<TABLE>
<CAPTION>
                                                           1997             1996
                                                           ----             ----
                
<S>                                                    <C>                <C>    
        Balance at beginning of year                   $   879,463        677,681
        Provision for loan losses                          250,000        230,000
        Charge-offs                                        (23,578)       (28,218)
        Recoveries                                           2,195           --
                                                       -----------        -------
        Balance at end of year                         $ 1,108,080        879,463
                                                       ===========        =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                           1997            1996
                                                           ----            ----
                
<S>                                                   <C>                 <C>    
        Loans in non-accrual status                   $    469,351        716,461
        Loans contractually past due 90 days 
          or more and still accruing interest                --            65,953
                                                      ------------        -------
        Total non-performing loans                    $    469,351        782,414
                                                      ============        =======
</TABLE>


        There were no troubled  debt  restructurings  at  September  30, 1997 or
        1996.


<PAGE>


(6), Continued

        Accumulated   interest  on  non-accrual   loans,   as  shown  above,  of
        approximately  $30  thousand  and $33  thousand  was not  recognized  in
        interest  income  during the years  ended  September  30, 1997 and 1996,
        respectively.  Approximately $9 thousand and $29 thousand of interest on
        non-accrual  loans,  as shown above,  was  collected  and  recognized in
        interest  income  during the years  ended  September  30, 1997 and 1996,
        respectively.

        As of September 30, 1997 and 1996, the recorded investment in loans that
        were considered to be impaired under SFAS No. 114 totaled  approximately
        $10  thousand  and $40  thousand  respectively,  for which  the  related
        allowance for loan loss was  approximately  $3 thousand and $4 thousand,
        respectively.  During the years ended  September 30, 1997 and 1996,  the
        average balance of impaired loans was approximately $43 thousand and $40
        thousand, respectively.  Interest income collected on the impaired loans
        during the years ended September 30, 1997 and 1996 was  approximately $6
        thousand and $0, 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 Companys  normal credit terms,  including  interest rate
        and collateralization. The aggregate of such loans totaled approximately
        $361  thousand  and $301  thousand  at  September  30,  1997  and  1996,
        respectively.  Total  advances to the directors  and executive  officers
        during  the year  ended  September  30,  1997  were  approximately  $179
        thousand.  Total  payments made on these loans were  approximately  $119
        thousand for the year ended September 30, 1997.


(7)     Accrued Interest Receivable

        A summary of accrued  interest  receivable  as of September 30, 1997 and
        1996 is as follows:

<TABLE>
<CAPTION>
                                                               1997          1996
                                                               ----          ----
        
<S>                                                         <C>           <C>   
                Term deposits with the Federal Home 
                   Loan Bank                                $    --          43,900
                Securities available for sale                  373,185      186,706
                Investment securities held to maturity         507,444      432,787
                Loans receivable                               525,058      493,073
                                                            ----------    ---------
                        Total accrued interest receivable   $1,405,687    1,156,466
                                                            ==========    =========
</TABLE>
      
 (8)     Premises and Equipment, Net

        Premises and  equipment at September  30, 1997 and 1996 is summarized by
        major classification as follows:

<TABLE>
<CAPTION>

                                                               1997          1996
                                                               ----          ----
        
<S>                                                        <C>           <C>    
        Land and land improvements                         $   388,044      388,044
        Office buildings                                     1,128,801    1,128,801
        Leasehold improvements                                 371,889      370,511
        Furniture, fixtures and equipment                    1,043,249      929,751
                                                           -----------    ---------
        Total                                                2,931,983    2,817,107
        Less accumulated depreciation                       (1,272,539)  (1,113,616)
                                                           -----------    ---------
        Premises and equipment, net                        $ 1,659,444    1,703,491
                                                           ===========    =========
</TABLE>

                                       17

<PAGE>


(8),    Continued

        Depreciation  included in occupancy  and equipment  expense  amounted to
        approximately  $170  thousand  and $167  thousand  for the  years  ended
        September 30, 1997 and 1996, respectively.


(9)     Deposits

        Deposit  account  balances at September 30, 1997 and 1996 are summarized
        as follows:

<TABLE>
<CAPTION>
                             Stated
                              rate                            1997            1996
                              ----                            ----            ----
        
<S>                        <C>                           <C>              <C>       
        Savings accounts      3.00%                      $ 36,180,998      36,916,478
        N.O.W. accounts    2.25 - 2.75                     11,617,872      10,779,847
        Money market
                accounts   2.75 - 4.87                      9,933,742       7,728,854
        Time deposit accounts:
                           3.00 - 3.99                        678,606          --
                           4.00 - 4.99                      2,093,829      14,505,461
                           5.00 - 5.99                     55,659,435      30,823,393
                           6.00 - 6.99                      8,584,559      15,491,537
                           7.00 - 7.99                      2,695,255       3,012,883
                                                         ------------     -----------
             Total time deposit accounts                   69,711,684      63,833,274
                                                         ------------     -----------
        
        Non-interest bearing
                accounts                                    7,872,026       7,201,628
                                                         ------------     -----------
                        Total deposits                   $135,316,322     126,460,081
                                                         ============     ===========
</TABLE>
        
        The  approximate  amount  of  contractual  maturities  of  time  deposit
        accounts for the years subsequent to September 30, 1997 are as follows:
        
                Years ended September 30,
                -------------------------
                        1998                             $51,344,348
                        1999                               9,156,369
                        2000                               5,474,873
                        2001                               2,687,470
                        2002                               1,048,624
                                                         -----------
                                                         $69,711,684
                                                         ===========
        
        At September  30, 1997 and 1996,  the  aggregate  amount of time deposit
        accounts  with  balances  equal to or in  excess  of $100  thousand  was
        approximately $8.6 million and $6.8 million,  respectively.  Deposits in
        excess of $100 thousand are not Federally insured.
        
                                       18
<PAGE>
        
        
(9),    Continued
        
        Interest  expense on deposits  and escrow  accounts  for the years ended
        September 30, 1997 and 1996, is summarized as follows:

                                                           1997           1996
                                                           ----           ----
        
        Savings accounts                                $1,081,101     1,067,478
        N.O.W. accounts                                    258,396       223,737
        Money market accounts                              363,605       256,736
        Time deposits                                    3,688,735     3,624,137
        Escrow accounts                                      8,358         9,326
                                                        ----------     ---------
                Total                                   $5,400,195     5,181,414
                                                        ==========     =========
        
        Weighted average 
         interest rate at end of period                    4.19%          4.11%
                                                           ====           ==== 
        
        
(10)    Income Taxes
        
        The  following is a summary of the  components of income tax expense for
        the years ended September 30, 1997 and 1996:

                                                           1997          1996
                                                           ----          ----
        
        Current tax expense:
                Federal                                 $  662,884       73,774
                State                                      126,083       13,634
        Deferred tax benefit                              (165,416)     (24,308)
                                                        ----------       ------
                Income tax expense                      $  623,551       63,100
                                                        ==========       ======
        
        Income tax expense for financial  reporting purposes is greater than the
        amount computed by applying the statutory federal income tax rate of 34%
        to income  before  income tax expense for the reasons noted in the table
        below:

                                                          1997           1996
                                                          ----           ----
        
        Expense at statutory federal tax rate          $   616,277       93,302
        Tax-exempt income                                  (61,948)     (49,137)
        State income taxes, net of 
           federal tax benefit                              64,700       16,708
        Decrease in the deferred tax asset 
           valuation allowance                             (30,000)        --
        Effect of graduated tax rates                         --         (2,438)
        Other, net                                          34,522        4,665
                                                       -----------       ------
                Income tax expense                     $   623,551       63,100
                                                       ===========       ======
        
        Effective tax rate                                    34.4%        23.0%
                                                       ===========       =======


                                       19
        
<PAGE>
        
        
(10),   Continued

        The tax effects of temporary  differences  that give rise to significant
        portions of the deferred  tax assets and  liabilities  at September  30,
        1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                        1997          1996
                                                                        ----          ----
        
<S>                                                                   <C>           <C>    
        Deferred tax assets:
        Differences in reporting the provision for 
           loan losses and loan charge-offs                           $ 444,562      352,841
        Other                                                            68,819       36,404
                                                                      ---------     -------- 
                Total gross deferred tax assets                         513,381      389,245
                Less valuation allowance                               (120,000)    (150,000)
                                                                      ---------     -------- 
                Net deferred tax assets                                 393,381      239,245
                                                                      ---------     -------- 
        
        Deferred tax liabilities:
        Depreciation                                                    (77,079)     (75,901)
        Prepaid expenses                                                 (8,597)     (28,463)
        Other                                                           (22,183)     (14,775)
                                                                      ---------     -------- 
                Total deferred tax liabilities                         (107,859)    (119,139)
                                                                      ---------     -------- 
                Net deferred tax asset at end of year                   285,522      120,106
                Net deferred tax asset at beginning 
                  of year                                               120,106       95,798
                                                                      ---------     -------- 
        Deferred tax benefit for the year                             $(165,416)     (24,308)
                                                                      =========     ======== 
</TABLE>
        
        In addition to the deferred tax assets and liabilities  noted above, the
        Company also had a deferred tax liability of  approximately  $6 thousand
        at September  30, 1997,  and a deferred tax asset of  approximately  $14
        thousand at September 30, 1996,  related to the net  unrealized  gain or
        loss on securities available for sale.
        
        During  the year  ended  September  30,  1997,  the  deferred  tax asset
        valuation  allowance was reduced by $30  thousand.  In  maintaining  the
        valuation allowance, the Company takes into consideration the nature and
        timing of the deferred tax 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 valuation  allowance are
        based  upon the  Companys  continuing  evaluation  of the  level of such
        allowance,  the amount of New York State  deferred  tax assets,  and the
        realizability  of the  temporary  differences  creating the deferred tax
        asset.  Based  on  recent  historical  and  anticipated  future  pre-tax
        earnings,  management  believes  it is more  likely  than  not  that the
        Company will realize its net deferred tax assets.

        As a thrift  institution,  the Bank is subject to special  provisions in
        the federal and New York State tax laws  regarding its allowable tax bad
        debt  deductions  and related tax bad debt  reserves.  These  deductions
        historically have been determined using methods based on loss experience
        or a percentage of taxable income.  Tax bad debt reserves are maintained
        equal to the excess of allowable  deductions over actual bad debt losses
        and  other  reserve  reductions.  These  reserves  consist  of a defined
        base-year amount, plus additional amounts (excess reserves)  accumulated
        after the base year.  SFAS No. 109 requires  recognition of deferred tax
        liabilities with respect to such excess reserves, as well as any portion
        of the  base-year  amount  which  is  expected  to  become  taxable  (or
        recaptured) in the foreseeable future.

                                       20
<PAGE>


(10), Continued

        Certain  amendments to the federal and New York State tax laws regarding
        bad debt  deductions  were enacted in July and August 1996.  The federal
        amendments  include  elimination  of the  percentage  of taxable  income
        method for tax years beginning after December 31, 1995 and imposition of
        a requirement to recapture into taxable income (over a six-year  period)
        the bad debt reserves in excess of the base-year  amounts.  The Bank did
        not have any  federal  bad debt  reserves  in  excess  of the  base-year
        amount,  thus  there was no  recapture  requirement.  The New York State
        amendments redesignate the Banks state bad debt reserves at December 31,
        1995 as the  base-year  amount and also provide for future  additions to
        the base-year reserve using the percentage of taxable income method.

        In accordance with SFAS No. 109,  deferred tax liabilities have not been
        recognized  with  respect to the  December 31, 1996 (the latest date for
        which the calculation is available) federal and state base-year reserves
        of approximately $2.0 million and $3.4 million, respectively,  since the
        Company does not expect that these  amounts  will become  taxable in the
        foreseeable  future.  Under the tax laws as  amended,  events that would
        result in taxation of these  reserves  include  (i)  redemptions  of the
        Banks  stock or certain  excess  distributions  to the  Company and (ii)
        failure of the Bank to maintain a specified  qualifying  assets ratio or
        meet other thrift definition tests for New York State tax purposes.  The
        unrecognized  deferred tax liabilities at December 31, 1996 with respect
        to the federal and state  base-year  reserves  were  approximately  $669
        thousand and $137 thousand (net of federal benefit), respectively.


(11)    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  Companys  loan
        portfolio,  as well as the Federal Home Loan Bank of New York stock. The
        rates on the various  advances  ranged from 5.42% to 10.30% and 5.07% to
        10.30% at  September  30,  1997 and  1996,  respectively.  The  weighted
        average  rate  on the  remaining  borrowings  was  7.01%  and  6.83%  at
        September  30, 1997 and 1996,  respectively.  The  following  table sets
        forth the remaining maturities of the borrowings at September 30, 1997:

        Years ended September 30,
        -------------------------

                 1998                                  $  350,000
                 1999                                     337,500
                 2000                                     321,875
                 2001                                     181,250
                 2002                                     112,500
               2003-2004                                  112,500
                                                       ----------
                                                       $1,415,625
                                                       ==========
                     

(12)    Related Party Transactions

        The law firm of a Director of the Company  provides  the majority of the
        Companys legal services. The Company expensed approximately $62 thousand
        in fees to this law firm for legal  services for each of the years ended
        September 30, 1997 and 1996, respectively.

                                       21

<PAGE>


(12), Continued

        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 6.


(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 Companys  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  managements  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.
                                       22

<PAGE>


(13),   Continued

        Contract amounts of financial  instruments that represent credit risk as
        of September 30, 1997 and 1996, at fixed and variable interest rates are
        as follows:

<TABLE>
<CAPTION>

                                                                      1997
                                                      -------------------------------------
                                                        Fixed        Variable      Total
                                                        -----        --------      -----
<S>                                                   <C>             <C>          <C>    
        Commitments outstanding:
        Residential mortgages                         $  672,000      194,000      866,000
        Commercial real estate loans                     150,000         --        150,000
        Unadvanced portion of construction 
           loans                                         332,245      256,818      589,063
                                                      ----------      -------    ---------
                                                       1,154,245      450,818    1,605,063
                                                      ----------      -------    ---------
        
        Unused lines and standby letters of credit:
        Personal lines of credit                         276,944         --        276,944
        Standby letters of credit                           --         40,000       40,000
                                                      ----------      -------    ---------
                                                         276,944       40,000      316,944
                                                      ----------      -------    ---------
                                                      $1,431,189      490,818    1,922,007
                                                      ==========      =======    =========
</TABLE>

<TABLE>
<CAPTION>
                                                                       1996
                                                      ------------------------------------
                                                         Fixed       Variable       Total
                                                         -----       --------       -----
<S>                                                   <C>             <C>        <C>    
        Commitments outstanding:
        Residential mortgages                         $  300,200      629,000      929,200
        Commercial real estate loans                      86,500         --         86,500
        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
                                                       =========      =======    =========
</TABLE>

        
        The range of interest rates on fixed rate  commitments  outstanding  was
        7.25% to 8.25% at September  30, 1997.  The interest  rate on the unused
        personal lines of credit was 15.00% at September 30, 1997
                
        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.
        
                                       23

<PAGE>


(13),   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, 1997 and 1996,  were  approximately  $105
        thousand and $97 thousand, respectively.

        A summary of the future minimum commitments required under noncancelable
        operating leases as of September 30, 1997 are as follows:

                     Years ending September 30,
                     --------------------------
                                1998                $ 134,337
                                1999                  139,763
                                2000                   81,899
                                2001                   39,776
                                2002                   27,400
                                                    ---------
                                                    $ 423,175
                                                    =========

        Borrowing Arrangements
        ----------------------
        The Company has two lines of credit available with the Federal Home Loan
        Bank of New York which expire in January 1998. The first is an overnight
        line of credit for  approximately  $7.7 million with  interest  based on
        existing  market  conditions.   The  second  is  a  one-month  overnight
        repricing  line of credit for  approximately  $7.7 million with interest
        based on existing market conditions.  There were no amounts  outstanding
        under these lines at September 30, 1997.

        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  Companys  defined  contribution  401(k)  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 approximately $39 thousand and $35 thousand for the years
        ended September 30, 1997 and 1996, respectively.

        The Company also has a supplemental  employee retirement plan (SERP) for
        certain executive  officers.  The expense  associated with this plan was
        approximately  $24 thousand for the year ended  September 30, 1997,  and
        approximately  $21 thousand for the year ended  September 30, 1996.  The
        SERP is funded annually.

                                       24

<PAGE>


(14),   Continued

        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  Companys
        discretionary  contributions  to the ESOP over a period of ten years. At
        September 30, 1997,  the loan had an  outstanding  balance of $1,080,105
        and an interest rate of 8.5%.  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.

        The unallocated ESOP shares are pledged as collateral to secure the loan
        and are  reported  as  common  stock  acquired  by ESOP in  stockholders
        equity.  The Company reports  compensation  expense equal to the average
        market price of the shares during the  applicable  service  period.  The
        shares become outstanding for net income per share computations when the
        shares are committed to be allocated to employees accounts.  The Company
        recorded  approximately $151 thousand in compensation expense related to
        the  ESOP  during  the year  ended  September  30,  1997.  There  was no
        compensation  expense  related to the ESOP for the year ended  September
        30, 1996.

        The ESOP shares as of September 30, 1997 were as follows:

        Allocated shares                                              2,770
        Shares committed to be allocated                               --
        Unallocated shares                                          108,010
                                                                 ----------
                                                                    110,780
                                                                 ==========
        
        Approximate fair value of unallocated shares at 
          September 30, 1997                                     $1,930,679
                                                                 ==========
        
        Stock Option Plan
        -----------------
        On May 30, 1997, the stockholders approved the AFSALA Bancorp, Inc. 1997
        Stock  Option Plan  (Option  Plan).  Under the Option  Plan,  options to
        purchase a number of shares equal to 10% of the Companys  shares  issued
        in its initial public offering,  or 145,475 shares, became available for
        award to officers,  directors, key employees and other persons from time
        to time.  Concurrent with the approval of the Option Plan, 145,475 stock
        options  were granted to officers,  directors  and key  employees of the
        Company at an exercise price of $13.875 per share, representing the mean
        between the last bid and ask price of the stock on the grant  date.  The
        options  have a term of 10 years and vest  over a five year  period at a
        rate of 20%  annually,  commencing  on the one year  anniversary  of the
        grant date. No options were exercised,  cancelled,  or forfeited  during
        the year ended  September  30,  1997.  As of  September  30,  1997,  the
        weighted-average   remaining   contractual   life  of  the  options  was
        approximately 9.7 years.

                                       25
<PAGE>


(14),   Continued

        As all options were granted at an exercise price equal to the fair value
        of the common stock at the grant date, in accordance with the provisions
        of APB Opinion No. 25 related to fixed stock  options,  no  compensation
        expense was recognized  with respect to the options  granted.  Under the
        alternative  fair-value-based  method  defined in SFAS No. 123, the fair
        value of all fixed stock  options on the grant date would be  recognized
        as expense over the vesting period.  The estimated weighted average fair
        value of options  granted  during the year ended  September 30, 1997 was
        $5.17.   The  fair   value  was   estimated   using  the   Black-Scholes
        option-pricing model with the following  assumptions:  dividend yield of
        1.25%;  expected  volatility rate of 25.0%;  risk-free  interest rate of
        6.69%; and an expected option life of 7.0 years.

        The  following is a comparison of the Companys net income and net income
        per share, as reported, to the pro forma amounts assuming application of
        the  fair-value-based  method of SFAS No. 123 to options  granted during
        the year ended September 30, 1997:

        Net income:
                As reported             $ 1,189,029
                Pro forma                 1,143,984
        Net income per share:
                As reported                  0.89
                Pro forma                    0.85
        
        Restricted Stock Plan
        ---------------------
        On May 30, 1997, the  stockholders  approved the Amsterdam  Federal Bank
        Restricted Stock Plan (RSP) for the benefit of officers,  directors, and
        key employees of the Company.  Under the RSP, 4% of the Companys  common
        stock,  or 58,190 shares,  became  available for award in recognition of
        expected future services to the Company by its directors,  officers, and
        key employees  responsible for implementation of the policies adopted by
        the Companys  Board of  Directors  and as a means of providing a further
        retention  incentive.  Concurrent  with the approval of the RSP,  58,190
        shares  were  awarded  and vest over a five year period at a rate of 20%
        annually,  commencing on the one year anniversary of the grant date. The
        fair  market  value  of  the  shares   awarded  on  the  grant  date  of
        approximately  $786 thousand is being amortized to compensation  expense
        as the  participants  become vested in those shares.  For the year ended
        September 30, 1997, the Company recognized  compensation expense related
        to the RSP of approximately  $52 thousand.  The restricted stock used to
        fund the RSP was purchased by the Company in open-market transactions.


(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.  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  Companys  entire
        holdings of a particular financial  instrument.  Because no ready market
        exists for a significant portion of the Companys 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.

                                       26
<PAGE>


(15), 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 Companys
        branch network, and other items generally referred to as goodwill.

        The following  table  presents the carrying  amounts and estimated  fair
        values of the Companys  financial  instruments at September 30, 1997 and
        1996:
<TABLE>
<CAPTION>
                                                                                         1997                    1996
                                                                                 ----------------------   ---------------------
                                                                                 Carrying     Estimated   Carrying   Estimated
                                                                                  Amount     Fair Value    Amount    Fair Value
                                                                                  ------     ----------    ------    ----------
                                                                                                 (in thousands)
        
        Financial assets:
<S>                                                                              <C>           <C>         <C>        <C>   
                Cash and cash equivalents                                        $  7,802       7,802      27,016     27,016
                Securities available for sale                                      37,705      37,705      17,132     17,132
                Investment securities held to maturity                             35,264      35,470      35,000     34,763
                Federal Home Loan Bank of New York stock                              565         565         565        565
        
                Loans receivable                                                   76,927      77,523      71,556     71,631
                        Less:  Allowance for loan losses                           (1,108)        --         (879)      --
                                                                                 --------      ------      ------     ------
                                Net loans receivable                               75,819      77,523      70,677     71,631
                                                                                 ========      ======      ======     ======

                Accrued interest receivable                                         1,406       1,406       1,156      1,156
        
        Financial liabilities:
                Savings, N.O.W, money market and non-interest bearing accounts     65,605      65,605      62,627     62,627
                Time deposit accounts                                              69,712      70,024      63,833     64,232
                Federal Home Loan Bank of New York long term borrowings             1,416       1,447       1,816      1,842
                Escrow accounts                                                       267         267         365        365
                Accrued interest payable                                                8           8          19         19
        
</TABLE>

        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.
        
                                       27
<PAGE>


(15),   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  interest rate
        terms and by performing and non-performing 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  non-performing  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
        -------------------
        Under SFAS 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 are equal to the carrying amounts payable
        on demand.  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.


                                       28
<PAGE>


(15),   Continued

        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 Companys  business and in the Companys
        business territory are not currently a normal business practice.


(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, 1997 and 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  institutions  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  total  adjusted  quarterly
        average  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, 1997 and 1996,  the Bank
        met all capital adequacy requirements to which it was 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 Banks capital classification.

        The  following  is a summary of the Banks  actual  capital  amounts  and
        ratios as of  September  30, 1997 and 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  Companys
        consolidated capital amounts and ratios are also presented. The OTS does
        not have a holding company capital requirement.

                                       29
<PAGE>


                      AFSALA BANCORP, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued


(16), Continued

<TABLE>
<CAPTION>
                                                                                            OTS Required Capital Ratios
                                                                                         --------------------------------------
                                                    1997              1996
                                         --------------------    -----------------      
                                                Actual                Actual               
                                         --------------------    -----------------        For Minimum      For Classification
                                          Amount       Ratio     Amount     Ratio       Capital Adequacy   as Well Capitalized
                                         --------      -----     ------     -----       ----------------   -------------------
                                                                (Dollars in Thousands)
              
<S>                                        <C>          <C>      <C>         <C>             <C>                  <C>
              Tangible capital:
                      Bank only            $  16,636    10.5%    13,816      9.0%            1.5%
                      Consolidated            20,608    13.0     20,619      13.4            N/A
              
              Core (Tier 1) capital:
                      Bank only               16,636    10.5     13,816      9.0             3.0                  5.0%
                      Consolidated            20,608    13.0     20,619      13.4            N/A                  N/A
              
              Risk-based capital:
                      Core (Tier 1):
                              Bank only       16,636    24.0     13,816      21.7                                 6.0
                              Consolidated    20,608    29.7     20,619      32.4                                 N/A
              
                      Total:
                              Bank only       17,456    25.2     14,573      22.9            8.0                  10.0
                              Consolidated    21,429    30.9     21,376      33.5            N/A                  N/A

</TABLE>



                                       30



<PAGE>


(17)    Parent Company Financial Information

        The  following  information  presents the  financial  position of AFSALA
        Bancorp,  Inc.  (Parent  Company) as of September 30, 1997 and 1996, and
        the  results  of its  operations  and  cash  flows  for the  year  ended
        September 30, 1997. The results of its operations and cash flows for the
        year  ended  September  30,  1996 are not  applicable  as  there  was no
        activity prior to its initial public offering on September 30, 1996.
<TABLE>
<CAPTION>


                     Balance Sheets                                                 1997             1996
                     --------------                                                 ----             ----
        
<S>                                                                             <C>             <C>          
                         Assets
                Cash and cash equivalents                                       $  3,876,462           --
                Loan receivable from subsidiary bank                                   --          5,695,128
                Loan receivable from ESOP                                          1,080,105       1,107,800
                Investment in subsidiary bank                                     16,647,627      13,787,944
                Other assets                                                           9,641           --
                                                                                ------------      ----------
                                Total assets                                    $ 21,613,835      20,590,872
                                                                                ============      ==========
        
               Liabilities and stockholders equity
        
        Liabilities:
                Accrued expenses and other liabilities                               994,714           --
                                                                                ------------      ----------
        
        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                          145,475         145,475
                Additional paid-in capital                                        13,465,092      13,460,381
                Retained earnings, substantially restricted                        9,048,824       8,120,864
                Common stock acquired by ESOP (108,010 shares 
                  in 1997 and 110,780 shares in 1996)                             (1,080,105)     (1,107,800)
                Unearned Restricted Stock Plan                                      (733,194)          --
                Treasury stock, at cost (15,000 shares in 1997)                     (238,125)          --
                Net unrealized gain (loss) on securities available 
                  for sale, net of tax                                                11,154         (28,048)
                                                                                ------------      ----------
                                Total stockholders equity                         20,619,121      20,590,872
                                                                                ------------      ----------
                                Total liabilities and stockholders equity       $ 21,613,835      20,590,872
                                                                                ============      ==========
</TABLE>


                               Statement of Income
                          Year ended September 30, 1997

<TABLE>
<CAPTION>

<S>                                                                       <C>       
        Interest income                                                   $  312,953
        Dividends from subsidiary bank                                        58,190
        Interest expense                                                        --
                                                                          ----------
                Net interest income                                          371,143
        Non-interest expenses                                                 75,013
                                                                          ----------
        Income before income tax expense and equity                
           in undistributed earnings of subsidiary bank                      296,130
        
        Income tax expense                                                    95,176
                                                                          ----------
        Income before equity in undistributed earnings 
           of subsidiary bank                                                200,954
        
        Equity in undistributed earnings of subsidiary bank                  988,075
                                                                          ----------
        Net income                                                        $1,189,029
                                                                          ==========
</TABLE>
                                       31


<PAGE>


(17), Continued

                            Statement of Cash Flows
                         Year ended September 30, 1997
<TABLE>
<CAPTION>


<S>                                                                                  <C>        
        Cash flows from operating activities:
                Net income                                                           $ 1,189,029
                Adjustments to reconcile net income 
                  to net cash provided by operating activities:
                                Equity in undistributed earnings of 
                                  subsidiary bank                                     (1,014,668)
                                Increase in other assets                                 (71,641)
                                                                                     -----------
                                        Net cash provided by operating 
                                          activities                                     102,720
                                                                                     -----------
        
        Cash flows from investing activities:
                Payments on loan receivable from subsidiary bank                       5,695,128
                Payments on loan receivable from ESOP                                     27,695
                                                                                     -----------
                                        Net cash provided by investing 
                                          activities                                   5,722,823
                                                                                     -----------
        
        Cash flows from financing activities:
                Purchases of treasury stock                                           (1,030,625)
                Cash dividends paid on common stock                                     (107,738)
                                                                                     -----------
                                        Net cash used in financing activities         (1,138,363)
                                                                                     -----------
        
        Net increase in cash and cash equivalents                                      3,876,462
        Cash and cash equivalents at beginning of year                                     --
                                                                                     -----------
        Cash and cash equivalents at end of year                                     $ 3,876,462
                                                                                     ===========
        
</TABLE>

        
        These  financial  statements  should  be read in  conjunction  with  the
        Companys consolidated financial statements and notes thereto.
        
                                       32
<PAGE>
                             CORPORATE INFORMATION

                              EXECUTIVE OFFICERS:

 John M. Lisicki              Benjamin W. Ziskin            James J. Alescio
President and Chief             Vice President               Treasurer and
 Executive Officer                                       Chief Financial Officer

                                   DIRECTORS:

Dr. Ronald S. Tecler            John M. Lisicki           Dr. Daniel J. Greco
     Dentist                  President and Chief                Retired
                               Executive Officer         (School Superintendent)

Joseph G. Opalka              John A. Tesiero, Jr.        John A. Kosinski, Jr.
   Accountant                       Owner                        Attorney
                         Construction Supply Business

                               Florence B. Opiela
                                    Retired
                                (Bank Executive)

          Stock Transfer Agent
     American Stock Transfer & Trust Co.
        40 Wall Street 46th Street
         New York, New York 10005


          Special Legal Counsel
     Malizia, Spidi, Sloane & Fisch, P.C.
           1301 K Street, N.W.
         Washington, D.C. 20005


           Independent Auditors
           KPMG Peat Marwick LLP
           74 North Pearl Street
           Albany, New York 12207