INDEPENDENT AUDITOR'S REPORT

The Board of Directors
Catskill Financial Corporation:

We have audited the accompanying consolidated statements of financial
condition of Catskill Financial Corporation and subsidiary (the Company)
as of September 30, 1997 and 1996, and the related statements of operations,
changes in shareholders' equity and cash flows for each of the years
in the three-year period ended September 30, 1997. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Catskill Financial Corporation and subsidiary at September 30,
1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended September 30,
1997, in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

October 24, 1997
Albany, New York

<TABLE>
Consolidated Statements of Financial Condition
<CAPTION>
                                                                                   September 30,
(in thousands, except for share amounts)                                       1997          1996
<S>                                                                            <C>           <C>
Assets
  Cash and due from banks                                                      $  2,274      $  4,112
  Federal funds sold                                                                 --        35,600

    Cash and cash equivalents                                                     2,274        39,712

Securities available for sale, at fair value (note 4)                           148,114        97,041
Investment securities (estimated fair value of $8,112 in 1997 
    and $19,090 in 1996) (note 5)                                                 8,055        19,077
Investment required by law, stock in Federal Home Loan Bank of NY,at cost         1,762         1,159
Loans receivable, net (note 6)                                                  124,337       122,533
Accrued interest receivable (note 7)                                              2,303         1,736
Premises and equipment, net (note 8)                                              2,367         1,886
Real estate owned, net                                                              248           357
Deposits held at Nationar, net (note 14)                                             --            83
Other assets                                                                        159           175

      Total assets                                                             $289,619      $283,759

Liabilities and Shareholders' Equity

Liabilities:
  Due to depositors (note 9):
    Non-interest bearing                                                       $  4,370      $  3,714
    Interest bearing                                                            196,542       193,039

      Total deposits                                                            200,912       196,753

  Short-term borrowings (note 15)                                                11,385            --
  Advance payments by borrowers for taxes and insurance                             533         1,632
  Accrued interest payable                                                           59            58
  Official bank checks                                                            3,861         2,557
  Accrued expenses and other liabilities                                          1,092           378

      Total liabilities                                                         217,842       201,378
Commitments and contingent liabilities (notes 10, 11, 12 and 13)

Shareholders' Equity:
  Preferred stock, $.01 par value; authorized 5,000,000 shares                       --            --
  Common stock, $.01 par value; authorized 15,000,000 shares; 
    5,686,750 shares issued at September 30, 1997 and 1996                           57            57
  Additional paid-in capital                                                     54,811        54,864
  Retained earnings, substantially restricted (note 2)                           34,915        31,984
  Common stock acquired by ESOP (note 12)                                        (4,209)       (4,436)
  Unearned management recognition plan (MRP) (note 12)                           (1,856)           --
  Treasury stock, at cost (848,244 shares at September 30, 1997)                (12,862)           --
  Net unrealized gain (loss) on securities available for sale, net of taxes         921           (88)

      Total shareholders' equity                                                 71,777        82,381

      Total liabilities and shareholders' equity                               $289,619      $283,759
</TABLE>
See accompanying notes to consolidated financial statements.

<TABLE>
Consolidated Statements of operations
<CAPTION>
                                                                                 Years ended September 30,
(in thousands, except for share amounts)                                  1997           1996          1995
<S>                                                                       <C>            <C>           <C>
Interest and dividend income:
  Loans                                                                   $   10,083     $    9,783    $ 9,733
  Securities available for sale                                                8,805          2,201         --
  Investment securities                                                          688          2,282      4,663
  Federal funds sold and other                                                   546          3,625      1,196
  Stock in Federal Home Loan Bank of NY                                           95             41         --

    Total interest and dividend income                                        20,217         17,932     15,592

Interest expense:      

  Deposits (note 9)                                                            8,652          9,022      8,009
  Short-term borrowings (note 15)                                                149             --         --

    Total interest expense                                                     8,801          9,022      8,009

    Net interest income                                                       11,416          8,910      7,583

Provision for loan losses (note 6)                                               300            195        255

    Net interest income after provision for loan losses                       11,116          8,715      7,328

Noninterest income:
  Recovery of Nationar loss contingency (note 14)                                100            560         --
  Service fees on deposit accounts                                               243            218        128
  Net securities gains (losses)                                                   19             33        (45)
  Other income                                                                   150            185        179

    Total noninterest income                                                     512            996        262

Noninterest expenses:
  Salaries and employee benefits                                               2,996          2,173      1,941
  Advertising and business promotion                                             200            137        324
  Net occupancy on premises                                                      329            251        241
  Federal deposit insurance premium                                               20             21        332
  Postage and supplies                                                           239            171        185
  Provision for Nationar loss contingency (note 14)                               --             --        660
  Outside data processing fees                                                   357            337        235
  Equipment                                                                      177            153        155
  Professional fees                                                              262            210        122
  Other real estate expenses, net                                                (54)           211         19
  Other                                                                          661            594        451

    Total noninterest expense                                                  5,187          4,258      4,665

Income before taxes                                                            6,441          5,453      2,925
Income tax expense (note 10)                                                   2,534          2,136      1,201

  Net income                                                              $    3,907     $    3,317     $1,724

Earnings per share (for 1996, calculated using post conversion 
  net income)(see note 1)                                                 $      .84     $      .38        N/A
Weighted average common shares                                             4,629,697      5,231,810        N/A
                        
</TABLE>
See accompanying notes to consolidated financial statements.

<TABLE>
Consolidated Statements of Changes in Shareholders' Equity
<CAPTION>
                                                         Years ended September 30, 1997, 1996 and 1995
                                                                                                           Net unrealized
                                                                                                           gain (loss)
                                                             Retained      Common    Unearned              on securities 
                                                  Additional earnings,     stock     management   Treasury available
(dollars in thousands,           Shares    Common paid-in    substantially acquired  recognition  stock,   for sale
except for share amounts)        issued    stock  capital    restricted    by ESOP   plan         at cost  net of taxes  Total
<S>                              <C>       <C>    <C>        <C>           <C>       <C>          <C>      <C>           <C>
Balance at September 30, 1994           -- $   -- $       -- $      26,943 $     --  $        --  $     -- $          -- $26,943
Net income                              --     --         --         1,724       --           --        --            --   1,724
Balance at September 30, 1995           --     --         --        28,667       --           --        --            --  28,667
Net income                              --     --         --         3,317       --           --        --            --   3,317
Common stock issued              5,686,750     57     54,858            --       --           --        --            --  54,915
Acquisition of common stock    
  by ESOP (454,940 shares)              --     --         --            --   (4,549)          --                          (4,549)
Allocation of ESOP stock 
  (11,374 shares)                       --     --          6            --      113           --                             119
Change in net unrealized gain
  (loss) on securities available
  for sale, net of taxes                --     --         --            --       --           --        --           (88)    (88)
Balance at September 30, 1996    5,686,750     57     54,864        31,984   (4,436)          --        --           (88) 82,381
Net income                              --     --         --         3,907       --           --        --            --   3,907
Dividends paid on 
  common stock                          --     --         --          (976)      --           --        --            --    (976)
Purchases of common stock 
  (1,029,476 shares)                    --     --         --            --       --           --   (15,305)           -- (15,305)
Allocation of ESOP stock 
  (22,722 shares)                       --     --        115            --      227           --        --            --     342
Change in net unrealized gain 
  (loss) on securities available 
  for sale, net of taxes                --     --         --            --       --           --        --         1,009   1,009
Grant of restricted stock under
  MRP (181,232 shares)                  --     --       (168)           --       --       (2,275)    2,443            --      --
Amortization of unearned
  MRP compensation                      --     --         --            --       --          419        --            --     419
Balance at September 30, 1997    5,686,750 $   57 $   54,811 $      34,915 $ (4,209) $    (1,856) $(12,862) $        921 $71,777
</TABLE>

See accompanying notes to consolidated financial statements.

<TABLE>
Consolidated Statements of Cash Flows       
<CAPTION>
                                                                                         Years ended September 30,
(in thousands, except for share amounts)                                            1997           1996           1995
<S>                                                                                 <C>            <C>            <C>
Increase (decrease) in cash and cash equivalents:
  Cash flows from operating activities:
    Net income                                                                      $   3,907      $  3,317       $  1,724
    Adjustments to reconcile net income to net cash provided by 
        operating activities:
      Depreciation                                                                        183           136            139
      Provision for loan losses                                                           300           195            255
      Provision for (recovery of) Nationar loss contingency                              (100)         (560)           660
      MRP compensation expense                                                            419            --             --
      ESOP compensation expense                                                           342           119             --
      Writedown on real estate owned                                                       --           134             --
      Writedown of Nationar debenture and capital stock                                    --            --             47
      Loss (gain) on sale of other real estate owned                                     (140)           85            (17)
      Gain on sales and calls of securities                                               (19)          (33)            (2)
      Net accretion on securities                                                        (157)         (308)          (337)
      Deferred tax benefit                                                               (156)         (151)          (321)
      (Transfer to other assets) collection of deposits held at Nationar                  183         3,083         (3,266)
      (Increase) decrease in other assets                                                (551)         (149)           (11)
      Increase (decrease) in accrued expenses and other liabilities                     1,502            25          3,010
        
        Net cash provided by operating activities                                       5,713         5,893          1,881

  Cash flows from investing activities:
      Proceeds from maturity, paydowns, and calls of investment securities             11,023        28,884         24,203
      Proceeds from maturity, paydowns, and calls of securities 
        available for sale                                                             64,415       126,656             --
      Proceeds from sales of securities available for sale                              5,959            --             --
      Purchases of investment securities                                                   --        (6,015)       (12,930)
      Purchase of Federal Home Loan Bank Stock                                           (603)       (1,159)            --
      Purchases of securities available for sale                                     (119,590)     (198,359)            --
      Net (increase) decrease in loans                                                 (2,642)       (4,570)           340
      Capital expenditures, net                                                          (664)         (290)          (365)
      Proceeds from sale of other real estate owned                                       787           114            185
                        
        Net cash (used) provided by investing activities                              (41,315)      (54,739)        11,433

  Cash flows from financing activities:
      Net increase (decrease) in demand, statement, passbook, money market
        and NOW deposit accounts                                                       (2,523)       (1,814)       (33,407)
      Net increase in certificates of deposit                                           6,682         1,337         29,812
      Increase (decrease) in advances from borrowers for taxes and insurance           (1,099)          605         (1,235)
      Net proceeds from sale of common stock                                               --        54,915             --
      Common stock acquired by ESOP                                                        --        (4,549)            --
      Cash dividends on common stock                                                     (976)           --             --
      Purchase of common stock for treasury                                           (15,305)           --             --
      Increase in short-term borrowings                                                11,385            --             --
                        
        Net cash (used) provided by financing activities                               (1,836)       50,494         (4,830)

Net (decrease) increase in cash and cash equivalents                                  (37,438)        1,648          8,484
Cash and cash equivalents at beginning of year                                         39,712        38,064         29,580

Cash and cash equivalents at end of year                                            $   2,274      $ 39,712     $   38,064

Supplemental disclosures of cash flow information -- 
  cash paid during the year for: 
    Interest                                                                        $   8,800      $  9,018      $   8,014
                        
    Income taxes                                                                    $   2,770      $  2,274      $   1,416
                        
Noncash investing activities:
  Reduction in loans receivable resulting from the transfer to real estate owned    $     538      $    206      $     273
                          
  Investments securities transferred to securities available for sale in accordance 
    with the Financial Accounting Standards Board's "Special Reports," fair value 
    of securities transferred was $25.3 million (note 4)                                   --      $ 24,800             --
                        
  Change in net unrealized gain (loss) on securities available for sale,
  net of deferred tax liability (benefit) of $673 and ($59) respectively            $   1,009      $     88             --
</TABLE>

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies
Catskill Financial Corporation (the Holding Company) was incorporated
under Delaware law in December 1995 as a holding company to purchase
100% of the common stock of Catskill Savings Bank (the Bank). The
Bank converted from a mutual form to a stock institution in January
1996, and the Holding Company completed its initial public offering
on April 18, 1996, at which time the Holding Company purchased all
of the outstanding stock of the Bank. To date, the principal operations
of Catskill Financial Corporation and subsidiary (the Company) have
been those of the Bank.

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

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

The 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 real estate acquired in connection
with foreclosures or in satisfaction of loans. In connection with
the determination of the allowance for loan losses and the valuation
of real estate owned, management obtained appraisals for significant
properties.

(b) Business
A significant portion of the Company's loans are secured by real estate
in Greene County and southern Albany County in New York. In addition,
a substantial portion of the real estate owned is located in those
same markets. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio and the recovery of a substantial
portion of the carrying amount of real estate owned are dependent
upon market conditions in the upstate New York region.

Management believes that the allowance for loan losses is adequate
and that real estate owned is properly valued. While management uses
available information to recognize losses on loans and real estate
owned, future additions to the allowance or writedowns on real estate
owned 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 Bank's allowance for
loan losses. Such agencies may require the Bank to recognize additions
to the allowance or writedowns on real estate owned based on their
judgments about information available to them at the time of their
examination which may not be currently available to management.

(c) Securities Available for Sale,
 Investment Securities 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 and are stated at amortized cost. All other
debt and marketable equity securities are classified as securities
available for sale and are reported at fair value, with net unrealized
gains or losses reported as a separate component of shareholders'
equity, net of estimated income taxes. The Company does not maintain
a trading portfolio.

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

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

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

Non-marketable equity securities, such as Federal Home Loan Bank of
New York stock, is stated at cost. The investment in Federal Home
Bank of New York stock is required for membership.

(d) Loans Receivable
Loans receivable are stated at unpaid principal amount, net of deferred
loan fees and allowance for loan losses. Loan origination fees net
of certain related costs are amortized into income over the estimated
term of the loan using the interest method of amortization. Interest
income on loans is not recognized when considered doubtful of collection
by management.

Loans considered doubtful of collection by management are placed on
a nonaccrual status for the recording of interest. Generally loans
past due 90 days or more as to principal or interest are placed on
nonaccrual status except for certain loans which, in management's
judgment, are adequately secured and for which collection is probable.
Previously accrued income that has not been collected is reversed
from current income. Thereafter, the application of payments received
(principal or interest) is dependent on the expectation of ultimate
repayment of the loan. If ultimate repayment of the loan is expected,
any payments received are applied in accordance with contractual terms.
If ultimate repayment of principal is not expected or management judges
it to be prudent, any payment received on a non-accrual loan is applied
to principal until ultimate repayment becomes expected. Loans are
removed from non-accrual status when they are estimated to be fully
collectible as to principal and interest. Amortization of related
deferred fees or costs is suspended when a loan is placed on non-accrual
status.

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 present portfolio, the level of non-performing loans, past
loan loss experience, estimated value of underlying collateral, and
current and prospective economic conditions. The allowance is increased
by provisions for loan losses charged to operations.

Impaired loans are identified and measured in accordance with 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." These
Statements were adopted by the Company on October 1, 1995. A loan
is considered impaired when it is probable that the borrower will
be unable to repay the loan according to the original contractual
terms of the loan agreement, or the loan is restructured in a troubled
debt restructuring subsequent to October 1, 1995. These standards
are applicable principally to commercial and commercial real estate
loans, however, certain provisions related to restructured loans are
applicable to all loan types. The adoption of these Statements did
not have a material effect on the Company's consolidated financial
statements.

Under these Statements the allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's initial effective
interest rate or the fair value of the collateral for certain loans
where repayment of the loan is expected to be provided solely by the
underlying collateral (collateral dependent loans). The Company's impaired loans
are generally collateral dependent. The Company considers estimated
costs to sell on a discounted basis, when determining the fair value
of collateral in the measurement of impairment if these costs are
expected to reduce the cash flows available to repay or otherwise
satisfy the loans.

(e) Real Estate Owned
Real estate owned includes assets received from foreclosure and in-substance
foreclosures. 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.

Foreclosed assets, including in-substance foreclosures, are recorded
on an individual asset basis at net realizable value which is the
lower of fair value minus estimated costs to sell or "cost" (defined
as the fair value at initial foreclosure). When a property is acquired
or identified as in-substance foreclosure, the excess of the loan
balance over fair value is charged to the allowance for loan losses.
Subsequent write-downs to carry the property at fair value less costs
to sell are included in noninterest expense. Costs incurred to develop
or improve properties are capitalized, while holding costs are charged
to expense.

At September 30, 1997 and 1996, real estate owned 
consisted primarily of residential one to four family properties.
The Company had no in-substance foreclosures at September 30, 1997
and 1996.

(f) Premises and Equipment, Net
Premises and equipment are carried at cost, less accumulated depreciation
applied on a straight-line basis over the estimated useful lives of
the assets. Useful lives are 10 to 
40 years for banking house and 5 to 7 years for furniture, fixtures
and office equipment.

(g) Income Taxes
Income taxes are provided on income reported in the 
consolidated statements of income regardless of when such taxes are
payable. The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires
the asset and liability method of 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 financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences
are expected 
to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The Company's
policy is that deferred tax assets are reduced by a valuation reserve
if, based on the weight of available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized.

(h) Pension Plan
The Company has a defined benefit pension plan covering all full time
employees meeting age and service requirements. This plan is accounted
for in accordance with SFAS No. 87, "Employers' Accounting for Pensions."

(i) Off-Balance-Sheet Risk
The Company is a party to certain financial instruments with off-balance-sheet
risk such as commitments to extend credit. The Company's policy is
to record such instruments when funded.

(j) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all cash and due from banks and federal funds sold to be
cash equivalents.

(k)  Official Bank Checks
The Company's official checks (including teller's checks, loan disbursement
checks, interest checks, expense checks and money orders) are drawn
upon deposit accounts at the Bank and are ultimately paid through
the Bank's Federal Reserve correspondent account.

(l)  Stock Based Compensation Plans
Compensation expense in connection with the Company's Employee Stock
Ownership Plan ("ESOP") is recorded in accordance with the American
Institute of Certified Public Accountants' Statement of Position No.
93-6, "Employers' Accounting for Employee Stock Ownership Plans."

The Company accounts for its stock option plans 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 earnings per share as if the fair-value-based method
defined in SFAS No. 123 had been applied. 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's Management Recognition Plan ("MRP") is also accounted
for in accordance with APB Opinion No. 25. The fair value of the shares
awarded, measured as of 
the grant date, is recognized as unearned compensation 
(a deduction from shareholders' equity) and amortized to compensation
expense as the shares become vested. Any excess of the cost to fund
purchases of MRP shares over the grant-date fair value is charged
to shareholders' equity.

(m) Earnings per Share
For the year ending September 30, 1997, earnings per share is computed
by dividing net income by the weighted average common shares outstanding,
which excludes the unallocated employee stock ownership plan shares
during the period. The effect of the outstanding stock option awards
and unvested management recognition plan shares is not material to
the calculation of net income per share.

For 1996, earnings per share are compiled on estimated post conversion
earnings of approximately $2.0 million, 
and are based on the weighted average number of shares outstanding
during this period, less unallocated employee stock ownership plan
shares, during the period. Earnings per share are not presented for
periods prior to the initial stock offering as the Bank was a mutual
savings bank at the time and no stock was outstanding.

(n) Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June 1996, the Financial Accounting Standards Board 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.

(o) Reclassifications
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform to the current year's presentations.

(2) Conversion to Stock Ownership
On April 18, 1996, the Holding Company sold 5,686,750 shares of common
stock at $10.00 per share to depositors and employees of the Bank.
Net proceeds from the sale of stock of the Holding Company, after
deducting conversion expenses of approximately $1.9 million, were
$54.9 million and are reflected as common stock and additional paid-in
capital in the accompanying September 30, 1997 and 1996 consolidated
statements of financial condition. The Company utilized $27.5 million
of the net proceeds to acquire all of the capital stock of the Bank.

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

The Bank's capital exceeds all of the fully phased-in capital regulatory
requirements. The Office of Thrift Supervision ("OTS") regulations
provide that an institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution could,
after prior notice but without the approval by the OTS, make capital
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. At September
30, 1997, the maximum amount that could have been paid by the Bank
to the Holding Company was approximately $26.5 million.

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

(3) Reserve Requirements
The Bank is required to maintain certain reserves of cash and/or deposits
with the Federal Reserve Bank. The amount of this reserve requirement,
which was covered by the Bank's vault cash included in cash and due
from banks, was approximately $386,000 and $335,000 at September 30,
1997 and 1996, respectively.

The Bank as a member of the FHLB of New York, is required to maintain
a minimum investment in the capital stock of the FHLB, at cost, in
an amount not less than 1% 
of its outstanding home loans or 1/20 of its outstanding borrowings
with the FHLB, whichever is greater, as determined at December 31
of each year. Any excess may be redeemed by the Bank or called by
the FHLB at par.

(4) Securities Available for Sale
In November 1995, the staff of the Financial Accounting Standards
Board 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. On December 29,
1995, the Company transferred certain securities with amortized costs
totaling $24.8 million and fair value totaling $25.3 million from
the "held to maturity" classification to the "available for sale"
classification.

The amortized cost and estimated fair values of 
securities available for sale at September 30, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
                                                                                1997
                                                                     Gross          Gross
                                                      Amortized      Unrealized     Unrealized     Estimated                   
(in thousands)                                        Cost           Gains          Losses         Fair Value
<S>                                                   <C>            <C>            <C>            <C>                              
U.S. Treasury and other U.S. Government agencies      $  54,875      $      417     $      (59)    $   55,233
Mortgage backed securities                               83,786           1,069            (61)        84,794
Obligations of states and political subdivisions            194               9             --            203
Corporate bonds                                           5,042              40            (12)         5,070
Other                                                     2,682             132             --          2,814
                              
Total securities available for sale                   $ 146,579      $    1,667     $     (132)    $  148,114
</TABLE>

<TABLE>                              
<CAPTION>
                                                                                1996
<S>                                                   <C>            <C>            <C>            <C> 
                                                                     Gross          Gross
                                                      Amortized      Unrealized     Unrealized     Estimated
(in thousands)                                        Cost           Gains          Losses         Fair Value
                              
U.S. Treasury and other U.S. Government agencies      $  56,842      $      157     $      (78)    $   56,921
Mortgage backed securities                               35,151             580           (829)        34,902
Obligations of states and political subdivisions            191               2             --            193
Corporate bonds                                           5,000              28            (36)         4,992
Other                                                         3              30             --             33
                              
Total securities available for sale                   $  97,187      $      797     $     (943)    $   97,041
</TABLE>

During the year ended September 30, 1997, proceeds from sales of securities
available for sale were $6.0 million. Gross gains realized on these
transactions were approximately $19 thousand. There were no gross
realized losses. There were no sales of securities available for sale
during the year ended September 30, 1996. Prior to December 31, 1995,
the Company did not maintain a securities available for sale portfolio.

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

<TABLE>
<CAPTION>
                                          September 30, 1997
                                       Amortized      Estimated
(in thousands)                         Cost           Fair Value
<S>                  		       <C>	      <C>
Due within one year                    $  12,991      $   13,012
Due one year to five years                10,963          11,050
Due five years to ten years               43,888          44,207
Due after ten years                       78,737          79,845
                  
Total securities available for sale    $ 146,579      $  148,114
</TABLE>

(5) Investment Securities
The amortized cost and estimated fair value of investment securities
at September 30, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                                              1997
                                                                     Gross          Gross
                                                      Amortized      Unrealized     Unrealized     Estimated
(in thousands)                                        Cost           Gains          Losses         Fair Value
<S>                                                   <C>            <C>            <C>            <C>                              
U.S. Treasury and other U.S. Government agencies      $   6,958              58             (2)         7,014
Corporate bonds                                           1,000               1             --          1,001
Mortgage backed securities                                   97              --             --             97
                              
Total investment securities                           $   8,055      $       59     $       (2)    $    8,112
</TABLE>

<TABLE>
<CAPTION>                                                                          
                                                                              1996
                                                                     Gross          Gross
                                                      Amortized      Unrealized     Unrealized     Estimated
(in thousands)                                        Cost           Gains          Losses         Fair Value
<S>                              		      <C>	     <C>	    <C>		   <C>
U.S. Treasury and other U.S. Government agencies      $  13,965              66            (58)        13,973
Corporate bonds                                           4,999               7             (2)         5,004
Obligations of states and political subdivisions             15              --             --             15
Mortgage backed securities                                   98              --             --             98
                              
Total investment securities                           $  19,077      $       73     $      (60)    $   19,090
</TABLE>

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

<TABLE>
<CAPTION>
                                       Amortized      Estimated
(in thousands)                         Cost           Fair Value
<S>                                    <C>            <C>                  
Due within one year                    $   1,999      $    2,001
Due one year to five years                 6,009           6,014
Due after five years to ten years             --              --
Due after ten years                           47              97
                  
Totals                                 $   8,055      $    8,112
</TABLE>

There were no sales of investment securities during the years ended
September 30, 1997, 1996 or 1995.

(6) Loans Receivable, Net
Loans receivable consist of the following at September 30, 1997 and
1996:

<TABLE>
<CAPTION> 
                                                September 30,
(in thousands)                              1997           1996
<S>                                         <C>            <C>                  

Loans secured by real estate:
  Conventional one-to four-family           $102,145       $100,254
  Commercial and multi-family                  4,691          5,115
  FHA and VA insured loans                        87            129
  Construction                                 1,306            423
                  
    Total loans secured by real estate       108,229        105,921
                  
Other loans:
  Student loans                                2,658          2,450
  Automobile loans                             6,655          7,029
  Consumer                                     2,698          2,516
  Mobile home                                    687            782
  Passbook loans                                 952            856
  Home improvement                               935            923
  Home equity                                  3,709          4,368
  Other                                          179            100
                  
    Total other loans                         18,473         19,024
                  
    Less:
      Net deferred loan fees                     476            579
      Allowance for loan losses                1,889          1,833 
                                               2,365          2,412      
                                            $124,337       $122,533
</TABLE>

Activity in the allowance for loan losses is summarized as follows
for the years ended:

<TABLE>
<CAPTION>
                                                   September 30,
(in thousands)                         1997           1996           1995
<S>                                    <C>            <C>            <C>                        
Balance at beginning of period         $1,833         $1,950         $1,746
Provision charged to operations           300            195            255
Charge offs                              (282)          (323)           (62)
Recoveries                                 38             11             11
                        
Balance at end of period               $1,889         $1,833         $1,950
</TABLE>

(6) Loans Receivable, Net (continued)
The following table sets forth the information with regard to non-performing
loans:

<TABLE>
<CAPTION>
                                                         September 30,
(in thousands)                                   1997      1996        1995
<S>                                              <C>       <C>         <C>                        
Loans in a non-accrual status                    $780      $1,086      $  784
Loans past due 90 days and still accruing         137         283         251
Restructured loans                                 --          --          --
                        
Total non-performing loans                       $917      $1,369      $1,035
</TABLE>

For the years ended September 30, 1997 and 1996, interest income that
would have been recorded on non-performing loans had they remained
performing amounted to approximately $50 thousand and $77 thousand,
respectively.

Certain executive officers of the Company were customers of and had
other transactions with the Company 
in the ordinary course of business. Loans to these parties were made
in the ordinary course of business at the Bank's normal credit terms,
including interest rate and collateralization. The aggregate of such
loans totaled less than 5% of total equity at September 30, 1997 and
1996.

As of September 30, 1997, there was no recorded investment in loans
that are considered to be impaired under SFAS No. 114. As of September
30, 1996, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 totalled approximately $78,000, for
which the related allowance for loan loss was approximately $16,000.
As of September 30, 1997 and 1996, there were no impaired loans which
did not have an allowance for loan losses determined in accordance
with SFAS No. 114. During 1997 and 1996, the average balance of impaired
loans was approximately $3,000 and $78,000, respectively. Interest
income collected on impaired loans during fiscal 1997 and 1996 was
approximately $0 and $2,000, respectively.

(7) Accrued Interest Receivable

<TABLE>
Accrued interest receivable consists of the following:
<CAPTION>     
                                                    September 30,
(in thousands)                                   1997           1996
<S>                                              <C>            <C>                  
Investment securities                            $  111         $  323
Securities available for sale                     1,374            657
Loans                                               818            756
                                                 $2,303         $1,736
</TABLE>

(8) Premises and Equipment, Net
A summary of premises and equipment is as follows:

<TABLE>
<CAPTION>
                                                         September 30,
(in thousands)                                        1997           1996
<S>                                                   <C>            <C>                  
Banking house and land                                $2,357         $2,051
Furniture, fixtures and equipment                        785            646
                                                       3,142          2,697
Less accumulated depreciation                            775            811
Premises and equipment, net                           $2,367         $1,886
</TABLE>

Amounts charged to depreciation expense were approximately $183 thousand,
$136 thousand and $139 thousand for the years ended September 30,
1997, 1996 and 1995, respectively.

(9) Due to Depositors
Due to depositors are summarized as follows as of September 30, 1997
and 1996:

<TABLE>
<CAPTION>
                               Approximate                 September 30,
(in thousands)                 Stated Rates             1997           1996
<S>                            <C>                      <C>            <C>                        
Passbook savings accounts           1997 -- 3.50%       $ 71,060       $ 75,477
                                    1996 -- 3.50%      

Statement savings accounts          1997 -- 3.50%          8,388          7,881
                                    1996 -- 3.50%
Certificates of deposit:
                                    3.00 -- 3.99%             20             30
                                    4.00 -- 4.99%             --         10,503
                                    5.00 -- 5.99%         88,416         64,790
                                    6.00 -- 6.99%          8,737         15,264
                                    7.00 -- 7.99%          2,368          2,272
                        
                                                          99,541         92,859
                        
Money market accounts          1997 -- 2.50-3.20%          7,115          7,752
                               1996 -- 2.50-3.45%      

NOW accounts                        1997 -- 2.50%         10,438          9,070
                                    1996 -- 2.50%
Demand accounts                               --           4,370          3,714
                        
  Total deposits                                        $200,912       $196,753
</TABLE>

(9) Due to Depositors (continued)
The approximate amount of contractual maturities of certificates of
deposit for the years subsequent to September 30, 1997 are as follows:

<TABLE>
<CAPTION>
(in thousands)
Years ended September 30,
     <S>                <C>
     1998               $63,208
     1999                24,619
     2000                 8,482
     2001                 1,944
     2002                   952
     Thereafter             336
                        $99,541
</TABLE>
          
The aggregate amount of time deposit accounts with a balance of $100,000
or more (not federally-insured beyond $100,000) were approximately
$8.2 million and $7.3 million at September 30, 1997 and 1996, respectively.

Interest expense on deposits and advances from borrowers for property
taxes and insurance (escrow balances) for the years ended September
30, 1997, 1996 and 1995, is summarized as follows:

<TABLE>
<CAPTION>
                                                                 September 30,
(in thousands)                                             1997      1996      1995
<S>                                                        <C>       <C>       <C>
Passbook savings accounts                                  $2,544    $2,702    $3,149
Statement savings accounts                                    277       260       285
Certificates of deposit                                     5,309     5,218     4,026
Money market accounts                                         242       289       310
NOW accounts                                                  237       216       195
Escrow balances (including common stock subscriptions)         43       337        44
                        
  Total interest expense                                   $8,652    $9,022    $8,009
</TABLE>

Escrow balances expense for the year ended September 30, 1996 includes
interest expense on common stock subscriptions held in connection
with the Company's initial public offering.

(10) Income Taxes
The components of income tax expense are as follows for the years
ended September 30, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                             September 30,
(in thousands)                         1997      1996      1995
<S>                                    <C>       <C>       <C>                        
Current tax expense:
  Federal                              $2,111    $1,605    $1,197
  State                                   579       682       325
                                        2,690     2,287     1,522
Deferred tax expense (benefit)           (156)     (151)     (321)
                        
  Total income tax expense             $2,534    $2,136    $1,201
</TABLE>

(10) Income Taxes (continued)
Actual tax expense for the years ended September 30, 1997, 1996 and
1995 differs from expected tax expense, computed 
by applying the Federal corporate tax rate of 34% to income before
taxes as follows:

<TABLE>
<CAPTION>
                                                                              September 30,
                                                       1997                      1996                    1995
                                                           % Pretax                 % Pretax                 % Pretax
(in thousands)                                   Amount    Income         Amount    Income   	   Amount    Income
<S>                                              <C>       <C>            <C>       <C>            <C>       <C>       
Expected tax expense                             $2,190        34.0%      $1,854        34.0%      $  995        34.0%
State taxes, net of Federal income tax benefit      380         5.9          333         6.1          174         6.0
Reduction in valuation allowance for deferred 
  tax assets                                         --          --         (131)       (2.4)          --
Other items                                         (36)        (.6)          80         1.5           32         1.0
                                          
                                                 $2,534        39.3%      $2,136        39.2%      $1,201        41.0%
</TABLE>  

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

<TABLE>
<CAPTION>
                                                                Temporary           Temporary
                                                                Deductible          Taxable
(in thousands)                                                  Differences         Differences
<S>                                                             <C>                 <C>                  
Postretirement benefits                                         $ 175                  --
Allowance for loan losses                                         329                  --
Nonqualified deferred compensation                                100                  --
Loan accounting differences                                       103                  --
MRP compensation expense                                          180                  --
Bond accretion                                                     --                  86
Other items                                                        48                 120
                  
                                                                  935               $ 206
                  
Valuation reserve                                                (150)
            
Deferred tax asset net of valuation reserve                       785
Deferred tax liability                                           (206)
            
Net deferred tax asset at September 30, 1997                      579
Net deferred tax asset at October 1, 1996                         423
            
Deferred tax benefit for the year ended September 30, 1997      $ 156
</TABLE>

(10) Income Taxes (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax 
liabilities at September 30, 1996 are presented below:

<TABLE>
<CAPTION>
                                                                Temporary           Temporary
                                                                Deductible          Taxable
(in thousands)                                                  Differences         Differences
<S>                                                             <C>                 <C>                  
Postretirement benefits                                         $  99                  --
Reserve for Nationar loss contingency                              43                  --
Allowance for loan losses                                         328                  --
Nonqualified deferred compensation                                 70                  --
Loan accounting differences                                       122                  --
Bond accretion                                                     --                 110
Other items                                                        97                  76
                  
                                                                  759               $ 186
                  
Valuation reserve                                                (150)
            
Deferred tax asset net of valuation reserve                       609
Deferred tax liability                                           (186)
            
Net deferred tax asset at September 30, 1996                      423
Net deferred tax liability at October 1, 1995                     272
            
Deferred tax benefit for the year ended September 30, 1996      $ 151
</TABLE>

In addition to the deferred tax amounts described above, the Company
also had a deferred tax liability of approximately $614 thousand at
September 30, 1997 and a deferred tax asset of $59 thousand at September
30, 1996 related to the net unrealized gains and losses on securities
available for sale.

The valuation allowance for deferred tax assets as of September 30,
1997 and 1996 was $150 thousand. During the year ended September 30,
1996, the valuation allowance was reduced by $131 thousand. This reduction
was primarily the result of the realization of certain deferred items
which were previously considered to be uncertain. In evaluating the
valuation allowance the Company takes into consideration the nature
and timing of the deferred tax asset items as well as the amount of
available open tax carrybacks. The Company has fully reserved its
New York State deferred tax asset, which is a significant component
of deferred tax assets, due to the lack of carryback and carryforward
provisions available in New York State. Any changes in the deferred
tax asset valuation allowance is based upon the Company's continuing
evaluation of the level of such allowance, 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.

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 period of approximately six years) the bad
debt reserves in excess of the base-year amounts. The Bank previously
established, and will continue to maintain, a deferred tax liability
with respect to such excess Federal reserves. The New York State amendments
redesignate the Bank's 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 at September 30, 1997 with respect to the Federal
and State base-year reserves of $3.6 million and $7.5 million, respectively,
since the Bank does not expect that these amounts will become taxable
in the foreseeable future. Under New York State tax law, as amended,
events that would result in taxation of these reserves include the
failure of the Bank to maintain a specified qualifying assets ratio
or meet other thrift definition tests for tax purposes. The unrecognized
deferred tax liabilities at September 30, 1997 with respect to the
Federal and State base-year reserves were approximately $1.2 million
and $446 thousand (net of Federal benefit), respectively.

(11) Employee Benefit Plans

(a) Pension Plan
The Company maintains a non-contributory defined 
benefit pension plan with RSI Retirement Trust, covering substantially
all employees aged 21 and over with one year of service with the exception
employees who work less than 1,000 hours. Benefits are computed as
two percent of the highest three year average annual earnings multiplied
by credited service up to a maximum of 30 years and are paid as a
life annuity or actuarially equivalent alternative form of payment.
Full retirement benefits are available at age 65 with at least 5 years
of participation or after age 60 with at least 30 years of service.
Reduced retirement benefits are available prior to age 60. Employees
are fully vested at five years of service. The Plan also provides
death and disability benefits to eligible employees.

The amounts contributed to the plan are determined annually on the
basis of (a) the maximum amount that can be deducted for Federal income
tax purposes or (b) the amount certified by a consulting actuary as
necessary to avoid an accumulated funding deficiency as defined by
the Employee Retirement Income Security Act of 1974. Contributions
are intended to provide not only for benefits attributed to service
to date but also for those expected to 
be earned in the future. Assets of the plan are primarily invested
in common and preferred stock, investment grade corporate bonds, and
U.S. government obligations.

The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated statements of financial condition
at September 30, 1997 and 1996:

<TABLE>
<CAPTION>
(in thousands)                                                                 1997           1996
<S>                                                                            <C>            <C>                  
Actuarial present value of benefit obligations:
  Accumulated benefit obligation, including vested benefits of $2,387 in 1997 
    and $2,094 in 1996                                                         $(2,389)       $(2,227)
                  
  Projected benefit obligation for service rendered to date                     (3,041)	       (3,029)
  Plan assets at fair value                                                      4,263          3,581
                
  Plan assets in excess of projected benefit obligation                          1,222            552
  Unrecognized net gain from past experience different from that assumed
    and effects of changes in assumptions                                       (1,056)          (398)
  Unrecognized prior service cost                                                   70             83
  Unrecognized net asset being recognized over 12.5 years                          (61)           (78)
                  
  Prepaid pension cost                                                         $   175        $   159
</TABLE>

Components of net periodic pension cost for the years ended September
30, 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
(in thousands)                                             1997           1996      1995
<S>                                                        <C>            <C>       <C>
Service cost-benefits earned during the period             $   83         $  91     $   81
Interest cost on estimated projected benefit obligation       214           215        199
Actual return on plan assets                                 (783)         (452)      (452)
Net amortization and deferral                                 471           198        244
                        
Net periodic pension cost (credit)                         $  (15)        $  52     $   72
</TABLE>

Significant assumptions used in determining the actuarial present
value of the projected benefit obligation at September 30, 1997, 1996
and 1995 are as follows

<TABLE>
<CAPTION>

                                       1997           1996           1995
<S>                                    <C>            <C>            <C>
Weighted average discount rate         7.50%          7.75%          7.50%
Increase in future compensation        5.00%          5.50%          5.50%
Expected long-term rate of return      8.00%          8.00%          8.00%
</TABLE>

(b) 401(k) Savings Plan
The Company also maintains a defined contribution 401(k) savings plan,
covering all full time employees who have attained age 21 and have
completed one year of service in which they work more than 1,000 hours.
The Company matches 50% of employee contributions that are less than
or equal to 6% of the employee's salary. Total expense recorded during
1997, 1996, 1995 was $37 thousand, $34 thousand, and $31 thousand,
respectively.

(c) Postretirement Benefits
The Company accounts for postretirement benefits under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
Under SFAS No. 106, the cost of postretirement benefits other than
pensions must be recognized on an accrual basis as employees perform
services to earn the benefits. Many of the provisions and concepts
of SFAS No. 106 are similar to current standards on accounting for
pensions. The Company adopted SFAS No. 106 as of October 1, 1995 and
opted to amortize the transition obligation into expense over the
allowed twenty year time period. The adoption of SFAS No. 106 did
not have a material effect on the Company's consolidated financial
statements.
The Company provides postretirement medical and life insurance benefits
to eligible retirees. The plans are 
noncontributory except that the retiree must pay the full cost of
spouse medical coverage. Both of the plans are unfunded.

Life insurance is provided in the amount of $5,000 (50% of final year
compensation as an active employee if 
compensation is less than $10,000).

The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheets at
September 30, 1997 and 1996:

<TABLE>
<CAPTION>
(in thousands)                                                       1997           1996
<S>                                                                 <C>            <C>                 
Accumulated postretirement benefit obligation (APBO):
  Retirees                                                           $  (598)        $  (642)
  Fully-eligible active plan participants                               (100)            (59)
  Other active plan participants                                        (481)           (630)
                  
    Total APBO                                                        (1,179)         (1,331)
Unrecognized transition obligation                                       957           1,011
Unrecognized (gain) loss                                                (183)             90
                  
Accrued postretirement benefit cost included in other liabilities
                                                                     $  (405)        $  (230)
</TABLE>

Net periodic postretirement benefit cost for the years ended September
30, 1997 and 1996 include the following components:

<TABLE>
<CAPTION>
(in thousands)                                                       1997           1996
<S>                                                                  <C>            <C>
Service cost                                                         $ 52           $ 42
Interest cost                                                         103             90
Net amortization and deferral                                          54             54
                  
Net periodic postretirement benefit cost                             $209           $186
</TABLE>

The discount rate used in determining the accumulated postretirement
benefit obligation was 7.50% and 7.75% at September 30, 1997 and 1996,
respectively. For measurement purposes at September 30, 1997, an 8.5%
annual rate of increase in the per capital cost of covered health
care benefits was assumed for medical coverage for fiscal 1998; the
rate was assumed to decrease gradually to 5.5% by 2001 and to remain
at that level thereafter. The health care cost trend rate assumption
has a significant effect on the amounts reported. To illustrate, increasing
the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation
as of September 30, 1997 by approximately 16% and the aggregate of
the service and interest cost components of the net periodic postretirement
benefit cost by approximately 21%.

(12) Stock-Based Compensation Plans

(a) 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 shareholders. The ESOP
borrowed $4.5 million from the Company and used the funds to purchase
454,940 shares of the common stock of the Company issued in the conversion.
The loan will be repaid principally from the Company's discretionary
contributions to the ESOP over a period of twenty years. At September
30, 1997, the loan had an outstanding balance of $4.4 million and
an interest rate of 6.41%. 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 Company accounts for the ESOP in accordance with the American
Institute of Certified Public Accountants' Statement of Position No.
93-6 "Employees' Accounting For Stock Ownership Plans" (SOP 93-6). 
Accordingly, the shares pledged as collateral are reported as 
unallocated ESOP shares in shareholders' equity. As shares are released 
from collateral, the Company reports compensation expense equal to the 
average market price of the shares (during the applicable service period),
and the shares become outstanding for earnings per share computations. 
Unallocated ESOP shares are notincluded in the earnings per share computations.
The Company recorded approximately $342 thousand and $119 thousand,
respectively, of compensation expense under the ESOP during the years ended 
September 30, 1997 and 1996.
The ESOP shares as of September 30, 1997 were as follows:

<TABLE>
<CAPTION>
<S>                                          <C>
Allocated shares                                 11,374
Shares released for allocation                   22,722
Unallocated shares                              420,844

                                                454,940

Market value of unallocated shares at 
  September 30, 1997                         $7,101,743
</TABLE>

(b) Stock Option Plan
On October 24, 1996, the Company's shareholders approved the Catskill
Financial Corporation 1996 Stock Option and Incentive Plan ("Stock
Option Plan"). The primary objective of the Stock Option Plan is to
provide officers and directors with a proprietary interest in the
Company and as an incentive to encourage such persons to remain with
the Company.

Under the Stock Option Plan, 568,675 shares of authorized but unissued
stock are reserved for issuance upon option exercises. The Company
also has the alternative to fund the Stock Option Plan with treasury
stock. Options under the plan may be either non-qualified stock options
or incentive stock options. Each option entitles the holder to purchase
one share of common stock at an exercise price equal to the fair market
value on the date of grant. Options expire no later than ten years
following the date of grant.

On October 24, 1996, 416,333 shares were awarded at an exercise price
of $12.50 per share, and on August 19, 1997, 10,000 shares were awarded
at an exercise price of $16.38 per share. These shares have a ten-year
term and vest at a rate of 20% per year from their respective grant
dates.

The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its stock option plan. Accordingly, no compensation
cost has been recognized for its stock option plans. SFAS No. 123
requires Companies not using a fair value based method of accounting
for employee stock options or similar plans, to provide pro forma
disclosure of net income and earnings per share as if that method
of accounting had been applied. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants
in fiscal 1997: dividend yield of 1.8%; expected volatility of 25.0%;
risk free interest rates of 6.50% for the October 24, 1996 grant and
6.25% for the August 19, 1997 grant; and expected lives of 7 years.
Pro forma disclosures for the Company for the year ending September
30, 1997 is as follows:

<TABLE>
<CAPTION>
(in thousands, except per share data)
<S>                                    <C>
Net income:
As reported                            $ 3,907
Pro forma                                3,614
Earning per share:
As reported                            $   .84
Proforma                                   .78
</TABLE>
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the
Black-Scholes model was developed, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide
a reliable single measure of the fair value of its employee stock
options.

A summary of the status of the Company's stock option plans as of
September 30, 1997 and changes during the year on that date is presented
below:
<TABLE>
<CAPTION>
                                                                                    Weighted Average
                                                                       Shares        Exercise Price
<S>                                                                    <C>           <C>                  
Options:
  Outstanding at October 1                                                     --      
  Granted                                                                 426,333      $12.59
  Exercised                                                                    --      
  Cancelled                                                                    --      
                  
  Outstanding at year-end                                                 426,333      
                  
  Exercisable at year-end                                                      --      
Estimated weighted-average fair value 
  of options granted on October 24, 1996                               $     4.25      
Estimated weighted-average fair value 
of options granted on August 19, 1997                                  $     5.47
</TABLE>
(c) Management Recognition Plan
On October 24, 1996, the Company's shareholders approved the Catskill
Financial Corporation Management Recognition Plan. The purpose of
the plan is to promote the long-term interests of the Company and
its shareholders by providing a stock based compensation program to
attract and retain officers and directors. Under the MRP, 227,470
shares of authorized but unissued shares, are reserved for issuance
under the plan. The Company also has the alternative to fund the MRP
with treasury stock.

On October 24, 1996 and August 19, 1997, 178,732 shares and 2,500
shares, respectively, were awarded under the MRP. The shares vest
in five equal installments commencing one year from the date of grant.
The fair market value of the shares awarded under the plan was $2.3
million at the grant dates, and is being amortized to compensation
expense on a straight line basis over the five year vesting periods.
Compensation expense of $419,000 was recorded in fiscal 1997, with
the remaining unearned compensation cost of $1.9 million shown as
a reduction of shareholders' equity at September 30, 1997.

(13) Commitments and Contingent Liabilities

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

(b) Lease Commitments
The Company leases equipment under noncancelable 
operating leases. Minimum rental commitments under these leases are
not significant. In addition, the Company has a data processing agreement
with minimum annual payments of approximately $100 thousand through
June 30, 1999.

(c) Off-Balance-Sheet Financing 
and Concentrations of Credit
The Company is a party to certain financial instruments with off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments
to extend credit. These instruments involve, to varying degrees, elements
of credit risk in excess of the amount recognized on the consolidated
statement of financial condition. The contract amounts of these instruments
reflect the extent of involvement the Company has in particular classes
of financial instruments.

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

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

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

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

<TABLE>
<CAPTION>
Financial instruments whose contract amounts represent Credit risk:
                                                                                           1997
(in thousands)                                                                Fixed       Variable    Total
<S>                                                                           <C>         <C>         <C>
                        
Mortgages                                                                     $1,308      $   --      $1,308
Consumer                                                                          18          --          18
Lines of credit                                                                  535         385         920
Home Equity                                                                       30       1,553       1,583
                        
                                                                              $1,891      $1,938      $3,829
</TABLE>
<TABLE>
<CAPTION>                        
Financial instruments whose contract amounts represent Credit risk:
                                                                                           1996
(in thousands)                                                                 Fixed       Variable    Total
<S>                                                                            <C>         <C>         <C>                        
Mortgages                                                                      $2,901         369      $3,270
Consumer                                                                           18          --          18
Lines of credit                                                                   834         531       1,365
Home Equity                                                                        41       1,341       1,382
                        
                                                                               $3,794      $2,241      $6,035
</TABLE>

The range of interest on fixed rate commitments was 7.125% to 18.00%
at September 30, 1997 and 7.625% to 18.00% at September 30, 1996.
The range of interest on adjustable rate commitments was 8.25% to
10.50% at September 30, 1997 and 6.75% to 10.25% at September 30,
1996, respectively.

(14) Deposits Held at Nationar, Net
On February 6, 1995, the New York Superintendent of Banks (the "Superintendent")
took possession of Nationar, a New York chartered bank that provided
correspondent banking and related services for various banking institutions,
including the Bank. At the time that Nationar was seized by the Superintendent,
the Bank had a total of approximately $3.3 million on deposit with
Nationar in an account which was used primarily to fund checks written
by the Bank's customers and drafts drawn by the Bank, as well as Nationar 
capital stock of approximately $7,200, and a Nationar debenture of 
approximately $40 thousand collateralized by a $100 thousand investment 
security.

As of September 30, 1995, the Bank had charged off the $40 thousand
Nationar debenture and the $7,200 Nationar capital stock. The Bank
also reclassified the demand account balance to other assets and,
based upon uncertainties of collecting the demand account balance,
management, as advised by legal counsel, set up a reserve for probable
losses as of September 30, 1995 of $660 thousand, representing approximately
20% of the Bank's deposit claim. In fiscal 1996, the Bank received
a cash payment of $3.1 million from the Superintendent relating to
its Nationar claim, and recorded a recovery of $560 thousand on the
reserve for probable Nationar losses. During fiscal 1997, the Company
received the remaining $200 thousand of its claim and recovered the
remaining $100 thousand of the loss reserve. Both recoveries are shown
in the consolidated statements of operations as other income.

(15) Short-Term Borrowings
In March 1997, the Bank activated its line of credit program with
the Federal Home Loan Bank of New York ("FHLB"). Under the program,
the Bank has access to overnight funds of approximately $13.1 million,
along with an additional line of $13.1 million for one month advances. 
The Company has only used its overnight line. Borrowings outstanding 
under the overnight line were $11.4 million as of September 30, 1997, 
at a rate of 6.25%. Borrowings for the year ended September 30, 1997, 
averaged $2.6 million, at an average rate of 5.75%. The maximum month 
end balance for the year ended September 30, 1997 was $11.4 million.

(16) Fair Values
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires that the Bank disclose estimated fair values for certain
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 Company's entire 
holdings of a particular financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected net
cash flows, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets
and liabilities that are not considered financial assets or liabilities
include the deferred tax asset and bank premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the estimates of fair
value under SFAS No. 107.

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

The specific estimation methods and assumptions used can have a substantial
impact on the resulting fair values ascribed to financial instruments.
Following is a brief summary of the significant methods and assumptions
used:

Securities
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated
credit concerns. The fair value of longer-term investments and mortgage
backed securities, except certain state and municipal securities,
is estimated based on bid prices published in financial newspapers
or bid quotations received from securities dealers. The fair value
of certain state and municipal securities is not readily available
through market sources other than dealer 
quotations, so fair value estimates are based on quoted market prices
of similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued. See notes 4 and 5 for
detail disclosure of securities available for sale and investment
securities, respectively. 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 single family
loans, consumer loans and commercial loans. Each loan category is
further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories.

The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the contractual term of
the loans to maturity taking into consideration certain prepayment
assumptions. 

Fair value for significant non-performing loans is based on recent
external appraisals and/or 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 non-interest bearing demand deposit, passbook savings accounts,
statement savings accounts, NOW accounts, and money market accounts,
must be stated at the amount payable on demand as of September 30,
1997 and 1996. The fair value of certificates of deposit 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. These fair value estimates do 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.

Other Items
The following items are considered to have a fair value equal to carrying
value due to the nature of the financial instrument and the period
within which it will be settled: cash and due from banks, federal
funds sold, accrued interest receivable, advances from borrowers for
taxes and insurance, short term borrowings, and accrued interest payable.

Table of Financial Instruments
The carrying values and estimated fair values of financial instruments
as of September 30, 1997 and September 30, 1996 were as follows
<TABLE>
<CAPTION>:
                                                                  September 30, 1997       September 30, 1996
                  
                                                               Carrying    Estimated     Carrying    Estimated
(in thousands)                                                 Value       Fair Value    Value       Fair Value
<S>                                                            <C>         <C>           <C>         <C>    
Financial assets:
  Cash and cash equivalents                                    $  2,274    $  2,274      $ 39,712    $ 39,712
  Securities available for sale                                 148,114     148,114        97,041      97,041
  Investment securities                                           8,055       8,112        19,077      19,090
  Federal Home Loan Bank Stock                                    1,762       1,762         1,159       1,159
  Loans                                                         126,702     128,623       124,945     124,870
  Less: Allowance for loan losses                                 1,889          --         1,833          --
    Net deferred loan fees                                          476          --           579          --
                              
      Net loans                                                 124,337     128,623       122,533     124,870
  Accrued interest receivable                                     2,303       2,303         1,736       1,736

Financial liabilities:
  Deposits:
  Demand, statement, passbook, money market, and NOW accounts   101,371     101,371       103,894     103,894
  Certificates of deposit                                        99,541      99,701        92,859      92,877
  Short-Term Borrowings                                          11,385      11,385            --          --
  Accrued interest on depositors accounts                            59          59            58          58
  Advances from borrowers for taxes and insurance                   533         533         1,632       1,632
</TABLE>

Commitments to Extend Credit
and Financial Guarantees Written
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
credit worthiness of the counterparties. For fixed rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of financial
guarantees written is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties. Fees, such as these
are not a major part of the Bank's business and in the Bank's business
territory are not a "normal business practice." Therefore, based upon
the above facts the Company believes that book value equals fair value
and the amounts are not significant.

(17) Parent Company Financial Information
The Holding Company began operations on April 18, 1996 in conjunction
with the Bank's mutual-to-stock conversion and the Company's initial
public offering of its common stock

<TABLE>
Statement of Financial Condition as of September 30, 1997 and 1996
<CAPTION>
(in thousands, except share data)                                             1997           1996
<S>                                                                           <C>            <C>                  
Assets
Cash and cash equivalents                                                     $  3,005        $ 1,138
Securities available for sale                                                    4,030         22,002
ESOP loan receivable from subsidiary                                             4,359          4,479
Equity in net assets of subsidiary                                              59,933         54,791
Other assets                                                                       500             24
                        
  Total assets                                                                $ 71,827        $82,434
                        
Liabilities and Shareholders' Equity
Liabilities:
  Accrued expenses and other liabilities                                      $     50        $    53
Shareholders' Equity:
  Preferred stock, $.01 par value; authorized 5,000,000 shares   
                                                                                    --             --
  Common stock, $.01 par value; authorized 15,000,000 shares; 
    5,686,750 shares issued at September 30, 1997 and 1996                          57             57
  Additional paid-in capital                                                    54,811         54,864
  Retained earnings, substantially restricted                                   34,915         31,984
  Common stock acquired by ESOP                                                 (4,209)        (4,436)
  Unearned management recognition plan                                          (1,856)            --
  Treasury stock, at cost (848, 244 shares at September 30, 1997)
                                                                               (12,862)            --
  Net unrealized gain (loss) on securities available for sale, net
    of taxes                                                                       921            (88)
                        
    Total shareholders' equity                                                  71,777         82,381
                         
    Total liabilities and shareholders' equity                                $ 71,827        $82,434
</TABLE>

<TABLE>
                      Statement of Operations For the Year Ended September 30, 1997
              and for the Period From Inception (April 18, 1996) Through September 30,1996

<CAPTION>
(in thousands)                                                                      1997           1996
<S>                                                                                 <C>            <C>                     

Interest income                                                                     $  475         $  296
Non interest expense                                                                   223             70                  
Income before income taxes and equity in undistributed earnings of
  subsidiary                                                                           252            226
Income tax expense                                                                      61             91                  
Income before equity in undistributed earnings of subsidiary     
                                                                                       191            135
Equity in undistributed earnings of subsidiary                                       3,716          3,182
                  
Net income                                                                          $3,907         $3,317
</TABLE>

<TABLE>                  
                        Statement of Cash Flows For the Year Ended September 30,1997 
             and for the Period From Inception (April 18, 1996) Through September 30,1996
<CAPTION>
(in thousands)                                                                      1997           1996
<S>                                                                                 <C>            <C>       
Cash flows from operating activities:
  Net income                                                                        $   3,907      $   3,317
  Adjustment to reconcile net income to net cash provided by operating
    activities:
    Equity in undistributed earnings of subsidiary                                     (3,716)        (3,182)  
    Net accretion on securities                                                           (42)            --
    Increase in other assets                                                              (57)           (24)
    Increase (decrease) in liabilities                                                    (16)            53
                  
    Net cash provided by operating activities                                              76            164
                  
Cash flows from investing activities:
  Purchase of securities available for sale                                           (25,000)      (122,347)
  Proceeds from the maturity of securities available for sale                          43,045        100,345
  Investment in common stock of subsidiary                                                (93)       (27,460)
  Net decrease (increase) in ESOP loan receivable from subsidiary                         120         (4,479)
                  
    Net cash provided by (used in) investing activities                                18,072        (53,941)

Cash flows from financing activities:
  Proceeds from issuance of common stock, net                                              --         54,915
  Purchase of common stock for treasury                                               (15,305)            --
  Cash dividends on common stock                                                         (976)            --
    Net cash provided by (used in) provided by financing activities                   (16,281)        54,915
                  
Net increase in cash and cash equivalents                                               1,867          1,138
Cash and cash equivalents:
  Beginning of period                                                                   1,138             --
                  
  End of period                                                                     $   3,005      $   1,138
                  
Supplemental disclosures of cash flow information:
  Cash paid during year for income taxes                                            $      91             --
                  
Noncash investing activities:
  Change in net unrealized gain (loss) on securities available for
  sale, net of deferred tax liability of $13                                        $      18             --
                  
  Recording of subsidiary's equity, including retained earnings, common
  stock acquired by ESOP, and net unrealized loss on securities available
  for sale, net of taxes, on date of investment in common stock of
  subsidiary                                                                               --      $  24,149
</TABLE>
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.

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

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

Management believes that, as of September 30, 1997 and 1996, the Bank
meets all capital adequacy requirements to which it is subject. Further,
the most recent OTS notification categorized the Bank as a well-capitalized
institution under the prompt corrective action regulations. There
have been no conditions or events since that notification that management
believes have changed the Bank's capital classification.

The following is a summary of the Bank's actual capital amounts and
ratios as of September 30, 1997 and 1996, compared to the OTS minimum
capital adequacy requirements and the OTS requirements for classification
as a well-capitalized institution. Although the OTS capital regulations
apply at the Bank level only, the Company's consolidated capital amounts
and ratios are also presented. The OTS does not have a holding company
capital requirement.
<TABLE>   
<CAPTION>
                                                                     1997
                                                               Minimum Capital        For Classification
                                            Actual                 Adequacy          as Well Capitalized
                                      Amount     Ratio          Amount    Ratio          Amount    Ratio
<S>                                   <C>        <C>            <C>       <C>            <C>       <C>             
Bank
Tangible capital                      $59,031    20.70%         $4,278    1.50%         $    --       --
Tier 1 (core) capital                  59,031    20.70           8,556    3.00           14,259     5.00%
Risk-based capital:
  Tier 1                               59,031    60.13              --      --            5,890     6.00
  Total                                60,159    61.28           7,854    8.00            9,817    10.00
</TABLE>

<TABLE>
<CAPTION>
                                            Actual      
                                      Amount     Ratio
<S>                                   <C>        <C>                 
Consolidated
Tangible capital                      $70,856    24.54%
Tier 1 (core) capital                  70,856    24.54
Risk-based capital:
  Tier 1                               70,856    69.27
  Total                                71,984    70.38
</TABLE>

<TABLE>
<CAPTION>
                                                                      1996
                                                                Minimum Capital          For Classification
                                            Actual                  Adequacy            as Well Capitalized
                        
                                       Amount     Ratio          Amount    Ratio         Amount    Ratio
 <S>                                   <C>        <C>            <C>       <C>           <C>       <C>            
Bank
Tangible capital                       $54,879    20.93%         $3,934     1.50%        $    --     --
Tier 1 (core) capital                   54,879    20.93           7,867     3.00          13,112   5.00%
Risk-based capital:
  Tier 1                                54,879    60.59              --       --           5,435   6.00
  Total                                 56,034    61.08           7,339     8.00           9,173  10.00
</TABLE>

<TABLE>
<CAPTION>
                                            Actual      
                                       Amount    Ratio
<S>                                    <C>       <C>
Consolidated
Tangible capital                       $82,469   29.05%
Tier 1 (core) capital                   82,469   29.05
Risk-based capital:
  Tier 1                                82,469   91.05
  Total                                 83,624   91.16
</TABLE>

Shareholder information

Corporate Offices

Catskill Financial Corporation
341 Main Street
Catskill, New York  12414-1450
(518) 943-3600

Annual Meeting of Shareholders

The annual meeting of Catskill Financial Corporation will be held
7:00 p.m., Tuesday, February 17, 1998 at the Bank's office at 341
Main Street, Catskill, New York

Annual Report on Form 10-K

For the 1997 fiscal year, Catskill Financial Corporation will file
an Annual Report on Form 10-K. Shareholders wishing a copy may obtain
one free of charge by writing:

David L. Guldenstern
Corporate Secretary
Catskill Financial Corporation
341 Main Street
Catskill, New York 12414-1450

Stock Transfer Agent and Registrar

Shareholders wishing to change name, address or ownership of stock,
or to report lost certificates and or consolidate accounts are asked
to contact the Company's stock registrar and transfer agent directly
at:

Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey  07016-3572
(800) 368-5948

Counsel

Serchuk & Zelermyer, LLP
81 Main Street
White Plains, New York  10601

Independent Auditors

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

Market Information for Common Stock

The common stock of Catskill Financial Corporation trades on the Nasdaq
Stock Market under symbol CATB.

At December 3, 1997, there were approximately 900 shareholders of
record not including the number of persons or entities holding stock
in nominee or street names through various brokers and banks.

Catskill Financial Corporation common stock was issued at $10.00 per
share in connection with the Company's initial public offering completed
on April 18, 1996.  The following table shows the range of high and
low sale prices for each quarterly period since the Company began
trading in April.

<TABLE>
<CAPTION>
1997                      High             Low          Dividend
<S>                       <C>              <C>          <C>
First Quarter             $14.50           $12.13
Second Quarter            $16.50           $13.75       $.07
Third Quarter             $16.50           $13.50       $.07
Fourth Quarter            $17.25           $15.25       $.07
</TABLE>

<TABLE>
<CAPTION>
1996                      High             Low
<S>                      <C>               <C>
Third Quarter            $11.00            $10.00
Fourth Quarter           $12.38            $ 9.88
</TABLE>

During the second quarter of fiscal 1997, the Company declared its
first quarterly dividend.  The Company expects to continue to pay
dividends, however, dividend payment decisions are made with consideration
of a variety of factors including earnings, financial condition, market
considerations and regulatory restrictions.  Restrictions on dividend
payments are described in Note 2 of the Notes to Consolidated Financial
Statements included in this Annual Report.