<PAGE>

                                                                      EXHIBIT 13
================================================================================






                                     1998
                                    ANNUAL
                                    REPORT




                   [LOGO OF ES&L BANCORP, INC. APPEARS HERE]

================================================================================
<PAGE>
 
                      Selected Consolidated Financial Data

<TABLE>
<CAPTION>

SUMMARY OF FINANCIAL CONDITION   
------------------------------------------------------------------------------------------------------------------------------------
At June 30                                                      1998            1997            1996            1995            1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>             <C>             <C>             <C>         
Total amount of:
   Assets                                               $152,160,204    $149,641,144    $140,138,518    $136,484,313    $120,933,211
   Loans receivable, net                                 126,181,335     131,710,850     121,636,011     118,186,529     106,437,875
   Cash and investment securities (1)                      8,474,514       4,812,020       4,452,792       5,305,872       5,487,223
   Mortgage-backed securities                              1,348,600       1,575,642       2,069,579       2,867,553       3,257,042
   Deposit accounts                                      112,179,831     111,748,518     106,652,829     101,014,522      86,856,773
   Advances from FHLB                                     21,897,090      20,606,615      17,615,560      20,523,963      20,831,855
   Shareholders' equity, substantially
     restricted                                           14,500,671      14,155,282      12,912,145      11,471,243      10,145,984
   Book value (2)                                              17.43           16.71           15.29           13.92           12.38
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
SUMMARY OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,                                             1998            1997            1996            1995            1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>             <C>             <C>             <C>        

Interest income                                          $12,265,660     $11,944,989     $11,379,003     $10,052,154     $ 8,535,120
Interest expense                                           6,701,218       6,404,745       6,195,480       5,474,611       4,441,012
------------------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for
   loan losses                                             5,564,442       5,540,244       5,183,523       4,577,543       4,094,108
Provision for loan losses                                    300,000          40,000          60,000         150,000         640,000
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
   loan losses                                             5,264,442       5,500,244       5,123,523       4,427,543       3,454,108
Other income                                               1,267,843       1,041,176         800,752         673,417         816,574
Other expenses                                             3,297,107       4,012,490       3,078,154       2,770,757       2,638,756
------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
   cumulative effect                                       3,235,178       2,528,930       2,846,121       2,330,203       1,631,926
Income taxes                                               1,195,785         690,550       1,092,560         747,227         369,433
------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect                            2,039,393       1,838,380       1,753,561       1,582,976       1,262,493
Cumulative effect of accounting change                           ---             ---             ---             ---         142,000
------------------------------------------------------------------------------------------------------------------------------------
Net Income                                               $ 2,039,393     $ 1,838,380     $ 1,753,561     $ 1,582,976     $ 1,404,493
                                                         ===========     ===========     ===========     ===========     ===========
Net Income per share, assuming dilution (2)              $      2.41     $      2.14     $      2.05     $      1.88     $      1.71
                                                         ===========     ===========     ===========     ===========     ===========
Cash dividends paid (2)                                  $      1.68     $      0.68     $      0.45     $      0.40     $      0.25
                                                         ===========     ===========     ===========     ===========     ===========
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
KEY OPERATING RATIOS
------------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,                                                                       1998              1997              1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>               <C>               <C>  
Return on average assets                                                                  1.35%             1.27%             1.27%
Return on average equity                                                                 14.23%            13.58%            14.38%
Average equity-to-average asset ratio                                                     9.49%             9.34%             8.81%
Interest rate spread                                                                      3.51%             3.61%             3.55%
Net yield on interest-earning assets                                                      3.83%             3.93%             3.87%
Other expenses to average total assets                                                    2.18%             2.77%             2.23%
Non-performing loans as a percentage of total loans, at 6/30                              0.23%             0.53%             0.24%
One year interest rate sensitivity gap to total assets, at 6/30                           0.61%             0.73%            12.00%
Net interest income to other expenses (3)                                                 1.69X             1.38X             1.68X
</TABLE>

(1)  Includes interest-earning deposits in other depository institutions.
(2)  Per share data has been adjusted for the three-for-two stock split which
     occurred on August 23, 1996.
(3)  Represents the number of times net interest income covers other expenses.


                               ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
<PAGE>
 
                       A Message from the Managing Officer

TO OUR SHAREHOLDERS:

    I am pleased to report that ES&L Bancorp completed another record fiscal
year during 1998. The $2,039,393 earned generated a 1.35% return on average
assets and a 14.23% return on average equity. Our earnings increased almost 11%
over the previous period. Additionally, a record $71.3 million in loan
originations by ES&L and its affiliates contributed significantly to the
successful year. These performance indicators are well above the average of
various peer groups that we monitor.

    As a stockholder, you shared in the Company's success by receiving four
quarterly dividends of $.17 each and a $1.00 special dividend which was paid in
July of 1997. The Board of Directors also approved a 47% increase in the
quarterly dividend payable in August of 1998. The new quarterly cash dividend
rate is $0.25 per share. In addition, based on the limited trades that we are
aware of, the company's stock appreciated in value from $16.50 per share at the
beginning of the fiscal year to $21.00 per share at the end of the fiscal year.
The cash dividend paid and the appreciation in the share price represents a
37.45% total return to our stockholders during our 1998 fiscal year.

    Last year was a good one for ES&L. However, as we look to the near future,
new challenges are expected which may restrain our efforts to achieve growth in
earnings comparable to prior periods. Competition is intense and is coming from
a variety of sectors. This drives down pricing and shrinks profit margins within
our industry. In some cases, competitive pricing is irrational.

    Another issue we are wrestling with is the current interest rate
environment. Long term interest rates have fallen substantially and are only
slightly higher than short term interest rates. This flat yield curve affects
our business in several ways. Loan payoffs increase as consumers refinance out
of higher rate loans, while our resulting reinvestment opportunitites are
limited. At the same time, our cost of money has not declined because short term
rates haven't fallen to the same extent as long term rates. If all of these
factors continue and the economy begins to slow, even more pressure will be
placed on earnings.

    In developing our strategy to address these conditions, ES&L's Board
believes it is not in our best long term interest to take on unwarranted
additional interest rate risk and/or unwise additional credit risk. Instead, it
is the Bank's intent to maximize the resources of our company to further pursue
the strategies that have made it successful to date. This course of action may,
however, limit balance sheet growth and expectations of earnings growth in the
short term.

    Additionally, the regulatory climate for our industry is still clouded.
Financial modernization legislation is slowly working its way through the halls
of Congress. Proposals are made from time to time that would harm our industry
by curtailing some of the powers currently available through our holding company
structure. We believe that our trade associations will be effective in
persuading Congress to maintain our structure as it currently exists.

    While future challenges are abundant, so are opportunities. All of us
associated with ES&L are committed to maximizing the return to shareholders over
the long run. Our intent is to strengthen the sound financial foundation that
has been built up over the years by focusing our efforts on prudent strategies
that serve our community. New and innovative products, backed by state of the
art technology, will be instrumental in achieving objectives.

    I thank our staff and Board of Directors for their outstanding efforts in
bringing our Bank to the performance level it has achieved. They are talented
and dedicated people fully capable of meeting future challenges. And thank you,
our owners, for your continued support.

                                      /s/ William A. McKenzie

                                      William A. McKenzie
                                      President & Chief Executive Officer

                              ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                       1

<PAGE>
 
                           Asset/Liability Management

The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income, and during a period of
falling interest rates, a negative gap would result in an increase in net
interest income while conversely a positive gap would negatively affect net
interest income.

The thrift industry has experienced significant fluctuations in net interest
income due to changing interest rate environments. During periods of increasing
rates, net interest income has decreased because thrifts generally have larger
amounts of rate sensitive liabilities than rate sensitive assets. However, the
Bank has a virtual even one-year gap, which means that its net interest income
should be stable regardless of shifts in interest rates.

The Bank is subject to minimal interest rate risk to the degree that its
interest-bearing liabilities mature or reprice more slowly, or on a different
basis, than its interest-earning assets. As a continuing part of its financial
strategy, the Bank attempts to manage the impact of fluctuations in market
interest rates on its net interest income. This effort entails providing a
reasonable balance between interest rate risk, credit risk and maintenance of
yield.

Management believes that interest rate risk is one of the most significant
factors affecting the Bank's future ability to generate earnings consistently.
The Bank has established a policy on the management of interest rate risk which
establishes guidelines for acceptable limits on the sensitivity of the market
value of the Bank's assets and liabilities to changes in interest rates.
Accordingly, since 1983 the Bank has improved the matching and limited the
sensitivity of its interest-earning assets and interest-bearing liabilities to a
level which management believes provides an acceptable level of interest rate
risk. To accomplish this, fixed-rate mortgages, mortgage-backed securities and
investments have been sold and proceeds reinvested in loans and securities with
shorter terms or adjustable rates. Although the Bank continues to hold an amount
of fixed-rate mortgage loans, management believes that it has adequately
mitigated the interest rate exposure of these loans through the origination of
adjustable-rate mortgages and the occasional purchase of adjustable-rate
mortgage-backed securities and investment grade corporate bonds.

The Board of Directors of the Bank has adopted an interest rate policy providing
that one-year gap of up to negative 5% or positive 25% is acceptable. At June
30, 1998, the Bank had a positive one-year gap of 0.61% of total assets.

The following table presents the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at June 30, 1998
(000's):

<TABLE>
<CAPTION>
                                                                1 Yr.         Over 1         Over 3           Over
                                                                   or           thru           thru              5
                                                                 Less         3 Yrs.         5 Yrs.            Yrs.           Total
                                                             ----------------------------------------------------------------------
<S>                                                        <C>              <C>            <C>             <C>           <C> 
Interest-Earning Assets:
  Mortgage-Backed Securities                               $    1,299       $      0       $      0        $      0      $    1,299
  Loans Receivable                                             88,219         38,213          3,599           5,759         135,790
  Investments                                                   7,313          1,025              0               0           8,338
                                                             ----------------------------------------------------------------------
                                          Total            $   96,831       $ 39,238       $  3,599        $  5,759      $  145,427
Interest-Bearing Liabilities:
  Certificates of Deposit                                  $   64,852       $ 14,517       $  4,573        $      0      $   83,942
  Other Deposits                                               22,445              0              0           5,793          28,238
  Borrowings                                                    8,612          1,121          1,276          10,887          21,897
                                                             ----------------------------------------------------------------------
                                          Total            $   95,909       $ 15,638       $  5,849        $ 16,681      $  134,077

Interest Sensitivity Gap                                   $      922       $ 23,599       $ (2,250)       $(10,922)     $   11,350

Gap as a Percentage of Total Assets                             0.61%         15.51%         -1.48%          -7.18%

Cumulative Gap                                             $      922       $ 24,521       $ 22,272        $ 11,349

Cumulative Gap as a Percentage of Total Assets                  0.61%         16.11%         14.63%           7.46%
</TABLE>



                              ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                       2

<PAGE>
 
          Management's Discussion and Analysis of Financial Condition
                           and Results of Operation

           COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDING
                        JUNE 30, 1998 AND JUNE 30, 1997

General:
--------

For the fiscal year ending June 30, 1998 the Corporation recorded net income
totaling $2,039,393, an increase of $201,013, or 10.93%, compared to net income
of $1,838,380 earned during the year ending June 30, 1997. 

Since the beginning of the 1998 fiscal year, the Corporation's total assets have
increased by $2,519,060, or 1.68%, to $152,160,204, compared to $149,641,144 at
June 30, 1997. The growth in assets occurred primarily in cash and cash
equivalents, specifically federal funds sold and mortgage loans held for sale,
and offset reductions in the outstanding balance of the Corporation's net loans
receivable and securities portfolios.

The Corporation, like many lenders throughout the country, has experienced a
shrinkage in its loan portfolio as a result of a flat yield curve which has
prompted a significant and lengthy, decline in long term interest rates, while
short term interest rates have not decreased proportionately. The majority of
the residential and commercial loans which comprise the Corporation's loan
portfolio are adjustable rate mortgages. With the overall reduction of long term
fixed interest rates, many borrowers have opted to refinance out of adjustable
rate mortgages to fixed rate mortgages. The Corporation originates substantially
all of its fixed rate residential mortgages for sale in the national secondary
mortgage market and only originates fixed rate commercial mortgages on loans
with very short maturities. As a result, despite record overall loan origination
volumes, the outstanding balance of the portfolio, net of adjustments, decreased
$5,529,515 to $126,181,335 at June 30, 1998. Persistence of a flat yield curve
will continue to put pressure on the Corporation's net interest margin and
therefore its net income in future periods. The portion of the Corporation's
investment security portfolio, which was scheduled to be held to maturity,
decreased by $2,997,688 as a result of the payoff of certain investments in the
portfolio which had callable features. The monies generated by these identified
reductions helped fund a $6,644,423 increase in cash and cash equivalents and a
$3,770,664 increase in mortgage loans held for sale.

Total liabilities of the Corporation increased by $2,173,671 to $137,659,533 at
June 30, 1998, compared to $135,485,862 at June 30, 1997. Despite extensive
competition from non-traditional, uninsured, investment alternatives, aimed at
luring customer deposits from federally insured deposit instruments, the
Corporation, after the payment of approximately $5.5 million in interest,
reported a small increase, $431,313, in total deposits at June 30, 1998 compared
to the start of the 1998 fiscal year. Total deposits were $112,179,831 and
$11,748,518 at June 30, 1998 and 1997, respectively. At the end of the 1998
fiscal year, the Corporation's total borrowings, advances from the Federal Home
Loan Bank of New York, grew by $1,290,475, or 6.26%, to $21,897,090. The
Corporation's mortgage servicing escrow balance, advances from borrowers for
taxes and insurance, have increased by $417,922, or 16.29%, to $2,982,958 at
June 30, 1998, compared to $2,565,036 at June 30, 1997.

The fiscal year end balance of the Corporation's Shareholders' equity increased
by $345,389, or 2.44%, to $14,500,671, compared to $14,155,282 at the start of
the fiscal year. While net income added in excess of $2 million to equity, the
Corporation paid $1,415,869 in cash dividends, including a $1.00 per share
special cash dividend, and utilized $275,722 towards the repurchase of 15,261
shares of the Corporation's common stock.

Net Interest Income: 
--------------------

Despite a 10 basis point reduction in its net interest spread, the Corporation's
1998 fiscal year net interest income, $5,564,442, remained nearly unchanged
compared to the previous year's net interest income of $5,540,244. The
Corporation's net interest spread for the year ending June 30, 1998 was 3.51%,
compared to a 3.61% net interest spread for the year ending June 30, 1997.

Interest Income: 
----------------

Interest earned by the Corporation during the 1998 fiscal year equaled
$12,265,660, an increase of $320,671 or 2.68%, compared to $11,944,989 earned
during the 1997 fiscal year.

Income provided from the Corporation's loan portfolio, including mortgage loans
held for sale, generates the majority of the interest earned by the Corporation.
For the year ending June 30, 1998, loan interest income was $11,874,446, an
increase of $412,818, or 3.60%, compared to $11,461,628 earned during the year
ending June 30, 1997. The increase is the result of a $5.5 million increase in
the average balance of the loan portfolio and despite a 4 basis point decrease
in the average yield earned on these assets. During the 1998 fiscal year the
average balance outstanding totaled $138.8 million, yielding 8.56%, compared to
$133.3 million, yielding 8.60%, during the 1997 fiscal year.

Decreases in the average balances of the Corporation's investment security and
mortgage-backed security (MBS) portfolios more than offset increases in the
average yields earned on the portfolios and resulted in lower earnings for both
during the recently concluded fiscal year. As was previously mentioned, during
the 1998 fiscal year several assets within the investment security portfolio,
with callable features, were redeemed by their issuers. As a result, the average
balance of the Corporation's investment portfolio decreased from $5.3 million,
yielding 6.42%, during the 1997 fiscal year to $3.8 million, yielding 6.64%,
during the 1998 fiscal year. Overall, interest provided from the investment
security portfolio decreased by $84,795 to $254,680 for the year ending June 30,
1998. The average balance of the Corporation's MBS portfolio, which is comprised
solely of adjustable rate mortgages, decreased from $1.9 million, yielding
6.97%, during the 1997 fiscal year, to $1.4 million, yielding 7.76%, for the
1998 fiscal year. Interest earned from the MBS portfolio totaled $110,899 during
the 1998 period, a decrease of $21,120 from the previous fiscal year.

Interest Expense: 
-----------------

The Corporation's total interest expense was $6,701,218 during the year ending
June 30, 1998, an increase of $296,473, or 4.63%, compared to $6,404,745
recorded during the 1997 fiscal year.

During the 1998 fiscal year the Corporation paid $5,525,633 in interest on
deposits, an increase of $357,349, or 6.91%, compared to deposit interest
expense of $5,168,284 during the 1997 fiscal period. The increase in deposit
interest expense is the direct result of an increase in

                               ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                        3

<PAGE>
 
               Management's Discussion and Analysis (continued)

both the average balance and average cost of the Corporation's deposits. During
the 1998 fiscal period, average deposits outstanding totaled $114.7 million,
costing 4.82%, compared to $109.3 million, costing 4.73%, during the 1997 fiscal
year. Interest paid on the Corporation's borrowings, Advances from the Federal
Home Loan Bank of New York (FHLB Advances), decreased by $60,876, or 4.92%, as a
result of a decrease in the average balance of borrowings. For the twelve months
ending June 30, 1998, the average balance of FHLB Advances was $20.9 million,
compared to $22.0 million, for the twelve months ending June 30, 1997. The
average cost for each of the two years was nearly identical.

Provision for Loan Losses: 
--------------------------

Provisions for loan losses are charged to earnings to bring the total allowance
to a level considered appropriate based on historical experience, the volume and
type of lending conducted by the Corporation, industry standards, the status of
past due principal and interest payments, general economic conditions -
particularly as they relate to the Corporation's market area - and other factors
related to the collectibility of the Corporation's loan portfolio. The
Corporation's provision for loan loss totaled $300,000, for the year ending June
30, 1998, compared to a $40,000 provision which was charged to earnings during
the 1997 period. During the 1998 fiscal period the Corporation resolved, through
foreclosure, several delinquent mortgage loan accounts which resulted in net
charge-offs of approximately $270,000. At June 30, 1998 the Corporation's total
allowance for loan loss was $1,473,346, compared to $1,435,500 at June 30, 1997.

Other Income:
-------------

Total other income earned by the Corporation during the 1998 fiscal year was
$1,267,843, an increase of $226,667, or 21.77%, compared to other income of
$1,041,176 earned during the 1997 fiscal period. 

The majority of the increase is related to the gain on the sale of mortgages,
which increased by $197,673, or 51.34%, to $582,664 for the fiscal year ending
June 30, 1998. As was mentioned earlier, the Corporation sells substantially all
of its newly originated fixed rate mortgages in the national secondary mortgage
market, and the flat yield curve and low interest rate environment, which has
existed throughout the entire fiscal year, has significantly increased the
volume of mortgages originated for sale.

Income earned by the Corporation's unconsolidated mortgage banking partnership,
PACE Funding Company, was $59,567 for the 1998 period, an increase of $37,042 in
comparison to the 1997 fiscal year. PACE Funding Company originates residential
mortgages, servicing released, for sale to investors, one of whom is the
Corporation. The increase in the earnings from the partnership are the result of
an increase in mortgages originated.

Service fees and other charges increased $32,301, or 25.38%, to $159,549 for the
year ending June 30, 1998. The increase was largely attributable to increases in
late payment, checking account and mortgage conversion fees.

During the 1998 fiscal year the Corporation recognized income of $54,817 from
its unconsolidated land development joint venture partnership, an increase of
$25,090 over the 1997 fiscal year. Income earned by the joint venture is the
direct result of lot sales of real estate owned by the partnership.

Despite a substantial increase in the Corporation's loans serviced for others
(from $129.5 million at June 30, 1997 to $151.1 million at June 30, 1998),
income generated from loan servicing for others decreased by $49,778, or 16.93%,
to $244,211 for the year ending June 30, 1998. The decrease is directly related
to the amortization of mortgage servicing rights, as required by Financial
Accounting Standards No. 122 (SFAS 122) entitled "Accounting for Mortgage
Servicing Rights." Exclusive of this adjustment, the income from loan servicing
would have increased during the 1998 fiscal year.

Other operating income earned by the Corporation during the 1998 fiscal year was
$165,787, a reduction of $26,909, or 13.96%, when compared to the 1997 fiscal
year. During the 1997 period the Corporation had received a $35,000 settlement
of a deficiency judgment which resulted from a 1989 mortgage foreclosure. No
such income was included during the 1998 period.

Other Expenses:
---------------

During the 1998 fiscal year the Corporation's total other expenses were
$3,297,107, a reduction of $715,383, or 17.83%, compared to total other expenses
of $4,012,490 for the year ending June 30, 1997. 

The majority of the decrease is related to a reduction of federal deposit
insurance premium expense, which totaled $844,055 during the 1997 period,
compared to $115,156 for the 1998 period. During the first quarter of the 1997
fiscal year the Corporation, in response to the passage of federal legislation
to recapitalize its insurance fund, paid a one-time, pre-tax special assessment
of $657,000. The assessment was charged to all institutions insured by the
Savings Association Insurance Fund (SAIF). Included in the legislation was also
a provision which reduced the Corporation's ongoing insurance premiums to a
level nearly equal to its competitors, who are insured by the Bank Insurance
Fund (BIF). Both insurance funds, SAIF and BIF, are part of the Federal Deposit
Insurance Corporation (FDIC).

Employee compensation and benefits expense decreased by $50,732, or 2.54%, to
$1,945,004 for the year ending June 30, 1998, compared to $1,995,736 for the
year ending June 30, 1997. There were fewer employees working throughout the
Corporation during the 1998 period when compared to the 1997 year and this
savings more than offset any wage and benefit cost increases.

Other expenses of the Corporation totaled $743,669 during the 1998 fiscal year,
an increase of $73,269, or 10.93%, compared to $670,400 for the 1997 period. The
majority of the increase is a result of expenses related to loan origination
activities which, as reported earlier, were significantly greater than during
the comparable period. The Corporation also recognized increases in expenses
related to office supplies, contributions and in costs related to properties
owned as a result of foreclosure during the 1998 fiscal year.

Income Taxes: 
-------------

The Corporation has recorded an income tax provision of $1,195,785 for the
fiscal year ending June 30, 1998, compared to $690,550 for the fiscal year
ending June 30, 1997. The income tax provision during the 1997 fiscal year was
substantially reduced after an extensive review of all tax liabilities during
the first quarter of that fiscal year. The provision for the 1998 period
approximates the statutory rate on the Corporation's pre-tax earnings, less any
applicable tax credits.

                              ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                       4

<PAGE>
 
               Management's Discussion and Analysis (continued)

           COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDING
                        JUNE 30, 1997 AND JUNE 30, 1996
General:
--------

The Corporation recorded net income of $1,838,380, for the fiscal year ending
June 30, 1997, an increase of $84,819, or 4.84% compared to net income totaling
$1,753,561, earned during the fiscal year ending June 30, 1996.

Total assets of the Corporation increased by $9,502,626, or 6.78%, to
$149,641,144 for the fiscal year ending June 30, 1997, compared to $140,138,518
at the start of the fiscal year. The majority of the increase occurred in the
Corporation's net loans receivable portfolio, which increased by $10,074,839, or
8.28%, to $131,710,850 at June 30, 1997. The majority of the funding for the
increase in net loans outstanding was through an increase in deposits, which
rose by $5,095,689, or 4.78%, to $111,748,518. Additionally, the Corporation's
borrowings, advances from the Federal Home Loan Bank of New York, increased by
$2,991,055, or 16.98%, to $20,60,615 at June 30, 1997.

During the fiscal year ending June 30, 1997 the Corporation's Stockholders'
Equity increased by $1,243,137, or 9.63%, to $14,155,282.

Net Interest Income: 
--------------------

Net interest income earned by the Corporation was $5,540,244 for the fiscal year
ending June 30, 1997, an increase of $356,721, or 6.88%, when compared to net
interest income of $5,183,523 earned during the fiscal year ending June 30,
1996. The Corporation's net interest margin increased to 3.61% for the year
ending June 30, 1997, compared to 3.55% for the year ending June 30, 1996.

Interest Income: 
----------------

The Corporation's total interest income was $11,944,989 for the year ending June
30, 1997, an increase of $565,986, or 4.97%, over the comparative fiscal period.

The majority of the Corporation's interest income is generated by its loan
portfolio. During the 1997 fiscal year the Corporation's loan portfolio
generated interest income of $11,461,628, an increase of $606,199, or 5.58%,
over the previous fiscal year when $10,855,429 in interest income was generated
from the loan portfolio. The increase in earnings is the result of an increase
in the average outstanding balance of the portfolio, which more than offset a
slight decrease in the average yield earned on the portfolio. For the year
ending June 30, 1997 the average balance of the Corporation's loan portfolio was
$133.3 million, yielding 8.60%, compared to an average balance of $125.8
million, yielding 8.63%, for the year ending June 30, 1996.

The Corporation also recorded a $20,783, or 6.52%, increase in income from its
investment security portfolio. Interest generated from the investment portfolio
totaled $339,475 and $318,692 for the fiscal years ending June 30, 1997 and
1996, respectively. The increase is attributable to an increase in both the
average balance and yield of the portfolio. During the 1997 fiscal year the
average balance of the portfolio was $5.3 million, yielding 6.42%, compared to
$5.1 million, yielding 6.22% for the 1996 fiscal year.

Conversely, a decrease in the average balance and average yield of the
Corporation's mortgage-backed security (MBS) portfolio, combined with the
ongoing legal problems of a servicer of one of the Corporation's smaller MBS
pools, has prompted a $57,398, or 30.30%, decrease in interest income generated
from this portfolio. Because of strong loan demand in its primary markets, the
Corporation has not purchased MBS pools in a number of years and has seen the
balance of its existing MBS portfolio, which is comprised of adjustable rate
mortgages, decrease as a result of scheduled principal paydowns and individual
loan payoffs. This balance reduction, combined with a reduction in the yield of
the portfolio, as the underlying mortgages adjust to current market rates, has
prompted an overall reduction in earnings from the portfolio. In addition, the
Servicer of a small (approximately $182,000) MBS pool owned by the Corporation
is in the midst of a dispute with the FDIC. Despite the fact that the underlying
borrowers have been making payments to the Servicer, a dispute has existed
between the Servicer and the FDIC, and not all the payments due the Corporation
have been remitted by the Servicer. The Corporation began receiving current
payments during the fourth quarter of the 1997 fiscal year and, based on amounts
estimated by the Office of Thrift Supervision, has fully reserved any principal
and interest payments which may not be received as a result of the settlement of
this dispute. During the fiscal year ending June 30, 1997 the average balance of
the MBS portfolio was $1.9 million, yielding 6.97%, compared to $2.4 million,
yielding 7.84% for the year ending June 30, 1996.

Interest Expense: 
-----------------

The Corporation's total interest expense was $6,404,745 for the year ending June
30, 1997, an increase of $209,265, or 3.38%, compared to total interest expense
of $6,195,480 for the year ending June 30, 1996.

Interest paid to the Corporation's depositors during the 1997 fiscal year was
$5,168,284, nearly equal to deposit interest expense of $5,157,450 paid during
the 1996 fiscal year. The increase was prompted by an increase in the average
balance of total deposits, which slightly exceeded the reduction in interest
expense which resulted from a decrease in the average interest rate (cost) paid
on deposits. For the fiscal year ending June 30, 1997 the average balance of
deposits outstanding totaled $109.3 million, costing 4.73%, compared to an
average balance of $106.8 million, costing 4.83%, for the fiscal year ending
June 30, 1996.

The expense related to the Corporation's borrowings, advances from the Federal
Home Loan Bank of New York, increased by $198,431, or 19.12%, as a result of an
increase in the average balance of the borrowings, and despite a slight
reduction in the average cost of the borrowings. During the 1997 fiscal year,
the Corporation's average borrowings totaled $22.0 million, costing 5.61%,
compared to $18.3 million, costing 5.67%, for the 1996 fiscal year.

Provisions for Loan Losses: 
---------------------------

Provisions for loan losses are charged to earnings to bring the allowance to a
level considered appropriate based on historical experience, the volume and type
of lending conducted by the Bank, industry standards, the status of past
principal and interest payments, general economic conditions - particularly as
they relate to the Bank's market area - and other factors related to the
collectibility of the Bank's loan portfolio. During the 1997 fiscal year the
Bank reduced its provision from $60,000 for the fiscal year ending June 30, 1996
to $40,000 for

                               ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                        5

<PAGE>
 
               Management's Discussion and Analysis (continued)

the fiscal year ending June 30, 1997. At June 30, 1997 the total allowance for
loan losses was $1,435,500, compared to $1,430,781 at June 30, 1996.

Other Income: 
-------------

The Corporation's total other income increased by $240,424, or 30.02%, to
$1,041,176 for the fiscal year ending June 30, 1997, compared to $800,752 for
the same period one year earlier.

Income from loan servicing totaled $293,989 during the 1997 fiscal year, a
decrease of $20,926, or 6.64%, when compared to $314,915 earned during the 1996
fiscal year. During the 1997 fiscal year the Corporation increased the
outstanding balance of the mortgages it serviced for a fee in the national
secondary mortgage market by more than $12.0 million. The reduction in servicing
income is actually attributable to the amortization of mortgage servicing rights
and is prompted by an accounting change issued by the Financial Accounting
Standards Board in Statement of Financial Accounting Standards No. 122 (SFAS
122) entitled "Accounting for Mortgage Servicing Rights." See Note A of the
accompanying audited financial statements for additional information on this
accounting change. At June 30, 1997 the total of all residential mortgages
serviced by the Corporation, in the national secondary mortgage market for
which it either receives a fee or certain tax credits, was $126.5 million,
compared to $109.1 million at June 30, 1996.

The Corporation recorded earnings of $29,727 from its unconsolidated land
development joint venture during the 1997 fiscal year, an increase of $13,249
over the 1996 fiscal year. Profits are generated from the net income resulting
from lot sales of real estate owned by the partnership.

During the 1997 fiscal year PACE Funding Company, an Ithaca, NY mortgage banking
partnership, 50% of which is owned by ES&L Mortgage Corporation, generated
earnings of $22,525 for the Corporation. The current fiscal year was the first
full year of operation for PACE Funding, which originates residential mortgages,
servicing released, for sale to investors, one of whom is the Corporation. No
comparable income resulted from this mortgage banking operation during the 1996
fiscal year.

During the year ending June 30, 1997 income recorded from the gain on the sale
of mortgages totaled $384,991, an increase of $224,042, compared to $160,949
recorded during the year ending June 30, 1996. Like income from loan servicing,
gains on the sale of mortgages were impacted by the implementation of SFAS 122.
Included during the 1997 fiscal year is income from this accounting change
totaling approximately $243,000 for which there was no comparable offset during
the 1996 fiscal year. See Note A of the accompanying audited financial
statements for additional information on this accounting change.

Other operating income earned by the Corporation during the 1997 fiscal year
increased by $15,641, or 8.83%. The majority of the overall increase is
primarily attributable to a $35,000 settlement received by the Bank on a
deficiency judgment resulting from a 1989 mortgage foreclosure. Additionally,
sales commissions earned through ES&L Financial Services, a division of Brilie
Corporation, generated an increase in revenue of approximately $10,000, and
additional rental income, totaling $8,500, was recorded by leasing a portion of
the Bank's parking lot. During the 1996 fiscal year the Corporation, through
ES&L Mortgage Corporation earned approximately $44,000 in processing fees from
PACE Funding Company. During the 1997 fiscal year PACE Funding Company assumed
these responsibilities, which resulted in a reduction of approximately $27,500
in processing fees earned by ES&L Mortgage Corporation. Additionally, the
Corporation recorded a gain on the sale of foreclosed real estate of
approximately $13,500 during the 1996 fiscal year, while no comparable activity
occurred during the current fiscal year.

Other Expenses:
---------------

Employee compensation and benefit expense totaled $1,995,736, during the year
ended June 30, 1997, an increase of $172,552, or 9.46%, compared to $1,823,184
during the comparison period. The increase is directly related to increased
wages and the expense related to the Corporation's Officer/Manager bonus plan,
which is related to the overall profitability of the Corporation. Additionally,
the Corporation has also experienced an overall increase in the cost of employee
benefits.

During the first quarter of the Corporation's 1997 fiscal year the federal
government passed legislation which assessed a special premium to all financial
institutions insured by the Savings Association Insurance Fund (SAIF), in an
effort to recapitalize the fund. SAIF is one of the two federal deposit
insurance funds administered by the Federal Deposit Insurance Corporation. The
Corporation's deposits are insured by SAIF. As a result the Corporation recorded
a one time special assessment expense totaling $657,000 before taxes. As a
result, deposit insurance expense for the 1997 fiscal year totaled $844,055, an
increase of $565,961 over deposit insurance expense of $278,094 recorded during
the fiscal year ending June 30, 1996. As a result of the recapitalization of the
fund, the Corporation's ongoing insurance premiums have been decreased
substantially, and are now nearly equal to its competitors. Despite an increase
in deposits outstanding, insurance expense, exclusive of the special assessment,
decreased by $90,600 during the 1997 fiscal year.

Other expenses of the Corporation were $670,400 for the 1997 fiscal year, an
increase of $197,083 over the comparative fiscal period. The majority of the
increase results from increases in expense related to the Corporation's mortgage
origination activity and the coordination of all mortgage banking activities of
the Bank and its mortgage banking subsidiaries. The Corporation reported an
increase in advertising and office supply/printing/stationery expenses, much of
which was related to the November 1996 opening of its "cashless" deposit office
in Ithaca, NY. Additionally, the Corporation reported losses on the sale of
foreclosed real estate during the 1997 fiscal year of approximately $20,000. No
similar losses were recorded during the 1996 fiscal year.

Income Taxes: 
-------------

The Corporation's income tax expense for the year ending June 30, 1997 was
$690,550, a decrease of $402,010 from the year ending June 30, 1996. During the
1997 fiscal year the Corporation concluded a thorough analysis of all potential
income tax liabilities and adjusted the liability balance accordingly, resulting
in an income tax benefit of $235,000. Additionally, the Corporation's pre-tax
income decreased by over $300,000. 

                               ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                       6

                                   
<PAGE>
 
                    Liquidity and Capital Resources

The Bank's primary source of funds are deposits, principal and interest payments
on loans, Federal Home Loan Bank (FHLB) of New York advances and funds provided
from operations. While scheduled loan payments and short-term investment
maturities are a relatively predictable source of funds, deposit flows are
significantly influenced by interest rates, general economic conditions and more
recently, the competition from traditional and non-traditional financial
instruments, specifically the growth of mutual funds.

The Bank is required to maintain minimum levels of liquid assets as defined by
Office of Thrift Supervision (OTS) requirements. This requirement, which may,
depending upon economic conditions and cash flows of the Bank, be varied from
time to time at the direction of the OTS, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 4.0%. Elmira Savings
& Loan's liquidity ratio for June 1998 was 12.45%.

An analysis of the three components of the Consolidated Statements of Cash Flows
provides a more detailed presentation of the Bank's activities. Net cash
provided from operating activities is normally a steady source of liquidity and
this area provided $3,107,000 during fiscal year ending June 30, 1997, however,
this amount was a negative $1,187,000 for the current year ending June 30, 1998.
Although net income provided $2,039,000 to our cash position, this amount was
more than offset by a negative $3,715,000 in the net proceeds from loan sales
category. During year ending June 30, 1997, net income was $1,838,000 while net
loan sales were $1,139,000. Conversely, gain on sales of mortgages caused a
reduction in cash of $583,000, $385,000 and $161,000 for the same years.
Advances from borrowers for taxes and insurance also added $418,000 and $279,000
for years ending June 30, 1998 and June 30, 1997 but had a negative impact for
year ending June 30, 1996 of $371,000.

Net cash provided from investing activities amounted to $7,801,000 for year
ending June 30, 1998 but had a negative effect for the prior two years,
amounting to $11,227,000 and $1,810,000. One of the main categories in these
large differences is the net change in loans receivable. During the current
year, this generated $4,473,000 but lost $10,287,000 and $3,668,000 the prior
two years. Net proceeds from the sale and maturity of investments netted against
purchases provided $3,009,000 and $923,000 during fiscal years ending June 30,
1998 and June 30, 1996, respectively but had a negative cash impact of $989,000
during year ending June 30, 1997. Proceeds from sale of foreclosed real estate
also provided $408,000, $120,000 and $284,000 during the last three years. Other
large factors were principal repayments on mortgage-backed securities which
provided $200,000, $502,000 and $773,000 during years ending June 30, 1998, June
30, 1997 and June 30, 1996, respectively, and purchase of mortgage servicing
rights which had a negative impact of $227,000 and $105,000 for years ending
June 30, 1998 and June 30, 1997. The significant changes in the net loans
receivable balances are driven by the interest rate environment and due to a
relatively flat yield curve, most borrowers are currently opting for fixed rate
loans. Because we sell substantially all of our fixed rate instruments, total
loans receivable is declining.

Financing activities, the third component of cash flows, provided $30,000,
$7,470,000 and $2,396,000 in cash and cash equivalent for fiscal years ending
June 30, 1998, June 30, 1997 and June 30, 1996, respectively. Interest credited
to deposit accounts consistently had a positive impact, amounting to $5,538,000,
$5,103,000 and $5,130,000, however, net other change in deposits had significant
fluctuation. Increased competition, combined with some irrational pricing for
deposits, caused a net decrease of $5,107,000 for year ending June 30, 1998.
Advances from Federal Home Loan Bank provided $1,290,000 and $2,991,000 during
years ending June 30, 1998 and June 30, 1997, while the impact was negative for
year ending June 30, 1996 of $2,908,000. Dividends paid are always a negative to
our cash position but was even more significant during the current year because
of a special $1.00 per share dividend paid in addition to our normal quarterly
payments. The total cost of dividends paid over the last three years was
$1,416,000, $577,000 and $381,000. ES&L Bancorp has actively attempted to
buy-back its own stock and these purchases amounted to $276,000, $62,000 and
$36,000 for the last three fiscal years.

ES&L has available to it significant funds in the form of retail repurchase
agreements and advances from FHLB of New York, though there can be no assurance
as to the impact of any increase in such borrowings on the Bank's cost of funds.
There are no limits on the amount of advances made to Banks that are Qualified
Thrift Lenders (QTLs), of which the Bank is one, or that are exempt from the QTL
limitations, in order to replace deposit outflows occurring in the 30 days
immediately preceding an advance application, or advances made to fulfill
outstanding advance commitments, including AHP, CIP and CDF commitments, or in
order to repay maturing advances. Advances and new money commitments to ES&L for
purposes other than what was stated above may not exceed net new, $150 million
per calendar month or 30% of a customer's assets without prior approval of the
FHLB's Board of Directors or its Executive Committee.

ES&L is not aware of any trends, events or uncertainties, other than those
disclosed, that will have or that are reasonably likely to have a material
affect on the Bank's liquidity position, operations or capital resources.

                              ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                        7

<PAGE>
 
           Pending Financial Services Modernization Legislation

Legislation currently under consideration by Congress would repeal the federal
thrift charter and require federal associations like the Bank to convert to
national banks two years after the enactment of the bill. The bill, in its
current form, would permit federal thrifts that converted to national banks to
exercise any authority which they were legally entitled to exercise immediately
prior to such conversion and would not be required to divest any branches.
Further, these institutions could continue to branch in any state in which they
were located to the same extent as national banks. Unitary savings and loan
holding companies, like the Corporation, could continue to exercise any powers
they had prior to their subsidiary becoming a bank by operation of law as long
as they did not acquire another bank. Powers of those unitary savings and loan
holding companies that were grandfathered, however, could not be transferred to
another company which acquires control of the unitary holding company after the
effective date of the law. There can be no assurance that this legislation will
be passed in its current form. At this time, the Corporation is unable to
predict whether such legislation would significantly impact its operations.

                      Year 2000 Considerations

A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as
1900 and compute payment, interest or delinquency based on the wrong date or are
expected to be unable to compute payment, interest or delinquency. Rapid and
accurate data processing is essential to the operations of the Corporation.

During 1997, the Corporation developed a Year 2000 preparedness plan which was
submitted and approved by the Corporation's Board of Directors on July 10, 1997
and was subsequently submitted to the Office of Thrift Supervision (OTS).

The plan established procedures to contact and monitor the Year 2000
preparedness of all third party servicers, including NCR Corporation, the
company responsible for the Bank's customer account processing. NCR has a plan
in place which has been reviewed by external audit organizations, as well as
Federal Bank examiners. NCR is currently in the process of testing their plan.

All other service providers have been contacted and have responded identifying
the plan they have developed and have provided testing dates to verify the
resolution of any potential problems.

The Corporation has tested all of its internal systems and have found them to be
year 2000 compliant. Additionally, the Corporation has surveyed its commercial
loan customer base asking for information on how those companies are addressing
any potential problems.

While, at the present time, the Corporation anticipates no significant financial
expenditure will be necessary with regard to year 2000 compliance, there can be
no assurance in this regard.

                    Impact of Inflation and Changing Prices

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

                              ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                       8
                                        
<PAGE>
 
         [LETTERHEAD OF MENGEL, METZGER, BARR & CO. LLP APPEARS HERE]


              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
              --------------------------------------------------


To the Board of Directors of
ES&L Bancorp, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheets of ES&L Bancorp,
Inc. and Subsidiary as of June 30, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended June 30, 1998.  These consolidated
financial statements are the responsibility of the Corporation'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 consolidated financial statements are
free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of ES&L
Bancorp, Inc. and Subsidiary as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.

As discussed in Note A to the consolidated financial statements, the Corporation
changed its method of accounting for mortgage servicing rights and impairment of
loans in fiscal years 1997 and 1996, respectively.

                                        /s/ MENGEL, METZGER, BARR & CO. LLP

Elmira, New York
July 17, 1998

                                      -9-

<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------


<TABLE>
<CAPTION>
                                                                                        June 30,                  
                                                                       -----------------------------------------  
                              ASSETS                                         1998                   1997          
                              ------                                   -------------------    ------------------
<S>                                                                      <C>                    <C>
Cash and due from banks                                                       $  1,362,039          $    721,891
Federal funds sold                                                               6,000,000                     -
Short-term investments                                                               5,316                 1,041
                                                                              ------------          ------------
                                          Cash and cash equivalents              7,367,355               722,932
                                                                                                   
                                                                                                   
                                                                                                   
                                                                                                   
Securities available for sale                                                       81,915                66,156
Securities to be held to maturity -                                                                
  approximate market value of $1,026,199                                                           
  and $4,036,495 at 1998 and 1997, respectively                                  1,025,244             4,022,932
Mortgage-backed securities available for sale                                    1,212,122             1,403,848
Mortgage-backed securities to be held to                                                           
  maturity - approximate market value of $136,478                                                  
  and $171,794 at 1998 and 1997, respectively                                      136,478               171,794
Mortgage loans held for sale                                                     8,231,474             4,460,810
Loans receivable, net of allowance for loan                                                        
  losses of $1,473,346 and $1,435,500                                                              
  at 1998 and 1997, respectively                                               126,181,335           131,710,850
Federal Home Loan Bank stock, at cost                                            1,313,100             1,313,100
Foreclosed real estate                                                             485,226               131,000
Investment in joint venture - acquisition,                                                         
  development and construction arrangement                                         765,952               676,001
Investment in mortgage banking partnership                                         197,646               183,318
Property and equipment, net                                                      2,901,870             3,053,735
Accrued interest receivable:                                                                       
  Loans and mortgage-backed securities                                             739,429               811,247
  Investment securities and other                                                   35,887                89,675
Other assets                                                                     1,485,171               823,746
                                                                              ------------          ------------
                                                      TOTAL ASSETS            $152,160,204          $149,641,144
                                                                              ============          ============
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.

                                     -10-

<PAGE>
 
<TABLE>
<CAPTION>
                                                                                                                 
                                                                                      June 30,                   
                                                                       ----------------------------------------  
               LIABILITIES AND SHAREHOLDERS' EQUITY                          1998                  1997          
-------------------------------------------------------------------    ------------------    ------------------
                                                                                                  
Deposits:                                                                                         
<S>                                                                      <C>                   <C>
  Non-interest bearing                                                       $  5,506,587          $  4,851,413
  Interest bearing                                                            106,673,244           106,897,105
                                                                             ------------          ------------
                                                                              112,179,831           111,748,518
                                                                                                  
Advances from Federal Home Loan Bank                                           21,897,090            20,606,615
                                                                                                  
Accrued interest payable:                                                                         
  Deposits                                                                          7,607                26,777
  Borrowings                                                                       84,614                69,695
Advances from borrowers for taxes and insurance                                 2,982,958             2,565,036
Other liabilities                                                                 507,433               469,221
                                                                             ------------          ------------
                                          TOTAL LIABILITIES                   137,659,533           135,485,862
                                                                                                  
                                                                                                  
Shareholders' equity:                                                                             
  Preferred stock:                                                                                
    Authorized, 500,000 shares                                                                    
    Issued, none                                                                        -                     -
  Common stock, $.01 par value:                                                                   
    Authorized, 3,000,000 shares                                                                  
    Issued 855,967 shares                                                           8,560                 8,560
  Additional paid-in capital                                                    2,599,654             2,599,654
  Retained earnings, substantially restricted                                  12,219,481            11,595,957
  Net unrealized gain on securities available for sale                             57,069                59,482
                                                                             ------------          ------------
                                                                               14,884,764            14,263,653
  Less cost of treasury stock, 24,194 and                                                         
    8,933 shares, respectively                                                    384,093               108,371
                                                                             ------------          ------------
                                 TOTAL SHAREHOLDERS' EQUITY                    14,500,671            14,155,282
                                                                             ------------          ------------
                                                                             $152,160,204          $149,641,144
                                                                             ============          ============
</TABLE>
                                                                                

                                     -11-

<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

                       CONSOLIDATED STATEMENTS OF INCOME
                       ---------------------------------

<TABLE>
<CAPTION>
                                                                              Year ended June 30,
                                                          ------------------------------------------------------------
                                                                 1998                1997                  1996
                                                          -----------------    -----------------     -----------------
<S>                                                         <C>                  <C>                   <C>
Interest income:                                                                                          
  Loans                                                         $11,874,446          $11,461,628           $10,855,429
  Investment securities                                             254,680              339,475               318,692
  Mortgage-backed securities                                        110,899              132,019               189,417
  Interest-earning deposits and other                                25,635               11,867                15,465
                                                                -----------          -----------           -----------
                                TOTAL INTEREST INCOME            12,265,660           11,944,989            11,379,003
Interest expense:                                                                                         
  Deposits                                                        5,525,633            5,168,284             5,157,450
  Borrowings                                                      1,175,585            1,236,461             1,038,030
                                                                -----------          -----------           -----------
                               TOTAL INTEREST EXPENSE             6,701,218            6,404,745             6,195,480
                                                                -----------          -----------           -----------
                                  NET INTEREST INCOME             5,564,442            5,540,244             5,183,523
                                                                                                          
Provision for loan losses                                           300,000               40,000                60,000
                                                                -----------          -----------           -----------
                            NET INTEREST INCOME AFTER                                                     
                            PROVISION FOR LOAN LOSSES             5,264,442            5,500,244             5,123,523
Other income:                                                                                             
  Service fees and other charges                                    159,549              127,248               131,394
  Net gain (loss) on investment securities                            1,248              (10,000)                  (39)
  Income from loan servicing                                        244,211              293,989               314,915
  Income from unconsolidated joint venture                           54,817               29,727                16,478
  Income from mortgage banking partnership                           59,567               22,525                     -
  Gain on sale of mortgages                                         582,664              384,991               160,949
  Other operating income                                            165,787              192,696               177,055
                                                                -----------          -----------           -----------
                                   TOTAL OTHER INCOME             1,267,843            1,041,176               800,752
Other expenses:                                                                                           
  Employee compensation and benefits                              1,945,004            1,995,736             1,823,184
  Office occupancy and equipment                                    493,278              502,299               503,559
  Federal deposit insurance premiums                                115,156              844,055               278,094
  Other expenses                                                    743,669              670,400               473,317
                                                                -----------          -----------           -----------
                                 TOTAL OTHER EXPENSES             3,297,107            4,012,490             3,078,154
                                                                -----------          -----------           -----------
                                                                                                          
                           INCOME BEFORE INCOME TAXES             3,235,178            2,528,930             2,846,121
                                                                                                          
Income taxes                                                      1,195,785              690,550             1,092,560
                                                                -----------          -----------           -----------
                                           NET INCOME           $ 2,039,393          $ 1,838,380           $ 1,753,561
                                                                ===========          ===========           ===========
                                                                                                          
Earnings per common share                                       $      2.44          $      2.17           $      2.09
                                                                ===========          ===========           ===========
                                                                                                          
Earnings per common share - assuming dilution                   $      2.41          $      2.14           $      2.05
                                                                ===========          ===========           ===========
</TABLE>
                                                                                



The accompanying notes are an integral part of the consolidated financial
statements.

                                     -12-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
           ----------------------------------------------------------

                    YEARS ENDED JUNE 30, 1998, 1997 AND 1996
                    ----------------------------------------
<TABLE>
<CAPTION>
                                                                                                                            
                                                                                                                Retained    
                                                                                              Additional        earnings     
                                                                                  Common       paid-in       (Substantially  
                                                                                   stock       capital         restricted)    
                                                                                 --------    -----------     ---------------
<S>                                                                               <C>        <C>             <C>            
Balance at July 1, 1995                                                            $5,508     $2,465,316        $ 8,962,639
                                                                                                                            
Current year change in unrealized gain on securities available for sale,                                                    
  net of deferred taxes of ($6,926)                                                     -              -                  - 
                                                                                                                            
Issuance of 23,519 shares in connection with stock options exercised at                                                     
  $3 5/9 per share                                                                    157         83,472                  - 
                                                                                                                            
Dividends on common stock ($.45 per share)                                              -              -           (381,259)
                                                                                                                            
Tax benefit from exercise of non-incentive stock options                                -         31,304                  -
                                                                                                                            
Purchase of 2,766 shares of treasury stock                                              -              -                  - 
                                                                                                                            
Net income                                                                              -              -          1,753,561 
                                                                                  -------    -----------        ----------- 
BALANCE AT JUNE 30, 1996                                                            5,665      2,580,092         10,334,941 
                                                                                                                            
Current year change in unrealized gain on securities available for sale,                                                    
  net of deferred taxes of $14,396                                                      -              -                  - 
                                                                                                                            
Issuance of 283,147 shares in connection with three-for-two stock split             2,832         (2,832)                 - 
                                                                                                                            
Dividend in lieu of fractional shares due to three-for-two stock split                  -              -             (1,405)
                                                                                                                            
Dividends on common stock ($.68 per share)                                              -              -           (575,959)
                                                                                                                            
Issuance of 6,315 shares in connection with options exercised at                                                            
  $3 5/9 per share                                                                     63         22,394                  - 
                                                                                                                            
Purchase of 3,917 shares of treasury stock                                              -              -                  - 
                                                                                                                            
Net income                                                                              -              -          1,838,380 
                                                                                  -------    -----------        ----------- 
BALANCE AT JUNE 30, 1997                                                            8,560      2,599,654         11,595,957 
                                                                                                                            
Current year change in unrealized gain on securities available for sale,                                                    
  net of deferred taxes of ($1,608)                                                     -              -                  - 
                                                                                                                            
Dividends on common stock ($1.68 per share)                                             -              -         (1,415,869) 
                                                                                                                            
Purchase of 15,261 shares of treasury stock                                             -              -                  -
                                                                                                                            
Net income                                                                              -              -          2,039,393 
                                                                                  -------    -----------        ----------- 
BALANCE AT JUNE 30, 1998                                                           $8,560     $2,599,654        $12,219,481 
                                                                                  =======    ===========        =========== 

<CAPTION>
                                                                              Net unrealized
                                                                                  gain on
                                                                                securities
                                                                                 available        Treasury
                                                                                 for sale           stock           Total
                                                                              --------------     ---------      ------------
<S>                                                                           <C>                <C>            <C>
                                                                              
Balance at July 1, 1995                                                             $ 48,280      $(10,500)      $11,471,243
                                                                                 
Current year change in unrealized gain on securities available for sale,         
  net of deferred taxes of ($6,926)                                                  (10,392)            -           (10,392)
                                                                              
Issuance of 23,519 shares in connection with stock options exercised at       
  $3 5/9 per share                                                                         -             -            83,629
                                                                              
Dividends on common stock ($.45 per share)                                                 -             -          (381,259)
                                                                              
Tax benefit from exercise of non-incentive stock options                                   -             -            31,304
                                                                              
Purchase of 2,766 shares of treasury stock                                                 -       (35,941)          (35,941)
                                                                              
Net income                                                                                 -             -         1,753,561
                                                                              --------------     ----------      -----------
BALANCE AT JUNE 30, 1996                                                              37,888        (46,441)      12,912,145
                                                                              
Current year change in unrealized gain on securities available for sale,      
  net of deferred taxes of $14,396                                                    21,594              -           21,594
                                                                              
Issuance of 283,147 shares in connection with three-for-two stock split                    -              -                -
                                                                              
Dividend in lieu of fractional shares due to three-for-two stock split                     -              -           (1,405)
                                                                              
Dividends on common stock ($.68 per share)                                                 -              -         (575,959)
                                                                              
Issuance of 6,315 shares in connection with options exercised at                                          
  $3 5/9 per share                                                                         -              -           22,457
                                                                              
Purchase of 3,917 shares of treasury stock                                                 -        (61,930)         (61,930)
                                                                              
Net income                                                                                 -              -        1,838,380
                                                                              --------------     ----------      -----------
BALANCE AT JUNE 30, 1997                                                              59,482       (108,371)      14,155,282
                                                                              
Current year change in unrealized gain on securities available for sale,      
  net of deferred taxes of ($1,608)                                                   (2,413)             -           (2,413)
                                                                              
Dividends on common stock ($1.68 per share)                                                -              -       (1,415,869)
                                                                              
Purchase of 15,261 shares of treasury stock                                                -       (275,722)        (275,722)
                                                                              
Net income                                                                                 -              -        2,039,393
                                                                              --------------     ----------      -----------
BALANCE AT JUNE 30, 1998                                                             $57,069     $ (384,093)     $14,500,671
                                                                              ==============     ==========      ===========
 


</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

                                     -13-


<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------


<TABLE>
<CAPTION>
                                                                              Year ended June 30,
                                                                 ----------------------------------------------
                                                                  1998                1997             1996
                                                                 ------------     ------------     ------------
<S>                                                              <C>              <C>              <C>
CASH FLOWS - OPERATING ACTIVITIES
------------------------------------------------------
  Net income                                                     $  2,039,393     $  1,838,380     $  1,753,561
  Adjustments to reconcile net income to net cash
    (used for) provided from operating activities:
      Depreciation                                                    172,874          175,774          180,336
      Deferred income taxes                                           227,484           17,254           24,884
      Provision for loan losses                                       300,000           40,000           60,000
      Net amortization                                                214,286           85,201           22,533
      Deferred loan origination fees                                  (30,490)         (22,515)         (52,490)
      Income from unconsolidated joint venture                        (54,817)         (29,727)         (16,478)
      Income from mortgage banking partnership                        (59,567)         (22,525)               -
      Net (gain) loss on investment securities                         (1,248)          10,000               39
      Net loss on sale of property and equipment                            -            3,091                -
      Net loss (gain) on sale of foreclosed real
       estate                                                          24,786           19,847          (13,457)
      Gain on sale of mortgages                                      (582,664)        (384,991)        (160,949)
      Proceeds from loan sales                                     41,739,938       27,155,312       29,370,422
      Originations and purchases of loans held for                (45,455,024)     (26,016,597)     (30,990,370)
       sale
      Changes in certain assets and liabilities
        affecting operations:
          Accrued interest receivable                                 125,606         (106,982)         (67,415)
          Other assets                                               (299,520)          80,522          (96,051)
          Accrued interest payable                                     (4,251)          (5,682)           8,494
          Advances from borrowers for taxes
            and insurance                                             417,922          278,638         (370,808)
          Other liabilities                                            38,212           (8,240)        (154,287)
                                                                 ------------     ------------     ------------
                     NET CASH (USED FOR) PROVIDED FROM
                                  OPERATING ACTIVITIES             (1,187,080)       3,106,760         (502,036)
 
CASH FLOWS - INVESTING ACTIVITIES
------------------------------------------------------
  Net other decrease (increase) in loans receivable                 4,472,577      (10,286,971)      (3,667,626)
  Net increase in Federal Home Loan Bank stock                              -         (209,300)               -
  Investment in foreclosed real estate                                (49,894)          (9,102)            (383)
  Investment in joint venture                                         (35,134)        (149,109)           9,356
  Investment in mortgage banking partnership                           45,239            9,272          (20,065)
  Proceeds from sale of foreclosed real estate                        408,191          120,038          283,620
  Proceeds from sale of securities available for sale                   2,362                -           49,812
  Proceeds on maturity of securities available for                          -                -          150,000
   sale
  Purchases of securities to be held to maturity                            -       (2,324,062)      (2,987,912)
  Proceeds from maturities of securities to be held
    to maturity                                                     3,006,688        1,335,269        3,710,959
  Principal repayments on mortgage-backed securities                  199,652          502,279          772,543
  Proceeds from sale of property and equipment                              -           13,464                -
  Purchases of property and equipment                                 (21,009)        (124,351)        (110,363)
  Purchase of mortgage servicing rights                              (227,366)        (104,925)               -
                                                                 ------------     ------------     ------------
                     NET CASH PROVIDED FROM (USED FOR)
                                  INVESTING ACTIVITIES              7,801,306      (11,227,498)      (1,810,059)
</TABLE>

                                     -14-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

                 CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
                 ---------------------------------------------


<TABLE>
<CAPTION>
                                                                                Year ended June 30,
                                                            ----------------------------------------------------------
                                                                  1998                 1997                 1996
                                                            ---------------       --------------       ---------------
<S>                                                         <C>                   <C>                  <C>
CASH FLOWS - FINANCING ACTIVITIES                                                                         
------------------------------------------------------                                                    
  Interest credited to deposit accounts                         $ 5,538,398           $5,103,199           $ 5,129,548
  Net other (decrease) increase in deposits                      (5,107,085)              (7,510)              508,759
  Net increase (decrease) in advances from                                                                
    Federal Home Loan Bank                                        1,290,475            2,991,055            (2,908,403)
  Proceeds from exercise of stock options                                 -               22,457                83,629
  Purchase of treasury stock                                       (275,722)             (61,930)              (35,941)
  Dividends paid                                                 (1,415,869)            (577,364)             (381,259)
                                                                -----------           ----------           -----------
                               NET CASH PROVIDED FROM                                                     
                               FINANCING ACTIVITIES                  30,197            7,469,907             2,396,333
                                                                -----------           ----------           -----------
                                                                                                          
                           NET INCREASE (DECREASE) IN                                                     
                           CASH AND CASH EQUIVALENTS              6,644,423             (650,831)               84,238
                                                                                                          
Cash and cash equivalents at beginning                                                                    
  of year                                                           722,932            1,373,763             1,289,525
                                                                -----------           ----------           -----------
                            CASH AND CASH EQUIVALENTS                                                     
                                       AT END OF YEAR           $ 7,367,355           $  722,932           $ 1,373,763
                                                                ===========           ==========           ===========
                                                                                                          
SUPPLEMENTAL DISCLOSURE OF                                                                                
------------------------------------------------------                                                    
  CASH FLOW INFORMATION                                                                                   
------------------------------------------------------                                                    
    Cash paid during the year for:                                                                        
      Interest on advances from Federal                                                                   
        Home Loan Bank                                          $ 1,160,666           $1,239,795           $ 1,027,992
                                                                ===========           ==========           ===========
                                                                                                          
      Income taxes                                              $ 1,101,335           $  782,909           $ 1,156,051
                                                                ===========           ==========           ===========
                                                                                                          
SUPPLEMENTAL SCHEDULE OF                                                                                  
------------------------------------------------------                                                    
  NONCASH INVESTING ACTIVITIES                                                                            
------------------------------------------------------                                                    
    Loans transferred to foreclosed real estate                 $   737,309           $  170,968           $   213,815
                                                                ===========           ==========           ===========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

                                     -15-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------


NOTE A:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------------

  Nature of operations
  --------------------

  ES&L Bancorp, Inc. and Subsidiary (the "Corporation") provides a variety of
  financial services to individuals and corporate customers through its offices
  in Elmira and Ithaca, New York.  The Corporation's primary sources of revenue
  are from single family residential loans to individuals and commercial
  mortgage loans to small and middle market businesses.

  Principles of consolidation
  ---------------------------

  ES&L Bancorp, Inc. is a unitary savings and loan holding company, which
  engages in no significant business activity other than holding the stock of
  Elmira Savings and Loan, F.A. (the "Bank") and operating the business of a
  savings and loan through the Bank.  The consolidated financial statements
  include the accounts of the Corporation, its wholly-owned subsidiary, the Bank
  and the wholly-owned subsidiaries of the Bank, Brilie Corporation (D/B/A ES&L
  Financial Services) and ES&L Mortgage Corporation (D/B/A Cayuga Mortgage
  Company).   All significant intercompany transactions and balances have been
  eliminated in consolidation.

  Cash and cash equivalents
  -------------------------

  For purposes of reporting cash flows, cash and cash equivalents include cash,
  due from banks, federal funds sold, and short-term investments, with original
  terms to maturity of less than 90 days.

  Investments in debt, equity and mortgage-backed securities
  ----------------------------------------------------------

  The Corporation has classified as held-to-maturity, all debt securities
  including certain mortgage-backed securities which the Corporation has the
  positive intent and ability to hold until maturity.  These securities are
  carried at amortized cost.  All other debt and equity securities, including
  certain mortgage-backed securities, having readily determinable fair values
  have been categorized as securities available-for-sale and are carried at fair
  value.  Unrealized holding gains and losses for these securities are reported
  as a separate component of shareholders' equity.  The (decrease) increase in
  unrealized gain amounted to $(2,413), $21,594 and $(10,392) net of deferred
  taxes of $(1,608), $14,396 and $(6,926) for 1998, 1997 and 1996, respectively.
  The Corporation has no securities classified as trading securities.

  Realized gains or losses are recognized upon the sale of securities on a
  specific identification basis.

  Mortgage loans held for sale
  ----------------------------

  Mortgage loans held for sale are carried at the lower of cost or estimated
  market value, determined in the aggregate.  At June 30, 1998 and 1997, market
  values of the mortgage loans held for resale approximate cost.  The mortgage
  loans held for resale represent fixed rate one-to-four family mortgage loans,
  which are to be sold pursuant to forward commitments.  For purposes of
  determining the gain on the sale of loans sold in the secondary market, normal
  servicing  fees are determined by reference to the stipulated servicing fee
  set forth in the loan sale agreements.

  Loans receivable
  ----------------

  Loans held in portfolio are stated at the principal amount outstanding, less
  the allowance for losses and net deferred loan origination fees and costs.
  Interest is accrued as earned unless collectibility of the loan is in doubt,
  at which time an allowance is provided.

                                      -16-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------


NOTE A:  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
---------------------------------------------------------------------------- 
Cont'd

   Uncollectible interest on loans that are contractually past due is charged
   off, or an allowance is established based on management's periodic
   evaluation. The allowance is established by a charge to interest income equal
   to all interest previously accrued and still due, and income is subsequently
   recognized only to the extent that cash payments are received until, in
   management's judgment, the borrower's ability to make periodic interest and
   principal payments is back to normal, in which case the loan is returned to
   accrual status. Interest income generally is not recognized on specific
   impaired loans unless the likelihood of further loss is remote. Interest
   payments received on such loans are applied as a reduction of the loan
   principal balance.

   Loan fees
   ---------

   All loan origination fees received from loans with similar characteristics,
   net of direct origination costs, are deferred and amortized to interest
   income using the level yield method, giving effect to actual loan
   prepayments. Fees received for loan commitments that are expected to be drawn
   upon, based on the Bank's experience with similar commitments, are deferred
   and amortized over the life of the loan using the level yield method. Fees
   for other loan commitments are deferred and amortized over the loan
   commitment period on a straight-line basis.

   Allowance for possible loan losses
   ----------------------------------

   The allowance for possible loan losses is maintained at a level which
   management considers adequate to provide for potential loan losses based upon
   an evaluation of known and inherent risks in the loan portfolio. Management's
   evaluation is based upon a continuing review of the loan portfolio which
   includes many factors, such as identification of adverse situations which may
   affect the borrower's ability to repay, a review of overall portfolio quality
   and an assessment of current and future economic conditions.

   Management believes that the allowance for loan losses is adequate. While
   management uses available information to recognize losses on loans and
   foreclosed real estate, future additions to the allowances may be necessary
   based on changes in local economic conditions. In addition, regulatory
   agencies, as an integral part of their examination process, periodically
   review the Bank's allowances for losses on loans and foreclosed real estate.
   Such agencies may require the Bank to recognize additions to the allowances
   based on their judgments about information available to them at the time of
   their examination.

   The Bank adopted the provisions of Statement of Financial Accounting
   Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan"
   as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a 
   Loan - Income Recognition and Disclosures" on July 1, 1995. Management
   considers a loan impaired when, based on current information and events, it
   is probable that the Bank will be unable to collect all amounts of principal
   and interest under the original terms of the loan agreement. Accordingly, the
   Bank measures certain impaired commercial mortgage loans based on the present
   value of expected future cash flows, discounted at the loan's effective
   interest rate or, at the loan's observable market price or fair value of
   collateral. Impairment losses are included in the allowance for loan losses
   through a charge to the provision for loan losses. The Bank recognizes
   interest income on impaired loans using the cash basis of income recognition.
   Adoption of these statements did not have a material impact on the Bank's
   1996 consolidated financial statements.

                                      -17-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------


NOTE A:   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
----------------------------------------------------------------------------- 
Cont'd

   Mortgage servicing rights
   -------------------------

   The Bank adopted the provisions of Statement of Financial Accounting
   Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122") on
   July 1, 1996. Under SFAS 122, the cost of mortgage loans purchased or
   originated and subsequently sold with servicing rights retained is allocated
   between the mortgage servicing rights and the loans based on their relative
   fair value. The mortgage servicing rights are amortized in proportion to, and
   over the period of, estimated net servicing income. Additionally, mortgage
   servicing rights are assessed for impairment based on their fair value,
   determined for each group of underlying loans with similar risk
   characteristics.

   Prior to July 1, 1996, a portion of the cost of acquiring loans was
   capitalized as mortgage servicing rights if the loans were purchased, but not
   if they were originated by the seller. Additionally, no impairment
   measurement was performed. In 1997, the adoption of SFAS 122 increased net
   income by approximately $128,400, net of income taxes of $85,600.

   During 1998 and 1997, approximately $754,000 and $348,000, respectively, of
   costs of acquiring the rights to service mortgage loans were capitalized and
   included in other assets in the accompanying consolidated balance sheets.
   Amortization of servicing rights amounted to $166,700 and $65,000 for the
   years ended June 30, 1998 and 1997, respectively. The aggregate fair value of
   mortgage servicing rights is approximately $1,165,000 and $398,000 at June
   30, 1998 and 1997, respectively. Fair value is based on fundamental analysis
   and the present value of expected future cash inflows.

   For measuring impairment, mortgage servicing rights are stratified based on
   one or more of the predominant risk characteristics of the underlying loans.
   Such characteristics include the loan size, interest rate, date of
   origination, loan term, and geographic region. Impairment is recognized
   through a valuation allowance for each stratum, as necessary. At June 30,
   1998 and 1997, no valuation allowance has been recorded.

   Foreclosed real estate
   ----------------------

   Real estate properties acquired through loan foreclosure are valued at the
   lower of cost or fair value minus estimated costs to sell. Costs relating to
   the improvement of property are capitalized to the extent that carrying value
   does not exceed estimated fair value, whereas costs relating to holding
   property are expensed. Valuations are periodically performed by management
   and an allowance for losses is established, if necessary, by a charge to
   operations if the carrying value of a property exceeds its estimated net
   realizable value.

   Property and equipment
   ----------------------

   Property and equipment are carried at cost. Depreciation is computed on the
   straight-line method over the estimated useful lives of the related assets.
   Repairs and maintenance, as well as renewals and replacements of a routine
   nature, are charged to operations, while costs incurred to improve or extend
   the life of existing assets are capitalized.

                                      -18-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------


NOTE A:   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
----------------------------------------------------------------------------- 
Cont'd

   Income taxes
   ------------

   Deferred income tax assets and liabilities arise from temporary differences
   associated with differences between the financial statement and tax basis of
   assets and liabilities, as measured by the enacted tax rates which are
   expected to be in effect when these differences reverse. Deferred tax expense
   (credit) is a result of the changes in deferred tax assets and liabilities,
   except for the change in deferred taxes related to unrealized gain on
   securities available for sale which is reflected in shareholders' equity. The
   principle types of temporary differences between assets and liabilities for
   financial statement and tax return purposes are depreciation, nonrefundable
   loan fees, certain postretirement benefits, allowance for loan losses
   incurred after July 1, 1988, mortgage servicing rights and unrealized gain on
   securities available for sale.

   Financial Instruments and Concentration of Credit Risk
   ------------------------------------------------------

   In the normal course of business to meet the financing needs of its customers
   and to reduce its own exposure to fluctuations in interest rates, the Bank is
   a party to financial instruments with off-balance-sheet risk. These financial
   instruments include loan commitments, standby letters of credit, loans
   written with interest rate caps and floors, and forward contracts. Those
   instruments involve, to varying degrees, elements of credit and interest rate
   risk in excess of the amount recognized in the balance sheet. The contract or
   notional amounts of those instruments reflect the extent of involvement the
   Bank has in particular classes of financial instruments.

   The Bank considers its primary market area for lending and savings activities
   to be Chemung, Tompkins, Steuben, Schuyler and Tioga Counties in New York and
   Tioga and Bradford Counties in Pennsylvania. Although the Bank has a
   diversified loan portfolio, a substantial portion of its debtors' ability to
   honor their contracts is reliant upon the economic stability of the area.

   The Bank's exposure to credit loss in the event of nonperformance by the
   other party to the financial instrument for loan commitments and standby
   letters of credit is represented by the contractual or notional amount of
   those instruments. The Bank uses the same credit policies in making
   commitments and conditional obligations as it does for on-balance-sheet
   instruments. For interest rate caps, floors, and forward contracts, the
   contract or notional amounts do not represent exposure to credit loss. The
   Bank controls the credit risk of forward contracts through credit approvals,
   limits and monitoring procedures.

   Loan commitments are agreements to lend to a customer as long as there is no
   violation of any condition established in the contract. Loan commitments
   generally have fixed expiration dates or other termination clauses and may
   require payment of a fee. The Bank evaluates each customer's creditworthiness
   on a case-by-case basis. The amount of collateral obtained, if deemed
   necessary by the Bank upon extension of credit, is based on management's
   credit evaluation. Collateral held varies but may include accounts
   receivable, inventory, property, plant and equipment, income-producing
   commercial properties, and residential and personal properties.

   Forward contracts are written primarily with government agencies, whereby the
   agency agrees to purchase substantially all fixed-rate loans originated by
   the Bank. Risks arise from the possible inability of counterparties to meet
   the terms of their contracts.

                                      -19-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------


NOTE A:   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
----------------------------------------------------------------------------- 
Cont'd

   The Bank writes variable rate loan contracts with interest rate caps and
   floors in order to manage its interest rate exposure. Substantially, all
   variable rate loans are held by the Bank; the interest rate caps and floors
   enable both customers and the Bank to transfer, modify, or reduce their
   interest rate risk.

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

   Earnings per common share
   -------------------------

   During fiscal 1998, the Bank adopted the provisions of Statement of Financial
   Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128
   changes the manner in which earnings per share (EPS) amounts are calculated
   and presented. Under SFAS 128 two EPS amounts are required - basic EPS and
   diluted EPS. Prior period EPS disclosures have been restated. See also 
   Note N.

   The numerator for the basic and diluted EPS equals net income for each of the
   years. For basic EPS the weighted average shares actually outstanding
   (denominator) amounted to 836,303, 846,200 and 839,299 shares for the years
   ended June 30, 1998, 1997 and 1996, respectively. For diluted EPS, the effect
   of dilutive stock options was to add weighted average shares of 10,938,
   12,438 and 16,937 shares for the years ended June 30, 1998, 1997 and 1996,
   respectively. As a result, the denominator for diluted EPS amounted to
   847,241, 858,658 and 856,236 shares for 1998, 1997 and 1996, respectively.

   Use of estimates in the preparation of financial statements
   -----------------------------------------------------------

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

   New Accounting Pronouncements
   -----------------------------

   In June 1997, the Financial Accounting Standards Board issued Statement of
   Financial Accounting Standards No. 130, "Comprehensive Income" (SFAS 130).
   SFAS 130 requires entities to include details of comprehensive income that
   arise in the reporting period. Comprehensive income consists of net income or
   loss for the current period and other comprehensive income - income,
   expenses, gains, and losses that bypass the income statement and are reported
   directly as a separate component of equity.

   SFAS 130 is effective for fiscal years beginning after December 15, 1997.
   Accordingly, the Bank is required to adopt SFAS 130 for the year ending June
   30, 1999. The adoption of SFAS 130 will require details relating to
   unrealized gains and losses on certain investment securities, which is the
   primary other comprehensive income of the Bank. Net unrealized gains recorded
   in equity amounted to $57,069 as of June 30, 1998.

                                      -20-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------


NOTE B:   INVESTMENT AND MORTGAGE-BACKED SECURITIES
---------------------------------------------------

   The amortized cost and fair value of investments in securities are as
   follows:

<TABLE>
<CAPTION>
       June 30, 1998:                                                Gross            Gross
                                                   Amortized       Unrealized       Unrealized         Fair
                                                     Cost            Gains            Losses           Value
                                                 -------------   --------------   --------------   -------------
   <S>                                            <C>              <C>              <C>             <C> 
   Securities available for sale:
       Corporate stock                            $   35,437        $ 46,478          $    -         $   81,915
                                                  ==========        ========          ======         ==========
 
   Securities to be held to maturity:
       U.S. Government and its agencies           $1,000,000        $    940          $    -         $1,000,940
       Corporate debt securities                      25,244              15               -             25,259
                                                  ----------        --------          ------         ----------
                                                  $1,025,244        $    955          $    -         $1,026,199
                                                  ==========        ========          ======         ==========
 
   Mortgage-backed securities available 
      for sale                                    $1,163,485        $ 48,637          $    -         $1,212,122
                                                  ==========        ========          ======         ==========
 
   Mortgage-backed securities to be 
      held to maturity                            $  136,478        $      -          $    -         $  136,478
                                                  ==========        ========          ======         ==========
 
   June 30, 1997:
 
   Securities available for sale:
      Corporate stock                             $   36,763        $ 29,790          $ (397)        $   66,156
                                                  ==========        ========          ======         ==========
 
   Securities to be held to maturity:
      U.S. Government and its agencies            $3,991,287        $ 13,133          $    -         $4,004,420
      Corporate debt securities                       31,645             430               -             32,075
                                                  ----------        --------          ------         ----------
                                                  $4,022,932        $ 13,563          $    -         $4,036,495
                                                  ==========        ========          ======         ==========
 
   Mortgage-backed securities available
      for sale                                    $1,334,104        $ 69,744          $    -         $1,403,848
                                                  ==========        ========          ======         ==========
 
   Mortgage-backed securities to be 
      held to maturity                            $  171,794        $      -          $    -         $  171,794
                                                  ==========        ========          ======         ==========
</TABLE>

                                      -21-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                         JUNE 30, 1998, 1997 AND 1996
                         ----------------------------

NOTE B:   INVESTMENT AND MORTGAGE-BACKED SECURITIES, Cont'd
----------------------------------------------------       

  The amortized cost and fair value of debt securities at June 30, 1998, by
  contractual maturity, are shown below.  Expected maturities will differ from
  contractual maturities because borrowers may have the right to repay
  obligations with or without call or prepayment penalties.  All mortgage-backed
  securities mature after ten years.

<TABLE>
<CAPTION>
                                                                                               Securities to be
                                                                                               Held to Maturity
                                                                                          --------------------------
                                                                                           Amortized         Fair
                                                                                             Cost            Value
                                                                                          ----------      ----------
       <S>                                                                                <C>             <C>
       Due in one year or less                                                            $        -      $        -
       Due after one year through                                                                         
        five years                                                                         1,000,000       1,000,940
       Due after five years through                                                                       
        ten years                                                                                  -               -
       Due after ten years                                                                    25,244          25,259
                                                                                          ----------      ----------
                                                                                          $1,025,244      $1,026,199
                                                                                          ==========      ==========
</TABLE>

  Proceeds and gross realized gains and losses from sales and maturities of
  securities are as follows:

<TABLE>
<CAPTION>
                                                Securities Available for Sale
                           -----------------------------------------------------------------------------
                                    Proceeds
                                      from
                                    sales and                  Realized                  Realized
                                   maturities                   gains                     losses
                           -------------------------   ----------------------   ------------------------
Year ended June 30, 
------------------- 
<S>                          <C>                         <C>                      <C>
                    1998                  $    2,362                   $1,037                    $     -
                    1997                           -                        -                          -
                    1996                     199,812                        -                         39
</TABLE> 
<TABLE> 
<CAPTION>
                                                     Securities to be Held to Maturity
                           -----------------------------------------------------------------------------
                                    Proceeds
                                      from
                                    sales and                  Realized                  Realized
                                   maturities                   gains                     losses
                           -------------------------   ----------------------   ------------------------
Year ended June 30, 
------------------- 
<S>                          <C>                         <C>                      <C>
                    1998                  $3,006,688                   $  211                    $     -
                    1997                   1,335,269                        -                     10,000
                    1996                   3,710,959                        -                          -
</TABLE>

                                      -22-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                         JUNE 30, 1998, 1997 AND 1996
                         ----------------------------

NOTE C:    LOANS RECEIVABLE
---------------------------

  Loans receivable consist of the following:

<TABLE>
<CAPTION>
                                                                           June 30,
                                                           --------------------------------------------
                                                               1998                            1997
                                                           ------------                    ------------
       <S>                                                <C>                             <C>
       Conventional first mortgage loans:                                                
        Residential                                        $ 79,358,322                    $ 86,088,562
        Commercial                                           28,422,122                      27,744,971
        Construction loans                                    4,993,395                       4,719,712
       Loans on savings accounts                                263,905                         245,864
       Education loans                                          333,449                         462,353
       Consumer loans                                         5,621,782                       5,202,370
       Demand notes                                             953,474                       1,188,781
       Home equity lines of credit                            5,392,259                       6,048,557
       Commercial non-mortgage loans                          1,602,953                       1,806,681
       Commercial lines of credit                             2,890,988                       1,353,262
                                                           ------------                    ------------
                                              Subtotal      129,832,649                     134,861,113
                                                                                         
       Allowance for loan losses                             (1,473,346)                     (1,435,500)
       Loans in process                                      (2,273,617)                     (1,789,694)
       Net deferred loan origination fees and premiums           95,649                          74,931
                                                           ------------                    ------------
                                                           $126,181,335                    $131,710,850
                                                           ============                    ============
</TABLE>

  The activity in the allowance for loan losses is as follows:

<TABLE>
<CAPTION>
                                                                                      Year ended June 30,
                                                               --------------------------------------------------------------
                                                                  1998                      1997                      1996
                                                               ----------                ----------                ----------
       <S>                                                     <C>                       <C>                       <C>
       Balance at beginning of year                            $1,435,500                $1,430,781                $1,423,826
       Provision for possible loan losses                         300,000                    40,000                    60,000
       Charged-off loans                                         (269,990)                  (44,465)                  (54,207)
       Recoveries                                                   7,836                     9,184                     1,162
                                                               ----------                ----------                ----------
                          Balance at end of year               $1,473,346                $1,435,500                $1,430,781
                                                               ==========                ==========                ==========
</TABLE>
                                                                                
  Nonaccrual loans for which interest has been reduced totaled approximately
  $313,000 and $340,000 at June 30, 1998 and 1997, respectively.  Interest
  income that would have been recorded on these loans for the years ended June
  30, 1998, 1997 and 1996 was approximately $28,000, $23,000 and $20,000,
  respectively.

  The Bank is not committed to lend additional funds to debtors whose loans have
  been modified.

                                      -23-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                         JUNE 30, 1998, 1997 AND 1996
                         ----------------------------

NOTE C:   LOANS RECEIVABLE, Cont'd
---------------------------       

  The Bank, in the ordinary course of business, has granted loans to certain
  officers, directors and their related interests.  Related party loans were
  made on substantially the same terms as those prevailing at the time for
  comparable transactions with unrelated persons and do not involve more than
  normal risk of collectibility.  An analysis of related party loan activity is
  as follows:

<TABLE>
       <S>                                                               <C>
       Balance at July 1, 1996                                           $ 444,593
       Increase                                                             18,000
       Decrease                                                           (190,375)
                                                                         ---------
                        BALANCE AT JUNE 30, 1997                           272,218
                                                                         
       Increase                                                             51,187
       Decrease                                                            (61,233)
                                                                         ---------
                        BALANCE AT JUNE 30, 1998                         $ 262,172
                                                                         =========
</TABLE>


  As stated in Note A, the Bank sells loans in the secondary market and
  generates income on the subsequent servicing of such loans.  The income is
  generated by continuing to service loans sold in the secondary market for an
  agreed-upon percentage of the interest earned.  Total loans serviced for
  others amounted to $151,050,157, $129,495,624 and $110,496,667 at June 30,
  1998, 1997 and 1996, respectively.

NOTE D:   PROPERTY AND EQUIPMENT
--------------------------------

  Property and equipment is summarized by major classification as follows:
<TABLE>
<CAPTION>
                                                                           June 30,
                                                                   ------------------------
                                                                      1998         1997
                                                                   ----------    ----------
       <S>                                                         <C>           <C>
       Land                                                        $  672,933    $  672,933
       Buildings                                                    2,262,652     2,262,652
       Furniture and equipment                                        829,460       808,450
                                                                   ----------    ----------
                                                                    3,765,045     3,744,035
       Less accumulated depreciation                                  863,175       690,300
                                                                   ----------    ----------
                                                                   $2,901,870    $3,053,735
                                                                   ==========    ==========
</TABLE>
                                                                                
                                      -24-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                         JUNE 30, 1998, 1997 AND 1996
                         ----------------------------

NOTE E:    DEPOSITS
-------------------

  Deposit accounts consist of the following:
<TABLE>
<CAPTION>
                                                                               June 30,
                                                                     -----------------------------
                                                                        1998             1997
                                                                     ------------     ------------
       <S>                                                           <C>              <C>
       Savings accounts with a year end interest rate of  2.81%
        and  2.96% at June 30, 1998 and 1997, respectively           $ 14,817,520     $ 14,183,722
       NOW accounts with a year end interest rate of 1.74%           
        at June 30, 1998 and 1997                                       8,556,180        7,883,421
       Money market deposit accounts with a year end                                  
        interest rate of 2.96% and 3.11% at                                            
       June 30, 1998 and 1997, respectively                             5,062,280        5,100,541
       Certificates of deposit with a year end interest rate                          
        range of 3.44% - 6.90% at June 30, 1998 and 1997               83,743,851       84,580,834
                                                                     ------------     ------------
                                                                     $112,179,831     $111,748,518
                                                                     ============     ============
</TABLE>
                                                                                
  Non-interest bearing checking accounts are included in the table above in NOW
  accounts.

  Maturities of outstanding certificates of deposit at June 30, 1998, are
  summarized as follows:

<TABLE>
<CAPTION>
                                 Year                          Amount
                                 ----                        -----------
                                 <S>                         <C>
                                 1999                        $63,862,227
                                 2000                         12,140,557
                                 2001                          2,748,205
                                 2002                          2,298,658
                                 2003                          2,682,249
                              Thereafter                          11,955
                                                             -----------
                                                             $83,743,851
                                                             ===========
</TABLE>


  The aggregate amount of individual deposits in excess of $100,000 was
  approximately $23,000,000 and $21,000,000 at June 30, 1998 and 1997,
  respectively.

  Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
                                                             Year ended June 30,
                                                   ----------------------------------------
                                                      1998          1997           1996
                                                   ----------     ----------     ----------
       <S>                                         <C>            <C>            <C>
       Savings accounts                            $  431,611     $  453,090     $  507,794
       NOW accounts                                    79,073         59,416         24,565
       Money market                                   187,732        209,290        217,075
       Certificates of deposit                      4,827,217      4,446,488      4,408,016
                                                   ----------     ----------     ----------
                                                   $5,525,633     $5,168,284     $5,157,450
                                                   ==========     ==========     ==========
</TABLE>

                                      -25-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                         JUNE 30, 1998, 1997 AND 1996
                         ----------------------------

NOTE F:   ADVANCES FROM FEDERAL HOME LOAN BANK
----------------------------------------------

  Advances from Federal Home Loan Bank are collateralized by certain residential
  mortgage loans and the Bank's investment in Federal Home Loan Bank stock
  pursuant to the provisions of a collateral pledge and security agreement.  The
  rate is variable (5.07% to 6.28% at June 30, 1998).

  Scheduled maturities are as follows:

<TABLE>
<CAPTION>
                              Maturing in
                          fiscal year ending                 Amount
                          ------------------               ----------- 
                          <S>                               <C>
                                 1999                      $ 8,610,139
                                 2000                          610,796
                                 2001                          611,491
                                 2002                          612,237
                                 2003                          613,027
                              Thereafter                    10,839,400
                                                           -----------
                                                           $21,897,090
                                                           ===========
</TABLE>


  The Bank has the ability to obtain additional advances from the Federal Home
  Loan Bank, up to an amount established at the time of borrowing by a
  predefined formula.

NOTE G:   BENEFIT PLANS
-----------------------

  Savings and Profit Sharing Plan
  -------------------------------

  The Bank maintains a defined contribution savings incentive plan (401k) and a
  profit sharing plan for all eligible employees.  Under these plans, the Bank
  will match up to 3% of annual employee wages, dollar for dollar, for amounts
  contributed to the savings incentive plan and will contribute a Board approved
  percentage of wages to the profit sharing plan.  Total expense including
  administrative costs amounted to $100,735, $90,476 and $83,521 for the years
  ended June 30, 1998, 1997 and 1996, respectively.

  Other Retirement Benefits
  -------------------------

  The Bank provides limited medical and life insurance benefits to current
  retirees.  The Bank intends to continue to fund the liability associated with
  these benefits on a "pay-as-you-go" basis, and does not expect to extend this
  benefit beyond those currently receiving benefits.

  The accumulated postretirement benefit obligation of all retirees as of June
  30, 1998 and 1997 was $54,298 and $57,918, respectively.  There are no
  plan/trust assets designated for this purpose.

  For measurement purposes, the weighted-average discount rate used in
  determining the accumulated postretirement benefit obligation was 8%.  The
  mortality rate was based on the 1983 Group Annuity Mortality Table.

                                      -26-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                         JUNE 30, 1998, 1997 AND 1996
                         ----------------------------

NOTE G:   BENEFIT PLANS, Cont'd
------------------------       

  Stock option plan
  -----------------

  Under the terms of the ES&L Bancorp, Inc. 1990 Stock Option Plan (the "Option
  Plan"), shares were reserved for future issuance by the Corporation upon
  exercise of stock options granted to employees and directors of the
  Corporation and its subsidiary from time to time under the Option Plan.  The
  Option Plan provides for a term of ten years, after which no awards may be
  made, unless earlier terminated by the Board of Directors pursuant to the
  Option Plan.  These options are priced at $3 5/9 per share, the equivalent of
  the purchase price at the time of issuance.  Options outstanding at both June
  30, 1998 and 1997 amounted to 13,598.  See also Note N.
 
NOTE H:    INCOME TAXES
-----------------------

  The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
                                                Year ended June 30,
                                       --------------------------------------
                                         1998           1997          1996
                                       ----------     --------     ---------- 
       <S>                             <C>            <C>          <C>
       Currently payable:
        State                          $   97,560     $ 92,945     $  160,560
        Federal                           870,741      580,351        907,116
       Deferred                           227,484       17,254         24,884
                                       ----------     --------     ----------
                                       $1,195,785     $690,550     $1,092,560
                                       ==========     ========     ==========
</TABLE>
                                                                                
  A reconciliation of income taxes at the federal statutory corporate tax rates
  to the effective tax rates follows:

<TABLE>
<CAPTION>
                                                             Year ended June 30,
                                                   --------------------------------------
                                                      1998          1997           1996
                                                   ----------     ---------     ----------   
       <S>                                         <C>            <C>           <C>
       Total provision at federal statutory       
        rates                                      $1,100,000     $ 860,000     $  968,000                                
       States taxes, net of federal benefit            65,000        61,000        106,000
       Resolution and adjustment of                                             
        prior year tax liabilities                          -      (235,000)             -
       Other                                           30,785         4,550         18,560
                                                   ----------     ---------     ----------
                                                   $1,195,785     $ 690,550     $1,092,560
                                                   ==========     =========     ==========
</TABLE>
                                                                                
  Amounts by which income taxes currently payable exceed estimated tax payments
  made during the year are included in other liabilities in the accompanying
  financial statements.

                                      -27-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                         JUNE 30, 1998, 1997 AND 1996
                         ----------------------------

NOTE H:   INCOME TAXES, Cont'd
-----------------------       

  A deferred tax asset resulting from temporary differences is summarized as
  follows and is included in other assets in the accompanying consolidated
  balance sheet:
<TABLE>
<CAPTION>
                                                         June 30,
                                                 ------------------------
                                                   1998            1997
                                                 ---------       --------
       <S>                                       <C>             <C>
       Depreciation                              $ (99,000)      $(70,000)
       Nonrefundable loan fees                      14,000         21,000
       Employee benefits                            18,000         20,000
       Allowance for loan losses                   276,000        234,000
       Mortgage servicing rights                  (218,000)             -
       Unrealized gain on securities                             
        available for sale                         (19,000)       (28,000)
       Other                                        36,000         50,000
                                                 ---------       --------
                                                 $   8,000       $227,000
                                                 =========       ========
</TABLE>
                                                                                
  As required by SFAS 109, deferred taxes have not been provided for the
  allowance for loan losses for tax purposes that arose in tax years beginning
  before July 1, 1988, as management believes that it is not apparent such
  temporary differences will reverse in the foreseeable future.  However, a
  deferred tax asset has been recognized for the difference between the
  provision for loan losses for book purposes and the bad debt tax deductions
  arising in tax years after July 1, 1988.

  In fiscal year 1997 the Bank performed an extensive analysis of all potential
  income tax liabilities, which ultimately resulted in an income tax benefit of
  $235,000.

  The IRS has permitted a tax deduction for estimated bad debts in an amount
  greater than the amount reported in the accompanying financial statements.
  This excess amount of estimated bad debts is subject to tax only if it is
  actually distributed to shareholders or depositors.  At June 30, 1998, the
  accumulated amount of such excess for which income taxes have not been accrued
  was approximately $2.1 million.

NOTE I:   COMMITMENTS
---------------------

  The Bank leases an office for ES&L Mortgage Corporation under a lease
  agreement, which is renewable annually.  The agreement requires minimum
  monthly rentals, as well as requiring the Bank to pay its pro rata share of
  property taxes and utilities.  Total rental expense under this agreement
  amounted to $17,375, $17,029 and $17,886 for the years ended June 30, 1998,
  1997 and 1996, respectively.

                                      -28-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                         JUNE 30, 1998, 1997 AND 1996
                         ----------------------------


NOTE I:   COMMITMENTS, Cont'd
----------------------       

  At June 30, 1998 and 1997, the Bank had outstanding commitments of $5,256,912
  and $5,243,927, respectively, to originate loans, of which $3,011,112 and
  $2,358,115, respectively, were comprised of fixed-rate loans and $2,245,800
  and $2,885,812, respectively, were comprised of variable-rate loans.
  Substantially all of the fixed-rate loan commitments are to be sold upon
  establishment of a specified fixed rate of interest.  In the opinion of
  management, all fixed-rate loan commitments equaled or exceeded prevalent
  market interest rates and all loan commitments will be funded via cash flows
  from operations, existing excess liquidity, advances from the Federal Home
  Loan Bank and other borrowings as necessary.

  At June 30, 1998 and 1997, the Bank had outstanding commitments under standby
  letters of credit totaling $365,358 and $256,822, respectively.

NOTE J:   INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
--------------------------------------------------------------------
 CONSTRUCTION ARRANGEMENT
 ------------------------

  The Bank's wholly-owned subsidiary, Brilie Corporation ("Brilie") has a
  partnership agreement with two unrelated parties.  The primary purpose of this
  partnership is to develop land in the Town of Horseheads for eventual resale
  as residential housing.  Management of the partnership intends to develop the
  land in several phases, enabling the partnership to increase its equity as
  sales take place.  As of June 30, 1998 and 1997, the Bank had loaned $636,401
  and $561,439, respectively, to the partnership, and was committed to lend an
  additional $313,599 and $188,561, respectively, to finance further land
  development.

  All costs incurred by the joint venture partnership during development stages,
  including interest financing costs, directly attributable to the project are
  capitalized and specifically allocated to individual parcels within the
  subdivision.  Interest ceases to be capitalized upon the phase's readiness for
  sale.  As sales take place, the partnership recognizes profits by subtracting
  previously allocated costs for each parcel from the individual sales proceeds
  of each parcel.  Further, interest is not capitalized for phases of the
  project not presently undergoing development.

  The Bank has classified these loans as an acquisition, development and
  construction arrangement, since the partnership has title to, but little or no
  equity in the underlying security and Brilie receives 50% of the profit on the
  ultimate sale of the project.

  Brilie recognizes profits from these activities under the equity method of
  accounting when the collectibility of the sales price is reasonably assured
  and the partnership is not obligated to perform significant activities after
  the sale.  Accordingly, profits on sales which do not meet the criteria for
  profit recognition are deferred and credited to operations on the installment
  basis until such time as the criteria for profit recognition is met.

  All interest income earned by the Bank is deferred.  The interest deferred is
  realized at the time of the sale of related parcels of the project.  In
  addition, the Bank capitalizes interest expense related to the average
  outstanding investment balance multiplied by the Bank's average cost of funds
  rate.

                                      -29-

<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                         JUNE 30, 1998, 1997 AND 1996
                         ----------------------------

NOTE J:   INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
--------------------------------------------------------------------
 CONSTRUCTION ARRANGEMENT, Cont'd
 ------------------------        

  As of June 30, 1998, Brilie's share of the partnership's capital was $129,551,
  which represents 50% of the accumulated earnings of the partnership as of that
  date less partners' withdrawals.  The following summarizes the unaudited
  financial condition and results of operations of the joint venture
  partnership:

  BALANCE SHEETS
  --------------

<TABLE>
<CAPTION>
                                                                          June 30,
                                                                 ---------------------------
                                                                    1998            1997
                                                                 -----------     -----------
                                                                 (UNAUDITED)     (UNAUDITED)
       <S>                                                         <C>            <C>
                                ASSETS
                                ------
 
       Investment in real estate                                   $686,653        $773,487
       Mortgage and lot sale receivable                             276,850          93,000
       Other asset                                                      800             800
                                                                   --------        --------
                                                                   $964,303        $867,287     
                                                                   ========        ========
                                                                                   
                                                                                   
                            LIABILITIES AND                                        
                            ---------------                                        
                           PARTNERS' CAPITAL                                       
                           -----------------                                       
                                                                                   
       Liabilities:                                                                
        Note payable to Elmira Savings and Loan                    $636,401        $561,439
        Mortgage payable                                             68,000          68,000
        Other liabilities                                               800           8,724
                                                                   --------        --------
                                                                    705,201         638,163
                                                                                   
       Partners' capital                                            259,102         229,124
                                                                   --------        --------
                                                                   $964,303        $867,287
                                                                   ========        ========
</TABLE>

                                      -30-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------

NOTE J:    INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
---------------------------------------------------------------------
 CONSTRUCTION ARRANGEMENT, Cont'd
 ------------------------        

  STATEMENTS OF INCOME AND PARTNERS' CAPITAL
  ------------------------------------------

<TABLE>
<CAPTION>
                                                                         Year ended June 30,
                                                   --------------------------------------------------------------
                                                           1998                  1997                  1996
                                                   ------------------    ------------------    ------------------
                                                        (UNAUDITED)           (UNAUDITED)           (UNAUDITED)
 
       <S>                                           <C>                   <C>                   <C>
       Sales                                            $479,250              $307,000              $311,901
       Cost of sales                                     337,006               234,484               265,042
                                                        --------              --------              --------
                                    Gross profit         142,244                72,516                46,859
                                                        
       Net rental income (expense)                         3,902                 1,885                (6,622)
       Interest income                                     5,324                     -                     -
       General and administrative expense                (12,316)              (14,947)               (7,281)
                                                        --------              --------              --------
                                      Net income         139,154                59,454                32,956
 
       Partners' capital at beginning of year            229,124               215,990               206,116
       Partners' withdrawals                             109,176                46,320                23,082
                                                        --------              --------              --------
                Partners' capital at end of year        $259,102              $229,124              $215,990
                                                        ========              ========              ========
 
</TABLE>

                                      -31-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------

NOTE K:   PARENT COMPANY FINANCIAL INFORMATION
----------------------------------------------

  BALANCE SHEETS
  --------------
<TABLE>
<CAPTION>
                                                                                June 30,
                                                              -------------------------------------------                     
                                ASSETS                                1998                    1997          
                                ------                        -------------------       -----------------                   
       <S>                                                       <C>                              <C>
       Cash and cash equivalents                                 $   208,358              $   328,270
       Securities available for sale                                  81,915                   66,156
       Investment in subsidiary                                   10,111,123                9,636,063
       Other assets                                                    5,184                   18,038
                                                                 -----------              -----------
                                                                 $10,406,580              $10,048,527
                                                                 ===========              ===========
 
               LIABILITIES AND SHAREHOLDERS' EQUITY
               ------------------------------------
 
       Shareholders' equity:
        Common stock                                             $     8,560              $    8,560
        Additional paid-in capital                                 2,599,654               2,599,654
        Retained earnings                                          8,154,572               7,531,048
        Net unrealized gain on securities available for sale          27,887                  17,636
                                                                 -----------             -----------
                                                                  10,790,673              10,156,898
        Less treasury stock                                          384,093                 108,371
                                                                 -----------             -----------
                                                                 $10,406,580             $10,048,527
                                                                 ===========             ===========
</TABLE>
                                                                                
   STATEMENTS OF INCOME AND RETAINED EARNINGS
   ------------------------------------------
<TABLE>
<CAPTION>
                                                                               Year ended June 30,
                                                   ------------------------------------------------------------------------
                                                             1998                     1997                     1996
                                                   ----------------------   ----------------------   ----------------------
       <S>                                           <C>                      <C>                      <C>
       Revenues:
        Equity in earnings of subsidiary                 $2,075,061               $1,883,734               $1,801,129
        Income from investments and other                     3,033                    2,619                    3,091
                                                         ----------               ----------               ----------
                                                          2,078,094                1,886,353                1,804,220
                                                        
       General and administrative expenses                   44,916                   60,209                   66,099
                                                         ----------               ----------               ----------
                      INCOME BEFORE INCOME TAXES          2,033,178                1,826,144                1,738,121
                                                        
       Income tax benefit                                     6,215                   12,236                   15,440
                                                         ----------               ----------               ----------
                                      NET INCOME          2,039,393                1,838,380                1,753,561
                                                        
       Retained earnings at beginning of year             7,531,048                6,270,032                4,897,730
       Dividends paid                                     1,415,869                  577,364                  381,259
                                                         ----------               ----------               ----------
                            RETAINED EARNINGS AT        
                                     END OF YEAR         $8,154,572               $7,531,048               $6,270,032
                                                         ==========               ==========               ==========
</TABLE>                                  
                                     -32-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------

NOTE K:   PARENT COMPANY FINANCIAL INFORMATION, Cont'd
----------------------------------------------        

  STATEMENTS OF CASH FLOWS
  ------------------------
<TABLE>
<CAPTION>
                                                                            Year ended June 30,
                                                        -------------------------------------------------------    
                                                            1998                   1997                1996
                                                        -----------            -----------          -----------
       <S>                                              <C>                    <C>                  <C>
       CASH FLOWS - OPERATING ACTIVITIES               
       -----------------------------------------       
       Net income                                       $ 2,039,393            $ 1,838,380          $ 1,753,561
       Adjustments to reconcile net income to net                                                  
         cash used for operating activities:                                                       
           Equity in earnings of subsidiary              (2,075,061)            (1,883,734)          (1,801,129)
           Gain on sale of securities available                                                    
             for sale                                        (1,037)                     -                    -
           Change in other assets affecting                                                        
             operations                                       6,022                 43,794              (36,276)
                                                        -----------            -----------          -----------
                               NET CASH USED FOR                                                   
                            OPERATING ACTIVITIES            (30,683)                (1,560)             (83,844)
                                                                                                   
       CASH FLOWS - INVESTING ACTIVITIES                                                           
       -----------------------------------------                                                   
       Dividend received from subsidiary                  1,600,000                800,000                    -
       Proceeds from sale of securities                                                            
        available for sale                                    2,362                      -                    -
                                                        -----------            -----------          -----------
                          NET CASH PROVIDED FROM                                                   
                            INVESTING ACTIVITIES          1,602,362                800,000                    -
                                                                                                   
       CASH FLOWS - FINANCING ACTIVITIES                                                           
       -----------------------------------------                                                   
       Dividends paid                                    (1,415,869)              (577,364)            (381,259)
       Purchase of treasury stock                          (275,722)               (61,930)             (35,941)
       Net proceeds from exercise of stock                        -                 22,457               83,629
       options                                          -----------            -----------          -----------
                               NET CASH USED FOR                                                   
                            FINANCING ACTIVITIES         (1,691,591)              (616,837)            (333,571)
                                                        -----------            -----------          -----------
                                                                                                   
                 NET (DECREASE) INCREASE IN CASH                                                   
                            AND CASH EQUIVALENTS           (119,912)               181,603             (417,415)
                                                                                                   
       Cash and cash equivalents                                                                   
        at beginning of year                                328,270                146,667              564,082
                                                        -----------            -----------          -----------
                       CASH AND CASH EQUIVALENTS                                                   
                                  AT END OF YEAR        $   208,358            $   328,270          $   146,667
                                                        ===========            ===========          ===========
</TABLE>
                                                                                

                                      -33-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------


NOTE L:   OFFICE OCCUPANCY AND EQUIPMENT EXPENSE
------------------------------------------------

  Office occupancy and equipment expense is comprised of the following:

<TABLE>
<CAPTION>
                                                                        Year ended June 30,
                                                   ------------------------------------------------------------
                                                           1998                 1997                 1996
                                                   ------------------   ------------------   ------------------
 
       <S>                                              <C>                  <C>                  <C>
       Depreciation                                     $172,874             $175,774             $180,336
       Service bureau                                    151,526              150,012              134,893
       Other                                             168,878              176,513              188,330
                                                        --------             --------             --------
                                                        $493,278             $502,299             $503,559
                                                        ========             ========             ========
</TABLE>
                                                                                

NOTE M:   REGULATORY CAPITAL
----------------------------

  The Bank is subject to various regulatory capital requirements administered by
  its primary federal regulator, the Office of Thrift Supervision (OTS).
  Failure to meet the minimum regulatory capital requirements can initiate
  certain mandatory, and possible additional discretionary actions by
  regulators, that if undertaken, could have a direct material affect on the
  Bank's consolidated financial statements.  Under the regulatory capital
  adequacy guidelines and the regulatory framework for prompt corrective action,
  the Bank must meet specific capital guidelines involving quantitative measures
  of the Bank's assets, liabilities and certain off-balance-sheet items as
  calculated under regulatory accounting practices.  The Bank's capital amounts
  and classifications are also subject to qualitative judgments by the
  regulators about components, risk weightings, and other factors.

  Quantitative measures established by regulation to ensure capital adequacy
  require the Bank to maintain minimum amounts and ratios of: total risk-based
  capital and Tier I capital to risk-weighted assets (as defined in the
  regulations), Tier I capital to adjusted total assets (as defined), and
  tangible capital to adjusted total assets (as defined).  Management believes,
  as of June 30, 1998, that the Bank meets all capital adequacy requirements to
  which it is subject.

  As of June 30, 1998, the most recent notification from OTS categorized the
  Bank as well capitalized under the regulatory framework for prompt corrective
  action.  To be categorized as well capitalized, the Bank must maintain minimum
  total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
  in the table.  There are no conditions or events since that notification that
  management believes have changed the Bank's category.

                                      -34-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------

NOTE M:   REGULATORY CAPITAL, Cont'd
----------------------------        

  The Bank's actual capital amounts and ratios are also presented in the table
  (000's omitted).
<TABLE>
<CAPTION>
                                                                                          
                                                                                          
                                                                                                           To be well          
                                                                                                     capitalized under prompt    
                                Actual                   For capital adequacy purposes               corrective action provisions
                        --------------------  ----------------------------------------  -------------------------------------------
                          Amount      Ratio          Amount               Ratio                Amount                 Ratio
                        --------   ---------  -------------------  -------------------  ----------------------  -------------------
<S>                         <C>    <C>        <C>                  <C>                  <C>                     <C>              
As of June 30, 1998             
 Total risk-based capital      
  (to risk-weighted assets) $14,805 14.65 %  greater than $8,087  greater than  8.00 %  greater than  $10,109  greater than  10.00 %
                                             or equal to          or equal to           or equal to            or equal to 
Tier I capital                                                                                 
 (to risk-weighted assets)   13,540 13.39 %  greater than  4,044  greater than  4.00 %  greater than    6,065  greater than   6.00 %
                                             or equal to          or equal to           or equal to            or equal to 
Tier I capital (leveraged)                                                                     
 (to adjusted total assets)  13,540  8.94 %  greater than  4,546  greater than 3.00 %   greater than    7,576  greater than   5.00 %
                                             or equal to          or equal to           or equal to            or equal to 
Tangible capital                                                                      
 (to adjusted total assets)  13,540  8.94 %  greater than  2,273  greater than 1.50 %   greater than    Not applicable
                                             or equal to          or equal to           or equal to 

As of June 30, 1997                                                                     
 Total risk-based capital                                                              
  (to risk-weighted assets) $14,377 14.55 %  greater than $7,907  greater than 8.00 %   greater than  $ 9,884  greater than  10.00 %
                                             or equal to          or equal to           or equal to            or equal to 
Tier I capital                                                                        
 (to risk-weighted assets)   13,140 13.29 %  greater than  3,954  greater than 4.00 %   greater than    5,931  greater than   6.00 %
                                             or equal to          or equal to           or equal to            or equal to 
Tier I capital (leveraged)                                                            
 (to adjusted total assets)  13,140  8.78 %  greater than  4,471  greater than 3.00 %   greater than    7,452  greater than  5.00 % 
                                             or equal to          or equal to           or equal to            or equal to 
Tangible capital                                                                      
 (to adjusted total assets)  13,140  8.78 %  greater than  2,235  greater than 1.50 %                   Not applicable
                                             or equal to          or equal to 
 
</TABLE>

NOTE N: SHAREHOLDERS' EQUITY
----------------------------
 
  Capital restrictions
  ----------------------
  Since the Corporation has no significant source of income other than dividends
  from the Bank, the payment of dividends by the Corporation is dependent upon
  receipt of dividends from the Bank.  Payment of cash dividends by the Bank is
  limited by certain federal regulations under which the Bank may not declare or
  pay a cash dividend on or repurchase any of its common stock if the effect
  thereof would cause its regulatory capital to be reduced below (1) the amount
  required for the liquidation account established in connection with the Bank's
  conversion to stock form or (2) the regulatory capital requirements imposed by
  the OTS.  In certain circumstances, earnings appropriated to bad debt reserves
  and deducted for federal income tax purposes may not be available to pay cash
  dividends without the payment of federal income taxes by the Bank on the
  amount of such earnings removed from the reserves for such purposes at the
  then current income tax rate (see Note H).

  At the time of conversion, the Bank established a liquidation account for the
  benefit of Eligible Account Holders who continue to maintain their accounts in
  the Bank.  The liquidation account was set at an amount equal to the
  regulatory capital of the Bank at March 31, 1990.  The liquidation account
  will be reduced annually to the extent that Eligible Account Holders reduce
  their eligible deposits.  Subsequent increases will not restore an Eligible
  Account Holder's interest in the liquidation account.  In the event of a
  complete liquidation, each Eligible Account Holder will be entitled to receive
  a distribution from the liquidation account in an amount proportionate to the
  current adjusted eligible account balance held.

                                      -35-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------


NOTE N:   SHAREHOLDERS' EQUITY, Cont'd
------------------------------        

  Preferred stock
  ---------------

  Shareholders of the Corporation have authorized the issuance of up to 500,000
  shares of preferred stock with terms to be established by the Board of
  Directors.  The serial preferred may rank prior to the common stock as to
  dividend rights, liquidation preference, or both, and may have full or limited
  voting rights.  No shares of this preferred stock have been issued, nor does
  the Corporation have any present plan for the issuance or sale of any such
  shares.

  Stock split
  -----------

  The Corporation's common stock was split three-for-two on August 23, 1996,
  effected in the form of a 50% stock dividend.  All stock option data, common
  and treasury stock, and earnings and dividend per share amounts in the
  consolidated financial statements were restated to give effect to this stock
  split.

NOTE O:  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
------------------------------------------------------------------

  The following methods and assumptions were used to estimate the fair value of
  each class of financial instruments for which it is practicable to estimate
  that value:

  Cash and short-term investments
  -------------------------------
  The balance sheet carrying amounts for cash and short-term instruments
  approximate the estimated fair values of such assets.

  Securities (including mortgage-backed securities)
  -------------------------------------------------

  Fair values for securities are based on quoted market prices, if available.
  If quoted market prices are not available, fair values are based on quoted
  market prices of comparable instruments.

  Loans receivable
  ----------------

  For variable rate loans that reprice frequently and which entail no
  significant change in credit risk, fair values are based on the carrying
  values.  The estimated fair values of certain mortgage loans are based on
  quoted market prices of similar loans sold in conjunction with the
  securitization transactions, adjusted for differences in loan characteristics.
  The estimated fair values of other loans are estimated based on discounted
  cash flow analyses using interest rates currently offered for loans with
  similar terms to borrowers of similar credit quality.

  Accrued interest
  ----------------
  The carrying amount of accrued interest approximates its fair value.

  Deposits
  --------

  The fair values estimated for demand deposits (e.g., interest and non-interest
  bearing demand deposits, savings, and certain types of money market accounts)
  are, by definition, equal to the amount payable on demand at the reporting
  date (i.e., their carrying amounts).  The carrying amounts of variable rate,
  fixed-term money market accounts and certificates of deposit approximate their
  fair values at the reporting date.  Fair values of fixed rate certificates of
  deposit are estimated using a discounted cash flow calculation that applies
  interest rates currently being offered to a schedule of aggregated expected
  monthly time deposit maturities.

                                      -36-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------

NOTE O:  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS, Cont'd
------------------------------------------------------------------        

  Borrowed funds
  --------------

  The fair value of the advances from the Federal Home Loan Bank is estimated
  using discounted cash flow analyses based on the Bank's current incremental
  borrowing rate for similar borrowing arrangements.

  Off-balance-sheet instruments
  -----------------------------
  Fair values for off-balance-sheet lending commitments approximate the loan
  commitment amount (see Note I).

  Information regarding the Corporation's financial instruments is as follows at
  June 30, 1998 and 1997:  (000's)

<TABLE>
<CAPTION>
                                                                                        1998
                                                                   -----------------------------------------------
                                                                           Carrying                Estimated
                                                                            value                  fair value
                                                                   ----------------------   ----------------------
       <S>                                                           <C>                      <C>
       Financial assets:                                                   
        Cash and short-term investments                                     $  7,367               $  7,367
        Investment securities (including mortgage-backed                       3,769                  3,770
         securities)                                                                                
        Loans receivable                                                     134,413                137,803
        Accrued interest receivable                                              775                    775
       Financial liabilities:                                                                     
        Deposits                                                             112,180                112,342
        Advances from Federal Home Loan Bank                                  21,897                 21,375
       Off-balance-sheet instruments:                                                             
        Commitments to extend credit                                           5,257                  5,257
        Standby letters of credit                                                365                    365
                                                                       
                                                                                         1997
                                                                   -----------------------------------------------
                                                                           Carrying                Estimated
                                                                            value                  fair value
                                                                   ----------------------   ----------------------
       Financial assets:
        Cash and short-term investments                                    $    723               $     723
        Investment securities (including mortgage-backed                      6,978                   6,991
         securities)
        Loans receivable                                                    136,172                 138,594
        Accrued interest receivable                                             901                     901
       Financial liabilities:                                           
        Deposits                                                            111,749                 111,550
        Advances from Federal Home Loan Bank                                 20,607                  20,333
       Off-balance-sheet instruments:                                   
        Commitments to extend credit                                          5,244                   5,244
        Standby letters of credit                                               257                     257
</TABLE>

                                      -37-
<PAGE>
 
                       ES&L BANCORP, INC. AND SUBSIDIARY
                       ---------------------------------

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
              --------------------------------------------------

                          JUNE 30, 1998, 1997 AND 1996
                          ----------------------------

NOTE P:  IMPACT OF YEAR 2000 (UNAUDITED)
----------------------------------------

  The Year 2000 issue is the result of computer programs being written using two
  digits rather than four digits to define the applicable year.  Certain
  computer programs or operating equipment that have time-sensitive software may
  recognize a date using "00" as the year 1900 rather than Year 2000.  This
  could result in a computer system failure or miscalculations causing
  disruptions of operations.

  During 1997, the Corporation developed a Year 2000 preparedness plan.  The
  plan established procedures to contact and monitor the Year 2000 preparedness
  of all third party servicers, including NCR Corporation - the company
  responsible for the Bank's customer account processing.  NCR has a plan in
  place which has been reviewed by external audit organizations, as well as
  Federal Bank examiners.  NCR is currently in the process of testing their
  plan.  All other service providers have been contacted and have responded
  identifying the plan they have developed and have provided testing dates to
  verify the resolution of any potential problems.

  The Corporation has tested its internal systems and believes them to be year
  2000 compliant.  Therefore, the Corporation anticipates no significant
  financial expenditure will be necessary with regard to year 2000 compliance.

                                      -38-
<PAGE>
 
                   Market Price and Dividend Information

ES&L Bancorp stock is not listed on a national or regional exchange and there
are minimal trades occurring. While there are no market makers for the stock,
registered brokers can facilitate sales and purchases of ES&L Bancorp shares by
using standard procedures for trading unlisted stocks.

Currently the following local brokerage offices have facilitated purchases and
sales of ES&L Bancorp Stock:

     Morgan Stanley Dean Witter,                     Smith Barney Shearson, 
     Elmira, New York                                Elmira, New York

During the 1998 fiscal year, the Corporation's Board of Directors declared a
special cash dividend of $1.00 per share, payable on July 31, 1997 to
stockholders of record on July 22, 1997. The special cash dividend was paid in
addition to four quarterly cash dividends of $0.17 per share.

Given the minimal trading activity, the Corporation must rely on information
obtained from brokers, investment advisors and investors themselves in
identifying the market price of the common stock. During fiscal 1998, the
trading price of the stock has ranged from $16.50 to $21.00 per share.

Since the Corporation has no significant source of income other than dividends
from the Bank, the payment of dividends by the Corporation is dependent upon
receipt of dividends from the Bank. Payment of cash dividends by the Bank is
limited by certain federal regulations under which the Bank may not declare or
pay a cash dividend on or repurchase any of its common stock if the effect
thereof would cause its regulatory capital to be reduced below (1) the amount
required for the liquidation account established in connection with the Bank's
conversion to stock form or (2) the regulatory capital requirements imposed by
the OTS. In certain circumstances, earnings appropriated to bad debt reserves
and deducted for federal income tax purposes may not be available to pay cash
dividends without the payment of federal income taxes by the Bank on the amount
of such earnings removed from the reserves for such purposes at the then current
income tax rate.

Federal regulations impose certain additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by Elmira Savings & Loan. Under such regulations, a savings institution
that, immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Institution") is generally permitted without OTS
approval to make capital distributions during a calendar year in the amount of
the greater of (a) 75% of its income for the previous four quarters or (b) up to
100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its total capital to assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Institution") is permitted to make capital
distributions without OTS approval of up to 75% of its net income for the
previous quarters, less dividends already paid for such period. A savings
institution that fails to meet current minimum capital requirements (a "Tier 3
Institution") is prohibited from making any capital distributions without the
prior approval of the OTS. Tier 1 Institutions that have been notified by the
OTS that they are in need of more than normal supervision will be treated as
either a Tier 2 or Tier 3 Institution. At June 30, 1998, ES&L was a Tier 1
Institution.

ES&L Bancorp, Inc. has paid the following per share cash dividends, adjusted to
reflect the effect of the 1996 three-for-two stock split, to its shareholders
during the past three fiscal years:
<TABLE>
<CAPTION>
                      1998 Fiscal Year    1997 Fiscal Year    1996 Fiscal Year
<S>                     <C>      <C>       <C>       <C>     <C>       <C> 
                         7/31/97 $1.00      8/30/96  $0.17    8/31/95  $0.1133
                         8/29/97 $0.17     11/29/96  $0.17   11/30/95  $0.1133
                        11/28/97 $0.17      2/28/97  $0.17    2/29/96  $0.1133
                         2/27/98 $0.17      5/30/97  $0.17    5/31/96  $0.1133
                                                     -----             -------
                         5/29/98 $0.17                                        
                                 ----- 
                                 $1.68               $0.68             $0.4532
Dividend Payment Ratio           69.71%              31.76%              22.11%

</TABLE>
The Corporation's Board of Directors intend to periodically review the financial
condition, earnings and capital requirements of the Corporation in an effort to
determine the declaration of future dividend payments.

At June 30, 1998, the Corporation had 831,773 shares of common stock
outstanding. At September 1, 1998, 835,192 shares were outstanding, representing
approximately 450 shareholders of record, excluding those shares registered in
the "street name" of brokerage firms and stock depositories.

                               ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                       -39-
<PAGE>
 
Corporate Information__________________   Auditors, Agents and Counsel_________


Main Office                             Independent Auditors
-----------                             --------------------        
   300 West Water Street                   Mengel, Metzger, Barr & Co. LLP
   Elmira, New York 14901                  Suite 210
   607-733-5533                            147 West Gray Street
                                           Elmira, New York 14901
"CASHLESS" Deposit Office     
-------------------------
   200 East Buffalo Street              General Counsel 
   Suite 101B                           ---------------
   Ithaca, NY 14850                        Denton, Keyser, LaBrecque & Moore
   607-272-4880                            150 Lake Street
                                           Elmira, New York 14901

      Subsidiaries            
      ------------
                              
Brilie Corporation                      Special Counsel
------------------                      ---------------
   ES&L Financial Services                 Housley Kantarian & Bronstein, P.C.
   300 West Water Street                   Suite 700
   Elmira, New York 14901                  1220 19th Street, NW
   607-733-5533                            Washington, D.C. 20036
                              
ES&L Mortgage Corporation               Stock Registrar and Transfer Agent
-------------------------               ----------------------------------
   Cayuga Mortgage Company                 American Stock Transfer & Trust Co.
   200 East Buffalo Street                 40 Wall Street
   Suite 101B                              New York, New York 10005
   Ithaca, New York 14850                  (800) 937-5449
   607-272-3595



Meeting Information__________________________________________________________
The annual Meeting of Stockholders of ES&L Bancorp, Inc. will be held at the
Downtown Elmira Holiday Inn, One Holiday Plaza, Elmira, New York, on Monday,
October 26, 1998, at 7:00 p.m.

                               ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                       -40-
<PAGE>
 
                                    DIRECTORS
-------------------------------------------------------------------------------
Robert E. Butler -                            Dr. Adrian P. Hulsebosch -   
Chairman of the Board                         Retired Othodontist          
President, Deister & Butler, Inc.                                          
Owner, H. H. Equipment, Inc.                  Jack H. Mikkelsen -          
                                              Retired President,           
                                              Zelser Wilbert Vault, Inc.   
William A. McKenzie -                                                      
President and Chief Executive Officer,                                     
Elmira Savings & Loan, F.A.                   Frederick J. Molter -        
                                              Professional Engineer,       
                                              The Sear Brown Group         
John F. Cadwallader -                                                      
President of the following companies:                                      
John F. Cadwallader, Inc.                     Paul Morss -                 
d/b/a "The Glass Company"                     Retired Insurance Executive, 
Windshield Installation Network, Inc.         Swan & Sons Morss Co. 
d/b/a WIN                                     Insurance Agency      
Auto Glass Insurance Company                                               
                                                                     
                                              Gerald F. Schichtel -  
L. Edward Considine -                         Retired President,     
Professional Engineer,                        Hilliard Corporation   
Hunt Engineers and Architects
Retired General Manager, Elmira Water Board

   All directors of ES&L Bancorp, Inc. are directors of Elmira Savings and 
   Loan, F.A.



                                    OFFICERS
-------------------------------------------------------------------------------

William A. McKenzie                           Glenn R. Ahart                    
President and Chief Executive Officer         Assistant Vice President          
                                                                                
J. Michael Ervin                              Anne H. Bennett                   
Senior Vice President and Treasurer           Assistant Vice President          
                                                                                
Michael J. Wayne                              Maryanna S. Atkinson              
Vice President                                Assistant Vice President          
                                                                                
Lynn M. Morris                                Brenda A. Bement                  
Vice President                                Assistant Vice President          
                                                                                
James D. Stanton                              Larry A. Tressler                 
Vice President                                Assistant Treasurer               
                                                                                
Judy A. Peters                                Robin M. Fuller                   
Vice President                                Assistant Vice President          
                                                                                
Michael J. Crimmins                           Shirley L. Gleockner              
Vice President                                Corporate Secretary   

                                   
                                   
All officers of ES&L Bancorp, Inc. are officers of Elmira Savings and Loan, F.A.



                               ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                      -41-
<PAGE>

================================================================================


                                Corporate Profile

ES&L Bancorp, Inc. (the "Corporation") was formed in 1990 as a Delaware
corporation at the direction of Elmira Savings & Loan, F.A. (the "Bank") for the
purpose of becoming a holding company for the Bank as part of the Bank's
conversion from mutual to stock form. The Bank, a federally chartered savings
association founded in 1888, conducts business through its main office located
in Elmira, NY and its "CASHLESS" Deposit Office located in Ithaca, NY.

Prior to the acquisition of all of the outstanding stock of the Bank, the
Corporation had no assets or liabilities and engaged in no business activities.
Subsequent to the acquisition of the Bank, the Corporation has engaged in no
significant activity other than holding the stock of the Bank and operating the
business of a savings and loan through Elmira Savings & Loan, F.A. Accordingly,
the information set forth in this report, including financial statements and
related data, relates primarily to the Bank and its subsidiaries.

The Corporation, through the Bank, is primarily engaged in the business of
accepting deposits from the general public and originating loans secured by
residential real estate. The Bank also engages in commercial real estate lending
in its primary market area and, to a lesser extent, consumer lending, and
invests in government and federal agency obligations.


                                Mission Statement

The primary mission of the Directors, Officers and staff of Elmira Savings and
Loan, F.A. is to generate profits, in the course of business, sufficient enough
to pay a fair and equitable return to the shareholders of the institution,
within the constraints of applicable laws and regulations.

It is also recognized that this institution has an obligation to the community
or communities within which it is located to provide services for the financial
needs of the area. In accordance with the Bank's Charter and its membership in
the Federal Home Loan Bank, it will concentrate its efforts on real estate
finance. The services provided must be cost justified as well as conducive to
sound banking principles. The institution will also be supportive of those
activities that contribute to the quality of life within the communities served.

The Bank will provide its employees: a safe and aesthetically appealing work
environment, fair wages and benefits for services rendered, adequate training,
regular performance review and an opportunity to voice their opinion on factors
that contribute to the well being of the institution.

The above mission will be accomplished by striving to be the best customer
driven organization in the community by providing financial services to the
Bank's primary market area defined as Chemung County and its secondary market
areas defined as all counties contiguous to Chemung County.


================================================================================


         COPIES OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE
         FISCAL YEAR ENDED JUNE 30, 1998, AS FILED WITH THE SECURITIES
         AND EXCHANGE COMMISSION, MAY BE OBTAINED AFTER SEPTEMBER 30,
         1998, AT NO CHARGE TO STOCKHOLDERS BY WRITING TO THE SECRETARY
         OF THE CORPORATION, 300 WEST WATER STREET, ELMIRA, NEW YORK
         14901.



                               ES&L Bancorp, Inc.
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[LETTERHEAD OF ES&L BANCORP, INC. APPEARS HERE]