<TABLE>

                          Exhibit 13 1997 Annual Report to Security Holders
                          SELECTED CONSOLIDATED FINANCIAL INFORMATION

<CAPTION>

                                                                             September 30,

(in thousands)                                          1997         1996         1995         1994         1993
<S>                                                     <C>          <C>          <C>          <C>          <C>

Selected Consolidated Financial Condition Data:
Total assets                                            $289,619     $283,759     $230,102     $230,518     $226,610
Cash and cash equivalents                                  2,274       39,712       38,064       29,580       35,457
Loans receivable, net                                    124,337      122,533      118,364      119,233      119,585
Mortgage backed securities                                84,794       34,902       13,647       13,922       12,973
Other securities                                          73,137       82,375       53,443       64,151       55,094
Deposits                                                 200,912      196,753      197,230      200,825      199,812
Short-term borrowings                                     11,385           --           --           --           --
Total equity                                              71,777       82,381       28,667       26,943       24,852

</TABLE>

<TABLE>

<CAPTION>

                                                                            Year Ended September 30,

(in thousands)                                          1997         1996         1995         1994         1993
<S>                                                     <C>          <C>          <C>          <C>          <C>
            
Selected Consolidated Operations Data:
Total interest income                                   $20,217      $17,932      $15,592      $15,022      $15,419
Total interest expense                                    8,801        9,022        8,009        7,529        8,051

  Net interest income                                    11,416        8,910        7,583        7,493        7,368
Provision for loan losses                                   300          195          255          465          470

Net interest income after provision for loan losses      11,116        8,715        7,328        7,028        6,898
Total non-interest income                                   512          996          262          339          367
Total non-interest expense                                5,187        4,258        4,665        3,814        3,489

Income before taxes                                       6,441        5,453        2,925        3,553        3,776
Income tax expense                                        2,534        2,136        1,201        1,463        1,678

Net income                                              $ 3,907      $ 3,317      $ 1,724      $ 2,090      $ 2,098

Earnings per common share<F1>                           $   .84      $   .38          N/A          N/A          N/A

<FN>

<F1> The company completed its initial public offering on April 18, 1996,
     so net income per common share is not applicable to all periods prior
     to that date.  Net income per share is based on weighted average common
     shares outstanding excluding unallocated ESOP shares.  In calculating
     1996 fiscal year's earnings per share, post conversion net income
     and weighted average shares outstanding were used.  See Note 1 to
     Notes to Consolidated Financial Statements.  Certain reclassifications
     have been made to prior years' amounts to conform with current year's
     presentation.

</TABLE>

<TABLE>

<CAPTION>

                                                                            Year Ended September 30,

                                                        1997         1996         1995         1994         1993
<S>                                                     <C>          <C>          <C>          <C>          <C>

Selected Financial Ratios and Other Data:

Performance Ratios:
Return on average assets                                1.40%        1.25%         .76%         .90%         .97%
Return on average equity                                5.22         6.33         6.15         8.06         8.79
Average net interest rate spread                        2.93         2.54         2.99         3.03         3.16
Net interest margin<F1>                                 4.17         3.44         3.47         3.36         3.56
Ratio of operating expense to average total assets      1.86         1.60         1.77<F2>     1.65         1.62
Efficiency ratio<F3>                                   43.43        45.56        51.05        48.47        45.11
Ratio of average interest-earning assets to average
  interest- bearing liabilities                       138.60       125.79       112.97       109.92       110.34

Quality Ratios:
  Non-performing loans to total loans at
    end of period                                        .73         1.10          .86          .54         1.53
  Non-performing assets to total assets
    at end of period                                     .40          .61          .66          .45          .84
  Allowance for loan losses to
    non-performing loans                              206.00       133.89       188.41       268.62        69.91
  Allowance for loan losses to loans receivable         1.50         1.47         1.61         1.43         1.06

Capital Ratios:
  Equity to total assets at end of period              24.78        29.03        12.46        11.69        10.97
  Average equity to average assets                     26.86        19.73        12.44        11.23        11.09

Other Data:
  Number of full-service offices                           4            3            3            3            3

<FN>

<F1> Net interest income divided by average interest-earning assets.

<F2> Excludes $660,000 provision for Nationar loss contingency. See
     Note 14 to Notes to Consolidated Financial Statements.

<F3> Efficiency ratio is non-interest expense/(non-interest income
     + net interest income on a tax equivalent basis). For 1996, excludes
     $560,000 Nationar recovery  included in non-interest income and for
     1995 excludes $660,000 provision for Nationar loss contingency included
     in non-interest expense.

</TABLE>

<TABLE>

                                                                        SUMMARY OF UNAUDITED CONSOLIDATED
                                                                         QUARTERLY FINANCIAL INFORMATION
   
<CAPTION>

                                                                           Year Ended September 30, 1997
 
(in thousands, except per share amounts)             First           Second           Third           Fourth           Fiscal
                                                     Quarter         Quarter          Quarter         Quarter          Year
<S>                                                  <C>             <C>              <C>             <C>              <C>  
            
Total interest income                                $4,977          $4,963           $5,090          $5,187           $20,217
Total interest expense                                2,136           2,102            2,244           2,319             8,801

Net interest income                                   2,841           2,861            2,846           2,868            11,416
Provision for loan losses                                75              75               75              75               300

Net interest income after provision for
  loan losses                                         2,766           2,786            2,771           2,793            11,116
Total non-interest income                               177             121              108             106               512
Total non-interest expense                            1,171           1,341            1,324           1,351             5,187

Income before taxes                                  $1,772          $1,566           $1,555          $1,548           $ 6,441
Income tax expense                                      706             623              606             599             2,534
            
Net income                                           $1,066          $  943           $  949          $  949           $ 3,907

Net income per common share                          $  .21          $  .20           $   .21         $  .22           $   .84
                                                                                                                                 
</TABLE>

<TABLE>

<CAPTION>

                                                                           Year Ended September 30, 1996
 
(in thousands, except per share amounts)             First           Second           Third           Fourth           Fiscal
                                                     Quarter         Quarter          Quarter         Quarter          Year
<S>                                                  <C>             <C>              <C>             <C>              <C>  



Total interest income                                $4,009          $4,006           $4,985          $4,932           $17,932
Total interest expense                                2,217           2,187            2,461           2,157             9,022

Net interest income                                   1,792           1,819            2,524           2,775             8,910
Provision for loan losses                                45              30               45              75               195

Net interest income after provision for
  loan losses                                         1,747           1,789            2,479           2,700             8,715
Total non-interest income                               111             127              660              98               996
Total non-interest expense                            1,022             937            1,205           1,094             4,258

Income before taxes                                  $  836          $  979           $1,934          $1,704           $ 5,453
Income tax expense                                      299             402              795             640             2,136

Net income                                           $  537          $  577           $1,139          $1,064           $ 3,317

  Net income per common share<F1>                                                     $  .18          $  .20           $   .38      

<FN>

<F1> The company completed its initial public offering on April 18, 1996,
     so net income per common share is not applicable to all periods prior
     to that date. Net income per share is based on weighted average common
     shares outstanding excluding unallocated ESOP shares. In calculating
     1996 fiscal year's earnings per share, post conversion net income
     and weighted average shares outstanding were used. See Note 1 to Notes
     to Consolidated Financial Statements. Certain reclassifications have
     been made to prior quarters' amounts to conform with current quarter's
     presentation.

</TABLE>

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

General

Catskill Financial Corporation (the "Company" or "Catskill Financial")
was formed in December 1995 to acquire all of the common stock of Catskill
Savings Bank (the "Bank") upon its conversion from a mutual savings bank
to a stock savings bank. On April 18, 1996, the Company completed its
initial public stock offering, issuing 5,686,750 shares of $.01 par value
common stock at $10.00 per share. Net proceeds to the Company were $54.9
million after conversion costs, and $50.4 million excluding the shares
acquired by the Company's Employee Stock Ownership Plan (the "ESOP"),
which were purchased with the proceeds of a loan from the Company.

The consolidated financial condition and operating results of the
Company are primarily dependent upon its wholly owned subsidiary,
the Bank, and all references to the Company prior to April 18, 1996,
except where otherwise indicated, are to the Bank.

The Bank has been and continues to be a community oriented financial
institution offering a variety of financial services. The Bank attracts
deposits from the general public and uses such deposits, together
with other funds, to originate one to four family residential mortgages,
and, to a lesser extent, consumer (including home equity lines of credit),
commercial, and multi-family real estate and other loans in its primary
market area. The Bank's primary market is comprised of Greene County and
southern Albany County in New York, which are serviced through four banking
offices, the most recent having opened in December 1996. The Bank's deposit
accounts are insured by the Bank Insurance Fund ("BIF") of the Federal
Deposit Insurance Corporation ("FDIC"), and, as a federal savings bank,
the Bank is subject to regulation by the Office of Thrift Supervision ("OTS").

The Company's profitability, like many financial institutions and
their holding companies, is dependent to a large extent upon its net
interest income, which is the difference between the interest it receives
on interest earning assets, such as loans and investments, and the
interest it pays on interest bearing liabilities, principally deposits.

Results of operations are also affected by the Company's provision
for loan losses, non-interest expenses such as salaries and employee
benefits, occupancy and other operating expenses and to a lesser extent,
non-interest income such as service charges on deposit accounts. 

Financial institutions in general, including the Company, are significantly
affected by economic conditions, competition and the monetary and
fiscal policies of the federal government. Lending activities are influenced
by the demand for and supply of housing, competition among lenders, 
the interest rate conditions and funds availability. Deposit balances
and cost of funds are influenced by prevailing market rates on competing
investments, customer preference and the levels of personal income and
savings in the Bank's primary market area.

For comparative purposes, net income for the year ended September
30, 1996, was favorably impacted by the Company's recovery of $560,000
of the reserve for probable losses in connection with the takeover
of Nationar. On February 6, 1995, the New York Superintendent of Banks
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 Nationar was seized, the Bank had
$3.3 million on deposit with Nationar. As a result of uncertainty
related to collectibility, as of September 30, 1995, the Bank established
a reserve of $660,000, or 20% of the deposit. In June 1996, the Bank
received payment of approximately $3.1 million of its claim and estimated
that only $100,000 of the reserve was still necessary. During the
fiscal year ended September 30, 1997, the Bank received payment of
the remainder of the claim for which the reserve had been established,
and the $100,000 remaining in the reserve was recovered.

For the year ended September 30, 1997, the Company recorded net income
of $3,907,000, an increase of $590,000, or 17.8% over the comparable
period of 1996. Earnings per common share for the year ended September
30, 1997, were $.84, based on weighted average common shares outstanding
of 4,629,697. The Company completed its initial public offering on
April 18, 1996, so shares were only outstanding for part of fiscal
1996 and, therefore, are not comparable to fiscal 1997. Return on
average assets for the year ended September 30, 1997 and 1996 was
1.40% and 1.25%, respectively, and return on average equity was 5.22%
and 6.33%, respectively.

Forward Looking-Statements

When used in Form 10-K or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with
the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project", "believe", or similar expressions are intended
to identify "forward-looking statements" within the meaning of the
Private Securities Litigations Reform Act of 1995. In addition, certain
disclosures and information customarily provided by financial institutions,
such as analysis of the adequacy of the loan loss allowance or an analysis
of the interest rate sensitivity of the Company's assets and liabilities,
are inherently based upon predictions of future events and circumstances.
Furthermore, from time to time, the Company may publish other forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, and similar matters.

The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the
terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. Some of the risks and
uncertainties that may affect the operations, performance, development
and results of the Company's business, the interest rate sensitivity of
its assets and liabilities, and the adequacy of its loan loss allowance,
include but are not limited to the following:

a. Deterioration in local, regional, national or global economic conditions
which could result, among other things, in an increase in loan delinquencies,
a decrease in property values, or a change in the housing turnover
rate;

b. changes in market interest rates or changes in the speed at which
market interest rates change;

c. changes in laws and regulations affecting the financial service
industry;

d. changes in competition; and 

e. changes in consumer preferences.

The Company wishes to caution readers not to place undue reliance
on any forward-looking statements, which speak only as of the date
made, and to advise readers that various factors, including those
described above, could affect the Company's financial performance
and could cause the Company's actual results or circumstances for
future periods to differ materially from those anticipated or projected.

The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions
which may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.

Financial Condition

Total assets were $289.6 million at September 30, 1997, an increase
of $5.8 million, or 2.0% from the $283.8 million at September 30,
1996.  

Cash and cash equivalents were $2.3 million, a decrease of $37.4 million,
or 94.2% from the $39.7 million at September 30, 1996.  The decrease
was principally a reduction in federal funds as the Company used available
cash to purchase 1,029,476 shares of its common stock at a total cost of
approximately $15.3 million, and continued to invest the net proceeds of
its initial public offering in securities available for sale and, to a
lesser extent, loans.

Total securities, which include securities held to maturity ("HTM")
and securities available for sale ("AFS"), excluding Federal Home
Loan Bank stock, were $156.2 million, an increase of $40.1 million,
or 34.5% over the $116.1 million as of September 30, 1996.  The change
in securities consisted of a $51.1 million increase in AFS securities,
primarily due to the Company's purchase of mortgage backed securities,
and a $11.0 million decrease in HTM securities from scheduled maturities.
Consequently as of September 30, 1997, 94.8% of the Company's investment
portfolio excluding the Federal Home Loan Bank stock was classified as AFS,
compared to 83.6% as of September 30, 1996.

Loans receivable were $126.2 million as of September 30, 1997, an
increase of $1.8 million or 1.4% over the $124.4 million as of September
30, 1996.  The following table shows the loan portfolio composition
as of the respective balance sheet dates:

<TABLE>

<CAPTION>

                                                   At September 30
                                             1997                    1996
<S>                                          <C>                     <C>      
                                                   (In thousands)

Real Estate Loans
  One-to-four family                         $102,232                $100,383
  Multi-family and commercial                   4,691                   5,115
  Construction                                  1,306                     423

    Total real estate loans                   108,229                 105,921
Consumer Loans                                 18,473                  19,024

    Gross Loans                               126,702                 124,945
Less: Net deferred loan fees                     (476)                   (579)

    Total loans receivable                   $126,226                $124,366

</TABLE>

The decrease in consumer loans was principally a decrease in home
equity loans, as lower mortgage rates have encouraged customers to refinance
their underlying first mortgages and repay their home equity loans.

During fiscal 1997, the Company originated $21.3 million in loans,
a decrease of $5.5 million from the $26.8 million originated in 1996.
The decrease was principally rate related as 1996 was a favorable
financing market after Federal Reserve lowered the discount rate in
January 1996. Conversely, 1997 was somewhat impacted by the increase
in the federal funds rate in March 1997. The Bank's primary market
has not fully participated in the national economic recovery, so the
real estate market has remained soft.

Total deposits were $200.9 million, at September 30, 1997, an increase
of $4.1 million, or 2.1% from the $196.8 million at September 30,
1996. The following table shows the deposit composition as of the
respective balance sheet dates:

<TABLE>

<CAPTION>

                                                                 At September 30
                                                      1997                                    1996
                                       (In thousands)      % of Deposits        (In thousands)      % of Deposits
<S>                                    <C>                 <C>                  <C>                 <C> 

Savings                                $ 79,448             39.6%               $ 83,358             42.4%
Money market                              7,115              3.5                   7,752              3.9
NOW                                      10,438              5.2                   9,070              4.6
Non-interest demand                       4,370              2.2                   3,714              1.9
Certificates of deposits                 99,541             49.5                  92,859             47.2
                                       $200,912            100.0%               $196,753            100.0%

</TABLE>

The growth in deposits was principally related to the opening of our
fourth full service branch in late December 1996, and had the Company
not opened the branch, deposits would have decreased $1.1 million,
or .6%. Although the Company experienced deposit growth, savings deposits
decreased $3.9 million or 4.7%, and now represent 39.6% of deposits
compared to 42.4% as of September 30, 1996. The composition of deposits
continues to shift to higher costing certificates of deposits as the
decrease in savings deposits was more than offset by a $6.7 million
increase in certificates of deposits which now represent 49.5% of
deposits compared to 47.2% as of September 30, 1996. During fiscal
1997, the Company ran two promotional campaigns to increase 
the balance of certificates of deposit ("CDs"), the first in early
February was to attract six-month money in anticipation of lower rates
as well as mitigate run-off in its longer term CDs. In addition, the
Company also promoted a 15-month CD to meet a demand in our market for
a longer term product, and so far the program has generated approximately
$2.6 million in new money. Management believes that this change in mix,
which is consistent with what other financial institutions are experiencing,
will continue to occur as customers seek to maximize their returns and the
Company has to compete with other investment vehicles such as mutual funds. 

The Company anticipates opening at least one branch in fiscal 1998,
which should generate additional deposit growth. In addition, the
Company will continue to promote lower costing transactional accounts
(NOW and non-interest bearing demand), which have grown 15.1% and
17.7%, respectively, over the balance at September 30, 1996.

In March 1997, the Company activated its line of credit program with
the Federal Home Loan Bank of New York ("FHLB"). Under the program,
the Company has access to overnight funds of approximately $13.1 million,
along with a companion line for the same amount available for one
month advances. The Company has only used its overnight line and had
borrowings outstanding of $11.4 million as of September 30, 1997.
Borrowings for the year ended September 30, 1997, averaged $2.6 million,
and management expects to use its borrowing lines to leverage the Company's
capital by increasing earning assets.

Shareholders' equity at September 30, 1997 was $71.8 million, a decrease
of $10.6 million, or 12.9% from the $82.4 million at September 30,
1996. The decrease was principally caused by the Company's repurchase of
1,029,476 common shares at a cost of $15.3 million, somewhat offset by the
$2.9 million of net income retained after payment of cash dividends for the
year ended September 30, 1997, and a $1.0 million change in the Company's
net unrealized gain (loss) on securities available for sale, net of taxes.
The Company also recorded a $.7 million increase in shareholder's equity as
a result of amortization and/or release of shares under its stock based
compensation plans.

Shareholders' equity as a percent of total assets was 24.8% at September
30, 1997 compared to 29.0% at September 30, 1996. Book value per common
share was $15.41 excluding unvested shares of the Company's MRP, and 
was $16.94 excluding unallocated ESOP shares and unvested MRP shares.

Asset/Liability Management

The Company, like other financial institutions, is subject to interest
rate risk to the extent that its interest-bearing liabilities reprice
on a different basis or at different time periods from its interest-earning
assets. Interest rate risk may be assessed by analyzing the extent
to which assets and liabilities are "interest rate sensitive" and
the resultant interest rate sensitivity "gap". An asset or liability
is said to be interest rate sensitive within a defined time period
if it matures or reprices within that period. The difference between
the amount of interest-earning assets and interest-bearing liabilities
maturing or repricing within a given period is defined as the interest
rate sensitivity gap. Gap is negative if more interest-bearing liabilities
than interest earning assets mature or reprice within a specified
time period. If the reverse is true, then the institution is considered
to have a positive gap. Accordingly, during a period of rising interest
rates, an institution with a negative gap position would not be in
as favorable a position, as compared with an institution with a positive
gap, to invest in higher yielding assets. This may result in the yield
on the institution's assets increasing at a slower rate than the increase
in its cost of interest-bearing liabilities. Conversely, during a
period of falling interest rates, an institution with a negative gap
would experience a repricing of its assets at a slower rate than its
interest-bearing liabilities, which, consequently, may result in its
net interest income growing at a faster rate than an institution with
a positive gap position.

The principal objective of the Company's interest rate risk management
function is to evaluate the interest rate risk included in certain
balance sheet accounts, determine the level of risk appropriate given
the Company's business strategy, operating environment, capital and
liquidity requirements, and manage the risk consistent with Board
of Directors' approved guidelines. Through such management, the Company
seeks to reduce the vulnerability of its operations to changes in interest
rates, however, the Company has not entered into any derivatives such as
futures, forwards, interest rate swaps or other financial instruments with 
similar characteristics. The extent of the movement of interest rates
is an uncertainty that could have a negative impact on the earnings of
the Company. The Company monitors its interest rate risk as such risk
relates to its operating strategies. The Company's Board of Directors has
established a management Asset Liability Committee which is responsible for
reviewing the Company's asset/liability policies and interest rate risk
position. The Committee meets at least monthly and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis.

The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at September 30, 1997,
which are anticipated by the Company, based upon certain assumptions,
to reprice or mature in each future time period shown. Except as stated,
the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the
earlier of the term to repricing or the contractual maturity. The
table is intended to provide an approximation of the repricing as
of September 30, 1997, within a six-month period and subsequent selected
time intervals. Annual prepayments for one to four family mortgage loans
and mortgage-backed securities were assumed to be 9%. Callable securities,
principally U.S. Government agencies, are shown by their respective
contractual maturities. Savings deposit accounts are shown with a decay
rate of 9% annually. Money market deposits are assumed to be immediately
rate sensitive, and NOW accounts assume that 20% are immediately repricable
with the balance, repricing in the over five year period. Prepayment and
decay rates can have a significant impact on the Company's sensitivity gap,
and there are no assurances that the Company's prepayment and decay rate
assumptions will be realized.

<TABLE>

                                                                      At September 30, 1997

                                                                       Maturing or Repricing
<CAPTION>

                                                            Over 6
                                             6 Months       Months to       Over 1-3       Over 3-5       Over
                                             or Less        One Year        Years          Years          5 Years       Total

(dollars in thousands)                       Amount         Amount          Amount         Amount         Amount        Amount
<S>                                          <C>            <C>             <C>            <C>            <C>           <C>
            
Fixed rate one- to four-family,
  multi-family and commercial real
  estate and construction loans              $  5,972       $ 4,218         $14,777        $13,116        $ 32,855      $ 70,938
Adjustable rate one- to four-family,
  multi-family and commercial real
  estate and construction loans                14,566        13,700           8,906            133              49        37,354
Consumer loans                                  8,543         1,893           5,029          1,464           1,481        18,410
Mortgage-backed securities                     12,760         4,936          14,767          9,390          42,030        83,883
Other securities<F1>                            5,999         8,992           5,989         10,982          40,550        72,512
Federal funds and other                            88           ---             ---            ---              30           118

  Total interest-earning assets                47,928        33,739          49,468         35,085         116,995       283,215

            

Savings deposits                                4,016         3,347          11,915          9,946          50,224        79,448
Money market                                    7,115           ---             ---            ---             ---         7,115
Certificate accounts                           42,178        21,030          33,101          2,896             336        99,541
NOW deposits                                    2,088           ---             ---            ---           8,350        10,438
Other deposits                                    ---           ---             ---            ---             766           766
Short-term borrowings                          11,385           ---             ---            ---             ---        11,385

  Total interest-bearing liabilities           66,782        24,377          45,016         12,842          59,676       208,693

Interest-earning assets less
  interest-bearing liabilities               ($18,854)     $  9,362         $ 4,452        $22,243        $ 57,319      $ 74,522

Cumulative interest-rate sensitivity gap    ($ 18,854)    ($  9,492)       ($ 5,040)       $17,203        $ 74,522

Cumulative interest-rate gap as a
  percentage of total assets at
  September 30, 1997                            (6.51%)       (3.28%)         (1.74%)         5.94%          26.28%

Cumulative interest-rate gap as a
  percentage of interest-earning
  assets at September 30, 1997                  (6.66%)       (3.35%)         (1.78%)         6.07%          26.31%

<FN>                  

<F1> Includes all securities available for sale and investment securities
     held to maturity except mortgage backed securities.  Also includes
     Federal Home Loan Bank Stock, which is included in the over five years
     category since the stock has no contractual maturity.

</TABLE>

Based on these assumptions, the Company, as of September 30, 1997,
had a cumulative one year negative gap of $9.5 million, or 3.3% of
total assets. However, Management has estimated based on the current
level of interest rates as of September 30, 1997, that $15.0 million
of the Company's securities could be called in the next fiscal year,
which would reduce the Company's cumulative one-year sensitivity gap
from a negative $9.5 million to an estimated positive gap of $5.5
million or 1.9% of total assets. Consequently, if interest rates were
to increase or decrease, the Company's net interest income could be
adversely impacted. Management expects to maintain a relatively balanced
gap position in order to limit the Company's exposure to interest rate risk,
including reducing the amount of securities with call risk.

In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets,
such as adjustable rate mortgages, have features which restrict changes
in interest rates in the short term and over the life of the asset.
Further, in the event of a change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those
assumed in calculating the table. Any change in projected repayments
could materially affect the rate at which assets reprice. Finally,
the ability of many borrowers to service their debt may decrease in
the event of an interest rate increase. As a result, the actual effect
of changing interest rates may differ from that presented in the foregoing
table.

The Bank's interest rate sensitivity is also monitored quarterly through
use of an OTS model which generates estimates of the change in net
portfolio value ("NPV") over a range of interest rate change scenarios.
NPV represents the estimated market value of portfolio equity, and
is equal to the market value of assets minus the market value of liabilities,
with adjustments made for off-balance sheet items. The NPV ratio is defined
as NPV, in that interest rate scenario, divided by the market value of assets
in the same scenario. The following are the estimated impacts of immediate
changes "rate shocks" in interest rates at September 30, 1997, as calculated
by the OTS model for the Bank:

<TABLE>

<CAPTION>

         Rates
         In Basis                          Net Portfolio Value                        NPV as a % Assets
         Points                 Dollars in Thousands                  %              NPV               %
         (Rate Shock)       Amount                Change              Change         Ratio             Change
<S>      <C>                <C>                   <C>                 <C>            <C>               <C>            

            400             $45,894               $(24,286)           (34.6)%        17.16%            (27.6)%
            300              52,021                (18,159)           (25.9)         18.94             (20.0)
            200              58,335                (11,844)           (16.9)         20.68             (12.7)
            100              64,564                 (5,616)            (8.0)         22.31              (5.8)
         static              70,180<F1>                ---              ---          23.69               ---
           (100)             74,112                  3,932              5.6          24.58               3.8
           (200)             77,371                  7,192              9.3          25.27               6.7
           (300)             80,874                 10,649             13.2          25.98               9.7
           (400)             85,335                 15,155             21.6          26.88              13.5

<FN>

<F1> Represents Bank only, Holding Company has additional portfolio equity
     of $7.6 million not shown in analysis, which if included, would reduce
     % changes.

</TABLE>

As is the case with the gap table, certain shortcomings are inherent
in the methodology used in NPV measurements. Modeling changes in NPV
require the making of assumptions which may tend to oversimplify the
manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model assumes that the composition
of the interest sensitive assets and liabilities repricing at the
beginning of the period remain constant, in addition, it assumes
hanges in interest rates change uniformly across the yield curve
regardless of duration. Accordingly, although the NPV model provides
an indication of market value risk at a particular point in time, actual
results may differ from those projected.

As is the case with the gap table, certain shortcomings are inherent
in the methodology used in NPV measurements. Modeling changes in NPV
require the making of assumptions which may tend to oversimplify the
manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV model assumes that the composition
of the interest sensitive assets and liabilities repricing at the
beginning of the period remain constant, in addition, it assumes changes
in interest rates change uniformly across the yield curve regardless of
duration. Accordingly, although the NPV model provides an indication of
market value risk at a particular point in time, actual results may differ
from those projected.

The following table shows the Company's financial instruments that
are sensitive to changes in interest rates, categorized by expected
maturity along with the weighted average yield, and estimated fair
market values as of September 30, 1997. The Company's assets and liabilities
that do not have a stated maturity date, such as savings, NOW and
money market deposits are considered long-term in nature, and are
reported in the thereafter column. The Company does not consider these
financial instruments materially sensitive to interest rate fluctuations,
and historically, they have remained fairly constant. The weighted
average interest rates for the various assets and liabilities presented
are actual as of September 30, 1997.

<TABLE>

                                                               Expected Maturity Dates
                                                                 as of September 30,

<CAPTION>

                                                                                                                        Estimated
(dollars in thousands)                1998       1999       2000       2001      2002       Thereafter       Total      Fair Value 
<S>                                   <C>        <C>        <C>        <C>       <C>        <C>              <C>        <C>    

Interest-Sensitive Assets:
Loans                                 $12,919    $11,855    $ 9,204    $ 8,426   $ 8,560    $75,738          $126,702   $128,623
                                         8.29%      8.03%      7.64%      6.94%    10.11%      7.82%             7.97%

Securities, at
  amortized cost                       18,023      8,132      6,013     11,973     3,104    109,151           156,396    157,988
                                         6.11%      6.39%      6.65%      6.78%     7.04%      7.24%             7.00%      

Interest-Sensitive 
  Liabilities:                                                
Certificates of Deposit                63,209     24,619      8,482      1,944       951        336            99,541     99,701
                                         5.58%      5.70%      5.76%      5.84%     5.94%      5.93%             5.64%      
Savings                                   ---        ---        ---        ---       ---     79,448            79,448     79,448
                                                                                               3.50%             3.50%      
NOW Deposits                              ---        ---        ---        ---       ---     10,438            10,438     10,438
                                                                                               2.46%             2.46%      
Money Market                              ---        ---        ---        ---       ---      7,115             7,115      7,115
                                                                                               3.19%             3.19%
Other Deposits                            ---        ---        ---        ---       ---        766               766        766
                                                                                               2.92%             2.92%      
FHLB Borrowing                         11,385        ---        ---        ---       ---        ---            11,385     11,385
                                         6.25%                                                                   6.25%

</TABLE>

Asset Quality

Non-performing assets include non-accrual loans, troubled debt restructurings,
loans greater than 90 days past due and still accruing interest and
other real estate properties. Loans are placed on non-accrual status
when the loan is more than 90 days delinquent (except for student,
FHA insured and VA guaranteed loans) or when the collection of principal
and/or interest in full becomes doubtful. When loans are designated
as non-accrual, all accrued but unpaid interest is reversed against
current period income and subsequent cash receipts generally are applied
to reduce the unpaid principal balance. Foreclosed assets include
assets acquired in settlement of loans.

Non-performing assets at September 30, 1997 were $1.2 million, or .40%
of total assets, compared to the $1.7 million or .61% of total assets at
September 30, 1996. The table below sets forth the amounts and categories
of the Company's non-performing assets.

<TABLE>

<CAPTION>

                                                       Year Ended September 30,
(dollars in thousands)                 1997           1996           1995           1994           1993
<S>                                    <C>            <C>            <C>            <C>            <C>
            
Non-performing loans:
  One- to four-family real estate      $  780         $1,008         $  784         $  650         $  409
  Multi-family and commercial
    real estate                           ---             78            ---            ---            ---
  Consumer<F1>                            137            283            251            ---             15

    Total                                 917          1,369          1,035            650            424

Troubled debt restructured loans:
  Multi-family and commercial
    real estate                           ---            ---            ---            ---          1,427

Foreclosed assets, net:
  One- to four-family real estate         225            334            326            220             56
  Multi-family and commercial
    real estate                            23             23            158            158            ---

    Total                                 248            357            484            378             56

Total non-performing assets            $1,165         $1,726         $1,519         $1,028         $1,907

Total non-performing loans
  as a % of total loans                   .73%          1.10%           .86%           .54%          1.53%

Total as a percentage of
  total assets                            .40%           .61%           .66%           .45%           .84%

<FN>            

<F1> Loans greater than 90 days past due and still accruing, principally
     student loans.

</TABLE>

Principally all of the decrease in non-performing loans at September
30, 1997 as compared to September 30, 1996 was attributed to the Company
foreclosing on nine properties. The net realizable value of the properties
totalling $538,000, was transferred to other real estate, and $160,000
representing the excess of the carrying value of the related loans over the
net realizable value of the properties, was charged against the allowance
for loan losses. These reductions were partially offset by an increase of
$246,000 in non-performing loans. In addition, during the year ended
September 30, 1997, the Company sold eleven parcels of other real estate
realizing gains of $140,000. The following table summarizes the activity in
other real estate:

<TABLE>

<CAPTION>

                                                      Years Ended September 30,
                                                    1997                     1996
<S>                                                 <C>                      <C>

                                                           (In thousands)

Other real estate beginning of period               $ 357                    $ 484
Transfer of loans to other real estate owned          538                      206
Sales of other real estate                           (647)                    (199)
Write-downs                                           ---                     (134)

Other real estate end of period                     $ 248                    $ 357

</TABLE>                  

Additionally, at September 30, 1997, the Company has identified approximately
$2.0 million in loans having more than normal credit risk.  The Company
believes that if economic and/or business conditions change in its lending
area, some of these loans could become non-performing in the future.

The allowance for loan losses was $1.9 million, or 1.50% of period
end loans at September 30, 1997, and provided coverage of non-performing
loans of 206.0% compared to coverage of 133.9% as of September 30,
1996.   For more detail on the allowance, see "Provision for Loan
Losses."

Results of Operations

Comparision of Operating Results for the Years Ended September 30, 1997 and 1996

Net Interest Income

The Company's net income is primarily dependent upon net interest
income. Net interest income is a function of the relative 
amounts of the Company's interest earning assets versus interest bearing
liabilities, as well as the difference ("spread") between 
the average yield earned on loans, securities, interest-earning deposits,
and federal funds sold and the average rate paid on 
deposits and borrowings. The interest rate spread is affected by economic
and competitive factors that influence interest rates, 
loan demand and deposit flows. The Company, like other financial institutions,
is subject to interest rate risk to the degree that 
its interest-bearing liabilities mature or reprice at different times,
or on a different basis, than its interest-earning assets.

Net interest income for the year ended September 30, 1997 was $11.4
million, an increase of $2.5 million, or 28.1% over the 
comparable period of 1996. The improvement was principally an increase
in average earning assets, a shift in asset mix and the 
funding benefit from the full year impact of the Company's public
offering.

Interest income for the year ended September 30, 1997 was $20.2 million,
an increase of $2.3 million, or 12.8%, over the 
comparable period in fiscal 1996. Average earning assets were $273.9
million, an increase of $14.9 million or 5.7% over fiscal 
1996, although the primary cause of the improvement was a deliberate
shift in the mix of the Company's investments away from lower 
yielding federal funds sold and towards higher yielding mortgage-backed
securities in order to improve average yields and increase 
interest income. The average balance of federal funds sold decreased
$57.0 million from $67.2 million for the year ended September 
30, 1996 to $10.2 million for the year ended September 30, 1997. In
contrast, the average balance of mortgage-backed securities 
increased by $55.5 million from $19.5 million to $75.0 million between
the periods. Although the average yield on mortgage-backed 
securities declined from 7.48% for the year ended September 30, 1996
to 7.09% for the year ended September 30, 1997, the yield 
still far exceeded the average yield on federal funds sold, which
was 5.39% for the 1996 period and 5.35% for the 1997 period. In 
addition to increasing yields, the shift in the asset mix also had
the effect of decreasing the sensitivity of the Company's 
assets to interest rate changes.

Interest expense for the year ended September 30, 1997 was $8.8 million,
a decrease of $221,000, or 2.4%. Approximately 77% was 
attributed to a decrease in volume with the remainder attributable
to a decline in rates paid on certain types of deposits. Average interest 
bearing liabilitieswere $197.7 million, a decrease of $8.3 million or 4.0% 
from the comparable period of 1996. The decrease in volume was principally
in common stock subscriptions as the Company in the year 
ended September 30, 1996, held stock subscription deposits averaging
approximately $9.1 million for its initial public offering. 
There were no such subscriptions in 1997. The decline in certain rates
paid was principally caused by a reduction in the cost of 
certificates of deposits which decreased from 5.63% to 5.58%, or 5
basis points, primarily from the decrease in market rates since 
the Federal Reserve lowered the discount rate in January 1996.

The Company's net yield on average earning assets was 4.17%, compared
to 3.44% for the comparable period of 1996. The improvement 
was primarily the result of the investment of the Company's net offering
proceeds which caused an increase in average earning 
assets with no corresponding funding costs, although the Company also
improved its net interest spread to 2.93%, a 39 basis point 
improvement over the comparable period of 1996, due to the change
in asset mix discussed previously.

As necessary, management of the Company will continue to increase
or decrease the Company's deposit rates and terms in order to 
manage interest rate risk and liquidity, and to maintain market share.
For more information on average balances, interest rates 
and yields, please refer to the "Analysis of Net Interest Income"
and "Rate/Volume Analysis of Net Interest Income" tables.

Analysis of Net Interest Income

The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning 
assets and the resultant yields, as well as the 
interest expense on average interest-bearing liabilities, expressed
both in dollars and rates. Tax equivalent adjustments totaled 
$14 thousand in 1997; there were no tax equivalent adjustments in
the other periods. Non-accruing loans have been included in the 
table as loans receivable with interest earned recognized on a cash
basis only. Securities include both the securities available 
for sale portfolio and the held to maturity portfolio excluding mortgage
backed securities. Mortgage backed securities are 
primarily classified as available for sale. Securities available for
sale are included at amortized cost.

<TABLE>

<CAPTION>

                                                            Year Ended September 30,

                                                     1997                                     1996

                                     Average       Interest                      Average    Interest
                                 Outstanding         Earned/      Yield/     Outstanding      Earned/    Yield/
                                     Balance           Paid        Rate          Balance        Paid      Rate
<S>                              <C>               <C>            <C>        <C>            <C>          <C>
                                                           (dollars in thousands)

Interest-Earning Assets:

  Loans receivable                  $125,146        $10,083        8.06%        $121,105     $ 9,783      8.08%
  Mortgage backed securities          75,069          5,319        7.09           19,541       1,462      7.48
  Securities                          63,521          4,283        6.74           51,182       3,062      5.98
  Federal funds sold and other        10,214            546        5.35           67,245       3,625      5.39

  Total interest-earning assets     $273,950         20,231        7.38         $259,073      17,932      6.92

  Non-interest-bearing assets          4,982                                       6,440

    Total Assets                    $278,932                                    $265,513

Interest-Bearing Liabilities:

  Savings deposits                  $ 80,697        $ 2,821        3.50%        $ 84,607     $ 2,962      3.50%
  Certificate accounts                95,215          5,309        5.58           92,699       5,218      5.63
  Money market                         7,418            242        3.26            8,431         289      3.43
  NOW deposits                         9,667            237        2.45            8,764         216      2.46
  Other<F1>                            2,065             43        2.08           11,451         337      2.94
  Short-term borrowings                2,590            149        5.75               --          --          

  Total interest-bearing
    liabilities                     $197,652          8,801        4.45         $205,952       9,022      4.38

Non-interest bearing 
  liabilities                          6,372                                       7,186

Shareholders' equity                  74,908                                      52,375

Total liabilities and equity        $278,932                                    $265,513

Net interest income                                 $11,430                                  $ 8,910

Net interest rate spread                                           2.93%                                  2.54%

Net earning assets                  $ 76,298                                    $ 53,121

Net yield on average interest-
  earning assets                                                   4.17%                                  3.44%

Average interest-earning 
  assets to average interest-
  bearing liabilities                                138.60x                                  125.79x  

<FN>

<F1>  Other includes principally escrow balances on mortgages for taxes
      and insurance, except for 1996 which also includes approximately 
      $9.1 million, representing the average of common stock subscriptions 
      held until the Company's public offering was consummated. The Bank 
      paid its savings deposit rate of 3.5% on those subscriptions

</TABLE>

<TABLE>

<CAPTION>
                                          Year Ended September 30,

                                                  1995
                                     Average      Interest
                                 Outstanding        Earned/      Yield/
                                     Balance          Paid        Rate
<S>                              <C>              <C>            <C>
                                           (dollars in thousands)

Interest-Earning Assets:

  Loans receivable                  $121,389       $ 9,733        8.02%
  Mortgage backed securities          14,331         1,065        7.43
  Securities                          62,326         3,598        5.77
  Federal funds sold and other        20,740         1,196        5.77

  Total interest-earning assets     $218,786        15,592        7.13

  Non-interest-bearing assets          7,678

    Total Assets                    $226,464

Interest-Bearing Liabilities:

  Savings deposits                  $ 98,064         3,434        3.50%
  Certificate accounts                76,457         4,026        5.27
  Money market                         9,004           310        3.44
  NOW deposits                         7,790           195        2.50
  Other<F1>                            2,346            44        1.88
  Short-term borrowings                   --            --            

    Total interest-bearing 
      liabilities                   $193,661         8,009        4.14

Non-interest bearing 
  liabilities                          4,785
Shareholders' equity                  28,018

Total liabilities and equity        $226,464

Net interest income                                $ 7,583      

Net interest rate spread                                          2.99%

Net earning assets                  $ 25,125

Net yield on average interest-
  earning assets                                                  3.47%

Average interest-earning 
  assets to average interest-
  bearing liabilities                               112.97x

<FN>

<F1>  Other includes principally escrow balances on mortgages for taxes
      and insurance, except for 1996 which also includes approximately 
      $9.1 million, representing the average of common stock subscriptions 
      held until the Company's public offering was consummated. The Bank 
      paid its savings deposit rate of 3.5% on those subscriptions

</TABLE>

Rate/Volume Analysis of Net Interest Income

The following table presents the dollar amount of changes in interest
income and interest expense for major components of 
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and 
that due to the changes in interest rates. For each category of 
interest-earning assets and interest-bearing liabilities, information is 
provided on changes attributable to (i) changes in volume (i.e., changes 
in volume multiplied by old rate) and (ii) changes in rate (i.e., changes 
in rate multiplied by old volume).For purposes of this table, changes 
attributable to both rate and volume, which cannot be segregated, have been 
allocated proportionately to the change due to volume and the change due to 
rate.

<TABLE>

<CAPTION>

                                                             Year Ended September 30,

                                                   1997 vs. 1996                       1996 vs. 1995
                                            Increase                           Increase
                                           (Decrease)          Total          (Decrease)            Total
                                              Due to         Increase            Due to           Increase
                                        Volume     Rate     (Decrease)      Volume     Rate      (Decrease)
<S>                                     <C>        <C>       <C>            <C>        <C>        <C>
                                                                    (in thousands)

Interest-earning assets:

  Loans receivable                      $  315    $ (15)       $  300       $  (23)    $ 73         $   50
  Mortgage-backed securities             3,929      (72)        3,857          404       (7)           397
  Securities                               800      421         1,221         (673)     137           (536)
  Federal funds                         (3,052)     (27)       (3,079)       2,508      (79)         2,429

    Total interest-earning assets       $1,992     $307        $2,299       $2,216     $124         $2,340

Interest-bearing liabilities:

  Savings deposits                      $ (141)    $ --        $ (141)      $ (472)    $ --         $ (472)
  Certificate accounts                     135      (44)           91          856      336          1,192
  Money market                             (33)     (14)          (47)         (20)      (1)           (21)
  NOW deposits                              22       (1)           21           24       (3)            21
  Other<F1>                               (301)       7          (294)         171      122            293
  Short-term borrowings                    149       --           149           --       --             --

    Total interest-bearing liabilities  $ (169)    $(52)        $(221)      $  559     $454         $1,013

  Net change in net interest income                            $2,520                               $1,327

<FN>

<F1>  Other includes principally escrow balances on mortgages for taxes
      and insurance, except for 1996 which also includes interest 
      expense on approximately $9.1 million, representing the average of
      common stock subscriptions held in escrow until the Company's 
      public offering was consummated. The Bank paid its savings deposit
      rate, of 3.5% on those subscriptions

</TABLE>

Provision For Loan Losses

The Company establishes an allowance for loan losses based on an analysis
of risk factors in the loan portfolio. This analysis 
includes concentrations of credit, past loan loss experience, current
economic conditions, amount and composition of loan 
portfolio, estimated fair market value of underlying collateral, delinquencies
and other factors. Accordingly, the calculation of 
the adequacy of the allowance for loan losses is not based solely
on the level of non-performing loans. The provision for loan 
losses was $300,000 for the year ended September 30, 1997, an increase
of $105,000 from the comparable period of 1996. The 
increase in the provision over 1996 was principally to cover net charge-offs
in 1997, as well as to provide for loan growth so 
that the allowance as a percentage of loans remained relatively stable.
The allowance for loan losses at September 30, 1997 was 
$1.9 million, or 1.50% of total loans and provided coverage of non-performing
loans of 206.0%.

The following table sets forth an analysis of the Company's allowance
for loan losses.

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,

(dollars in thousands)                                 1997         1996         1995         1994         1993
<S>                                                    <C>          <C>          <C>          <C>          <C>

Balance at beginning of period                         $1,833       $1,950       $1,746       $1,294       $  857
Charge-offs:
    One- to four-family real estate                      (162)        (237)         (12)          (3)         ---
    Multi-family and commercial real estate               (30)         ---          ---          ---          (20)
    Consumer                                              (90)         (86)         (50)         (29)         (45)

      Total charge-offs                                  (282)        (323)         (62)         (32)         (65)

Recoveries:
    One- to four-family real estate                         4          ---            1           14           10
    Consumer                                               34           11           10            5           22

      Total recoveries                                     38           11           11           19           32

Net charge-offs                                          (244)        (312)         (51)         (13)         (33)
Provision charged to operations                           300          195          255          465          470

Balance at end of period                               $1,889       $1,833       $1,950       $1,746       $1,294

Ratio of net charge-offs during the period to average 
  loans outstanding during the period                     .19%         .26%         .04%         .02%         .03%

                                    

Allowance for loan losses as a % of period-end loans     1.50%        1.47%        1.61%        1.43%        1.06%

</TABLE>

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

Non-Interest Income

Non-interest income was $512,000 for the year ended September 30,
1997, a decrease of $484,000 or 48.6% over the comparable period 
of 1996. The decrease was principally due to the $460,000 net change
in the Company's recovery of its Nationar loss reserve. In 
the year ended September 30, 1996, the Company recovered $560,000
of its original loss reserve of $660,000, and recovered the 
remaining $100,000 in fiscal 1997.

Non-Interest Expense

Non-interest expense for the year ended September 30, 1997 was $5,187,000
an increase of $929,000, or 21.8% over 
1996. Increases in personnel costs, net occupancy, supplies, professional
fees and other expenses, were offset somewhat by 
reductions in other real estate expenses. 

Salaries and employee benefits increased $823,000, or 37.9% over 1996,
principally from ESOP and MRP compensation expenses, both 
new plans since the Company went public. ESOP and MRP expenses for
the year ended September 30, 1997, were $342,000 and $419,000, 
respectively, compared to ESOP expense of only $119,000 and no MRP
expense during the comparable period in 1996. In addition, the 
Company experienced increased personnel costs of approximately $135,000
due to opening its fourth full service branch in late 
December 1996. 

Net occupancy costs were $329,000, an increase of $78,000, or 31.1%
over 1996, as the Company experienced increased costs relating 
to its new branch, as well as depreciation of renovations at another
branch office. Postage and supplies increased $68,000, or 
39.8% over 1996, principally from the new branch and shareholder related
costs such as annual reports as well as special and 
annual meeting proxy costs. Professional fees were $262,000, an increase
of $52,000, or 24.8%, as the Company experienced 
increased legal and accounting costs of operating a public company.
Other expenses increased $67,000, or 11.3% over the comparable 
period of 1996. The increases included higher OTS assessments because
1996 included only assessments for the two quarters after 
the January conversion of the Bank from a state mutual to a federal
stock savings bank. In addition, the Company incurred higher 
director and officer insurance costs, transfer agent, franchise tax
and other costs relating to operating a public company.

Other real estate expenses decreased $265,000, as the Company realized
$140,000 in gains on the sale of other real estate during 
the year ended September 30, 1997; 
there were no gains during fiscal 1996. In addition, in the year ended
September 30, 1996, the Company, as part of its 
periodic valuations of real estate owned, recorded write-downs on
certain properties and increased its estimated cost of 
the future disposition of property owned by approximately $134,000.
There were no write-downs in the comparable period of 1997.

Income Tax Expense

Income tax expense for the year ended September 30, 1997 was $2,534,000
an increase of $398,000, or 18.6% over the comparable 
period of 1996. The change was principally the 18.1% improvement in
income before income taxes. The Company's effective tax rates 
for the year ended September 30, 1997 and 1996, were 39.34% and 39.17%,
respectively.

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

General

Net income for the year ended September 30, 1996 was 
$3.3 million, an increase of $1.6 million or 92.4% over the $1.7 million
for the year ended September 30, 1995. The Company showed 
improvement throughout its consolidated statement of operations as
net interest income increased $1.3 million, non-interest income 
increased $.7 million, non-interest expenses decreased $.4 million
and the provision for loan losses decreased $.1 million.  The 
Company experienced an increase in income taxes of $.9 million, primarily
due to higher pre-tax income of $2.5 million.

On a comparative basis, net income for fiscal years 1996 and 1995,
were impacted by the closure liquidation of Nationar, the 
Bank's principal correspondent bank. During fiscal 1995, the Company
established a reserve of $660,000 for possible Nationar 
losses, resulting in a $396,000 after 
tax reduction in net income for the year. In June 1996, the Company
was paid more than 90% of its claim and since $100,000 of the 
reserve is estimated to be necessary to cover the remaining claim,
the Company included $560,000 in non-interest income as a 
recovery in the year ended September 30, 1996, increasing net income
by approximately $336,000 after tax. See Note 14 of Notes to 
Consolidated Financial Statements.

Net-interest Income

Net interest income was $8.9 million for the year ended September
30, 1996, an increase of $1.3 million or 17.5% over fiscal 1995. 
The increase was principally caused by the higher level of average
earning assets, related to the Company's initial public 
offering which provided net investable proceeds of $50.4 million,
somewhat offset by a lower net yield on average earning assets 
as those proceeds could not immediately be invested prudently in loans,
the Company's highest yielding asset category. Average 
earning assets were $259.1 million, an increase of $40.3 million,
or 18.4% over fiscal 1995. In addition, net interest income and 
average earning assets were favorably impacted by the approximately
$128.0 million of common stock subscriptions held by the Bank 
pending consummation of the Company's stock offering. For fiscal 1996,
common stock subscriptions were included in "other" 
interest bearing liabilities and averaged approximately $9.1 million.
The Bank paid interest on those subscriptions at its savings 
deposit rate of 3.5%.

The net yield on average earning assets was 3.44% for the year ended
September 30, 1996, down slightly from the 3.47% in 1995. The 
decrease was principally due to the high percentage of assets invested
in federal funds sold and the change in the composition of 
interest bearing liabilities. Federal funds sold represented approximately
25.4% of average earning assets in 1996, as compared to 
only 9.5% in 1995. In addition, the Company had experienced in fiscal
1995 and early 1996, similar to many financial institutions, 
a customer preference in a then rising rate environment, for higher
costing certificates of deposits, rather than savings 
accounts. Average savings account balances represented 41.1% of average
interest bearing liabilities in 1996, compared to 50.6% in 
1995. Average certificates of deposits were 45.0% of average interest
bearing liabilities in fiscal 1996, as 
compared to 39.5% in 1995.

Provision for loan losses

The provision for loan losses is based upon management's periodic
analysis of the allowance for loan losses. For the year ended 
September 30, 1996, the provision for loan losses was $195,000, a
decrease of $60,000 from the $255,000 in 1995. The decrease is 
based on management's assessment of the adequacy of the allowance,
which is based on a number of factors including review of non-
performing and other classified loans, the value of collateral for
such loans, historical net charge-offs, and current and 
prospective economic conditions. During fiscal 1996, the Company experienced
an increase in non-performing loans, which were $1,369,000 as of 
September 30, 1996, an increase of $334,000 or 32.3% over the $1,035,000
as of September 30, 1995. The increase was principally 
due to a higher number of residential borrowers filing for bankruptcy
protection. Management believes that since most of loans 
with bankruptcy filings are secured by real estate, losses will be
limited and that the $1.8 million allowance for loan losses at 
September 30, 1996, which provided 133.9% coverage of non-performing
loans, was adequate.

Non-interest income

Non-interest income was $996,000 for the year ended September 30,
1996, an increase of $734,000 over 1995. The increase 
principally represented the recovery of $560,000 from the Nationar
loss contingency reserve established in 1995. In addition, 
service fees on deposit accounts increased $90,000 or 70.3% due to
the implementation of new fees on existing products. Lastly, the Company
realized net security gains of $33,000 in 1996, an improvement of $78,000
over the $45,000 of net security losses in the year ended September 30, 1995.
The gains realized in 1996 related to securities acquired at 
a discount that were called by the issuer prior to contractual maturity,
and the loss in 1995 related to the Bank's write-off of both its stock and 
debenture investments in Nationar. See Note 14 to Notes to 
Consolidated Financial Statements.

Non-interest expense

Non-interest expense for the year ended September 30, 1996 was $4,258,000,
a decrease of $407,000 from fiscal 1995 when the 
Company recorded the $660,000 provision for losses on Nationar. Excluding
the Nationar provision, non-interest expense in 1996 was 
up $253,000 or 6.3%. Increases in 
personnel costs, outside data processing, other professional fees,
costs related to real estate acquired in foreclosure, 
and all other expenses were partially offset by reductions in FDIC
insurance premiums and advertising expenses. 

Salaries and employee benefits were $2,173,000, an increase of $232,000,
or 11.9% over 1995, principally due to ESOP and 
postretirement benefit costs other than pensions. In fiscal 1996,
the Company recognized ESOP expense of $119,000, representing 
the expense since April 18, 1996, a period of less than six months.
In addition, on October 1, 1995, the Company implemented 
Statement of Financial Accounting Standard No. 106 (SFAS #106), which
increased the expense of postretirement benefits other than 
pensions by approximately $150,000. Partially offsetting the increases
were lower medical benefit costs as the Company changed 
insurance carriers and received premium reductions due to its favorable
claims experience.

Outside data processing costs were $337,000 in 1996, an increase of
$102,000 or 43.4% over 1996. The increase is principally due 
to a change from paying for services by maintaining compensating balances
for which no interest was received, to instead paying 
direct service fees, only with no required compensating balances.
Management believes that the increase in servicing fees is 
offset by an increase in interest earned on the amounts no longer
required to be held as compensating balances. Professional fees 
increased $88,000, principally from higher legal and accounting 
costs relating to operating a public company. Other real estate costs
were higher as the Company, as part of its regular 
valuations of real estate owned, recorded write-downs on certain properties
acquired in foreclosure and increased its estimated 
cost of disposition. All other expenses were $594,000, an increase
of $143,000 or 31.7%. The increases were principally $55,000 in 
OTS assessments due to the Bank's change to a federal thrift charter,
higher directors' fees of $46,000 and increased insurance 
costs of operating 
a "public" company. 

Advertising and business promotion expense was $137,000 in 1996, a
decrease of $187,000. The decrease was principally because 1995 
included more special promotional campaigns. FDIC insurance premiums
were lower in 1996, since the Bank is BIF insured and paid 
only the regulatory minimum of $500 in each of the last three quarters
of fiscal 1996, and $.04 for the first fiscal quarter of 
1996, compared to last year's $.23 per $100 of assessed deposits for
the first fiscal quarter, and $.04 for the remaining three 
quarters.

Income taxes

Income tax expense for the year ended September 30, 1996 was $2,136,000,
an increase of $935,000, or 77.9% higher than the same 
period of 1995. The increase was principally the 86.4% improvement
in income before income taxes. The Company's effective tax rate 
for the years ended September 30, 1996 and 1995, were 39.17% and 41.06%,
respectively. The decrease in the Company's effective 
rate in 1996 was principally the $131,000 reduction in the Company's
deferred tax valuation reserve as certain deferred tax 
uncertainties were resolved.

Liquidity and Capital Resources

Liquidity is the ability to generate cash flows to meet present, and
expected future funding needs. Management monitors the 
Company's liquidity position, principally its federal funds and short-term
borrowings, on a daily basis and evaluates its ability 
to meet expected and unexpected depositor withdrawals and to make
new loans and or investments. 
The Company has historically maintained high levels of 
liquidity, and manages its balance sheet so there has been no need
for unanticipated sales of assets.

The primary sources of funds for operations are deposits, short-term
borrowings, principal and interest payments on loans, 
mortgage backed securities, and other securities available for sale.

Net cash provided by operating activities was $5.7 million for the
year ended September 30, 1997, a decrease of $.2 million over 
the comparable period of 1996. The decrease from 1996, was principally
the collection of the Company's claim against Nationar, 
partially offset by an increase in net income, an increase in accrued
expenses and other liabilities, and non cash compensation 
accruals such as MRP and ESOP compensation expense. In June 1996,
the Company received approximately $3.1 million of its claim 
against Nationar with the remaining balance of $183,000 collected
in the year ended September 30, 1997, or a net change of $2.9 
million. The increase in accrued expenses and other liabilities was
principally caused by an increase in outstanding official bank 
checks, resulting from a change in school tax due dates. Investing
activities used $41.3 million in 1997, as the Company invested 
more of its initial net offering 
proceeds in securities available for sale, principally mortgage backed
securities and, to a lesser extent, loans and capital 
expenditures related to its new branch office. Financing activities
used $1.8 million, as the Company repurchased 1,029,476 shares 
of its common stock at a cost of approximately $15.3 million, and
paid cash dividends of approximately $1.0 million, offset 
somewhat by an $11.4 million increase in the Company's short-term
borrowings and a $4.2 million increase in deposits. For more 
details 
concerning the Company's cash flows, see "Consolidated Statements
of Cash Flows."

An important source of the Company's funds is the Bank's core deposits.
Management believes that a substantial portion of the 
Bank's $200.9 million of deposits are a dependable source of funds
due to long term customer relationships. The Company does not 
currently use brokered deposits as a source of funds, and deposit
accounts having balances in excess of $100,000 total only $20.0 
million or less than 10.0% of total deposits. The Bank is required
to maintain minimum levels of liquid assets as defined by the 
OTS regulations. The requirement, which may be varied by the OTS depending
upon economic conditions and deposit flows, is based 
upon a percentage of deposits and short-term borrowings. The OTS required
minimum liquidity ratio is currently 5% and for the 
month of September 1997, the Bank exceeded that, maintaining an average
liquidity ratio of 20.1%. On November 24, 1997, the OTS 
issued an updated rule, which simplifies and streamlines its liquidity
regulation. Under the new rule, the minimum liquidity ratio 
has been reduced to 4%, and the definition of liquid assets, as well
as net withdrawable accounts were revised. Since the Bank was 
in substantial compliance before the regulation, the new rule should
not have a material effect on its operations.

The Company anticipates that it will have sufficient funds to meet
its current commitments. At September 30, 1997, the Company had 
commitments to originate loans of $1.3 million. In addition, the Company
had undrawn commitments of $2.5 million on home equity 
and other lines of credit. Certificates of deposits which are scheduled
to mature in one year or less at September 30, 1997, 
totaled $63.2 million, and management believes that a significant
portion of such deposits will remain with the Company.

Catskill Financial is regulated by the OTS and although there are
no minimum capital requirements for the holding company itself, 
the Bank is required to maintain minimum regulatory capital ratios.
The following is a summary of the Bank's actual capital 
amounts and ratios as of September 30, 1997, compared to the OTS minimum
capital requirements:

<TABLE>
<CAPTION>
                                                                    Actual                           Minimum

(dollars in thousands)                                        Amount           %               Amount           %
<S>                                                           <C>              <C>             <C>              <C>

Tangible Capital                                              $59,031          20.7%           $4,278           1.5%
Core Capital                                                   59,031          20.7             8,556           3.0
Risk Based Capital                                             60,159          61.3             7,854           8.0

</TABLE>

Liquidity and Capital Resources (continued)

In October 1996, the Board of Directors authorized the Company to
repurchase 4% of its issued and outstanding shares to fund its 
Management Recognition Plan which was approved at a special meeting
of shareholders on October 24, 1996. By December 4, 1996, the 
Company had completed the repurchase of 227,470 shares of its common
stock to fund the MRP at a cost of $3.1 million, or an 
average of $13.59 per share. In addition, after Board approval, the
Company received OTS approval on November 26, 1996, to 
repurchase up to 10% of its shares over the period ending April 18,
1997. Such shares are available for general corporate purposes 
including funding the Company's stock option plan which was also approved
at the special meeting of shareholders. By April 17, 
1997, the Company had completed the repurchase of 564,506 shares under
the 10% repurchase program at a cost of $8.5 million or 
$15.06 per share. On May 15, 1997, the Company filed notice with the
OTS of its intention to repurchase up to 5% of its 
outstanding stock, or 253,675 shares. The OTS had no objection to
the proposal, provided the purchases are completed by April 18, 
1998, and by September 30, 1997, the Company had already repurchased
237,500 shares at a cost of $3.7 million or $15.73 per share. 
The Holding Company itself has adequate resources to repurchase the
remaining 16,175 shares without dividends from the Bank. In 
addition, at September 30, 1997, the Bank could, after notifying the
OTS in writing, pay to the holding company dividends of 
approximately $26.5 million.

Impact of Year 2000

The Company has conducted a comprehensive review of its computer systems
to identify applications that could be affected by the 
"Year 2000" issue, and has developed an implementation plan to resolve
the issue. The Company's data processing is performed 
exclusively by third party vendors, consequently, the Company is primarily
dependent 
on those vendors to conduct its business. The Company has already
contacted each vendor to request time tables for year 2000 
compliance and expected costs, if any, to be passed along to the Company.
The Company's primary service provider anticipates that 
all reprogramming efforts will be completed by December 31, 1998,
allowing the Company adequate time for testing. Certain other 
vendors have not yet responded, however, the Company will pursue other
options if it appears that these vendors will be unable to 
comply. Management does not expect these costs to have a significant
impact on its financial position or results of operations, 
however, there can be no assurance that the vendors systems will be
2000 compliant, consequently the Company could incur 
incremental costs to convert to another vendor.

Impact of Inflation and Changing Prices

The Company's consolidated financial statements are prepared in accordance
with generally accepted accounting principles which 
require the measurement of financial position and operating results
in terms of historical dollars without considering the changes 
in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increasing cost 
of the Company's operations. Unlike most industrial companies, nearly
all assets and liabilities of the Company are monetary. As a 
result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. In 
addition, interest rates do not necessarily move in the direction,
or to the same extent as the 
price of goods and services.

Impact of New Accounting Standards

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

Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of 
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other 
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that 
then shared in the earnings of the entity (such as the Company's stock
options). This Statement is effective for financial 
statements issued for periods ending after December 15, 1997, including
interim periods. Earlier adoption is not permitted. This 
Statement requires restatement of all prior-period EPS data presented.
Management does not anticipate the effect of the adoption 
of SFAS No. 128 to be material.

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 129, "Disclosure 
of Information about Capital Structure" (SFAS No. 129), which establishes
standards 
for disclosure about a company's capital structure. In accordance
with SFAS No. 129, companies will be required to provide in the 
financial statements a complete description of all aspects of their
capital structure, including call and put features, redemption 
requirements and conversion options. The disclosures required by SFAS
No. 129 are for financial statements for periods ending 
after December 15, 1997. Management anticipates providing the required
information in the 1998 annual consolidated financial 
statements.

In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130, "Reporting 
Comprehensive Income" (SFAS No. 130).
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income. SFAS No. 130 states that comprehensive 
income includes the reported net income of a company adjusted for
items that are currently accounted for as direct entries to 
equity, such as the mark to market adjustment on securities available
for sale, foreign currency items and minimum pension 
liability adjustments. This statement is effective for fiscal years
beginning after December 15, 1997. Management anticipates 
developing the required information for inclusion in the 1998 annual
consolidated financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 131, "Disclosure 
about Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131 establishes standards for reporting by 
public companies about operating segments of their business. SFAS
No. 131 also establishes standards for related disclosures about 
products and services, geographic areas and major customers. This
statement is effective for periods beginning after December 15, 
1997. Management anticipates developing the required information for
inclusion in the 1998 annual consolidated financial 
statements of Catskill Financial Corporation.