LOGO
Jeffersonville Bancorp
Annual Report

1997
To Our Stockholders and Customers:
     The year  1997 was a  disappointment,  from an  earnings  perspective,  for
Jeffersonville  Bancorp.  Operating in the adverse  economic climate of Sullivan
County,  we incurred a much higher  level of loan losses  compared to the recent
past.  Net income  for 1997 was  $1,763,000,  a decrease  of 17.8% from 1996 net
income of $2,145,000. The first quarter saw the overwhelming defeat of the
casino gambling proposal by the New York State Senate. This was a severe blow to
many people who were relying on the expected  economic  upturn to improve  their
financial  situation.  A short time later,  the  announcement  of the Chapter 11
bankruptcy  by the  Concord  Hotel  raised  more  questions  with  regard to the
viability of our tourism industry. During the second quarter, Alan Gerry, former
CEO of Liberty-based Cablevision Industries, announced that he had purchased the
Woodstock  site plus over  1,000  surrounding  acres  and was  planning  a major
tourist  destination.  This  announcement  had a positive impact on the area and
speculators  began purchasing  properties in the vicinity of the site as well as
the Route 17B corridor.  The third  quarter saw renewed  efforts by the Sullivan
County  Partnership,  the  Industrial  Development  Agency and the Department of
Economic  Development to attract  businesses to the area.  Initial  contacts for
several  major  projects  occurred over the summer and continue to show promise.
The highlight of the fourth quarter of 1997 was the personal visit from Governor
Pataki to the County.  His meeting with local officials  resulted in a pledge of
$2,000,000  in economic  development  aid.  Jeffersonville  Bancorp's  financial
performance is directly  affected by the local economy,  as approximately 98% of
our  outstanding  loans are to Sullivan County  residents and  businesses.  As a
community  bank,  we have made a commitment  to  customers to provide  loans and
other  services  to meet  their  banking  needs.  We  intend  to  continue  this
commitment.  Sullivan  County  has the  unenviable  status of having  the lowest
economic  rating in New York State as reported by  Roosevelt  & Cross,  Inc.,  a
highly regarded municipal bond dealer. Their report did go on to state, however,
that  initiatives are being taken to try to improve the depressed local economy.
Our  disappointing  1997 earnings were  primarily a result of loan losses.  Loan
losses aside, the underlying  strength of the bank is evident. We have continued
to increase  our  leadership  in market share in the County and feel we are well
positioned to reap the rewards of an economic revival. As always, your comments,
questions and suggestions are welcome.  Thank you for your patience during these
trying times.

/s/ Arthur E. Keesler
Arthur E. Keesler, President
Jeffersonville Bancorp

/s/ Raymond Walter
Raymond Walter, President
First National Bank of Jeffersonville


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<PAGE>



Arthur E. Keesler
Raymond Walter
Jeffersonville Bancorp Board of Directors
Arthur E. Keesler
Gibson McKean
Lawrence H. Cooke
John K. Gempler
Edward T. Sykes
Frederick W. V. Schadt, Jr.
Raymond Walter
John W. Galligan
James F. Roche
Gilbert E. Weiss
Earl A. Wilde
Douglas A. Heinle
Solomon Katzoff
Selected Financial Information
Five-Year Summary
<TABLE>
<CAPTION>

                                       2
<PAGE>

                                    1997           1996           1995           1994           1993
                                    ----           ----           ----           ----           ----
Results of Operations
<S>                            <C>             <C>             <C>             <C>             <C>
Net interest income ........   $  8,904,000    $  8,666,000    $  8,581,000    $  9,245,000    $  9,340,000
Provision for loan losses ..      1,150,000         290,000         160,000         427,000         405,000
Net income .................      1,763,000       2,145,000       2,424,000       2,460,000       2,983,000
Financial Condition
Total assets ...............   $213,659,000    $196,113,000    $188,469,000    $188,118,000    $175,245,000
Deposits ...................    179,160,000     172,930,000     164,184,000     165,531,000     155,251,000
Loans, net .................    125,793,000     115,605,000     109,288,000     101,414,000      97,076,000
Stockholders' equity .......     22,176,000      20,975,000      20,928,000      17,782,000      18,023,000
Average Balances
Total assets ...............   $211,034,000    $198,134,000    $193,568,000    $194,114,000    $177,896,000
Deposits ...................    180,635,000     173,139,000     169,209,000     165,368,000     158,766,000
Gross loans ................    122,567,000     113,981,000     107,567,000     100,517,000      96,680,000
Stockholders' equity .......     21,539,000      20,751,000      19,871,000      18,483,000      16,973,000
Financial Ratios
Net income to
  average total assets .....           0.84%           1.08%           1.25%           1.27%           1.68%
Net income to average
 stockholders' equity ......           8.19%          10.34%          12.20%          13.31%          17.57%
Average stockholders'
 equity to average
total assets ...............          10.21%          10.47%          10.27%           9.52%           9.54%
      Per Share Data*
      Income per share .....   $       1.24    $       1.49    $       1.61    $       1.59    $       1.93
      Dividends per share ..           0.56            0.54            0.50            0.46            0.42
      Dividend payout ratio           44.92%          36.13%          31.15%          28.82%          21.59%
      Book value at year end   $      15.62    $      14.78    $      14.16    $      11.50    $      11.66
      Total dividends paid .        792,000         775,000         755,000         709,000         644,000
      Average number of
       shares outstanding ..      1,419,298       1,440,623       1,503,480       1,545,996       1,545,996
      Shares outstanding
       at year end .........      1,419,295       1,419,353       1,477,860       1,545,996       1,545,996
</TABLE>

* All share and per share  amounts  have  been  adjusted  for the  affect of the
twenty percent stock dividend distributed in February 1998.


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<PAGE>



Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations

The following is a discussion of the factors  which  significantly  affected the
consolidated  results of operations  and financial  condition of  Jeffersonville
Bancorp  ("the  Parent  Company")  and its  wholly-owned  subsidiary,  The First
National Bank of Jeffersonville  ("the Bank").  For purposes of this discussion,
references to the Company include both the Bank and Parent Company,  as the Bank
is the Parent  Company's  only  subsidiary.  This  discussion  should be read in
conjunction with the consolidated  financial  statements and notes thereto,  and
the other financial information appearing elsewhere in this annual report

General

The  Parent  Company  is  a  one-bank   holding  company  founded  in  1982  and
headquartered in  Jeffersonville,  New York. The Parent Company owns 100% of the
outstanding  shares of the Bank's common stock and derives  substantially all of
its income from the Bank's  operations.  The Bank is a commercial bank chartered
in 1913  serving  Sullivan  County,  New York with  offices  in  Jeffersonville,
Eldred, Liberty, Loch Sheldrake,  Monticello,  Livingston Manor, Narrowsburg and
Callicoon.  The Company's mission is to serve the community banking needs of its
borrowers and depositors,  who predominantly  are individuals,  small businesses
and local  municipal  governments.  The  Company is in tune with local  customer
needs and provides  quality service with a personal  touch.  This discussion and
analysis of financial  results should be reviewed with the Company's  philosophy
in mind.

Local Economy

The local  economy  displayed  continued  lackluster  performance  in 1997.  The
Company's  borrowers  continued to struggle  with their loan payments due to the
local economy's poor performance,  although we did see some growth in commercial
and home equity loan demand.  The Company will continue to seek opportunities to
provide  fresh  capital for the local  economy,  while  adhering to prudent loan
underwriting  standards.  Management  of the  Company  does not  anticipate  any
improvement in the local economy in 1998.  However,  the groundwork has been put
in place by county  government and private  enterprise  for several  initiatives
which could bolster the local economy at some point in the future.

Financial Condition

     Total  average   assets  in  1997  increased   $12,900,000   over  1996  to
$211,034,000,  an  increase  of  6.5%  compared  to a 2.4%  increase  in 1996 to
$198,134,000  from  $193,568,000  in 1995.  Average assets  increased in 1997 as
deposit  growth and Federal Home Loan Bank  ("FHLB")  borrowings  were  invested
primarily into loans that met our underwriting criteria and securities available
for sale.
Total average securities (including securities available for sale and investment
securities  held  to  maturity)   increased   $3,296,000  or  4.6%  in  1997  to
$74,900,000,  compared  to a 1.0%  decrease  in the prior  year.  Total  average
securities were $71,604,000 and $72,335,000 for 1996 and 1995, respectively. The
increase in 1997  reflects a  leveraging  strategy  in which the Company  funded
security purchases with FHLB borrowings.  The purchases were partially offset by
sales  of  tax  exempt  securities  in  order  to  minimize  the  impact  of the
alternative  minimum  tax.  See  notes  3 and 4 to  the  consolidated  financial
statements  for  period-end  balances  of  securities  available  for  sale  and
investment  securities.  Average  interest  bearing  deposits in 1997  increased
$5,497,000  to  reach  $155,568,000,  an  increase  of 3.7%  compared  to a 1.0%
increase in 1996 to $150,071,000  from $148,568,000 in 1995. The higher interest
rates paid on time savings certificates in 1997 resulted in an increase in these
deposits,  as funds  flowed  from other types of accounts  paying  lower  rates.
During  1995 a new savings  certificate  product,  the  Escalator  Account,  was
introduced.  This  account  is  written  with an 18 month  term,  but  gives the
depositor an option  during the deposit  term to increase the interest  rate one



                                       4
<PAGE>



time to match  market  rates.  The  Escalator  Account  has  proven to be a very
popular  product,  growing to $22,471,000  at year end 1997 from  $15,800,000 in
1996 and from  $6,000,000 in 1995. In 1997,  average demand  accounts  increased
8.7% over 1996, after increasing 11.8% in 1996 above the 1995 level. The Company
offers these accounts on an extremely competitive basis and continues to attract
a pool of low cost  funds  for  reinvestment  in the  community.

Loans

In  1997,   average  loans  increased   $8,586,000  to  $122,567,000,   up  from
$113,981,000  in 1996 and  $107,567,000  in 1995.  This increase was  acceptable
considering  the current  condition  of the local  economy.  As in prior  years,
average  residential and commercial real estate loans made up a major portion of
the loan  portfolio at 71.0% of total loans in 1997,  compared to 74.6% in 1996.
Home equity loans were  introduced in 1996 and increased from $4,331,000 at year
end 1996,  to  $7,677,000  at year end 1997,  an increase  of 77.3%.  Additional
growth is anticipated in home equity loans during 1998.  Average commercial time
and demand loans and average  consumer loans showed  combined net growth of 9.6%
in 1997.  The overall  portfolio is structured in accordance  with  management's
belief that loans secured by residential  and commercial  real estate  generally
result in lower loan loss levels  compared  to other types of loans,  because of
the value of the underlying collateral.

Provision for Loan Losses

The  provision  for loan losses was  $1,150,000  in 1997 compared to $290,000 in
1996 and $160,000 in 1995. The substantial  increase in 1997 primarily  reflects
higher net charge-offs in each loan category and, to a lesser extent,  portfolio
growth and an overall increase in nonaccrual loans. Net (Charge-offs) Recoveries
by Loan Category for Years Ended December 31, 1997, 1996 and 1995



                                                1997         1996         1995
                                                ----         ----         ----
Loan Category

Residential Mortgages      Charge-off      $(155,000)   $ (71,000)   $ (34,000)
                             Recovery          8,000       32,000       70,000
Commercial Mortgages       Charge-off       (425,000)        --           --
                             Recovery         76,000         --         28,000
Commercial Loans           Charge-off       (371,000)     (58,000)    (182,000)
                             Recovery         91,000       23,000       34,000
Consumer Loans             Charge-off       (223,000)    (167,000)    (120,000)
                             Recovery         68,000       65,000      118,000
Other Loans                Charge-off        (81,000)     (50,000)     (48,000)
                             Recovery         13,000       18,000       11,000
                                              ------       ------       ------

                                           $(999,000)   $(208,000)   $(123,000)
                                           =========    =========    =========



Net  charge-offs  were 0.82% of average  outstanding  loans in 1997  compared to
0.18% in 1996 and 0.11% in 1995,  reflecting a much higher level of loan losses.
This unfavorable net trend may
continue until the local economy improves.  On a combined basis, net charge-offs
on residential  and commercial  mortgages  increased by $457,000 from $39,000 in
1996 to $496,000 in 1997. This increase was due in part to Sullivan County's new
policy of  accelerated  tax sales for  properties  with real estate tax arrears.
Management has instituted new tax escrow  policies on renewing  mortgages and is
upgrading  the Bank's loan  collection  practices,  in an effort to mitigate the
problem  of  rising  delinquencies  and  loan  losses.  The  net  charge-off  on



                                       5
<PAGE>



commercial  loans was  $280,000  in 1997 or 2.65% of  average  commercial  loans
outstanding,  a substantial increase compared to 0.38% for 1996. The increase in
commercial  loan losses was  concentrated in a few large loans that defaulted in
1997.  Efforts  continue  to recover a portion of these  losses.  Consumer  loan
charge-offs  also  increased  in 1997,  as borrowers  struggled  with their loan
payments in a unfavorable local economy.
     Other loan and credit card net  charge-offs of $68,000 in 1997  represented
3.37% of average outstanding loans in this category, an increase of $36,000 from
1996, reflecting the higher credit risk inherent in these types of loans. Higher
interest rates on these loans help compensate for this risk.
The Company manages asset quality with an intensive review process that includes
careful  analysis of credit  applications  and both  internal and external  loan
review of existing  outstanding loans and delinquencies.  Management strives to:
identify potential  non-performing  loans early; take charge-offs promptly based
on a realistic assessment of probable losses; and maintain an adequate allowance
for loan losses based on the inherent risk of loss in the existing portfolio. No
portion of the  allowance is  restricted  to any loan or group of loans,  as the
entire  allowance is available to absorb  charge-offs in any loan category.  The
amount and timing of future charge-offs and allowance  allocations may vary from
current  estimates.  The following table shows the distribution of the allowance
for loan losses and the percentage of each loan type to total loans outstanding.

Distribution of Allowance for Loan Losses at December 31, 1997
                                                                Loan Balance by
                                Allowance        Percentage of        Type to
                                  Balance       Total Allowance    Total Loans 1
Loan Category
Residential Mortgages          $  606,000              32.5%           59.7%
Commercial Mortgages              400,000              21.5            16.5
Commercial Loans ....             476,000              25.6            10.3
Consumer Loans ......             304,000              16.3            12.2
Other Loans .........              76,000               4.1             1.3
                                   ------               ---             ---

                               $1,862,000             100.0%          100.0%
                               ==========             =====           =====

Distribution of
Allowance for
Loan Losses at
December 31, 1996
                                                                Loan Balance by
                                Allowance       Percentage of         Type to
                                  Balance      Total Allowance     Total Loans 1
                                  -------      ---------------     -------------
Loan Category
Residential Mortgages          $  610,000              35.7%           61.0%
Commercial Mortgages              250,000              14.6            16.1
Commercial Loans ....             384,000              22.4             8.1
Consumer Loans ......             319,000              18.6            13.5
Other Loans .........             148,000               8.7             1.3
                                  -------               ---             ---

                               $1,711,000             100.0%          100.0%
                               ==========             =====           =====

1 Percentage  relationship between average loans outstanding by type compared to
total average loans outstanding.


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<PAGE>





     The allowance for loan losses was  $1,862,000 at December 31, 1997 compared
to $1,711,000  and $1,629,000 at December 31, 1996 and 1995,  respectively.  The
allowance  as a  percentage  of total  loans was  1.45% at  December  31,  1997,
compared to 1.46% and 1.47% at December  31,  1996 and 1995,  respectively.  The
allowance's  coverage  of  non-performing  loans was  50.4%,  38.2% and 39.0% at
December 31, 1997, 1996 and 1995, respectively.
The total  allowance for loan losses at December 31, 1997 includes an allocation
of $408,000,  or 21.9%, to classified commercial mortgages and commercial loans;
the remainder is a general
allocation. The allocation to classified loans at December 31, 1996 was $573,000
or 33.5%. Future charge-offs will continue to be dependent on the local economy.
Management  believes that the  allowance  for loan losses is adequate;  however,
certain regulatory  agencies,  as an integral part of their examination process,
periodically  review the adequacy of the  Company's  allowance  for loan losses.
Such  agencies may require the Company to recognize  additions to the  allowance
based on their  judgments  about  information  available  to them at the time of
their examination which may not be currently available to management

 Nonaccrual and  Past  Due  Loans

The Company places a loan on nonaccrual status when  collectability of principal
or interest is doubtful, or when either principal or interest is 90 days or more
past due and the loan is not well  secured  and in the  process  of  collection.
Interest payments received on nonaccrual loans are applied as a reduction of the
principal  balance  when  concern  exists  as  to  the  ultimate  collection  of
principal. A distribution of nonaccrual loans and loans 90 days or more past due
and still accruing interest is shown in the following table. December 31, 1997

<TABLE>
<CAPTION>
                                            90 Days
                                            or More
                           Nonaccrual    Still Accruing      Total      Percentage1  Percentage2
                           ----------    --------------      -----      -----------  -----------
Loan Category
<S>                        <C>             <C>             <C>               <C>        <C>
Residential Mortgages      $2,012,000      $  330,000      $2,342,000        3.1%       63.4%
Commercial Mortgages        1,258,000            --         1,258,000        5.4        34.1
Commercial Loans ....          54,000            --            54,000        0.4         1.5
Consumer Loans ......            --            38,000          38,000        0.2         1.0
                                               ------          ------        ---         ---

Total ...............      $3,324,000      $  368,000      $3,692,000        2.8%      100.0%
                           ==========      ==========      ==========        ===       =====

December 31, 1996
                                            90 Days
                                            or More
                           Nonaccrual    Still Accruing      Total      Percentage1  Percentage2
Loan Category
Residential Mortgages      $  856,000      $1,047,000      $1,903,000        2.8%       47.7%
Commercial Mortgages        1,021,000         299,000       1,320,000        8.4        33.0
Commercial Loans ....         695,000           4,000         699,000        7.0        17.5
Consumer Loans ......            --            73,000          73,000        0.4         1.8
                                               ------          ------        ---         ---

Total ...............      $2,572,000      $1,423,000      $3,995,000        3.3%      100.0%
                           ==========      ==========      ==========        ===       =====
</TABLE>

1 Percentage of gross loans outstanding for each loan category.  2 Percentage of
total nonaccrual and 90 day past due loans.


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<PAGE>



     The  small  decrease  in total  nonaccrual  and 90 day  past  due  loans is
primarily due to a decrease in nonaccrual commercial loans, substantially offset
by an increase in total nonaccrual and past due residential mortgages. The lower
level of nonaccrual  commercial loans reflects,  in part, the higher charge-offs
during 1997.  The increase in residential  mortgage  loans occurred  despite the
borrowers  doing their  utmost to repay their loans to protect  their homes in a
difficult  economic  environment.  The majority of the  nonaccrual  and past due
loans are  secured  loans and,  as such,  management  anticipates  there will be
limited  risk of loss in their  ultimate  resolution.  As of December  31, 1997,
management believes all significant potential problem loans have been identified
in the table above.

Restructured Loans

Loans  are  renegotiated  in a  troubled  debt  restructuring  when the  Company
determines that it will ultimately  receive greater economic value under the new
terms than through  foreclosure,  liquidation,  or  bankruptcy.  Candidates  for
renegotiation must meet specific  guidelines.  These guidelines consider factors
such as:  the  borrower's  ability  to enhance  the value of the  property;  the
availability and value of collateral;  the ability of the guarantor,  if any, to
perform; and the economic value of the renegotiated loan relative to foreclosure
and other options.  Restructured  loans  performing in accordance with their new
terms and, therefore,  not included in nonaccrual loans, amounted to $481,000 at
December 31, 1996.

Other Real Estate Owned

Other real estate owned represents  properties  acquired through foreclosure and
loans classified as in-substance foreclosures.  In accordance with SFAS No. 114,
a loan is classified as an in-substance  foreclosure  when the Company has taken
possession  of  the  collateral   regardless  of  whether   formal   foreclosure
proceedings  have  taken  place.  Other  real  estate  owned is  recorded  on an
individual  asset basis at the lower of (1) fair value less  estimated  costs to
sell or (2) "cost"  (defined as the fair value at initial  foreclosure).  When a
property is acquired or classified as  in-substance  foreclosure,  the excess of
the loan balance over the fair value of the property is charged to the allowance
for loan  losses.  Subsequent  write downs to reflect  further  declines in fair
value are included in other operating expense.  The following are the changes in
other real estate owned during the last two years:

Years Ended December 31, 1997
and 1996
                            1997            1996
                            ----            ----
Beginning Balance      $ 831,000       $ 549,000
Additions .......        352,000         814,000
Sales ...........       (763,000)       (501,000)
Write downs .....       (119,000)        (31,000)
                        --------         -------

Ending Balance ..      $ 301,000       $ 831,000
                       =========       =========

Liquidity

Liquidity  is the  ability to  provide  sufficient  cash flow to meet  financial
commitments  and to fund  additional  loan  demand  or  withdrawal  of  existing
deposits. The Company's primary sources of
liquidity are: its deposit base; FHLB  borrowings;  repayments and maturities on
loans;  short-term assets such as federal funds and short-term  interest bearing
deposits in banks;  and maturities  and sales of securities  available for sale.
These sources are available in amounts  sufficient to provide  liquidity to meet
the Company's ongoing funding requirements. The Bank's membership in the FHLB of
New  York  enhances  liquidity  in the form of a  revolving  line of  credit  of
$20,651,000 which may be used to meet unforeseen liquidity demands and for other
purposes.  At December  31, 1997,  $10,000,000  of this line of credit was being
used to fund  securities  leverage  transactions.  In 1997,  cash generated from



                                       8
<PAGE>



operating  activities  amounted to $3,124,000  and cash generated from financing
activities amounted to $15,312,000. These amounts were substantially offset by a
use of cash in investing activities of $17,296,000,  resulting in a net increase
in cash and cash equivalents of $1,140,000.  See the Consolidated  Statements of
Cash Flows for  additional  information.

Capital  Adequacy

One of management's  primary objectives is to maintain a strong capital position
to merit the confidence of depositors, the investing public, bank regulators and
shareholders.  A strong  capital  position  should  help the  Company  withstand
unforeseen  adverse  developments  and take  advantage of profitable  investment
opportunities when they arise. Stockholder's equity increased $1,201,000 or 5.7%
in 1997  following an increase of 0.2% in the prior year.  In 1996,  the Company
offered to repurchase and retire 50,000 common shares utilizing  open-market and
privately-negotiated  purchases.  By  December  31,  1996,  49,672  shares  were
acquired  at $21.00  per share,  reducing  stockholders'  equity by  $1,043,000.
Although the Board of Directors  authorized that $1,000,000 be made available to
purchase and retire additional  shares during 1997, no shares were acquired.  In
1998,  the Board of  Directors  has again  authorized  that  $1,000,000  be made
available  to  purchase  and  retire  additional  shares  on  the  open  market.
Management  believes that the  repurchase of Company stock  represents a prudent
use of excess capital.  The Company retained $971,000 from 1997 earnings,  while
the after-tax adjustment for the change in the net unrealized gain on securities
available for sale increased capital by $231,000.  In accordance with regulatory
capital  rules,  the  adjustment  for  securities  available  for  sale  is  not
considered in the computation of regulatory  capital  ratios.  Under the Federal
Reserve Bank's risk-based capital rules, the Company's Tier I risk-based capital
was 17.7% and total risk-based capital was 19.0% of risk-weighted  assets. These
risk-based capital ratios are well above the minimum regulatory  requirements of
4.0% for Tier I capital and 8.0% for total capital. The Company's leverage ratio
(Tier I capital  to  average  assets)  of 10.0% is well  above the 4.0%  minimum
regulatory  requirement.  The following table shows the Company's actual capital
measurements compared to the minimum regulatory requirements. At December 31,
1997 and 1996
                                                           1997         1996
                                                           ----         ----
Tier I capital
Stockholders' equity, excluding the after-tax net
 unrealized gain on securities available for sale   $ 21,623,000    $ 20,653,000
Tier II capital
Allowance for loan losses1 ......................      1,528,000       1,343,000
                         -                             ---------       ---------

Total risk-based capital ........................   $ 23,151,000    $ 21,996,000
                                                    ============    ============

Risk-weighted assets2 ...........................   $121,885,000    $107,056,000
                    =                               ============    ============

Average assets ..................................   $211,034,000    $198,134,000
                                                    ============    ============

Ratios
Tier I risk-based capital (minimum 4.0%) ........          17.7%           19.3%
Total risk-based capital (minimum 8.0%) .........          19.0%           20.6%
Leverage (minimum 4.0%) .........................          10.0%           10.4%

     1 The allowance for loan losses is limited to 1.25% of risk-weighted assets
for the purpose of this  calculation.  2 Risk-weighted  assets have been reduced
for excess  allowance for loan losses  excluded from total  risk-based  capital.


                                       9
<PAGE>



Results of Operations

Net Income

Net  income  for 1997 of  $1,763,000  was down 17.8% from the 1996 net income of
$2,145,000,  following an 11.5%  decrease in 1996 compared to 1995 net income of
$2,424,000.  These  decreases were due to the interaction of a number of factors
including  increasing  pressure  on net  interest  margin,  increased  loan loss
provisions and other costs  associated  with problem loans and other real estate
owned.  The most  significant  factor  which  lowered  1997 net  income  was the
increase in the provision  for loan losses to $1,150,000  from $290,000 in 1996,
an increase of $860,000 or 296.6%. The increase reflects higher loan charge-offs
largely  attributable to Sullivan County's poor economic climate.  Occupancy and
equipment  expense  increased  $189,000,  or  18.0%,  in 1997  primarily  due to
investments  in new computer  technology  and an additional  supermarket  branch
opening. Employee benefits expense increased in 1997 by $108,000, or 13.0%.

Interest Income and Interest Expense

Throughout the following discussion,  net interest income and its components are
expressed on a tax equivalent  basis which means that,  where  appropriate,  tax
exempt  income  is shown as if it were  earned  on a fully  taxable  basis.  The
largest  source  of  income  for  the  Company  is net  interest  income,  which
represents interest earned on loans, securities and short-term investments, less
interest paid on deposits and other interest bearing  liabilities.  Net interest
income of  $9,653,000  for 1997  represented  in an increase of 1.6% compared to
$9,505,000  for 1996.  Interest  income  for 1997 was  $16,596,000  compared  to
$15,783,000 in 1996 and  $15,716,000 in 1995. The increase in 1997 is the result
of  an  increase  in  the  average  balance  of  interest  earning  assets  from
$187,423,000  in 1996 to $199,829,000 in 1997, an increase of 6.6%. The increase
in earning assets was partially  offset by an overall  decrease in average yield
on earning assets of eleven basis points in 1997. In the current  declining rate
environment,  average  yields will decline as loans are made and  securities are
acquired at yields below existing  portfolio rates.  Loans increased slightly in
1997,  primarily due to an increase in home equity loans. In 1998,  increases in
funding will be allocated first to meet loan demand,  as necessary,  and then to
the investment portfolios.  Interest expense in 1997 increased $665,000 or 10.6%
over 1996,  contrasted to a 0.1% decrease from 1995 to 1996. The average balance
of  interest  bearing  liabilities   increased  from  $150,071,000  in  1996  to
$162,414,000  in 1997, an increase of 8.2%.  Like rates on earning  assets,  the
cost of funding is also closely tied to market rates. During 1997, deposit rates
increased  slightly.  A new competitive 18 month savings  certificate,  with one
interest  escalation  during its term,  continues to attract new  deposits.  Net
interest margin declined to 4.83% in 1997 compared to 5.07% in 1996 and 5.13% in
1995. Although the effect of a low interest rate environment will continue to be
a real challenge in maintaining the net interest margin,  the Company intends to
take actions to stabilize margin in 1998.

Operating Income and Operating Expense

Operating income primarily consists of service charges, commissions and fees for
various banking services,  and securities gains and losses.  Operating income in
1997  increased  18.0% or $191,000 over 1996.  The increase is  attributable  to
income earned on a new cashier's check program,  income from ATM fees charged to
nonbank  customers,  increases in fees for NSF checks and higher monthly service
charges for commercial  checking  accounts.  Operating  income in 1996 increased
$129,000  over the prior  year,  primarily  from net  security  gains of $95,000
compared  to a net gain of  $33,000  in 1995.  Operating  expense  increased  by
$137,000 or 2.0% in 1997,  compared to  increases  of 9.95% in 1996 and 0.03% in
1995.  Salary and wage expense combined with employee benefit expense  increased
2.8% to $3,728,000 in 1997 compared to $3,628,000 in 1996, which increased 10.8%



                                       10
<PAGE>



over $3,275,000 in 1995. Although salary expense decreased $8,000 from 1996, the
cost of group  insurance  benefits  increased  $84,000  and 401-K  contributions
increased  $24,000  compared to 1996 amounts.  Occupancy  and equipment  expense
increased  18.0% to reach  $1,238,000  in 1997,  up from  $1,049,000 in 1996 and
$936,000 in 1995.  This increase  reflects the  Company's  commitment to upgrade
facilities  and services,  which  continued in 1997 with the addition of a third
supermarket  branch and new computer network  technology.  Net other real estate
owned expense  decreased 37.1% to $178,000 in 1997 from $283,000 in 1996,  after
increasing  from  $184,000  in 1995.  Only an upturn in the local  economy  will
decrease foreclosure activity and the associated costs. In the interim, however,
the  Company  will  continue  to  follow  its loan  underwriting  and  appraisal
standards to decrease  future losses,  and will continue to make every effort to
liquidate  foreclosed  property  in a fashion  that will  minimize  loss.  Other
operating  expense at $1,714,000 in 1997 decreased by $47,000 or 2.7% from 1996.

Year 2000  Planning  and  Implementation

The Company has reviewed its computer systems to identify the systems that could
be affected by the "Year 2000" issue, and has developed an  implementation  plan
to address the issue.  The Year 2000 problem is the result of computer  programs
being written using two digits rather than four to define the  applicable  year.
Any of the Company's programs that have time-sensitive  software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a major system failure or miscalculations.  The Company presently believes that,
with modifications to existing software and converting to new software, the Year
2000 problem will not pose  significant  operational  problems for the Company's
computer systems as so modified and converted.  However,  if such  modifications
and  conversions  are not  completed  timely,  the Year 2000  problem may have a
material impact on the operations of the Company.  In addition,  there can be no
assurance  that the systems of other  companie s on which the Company's  systems
may rely  will  become  Year 2000  compliant  in a timely  fashion,  or that the
Company's  commercial  customers  will not  experience  Year 2000 problems which
could  adversely  affect the credit  quality  of these  customer  relationships.
Management  does not  anticipate  the cost to become Year 2000 compliant will be
material to the Company's financial position or results of operations.

Recent  Accounting Standards

See note 17 to the consolidated  financial statements for a discussion
of recently issued  accounting  standards  concerning  comprehensive  income and
segment reporting.

Inflation

The Company's  operating  results  generally reflect the effects of inflation as
interest  rates,  loan demand and deposit  levels adjust to inflation and impact
net interest  income.  Management  can best counter the effect of inflation over
the long term by managing net interest income and controlling expenses. The most
significant  item not  reflecting  the  effects  of  inflation  is  depreciation
expense, as it is determined based on the historical cost of the assets




                                       11
<PAGE>


<TABLE>
<CAPTION>

 Distribution of Assets, Liabilities, & Stockholders' Equity:
Interest Rates & Interest Differential Consolidated Average Balance Sheet 1997

                                        Average    Percentage of    Interest     Average
                                        Balance    Total Asset     Earned/Paid  Yield/Rate
                                        -------    -----------     -----------  ----------
Assets
<S>                                <C>                  <C>    <C>                 <C>
Investment securities and
 securities available for sale1
  Taxable securities ...........   $  47,726,000        22.61% $   3,153,000       6.61%
  Tax-exempt securities ........      27,174,000        12.88      2,202,000       8.10
                                      ----------        -----      ---------       ----

Total Securities ...............      74,900,000        35.49      5,355,000       7.15
                                      ----------        -----      ---------       ----

Short-term investments .........       2,362,000         1.12        129,000       5.46
Loans, net of unearned discount:
  Real estate mortgages ........      86,979,000        41.22      7,461,000       8.58
Home equity loans ..............       6,000,000         2.84        518,000       8.63
Time and demand loans ..........      10,582,000         5.01        997,000       9.42
Installment loans ..............      16,988,000         8.05      1,871,000      11.01
Other loans ....................       2,018,000         0.96        265,000      13.13
                                       ---------         ----        -------      -----

TOTAL LOANS2 ...................     122,567,000        58.08     11,112,000       9.07
           -                         -----------        -----     ----------       ----

TOTAL INTEREST-
 EARNING ASSETS ................     199,829,000        94.69     16,596,000       8.31
                                     -----------        -----     ----------       ----

Allowance for loan losses ......      (1,674,000)       (0.79)
Cash and due from banks ........       6,709,000         3.18
Premises and equipment, net ....       2,668,000         1.26
Other assets ...................       3,120,000         1.48
Net unrealized gain on
 securities available for sale .         382,000         0.18
                                         -------         ----

TOTAL ASSETS ...................   $ 211,034,000       100.00%
                                   =============       ======

Liabilities and
 Stockholders' Equity
NOW and Super NOW deposits ....   $ 27,756,000        13.15%$    843,000      3.04%
Savings and insured money
 market deposits ..............     52,949,000        25.09    1,726,000      3.26
Time deposits .................     74,863,000        35.48    3,971,000      5.30
                                    ----------        -----    ---------      ----

TOTAL INTEREST-
 BEARING DEPOSITS .............    155,568,000        73.72    6,540,000      4.20
                                   -----------        -----    ---------      ----

Federal funds purchased
 and other short-term debt ....        747,000         0.35       36,000      4.82
Federal Home Loan Bank advances      6,099,000         2.89      367,000      6.02
                                     ---------         ----      -------      ----

TOTAL INTEREST-
 BEARING LIABILITIES ..........    162,414,000        76.96    6,943,000      4.27
                                   -----------        -----    ---------      ----

Demand deposits ...............     25,067,000        11.88
Other liabilities .............      2,014,000         0.95
                                     ---------         ----

TOTAL LIABILITIES .............    189,495,000        89.79
Stockholders' equity ..........     21,539,000        10.21
                                    ----------        -----

TOTAL LIABILITIES AND
 STOCKHOLDERS' EQUITY .........   $211,034,000       100.00%
                                  ============       ======

Net interest income ...........                             $  9,653,000
                                                            ============

Net interest spread ...........                                               4.04%
                                                                              ====

Net interest margin3 ..........                                               4.83%
                   =                                                          ====
</TABLE>

1 Yields are calculated on a tax equivalent basis, based on amortized cost.
2 For  purpose of this  schedule,  interest on  nonaccruing  loans has been
included only to the extent reflected in the consolidated income statement.
However,  the  nonaccrual  loan balances are included in the average amount
outstanding.
3 Computed by dividing net interest income by total interest earning assets.
Consolidated

                                       12
<PAGE>

Average
Balance Sheet
 1996

<TABLE>
<CAPTION>
                                         Average     Percentage of    Interest       Average
                                         Balance      Total Assets Earned/Paid    Yield/Rate
                                         -------      ------------ -----------    ----------
Assets
<S>                                <C>                   <C>    <C>                 <C>
Investment securities and
 securities available for sale1
Taxable securities ...........     $  41,732,000         21.06% $   2,699,000       6.47%
Tax-exempt securities ........        29,872,000         15.08      2,468,000       8.26
                                      ----------         -----      ---------       ----

Total Securities ...............      71,604,000         36.14      5,167,000       7.22
                                      ----------         -----      ---------       ----

Short-term investments .........       1,838,000          0.92        104,000       5.66
Loans, net of unearned discount:
  Real estate mortgages ........      85,010,000         42.90      7,431,000       8.74
Home equity loans ..............       1,973,000          1.00        148,000       7.50
Time and demand loans ..........       9,108,000          4.60        900,000       9.88
Installment loans ..............      16,024,000          8.09      1,798,000      11.22
Other loans ....................       1,866,000          0.94        235,000      12.59
                                       ---------          ----        -------      -----

TOTAL LOANS2 ...................     113,981,000         57.53     10,512,000       9.22
           -                         -----------         -----     ----------       ----

TOTAL INTEREST-
 EARNING ASSETS ................     187,423,000         94.59     15,783,000       8.42
                                     -----------         -----     ----------       ----

Allowance for loan losses ......      (1,619,000)        (0.82)
Cash and due from banks ........       6,017,000          3.04
Premises and equipment, net ....       2,395,000          1.21
Other assets ...................       3,637,000          1.84
Net unrealized gain on
 securities available for sale .         281,000          0.14
                                         -------          ----

TOTAL ASSETS ...................   $ 198,134,000        100.00%
                                   =============        ======

Liabilities and
 Stockholders' Equity
NOW and Super NOW deposits .....   $  28,395,000         14.33% $     862,000       3.04%
Savings and insured money
 market deposits ...............      55,670,000         28.10      1,810,000       3.25
Time deposits ..................      66,006,000         33.31      3,485,000       5.28
                                      ----------         -----      ---------       ----

TOTAL INTEREST-
 BEARING DEPOSITS ..............     150,071,000         75.74      6,157,000       4.10
                                     -----------         -----      ---------       ----

Federal funds purchased
 and other short-term debt .....       1,096,000          0.55         63,000       5.75
Federal Home Loan Bank advances        1,133,000          0.57         58,000       5.12
                                       ---------          ----         ------       ----

TOTAL INTEREST-
 BEARING LIABILITIES ...........     152,300,000         76.87      6,278,000       4.12
                                     -----------         -----      ---------       ----

Demand deposits ................      23,068,000         11.64
Other liabilities ..............       2,015,000          1.02
                                       ---------          ----

TOTAL LIABILITIES ..............     177,383,000         89.53
Stockholders' equity ...........      20,751,000         10.47
                                      ----------         -----

TOTAL LIABILITIES AND
 STOCKHOLDERS' EQUITY ..........   $ 198,134,000        100.00%
                                   -------------        ------

Net interest income ............                                $   9,505,000
                                                                =============

Net interest spread ............                                                    4.30%
                                                                                    ====

Net interest margin3 ...........                                                    5.07%

                   =                                                                ====
</TABLE>

1 Yields are calculated on a tax equivalent basis, based on amortized cost.
2 For  purpose of this  schedule,  interest on  nonaccruing  loans has been
included  only to the extent  reflected in the  consolidated  income  statement.
However,  the  nonaccrual  loan  balances  are  included in the  average  amount
outstanding.  3 Computed  by  dividing  net  interest  income by total  interest
earning assets.


                                       13
<PAGE>



Consolidated
Average
Balance Sheet
1995
<TABLE>
<CAPTION>
                                       Average      Percentage of    Interest      Average
                                       Balance      Total Assets    Earned/Paid      Yield/Rate
                                       -------      ------------    -----------      ----------
Assets
<S>                                <C>                   <C>    <C>                 <C>
Investment securities and
 securities available for sale1
  Taxable securities ...........   $  43,098,000         22.27% $   2,847,000       6.61%
  Tax-exempt securities ........      29,237,000         15.10      2,495,000       8.53
                                      ----------         -----      ---------       ----

TOTAL SECURITIES ...............      72,335,000         37.37      5,342,000       7.39
                                      ----------         -----      ---------       ----

Short-term investments .........       3,899,000          2.01        225,000       5.77
Loans, net of unearned discount:
  Real estate mortgages ........      83,176,000         42.97      7,427,000       8.93
Time and demand loans ..........       8,416,000          4.35        848,000      10.08
Installment loans ..............      14,437,000          7.46      1,668,000      11.55
Other loans ....................       1,538,000          0.79        206,000      13.39
                                       ---------          ----        -------      -----

TOTAL LOANS2 ...................     107,567,000         55.57     10,149,000       9.44
           -                         -----------         -----     ----------       ----

TOTAL INTEREST-
 EARNING ASSETS ................     183,801,000         94.95     15,716,000       8.55
                                     -----------         -----     ----------       ----

Allowance for loan losses ......      (1,679,000)        (0.87)
Cash and due from banks ........       6,086,000          3.14
Premises and equipment, net ....       2,247,000          1.16
Other assets ...................       3,581,000          1.85
Net unrealized loss on
 securities available for sale .        (468,000)        (0.24)
                                        --------         -----

TOTAL ASSETS ...................   $ 193,568,000        100.00%
                                   =============        ======

Liabilities and
 Stockholders' Equity
NOW and Super NOW deposits .....   $  30,081,000         15.54% $     901,000       3.00%
Savings and insured money
 market deposits ...............      52,931,000         27.34      1,646,000       3.11
Time deposits ..................      65,556,000         33.87      3,602,000       5.49
                                      ----------         -----      ---------       ----

TOTAL INTEREST-
 BEARING DEPOSITS ..............     148,568,000         76.75      6,149,000       4.14
                                     -----------         -----      ---------       ----

Federal funds purchased
 and other short-term debt .....         370,000          0.19         19,000       5.14
Federal Home Loan Bank advances        2,718,000          1.40        119,000       4.38
                                       ---------          ----        -------       ----

TOTAL INTEREST-
 BEARING LIABILITIES ...........     151,656,000         78.35      6,287,000       4.15
                                     -----------         -----      ---------       ----

Demand deposits ................      20,641,000         10.66
Other liabilities ..............       1,400,000          0.72
                                       ---------          ----

TOTAL LIABILITIES ..............     173,697,000         89.73
Stockholders' equity ...........      19,871,000         10.27
                                      ----------         -----

TOTAL LIABILITIES AND
 STOCKHOLDERS' EQUITY ..........   $ 193,568,000        100.00%
                                   =============        ======

Net interest income ............                                 $   9,429,000
                                                                 =============

Net interest spread ............                                                    4.40%
                                                                                    ====

Net interest margin3 ...........                                                    5.13%

                                                                                    ====
</TABLE>

1 Yields are calculated on a tax equivalent basis, based on amortized cost.
2 For purpose of this schedule,  interest on nonaccruing loans has been included
only to the extent reflected in the consolidated income statement.  However, the
nonaccrual  loan  balances are  included in the average  amount  outstanding.  3
Computed by  dividing  net  interest  income by total  interest-earning  assets.



                                       14
<PAGE>




Volume and Rate  Analysis

The following  schedule sets forth, for each major category of  interest-earning
assets and  interest-bearing  liabilities,  the dollar amount of interest income
(calculated on a tax equivalent basis) and interest expense, and changes therein
for 1997 as  compared  to 1996,  and 1996 as  compared  to 1995.  The changes in
interest  income and  expense  attributable  to both rate and  volume  have been
allocated to rate on a consistent basis.
<TABLE>
<CAPTION>

                                         1997 Compared to 1996                         1996 Compared to 1995
                                          Increase (Decrease)                         Increase (Decrease)
                                            Due to Change In                            Due to Change In
                                 Volume            Rate         Total         Volume           Rate            Total
                                 ------            ----         -----         ------           ----            -----
Interest Income
<S>                         <C>            <C>            <C>            <C>            <C>            <C>
Investment securities
 and securities
 available for sale .....   $   238,000    $   (50,000)   $   188,000    $   (54,000)   $  (121,000)   $  (175,000)
Short term investments ..        30,000         (5,000)        25,000       (119,000)        (2,000)      (121,000)
Loans ...................       792,000       (192,000)       600,000        605,000       (242,000)       363,000
                                -------       --------        -------        -------       --------        -------

TOTAL INTEREST
 INCOME .................     1,060,000       (247,000)       813,000        432,000       (365,000)        67,000
                              ---------       --------        -------        -------       --------         ------

Interest Expense
NOW and Super
 NOW deposits ...........       (19,000)          --          (19,000)       (51,000)        12,000        (39,000)
Savings and insured
 money market deposits ..       (88,000)         4,000        (84,000)        85,000         79,000        164,000
Time deposits ...........       468,000         18,000        486,000         25,000       (142,000)      (117,000)
Federal funds purchased
and other short-term debt       (20,000)        (7,000)       (27,000)        37,000          7,000         44,000
Federal Home Loan
 Bank advances ..........       254,000         55,000        309,000        (70,000)         9,000        (61,000)
                                -------         ------        -------        -------          -----        -------

TOTAL INTEREST
 EXPENSE ................       595,000         70,000        665,000         26,000        (35,000)        (9,000)
                                -------         ------        -------         ------        -------         ------

NET INTEREST
 INCOME .................   $   465,000    $  (317,000)   $   148,000    $   406,000    $  (330,000)   $    76,000
                            ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>


                                       15
<PAGE>



Management's Statement of Responsibility

The consolidated financial statements and related information in the 1997 Annual
Report  were  prepared  in  conformity   with  generally   accepted   accounting
principles.  Management is responsible  for the integrity and objectivity of the
consolidated financial statements and related
information. Accordingly, it maintains internal controls and accounting policies
and procedures  designed to provide  reasonable  assurance of the accountability
and  safeguarding  of the  Company's  assets  and of the  accuracy  of  reported
financial  information.   These  controls  and  procedures  include:  management
evaluations of asset quality and the impact of economic  events;  organizational
arrangements  that  provide an  appropriate  division of  responsibility;  and a
program  of  internal  audits to  evaluate  independently  the extent of ongoing
compliance   with  the   Company's   adopted   policies  and   procedures.   The
responsibility  of the  Company's  independent  public  accountants,  KPMG  Peat
Marwick  LLP,  is  limited  to the  expression  of an  opinion  as to  the  fair
presentation  of the  consolidated  financial  statements  based on their  audit
conducted in accordance with generally accepted auditing standards. The Board of
Directors,  through its Examining  Committee,  is responsible  for insuring that
both management and the independent public accountants  fulfill their respective
responsibilities  with  regard to the  consolidated  financial  statements.  The
Examining  Committee,  which is  comprised  entirely  of  directors  who are not
officers or employees of the Company,  meets  periodically with management,  the
internal auditor and the independent  public  accountants.  The internal auditor
and independent  public  accountants  have full and free access to and meet with
the Examining Committee,  without management being present, to discuss financial
reporting and other relevant matters. The consolidated financial statements have
not been  reviewed or  confirmed  for accuracy or relevance by the Office of the
Comptroller of the Currency.

/s/ Arthur E. Keesler
      Arthur E. Keesler
President--Jeffersonville Bancorp

/s/ Raymond Walter
      Raymond Walter
President--First National Bank of Jeffersonville

/s/ K. Dwayne Rhodes
      K. Dwayne Rhodes
Treasurer--Jeffersonville Bancorp


                                       16
<PAGE>




<TABLE>
<CAPTION>

                                                             Consolidated Balance Sheets
                                                              December 31, 1997 and 1996
                                                                  1997             1996
                                                                  ----             ----
Assets
<S>                           <C>                          <C>              <C>
Cash and due from banks (note 2) .......................   $   5,563,000    $   4,723,000
Federal funds sold .....................................       1,600,000        1,300,000
                                                               ---------        ---------

 Cash and cash equivalents .............................       7,163,000        6,023,000
Securities available for sale, at fair value (note 3) ..      70,793,000       64,842,000
Investment securities, estimated fair value of
 $3,821,000 in 1997 and $3,518,000 in 1996 (note 4) ....       3,738,000        3,401,000
Loans, less allowance for loan losses of $1,862,000
 in 1997 and $1,711,000 in 1996 (note 5) ...............     125,793,000      115,605,000
Accrued interest receivable ............................       1,291,000        1,168,000
Premises and equipment, net (note 6) ...................       2,609,000        2,602,000
Federal Home Loan Bank stock ...........................         753,000          717,000
Other real estate owned (note 7) .......................         301,000          831,000
Other assets ...........................................       1,218,000          924,000
                                                               ---------          -------

Total Assets ...........................................   $ 213,659,000    $ 196,113,000
                                                           =============    =============

Liabilities and Stockholders' Equity
Liabilities:
Deposits:
  Demand deposits (non-interest bearing) ...............   $  23,545,000    $  22,044,000
Now and Super NOW accounts .............................      27,973,000       26,541,000
Savings and insured money market deposits ..............      54,513,000       53,665,000
Time deposits (note 8) .................................      73,129,000       70,680,000
                    -                                         ----------       ----------

Total deposits .........................................     179,160,000      172,930,000
Federal Home Loan Bank advances (note 9) ...............      10,000,000             --
Short-term debt ........................................         404,000          529,000
Accrued expenses and other liabilities .................       1,919,000        1,679,000
                                                               ---------        ---------

Total liabilities ......................................     191,483,000      175,138,000
                                                             -----------      -----------

Commitments and contingent liabilities (note 15) :
 Stockholders' equity (note 12)
 Series A preferred stock, no par value;
 2,000,000 shares authorized; none issued ..............            --               --
  Common stock; $0.50 par value; 2,250,000
 shares authorized; 1,234,711 shares and
1,234,778 shares issued at December 31, 1997
and 1996, respectively .................................         617,000          617,000
    Paid-in capital ....................................         446,000          447,000
    Treasury stock at cost; 51,965 shares and
    51,984 shares held at December 31, 1997
  and 1996, respectively ...............................        (206,000)        (206,000)
    Retained earnings ..................................      20,766,000       19,795,000
    Net unrealized gain on securities
    available for sale, net of tax .....................         553,000          322,000
                                                                 -------          -------

Total stockholders' equity .............................      22,176,000       20,975,000
                                                              ----------       ----------

Total liabilities and stockholders' equity .............   $ 213,659,000    $ 196,113,000
                                                           =============    =============

See accompanying notes to consolidated financial statements.
</TABLE>


                                       17
<PAGE>



Consolidated Statements of Income
Years Ended December 31, 1997, 1996 and 1995
                                               1997          1996          1995
                                               ----          ----          ----
Interest Income
Loan interest and fees ..............   $11,112,000   $10,512,000   $10,149,000
Securities:
 Taxable ............................     3,153,000     2,699,000     2,847,000
 Non-taxable ........................     1,453,000     1,629,000     1,647,000
Federal funds sold ..................       129,000       104,000       225,000
                                            -------       -------       -------

Total interest income ...............    15,847,000    14,944,000    14,868,000
                                         ----------    ----------    ----------

Interest Expense
Deposits ............................     6,540,000     6,157,000     6,149,000
Federal Home Loan Bank advances .....       367,000        58,000       119,000
Other ...............................        36,000        63,000        19,000
                                             ------        ------        ------

Total interest expense ..............     6,943,000     6,278,000     6,287,000
                                          ---------     ---------     ---------

Net interest income .................     8,904,000     8,666,000     8,581,000
Provision for loan losses (note 5) ..     1,150,000       290,000       160,000
                                -         ---------       -------       -------

Net interest income after
 provision for loan losses ..........     7,754,000     8,376,000     8,421,000
                                          ---------     ---------     ---------

Non-interest Income
Service charges .....................       728,000       651,000       619,000
Net security gains (note 3) .........        91,000        95,000        33,000
Other non-interest income ...........       431,000       313,000       278,000
                                            -------       -------       -------

Total Non-interest INCOME ...........     1,250,000     1,059,000       930,000
                                          ---------     ---------       -------

Non-interest Expenses
Salaries and wages ..................     2,786,000     2,794,000     2,497,000
Employee benefits (note 14) .........       942,000       834,000       778,000
Occupancy and equipment expenses ....     1,238,000     1,049,000       936,000
Other real estate owned expenses, net       178,000       283,000       184,000
Other non-interest expenses (note 11)     1,714,000     1,761,000     1,718,000
                                  --      ---------     ---------     ---------

Total Non-interest EXPENSES .........     6,858,000     6,721,000     6,113,000
                                          ---------     ---------     ---------

Income before income taxes expense ..     2,146,000     2,714,000     3,238,000
Income tax expense (note 10) ........       383,000       569,000       814,000
                         --                 -------       -------       -------

Net income ..........................   $ 1,763,000   $ 2,145,000   $ 2,424,000
                                        ===========   ===========   ===========

Basic earnings per common share1        $      1.24   $      1.49   $      1.61

Average common shares outstanding1        1,419,000     1,441,000      1,503,000

1 All per share amounts and average  shares  outstanding  have been adjusted for
the effect of the 20% stock dividend distributed in February 1998. See note 12.
 See accompanying notes to consolidated financial statements.


                                       18
<PAGE>



Consolidated Statements of Changes
in Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                              Net
                              Unrealized      Total
                              Common         Paid-in        Treasury        Retained      Gain (Loss)     Stockholders'
                               Stock         Capital           Stock        Earnings   on Securities          Equity
                               -----         -------           -----        --------   -------------          ------
Balance at
<S>                    <C>             <C>             <C>             <C>             <C>             <C>
 December 31, 1994 ..   $    672,000    $  2,569,000    $   (223,000)   $ 16,756,000    $ (1,992,000)   $ 17,782,000
Net income ..........           --              --              --         2,424,000            --         2,424,000
Change in net
 unrealized gain
 (loss) on securities
 available for sale,
 net of tax .........           --              --              --              --         2,613,000       2,613,000
Cash dividends
 ($0.50 per share)1 .           --              --              --          (755,000)           --          (755,000)
Purchases and
 retirements of
common stock ........        (30,000)     (1,170,000)           --              --              --        (1,200,000)
                             -------      ----------                                                      ----------
Treasury stock sold .           --            51,000          13,000            --              --            64,000

Balance at
 December 31, 1995 ..        642,000       1,450,000        (210,000)     18,425,000         621,000      20,928,000
Net income ..........           --              --              --         2,145,000            --         2,145,000
Change in unrealized
 gain on securities
available for sale,
net of tax ..........           --              --              --              --          (299,000)       (299,000)
Cash dividends
 ($0.54 per share)1 .           --              --              --          (775,000)           --          (775,000)
Purchases and
 retirements
of common stock .....        (25,000)     (1,018,000)           --              --              --        (1,043,000)
                             -------      ----------                                                      ----------
Treasury stock sold .           --            15,000           4,000            --              --            19,000

Balance at
 December 31, 1996 ..        617,000         447,000        (206,000)     19,795,000         322,000      20,975,000
Net income ..........           --              --              --         1,763,000            --         1,763,000
Change in unrealized
 gain on securities
available for sale,
net of tax ..........           --              --              --              --           231,000         231,000
Cash dividends
 ($0.56 per share)1 .           --              --              --          (792,000)           --          (792,000)
Purchases and
 retirements
of common stock .....           --            (1,000)           --              --              --            (1,000)
                                              ------                                                          ------

Balance at
 December 31, 1997 ..   $    617,000    $    446,000    $   (206,000)   $ 20,766,000    $    553,000    $ 22,176,000
          === ====      ============    ============    ============    ============    ============    ============

1All per  share  amounts  have  been  adjusted  for the  effect of the 20% stock
 dividend  distributed in February 1998. See note 12. See accompanying  notes to
 consolidated financial statements.
</TABLE>


                                       19
<PAGE>




Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                           1997            1996            1995
<S>                                                                 <C>             <C>             <C>
Operating Activities
Net income ......................................................   $  1,763,000    $  2,145,000    $  2,424,000
Adjustments to reconcile net income to net
 cash provided by operating activities:
  Provision for loan loss s .....................................      1,150,000         290,000         160,000
Write down of other real estate owned ...........................        119,000          31,000          58,000
Net gain on sales of other real estate owned ....................       (137,000)        (52,000)       (149,000)
Depreciation and amortization ...................................        516,000         423,000         368,000
Deferred income tax benefit .....................................        (55,000)       (102,000)        (94,000)
Net security gains ..............................................        (91,000)        (95,000)        (33,000)
(Increase) decrease in accrued interest receivable ..............       (123,000)         12,000         192,000
(Increase) decrease in other assets .............................       (395,000)        461,000        (396,000)
  Increase in accrued expenses and other liabilities ............        240,000         219,000         984,000
                                                                         -------         -------         -------

Net cash provided by operating activities .......................      2,987,000       3,332,000       3,514,000
                                                                       ---------       ---------       ---------

Investing Activities Proceeds from maturities and calls:
 Securities available for sale ..................................     10,443,000      10,873,000      18,412,000
 Investment securities ..........................................        770,000         983,000         773,000
Proceeds from sales of securities available for sale ............     17,345,000       3,812,000      18,496,000
Purchases:
 Securities available for sale ..................................    (33,261,000)    (18,323,000)    (24,353,000)
 Investment securities ..........................................     (1,107,000)     (2,602,000)       (644,000)
Disbursements for loan originations, net of principal collections    (11,690,000)     (7,421,000)     (8,616,000)
(Purchase) redemption of Federal Home Loan Bank stock ...........        (36,000)         19,000         (36,000)
Net purchases of premises and equipment .........................       (523,000)       (820,000)       (415,000)
Proceeds from sales of other real estate owned ..................        900,000         553,000         619,000
                                                                         -------         -------         -------

Net cash (used in) provided by
  investing activities ..........................................    (17,159,000)    (12,926,000)      4,236,000
                                                                     -----------     -----------       ---------

Financing Activities
Net increase (decrease) in deposits .............................      6,230,000       8,746,000      (1,347,000)
Proceeds from Federal Home Loan Bank advances ...................     10,000,000            --              --
Repayments of Federal Home Loan Bank advances ...................           --        (1,700,000)     (1,700,000)
Net (decrease) increase in short-term debt ......................       (125,000)        332,000        (298,000)
Cash dividends paid .............................................       (792,000)       (775,000)       (755,000)
Purchases and retirements of common stock .......................         (1,000)     (1,043,000)     (1,200,000)
                                                                          ------      ----------      ----------
Proceeds from sales of treasury stock ...........................           --            19,000          64,000

Net cash provided by (used in)
  financing activities ..........................................     15,312,000       5,579,000      (5,236,000)
                                                                      ----------       ---------      ----------

Net INCREASE (DECREASe) in cash and
  cash equivalents ..............................................      1,140,000      (4,015,000)      2,514,000
Cash and cash equivalents at beginning of year ..................      6,023,000      10,038,000       7,524,000
                                                                       ---------      ----------       ---------

Cash and cash equivalents at end of year ........................   $  7,163,000    $  6,023,000    $ 10,038,000
                                                                    ============    ============    ============

Supplemental Information
Cash paid for:
 Interest .......................................................   $  6,934,000    $  6,153,000    $  6,314,000
 Income taxes ...................................................        700,000         728,000         462,000
Transfer of loans to other real estate owned ....................        352,000         814,000         582,000
Change in net unrealized gain or loss
 on securities available for sale, net of tax ...................        231,000        (299,000)      2,613,000
Deferred tax effect of change in net unrealized
 gain or loss on securities available for sale ..................       (156,000)        206,000      (1,819,000)

                                                                        ========         =======      ==========
</TABLE>

See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements


                                       20
<PAGE>



1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated  financial  statements of  Jeffersonville  Bancorp (the "Parent
Company")  include  its  wholly-owned  subsidiary,  The First  National  Bank of
Jeffersonville (the "Bank"). Collectively, these entities are referred to herein
as the "Company." All significant intercompany transactions have been eliminated
in  consolidation.  The Parent Company is a bank holding company whose principal
activity is the ownership of all  outstanding  shares of the Bank's  stock.  The
Bank is a commercial bank providing  community  banking services to individuals,
small businesses and local municipal  governments in Sullivan County,  New York.
The  consolidated  financial  statements  have been  prepared,  in all  material
respects,  in conformity  with  generally  accepted  accounting  principles.  In
preparing the consolidated financial statements,  management is required to make
estimates  and  assumptions   that  affect  the  reported   amounts  of  assets,
liabilities,  revenues and expenses.  Material  estimates that are  particularly
susceptible  to near-term  change  include the allowance for loan losses and the
valuation of other real estate owned, which are described below.  Actual results
could differ from these estimates.  For purposes of the consolidated  statements
of cash flows,  the Company  considers  Federal  funds sold,  if any, to be cash
equivalents.  Reclassifications are made to prior years' consolidated  financial
statements whenever necessary to conform to the current year's presentation

Securities

Management  determines the appropriate  classification of securities at the time
of purchase.  If  management  has the  positive  intent and ability to hold debt
securities to maturity,  they are  classified as investment  securities  held to
maturity and are stated at amortized  cost. If securities  are purchased for the
purpose  of  selling  them in the near  term,  they are  classified  as  trading
securities  and are  reported  at fair  value with  unrealized  gains and losses
reflected in current  earnings.  All other debt and marketable equity securities
are classified as securities  available for sale and are reported at fair value,
with net unrealized gains or losses reported, net of income taxes, as a separate
component of stockholders' equity.  Non-marketable equity securities are carried
at cost. At December 31, 1997 and 1996,  the Company had no trading  securities.
Gains and losses on sales of  securities  are based on the net  proceeds and the
amortized cost of the securities sold, using the specific identification method.
The  amortization  of premium and  accretion of discount on debt  securities  is
calculated using the level-yield  interest method over the period to the earlier
of the call date or maturity date.  Unrealized losses on securities that reflect
a decline in value which is other than temporary, if any, are charged to income.


                                       21
<PAGE>



Loans

Loans are stated at unpaid principal  balances,  less unearned discounts and the
allowance for loan losses.  Unearned discounts on installment loans are accreted
into income using a method which  approximates the level-yield  interest method.
Interest  income is recognized on the accrual basis of accounting.  When, in the
opinion of  management,  the  collection  of interest  is in doubt,  the loan is
classified  as  non-accrual.  Generally,  loans  past due more  than 90 days are
classified as non-accrual. Thereafter, no interest is recognized as income until
received in cash or until such time as the borrower  demonstrates the ability to
make scheduled payments of interest and principal.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses
charged to expense.  Loans are charged-off against the allowance when management
believes  that  the  collectability  of all or a  portion  of the  principal  is
unlikely.  Recoveries  of  loans  previously  charged-off  are  credited  to the
allowance when realized. The Company identifies impaired loans and measures loan
impairment  in  accordance  with  Statement  of Financial  Accounting  Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended
by SFAS No. 118.  Under SFAS No. 114, a loan is considered to be impaired  when,
based on current  information and events,  it is probable that the creditor will
be unable to collect all principal and interest contractually due. Creditors are
permitted to measure  impaired  loans based on (i) the present value of expected
future cash flows  discounted at the loan's  effective  interest rate,  (ii) the
loan's  observable market price or (iii) the fair value of the collateral if the
loan is collateral dependent. If the approach used results in a measurement that
is less than an impaired  loan's  recorded  investment,  an  impairment  loss is
recognized  as part of the  allowance  for loan losses.  The  allowance for loan
losses is  maintained  at a level  deemed  adequate  by  management  based on an
evaluation of such factors as economic  conditions in the Company's market area,
past loan loss experience,  the financial condition of individual borrowers, and
underlying collateral values based on independent  appraisals.  While management
uses available information to recognize losses on loans, future additions to the
allowance  for loan  losses  may be  necessary  based  on  changes  in  economic
conditions,  particularly in Sullivan County.  In addition,  Federal  regulatory
agencies, as an integral part of their examination process,  periodically review
the Company's allowance for loan losses and may require the Company to recognize
additions to the allowance based on their judgments about information  available
to them at the time of their examination,  which may not be currently  available
to management.

Premises and Equipment

Premises and equipment are stated at cost,  less  accumulated  depreciation  and
amortization.  Depreciation  and  amortization  are provided  over the estimated
useful lives of the assets using straight-line or accelerated  methods.

Federal Home Loan Bank Stock

As a member  institution  of the Federal  Home Loan Bank  ("FHLB"),  the Bank is
required to hold a certain amount of FHLB stock.  This stock is considered to be
a  non-marketable  equity  security and,  accordingly,  is carried at cost since
there is no readily available market value.


                                       22
<PAGE>



Other Real Estate Owned

Other real estate owned consists of properties  acquired through foreclosure and
loans classified as in-substance foreclosures.  In accordance with SFAS No. 114,
a loan is classified as an in-substance  foreclosure  when the Company has taken
possession  of  the  collateral   regardless  of  whether   formal   foreclosure
proceedings  have  taken  place.  Other  real  estate  owned  is  stated  on  an
individual-asset  basis at the lower of (i) fair value less  estimated  costs to
sell or (ii) "cost" (defined as the fair value at initial  foreclosure).  When a
property is acquired or a loan is classified as an in-substance foreclosure, the
excess of the loan balance over the fair value of the property is charged to the
allowance  for loan  losses.  If  necessary,  subsequent  write downs to reflect
further declines in fair value are included in non-interest expenses. Fair value
estimates are based on independent  appraisals and other available  information.
While  management  estimates  real estate owned losses using the best  available
information, such as independent appraisals, future write downs may be necessary
based on changes in real  estate  market  conditions,  particularly  in Sullivan
County, and the results of regulatory examinations.

Income Taxes

Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences  attributable  to  "temporary  differences"  between the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases.  Deferred tax assets are reduced by a valuation  allowance
when management determines that it is more likely than not that all or a portion
of the  deferred  tax  assets  will not be  realized.  Deferred  tax  assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which temporary  differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.

Earnings Per Common Share

The Company has adopted SFAS No. 128,  "Earnings per Share,"  which  establishes
new standards for the computation and presentation of basic and diluted earnings
per share  ("EPS").  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. Entities with complex capital structures must
also present diluted EPS which reflects the potential  dilution that could occur
if  securities  or other  contracts  to issue  common  stock were  exercised  or
converted  into  common  shares.  The  Company  does not have a complex  capital
structure  and,  accordingly,  has  presented  only basic EPS.  The  Company has
restated  prior  years' EPS data to reflect its adoption of SFAS No. 128 and the
20% stock dividend distributed in February 1998 (see note 12).

2. Cash and Due From Banks

The Bank is  required  to  maintain  certain  reserves in the form of vault cash
and/or  deposits  with the  Federal  Reserve  Bank.  The amount of this  reserve
requirement,  which is included in cash and due from  banks,  was  approximately
$1,000,000 at both December 31, 1997 and 1996.



                                       23
<PAGE>



3. Securities Available for Sale

The amortized  cost and estimated  fair values of securities  available for sale
are as follows at December 31: December 31, 1997
<TABLE>
<CAPTION>

                                                      Gross           Gross     Estimated
                                      Amortized     Unrealized      Unrealized      Fair
                                        Cost          Gains           Losses       Value
                                        ----          -----           ------       -----
<S>                                 <C>           <C>           <C>            <C>
U.S. Government agency securities   $23,036,000   $    53,000   $   (58,000)   $23,031,000
Obligations of states and
 political subdivisions .........    18,394,000       937,000        (2,000)    19,329,000
Mortgage-backed
 securities and collateralized
mortgage obligations ............    26,495,000        70,000       (83,000)    26,482,000
Corporate debt securities .......       610,000         3,000          --          613,000
                                        -------         -----                      -------

Total debt securities ...........    68,535,000     1,063,000      (143,000)    69,455,000
Equity securities ...............     1,323,000        16,000        (1,000)     1,338,000
                                      ---------        ------        ------      ---------

                                    $69,858,000  $  1,079,000    $  (144,000)  $70,793,000

                                    ===========  ============    ===========   ===========
</TABLE>
<TABLE>
<CAPTION>

December 31, 1996
                                                             Gross           Gross      Estimated
                                            Amortized      Unrealized      Unrealized      Fair
                                              Cost           Gains          Losses        Value
                                              ----           -----          ------        -----
<S>                                     <C>            <C>             <C>             <C>
U.S. Treasury securities ............   $    100,000   $       --      $       --      $    100,000
U.S. Government agency securities ...     15,400,000           --          (170,000)     15,230,000
Obligations of states and
 political subdivisions .............     27,419,000        954,000         (73,000)     28,300,000
Mortgage-backed securities and
  collateralized mortgage obligations     20,293,000         41,000        (187,000)     20,147,000
Corporate debt securities ...........        509,000           --            (8,000)        501,000
                                             -------                         ------         -------

Total debt securities ...............     63,721,000        995,000        (438,000)     64,278,000
Equity securities ...................        573,000           --            (9,000)        564,000
                                             -------                         ------         -------

                                        $ 64,294,000   $    995,000    $   (447,000)   $ 64,842,000
                                        ============   ============    ============    ============
</TABLE>


                                       24
<PAGE>



The net unrealized gain on available for sale securities was $935,000  ($553,000
after  taxes) at  December  31,  1997 and  $548,000  ($322,000  after  taxes) at
December 31, 1996.  Changes in unrealized  holding gains and losses during 1997,
1996 and 1995 resulted in pre-tax increases  (decreases) in stockholders' equity
of $387,000,  ($505,000) and  $4,432,000,  respectively.  These gains and losses
will  continue  to  fluctuate  based on  changes  in the  portfolio  and  market
conditions.  Proceeds from sales of  securities  available for sale during 1997,
1996 and 1995 were $17,345,000, $3,812,000 and $18,496,000,  respectively. Gross
gains and gross losses realized on these transactions were as follows:

                           1997          1996        1995
                           ----          ----        ----
Gross realized gains    $ 155,000    $  96,000    $ 380,000
Gross realized losses     (64,000)      (1,000)    (347,000)
                          -------       ------     --------

  Net security gains    $  91,000    $  95,000    $ (33,000)
                        =========    =========    =========


The amortized  cost and estimated  fair value of debt  securities  available for
sale at December 31, 1997,  by remaining  period to  contractual  maturity,  are
shown in the following  table.  Actual  maturities will differ from  contractual
maturities  because of security  prepayments and the right of certain issuers to
call or prepay their obligations.

                     Amortized     Estimated
                       Cost        Fair Value
                       ----        ----------
Within one year .   $22,952,000   $22,895,000
One to five years    29,005,000    29,487,000
Five to ten years     9,764,000    10,132,000
Over ten years ..     6,814,000     6,941,000
                      ---------     ---------

                    $68,535,000   $69,455,000
                    ===========   ===========

Substantially  all  mortgage-backed   securities  and  collateralized   mortgage
obligations  are  securities  guaranteed  by  Freddie  Mac or  Fannie  Mae (U.S.
government-sponsored  entities). Securities available for sale with an estimated
fair value of  $36,195,000  at December 31, 1997 were  pledged to secure  public
funds  on  deposit  and  for  other  purposes  required  by law.



                                       25
<PAGE>



4.  Investment Securities

The amortized cost and estimated fair values of investment securities
are as follows as of December 31: December 31, 1997

                                             Gross       Gross     Estimated
                             Amortized    Unrealized    Unrealized    Fair
                                Cost         Gains        Losses      Value
                                ----         -----        ------      -----
Obligations of states and
 political subdivisions .   $3,738,000   $   86,000   $   (3,000)   $3,821,000
                            ==========   ==========   ==========    ==========

December 31, 1996
                                           Gross         Gross     Estimated
                             Amortized   Unrealized   Unrealized      Fair
                                Cost        Gains        Losses       Value
                                ----        -----        ------       -----
Obligations of states and
 political subdivisions .   $3,401,000   $  118,000   $   (1,000)   $3,518,000
                            ==========   ==========   ==========    ==========


The amortized cost and estimated fair value of these  securities at December 31,
1997, by remaining  period to contractual  maturity,  are shown in the following
table. Actual maturities will differ from contractual maturities because certain
issuers have the right to call or prepay their obligations


                     Amortized    Estimated
                        Cost     Fair Value
                        ----     ----------
Within one year .   $  923,000   $  940,000
One to five years    2,391,000    2,439,000
Five to ten years      387,000      400,000
Over ten years ..       37,000       42,000
                        ------       ------

                    $3,738,000   $3,821,000
                    ==========   ==========

There were no sales of investment securities in 1997, 1996 or 1995.


                                       26
<PAGE>



5. Loans

The major classifications of loans are as follows at December 31:
                                   1997             1996
                                   ----             ----
Real estate loans:
 Residential .............   $  65,599,000    $  67,577,000
 Commercial ..............      21,921,000       15,689,000
 Farm land ...............       1,550,000        1,560,000
 Construction ............       1,348,000        1,636,000
 Home equity .............       7,677,000        4,331,000
                                 ---------        ---------

                                98,095,000       90,793,000
                                ----------       ----------
Other loans:
 Commercial loans ........      12,314,000        9,960,000
Consumer installment loans      18,907,000       17,846,000
Other consumer loans .....       1,437,000        1,567,000
Agricultural loans .......         446,000          542,000
                                   -------          -------

                                33,104,000       29,915,000
                                ----------       ----------

Total loans ..............     131,199,000      120,708,000
Unearned discounts .......      (3,544,000)      (3,392,000)
Allowance for loan losses       (1,862,000)      (1,711,000)
                                ----------       ----------

TOTAL LOANS, net .........   $ 125,793,000    $ 115,605,000
                             =============    =============

The Company originates  residential and commercial real estate loans, as well as
commercial,  agricultural  and consumer loans, to borrowers in Sullivan  County,
New York. A substantial  portion of the loan portfolio is secured by real estate
properties located in that area. The ability of the
Company's  borrowers to make principal and interest  payments is dependent upon,
among other things,  the level of overall economic  activity and the real estate
market conditions prevailing within the Company's concentrated lending area.



                                       27
<PAGE>



Non-performing loans are summarized as follows at December 31:
                                    1997         1996         1995
                                    ----         ----         ----
Non-accrual loans ............   $3,324,000   $2,572,000   $2,475,000
Restructured loans ...........         --        481,000      841,000
Loans past due 90 days or more
 and still accruing interest .      368,000    1,423,000      863,000
                                    -------    ---------      -------

Total non-performing loans ...   $3,692,000   $4,476,000   $4,179,000
                                 ==========   ==========   ==========

Non-performing loans
 as a percentage of total loans      2.8%        3.7%         3.6%
                                     ===         ===          ===


The effects of non-accrual  and  restructured  loans on interest  income were as
follows for the years ended December 31:
                                                 1997        1996        1995
                                                 ----        ----        ----
Interest contractually due at original rates  $ 285,000   $ 280,000   $ 402,000
Interest income recognized .................   (124,000)   (200,000)   (192,000)
                                               --------    --------    --------

Interest income not recognized .............  $ 161,000   $  80,000   $ 210,000
                                              =========   =========   =========


Changes in the allowance for loan losses are summarized as follows for the years
ended December 31:

                                       1997          1996          1995
                                       ----          ----          ----
Balance at beginning of the year  $ 1,711,000   $ 1,629,000   $ 1,592,000
Provision for loan losses ......    1,150,000       290,000       160,000
Loans charged-off ..............   (1,255,000)     (346,000)     (384,000)
Recoveries .....................      256,000       138,000       261,000
                                      -------       -------       -------

Balance at end of the year         $1,862,000    $1,711,000    $1,629,000
                                   ==========    ==========    ==========

SFAS No. 114 applies to loans that are individually evaluated for collectibility
in accordance  with the Company's  ongoing loan review  procedures  (principally
commercial  mortgage  loans and commercial  loans).  As of December 31, 1997 and
1996, the recorded  investment in loans that are considered to be impaired under
SFAS No. 114  totaled  $1,550,000  and  $1,922,000,  respectively.  There was no
allowance for loan impairment  under SFAS No. 114 at either date,  primarily due
to prior  charge-offs  and the  adequacy of  collateral  values on these  loans.
During 1997,  1996 and 1995, the average  recorded  investment in impaired loans
was  $1,564,000,  $1,668,000 and  $1,634,000,  respectively.  Interest income of
$124,000,  $146,000 and $83,000 was  recognized  on impaired  loans during 1997,
1996 and  1995,  respectively,  using a  cash-basis  method  of  accounting



                                       28
<PAGE>



6. Premises and Equipment

The major  classifications  of premises and equipment are as follows at December
31:
                                                   1997        1996
                                                   ----        ----
Land .........................................  $  392,000  $  376,000
Buildings ....................................   2,121,000   2,112,000
Furniture and fixtures .......................     414,000     399,000
Equipment ....................................   3,588,000   3,150,000
Building and leasehold improvements ..........     500,000     387,000
Construction in progress .....................       1,000      69,000
                                                     -----      ------

                                                 7,016,000   6,493,000
Less accumulated depreciation and amortization   4,407,000   3,891,000
                                                 ---------   ---------

                                                $2,609,000  $2,602,000
                                                ==========  ==========

Depreciation  and  amortization  expense was $516,000,  $423,000 and $368,000 in
1997, 1996 and 1995, respectively.

7. Other Real Estate Owned

At December 31, 1997, real estate owned  represented ten foreclosed  properties.
Property  distribution  consisted of one  commercial,  two vacant land and seven
one- to four-  family  properties.  At December  31,  1996,  real  estate  owned
represented fifteen foreclosed  properties.  Property distribution  consisted of
three commercial, three vacant land and nine one- to four- family properties.

8.Time Deposits

The  approximate  amount of contractual  maturities of time deposit  accounts at
December 31, 1997 are as follows:

                             1997
                             ----
Within one year ....  $50,966,000
One to two years ...   14,604,000
  Two to three years    3,559,000
Three to four years     2,368,000
 Over four years ...    1,632,000
                        ---------

                      $73,129,000
                      ===========

Individual time deposits of $100,000 or more totaled  $9,109,000 at December 31,
1997 and  $10,535,000  at December 31, 1996.  Interest  expense  related to time
deposits over $100,000 was  $659,000,  $422,000 and $344,000 for 1997,  1996 and
1995,  respectively.



                                       29
<PAGE>



9. Federal Home Loan Bank Advances

FHLB   borrowings  of   $10,000,000  at  December  31,  1997   represented   two
variable-rate  advances with an average  interest rate of 5.70%.  These advances
are due in  1998.  As a  member  of the  FHLB of New  York,  the  Bank  may have
outstanding  FHLB advances of up to  approximately  $20,651,000  at December 31,
1997, in a combination of term advances and overnight  funds.  The Bank's unused
FHLB  borrowing  capacity was  approximately  $10,651,000  at December 31, 1997.
Borrowings  are secured by the Bank's  investment in FHLB stock and by a blanket
security  agreement.  This agreement requires the Bank to maintain as collateral
certain  qualifying  assets  (principally  securities and  residential  mortgage
loans) not otherwise pledged. The Bank satisfied this collateral  requirement at
December 31, 1997.

10.  Income  Taxes

The components of income tax expense are as follows for the years ended December
31:

                         1997        1996        1995
                         ----        ----        ----
Current tax expense:
 Federal ...........  $ 439,000   $ 470,000   $ 622,000
 State .............    143,000     201,000     286,000
Deferred tax benefit   (199,000)   (102,000)    (94,000)
                       --------    --------     -------

                      $ 383,000   $ 569,000   $ 814,000
                      =========   =========   =========

The  reasons  for the  differences  between  income tax  expense  and the amount
computed  by applying  the  statutory  Federal tax rate of 34% to income  before
income taxes are as follows:
                                              1997          1996          1995
                                              ----          ----          ----
Tax at statutory rate .................  $   730,000   $   923,000   $ 1,101,000
State taxes, net of Federal tax benefit       81,000       123,000       168,000
Tax-exempt interest ...................     (494,000)     (554,000)    (560,000)
Interest expense allocated
 to tax-exempt securities .............       62,000        63,000        74,000
Other adjustments .....................        4,000        14,000        31,000
                                               -----        ------        ------

Income tax expense ....................  $   383,000   $   569,000   $   814,000
                                         ===========   ===========   ===========




                                       30
<PAGE>



The tax  effects of  temporary  differences  and tax  credits  that give rise to
deferred tax assets and liabilities at December 31 are presented below
:
                                               1997         1996
                                               ----         ----
Deferred tax assets:
 Allowance for loan losses in
  excess of tax bad debt reserve ........  $ 487,000   $ 467,000
 Interest on non-accrual loans ..........    174,000     155,000
 Alternative minimum tax credit .........    183,000      64,000
 Postretirement benefits ................     56,000        --
                                              ------

Total deferred tax assets ...............    900,000     686,000
                                             -------     -------

Deferred tax liabilities:
 Prepaid expenses .......................   (186,000)   (173,000)
 Other taxable temporary differences ....    (63,000)    (61,000)
                                             -------     -------

Total deferred tax liabilities ..........   (249,000)   (234,000)

Net deferred tax asset ..................    651,000     452,000
Deferred tax liability for net unrealized
 gain on securities available for sale ..   (382,000)   (226,000)
                                            --------    --------

Net deferred tax asset ..................  $ 269,000   $ 226,000
                                           =========   =========

In assessing  the  realizability  of deferred tax assets,  management  considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized. Based upon management's consideration of historical
and anticipated  future pre-tax  income,  as well as the reversal period for the
items  giving rise to the  deferred tax assets,  a valuation  allowance  was not
considered  necessary  at December  31, 1997 and 1996.

11. Other  Non-Interest  Expenses

The major components of other non-interest expenses are as follows for the years
ended December 31:


                                         1997        1996        1995
                                         ----------------------------
Stationery and supplies ...........  $  215,000  $  206,000  $  198,000
Director expenses .................     230,000     254,000     237,000
ATM and credit card processing fees     222,000     178,000     157,000
Federal deposit insurance costs ...      21,000       2,000     190,000
Other expenses ....................   1,026,000   1,121,000     936,000
                                      ---------   ---------     -------

                                     $1,714,000  $1,761,000  $1,718,000
                                     ==========  ==========  ==========




                                       31
<PAGE>



12. Stockholders' Equity

Regulatory Capital Requirements  National banks are required to maintain minimum
levels of regulatory capital in accordance with regulations of the Office of the
Comptroller of the Currency  ("OCC").  The Federal Reserve Board ("FRB") imposes
similar requirements for consolidated capital of bank holding companies. The OCC
and FRB regulations  require a minimum leverage ratio of Tier 1 capital to total
adjusted  assets of 4.0%,  and  minimum  ratios of Tier I and total  capital  to
risk-weighted assets of 4.0% and 8.0%, respectively. Under its prompt corrective
action regulations, the OCC is required to take certain supervisory actions (and
may take additional  discretionary  actions) with respect to an undercapitalized
bank.  Such actions could have a direct  material  effect on a bank's  financial
statements.  The  regulations  establish a framework for the  classification  of
banks  into  five  categories:   well   capitalized,   adequately   capitalized,
undercapitalized,     significantly     undercapitalized,     and     critically
undercapitalized.  Generally,  a bank is considered well capitalized if it has a
leverage  (Tier I) capital  ratio of at least 5.0%; a Tier 1 risk-based  capital
ratio of at least 6.0%; and a total risk-based  capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets,  liabilities and certain  off-balance-sheet items as calculated under
regulatory  accounting  practices.  Capital amounts and classifications are also
subject to  qualitative  judgments by the regulators  about capital  components,
risk weightings and other factors.  Management believes that, as of December 31,
1997  and  1996,  the Bank  and the  Parent  Company  met all  capital  adequacy
requirements  to  which  they  are  subject.   Further,   the  most  recent  OCC
notification  categorized the Bank as a  well-capitalized  bank under the prompt
corrective  action  regulations.  There have been no  conditions or events since
that  notification  that  management  believes  have changed the Bank's  capital
classification.  The  following is a summary of the actual  capital  amounts and
ratios as of  December  31,  1997 and 1996 for the Bank and the  Parent  Company
(consolidated), compared to the required ratios for minimum capital adequacy and
for classification as well-capitalized:
1997                                                   Required Ratios
----                                                   ---------------
                              Actual     Minimum  Capital      Classification as

                              Amount     Ratio    Adequacy      Well Capitalized
                              ------     -----    --------      ----------------

Bank
Leverage (Tier I) capital  $19,042,000     8.8%     4.0%              5.0%
Risk-based capital:
 Tier I .................   19,042,000    16.0      4.0               6.0
 Total ..................   20,506,000    17.2      8.0              10.0
Consolidated
Leverage (Tier I) capital  $21,623,000    10.0%     4.0%
Risk-based capital:
 Tier I .................   21,623,000    17.7      4.0
 Total ..................   23,117,000    19.0      8.0



                                       32
<PAGE>




1996                                                  Required Ratios
----                                                  ---------------

                                Actual  Minimum Capital      Classification as
                                Amount   Ratio Adequacy      Well Capitalized
                                ------   --------------      ----------------

Bank
Leverage (Tier I) capital  $18,782,000     9.4%  4.0%              5.0%
Risk-based capital:
 Tier I .................   18,782,000    17.8   4.0               6.0
 Total ..................   20,105,000    19.1   8.0              10.0
Consolidated
Leverage (Tier I) capital  $20,653,000    10.4%  4.0%
Risk-based capital:
 Tier I .................   20,653,000    19.3   4.0
 Total ..................   21,996,000    20.6   8.0

Basic Earnings Per Common Share

Basic earnings per common share was computed based on average outstanding common
shares of 1,419,000 in 1997,  1,441,000  in 1996 and  1,503,000 in 1995,  all of
which have been adjusted for the effect of the 20% stock dividend distributed in
February  1998.  For purposes of  computing  basic  earnings  per share,  income
available  to common  stockholders  equaled net income for 1997,  1996 and 1995.

Stock  Dividend

On January 14, 1998,  the Parent  Company  announced a 20% stock
dividend  payable on February  10, 1998 to common  stockholders  of record as of
January  27,  1998.  Under the terms of the  dividend,  stockholders  received a
dividend  of one share of common  stock for every  five  shares  owned as of the
record  date,  plus cash in lieu of any  fractional  shares.  A total of 236,514
common  shares  were  issued in  connection  with the stock  dividend
 .
 Dividend Restrictions

 Dividends  paid  by the  Bank  are the  primary  source  of  funds
available to the Parent Company for payment of dividends to its stockholders and
for other working capital needs.  Applicable  Federal statutes,  regulations and
guidelines  impose  restrictions on the amount of dividends that may be declared
by the Bank. Under these  restrictions,  the dividends  declared and paid by the
Bank to the Parent  Company  may not  exceed the total  amount of the Bank's net
profit  retained in the current year plus its retained net profits,  as defined,
from the two  preceding  years.  As of December 31, 1997,  this total amount was
approximately  $370,000.

Preferred  Stock Purchase  Rights

On July 9, 1996, the Board of Directors declared a dividend  distribution of one
purchase  right  ("Right") for each  outstanding  share of Parent Company common
stock ("Common  Stock"),  to  stockholders of record at the close of business on
July 9, 1996. The Rights have a 10-year term. The Rights become  exercisable (i)
10 days following a public announcement that a person or group has acquired,  or
obtained  the  right  to  acquire,  beneficial  ownership  of 20% or more of the
outstanding  shares of Common Stock, or (ii) 10 days following the  commencement
of a tender  offer or exchange  offer that,  if  successful,  would result in an
acquiring  person or group  beneficially  owning 30% or more of the  outstanding
Common  Stock  (unless  such tender or  exchange  offer is  predicated  upon the
redemption  of the  Rights).  When the Rights  become  exercisable,  a holder is



                                       33
<PAGE>



entitled to purchase one  one-hundredth  of a share,  subject to adjustment,  of
Series A  Preferred  Stock of the Parent  Company  or,  upon the  occurrence  of
certain  events  described  below,  Common Stock of the Parent Company or common
stock of an  entity  that  acquires  the  Company.  The  purchase  price per one
one-hundredth  of a share of Series A Preferred  Stock  ("Purchase  Price") will
equal the Board of Directors' judgment as to the "long-term investment value" of
one share of Common Stock at the end of the 10-year term of the Rights. Upon the
occurrence of certain events (including certain acquisitions of more than 20% of
the Common Stock by a person or group), each holder of an unexercised Right will
be entitled to receive  Common  Stock having a value equal to twice the Purchase
Price of the Right.  Upon the  occurrence  of certain  other  events  (including
acquisition of the Parent  Company in a merger or other business  combination in
which the Parent  Company is not the surviving  corporation),  each holder of an
unexercised  Right will be entitled  to receive  common  stock of the  acquiring
person having a value equal to twice the Purchase Price of the Right. The Parent
Company  may redeem the Rights  (to the extent not  exercised)  at any time,  in
whole  but not in  part,  at a price of  $0.01  per  Right.

13.  Related  Party

Transactions Certain directors and executive officers of the Company, as well as
certain  affiliates  of these  directors  and  officers,  have  engaged  in loan
transactions  with the Company.  Such loans were made in the ordinary  course of
business at the Company's normal terms,  including interest rates and collateral
requirements,  and do  not  represent  more  than  normal  risk  of  collection.
Outstanding loans to these related parties are summarized as follows at December
31:
                                         1997        1996
                                         ----        ----

Directors .......................  $1,214,000  $  720,000
Executive officers (non-director)     135,000     136,000
                                      -------     -------

                                   $1,349,000  $  856,000
                                   ==========  ==========

Total  advances to these  directors and officers  during the years 1997 and 1996
were $926,000 and  $577,000,  respectively.  Total  payments made on these loans
were  $433,000 in 1997 and $615,000 in 1996.  These  directors  and officers had
unused lines of credit with the Company of $252,000 at December  31,  1997.

14.Employee Benefit Plans

Pension Plan The Company has a  non-contributory  defined  benefit  pension plan
covering substantially all of its employees.  The benefits are based on years of
service and the employee's
average  compensation during the five consecutive years in the last ten years of
employment  affording the highest such average.  The Company's funding policy is
to  contribute  annually an amount  sufficient  to satisfy  the minimum  funding
requirements  of ERISA,  but not  greater  than the  maximum  amount that can be
deducted for Federal income tax purposes.  Contributions are intended to provide
not only for  benefits  attributed  to  service to date,  but also for  benefits
expected to be earned in the future.



                                       34
<PAGE>




The  following is a  reconciliation  of the plan's funded status and the amounts
recognized in the consolidated balance sheets at December 31:
<TABLE>
<CAPTION>

                                                                  1997          1996
<S>                                                        <C>           <C>
Accumulated benefit obligation, including vested benefits
 of $2,066,000 in 1997 and $1,948,000 in 1996 ...........  $(2,079,000)  $(1,958,000)
    ==========    ====     ==========    ====              ===========   ===========

Projected benefit obligation for service rendered to date  $(2,732,000)  $(2,605,000)
Plan assets at fair value, primarily listed stocks and
 U.S. Government securities .............................    2,660,000     2,139,000
                                                             ---------     ---------

Projected benefit obligation in excess of plan assets ...      (72,000)     (466,000)
Unrecognized net loss from past experience different
 from that assumed and effects of changes in assumptions       435,000       797,000
Unrecognized prior service cost .........................      (32,000)      (49,000)
Unrecognized net transition obligation ..................      (35,000)      (40,000)
                                                               -------       -------

Prepaid pension cost ....................................  $   296,000   $   242,000
                                                           ===========   ===========
</TABLE>





Net pension expense included the following components:

                                                   1997        1996        1995
                                                   ----        ----        ----
Service cost (benefits earned during the year)$ 118,000   $ 112,000   $  90,000
Interest cost on projected benefit obligation   181,000     172,000     157,000
Return on plan assets ........................ (459,000)   (195,000)   (205,000)
Net amortization and deferral ................  301,000      60,000      72,000
                                                -------      ------      ------

Net pension expense ..........................$ 141,000   $ 149,000   $ 114,000
                                              =========   =========   =========


Following are the  significant  assumptions  used in  determining  the actuarial
present value of the projected benefit obligation at December 31:

                                    1997   1996   1995
                                    ----   ----   ----
Weighted average discount rate      7.25   7.25   7.25%
Increase in future compensation     5.00   5.00   5.00%

The expected  long-term  rate of return on plan assets was 8.50% for 1997,  1996
and 1995.



                                       35
<PAGE>



The Company accounts for the cost of these postretirement benefits in accordance
with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions."  Accordingly,  the cost of these benefits is recognized on an accrual
basis as employees  perform  services to earn the benefits.  The Company adopted
SFAS No. 106 as of  January 1, 1993 and  elected  to  amortize  the  accumulated
benefit obligation at that date ("transition  obligation") into expense over the
allowed  period of 20 years.  The  following is a  reconciliation  of the plan's
unfunded  benefit  obligations  and the amounts  recognized in the  consolidated
balance sheets at December 31:

                                                 1997          1996
                                                 ----          ----
Accumulated postretirement benefit obligation:
 Retirees ..............................     $(385,000)     $(207,000)
 Fully-eligible active plan participants       (40,000)       (52,000)
 Other active plan participants ........      (564,000)      (341,000)
                                              --------       --------

                                              (989,000)      (600,000)
Unrecognized transition obligation .....       276,000        294,000
Unrecognized net loss (gain) ...........       156,000       (149,000)
                                               -------       --------

Accrued postretirement benefit cost ....     $(557,000)     $(455,000)
                                             =========      =========

Net postretirement benefit expense included the following components:

                                                    1997      1996      1995
                                                    ----      ----      ----
Service cost (benefits earned during the year)   $ 52,000  $ 34,000  $ 52,000
Interest cost on accumulated benefit obligation    60,000    39,000    59,000
Net amortization and deferral .................    19,000    14,000    24,000
                                                   ------    ------    ------

Net postretirement benefit expense ............  $131,000  $ 87,000  $135,000
                                                 ========  ========  ========

The discount rate used in determining  the  accumulated  postretirement  benefit
obligation  was 7.00% at December 31, 1997,  and 7.25% at both December 31, 1996
and 1995. For measurement purposes at December 31, 1997, an 8.00% annual rate of
increase in the per capita cost of covered  health care benefits was assumed for
medical coverage in 1998; the rate was assumed to decrease gradually to 4.00% by
2001 and to remain at that level  thereafter.  The  health  care cost trend rate
assumption  has a significant  effect on the amounts  reported.  Increasing  the
assumed health care cost trend rates by one percentage  point in each year would
increase the accumulated  postretirement  benefit  obligation as of December 31,
1997 by  approximately  $155,000  and the  aggregate of the service and interest
cost  components  of the net  postretirement  benefit  expense by  approximately
$28,000.



                                       36
<PAGE>



Tax-Deferred  Savings Plan

The Company  maintains a qualified 401(k) plan for all employees,  which permits
tax-deferred  employee  contributions  up to  15% of  salary  and  provides  for
matching  contributions  by the Company.  Beginning in 1996, the Company matches
100% of employee  contributions up to 4% of the employee's salary and 25% of the
next 2% of the employee's salary. The Company continues to match 25% of employee
contributions  beyond 6% of the  employee's  salary  until  the  total  matching
contribution  reaches $1,500 or 15%. For 1995, the Company contributed a maximum
of fifty cents for each dollar contributed by each participating employee, up to
a maximum of $1,500 per employee. The Company contributed approximately $117,000
in 1997, $93,000 in 1996 and $53,000 in 1995.

15. Commitments and Contingent  Liabilities

Legal  Proceedings
The Parent  Company  and the Bank are,  from time to time,  defendants  in legal
proceedings  relating to the conduct of their business.  In the best judgment of
management,  the  consolidated  financial  position of the  Company  will not be
affected materially by the outcome of any pending legal proceedings.

Off-Balance-Sheet  Financial  Instruments

The Company is a party to certain financial  instruments with  off-balance-sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers. These are limited to commitments to extend credit and standby letters
of credit which involve,  to varying degrees,  elements of credit risk in excess
of the amounts  recognized  in the  consolidated  balance  sheets.  The contract
amounts of these instruments reflect the extent of the Company's  involvement in
particular classes of financial  instruments.  The Company's maximum exposure to
credit  loss in the  event  of  non-performance  by the  other  party  to  these
instruments represents the contract amounts, assuming that they are fully funded
at a later date and any collateral proves to be worthless.  The Company uses the
same  credit  policies  in making  commitments  as it does for  on-balance-sheet
extensions of credit.  Contract amounts of financial  instruments that represent
agreements to extend credit are as follows at December 31:

                                1997        1996
                                ----        ----
Loan origination commitments
and unused lines of credit:
  Mortgage loans ........  $ 1,475,000  $ 1,468,000
  Commercial loans ......    6,544,000    4,512,000
  Credit card lines .....    2,606,000    2,544,000
  Home equity lines .....    1,902,000    1,730,000
  Other revolving credit     1,294,000    1,265,000
                             ---------    ---------

                            13,821,000   11,519,000
Standby letters of credit      453,000      140,000
                               -------      -------

                           $14,274,000  $11,659,000
                           ===========  ===========


                                       37
<PAGE>



These  agreements  to extend  credit have been granted to  customers  within the
Company's  lending area  described in note 5 and relate  primarily to fixed-rate
loans.  Loan origination  commitments and lines of credit are agreements to lend
to a customer as long as there is no violation of any condition  established  in
the contract.  These  agreements  generally have fixed expiration dates or other
termination  clauses and may  require  payment of a fee by the  customer.  Since
commitments  and lines of credit may expire  without being fully drawn upon, the
total contract amounts do not necessarily  represent  future cash  requirements.
The Company evaluates each customer's  creditworthiness on a case-by-case basis.
The amount of collateral,  if any, required by the Company upon the extension of
credit is based on  management's  credit  evaluation of the  customer.  Mortgage
commitments are secured by a first lien on real estate. Collateral on extensions
of credit for  commercial  loans  varies but may  include  accounts  receivable,
equipment,   inventory,  livestock  and  income-producing  commercial  property.
Standby letters of credit are conditional  commitments  issued by the Company to
guarantee the performance of a customer to a third party.  These  guarantees are
primarily issued to support borrowing arrangements.  The credit risk involved in
issuing  standby  letters of credit is essentially  the same as that involved in
extending loan facilities to customers

16. Fair Values of Financial Instruments

SFAS No. 107, "Disclosures about Fair Value of Financial  Instruments," requires
that   the   Company   disclose   estimated   fair   values   for  its  on-  and
off-balance-sheet financial instruments.  SFAS No. 107 defines fair value as the
amount  at which  the  financial  instrument  could be  exchanged  in a  current
transaction  between  parties other than in a forced or liquidation  sale.  Fair
value  estimates are made at a specific point in time,  based on relevant market
information and information about the financial  instrument.  These estimates do
not reflect any premium or discount  that could result from offering for sale at
one time the Company's entire holding of a particular financial instrument,  nor
do they reflect  possible tax  ramifications  or transaction  costs.  Because no
market exists for a significant portion of the Company's financial  instruments,
fair value estimates are based on judgments  regarding  future expected net cash
flows,  current economic  conditions,  risk characteristics of various financial
instruments,  and other  factors.  These  estimates are subjective in nature and
involve uncertainties and matters of significant judgment,  and therefore cannot
be determined with precision.  Changes in assumptions could significantly affect
the   estimates.   Fair  value   estimates   are  based  on  existing   on-  and
off-balance-sheet financial instruments without attempting to estimate the value
of  anticipated  future  business  or the  value  of  non-financial  assets  and
liabilities such as premises and equipment.  In addition,  there are significant
unrecognized  intangible  assets  that  are not  included  in these  fair  value
estimates,  such as the  value  of  "core  deposits"  and the  Company's  branch
network.



                                       38
<PAGE>



The following is a summary of the net carrying  values and estimated fair values
of the Company's  financial assets and liabilities  (none of which were held for
trading purposes) at December 31:
 December 31, 1997
                                  Net Carryi     Estimated
                                     Value      Fair Value
                                     -----      ----------
Financial Assets:
Cash and cash equivalents .....  $  7,163,000  $  7,163,000
Securities available for sale .    70,793,000    70,793,000
Investment securities .........     3,738,000     3,821,000
Loans .........................   125,793,000   127,054,000
Accrued interest receivable ...     1,291,000     1,291,000
Federal Home Loan Bank stock ..       753,000       753,000
Financial Liabilities:
Demand deposits
 (non-interest bearing) .......    23,545,000    23,545,000
Interest-bearing deposits .....   155,615,000   155,678,000
Federal Home Loan Bank advances    10,000,000    10,000,000
Short-term debt ...............       404,000       404,000
Accrued interest payable ......       610,000       610,000

December 31, 1996
                                Net Carrying    Estimated
                                    Value      Fair Value
                                    -----      ----------
Financial Assets:
Cash and cash equivalents ...  $  6,023,000  $  6,023,000
Securities available for sale    64,482,000    64,482,000
Investment securities .......     3,401,000     3,518,000
Loans .......................   115,605,000   116,992,000
Accrued interest receivable .     1,168,000     1,168,000
Federal Home Loan Bank stock        717,000       717,000
Financial Liabilities:
Demand deposits
 (non-interest bearing) .....    22,044,000    22,044,000
Interest-bearing deposits ...   150,886,000   151,043,000
Short-term debt .............       529,000       529,000
Accrued interest payable ....       601,000       601,000



                                       39
<PAGE>


The specific  estimation  methods and  assumptions  used can have a  substantial
impact  on  the  estimated  fair  values.  The  following  is a  summary  of the
significant  methods and  assumptions  used by the Company to estimate  the fair
values shown in the preceding table:

Securities

The  carrying   values  for  securities   maturing  within  90  days
approximate  fair values  because  there is little  interest rate or credit risk
associated with these instruments. The fair values of longer-term securities are
estimated  based  on  bid  prices  published  in  financial  newspapers  or  bid
quotations  received from securities  dealers.  The fair values of certain state
and municipal  securities  are not readily  available  through  market  sources;
accordingly,  fair value  estimates are based on quoted market prices of similar
instruments,  adjusted  for  any  significant  differences  between  the  quoted
instruments and the instruments being valued.

Loans

Fair  values  are  estimated  for  portfolios  of loans with  similar  financial
characteristics. Loans are segregated by type such as commercial, consumer, real
estate and other loans. Each loan category is further  segregated into fixed and
adjustable rate interest terms and by performing and non-performing  categories.
The fair values of performing loans are calculated by discounting scheduled cash
flows through  estimated  maturity using  estimated  market  discount rates that
reflect the credit and  interest  rate risks  inherent  in the loans.  Estimated
maturities are based on contractual terms and repricing opportunities.  The fair
values of  non-performing  loans are based on  recent  external  appraisals  and
discounted cash flow analysis.  Estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions
regarding  credit  risk,  cash  flows  and  discount  rates  are   judgementally
determined using available market information and specific borrower information.

Deposit Liabilities

The fair values of deposits with no stated  maturity (such as checking,  savings
and money market  deposits) equal the carrying  amounts  payable on demand.  The
fair values of time deposits are based on the  discounted  value of  contractual
cash  flows  (but are not less  than the net  amount at which  depositors  could
settle their  accounts).  The discount  rates are  estimated  based on the rates
currently offered for time deposits with similar remaining maturities.

Federal  Home Loan Bank

Advances  The fair  value was  estimated  by  discounting  scheduled  cash flows
through maturity using current market rates.

Other Financial  Instruments

The fair  values of cash and cash  equivalents,  FHLB  stock,  accrued  interest
receivable,  accrued  interest  payable and other  short-term debt  approximated
their  carrying  values at December  31,  1997 and 1996.  The fair values of the
agreements to extend credit described in note 15 are estimated based on the fees
currently  charged to enter into  similar  agreements,  taking into  account the
remaining  terms  of the  agreements  and the  present  creditworthiness  of the
counterparties.  For fixed  rate loan  commitments,  fair value  estimates  also
consider the difference  between current market interest rates and the committed
rates.  At  December  31,  1997 and 1996,  the fair  values  of these  financial
instruments approximated the related carrying values which were not significant



                                       40
<PAGE>



17. Recent Accounting Standards

In June 1997, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income", which 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 net unrealized
gain or loss on securities  available for sale.  This Statement is effective for
fiscal years  beginning  after  December 15, 1997.  Management  will provide the
required information for inclusion in the Company's 1998 consolidated  financial
statements.  In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information",  which establishes standards
for reporting by public  companies about  operating  segments of their business.
SFAS No. 131 also establishes  standards for disclosure of entity-wide financial
information  about products and services,  geographic areas and major customers.
This Statement is effective for fiscal years  beginning after December 15, 1997.
Management will provide the required  information for inclusion in the Company's
1998 annual consolidated financial statements.


                                       41
<PAGE>



18. Condensed Parent Company Financial  Statements

The following are the condensed  parent  company only  financial  statements for
Jeffersonville Bancorp:

Balance Sheets
(Parent Company Only)
As of December 31,
                                                    1997        1996
                                                    ----        ----
Assets
Cash .......................................  $    95,000  $   155,000
Securities available for sale, at fair value    1,296,000      523,000
Investment in subsidiary ...................   19,586,000   19,112,000
Premises and equipment, net ................    1,272,000    1,324,000
Other assets ...............................       21,000         --
                                                   ------

Total assets ...............................  $22,270,000  $21,114,000
                                              ===========  ===========

Liabilities and Stockholders' Equity
Liabilities ................................  $    94,000  $   139,000
Stockholders' equity .......................   22,176,000   20,975,000
                                               ----------   ----------

Total liabilities and stockholders' equity    $22,270,000  $21,114,000
                                              ===========  ===========

Statements
of Income
(Parent Company Only)

For Years Ended December 31,                1997         1996          1995
----------------------------                ----         ----          ----
Dividend income from subsidiary ...  $ 1,375,000  $ 2,253,000   $ 2,090,000
Dividend income on securities
available for sale ................       72,000         --            --
                                          ------

                                       1,447,000    2,253,000     2,090,000
                                       ---------    ---------     ---------

Rental income from subsidiary .....      245,000      246,000       209,000
                                         -------      -------       -------

Occupancy and equipment expenses ..       62,000       63,000        53,000
Other non-interest expense ........       34,000      100,000        41,000
                                          ------      -------        ------

                                          96,000      163,000        94,000
                                          ------      -------        ------

Income before income taxes and
 undistributed income of subsidiary    1,596,000    2,336,000     2,205,000
Income tax expense ................       93,000       34,000        47,000
                                          ------       ------        ------

Income before undistributed
 income of subsidiary .............    1,503,000    2,302,000     2,158,000
Equity in undistributed
 income of subsidiary .............      260,000     (157,000)      266,000
                                         -------     --------       -------

Net income ........................  $ 1,763,000  $ 2,145,000   $ 2,424,000
                                     ===========  ===========   ===========


                                       42
<PAGE>


<TABLE>
<CAPTION>

Statements
of Cash Flows
(Parent Company Only)

For Years Ended December 31,                        1997          1996          1995
----------------------------                        ----          ----          ----
<S>                                          <C>           <C>           <C>
Operating Activities
  Net income ..............................  $ 1,763,000   $ 2,145,000   $ 2,424,000
Adjustments to reconcile net income to
 net cash provided by operating activities:
  Equity in undistributed income
 of subsidiary ............................     (260,000)      157,000      (266,000)
  Depreciation and amortization ...........       62,000        63,000        53,000
  Other adjustments, net ..................      (72,000)       27,000         9,000
                                                 -------        ------         -----

Net cash provided
 by operating activities ..................    1,493,000     2,392,000     2,220,000
                                               ---------     ---------     ---------

Investing Activities
Purchases of securities available for sale      (750,000)     (500,000)         --
Purchases of premises and equipment .......      (10,000)      (90,000)     (245,000)
                                                 -------       -------      --------

cash used in investing activities .........     (760,000)     (590,000)     (245,000)
                                                --------      --------      --------

Financing Activities
Cash dividends paid .......................     (792,000)     (775,000)     (755,000)
Purchases and retirements of common stock .       (1,000)   (1,043,000)   (1,200,000)
Proceeds from sales of treasury stock .....         --          19,000        64,000
                                                 ------         ------        ------

Net cash used in financing activities .....     (793,000)   (1,799,000)   (1,891,000)
                                                --------    ----------    ----------

Net (decrease) increase in cash ...........      (60,000)        3,000        84,000
Cash at beginning of year .................      155,000       152,000        68,000
                                                 -------       -------        ------

Cash at end of year .......................  $    95,000   $   155,000   $   152,000
                                             ===========   ===========   ===========
</TABLE>



                                       43
<PAGE>





19. Summary of Unaudited Quarterly Financial Information
The following is a condensed summary of quarterly results of operations for 1997
and 1996:
<TABLE>
<CAPTION>

1997
                               March 31       June 30      September 30   December 31      Total
                               --------       -------      ------------   -----------      -----
<S>                        <C>            <C>            <C>            <C>            <C>
Interest income .........  $  3,749,000   $  3,881,000   $  4,078,000   $  4,139,000   $ 15,847,000
Interest expense ........    (1,610,000)    (1,748,000)    (1,729,000)    (1,856,000)    (6,943,000)
                             ----------     ----------     ----------     ----------     ----------

Net interest income .....     2,139,000      2,133,000      2,349,000      2,283,000      8,904,000
Provision for loan losses       (90,000)      (350,000)      (256,000)      (454,000)    (1,150,000)
Non-interest income .....       265,000        409,000        291,000        285,000      1,250,000
Non-interest expenses ...    (1,692,000)    (1,631,000)    (1,728,000)    (1,807,000)    (6,858,000)
                             ----------     ----------     ----------     ----------     ----------

Income before taxes .....       622,000        561,000        656,000        307,000      2,146,000
Income taxes ............      (121,000)       (90,000)      (141,000)       (31,000)      (383,000)
                               --------        -------       --------        -------       --------

Net income ..............  $    501,000   $    471,000   $    515,000   $    276,000   $  1,763,000
                           ============   ============   ============   ============   ============

Basic earnings per share1  $      0.35     $      0.33    $      0.36    $      0.20    $      1.24


1996
                               March 31       June 30      September 30   December 31      Total
Interest income .........  $  3,657,000   $  3,752,000   $  3,727,000   $  3,808,000   $ 14,944,000
Interest expense ........    (1,536,000)    (1,557,000)    (1,573,000)    (1,612,000)    (6,278,000)
                             ----------     ----------     ----------     ----------     ----------

Net interest income .....     2,121,000      2,195,000      2,154,000      2,196,000      8,666,000
Provision for loan losses          --          (60,000)       (60,000)      (170,000)      (290,000)
Non-interest income .....       220,000        310,000        211,000        318,000      1,059,000
Non-interest expenses ...    (1,518,000)    (1,737,000)    (1,680,000)    (1,786,000)    (6,721,000)
                             ----------     ----------     ----------     ----------     ----------

Income before taxes .....       823,000        708,000        625,000        558,000      2,714,000
Income taxes ............      (201,000)      (119,000)      (130,000)      (119,000)      (569,000)
                               --------       --------       --------       --------       --------

Net income ..............  $    622,000   $    589,000   $    495,000   $    439,000   $  2,145,000
                           ============   ============   ============   ============   ============

Basic earnings per share1   $      0.42    $      0.41    $      0.35    $      0.31      $      1.49
                        =   ===========    ===========    ===========    ===========      ===========

</TABLE>

1All per  share  amounts  have  been  adjusted  for the  effect of the 20% stock
dividend distributed in February 1998. See note 12.


                                       44
<PAGE>




Independent Auditors' Report

KPMG Peat Marwick LLP
Certified Public Accountants
The Board of Directors and Stockholders
Jeffersonville Bancorp:
We have audited the accompanying  consolidated  balance sheets of Jeffersonville
Bancorp and subsidiary (the "Company") as of December 31, 1997 and 1996, and the
related consolidated  statements of income, changes in stockholders' equity, and
cash flows for each of the years in the  three-year  period  ended  December 31,
1997. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial  statements based on our audits. We conducted our audits
in accordance  with  generally  accepted  auditing  standards.  Those  standards
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audits  provide  a  reasonable  basis  for  our  opinion.  In our  opinion,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,   the  financial  position  of  Jeffersonville  Bancorp  and
subsidiary as of December 31, 1997 and 1996, and the results of their operations
and  their  cash  flows  for each of the years in the  three-year  period  ended
December 31, 1997 in conformity with generally accepted  accounting  principles.
/s/ KPMG Peat Marwick LLP Albany, New York  February 13, 1998



                                       45
<PAGE>



Jeffersonville  Bancorp  Board of  Directors

Arthur E. Keesler
Chairman of the Board Retired  Chief  Executive  Officer First  National Bank of
Jeffersonville Jeffersonville, New York

Honorable  Lawrence H. Cooke
Chief  Judge of the  State of New  York  Retired

John W.  Galligan  Owner
John Galligan,   Land  Surveyor  Monticello,   New  York  Surveyor

John  K.  Gempler
Secretary/Treasurer  Callicoon Co-op Insurance Company Jeffersonville,  New York
Insurance Company

Douglas A.  Heinle
Postmaster  Cochecton  Center  Cochecton Center, New York

Solomon Katzoff
President Katzoff Realty, Inc.  Jeffersonville, New York Real Estate  Sale

Gibson  McKean
 President  McKean Real Estate,  Inc. Barryville,  New York Real Estate Sales

James F. Roche
President  Roche's Garage Inc.  Callicoon,  New York Automobile Dealer

Frederick W. V. Schadt
Schadt and Schadt Jeffersonville, New York Attorneys

Edward T. Sykes
President Mike Preis Inc. Callicoon, New York Insurance Agency

Raymond Walter
President First National  Bank of  Jeffersonville  Jeffersonville,  New York

Gilbert  E.  Weiss
Retired  Chief   Executive   Officer  First  National  Bank  of   Jeffersonville
Jeffersonville,  New York

Earl A.  Wilde
Retired Sullivan County Cooperative Extension Liberty, New York


                                       46
<PAGE>



Officers

Arthur E. Keesler      Raymond Walter      John K. Gempler      K. Dwayne Rhodes
President              Vice President       Secretary               Treasurer

The First National Bank of Jeffersonville

Officers

Arthur E. Keesler
Chairman of the Board
Raymond Walter
President and Chief Executive Officer
K. Dwayne Rhodes
Executive Vice President and Cashier
John M. Riley
Senior Vice President--Loans
Theodore Bertot
Auditor
Charles E. Burnett
Controller
June B. Tegeler
Vice President and Branch Manager
Claire Pecsi
Vice President--Human Resources
Tatiana Hahn
Vice President
Susan A. Bodenstein
Assistant Vice President--Operations
Jacqueline M. Gieger
Operations Manager
Pearl L. Gain
Assistant Cashier--Accounting
Rhonda Decker
Branch Manager
Raymond W. Browne
Branch Manager
Tanja McKerrell
Branch Manager
Kathleen Beseth
Branch Manager
Edith Houghtaling
Assistant Branch Manager
Janet Siano
Assistant Branch Manager
Stacey Stephenson
Assistant Branch Manager
Linda Fisk
Sales Manager
Sandra S. Sipple
Sales Manager
Florence Horecky
Sales Manager
Loreen Gebelein
Mortgage Administrator
Andrew McKean
Commercial Loan Officer
Barbara Hahl
Marketing Manager
Staff

Melissa Adams
Dianne Banks
Amy Bernhardt
Geri Bennett
Dawn Berst
Renae Bishop
Jerilynn Brock
Michelle Brockner
Nancy Brown
MaryPaige Lange-Clouse
Nancy Crumley
Lydia D'Antoni
Charles DelGenovese, Sr. Joan DelGenovese Jane DePaolo Susan DeVito Denise Diehl
Cathleen  Doherty  Barbara  Donnelly Lisa Dreher Kelly  Ellsworth  Daniel Fenton
Linda Fisk Deborah  Forsblom  Lorraine  Forster  Dawn Gandy JoAnne  Girardi Nina
Gorton Troy Gorton  Vivian  Grabek  Cynthia  Gregson  Christine  Gruber  Justine
Hageman  Eugene Hahn Kerline Harman Alisa Horan Cathy Horan Martha Huebsch Heidi
Hulse Betty Johaneman Marilyn Kaempfe Helen Karkkainen Jean Kelly Jessica Kenyon
Lauren  Kickuth  Trishia  Kinney Brandy  Leonardo  Patricia  Leonardo Dana LeRoy
Shirley  Lindsley  Michele  Lupardo  Merrily Lynch Linda Mall JoAnn Malley Diane
McGrath  Jonathan  McGruder  Mariann  McKay Tina  Millis  Ruth Mootz Rose Morell
Deborah  Muzuruk Gale Myers  Lorraine  Niemann Kelli Pagan George Palmer Valerie
Panich Jenny Peters  Denise Price  Barbara  Pietrucha  Jimmy Porter Alice Reisen
Janet Reis Andrew Richardson  Damaris Rios Sandra Ross John Rudy Beth Schumacher
Catherine  Sigelakis  Crystal Smith Susan TerBush  Barbara  Walter Jayne Wartell
Carol Welton Everett Williams Jean Wood Heather Worzel Luz Young


                                       47
<PAGE>



Corporate Information

Corporate  Headquarters  Jeffersonville  Bancorp 300 Main  Street  P.O.  Box 398
Jeffersonville,  New York  12748  Tel.  (914)  482-4000

www.jeffbank.com  EMAIL jeffbank  @jeffbank.com

Description  of  Business

Jeffersonville  Bancorp is a one-bank holding company formed in June 1982, under
the laws of the State of New York.  Its subsidiary is The First National Bank of
Jeffersonville,   which  serves  Sullivan  County,   New  York  and  surrounding
communities  in  Southeastern,  New York through eight  offices.  A full-service
commercial  bank,  it provides a broad range of  financial  products,  including
demand and time deposits, mortgage, consumer, commercial and agricultural loans.

Annual Meeting

The Annual Meeting of  stockholders  will be held on Tuesday,  April 28, 1998 at
3:00 p.m.,  in the  Company's  Board Room at  Jeffersonville,  New York.  Annual
Report on Form 10-K Upon  written  request,  Company  management  will  provide,
without  charge,  a copy of the Company's  annual report on Form 10-K filed with
the Securities and Exchange Commission.  Requests for this information should be
submitted to the Company's Treasurer at the above address.

Stock Information

The Company's common stock has traded in the  Over-the-Counter  market under the
symbol JFBC since January 1997.  Ryan Beck & Company of West Orange,  New Jersey
is the primary market maker (contact  Andrew Lieb at  800-342-2325).  On January
14,  1998,  Jeffersonville  Bancorp  announced a 20% stock  dividend  payable on
February 10, 1998 to common stockholders of record as of January 27, 1998. Under
the terms of the  dividend,  stockholders  received a  dividend  of one share of
common stock for every five shares owned as of the record date. Cash was paid in
lieu  of  fractional   shares.   Shareholders   participating  in  our  Dividend
Reinvestment Plan have been credited for the fractional shares. In January 1998,
the  Company's  stock  traded for $20.41 to $23.75 per share.  These prices have
been adjusted to reflect the 20% stock dividend  discussed  above.  During 1997,
the Company's Board of Directors declared two cash dividends,  in June for $0.32
per  share  and  in  December  for  $0.35  per  share  (or  $0.267  and  $0.292,
respectively,  after adjustment for the stock dividend). Cash dividends of $0.32
and  $0.33  per  share  were   declared   in  June  1996  and   December   1996,
respectively(or $0.267 and $0.275, respectively,  after adjustment for the stock
dividend)
 .
 Jeffersonville Bancorp
P.O. Box 398
Jeffersonville, New York 12748
http://www.jeffbank.com

                                       49
<PAGE>