<PAGE>
 
                                     1997
                                 Annual Report


                              ES&L Bancorp, Inc.
<PAGE>
 
                     Selected Consolidated Financial Data

<TABLE> 
<CAPTION> 

SUMMARY OF FINANCIAL CONDITION
------------------------------------------------------------------------------------------------------------------
At June 30                                        1997           1996           1995           1994           1993
------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>            <C>            <C>            <C> 
Total amount of:
  Assets                                  $149,641,144   $140,138,518   $136,484,313   $120,933,211   $116,300,778
  Loans receivable, net                    131,710,850    121,636,011    118,186,529    106,437,875    101,613,693
  Cash and investment securities (1)         4,812,020      4,452,792      5,305,872      5,487,223      4,253,751
  Mortgage-backed securities                 1,575,642      2,069,579      2,867,553      3,257,042      4,279,104
  Deposit accounts                         111,748,518    106,652,829    101,014,522     86,856,773     83,973,773
  Advances from FHLB                        20,606,615     17,615,560     20,523,963     20,831,855     16,750,000
  Shareholders' equity, substantially
     restricted                             14,155,282     12,912,145     11,471,243     10,145,984      8,833,098
  Book value (2)                                 16.71          15.29          13.92          12.38          11.17

</TABLE> 

<TABLE> 
<CAPTION> 

------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
------------------------------------------------------------------------------------------------------------------
Year Ended June 30,                               1997           1996           1995           1994           1993
------------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>            <C>             <C>            <C> 
Interest income                            $11,944,989    $11,379,003    $10,052,154     $8,535,120     $8,531,797
Interest expense                             6,404,745      6,195,480      5,474,611      4,441,012      4,671,546
------------------------------------------------------------------------------------------------------------------
Net interest income before provision for
     loan losses                             5,540,244      5,183,523      4,577,543      4,094,108      3,860,251
Provision for loan losses                       40,000         60,000        150,000        640,000        265,000
------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
     loan losses                             5,500,244      5,123,523      4,427,543      3,454,108      3,595,251
Other income                                 1,041,176        800,752        673,417        816,574        960,306
Other expenses                               4,012,490      3,078,154      2,770,757      2,638,756      2,472,398
------------------------------------------------------------------------------------------------------------------
Income before income taxes and
     cumulative effect                       2,528,930      2,846,121      2,330,203      1,631,926      2,083,159
Income taxes                                   690,550      1,092,560        747,227        369,433        830,560
------------------------------------------------------------------------------------------------------------------
Income before cumulative effect              1,838,380      1,753,561      1,582,976      1,262,493      1,252,599
Cumulative effect of accounting change             ---            ---            ---        142,000         47,398
------------------------------------------------------------------------------------------------------------------
Net Income                                 $ 1,838,380    $ 1,753,561    $ 1,582,976    $ 1,404,493    $ 1,205,201
                                          ============   ============   ============   ============   ============
Net Income per share (2)                   $      2.14    $      2.05    $      1.88    $      1.71    $      1.51
                                          ============   ============   ============   ============   ============
Cash dividends paid (2)                    $      0.68    $      0.45    $      0.40    $      0.25    $      0.21
                                          ============   ============   ============   ============   ============

</TABLE> 

<TABLE> 
<CAPTION> 

------------------------------------------------------------------------------------------------------------------
KEY OPERATING RATIOS
------------------------------------------------------------------------------------------------------------------
Year Ended June 30,                                                             1997           1996           1995
------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>            <C> 
Return on average assets                                                       1.27%          1.27%          1.23%
Return on average equity                                                      13.58%         14.38%         14.65%
Average equity-to-average asset ratio                                          9.34%          8.81%          8.40%
Interest rate spread                                                           3.61%          3.55%          3.31%
Net yield on interest-earning assets                                           3.93%          3.87%          3.61%
Other expenses to average total assets                                         2.77%          2.23%          2.15%
Non-performing loans as a percentage of total loans, at 6/30                   0.53%          0.24%          0.82%
One year interest rate sensitivity gap to total assets, at 6/30                0.73%         12.00%         19.65%
Net interest income to other expenses (3)                                      1.38X          1.68X          1.65X

</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.

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

TO OUR SHAREHOLDERS:

     On behalf of the Directors and staff, I am pleased to report that your
Corporation again achieved record success during our recently concluded 1997
fiscal year. Earnings were $1.8 million which generated a 1.3% return on average
assets and a 13.6% return on average equity. These numbers compare very
favorably with our industry as a whole.

     Last year's commercial, consumer and residential lending volume of $54
million by the Bank and its affiliates, continued to be a key factor in our long
run profitability. That, coupled with high asset quality, well matched maturity
structures and tight expense control, positioned the Bank well ahead of various
peer groups. 

     Deposit growth was assisted greatly by our new limited service "cashless"
Ithaca deposit office. Customer acceptance of this facility resulted in new
deposits of $4.4 million as of the end of July 1997. Our Ithaca operation to
include the Branch, our wholly-owned subsidiary, Cayuga Mortgage Company, and
our joint venture, Pace Funding Company, contributed to the Corporation's
success for the year.

     ES&L Bancorp stock continues to generate a desirable return for investors.
The last known trade was at $16.50 per share. In addition to regular quarterly
dividends of $.17 per share, a special cash dividend of $1.00 per share was
declared and paid this past July, the first month of our 1998 fiscal year.

     Part of the banking moderization and deposit insurance legislation, which I
have reported in previous reports, was enacted during the first quarter of the
1997 fiscal year. Our FDIC insurance fund is now fully capitalized and our
insurance premiums are more in line with the commercial banking sector.
Unfortunately, the Thrift Industry's cost to solve this problem was a $4.5
billion special assessment, of which our share of the expense was $657,000. We
charged that expense off last September.

     Now Congress is wrestling with modernization of banking powers and a merger
of the FDIC funds. There are many pitfalls ahead as this legislation moves
through Congress over the next year. We are working hard through our trade
organizations to prevent losing any of our current desirable powers.

     In summary, your Corporation has done well over the past year and we are
optimistic that our objectives will be met and we will do even better in the
future. Your continued support is greatly appreciated. Our Directors and staff
members are determined to enhance your investment in our Bank as we move
forward. 



                                           /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, 1997, the Bank had a positive one-year gap of 0.73% of total assets.

The following table presents the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at June 30, 1997
(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                               $   1,516      $       0      $        0      $       0     $     1,516
   Loans Receivable                                            96,678         33,369           2,287          5,457         137,790
   Investments                                                  1,335          1,000           3,000             23           5,358
                                                             ----------------------------------------------------------------------
                                   Total                    $  99,529      $  34,369      $    5,287      $   5,480     $   144,664

Interest-Bearing Liabilities:         
   Certificates of Deposit                                  $  60,844      $  23,000      $      967      $       0     $    84,811
   Other Deposits                                              20,940              0               0          7,778          28,718
   Borrowings                                                  16,648            800             400          2,759          20,607
                                                             ----------------------------------------------------------------------
                                   Total                   $   98,432      $  23,800      $    1,367      $  10,537     $   134,136


Interest Sensitivity Gap                                   $    1,097      $  10,569      $    3,920      $ (5,057)     $    10,528

Gap as a Percentage of Total Assets                             0.73%          7.06%           2.62%         -3.38%

Cumulative Gap                                             $    1,097      $  11,666       $  15,586      $  10,528

Cumulative Gap as a Percentage of Total Assets                  0.73%          7.80%          10.42%          7.04%

</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, 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 $20,606,615 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

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

                                       3
<PAGE>
 
               Management's Discussion and Analysis (continued)

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 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.


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

                                       4
<PAGE>
 
                Management's Discussion and Analysis (continued)

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.

COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDING JUNE 30, 1996 AND JUNE
30, 1995

General:
-------

For the fiscal year ending June 30, 1996 the Corporation recorded net income of
$1,753,561, an increase of $170,585, or 10.78%, compared to the $1,582,976
earned during the 1995 fiscal year. 

At June 30, 1996, the Corporation's total assets were $140,138,518, an increase
of $3,654,205, or 2.68%, compared to total assets of $136,484,313 at June 30,
1995. The increase is primarily attributable to the growth of the Corporation's
net loan portfolio which increased by $3,449,482, or 2.92%, to $121,636,011,
compared to $118,186,529 at the start of the fiscal year. Total mortgage loans
held for sale also increased from $3,795,855 at June 30, 1995 to $5,457,831 at
June 30, 1996.

The Corporation's asset growth was funded by an increase in deposits, which
totalled $106,652,829 at June 30, 1996, an increase of $5,638,307, or 5.58%,
from $101,014,522 at June 30, 1995. The increase in deposits also helped fund a
decrease in advances from the Federal Home Loan Bank of New York, which were
reduced by $2,908,403, or 14.17%, during the 1996 fiscal year to $17,615,560 at
June 30, 1996.

In the beginning of the 1996 fiscal year ES&L Mortgage Corporation (d/b/a Cayuga
Mortgage Company) received formal approval to activate PACE Funding, a mortgage
banking partnership, with the largest real estate firm in Ithaca, NY. The
partnership originates loans for sale to investors, one of whom is the Bank.

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

The Corporation's net interest income was $5,183,523 for the 1996 fiscal year,
an increase of $605,980, or 13.24%, from $4,577,543 for the year ending June 30,
1995. The Corporation's net interest margin was 3.55% for the year ending June
30, 1996, compared to 3.31%, a year earlier.

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

Interest income earned by the Corporation increased by $1,326,849, or 13.20%,
during the 1996 fiscal year, totalling $11,379,003 compared to $10,052,154
during the 1995 fiscal year.

Interest income provided from the Corporation's loan portfolio generates the
majority of all interest income. For the fiscal year ending June 30, 1996
$10,855,429 was earned on the loan portfolio, representing an increase of
$1,339,146, or 14.07%, when compared to loan interest income of $9,516,283 for
the 1995 fiscal year. The increase is the result of increases in both the
average balance of the loan portfolio and average yield of the portfolio. During
the 1996 fiscal year the average balance of the portfolio increased to $125.8
million, yielding 8.63%, compared to $118.2 million, yielding 8.05%.

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

Total interest expense paid by the Corporation was $6,195,480 during the 1996
fiscal year, an increase of $720,869, or 13.17%, compared to $5,474,611 the year
earlier. 

Interest paid on deposits increased by $675,707, or 15.08%, to $5,157,450 for
the year ending June 30, 1996, compared to $4,481,743 for the comparable 1995
period. The current year's average balance of deposits outstanding was $106.8


                              ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                       5
<PAGE>
 
               Management's Discussion and Analysis (continued)

million, costing 4.83%, compared to $99.7 million, costing 4.50%, for the year
ending June 30, 1995. The growth in volume prompted the majority ($431,472) of
the increased interest expense, more so than the 33 basis point increase in the
average cost of deposits. 

During the 1996 fiscal year the average balance of the Corporation's outstanding
borrowings decreased from $19.0 million, costing 5.24%, during the 1995 fiscal
period to $18.3 million, costing 5.67%, for the current year. Despite the
decrease in the average balance, the increase in the average cost prompted an
increase in interest expense. Overall, for the year ending June 30, 1996,
interest paid on borrowings was $1,038,030, an increase of $45,162, or 4.55%,
from $992,868, during the 1995 fiscal year.

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

Provisions for loan losses are charged to earnings to bring the allowance to a
level considered appropriate by management based on historical experience, the
volume and type of lending conducted by the Bank, industry standards, the status
of past due 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 1996
fiscal year the Bank reduced its provision from $150,000 during the year ending
June 30, 1995 to $60,000 for the year ending June 30, 1996. At June 30, 1996 the
total allowance available for loan losses was $1,430,781 compared to $1,423,826
at June 30, 1995.

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

Total other income earned by the Corporation was $800,752, for the 1996 fiscal
year, an increase of $127,335, or 18.91%, when compared to the $673,417 recorded
during the 1995 fiscal year.

During the 1996 fiscal year the Corporation recorded $160,949 in gains on the
sale of mortgages, an increase of $91,855, more than double the $69,094 earned
last year. The increase is the result of increased fixed rate mortgage
originations by the Bank and its mortgage banking subsidiaries. Substantially
all residential fixed rate mortgages originated are sold, while adjustable rate
mortgages are originated for the Corporation's loan portfolio. A lower fixed
interest rate environment prevailed during the 1996 fiscal year, compared to the
1995 period, which prompted more borrowers to opt for this type of financing.
During the 1996 fiscal period $24.0 million in fixed rate residential mortgages
were originated, compared to $10.9 million the year earlier.

The Corporation's other operating income increased by $49,608, or 38.92%, to
$177,055 for the year ending June 30, 1996, compared to $127,447 for the year
ending June 30, 1995. The increase results primarily from additional income
earned by ES&L Mortgage Corporation for processing mortgage applications for its
mortgage banking partnership, PACE Funding, which became operational during the
1996 period.

During the 1996 fiscal year the Corporation recognized income of $16,478 from
its unconsolidated land development joint venture, a reduction of $43,821, or
72.67%, from the $60,299 earned during the 1995 fiscal year. Income earned by
the joint venture is the direct result of lot sales, of which there were fewer
during the 1996 fiscal year when compared to the 1995 fiscal year.

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

During the 1996 fiscal year, total operating expenses of the Corporation were
$3,078,154, an increase of $307,397, or 11.09%, compared to $2,770,757 incurred
during the last fiscal year.

Employee compensation and benefit expense increased by 4.25%, or $74,406, to
$1,823,184 during the year ending June 30, 1996, compared to $1,748,778 the year
earlier. The increase is the result of salary adjustments and increased payments
from the officer/manager bonus plan, which are directly related to the
Corporation's net income.

During the 1995 fiscal year the Corporation completed the expansion and
renovation of its main office facility. As a result, the 1996 fiscal year
included a full year's operating and depreciation expenses for the much larger
facility. For the year ending June 30, 1996 total office occupancy and equipment
expense was $503,559, an increase of $130,714, or 35.06%, compared to $372,845,
for the year ending June 30, 1995.

The expense paid by the Corporation to insure customers' deposits increased by
$23,684, or 9.31%, to $278,094 for the 1996 fiscal period, compared to $254,410
during the comparable period. The increase is the result of an increase in
outstanding deposits.

Other expenses for the 1996 fiscal year were $473,317, an increase of $78,593,
or 19.91%, compared to $394,724. The increase in expenses is related to a rise
in mortgage origination expenses, resulting from increased origination levels.
The Bank also incurred additional expenses related to engaging consultants to
improve operations and enhance shareholder value.

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

The Corporation's income tax expense was $1,092,560 for the 1996 fiscal year,
compared to $747,227 during the comparable fiscal year. See note H of the
accompanying audited financial statements for more information on this expense.


                              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 5.0%. Elmira Savings
& Loan's liquidity ratio for June 1997 was 5.37%.

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 expected to continue to be 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 $502,000 for the prior year ending
June 30, 1996. The main component of this cash addition for the June 30, 1997
period was net income which provided $1,838,000, in addition to net proceeds
from loan sales amounting to $1,139,000 and increases on advances from borrowers
for taxes and insurance of $279,000. The corresponding numbers for the June 30,
1996 period were $1,754,000, ($1,620,000) and ($371,000). Net income has been a
relatively stable number but net proceeds from loan sales are strictly timing
differences in that the majority of these loans will be delivered into the
secondary market within 60 days. The large change in advances from borrowers for
taxes and insurance was due to increased volumes of loans serviced by Elmira
Savings & Loan.

Net cash used for investing activities amounted to $11,227,000 for year ending
June 30, 1997 and $1,810,000 for 1996. The largest item responsible for this
reduction in cash was net loans receivable which utilized $10,287,000 for 1997
and $3,668,000 for 1996. Another significant item in investing activities was
net activity from securites held to maturity which used cash for the period
ending June 30, 1997 amounting to $989,000 and generated cash of $723,000 for
the June 30, 1996 period. The current year also saw a net increase in Federal
Home Loan Bank stock of $209,000 with no similar entry for the June 30, 1996
period. Principal repayments on mortgage-backed securities provided cash
amounting to $502,000 and $773,000 for both the 1997 and 1996 periods
respectively. The significant changes in the net loans receivable balances are
driven both by the interest rate risk environment and the increase in activity
of adjustable rate loans originated for the Bank's loan portfolio. As rates move
upward, demand for adjustable rate loans increase.

Financing activities, the third component of cash flows, provided $7,470,000 in
cash and cash equivalents for 1997 and $2,396,000 for 1996. Interest credited to
deposit accounts was $5,103,000 for 1997 and $5,130,000 for 1996. The current
period also had a net increase in advances from the Federal Home Loan Bank of
$2,991,000 and a decrease for the 1996 period of $2,908,000. Cash outflows of
$577,000 and $381,000 also were incurred through dividends paid for periods of
June 30, 1997 and June 30, 1996 respectively.

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.



                    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, 1997 and 1996, 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, 1997.  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 respect, the consolidated financial position of ES&L 
Bancorp, Inc. and Subsidiary as of June 30, 1997 and 1996, and the results of 
their operations and their cash flows for each of the years in the three-year 
period ended June 30, 1997, 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, impairment of
loans and certain investments in debt and equity securities in fiscal years
1997, 1996 and 1995, respectively.


                                                 Mengel, Metzger, Barr & Co. LLP

Elmira, New York
July 18, 1997


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

                                       9

<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                           June 30,          
                                                                 --------------------------- 
                                                                     1997           1996     
                                                                 ------------   ------------ 
<S>                                                              <C>            <C>          
ASSETS                                                                                       
Cash and due from banks                                          $    721,891   $  1,355,844 
Short-term investments                                                  1,041         17,919 
                                                                 ------------   ------------ 
CASH AND CASH EQUIVALENTS                                             722,932      1,373,763 

Securities available for sale                                          66,156         48,508 
Securities to be held to maturity -                                                          
  approximate market value of $4,036,495                                                     
  and $2,993,573 at 1997 and 1996, respectively                     4,022,932      3,030,521 
Mortgage-backed securities available for sale                       1,403,848      1,874,951 
Mortgage-backed securities to be held to                                                     
  maturity - approximate market value of                                                     
  $171,794 and $194,628 at 1997 and 1996, respectively                171,794        194,628 
Mortgage loans held for sale                                        4,460,810      5,457,831 
Loans receivable, net of allowance for loan                                                  
  losses of $1,435,500 and $1,430,781                                                        
  at 1997 and 1996, respectively                                  131,710,850    121,636,011 
Federal Home Loan Bank stock, at cost                               1,313,100      1,103,800 
Foreclosed real estate                                                131,000         90,815 
Investment in joint venture - acquisition,                                                   
  development and construction arrangement                            676,001        497,165 
Investment in mortgage banking partnership                            183,318        170,065 
Property and equipment, net                                         3,053,735      3,121,713 
Accrued interest receivable:                                                                 
  Loans and mortgage-backed securities                                811,247        749,780 
  Investment securities and other                                      89,675         44,160 
Other assets                                                          823,746        744,807 
                                                                 ------------   ------------ 
TOTAL ASSETS                                                     $149,641,144   $140,138,518 
                                                                 ============   ============ 
LIABILITIES AND SHAREHOLDERS' EQUITY                                                         
------------------------------------
Deposits:                                                                                    
  Non-interest bearing                                           $  4,851,413   $  5,009,504 
  Interest bearing                                                106,897,105    101,643,325 
                                                                 ------------   ------------ 
                                                                  111,748,518    106,652,829 
                                                                                             
Advances from Federal Home Loan Bank                               20,606,615     17,615,560 
                                                                                             
Accrued interest payable:                                                                    
  Deposits                                                             26,777         29,125 
  Borrowings                                                           69,695         73,029 
Advances from borrowers for taxes and insurance                     2,565,036      2,286,398 
Other liabilities                                                     469,221        569,432 
                                                                 ------------   ------------ 
TOTAL LIABILITIES                                                 135,485,862    127,226,373 
                                                     
Commitments

Shareholders' equity:
  Preferred stock:
    Authorized, 500,000 shares
    Issued, none                                                            -              -
  Common stock, $.01 par value:
    Authorized, 3,000,000 shares
    Issued, 855,967 and 849,757 shares, respectively                    8,560          5,665
  Additional paid-in capital                                        2,599,654      2,580,092
  Retained earnings, substantially restricted                      11,595,957     10,334,941                    
  Net unrealized gain on securities available for sale                 59,482         37,888
                                                                 ------------   ------------
                                                                   14,263,653     12,958,586
                                                   
Less cost of treasury stock, 8,933 and
  5,016 shares, respectively                                          108,371         46,441
                                                                 ------------   ------------
TOTAL SHAREHOLDERS' EQUITY                                       $ 14,155,282   $ 12,912,145 
                                                                 ------------   ------------
                                                                 $149,641,144   $140,138,518 
                                                                 ============   ============
                                                     
</TABLE> 

The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                             Year ended June 30,               
                                                  -----------------------------------------
                                                      1997           1996           1995  
                                                  -----------    -----------    -----------
<S>                                               <C>            <C>            <C>       
Interest income:                                                                          
  Loans                                           $11,461,628    $10,855,429    $ 9,516,283
  Investment securities                               339,475        318,692        315,661
  Mortgage-backed securities                          132,019        189,417        199,122
  Interest-earning deposits and other                  11,867         15,465         21,088
                                                  -----------    -----------    -----------
TOTAL INTEREST INCOME                              11,944,989     11,379,003     10,052,154
                                                    
Interest expense:
  Deposits                                          5,168,284      5,157,450      4,481,743
  Borrowings                                        1,236,461      1,038,030        992,868
                                                  -----------    -----------    -----------
TOTAL INTEREST EXPENSE                              6,404,745      6,195,480      5,474,611
                                                  -----------    -----------    -----------
NET INTEREST INCOME                                 5,540,244      5,183,523      4,577,543

Provision for loan losses                              40,000         60,000        150,000
                                                  -----------    -----------    -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES                           5,500,244      5,123,523      4,427,543

Other income:
  Service fees and other charges                      127,248        131,394        114,012
  Net (loss) gain on investment securities            (10,000)           (39)           800
  Income from loan servicing                          293,989        314,915        301,765
  Income from unconsolidated joint venture             29,727         16,478         60,299
  Income from mortgage banking partnership             22,525              -              -
  Gain on sale of mortgages                           384,991        160,949         69,094
  Other operating income                              192,696        177,055        127,447
                                                  -----------    -----------    -----------
TOTAL OTHER INCOME                                  1,041,176        800,752        673,417

Other expenses:
  Employee compensation and benefits                1,995,736      1,823,184      1,748,778
  Office occupancy and equipment                      502,299        503,559        372,845
  Federal deposit insurance premiums                  844,055        278,094        254,410
  Other expenses                                      670,400        473,317        394,724
                                                  -----------    -----------    -----------
TOTAL OTHER EXPENSES                                4,012,490      3,078,154      2,770,757
                                                  -----------    -----------    -----------

INCOME BEFORE INCOME TAXES                          2,528,930      2,846,121      2,330,203

Income taxes                                          690,550      1,092,560        747,227
                                                  -----------    -----------    -----------
NET INCOME                                        $ 1,838,380    $ 1,753,561    $ 1,582,976
                                                  ===========    ===========    ===========
Primary income per common share:
  Net income                                      $      2.14    $      2.05    $      1.88
                                                  ===========    ===========    ===========
</TABLE> 

The accompanying notes are an integral part of the consolidated financial 
statements.
<PAGE>
 
Years ended June 30, 1997, 1996 and 1995
----------------------------------------
                                                     
<TABLE> 
<CAPTION> 
                                                                                  Net unrealized                                
                                                                   Retained           gain on                                   
                                                   Additional      earnings,         securities                                 
                                      Common        paid-in      substantially       available      Treasury                    
                                       stock        capital        restricted         for sale        stock         Total      
                                   ------------  -------------  ---------------  ----------------  -----------  --------------- 
<S>                                <C>           <C>            <C>              <C>               <C>          <C> 
Balance at July 1, 1994             $    3,651    $ 2,444,851    $   7,707,982    $            -    $ (10,500)   $ 10,145,984   
                                                                                                                               
Cumulative effect of                                                                                                           
 accounting change -                                                                                                           
 unrealized gain on                                                                                                            
 securities available for                                                                                                      
 sale, net of deferred                                                                                                         
 taxes of $38,684                            -              -                -            58,027            -          58,027  
                                                                                                                               
Current year change in                                                                                                         
 unrealized gain on securities                                                                                                 
 available for sale, net of                                                                                                    
 deferred taxes of $6,498                    -              -                -            (9,747)           -          (9,747) 
                                                                                                                               
Issuance of 273,749                                                                                                            
 shares in connection with                                                                                                     
 three-for-two stock split               1,825         (1,825)               -                 -            -               -  
                                                                                                                               
Dividends on common stock                                                                                                      
 ($.40 per share)                            -              -         (328,319)                -            -        (328,319) 
                                                                                                                               
Issuance of 4,805 shares                                                                                                       
 in connection with stock                                                                                                      
 options exercised at                                                                                                          
 $3 5/9 per share                           32         17,043                -                 -            -          17,075  
                                                                                                                               
Tax benefit from exercise                                                                                                      
 of non-incentive stock                                                                                                        
 options                                     -          5,247                -                 -            -           5,247  
                                                                                                                               
Net income                                   -              -        1,582,976                 -            -       1,582,976  
                                   ------------  -------------  ---------------  ----------------  -----------  --------------- 
BALANCE AT JUNE 30, 1995                 5,508      2,465,316        8,962,639            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             157         83,472                -                 -            -          83,629  
                                                                                                                               
Dividends on common stock                                                                                                      
 ($.45 per share)                            -              -         (381,259)                -            -        (381,259) 
                                                                                                                               
Tax benefit from exercise of                                                                                                   
 non-incentive stock options                 -         31,304                -                 -            -          31,304  
                                                                                                                               
Purchase of 2,766 shares of                                                                                                    
 treasury stock                              -              -                -                 -      (35,941)        (35,941) 
                                                                                                                               
Net income                                   -              -        1,753,561                 -            -       1,753,561  
                                   ------------  -------------  ---------------  ----------------  -----------  --------------- 
BALANCE AT JUNE 30, 1996                 5,665      2,580,092       10,334,941            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                             2,832         (2,832)               -                 -            -               -  
                                                                                                                               
Dividend in lieu of fractional                                                                                                 
 shares due to three-for-two                                                                                                   
 stock split                                 -              -           (1,405)                -            -          (1,405) 
                                                                                                                               
Dividends on common stock                                                                                                      
 ($.68 per share)                            -              -         (575,959)                -            -        (575,959) 
                                                                                                                               
Issuance of 6,315 shares in                                                                                                    
 connection with options                                                                                                       
 exercised at $3 5/9 per share              63         22,394                -                 -            -          22,457  
                                                                                                                               
Purchase of 3,917 shares of                                                                                                    
 treasury stock                              -              -                -                 -      (61,930)        (61,930) 
                                                                                                                               
Net income                                   -              -        1,838,380                 -            -       1,838,380  
                                   ------------  -------------  ---------------  ----------------  -----------  --------------- 
BALANCE AT JUNE 30, 1997            $    8,560    $ 2,599,654    $  11,595,957    $       59,482    $(108,371)   $ 14,155,282  
                                   ============  =============  ===============  ================  ===========  =============== 
</TABLE> 
                                      
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                               Year ended June 30,
                                                            -------------------------------------------------------
                                                                   1997                1996               1995
                                                            --------------      --------------      ---------------
<S>                                                         <C>                 <C>                 <C> 
CASH FLOWS - OPERATING ACTIVITIES
---------------------------------
  Net income                                                $    1,838,380      $    1,753,561      $    1,582,976  
  Adjustments to reconcile net income to net cash                                                                   
    provided from (used for) operating activities:                                                                  
      Depreciation                                                 175,774             180,336              64,666  
      Deferred income taxes                                         17,254              24,884               4,221  
      Provision for loan losses                                     40,000              60,000             150,000  
      Net amortization                                              85,201              22,533              29,202  
      Deferred loan origination fees                               (22,515)            (52,490)             (7,446) 
      Income from unconsolidated joint venture                     (29,727)            (16,478)            (60,299) 
      Income from mortgage-banking partnership                     (22,525)                  -                   -  
      Net loss (gain) on investment securities                      10,000                  39                (800) 
      Net loss on sale of property and equipment                     3,091                   -                   -  
      Net loss (gain) on sale of foreclosed real estate             19,847             (13,457)                  -  
      Gain on sale of mortgages                                   (384,991)           (160,949)            (69,094) 
      Proceeds from loan sales                                  27,155,312          29,370,422          11,240,565  
      Originations and purchases of loans held for sale        (26,016,597)        (30,990,370)        (13,054,383) 
      Changes in certain assets and liabilities                                                                     
        affecting operations:                                                                                       
          Accrued interest receivable                             (106,982)            (67,415)           (158,330) 
          Other assets                                              80,522             (96,051)            181,053  
          Accrued interest payable                                  (5,682)              8,494              14,340  
          Advances from borrowers for taxes                                                                         
            and insurance                                          278,638            (370,808)            291,259  
          Other liabilities                                         (8,240)           (154,287)             70,387   
                                                            --------------      --------------      --------------
NET CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES                                             3,106,760            (502,036)            278,317

CASH FLOWS - INVESTING ACTIVITIES
---------------------------------
  Net other increase in loans receivable                       (10,286,971)         (3,667,626)        (11,987,160)
  Net increase in Federal Home Loan Bank stock                    (209,300)                  -             (37,200)
  Investment in foreclosed real estate                              (9,102)               (383)             (7,221)
  Investment in joint venture                                     (149,109)              9,356             128,565
  Investment in mortgage banking partnership                         9,272             (20,065)           (150,000)
  Proceeds from sale of foreclosed real estate                     120,038             283,620              19,608
  Proceeds from sale of securities available for sale                    -              49,812               1,900
  Proceeds on maturity of securities available for sale                  -             150,000              50,000
  Purchases of securities to be held to maturity                (2,324,062)         (2,987,912)           (500,000)
  Proceeds from maturities of securities to be held
    to maturity                                                  1,335,269           3,710,959             114,664
  Principal repayments on mortgage-backed securities               502,279             772,543             466,322
  Proceeds from sale of property and equipment                      13,464                   -                   -
  Purchases of property and equipment                             (124,351)           (110,363)         (2,406,315)
  Purchase of mortgage servicing rights                           (104,925)                  -                   -
                                                            --------------      --------------      --------------
NET CASH (USED FOR) INVESTING ACTIVITIES                       (11,227,498)         (1,810,059)        (14,306,837)
                                            
CASH FLOWS - FINANCING ACTIVITIES
---------------------------------
  Interest credited to deposit accounts                     $    5,103,199      $    5,129,548      $    4,435,853
  Net other (decrease) increase in deposits                         (7,510)            508,759           9,721,896
  Net increase (decrease) in advances from
    Federal Home Loan Bank                                       2,991,055          (2,908,403)           (307,892)
  Proceeds from exercise of stock options                           22,457              83,629              17,075
  Purchase of treasury stock                                       (61,930)            (35,941)                  -
  Dividends  paid                                                 (577,364)           (381,259)           (328,319) 
                                                            --------------      --------------      --------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES                      7,469,907           2,396,333          13,538,613
                                                            --------------      --------------      --------------

NET (DECREASE) INCREASE IN 
CASH AND CASH EQUIVALENTS                                         (650,831)             84,238            (489,907)

Cash and cash equivalents at beginning of year                   1,373,763           1,289,525           1,779,432
                                                            --------------      --------------      --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                    $      722,932      $    1,373,763      $    1,289,525
                                                            --------------      --------------      --------------

SUPPLEMENTAL DISCLOSURE OF
--------------------------
 CASH FLOW INFORMATION
 ---------------------
  Cash paid during the year for:
   Interest on advances from Federal
     Home Loan Bank                                              1,239,795           1,027,992             977,182 
                                                            --------------      --------------      --------------
  Income taxes                                              $      782,909      $    1,156,051      $      727,300
                                                            --------------      --------------      --------------
SUPPLEMENTAL SCHEDULE OF
------------------------
 NONCASH INVESTING ACTIVITIES
 ---------------------------- 
  Loans transferred to foreclosed real estate               $      170,968      $      213,815      $       91,455
                                                            --------------      --------------      --------------
  Foreclosed real estate transferred to 
   property and equipment                                   $            -      $            -      $       51,285
                                                            --------------      --------------      --------------
</TABLE> 

The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
 
NOTE A:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------

PRINCIPLES OF CONSOLIDATION
---------------------------
ES&L Bancorp, Inc. (the "Corporation") is a 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
whollyowned 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, and short-term investments, with original terms to maturity of
less than 90 days.

INVESTMENTS IN DEBT, EQUITY AND MORTGAGE-BACKED SECURITIES 
----------------------------------------------------------
The Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") on July 1, 1994. SFAS 115 applies to investments in
equity securities whose fair values are readily determinable and to all debt
securities. SFAS 115 requires banks to classify debt and equity securities into
three reporting categories: (1) held-to-maturity, (2) available-for-sale, or (3)
trading.

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 equity. The cumulative effect of this accounting change at
July 1, 1994, was recorded in the accompanying consolidated statement of changes
in shareholders' equity as an unrealized gain on securities available-for-sale
of $58,027 net of deferred taxes of $38,684. The increase (decrease) in
unrealized gain amounted to $21,594, $(10,392) and $(9,747) net of deferred
taxes of $14,396, $(6,926) and $(6,498) for 1997, 1996 and 1995, 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, 1997 and 1996, 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.

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.
<PAGE>
 
NOTE A:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT'D
-----------------------------------------------------

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.

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.

During 1997 and 1996, approximately $348,000 and $118,000, respectively, of
costs of acquiring the rights to service mortgage loans were capitalized and
included in other assets in the accompanying consolidated balance sheets. In
1997, the adoption of SFAS 122 increased net income by approximately $128,400,
net of income taxes of $85,600. The aggregate fair value of mortgage servicing
rights is approximately $398,000. 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, 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.
<PAGE>
 
NOTE A:   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
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-balancesheet 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.

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.

NET INCOME PER SHARE
--------------------
Primary net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents include shares issuable
upon exercise of the Company's outstanding stock options. Using the treasury
stock method for outstanding options, equivalent common shares of 12,438, 16,937
and 21,422 were added to weighted average shares for 1997, 1996 and 1995. Fully
diluted net income per share amounts are not presented because they are not
materially dilutive. Weighted average shares outstanding amounted to 858,658 for
1997, 856,236 for 1996, and 840,956 for 1995. See also Note N.
<PAGE>
 
NOTE A:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT'D
-----------------------------------------------------

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
-----------------------------

  EARNINGS PER SHARE
  ------------------ 
  In February 1997, the Financial Accounting Standards Board ("FASB") issued
  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. Basic EPS is the per share allocation of
  income based only on the weighted average number of common shares actually
  outstanding during the period. Diluted EPS represents the per share allocation
  of income based on the weighted average number of common shares actually
  outstanding plus all dilutive potential common shares outstanding during the
  period.

  SFAS 128 is effective for fiscal years ending after December 15, 1997.
  Accordingly, the Corporation is required to adopt SFAS 128 for the year ending
  June 30, 1998. The adoption of SFAS 128 will require the disclosure of basic
  EPS, however, management does not expect diluted EPS under SFAS 128 to be
  materially different than the currently disclosed primary EPS.

  DISCLOSURE OF CAPITAL STRUCTURE
  -------------------------------
  In February 1997, the Financial Accounting Standards Board ("FASB") issued
  Statement of Financial Accounting Standards No. 129, "Disclosure of
  Information about Capital Structure" ("SFAS 129"). SFAS 129 consolidates
  existing guidance about disclosure of capital structure into one standard and
  extends the scope of the disclosure requirements to include nonpublic
  entities.

  SFAS 129 is effective for fiscal years ending after December 15, 1997.
  Accordingly, the Corporation is required to adopt SFAS 129 for the year ending
  June 30, 1998. The Corporation is currently disclosing the information
  required in SFAS 129 since it is a public company; therefore, management does
  not expect the adoption of SFAS 129 to have a material effect on the
  Corporation's financial statements.
  
NOTE B:   INVESTMENT AND MORTGAGE-BACKED SECURITIES
---------------------------------------------------

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

     June 30, 1997:    

<TABLE> 
<CAPTION> 
                                                             Gross         Gross                   
                                              Amortizeed    Unrealized   Unrealized       Fair       
                                                Cost          Gains         Losses       Value       
                                             -----------    ----------   ----------   -----------                  
     <S>                                     <C>            <C>          <C>          <C>            
     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            
                                             -----------    ----------   ----------   -----------    
                                             $  4,022,92    $   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> 
<PAGE>
 
NOTE B:   INVESTMENT AND MORTGAGE-BACKED SECURITIES, Cont'd
---------------------------------------------------

    June 30, 1996: 

<TABLE> 
<CAPTION> 
                                                            Gross         Gross                 
                                             Amortized    Unrealized    Unrealized        Fair     
                                               Cost         Gains         Losses         Value       
                                             ----------   -----------  -----------  -----------     
    <S>                                      <C>          <C>          <C>          <C>                   
    Securities available  for sale:                
     Corporate stock                         $    36,763   $   13,558   $   (1,813)  $    48,508         
                                             -----------   ----------   ----------   ----------- 
    Securities to be held to maturity:                                                                          
     U.S. Government and its                                                                       
      agencies                               $ 2,988,894   $        -   $  (37,664)  $ 2,951,230    
     Corporate debt securities               $    41,627   $      716   $        -   $    42,343     
                                             -----------   ----------   ----------   -----------    
                                             $ 3,030,521   $      716   $  (37,664)  $ 2,993,573    
                                             -----------   ----------   ----------   -----------    
    Mortgage-backed securities                                                                     
      available for sale                     $ 1,823,549   $   51,402   $        -   $ 1,874,951     
                                             -----------   ----------   ----------   -----------    
                                                                                                   
    Mortgage-backed securities                                                                     
     to be held to maturity                  $   194,628   $        -   $        -   $   194,628      
                                             -----------   ----------   ----------   -----------
</TABLE> 

The amortized cost and fair value of debt securities at June 30, 1997, 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                                   3,991,287     4,004,420
    Due after five years through
     ten years                                            -             -
    Due after ten years                              31,645        32,075
                                                -----------   -----------    
                                                $ 4,022,932   $ 4,036,495
                                                ===========   ===========
</TABLE> 
                                                          
Proceeds and gross realized gains and losses from sales and maturities of
securities are as follows:

--------------------------------------------------------------------------------








--------------------------------------------------------------------------------
<PAGE>
 
NOTE C:   LOANS RECEIVABLE
--------------------------

Loans receivable consist of the following:

<TABLE> 
<CAPTION> 
                                                                June 30,
                                                     ------------------------------
                                                        1997               1996
                                                     --------------   -------------
   <S>                                               <C>              <C>   
    Conventional first mortgage loans:
     Residential                                     $   86,088,562   $  79,401,037         
     Commercial                                          27,744,971      25,007,635            
     Construction loans                                   4,719,712       3,958,500            
    Loans savings accounts                                  245,864         213,679            
    Education loans                                         462,353         470,515                  
    Consumer loans                                        5,202,370       4,663,964            
    Demand notes                                          1,188,781       1,519,863            
    Home equity lines of credit                           6,048,557       6,699,341                                
    Commercial non-mortgage loans                         1,806,681       1,926,130            
    Commercial lines of credit                            1,353,262       1,212,320                                  
                                                     --------------   -------------
    SUBTOTAL                                            134,861,113     125,072,984            
                                                                                               
    Allowance for loan losses                            (1,435,500)     (1,430,781)           
    Loans in process                                     (1,789,694)     (1,953,552)           
    Net deferred loan origination fees and premiums          74,931         (52,640)           
                                                     --------------   -------------            
                                                     $  131,710,850   $ 121,636,011             
                                                     ==============   ============= 
</TABLE> 

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

<TABLE> 
<CAPTION> 
                                                    Year ended June 30, 
                                          ----------------------------------------
                                              1997           1996        1995
                                          ------------   -----------  ------------
    <S>                                   <C>            <C>          <C> 
    Balance at beginning of year          $  1,430,781   $ 1,423,826  $  1,268,611        
    Provision for possible loan losses          40,000        60,000       150,000        
    Charged-off loans                          (44,465)      (54,207)       (2,142)       
    Recoveries                                   9,184         1,162         7,357        
                                          ------------   -----------  ------------                            
    BALANCE AT END OF YEAR                $  1,435,500   $ 1,430,781  $  1,423,826         
                                          ============   ===========  ============
</TABLE> 

Nonaccrual loans for which interest has been reduced totaled approximately
$340,000 and $223,000 at June 30, 1997 and 1996, respectively. Interest income
that would have been recorded on these loans for the years ended June 30, 1997,
1996 and 1995 was approximately $23,000, $20,000 and $30,000, respectively.

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

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, 1995                  $  524,770      
    Increase                                    103,207
    Decrease                                   (183,384)
                                             ----------  
    BALANCE AT JUNE 30, 1996                    444,593
                                                 

    Increase                                     18,000
    Decrease                                   (190,375)
                                             ---------- 
    BALANCE AT JUNE 30, 1997                 $  272,218        
                                             ==========
</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
$129,495,624, $110,694,667 and $90,824,269 at June 30, 1997, 1996 and 1995,
respectively.
<PAGE>
 
NOTE D:   PROPERTY AND EQUIPMENT
--------------------------------

Property and equipment is summarized by major classification as follows:

<TABLE> 
<CAPTION> 
                                                            June 30,           
                                                  ---------------------------- 
                                                       1997           1996     
                                                  -------------  ------------- 
<S>                                               <C>            <C>           
    Land                                          $    672,933   $     672,933 
    Buildings                                        2,262,652       2,251,476 
    Furniture and equipment                            808,450         789,356 
                                                  -------------  -------------  
                                                     3,744,035       3,713,765  
    Less accumulated depreciation                      690,300         592,052  
                                                  -------------  -------------  
                                                  $  3,053,735   $   3,121,713  
                                                  =============  =============  
</TABLE> 

Interest cost incurred on borrowed funds during fiscal year 1995 amounted to
$1,053,261, of which $60,393 was capitalized as building costs. No interest was
capitalized for 1996 or 1997.

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

Deposit accounts consist of the following:

<TABLE> 
<CAPTION> 
                                                             June 30,
                                                  ----------------------------
                                                       1997             1996  
                                                  -------------  ------------- 
<S>                                               <C>            <C> 
    Savings accounts with a year end interest      
     rate of 2.96% and  3.05% at June 30, 1997 
     and 1996, respectively                       $  14,183,722  $  15,777,639 
    NOW accounts with a year end interest rate    
     of 1.74% and 1.80% at June 30, 1997 and 
     1996, respectively                               7,883,421      6,516,746 
    Money market deposit accounts with a year 
     end interest rate of 3.11% and 3.20% at 
     June 30, 1997 and 1996, respectively             5,100,541      5,727,747 
    Certificates of deposit with a year end
     interest rate range of 3.80% - 6.08% at 
     June 30, 1997 and 1996                          84,580,834     78,630,697 
                                                  -------------  -------------  
                                                  $ 111,748,518  $ 106,652,829
                                                  =============  =============  
</TABLE> 

Non-interest bearing checking accounts are included in the table above in NOW
accounts.

Maturities of outstanding certificates of deposit at June 30, 1997, are
summarized as follows:

<TABLE> 
<CAPTION> 
                     Year                      Amount
                     ----                   ------------ 
                     <S>                    <C> 
                     1998                   $ 60,021,723
                     1999                     16,382,440
                     2000                      6,290,303
                     2001                      1,268,757
                     2002                        617,611
                                            ------------  
                                            $ 84,580,834
                                            ============  
</TABLE> 

The aggregate amount of individual deposits in excess of $100,000 was
approximately $21,000,000 and $19,000,000 at June 30, 1997 and 1996,
respectively.
<PAGE>
 
NOTE E:   DEPOSITS, Cont'd
------------------

Interest expense on deposits is summarized as follows:

<TABLE> 
<CAPTION> 
                                            Year ended June 30,
                                  -----------------------------------
                                      1997       1996        1995
                                  ----------  ----------   ---------- 
    <S>                           <C>         <C>          <C> 
    Savings accounts              $  453,090  $  507,794   $  578,524 
    NOW accounts                      59,416      24,565       26,287 
    Money market                     209,290     217,075      213,155 
    Certificates of deposit        4,446,488   4,408,016    3,663,777 
                                  ----------  ----------   ----------  
                                  $5,168,284  $5,157,450   $4,481,743
                                  ==========  ==========   ==========  
</TABLE> 

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.

Scheduled maturities are as follows:

<TABLE> 
<CAPTION> 
                  Maturing in
              fiscal year ending               Amount
              ------------------           ------------ 
              <S>                          <C> 
                     1998                  $ 16,709,523
                     1999                       610,139
                     2000                       610,796
                     2001                       611,491
                     2002                       612,237
                  Thereafter                  1,452,429
                                           ------------  
                                           $ 20,606,615
                                           ============  
</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 $90,476 , $83,521 and $81,178 for the years
ended June 30, 1997, 1996 and 1995, 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,
1997 and 1996 was $57,918 and $61,538, 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.
<PAGE>
 
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. See also Note N.
<TABLE> 
    <S>                                                           <C> 
    Options outstanding June 30, 1996                              13,276  
    Additional options due to three-for-two stock split             6,637  
    Less options exercised                                         (6,315) 
                                                                   ------
    OPTIONS OUTSTANDING JUNE 30, 1997                              13,598  
                                                                   ======
</TABLE> 

NOTE H:   INCOME TAXES
----------------------

The provision for income taxes consists of the following:

<TABLE> 
<CAPTION> 
                                                                  Year ended June 30,                          
                                                       -----------------------------------------                         
                                                            1997         1996           1995                  
                                                       ------------  -----------  --------------               
    <S>                                                <C>           <C>          <C>                         
    Currently payable:                                                                                        
     State                                              $   92,945    $  160,560   $    145,934               
     Federal                                               580,351       907,116        597,072                
    Deferred                                                17,254        24,884          4,221                
                                                       ------------  -----------  --------------              
                                                        $  690,550    $1,092,560   $    747,227                
                                                       ============  ===========  ==============               
</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,
                                                       -----------------------------------------                         
                                                            1997         1996           1995
                                                       ------------  -----------  --------------  
    <S>                                                <C>           <C>          <C> 
    Total provision at federal statutory rates          $  860,000    $  968,000   $    785,000
    States taxes, net of federal benefit                    61,000       106,000         96,000
    Resolution and adjustment of
     prior year tax liabilities                           (235,000)            -       (124,000)
    Other                                                    4,550        18,560         (9,773)
                                                       ------------  -----------  --------------  
                                                        $  690,550    $1,092,560   $    747,227
                                                       ============  ===========  ==============
</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.

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,
                                                                 -------------------------------
                                                                      1997             1996
                                                                 ------------   ---------------- 
    <S>                                                          <C>            <C>  
    Depreciation                                                  $  (70,000)    $      (50,000)
    Nonrefundable loan fees                                           21,000             35,000 
    Employee benefits                                                 20,000             21,000 
    Allowance for loan losses                                        234,000            344,000 
    Unrealized gain on securities                                                       
     available for sale                                              (28,000)           (25,000) 
   Other                                                              50,000             (3,000)  
                                                                 ------------   ---------------- 
                                                                  $  227,000     $      322,000 
                                                                 ============   ================
</TABLE> 
<PAGE>
 
NOTE H:   INCOME TAXES, Cont'd         
-----------------------

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.

Various tax court decisions have questioned the validity of tax regulations
which required thrift institutions to reduce, or eliminate, the bad debt
deductions in the year to which certain net operating losses were carried back.
As a result, the Bank filed its tax returns with an increased net operating loss
carryforward (NOL) of approximately $1.5 million. The Bank used this increased
NOL to offset income in previous years, while continuing to accrue income taxes
for financial reporting purposes without regard to the increase. During the year
ended June 30, 1995, contingencies relating to this matter were resolved and the
accruals were adjusted. Additionally, 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, 1997, 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 $17,029,
$17,886 and $14,696 for the years ended June 30, 1997, 1996 and 1995,
respectively.

At June 30, 1997 and 1996, the Bank had outstanding commitments of $5,243,927
and $3,169,511, respectively, to originate loans, of which $2,358,115 and
$931,311, respectively, were comprised of fixed-rate loans and $2,885,812 and
$2,238,200, 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, 1997 and 1996, the Bank had outstanding commitments under standby
letters of credit totaling $256,822 and $436,222, 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, 1997 and 1996, the Bank had loaned $561,439 and $389,170,
respectively, to the partnership, and was committed to lend an additional
$188,561 and $360,830, 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.
<PAGE>
 
NOTE J:   INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
--------------------------------------------------------------------
 CONSTRUCTION ARRANGEMENT, Cont'd
 ------------------------

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.

As of June 30, 1997, Brilie's share of the partnership's capital was $114,562,
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,           
                                                 -------------------------------
                    ASSETS                            1997             1996     
                    ------                       --------------   --------------
                                                  (UNAUDITED)       (UNAUDITED) 
    <S>                                          <C>              <C>           
    Investment in real estate                    $      773,487   $      673,160
    Other assets                                         93,800            1,526
                                                 --------------   --------------
                                                 $      867,287   $      674,686
                                                 ==============   ==============
                                                
                                                
                LIABILITIES AND
                ---------------
               PARTNERS' CAPITAL
               -----------------

    Liabilities:
      Note payable to Elmira Savings and Loan    $      561,439   $      389,170
      Mortgage payable                                   68,000           68,000
      Other                                               8,724            1,526
                                                 --------------   --------------
                                                        638,163          458,696

    Partners' capital                                   229,124          215,990
                                                 --------------   --------------
                                                 $      867,287   $      674,686
                                                 ==============   ==============
</TABLE> 
<PAGE>
 
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,
                                              ----------------------------------------------
                                                  1997               1996          1995
                                              -------------     -------------  -------------
                                               (UNAUDITED)       (UNAUDITED)    (UNAUDITED)
    <S>                                       <C>               <C>            <C>  
    Sales                                     $  307,000        $   311,901    $    319,499
    Cost of sales                                234,484            265,042         185,186
                                              ----------        -----------    ------------
    GROSS PROFIT                                  72,516             46,859         134,313
                                                  
    Net rental income (expense)                    1,885             (6,622)         (1,157)
    General and administrative expense           (14,947)            (7,281)        (12,558)  
                                              ----------        -----------    ------------ 
    NET INCOME                                    59,454             32,956         120,598
                                                                       
    Partners' capital at                      
    beginning of year                            215,990            206,116         124,828
    Partners' withdrawals                         46,320             23,082          39,310
                                              ----------        -----------    ------------
    PARTNERS' CAPITAL AT END OF YEAR             229,124            215,990         206,116           
                                              ==========        ===========    ============
</TABLE> 

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

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

<TABLE> 
<CAPTION> 
                                                                          June 30,
                                                               -------------------------------
                    ASSETS                                         1997               1996
                    ------                                     --------------  ---------------
    <S>                                                        <C>             <C> 
    Cash and cash equivalents                                  $    328,270    $      146,667 
    Securities available for sale                                    66,156            48,508
    Investment in subsidiary                                      9,636,063         8,552,329
    Other assets                                                     18,038            68,891
                                                               ------------    --------------
                                                               $ 10,048,527    $    8,816,395
                                                               ============    ==============
                                                
                LIABILITIES AND
                ---------------
             SHAREHOLDERS' EQUITY
             --------------------

    Shareholders' equity:
     Common stock                                              $      8,560    $        5,665
     Additional paid-in capital                                   2,599,654         2,580,092
     Retained earnings                                            7,531,048         6,270,032 
     Net unrealized gain on securities available for sale            17,636             7,047
                                                               ------------    --------------
                                                                 10,156,898         8,862,836
      Less treasury stock                                           108,371            46,441
                                                               ------------    --------------
                                                               $ 10,048,527    $    8,816,395
                                                               ============    ==============
</TABLE> 
<PAGE>
 
NOTE K: PARENT COMPANY FINANCIAL INFORMATION. Cont'd
--------------------------------------------

  STATEMENTS OF INCOME AND RETAINED EARNINGS
  ------------------------------------------

<TABLE> 
<CAPTION> 
                                                    Year ended June 30,
                                         --------------------------------------
                                             1997          1996        1995
                                         -----------   -----------  -----------
    <S>                                  <C>           <C>          <C>       
    Revenues:
     Equity in earnings of subsidiary    $ 1,883,734   $ 1,801,129  $ 1,579,440
     Income from investments and other         2,619         3,091        3,536
     Management fee income                         -             -       56,131
                                         -----------   -----------  ----------- 
                                           1,886,353     1,804,220    1,639,107

 
    General and administrative expenses       60,209        66,099       38,571
                                         -----------   -----------  -----------
    INCOME BEFORE INCOME TAXES             1,826,144     1,738,121    1,600,536

    Income tax benefit (expense)              12,236        15,440      (17,560)
                                         -----------   -----------  -----------
    NET INCOME                             1,838,380     1,753,561    1,582,976

    Retained earnings at beginning 
    of year                                6,270,032     4,897,730    3,643,073
    Dividends paid                           577,364       381,259      328,319
                                         -----------   -----------  -----------
    RETAINED EARNINGS AT
    END OF YEAR                          $ 7,531,048   $ 6,270,032  $ 4,897,730
                                         ===========   ===========  ===========
</TABLE> 
                                         
  STATEMENTS OF CASH FLOWS
  ------------------------
-------------------------------------------------------------------------------









-------------------------------------------------------------------------------
<PAGE>
 
NOTE L: OFFICE OCCUPANCY AND EQUIPMENT EXPENSE
----------------------------------------------

Office occupancy and equipment expense is comprised of the following:

<TABLE> 
<CAPTION> 
                                                    Year ended June 30,
                                        ------------------------------------
                                            1997         1996         1995
                                        -----------   ----------   ---------
    <S>                                 <C>           <C>          <C> 
    Depreciation                        $   175,774   $  180,336   $  64,666
    Service bureau                          150,012      134,893     119,989
    Other                                   176,513      188,330     188,190
                                        -----------   ----------   ---------
                                        $   502,299   $  503,559   $ 372,845
                                        ===========   ==========   =========
</TABLE> 
                                  
NOTE M: REGULATORY CAPITAL
--------------------------

The Bank is required to meet minimum capital standards, which have been
established by the Office of Thrift Supervision (OTS). The minimum capital
standards generally require the maintenance of regulatory capital sufficient to
meet each of three tests, hereinafter described as the tangible capital
requirement, the core capital requirement and the risk-based capital
requirement. The tangible capital requirement provides for a minimum tangible
capital (defined as shareholders' equity determined in accordance with generally
accepted accounting principles less all intangible assets) ratio equal to 1.5%
of adjusted assets. The core capital requirement provides for a minimum core
capital (tangible capital plus certain intangible assets) to adjusted assets
ratio of 3.0%. The risk-based capital requirement provides for the maintenance
of core capital plus general loss allowances equal to 8.0% of risk-weighted
assets. In computing risk-weighted assets, the Bank multiplies the value of each
asset on its balance sheet by a defined risk-weighting factor, e.g., one-to-four
family residential loans carry a risk-weighted factor of 50%.

Based on management's calculations, the Bank is in full compliance, as of June
30, 1997, with all of the current regulatory capital requirements as follows:

<TABLE> 
<CAPTION> 
                                                       June 30,
                                        -------------------------------------
                                           Tangible     Core      Risk-based 
                                           capital     capital     capital
                                        ------------  ----------  -----------
                                                    (in thousands)
    <S>                                 <C>           <C>         <C> 
    GAAP capital                        $     13,743  $   13,743  $    13,743
    Investment in joint venture                 (561)       (561)        (561)
    Net unrealized gain on securities
     available for sale                          (42)        (42)         (42)
    General allowance for loan losses              -           -        1,237
                                        ------------  ----------  -----------
    Actual amount                             13,140      13,140       14,377
    Required amount                            2,235       4,471        7,907
                                        ------------  ----------  -----------
    EXCESS                              $     10,905  $    8,669  $     6,470
                                        ============  ==========  ===========
</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).
<PAGE>
 
NOTE N:   SHAREHOLDERS' EQUITY, Cont'd
-------------------------------

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.

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.

Subsequent event
----------------
On July 15, 1997, the Board of Directors of the Corporation declared a special
cash dividend of $1.00 per share payable on July 31, 1997 to shareholders of
record on July 22, 1997.

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 noninterest
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.

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.
<PAGE>
 
NOTE  O:   DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS, CONT'D
---------------------------------------------------------------------

OFF-BALANCE-SHEET INSTRUMENTS
-----------------------------
Fair values for off-balance-sheet lending commitments, which are substantially
comprised of variable rate loans, approximate the loan commitment amount (see
Note I).

Information regarding the Corporation's financial instruments is as follows at
June 30, 1997 and 1996: (000's)

<TABLE> 
<CAPTION> 
                                                             1997         
                                              ---------------------------------
                                                   Carrying       Estimated
                                                    value         fair value
                                              --------------    ---------------
    <S>                                       <C>               <C>  
    Financial assets:
     Cash and short-term investments           $        723      $         723
     Investment securities (including
       mortgage-backed securities)                    6,978              6,991 
     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> 

<TABLE> 
<CAPTION> 
                                                             1996
                                              ----------------------------------
                                                   Carrying       Estimated
                                                    value         fair value
                                              --------------    ----------------
    <S>                                       <C>               <C>  
    Financial assets:
     Cash and short-term investments           $      1,374      $       1,374
     Investment securities (including
       mortgage-backed securities)                    6,253              6,216 
     Loans receivable                               127,094            129,593 
     Accrued interest receivable                        794                794 
    Financial liabilities:
     Deposits                                       106,653            107,143 
     Advances from Federal Home Loan Bank            17,616             17,373 
    Off-balance-sheet instruments:
     Commitments to extend credit                     3,170              3,170 
     Standby letters of credit                          436                436
</TABLE> 
<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 brokerage firms have facilitated purchases and sales of
ES&L Bancorp Stock:

         Dean Witter Reynolds                  Smith Barney Shearson 
         Elmira, New York                      Elmira, New York 

On July 16, 1996, the Corporation's Board of Directors approved a three-for-two
stock split, effected in the form of a 50% stock dividend. As a result, on
August 23, 1996, the Corporation issued 283,147 new shares of its common stock
to stockholders of record as of August 16, 1996. No fractional shares were
issued by the Corporation, rather 211 stockholders were paid $13.33 per full
share in lieu of any fractional shares created by the split. Management of the
Corporation established the $13.33 per share price by adjusting the last known
sale price relative to the terms of the stock split.

On September 1, 1994 the Corporation also enacted a three-for-two stock split,
effected in the form of a 50% stock dividend.

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 1997, the
trading price of the stock has ranged from $13.33 to $16.50 per share. These
prices have been adjusted to reflect the effect of the August 1996 three-for-two
stock split.

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, 1997, ES&L was a Tier 1
Institution.

                              ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                      30
<PAGE>
 
               Market Price and Dividend Information (continued)

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> 

                      1997 Fiscal Year      1996 Fiscal Year       1995 Fiscal Year
                      <S>                   <C>                    <C> 
                       8/30/96  $0.17       8/31/95  $0.1133          9/1/94  $0.10
                      11/29/96  $0.17      11/30/95  $0.1133         12/1/94  $0.10
                       2/28/97  $0.17       2/29/96  $0.1133          3/1/95  $0.10
                       5/30/97  $0.17       5/31/96  $0.1133          6/1/95  $0.10
                                -----                -------                  -----
                                $0.68                $0.4532                  $0.40
  Dividend Payment Ratio       31.76%                 22.11%                 21.28%
</TABLE> 

On July 15, 1997, the Board of Directors of the Corporation declared a special
cash dividend of $1.00 per share, payable July 31, 1997 to stockholders of
record on July 22, 1997.

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, 1997, the Corporation had 847,034 shares of common stock
outstanding. At September 2, 1997, 843,717 shares were outstanding, representing
approximately 450 shareholders of record, excluding those shares registered in
the "street name" of brokerage firms and stock depositories.

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                                                            
      ------------                      
                                      Special Counsel                         
Brilie Corporation                    ---------------  
------------------                      Housley Kantarian & Bronstein, P.C.   
  ES&L Financial Services               Suite 700                             
  300 West Water Street                 1220 19th Street, NW   
  Elmira, New York 14901                Washington, D.C. 20036                
  607-733-5533                                                                
                                      
                                      Stock Registrar and Transfer Agent    
ES&L Mortgage Corporation             ----------------------------------  
-------------------------               American Stock Transfer & Trust Co. 
  Cayuga Mortgage Company               40 Wall Street                      
  200 East Buffalo Street               New York, New York 10005            
  Suite 101B                            (800) 937-5449                      
  Ithaca, New York 14850
  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 27, 1997, at 7:00 p.m. 


                              ES&L Bancorp, Inc.
--------------------------------------------------------------------------------
                                      31
<PAGE>
 
<TABLE> 
<CAPTION> 
                                      DIRECTORS
--------------------------------------------------------------------------------------------
<S>                                                   <C> 
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,                     
William A. McKenzie -                                 Zeiser Wilbert Vault, Inc.             
President and Chief Executive Officer,                                                       
Elmira Savings & Loan, F.A.                           Frederick J. Molter -                  
                                                      Professional Engineer,                 
John F. Cadwallader -                                 The Sear Brown Group                   
President and Chief Executive Officer,                                                       
The Glass Company                                     Paul Morss -                           
Owner, Windshield Installation Network, Inc.          Retired Insurance Executive,           
                                                      Swan & Sons Morss Co. Insurance Agency 
L. Edward Considine -                                                                        
Professional Engineer,                                Gerald F. Schichtel -                  
Hunt Engineers and Architects                         President,                             
Retired General Manager, Elmira Water Board           Hilliard Corporation                    
</TABLE> 

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


<TABLE> 
<CAPTION> 
    
                                      OFFICERS
------------------------------------------------------------------------------------
     <S>                                                 <C> 
     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 (1)
     Vice President                                      Assistant Vice President 

     Michael J. Crimmins                                 Shirley L. Gleockner 
     Vice President                                      Corporate Secretary  
</TABLE> 


                          (1)- Elected October 15, 1996
All officers of ES&L Bancorp, Inc. are officers of Elmira Savings and Loan, F.A.


                             ES&L Bancorp, Inc.  
--------------------------------------------------------------------------------
                                      32
<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, operates through one office located in Elmira, 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, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY BE
OBTAINED 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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