<PAGE>
 
As filed with the Securities and Exchange Commission on December 22, 1997
                                                       Registration No. 333-
================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933

                             NIAGARA BANCORP, INC.
            (Exact name of registrant as specified in its charter)

<TABLE> 
<S>                                <C>                            <C> 
           DELAWARE                          6712                  (TO BE APPLIED FOR)
(State or other jurisdiction of       (Primary standard              (I.R.S Employer
incorporation or organization)     industry classification)       indentification number)
</TABLE> 

                     6950 SOUTH TRANSIT ROAD, P.O. BOX 514
                         LOCKPORT, NEW YORK 14095-0514
                                (716) 625-7500
         (Address, including zip code, and telephone number, including
            area code, of registrant's principal executive offices)

                                WILLIAM E. SWAN
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                             NIAGARA BANCORP, INC.
                     6950 SOUTH TRANSIT ROAD, P.O. BOX 514
                         LOCKPORT, NEW YORK 14095-0514
                                (716) 625-7500
          (Name, address, including zip code, and telephone number, 
                  including area code, of agent for service)

                                  Copies to:
                             JOHN J. GORMAN, ESQ.
                            KENNETH R. LEHMAN, ESQ.
                     LUSE LEHMAN GORMAN POMERENK & SCHICK
                          5335 WISCONSIN AVENUE, N.W.
                                   SUITE 400
                            WASHINGTON, D.C. 20015

Approximate date of commencement of proposed sale to the public: As soon as 
practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a 
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, 
check the following box: [X]

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the 
Securities Act registration statement number of the earlier effective 
registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c) under 
the Securities Act, check the following box and list the Securities Act 
registration statement number of the earlier effective registration statement 
for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(d) under 
the Securities Act, check the following box and list the Securities Act 
registration statement number of the earlier effective registration statement 
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]

<TABLE> 
<CAPTION> 
                                               CALCULATION OF REGISTRATION FEE
====================================================================================================================================
                                                                  PROPOSED               PROPOSED MAXIMUM         
  TITLE OF EACH CLASS OF                  AMOUNT TO BE        MAXIMUM OFFERING               AGGREGATE              AMOUNT OF
SECURITIES TO BE REGISTERED                REGISTERED          PRICE PER SHARE           OFFERING PRICE (1)      REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                  <C>                        <C>                     <C> 
Common Stock, $.01 par value per share   13,501,554 shares         $10.00                 $135,015,540              $39,830
====================================================================================================================================
</TABLE> 

__________________________
(1)  Estimated solely for the purpose of calculating the registration fee.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES 
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE 
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL 
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES 
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH 
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 
8(A), MAY DETERMINE.

<PAGE>
 
PROSPECTUS SUPPLEMENT

 
                             NIAGARA BANCORP, INC.

                             LOCKPORT SAVINGS BANK

                             LOCKPORT SAVINGS BANK
                                  401(K) PLAN

                           (Participation Interests)

     This Prospectus Supplement relates to the offer and sale to members (the
"Members") in the Lockport Savings Bank 401(k) Plan (the "Plan") of
participation interests and shares of common stock, par value $.01 per share
(the "Common Stock"), of Niagara Bancorp, Inc. (the "Company"), in connection
with the proposed conversion ("Conversion") of the Lockport Savings Bank (the
"Bank") from a New York state chartered mutual savings bank to a New York State
chartered stock savings bank, and the issuance of the Bank's capital stock to
the Company pursuant to the Bank's Plan of Conversion and Reorganization (the
"Plan of Conversion") and the related Subscription Offering and Direct Community
Offering (collectively, the "Offering").

     The Plan permits the investment of Plan assets in Common Stock of the
Company. The Plan permits Members to direct the trustee of the Plan (the
"Trustee") to invest in Common Stock with amounts in the Plan attributable to
such Members. Such investments in Common Stock would be by means of the Niagara
Bancorp, Inc. Stock Fund ("Employer Stock Fund"). This Prospectus Supplement
relates to the initial election of Members to direct that all or a portion of
their accounts be invested in the Employer Stock Fund in connection with the
Conversion and Offering and also to elections by Members to direct that all or a
portion of their accounts be invested in the Employer Stock Fund after the
Conversion. A Member will be able to provide alternative investment instructions
to the Trustee in the event that the Offering is oversubscribed and the total
amount allocated by a Member cannot be used by the Trustee to purchase Common
Stock.

     The Prospectus of the Company dated ____________, 1998 (the "Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion, the Common Stock and the financial condition,
results of operations and business of the Bank. This Prospectus Supplement,
which provides detailed information with respect to the Plan, should be read
only in conjunction with the Prospectus.

     THESE PARTICIPATION INTERESTS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF
NEW YORK, THE NEW YORK STATE BANKING BOARD, THE NEW YORK STATE BANKING
DEPARTMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR BY ANY OTHER FEDERAL
AGENCY, OR BY ANY STATE SECURITIES BUREAU OR OTHER STATE AGENCY, NOR HAS ANY
SUCH OFFICE, CORPORATION, COMMISSION, BUREAU OR OTHER
<PAGE>
 
AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

     No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Bank or the Plan since the date hereof, or
that the information herein contained or incorporated by reference is correct as
of any time subsequent to the date hereof. This Prospectus Supplement should be
read only in conjunction with the Prospectus that is attached hereto and should
be retained for future reference.

The date of this Prospectus Supplement is__________, 1998.
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<S>                                                                               <C>
THE OFFERING.....................................................................  1

     Securities Offered..........................................................  1
     Election to Purchase Common Stock in the Offering; Priorities...............  1
     Value of Participation Interests............................................  2
     Method of Director Transfer.................................................  2
     Time for Directing Transfer.................................................  2
     Irrevocability of Transfer Direction........................................  2
     Direction to Purchase Common Stock After the Offering.......................  2
     Purchase Price of Common Stock..............................................  3
     Nature of a Members Interest in Common Stock................................  3
     Voting Rights of Common Stock...............................................  3

DESCRIPTION OF THE PLAN..........................................................  3

     Introduction................................................................  3
     Eligibility and Participation...............................................  4
     Contributions Under the Plan................................................  4
     Limitations on Contributions................................................  5
     Investment of Contributions and Account Balances............................  7
     Benefits Under the Plan.....................................................  9
     Withdrawals and Distributions From the Plan.................................  9
     Trustee..................................................................... 10
     Plan Administrator.......................................................... 10
     Reports to Plan Members..................................................... 11
     Amendment and Termination................................................... 11
     Merger, Consolidation or Transfer........................................... 11
     Federal Income Tax Consequences............................................. 11
     ERISA and Other Qualifications.............................................. 14
     SEC Reporting and Short-Swing Profit Liability.............................. 14
     Financial Information Regarding Plan Assets................................. 15

LEGAL OPINION.................................................................... 15
</TABLE>    

                                       1
<PAGE>
 
                                 THE OFFERING

SECURITIES OFFERED

     The securities offered hereby are participation interests in the Plan. Up
to 480,000 shares (assuming a purchase price of $10.00 per share) of Common
Stock may be acquired by the Plan to be held in the Employer Stock Fund. The
Company is the issuer of the Common Stock. Only employees of the Bank may become
Members in the Plan. The Common Stock to be issued hereby is conditioned on the
consummation of the Conversion. A Member's investment in the Employer Stock Fund
in the Conversion is subject to the priority set forth in the Plan of
Conversion. Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operation and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 6950 South Transit Road, Lockport, New York 14095-0514. The Bank's telephone
number is (716) 625-7500.

ELECTION TO PURCHASE COMMON STOCK IN THE OFFERING; PRIORITIES

     The Plan permits each Member to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Plan may be
transferred to the Employer Stock Fund, an investment fund in the Plan, that
will invest in Common Stock and will be used to purchase Common Stock issued in
connection with the Offering. The Trustee of the Plan will purchase Common Stock
offered for sale in connection with the Offering in accordance with each
Member's directions. Members will be provided the opportunity to elect
alternative investments from among the six other funds offered. In the event the
Offering is oversubscribed and the Trustee is unable to use the full amount
allocated by a Member to purchase Common Stock in the Offering, Members may
either (i) elect alternative investments from among the six other funds offered,
or (ii) direct the Trustee to hold the funds transferred to the Employer Stock
Fund and purchase Common Stock in the open market after the Offering. If a
Member fails to direct the investment of his or her account balance, the
Member's account balance will remain in the other investment funds of the Plan
as directed by the Member.

     The shares of Common Stock to be sold in the Offering are being offered in
accordance with the following priorities: (i) holders of deposit accounts of the
Bank totaling $100 or more as of August 31, 1996 ("Eligible Account Holders");
(ii) the Employee Stock Ownership Plan ("ESOP"); (iii) holders of deposit
accounts of the Bank totaling $100 or more as of December 31, 1997
("Supplemental Eligible Account Holders"); (iv) certain members of the general
public with preference given to matured persons residing in Niagara, Erie,
Orleans and Genesee Counties, New York. To the extent that Members fall into one
of these categories, they are being permitted to use funds in their Plan account
to subscribe or pay for the Common Stock being acquired. Common Stock so
purchased will be placed in the Member's Employer Stock Fund within his Plan
account.

                                       1
<PAGE>
 
VALUE OF PARTICIPATION INTERESTS

     The assets of the Plan were valued at approximately $3.7 million as of
December 31, 1996. Each Member was informed of the value of his or her
beneficial interest in the Plan as of September 30, 1997. The $3.7 million value
represents the aggregate market value as of December 31, 1996, of all Members'
accounts and earnings thereon, less previous withdrawals.

METHOD OF DIRECTING TRANSFER

     Each Member shall receive a form which provides for a Member to direct that
all or a portion of his or her beneficial interest in the Plan be transferred to
the Employer Stock Fund (the "Contribution and Investment Form") or to the other
investment options established under the Plan. The Member's investment in the
other investment options set forth in the Plan may be in any whole percentage
from 0% to 100%. If a Member wishes to invest all or part of his or her
beneficial interest in the assets of the Plan to the purchase of Common Stock
issued in connection with the Offering, he or she should indicate that decision
on the Contribution and Investment Form.

TIME FOR DIRECTING TRANSFER

     Directions to transfer amounts to the Employer Stock Fund in order to
purchase Common Stock issued in connection with the Offering must be returned to
the Stock Information Center at 55 East Avenue, P.O. Box 886, Lockport, New York
14095 no later than _:00 p.m. on ______________, 1998.

IRREVOCABILITY OF TRANSFER DIRECTION

     A Member's direction to transfer amounts credited to such Member's account
in the Plan to the Employer Stock Fund in order to purchase shares of Common
Stock in connection with the Offering is irrevocable. Members, however, will be
able to direct the investment of their accounts under the Plan as explained
below.

DIRECTION TO PURCHASE COMMON STOCK AFTER THE OFFERING

     After the Offering, a Member will continue to be able to direct that a
certain percentage of his or her interest in the Plan be transferred to the
Employer Stock Fund and invested in Common Stock, or to the other investment
funds available under the Plan (amounts invested in the investment funds may be
invested in any whole percentage from 0% to 100%). The allocation of a Member's
interest in a Plan Fund may be changed on a monthly basis. Special restrictions
may apply to transfers directed to and from the Employer Stock Fund by those
Members who are officers, directors and principal shareholders of the Company
who are subject to the provisions of Section 16(b) of the Securities and
Exchange Act of 1934 (the "Exchange Act"), as amended.

                                       2
<PAGE>
 
PURCHASE PRICE OF COMMON STOCK

     The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Offering will be used by the Trustee to purchase
shares of Common Stock, except in the event of an oversubscription, as discussed
above. The price paid for such shares of Common Stock will be the same price as
is paid by all other persons who purchase shares of Common Stock in the
Offering.

     Subsequent to the Offering, Common Stock purchased by the Trustee will be
acquired in open market transactions. The prices paid by the Trustee for shares
of Common Stock will not exceed "adequate consideration" as defined in Section
3(18) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").

NATURE OF A MEMBER'S INTEREST IN THE COMMON STOCK

     The Common Stock will be held in the name of the Trustee for the Plan, as
Trustee. Shares of Common Stock acquired at the direction of a Member will be
allocated to the Member's account under the Plan. Therefore, earnings with
respect to a Member's account should not be affected by the investment
designations (including investments in Common Stock) of other Members. The
Trustee as record holder will vote such allocated shares, if any, as directed by
Members.

VOTING RIGHTS OF COMMON STOCK

     The Trustee generally will exercise voting rights attributable to all
Common Stock held by the Employer Stock Fund as directed by Members with
interests in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have a right to vote, each Member will be allocated
voting instruction rights reflecting such Member's proportionate interest in the
Employer Stock Fund. The number of shares of Common Stock held in the Employer
Stock Fund that are voted in the affirmative and negative on each matter shall
be proportionate to the number of voting instruction rights exercised by Members
in the affirmative and negative respectively.


DESCRIPTION OF THE PLAN

INTRODUCTION

     The Bank adopted a prototype plan effective January 1, 1990, which Plan and
related Adoption Agreement were amended, effective January 1, 1998, to include
the Employer Stock Fund as an investment alternative. The amendment transformed
the Plan into an individually designed plan. The Plan is a profit sharing plan
with a cash or deferred compensation feature established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Plan has applied for a ruling from
the Internal Revenue Service that the Plan is qualified under Section 401(a) of
the Code, and its related trust is qualified

                                       3
<PAGE>
 
under Section 501(a) of the Code.

     The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations.

     Employee Retirement Income Security Act.  The Plan is an "individual
     ----------------------------------------                            
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase plan). The Plan
is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding
requirements contained in Title IV of ERISA are not applicable to Members (as
defined below) or beneficiaries under the Plan.

     Reference to full Text of Plan. The following statements are summaries of
     ------------------------------                                           
certain provisions of the Plan. They are not complete and are qualified in their
entirety by the full text of the Plan. Words capitalized but not defined in the
following discussion have the same meaning as set forth in the Plan. Copies of
the Plan are available to all employees by filing a request with the Plan
Administrator, c/o Lockport Savings Bank, 6950 South Transit Road, Lockport, New
York 14095-0514. Each employee is urged to read carefully the full text of the
Plan.

ELIGIBILITY AND PARTICIPATION

     Any employee of the Employer is eligible to become a member in the Plan on
the first day of the month following completion of one (1) year of Entry
Service, as defined, with the Bank, provided he or she has reached age 21 at
such time. A year of Entry Service is defined as the 12 month period during
which an employee completes at least 1000 hours of service with the Bank. The
plan year is January 1 to December 31 (the "Plan Year").

     As of December 31, 1996, there were approximately 314 employees eligible to
participate in the Plan, and 277 employees participating by making elective
deferral contributions.

CONTRIBUTIONS UNDER THE PLAN

     401(k) Plan Contributions. Each Member of the Plan is permitted to elect to
     -------------------------                                                  
defer such Member's Pay (as defined below) on a pre-tax basis up to the lesser
of 15% of annual Pay (expressed in terms of whole percentages) or the applicable
limit under the Code (for 1998, the applicable limit is $10,000) and subject to
certain other restrictions imposed by the Code, and to have that amount
contributed to the Plan on such Member's behalf. For purposes of the Plan, "Pay"
means, generally, a Member's total pay received from the Bank as reported on IRS
Form W-2 for purposes of income-tax withholding. In 1998, the annual Pay of each
Member taken into account under the Plan was and

                                       4
<PAGE>
 
is limited to $160,000. (Limits established by the IRS are subject to increase
pursuant to an annual cost of living adjustment, as permitted by the Code). A
Member may elect to modify the amount contributed to the Plan by filing a new
elective deferral agreement with the Plan Administrator on a bi-weekly basis.

     Employer Contributions. The Bank makes matching contributions to the Plan
     ----------------------                                                   
equal to 50% of the elective deferral contributions, up to a maximum of 6% of
the Member's Pay for the Plan Year.
 
LIMITATIONS ON CONTRIBUTIONS
 
     Limitation on Employee Salary Deferrals.   The annual amount of deferred
     -----------------------------------------                               
Pay of a Member (when aggregated with any elective deferrals of the Member under
a simplified employee pension plan or a tax-deferred annuity) may not exceed the
limitation contained in Section 402(g) of the Code, adjusted for increases in
the cost of living as permitted by the Code (the limitation for 1998 is
$10,000). Contributions in excess of this limitation ("excess deferrals") will
be included in the Member's gross income for federal income tax purposes in the
year they are made. In addition, any such excess deferral will again be subject
to federal income tax when distributed by the Plan to the Member, unless the
excess deferral (together with any income allocable thereto) is distributed to
the Member not later than the first April 15th following the close of the
taxable year in which the excess deferral is made. Any income on the excess
deferral that is distributed not later than such date shall be treated, for
federal income tax purposes, as earned and received by the Member in the taxable
year in which the distribution is made.

     Limitations on Annual Additions and Benefits.   Pursuant to the
     ---------------------------------------------                 
requirements of the Code, the Plan provides that the amount of contributions and
forfeitures allocated to each Member's account during any Plan Year may not
exceed the lesser of $30,000 or 25% of the Member's Compensation (as defined)
for the Plan Year. In addition, annual additions are limited to the extent
necessary to prevent contributions on behalf of any employee from exceeding the
employee's combined plan limit, i.e., a limit that takes into account the
contributions and benefits made on behalf of an employee to all plans of the
Bank. To the extent that these limitations have been exceeded with respect to a
Member, the Plan Administrator shall:

     (i)   return any elective deferral contributions to the extent that the
return would reduce the excess amount in the Member's accounts;

     (ii)  if the Member is covered by the Plan at the end of the Plan Year, any
excess amount remaining will be used to reduce Employer Contributions for such
Member in the next Plan Year, and each succeeding Plan Year if necessary;

     (iii) if an excess amount still exists, and the Member is not covered by
the Plan at the end of a Plan Year, the Excess Amount will be held unallocated
in a suspense account.  The suspense account will be applied to reduce future
Employer Contributions for all remaining Members in the

                                       5
<PAGE>
 
next Plan Year, and each succeeding Plan Year if necessary;

     (iv)  if a suspense account is in existence at any time during a Plan Year,
it will participate in the allocation of the trust's investment gains or losses.
If a suspense account is in existence at any time during a particular Plan Year,
all amounts in the suspense accounts must be allocated and reallocated to
Member's Accounts before any employer or any Member contributions may be made to
the Plan for that Plan Year. Excess amounts may not be distributed to Members or
former Members.

     If, in addition to this Plan, the Member is covered under other defined
contribution plans and welfare benefit funds maintained by the Bank and annual
additions exceed the maximum permissible amount, the amount contributed or
allocated under this Plan will be reduced so that the annual additions under all
such plans and funds equal the maximum permissible amount.

     Limitation on Plan Contributions for Highly Compensated Employees.
     -----------------------------------------------------------------  
Sections 401(k) and 401(m) of the Code limits the amount of elective deferral
contributions and matching contributions that may be made to the Plan in any
Plan Year on behalf of Highly Compensated Employees (defined below) in relation
to the amount of elective deferral contributions made by or on behalf of all
other employees eligible to participate in the Plan. Specifically, the "actual
deferral percentage" ("ADP") (i.e., the average of the actual deferral ratios,
expressed as a percentage, of each eligible employee's elective deferral
contribution if any, for the Plan Year over the employee's Pay), of the Highly
Compensated Employees must meet either of the following tests: (i) the ADP of
the eligible Highly Compensated Employees is not more than 125% of the ADP of
all other eligible employees, or (ii) the ADP of the eligible Highly Compensated
Employees is not more than 200% of the ADP of all other eligible employees, and
the excess of the ADP for the eligible Highly Compensated Employees over the ADP
of all other eligible employees is not more than two percentage points.
Similarly, the actual contribution percentage ("ACP") (i.e., the average of the
actual contribution ratios, expressed as a percentage, of each eligible
employee's matching contributions, if any, for the Plan Year over the employees
Pay) of the Highly Compensated Employees must meet either of the following
tests: (i) the ACP of the eligible Highly Compensated Employees is not more than
125% of the ACP of all other eligible employees, or (ii) the ACP of the eligible
Highly Compensated Employees is not more than 200% of the ACP of all other
eligible employees, and the excess of the ACP for the eligible Highly
Compensated Employees over the ACP of all other employees is not more than two
percentage points.

     In general,  for Plan Years beginning in 1998, a Highly Compensated
Employee includes any employee, who, (1) during the Plan Year or the preceding
Plan Year, was at any time a 5% owner (i.e., owns directly or indirectly more
than 5% of the stock of an employer, or stock possessing more than 5% of the
total combined voting power of all stock of an employer), or (2) for the
preceding Plan Year, received Pay from an employer in excess of $80,000 (in
1998), and (if the employer elects for a Plan Year) was in the group consisting
of the top 20% of employees when ranked on the basis of Pay paid during the Plan
Year. The dollar amounts set forth above are adjusted annually to reflect
increases in the cost of living.

                                       6
<PAGE>
 
     In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the ADP limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed first to Highly Compensated Employees with the
greatest dollar amount deferrals, and so on, until the Plan satisfies the ADP
test, before the close of the following Plan Year. Moreover, the Bank will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are re-
characterized or are distributed before the close of the first 2-1/2 months
following the Plan Year to which such excess contributions relate. In addition,
in order to avoid disqualification of the Plan, any contributions by Highly
Compensated Employees that exceed the average contribution limitation in any
Plan Year ("excess aggregate contributions") together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the 10% excise tax will be imposed on
the Bank with respect to any excess aggregate contributions, unless such
amounts, plus any income allocable thereto, are distributed within 2-1/2 months
following the close of the Plan Year in which they arose.

INVESTMENT OF CONTRIBUTIONS AND ACCOUNT BALANCES

     All amounts credited to Members' accounts under the Plan are held in the
Plan Trust (the "Trust") which is administered by the Trustee appointed by the
Bank's Board of Directors.

     Prior to the effective date of the Offering, Members have been provided the
opportunity to direct the investment of their accounts into one of the following
funds (the "Funds"):

A.  Guaranteed Interest Account
B.  Money Market Account
C.  Bond and Mortgage Account
D.  Stock Index 500 Account
E.  U.S. Stock Account
F.  Small Company Blend Account

     The Plan now provides that in addition to the Funds specified above, a
Member may direct the Trustee to invest all or a portion of his account in the
Employer Stock Fund.

     A Member may elect to have both past contributions (and earnings), as well
as future contributions to the Member's account invested either in the Employer
Stock Fund or among the Funds listed above. Transfers of past contributions (and
the earnings thereon) do not affect the investment mix of future contributions.
These elections will be effective on the effective date of the Member's notice
to the Plan Administrator.  Any amounts credited to a Member's account for which
investment directions are not given will be invested in the Guaranteed Interest
Account.

A.   PREVIOUS FUNDS.
 
     Prior to the effective date of the Offering, contributions under the Plan
have been invested

                                       7
<PAGE>
 
in the six funds specified above.  The annual percentage return on these funds
for the prior three years was:

<TABLE>
<CAPTION>
                                   9/30/1997*   1996   1995   1994
                                   ---------   -----  -----  -----
<S>                                <C>         <C>    <C>    <C> 
A.  Guaranteed Interest Account           --     5.7   5.96   6.23
B.  Money Market Account                3.88    5.11   5.65   4.01
C.  Bond and Mortgage Account           7.34    3.94  18.41  -2.05
D.  Stock Index 500 Account            29.27   22.50  37.07   1.05
E.  U.S. Stock Account                 22.98   24.13  33.10   0.29
F.  Small Company                      28.69   18.01  29.44   3.05
</TABLE>

*Unannualized rate of return since January 1, 1997.

     The following is a description of each of the Plan's six investment funds:

     Account A (Guaranteed Interest Account)  This Account earns a guaranteed
     --------------------------------------                                  
interest rate for a specific number of years; it offers low risk and low
earnings.

     Account B (Money Market Account)  This Account invests in high-quality
     --------------------------------                                      
commercial paper (short-term, unsecured corporate loans). The average maturity
is usually less than one month; it offers low risk and low earnings.

     Account C (Bond and Mortgage Account)  This Account makes loans to
     -------------------------------------                             
companies, most of which are bonds and commercial mortgages; it offers moderate
risk and earnings.

     Account D (Stock Index 500 Account)  This Account invests in the common 
     -----------------------------------                                     
stocks of those companies listed in the Standard & Poor's 500 Stock Index; it
offers a chance for greater reward in return for a higher degree of risk.

     Account E (U.S. Stock Account)  This Account invests money in stocks of
     ------------------------------                                         
U.S. companies of all sizes; it offers a chance for greater reward in return for
a higher degree of risk.

     Account F (Small Company Blend Account) This Account invests in stocks of
     ---------------------------------------                                  
smaller seasoned companies where potential for long-term growth is expected to
be above-average. This Account combines growth and value in a "blend" portfolio.

B.   THE EMPLOYER STOCK FUND.

     The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Offering. After the Offering, the Trustee
will, to the extent practicable, use all amounts held by it in the Employer
Stock Fund, including cash dividends paid on Common Stock held in the Employer
Stock Fund, to purchase shares of Common Stock of the Company. It is expected
that all purchases will be made at prevailing market prices. Under certain
circumstances,

                                       8
<PAGE>
 
the Trustee may be required to limit the daily volume of shares purchased.
Pending investment in Common Stock, assets held in the Employer Stock Fund will
be placed in money market accounts.
 
     As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund. Performance will be dependent upon a number of
factors, including the financial condition and profitability of the Company and
the Bank and market conditions for the Common Stock generally.

     INVESTMENT IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISKS IN
INVESTMENT IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE THE PROSPECTUS.

BENEFITS UNDER THE PLAN

     Vesting.  A Member, at all times, has a fully vested, nonforfeitable
     --------                                                           
interest in his or her account under the Plan.
 
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN

     APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN MEMBER TO WITHDRAW AMOUNTS HELD FOR HIS OR HER BENEFIT
UNDER THE PLAN PRIOR TO THE MEMBER'S TERMINATION OF EMPLOYMENT WITH THE BANK. A
SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO
THE MEMBER'S ATTAINMENT OF AGE 59-1/2, REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.

     Withdrawals Prior to Termination of Employment.  A Member may make a
     -----------------------------------------------                     
withdrawal from his or her elective deferral contributions (and earnings
thereon) prior to termination of employment only in the event of financial
hardship, subject to the hardship distribution rules under the Plan. These
requirements insure that Members have a true financial need before a withdrawal
may be made.

     Distribution Upon Retirement or Disability.  Unless an optional form of
     -------------------------------------------                            
benefit has been elected, the automatic form of benefit payable to a Member who
retires, incurs a disability, or otherwise terminates employment shall be a
qualified joint and survivor annuity. In the case of a Member who dies before
the Annuity Starting Date, the automatic form of benefit to such Member's
Beneficiary shall be a qualified pre-retirement survivor annuity if the Member
is married and a lump sum payment if a Member is unmarried. The optional forms
of retirement benefit shall be the following: a straight life annuity; single
life annuities with certain periods of five, ten or fifteen years; a single life
annuity with installment refund; survivorship life annuities with installment
refund and survivor percentages of 50, 66 2/3, or 100; fixed period annuities
for any period of whole

                                       9
<PAGE>
 
months which is not less than sixty and does not exceed the Life Expectancy of
the Member and the named Beneficiary where the Life Expectancy is not
recalculated; a series of installments chosen by the Member with a minimum
payment each year beginning with the year the Member turns age 70-1/2; or a
single sum payment. Benefit payments ordinarily shall commence as soon as
practicable following termination of service upon (i) retirement on or after
attainment of normal retirement age; (ii) retirement due to disability; or (iii)
death of the Member. With respect of a 5% owner, benefit payments must commence
in no event later than April 1 following the calendar year in which the Member
attains age 70-1/2.

     Distribution Upon Death.  A Member who dies prior to the benefit
     ------------------------                                        
commencement date for retirement, disability or termination of employment shall
have his or her benefits paid to the surviving spouse or beneficiary under one
or more of the forms available under the Plan.

     Distribution Upon Termination for Any Other Reason.  Distribution of
     ---------------------------------------------------                 
benefits to a Member who terminates employment for any other reason will not be
made to the Member at the time of termination but shall be made on the
occurrence of an event which would result in a distribution had the Member
remained in the employ of the Bank (i.e., upon the Member's death, disability,
or attainment of early or normal retirement age). Alternatively, at the Member's
election, a Member may receive a distribution of his account after he ceases to
be an employee.

     Nonalienation of Benefits.  Except with respect to federal income tax
     -------------------------                                            
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.

TRUSTEE

     The Trustee is appointed by the Board of Directors of the Bank to serve at
its pleasure. Delaware Charter Guarantee and Trust Company has been appointed as
trustee of the Employer Stock Fund of the Plan.

     The Trustee receives, holds and invests the contributions to the Employer
Stock Fund of the Plan in trust and distributes them to Members and
beneficiaries in accordance with the terms of the Plan and the directions of the
Plan Administrator. The Trustee is responsible for investment of the assets of
the Trust.

PLAN ADMINISTRATOR

     Pursuant to the terms of the Plan, the Plan is administered by the plan
administrator (the "Plan Administrator"). The Bank is the Plan Administrator and
has designated Kathleen P. Monti, Senior Vice President, Human Resources and
Administration, to supervise its responsibilities as such. The address and
telephone number of the Plan Administrator is c/o Lockport Savings Bank,
Attention: Ms. Kathleen P. Monti, Senior Vice President, 6950 South Transit
Road, Lockport, New York 14095-0514, Telephone number (716) 625-7500. The Plan
Administrator is responsible for the

                                       10
<PAGE>
 
administration of the Plan, interpretation of the provisions of the Plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the Plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the Plan, and preparation and filing of all returns and reports relating to the
Plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to Members, beneficiaries, and
others under Sections 104 and 105 of ERISA.

REPORTS TO PLAN MEMBERS

     The Plan Administrator will furnish to each Member a statement quarterly
showing (i) the balance in the Member's account as of the end of that period,
(ii) the amount of contributions allocated to such Member's account for that
period, and (iii) the adjustments to such Member's account to reflect earnings
or losses (if any).

AMENDMENT AND TERMINATION

     It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee affected by such termination shall have a fully vested interest in
his or her accounts. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust to
be used for, or diverted to, any purpose other than the exclusive benefit of
Members or their beneficiaries; provided, however, that the Bank may make any
amendment it determines necessary or desirable, with or without retroactive
effect, to comply with ERISA.

MERGER, CONSOLIDATION OR TRANSFER

     In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that each
Member would (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).

FEDERAL INCOME TAX CONSEQUENCES

     The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Members are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.

     The Plan is qualified under Section 401(a) and 401(k) of the Code and the
related Trust is

                                       11
<PAGE>
 
exempt from tax under Section 501(a) of the Code. A plan that is qualified under
these sections of the Code is afforded special tax treatment which include the
following: (1) the Bank is allowed an immediate tax deduction for the amount
contributed to the Plan each year; (2) Members pay no current income tax on
amounts contributed by the Bank on their behalf; and (3) Earnings of the Plan
are tax-exempt thereby permitting the tax-free accumulation of income and gains
on investments. The Plan will be administered to comply in operation with the
requirements of the Code as of the applicable effective date of any change in
the law. The Bank expects to timely adopt any amendments to the Plan that may be
necessary to maintain the qualified status of the Plan under the Code.

     Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:

     (a) Amounts contributed to a Member's account and the investment earnings
on the account are not includable in a Member's federal taxable income until
such contributions or earnings are actually distributed or withdrawn from the
Plan. Special tax treatment may apply to the taxable portion of any distribution
that includes Common Stock or qualifies as a Lump Sum Distribution (as described
below).

     (b) Income earned on assets held by the Trust will not be taxable to the
Trust.

     Lump Sum Distribution. A distribution from the Plan to a Member or the
     ---------------------                                                 
beneficiary of a Member will qualify as a lump sum distribution ("Lump Sum
Distribution") if it is made: (i) within one taxable year of the Member or
beneficiary; (ii) on account of the Member's death, disability or separation
from service, or after the Member attains age 59-1/2; and (ii) consists of the
balance to the credit of the Member under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum Distribution
that is required to be included in the Member's or beneficiary's taxable income
for federal income tax purposes (the"total taxable amount") consists of the
entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Member to any other profit sharing plan
maintained by the Bank which is included in such distribution.

     Averaging Rules.  The portion of the total taxable amount of a Lump Sum
     ----------------                                                       
Distribution that is attributable to participation after 1973 in the Plan or in
any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Member who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Member's death (regardless of the period of the Member's participation in the
Plan or any other profit-sharing plan maintained by the Bank), may elect to have
the ordinary income portion of such Lump Sum Distribution taxed according to a
special averaging rule ("five-year averaging"). The election of the special
averaging rules may apply only to one Lump Sum Distribution received by the
Member or beneficiary, provided such amount is received on or after the Member
turns 59-1/2 and the recipient elects to have any other Lump Sum Distribution
from a qualified plan received in the same taxable year taxed under the special
averaging rule. Under a special grandfather rule, individuals who turned 50 by
1985 may elect to have their Lump Sum Distribution taxed under either the five-
year averaging rule or under the prior law ten-year averaging

                                       12
<PAGE>
 
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the Member's pre-1974 participation in the Plan
taxed at a flat 20% rate as gain from the sale of a capital asset.

     Common Stock Included in Lump Sum Distribution.  If a Lump Sum Distribution
     -----------------------------------------------                            
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over the cost or other basis to the Trust. The tax basis of such
Common Stock to the Member or beneficiary for purposes of computing gain or loss
on its subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered short-term, mid-term or long-term capital
gain depending upon the length of the holding period of the Common Stock. The
recipient of a distribution may elect to include the amount of any net
unrealized appreciation in the total taxable amount of such distribution to the
extent allowed by the regulations to be issued by the IRS.

     Contribution to Another Qualified Plan or to an IRA.  A Member may defer
     ----------------------------------------------------                    
federal income taxation of all or any portion of the total taxable amount of a
Lump Sum Distribution (including the proceeds from the sale of any Common Stock
included in the Lump Sum Distribution) to the extent that such amount, or a
portion thereof, is contributed, within 60 days after the date of its receipt by
the Member, to another qualified plan or to an individual retirement account
("IRA"). If less than the total taxable amount of a Lump Sum Distribution is
contributed to another qualified plan or to an IRA within the applicable 60-day
period, the amount not so contributed must be included in the Member's income
for federal income tax purposes and will not be eligible for the special
averaging rules or for capital gains treatment. Additionally, a Member may defer
the federal income taxation of any portion of an amount distributed from the
Plan on account of the Member's disability or separation from service,
generally, if the amount is distributed within one taxable year of the Member,
and such amount is contributed, within 60 days after the date of its receipt by
the Member, to an IRA. Prior to 1993, following the partial distribution of a
Member's account, any remaining balance under the Plan (and the balance to the
credit of the Member under any other profit sharing plan sponsored by the Bank)
would not be eligible for the special averaging rules or for capital gains
treatment. For these purposes, a "partial distribution" is a distribution within
one taxable year of the Member equal to at least 50% of the balance of a
Member's account ("Partial Distribution").

     Pursuant to a change in the law, effective January 1, 1993, virtually all
distributions from the Plan may be rolled over to another qualified Plan or to
an IRA without regard to whether the distribution is a Lump Sum Distribution or
a Partial Distribution. Effective January 1, 1993, Members have the right to
elect to have the Trustee transfer all or any portion of an "eligible rollover
distribution" directly to another plan qualified under Section 401(a) of the
Code or to an IRA. If the Member does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan or to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount

                                       13
<PAGE>
 
distributed from the Plan except: (1) a distribution that is (a) one of a series
of substantially equal periodic payments made (not less frequently than 
annually) over the Member's life or the joint life of the Member and the
Member's designated beneficiary, or (b) for a specified period of ten years or
more; (2) any amount that is required to be distributed under the minimum
distribution rules; and (3) any other distributions excepted under applicable
federal law.

     The beneficiary of a Member who is the Member's surviving spouse also may
defer federal income taxation of all or any portion of a distribution from the
Plan to the extent that such amount, or a portion thereof, is contributed within
60 days after the date of its receipt by the surviving spouse, to an IRA. If all
or any portion of the total taxable amount of a Lump Sum Distribution is
contributed by the surviving spouse of a Member to an IRA within the applicable
60-day period, any subsequent distribution from the IRA will not be eligible for
the special averaging rules or for capital gains treatment. Any amount received
by the Member's surviving spouse that is not contributed to another qualified
plan or to an IRA within the applicable 60-day period, and any amount received
by a nonspouse beneficiary will be included in such beneficiary's income for
federal tax purposes in the year in which it is received.

     Additional Tax on Early Distributions.  A Member who receives a
     --------------------------------------                         
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate or a Member) on or
after the death of the Member, (ii) attributable to the Member's being disabled
within the meaning of Section 72(m)(7) of the Code, (iii) part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the Member or the joint lives (or joint
life expectancies) of the Member and his beneficiary, (iv) made to the Member
after separation from service on account of early retirement under the Plan
after attainment of age 55, (v) made to pay medical expenses to the extent
deductible for federal income tax purposes, (vi) payments made to an alternate
payee pursuant to a qualified domestic relations order, or (vii) made to effect
the distribution of excess contributions or excess deferrals.

ERISA AND OTHER QUALIFICATIONS

     As noted above, the Plan is subject to certain provisions of the ERISA and
has applied for a favorable determination that it is qualified under Section
401(a) of the Code.

     The foregoing is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Member is urged to consult a tax advisor concerning the
federal, state and local tax consequences of participating in and receiving
distributions from the Plan.

SEC REPORTING AND SHORT-SWING PROFIT LIABILITY

     Section 16 of the Exchange Act imposes reporting and liability requirements
on officers, directors, and persons beneficially owning more than 10% of public
companies such as the

                                       14
<PAGE>
 
Company. Section 16(a) of the Exchange Act requires the filing of reports of
beneficial ownership. Within 10 days of becoming a person subject to the
reporting requirements of Section 16(a), a Form 3 reporting initial beneficial
ownership must be filed with the Securities and Exchange Commission ("SEC") .
Certain changes in beneficial ownership, such as purchases, sales and gifts must
be reported periodically, either on a Form 4 within 10 days after the end of the
month in which a change occurs, or annually on a Form 5 within 45 days after the
close of the Company's fiscal year. Certain discretionary transactions in and
beneficial ownership of the Common Stock through the Employer Stock Fund of the
Plan by officers, directors and persons beneficially owning more than 10% of the
Common Stock of the Company must be reported to the SEC by such individuals.

     In addition to the reporting requirements described above, Section 16(b) of
the Exchange Act as provides for the recovery by the Company of profits realized
by an officer, director or any person beneficially owning more than 10% of the
Company's Common Stock ("Section 16(b) Persons") resulting from non-exempt
purchases and sales of the Company's Common Stock within any six-month period.

     The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for all transactions in  employer securities within
an employee benefit plan, such as the Plan, provided certain requirements are
met. These requirements generally involve restrictions upon the timing of
elections to acquire or dispose of employer securities for the accounts of
Section 16(b) Persons.

     Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution and are
prohibited from directing additional purchases of units within the Employer
Stock Fund for six months after receiving such a distribution.

FINANCIAL INFORMATION REGARDING PLAN ASSETS

     Financial statements for the Plan for the year ending December 31, 1996 are
attached to the Prospectus. 


                                 LEGAL OPINION

     The validity of the issuance of the Common Stock will be passed upon by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., which firm acted as special counsel to the Bank in connection with the
Company's Conversion from a mutual savings bank to a stock based organization
and the concurrent formation of the Company.

                                       15
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                  401(k) PLAN

                      Financial Statements and Schedules

                          December 31, 1996 and 1995

                  (With Independent Auditors' Report Thereon)
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                  401(K) PLAN

                                     INDEX

Independent Auditors' Report

Statement of Net Assets Available for Plan Benefits
     with Fund Information as of December 31, 1996

Statement of Net Assets Available for Plan Benefits
     with Fund Information as of December 31, 1995

Statement of Changes in Net Assets Available for Plan
     Benefits with Fund Information for the year ended
     December 31, 1996

Statement of Changes in Net Assets Available for Plan
     Benefits with Fund Information for the year ended
     December 31, 1995

Notes to Financial Statements

                                                                    Schedule
                                                                    --------
 
Item 27a - Schedule of Assets Held for Investment Purposes              1
     as of December 31, 1996

Item 27d - Schedule of Reportable Transactions for the                  2
     year ended December 31, 1996

                                   * * * * *

<PAGE>
 
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]


                         Independent Auditors' Report
                         ----------------------------


The Employee Benefits Committee of
 Lockport Savings Bank:

We have audited the accompanying statements of net assets available for plan 
benefits of Lockport Savings Bank 401(k) Plan as of December 31, 1996 and 1995, 
and the related statements of changes in net assets available for plan benefits 
for the years then ended. These financial statements are the responsibility of 
the Plan's management. Our responsibility is to express an opinion on these 
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the net assets available for plan benefits of Lockport 
Savings Bank 401(k) Plan as of December 31, 1996 and 1995, and the changes in 
net assets available for plan benefits for the years then ended, in conformity 
with generally accepted accounting principles.

Our audits were performed for the purpose of forming an opinion on the basic 
financial statements taken as a whole. Supplemental schedules 1 and 2 are 
presented for the purpose of additional analysis and are not a required part of 
the basic financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under 
the Employee Retirement Income Security Act of 1974. The fund information in the
statements of net assets available for plan benefits and the statements of 
changes in net assets available for plan benefits is presented for purposes of 
additional analysis rather than to present the net assets available for plan 
benefits and changes in net assets available for plan benefits of each fund. The
supplemental schedules and fund information have been subjected to the auditing 
procedures applied in the audits of the basic financial statements and, in our 
opinion, are fairly stated in all material respects in relation to the basic 
financial statements taken as a whole. 

                                                       /s/ KPMG Peat Marwick LLP

August 26, 1997
<PAGE>
 
                             LOCKPORT SAVINGS PLAN
                                  401(k) PLAN

              Statement of Net Assets Available for Plan Benefits
                             with Fund Information

                               December 31, 1996

<TABLE> 
<CAPTION> 
                                        Guaranteed        U.S.       Money      Bond and      Stock            
                                         Interest        Stock       Market     Mortgage      Index            
                                         Account        Account     Account     Account      Account      Total
                                        ----------      -------     -------     --------     -------      -----
<S>                                   <C>              <C>          <C>         <C>          <C>        <C>    
Investments under group
  annuity contract with
  insurance company (note 3)          $  1,424,167     1,767,188     99,217      139,919     257,326    3,687,817
                                        ----------     ---------     ------      -------     -------    --------- 
Contributions receivable:
  Employee                                       7            23       --           --          --             30
  Employer                                       3            10       --           --          --             13
                                        ----------     ---------     ------      -------     -------    --------- 

     Total Contributions receivable             10            33       --           --          --             43
                                        ----------     ---------     ------      -------     -------    --------- 

Net assets available for plan
  benefits                            $  1,427,177     1,767,221     99,217      139,919     257,326    3,687,860
                                        ==========     =========     ======      =======     =======    =========
</TABLE> 

See accompanying notes to financial statements.
<PAGE>
 
                             LOCKPORT SAVINGS PLAN
                                  401(k) PLAN

              Statement of Net Assets Available for Plan Benefits
                             with Fund Information

                               December 31, 1995

<TABLE> 
<CAPTION> 
                                        Guaranteed        U.S.       Money      Bond and      Stock            
                                         Interest        Stock       Market     Mortgage      Index            
                                         Account        Account     Account     Account      Account      Total
                                        ----------      -------     -------     --------     -------      -----
<S>                                   <C>              <C>          <C>         <C>          <C>        <C>   
Investments under group               
  annuity contract with
  insurance company (note 3)          $  1,285,051     1,148,101     57,957       85,276     120,865    2,697,250 
                                         ---------     ---------     ------       ------     -------    ---------
Net assets available for plan                                                                                      
  benefits                            $  1,285,051     1,148,101     57,957       85,276     120,865    2,697,250
                                         =========     =========     ======       ======     =======    =========
</TABLE> 

See accompanying notes to financial statements.

<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                  401(k) PLAN

                      Statement of Changes in Net Assets
               Available for Plan Benefits with Fund Information

                               December 31, 1996

<TABLE> 
<CAPTION> 
                                             GUARANTEED          U.S.           MONEY         BOND AND        STOCK                 
                                              INTEREST          STOCK           MARKET        MORTGAGE        INDEX                 
                                               ACCOUNT         ACCOUNT         ACCOUNT        ACCOUNT        ACCOUNT         TOTAL 
                                             ----------        -------         -------      ----------     ----------        ----- 
Contributions:                                                                                                                      
<S>                                        <C>               <C>            <C>            <C>            <C>            <C>       
  Employer                                 $    59,467           69,830         4,922          14,324         20,568        169,111
  Employee                                     179,283          208,766        15,353          43,835         61,520        508,757
                                           -----------      -----------     ---------     -----------    -----------    -----------
                                               238,750          278,596        20,275          58,159         82,088        677,868
                                           -----------      -----------     ---------     -----------    -----------    -----------

Investment income:
  Interest                                      79,970                -             -               -              -         79,970
  Net appreciation (depreciation) in fair
   value of investments, including
   realized gains and losses                    (3,893)         317,414         4,187           4,984         40,445        363,137
                                           -----------      -----------     ---------     -----------    -----------    -----------
                                                76,077          317,414         4,187           4,984         40,445        443,107
                                           -----------      -----------     ---------     -----------    -----------    -----------

     Total contributions and
          investment income                    314,827          596,010        24,462          63,143        122,533      1,120,975

Benefits paid to participants                  (65,586)         (43,286)       (2,390)         (4,401)       (14,702)      (130,365)
Transfers among funds                         (110,115)          66,396        19,188          (4,099)        28,630              -
                                           -----------      -----------     ---------     -----------    -----------    -----------

          Net increase                         139,126          619,120        41,260          54,643        136,461        990,610

Net assets available for plan benefits:
     Beginning of year                       1,285,051        1,148,101        57,957          85,276        120,865      2,697,250
                                           -----------      -----------     ---------     -----------    -----------    -----------

     End of year                           $ 1,424,177        1,767,221        99,217         139,919        257,326      3,687,860
                                           ===========      ===========     =========     ===========    ===========    ===========
</TABLE> 

See accompanying notes to financial statements.

<PAGE>
 
                             LOCKPORT SAVINGS PLAN
                                  401(k) PLAN

                      Statement of Changes in Net Assets
               Available for Plan Benefits with Fund Information

                               December 31, 1996

<TABLE> 
<CAPTION> 
                                        Guaranteed        U.S.       Money      Bond and      Stock            
                                         Interest        Stock       Market     Mortgage      Index            
                                         Account        Account     Account     Account      Account      Total
                                        ----------      -------     -------     --------     -------      -----
<S>                                   <C>              <C>          <C>         <C>          <C>        <C>    
Contributions:                        
  Employer                            $     59,946       56,911       3,171       10,469      12,525     143,022
  Employee                                 150,426      215,196       7,502       27,205      31,036     431,365      
                                        ----------    ---------     -------     --------     -------    -------- 
                                           210,372      272,107      10,673       37,674      43,561     574,387
                                        ----------    ---------     -------     --------     -------    -------- 

Investment income:
  Interest                                  77,159           --          --           --          --      77,159
  Net appreciation (depreciation) 
   in fair value of investments,
   including realized gains and 
   losses                                       (6)     245,443       3,207        9,026      23,004     280,674
                                        ----------    ---------     -------     --------     -------   ---------      
                                            77,153      245,443       3,207        9,026      23,004     357,833
                                        ----------    ---------     -------     --------     -------   --------- 
     Total contributions and
       investment income                   287,525      517,550      13,880       46,700      66,565     932,220

Benefits paid to participants              (37,320)     (18,207)     (4,811)          --        (109)    (60,447)
Transfers among funds                      (25,700)       3,477      13,633        3,239       5,351          --
                                        ----------    ---------     -------     --------     -------   ---------  

     Net increase                          224,505      502,820      22,702       49,939      71,807     871,773
                                   
Net assets available for plan 
 benefits:
  Beginning of year                      1,060,546      645,281      35,255       35,337      49,058   1,825,477  
                                        ----------    ---------     -------     --------     -------   --------- 

  End of year                         $  1,285,051    1,148,101      57,957       85,276     120,865   2,697,250
                                        ==========    =========     =======     ========     =======   =========
</TABLE> 

See accompanying notes to financial statements.

<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                  401(K) PLAN

                         Notes to Financial Statements

                          December 31, 1996 and 1995


(1)  Description of Plan
     -------------------

     The following description of Lockport Savings Bank 401(k) Plan (the Plan)
          is provided for general information purposes only. Participants should
          refer to the Plan document for more complete information.

     (a)  General
          -------

          The Plan is a defined contribution plan covering all employees of
               Lockport Savings Bank (the Bank). The Plan is subject to the
               provisions of the Employee Retirement Income Security Act of 1974
               (ERISA).

     (b)  Eligibility
          -----------

          Employees are eligible to participate in the Plan when they reach age
               21 and have completed one year of service during which they
               worked at least 1,000 hours.

     (c)  Contributions
          -------------

          Participants may make contributions to the Plan in the form of salary
               reductions of up to 15% of their total compensation, excluding
               bonuses. The Bank makes matching contributions of 50% of employee
               contributions, up to a maximum of 6% of the employee's total
               compensation, excluding bonuses. Participant contributions are
               limited by the maximum allowable contribution under the Internal
               Revenue Code.

     (d)  Participants' Accounts
          ----------------------

          Each participant's account is credited with contributions and a pro
               rata share of investment income.

     (e)  Vesting
          -------

          Participant and Bank matching contributions immediately vest 100% to 
               the participant.

     (f)  Distributions
          -------------

          Participants or their beneficiaries are entitled to their entire
               account balance upon death, disability or retirement, payable in
               a single sum or in an annuity.

     (g)  Administrative Expenses
          -----------------------

          All the costs of administering the Plan are borne by the Bank.

                                       1                             (Continued)
                                       
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                  401(k) PLAN

                         Notes to Financial Statements


(2)  Summary of Significant Accounting Policies
     ------------------------------------------

     (a)  Basis of Presentation
          ---------------------

          The accompanying financial statements have been prepared on the 
               accrual basis of accounting.

     (b)  Use of Estimates
          ----------------

          The preparation of financial statements in conformity with generally
               accepted accounting principles requires the use of estimates and
               assumptions that affect the reported amounts of net assets
               available for plan benefits and changes therein. Actual results
               could differ from those estimates.

     (c)  Investments
          -----------

          Investments in the pooled separate accounts of the Principal Mutual
               Life Insurance Company (Principal) are carried at fair value
               based on the fair values of the underlying assets. The Guaranteed
               Interest Account is carried at fair value, which approximates
               contract value (original investment plus accrued interest).
               Investment income includes unrealized appreciation or
               depreciation in the value of the investments.

(3)  Investments
     -----------

     Contributions to the Plan are invested under a group annuity contract with
          Principal. Plan participants may allocate their funds among one or
          more of the following investment accounts under the contract:

     .    Guaranteed Interest - A general investment account comprised of 
               guaranteed interest contracts.

     .    U.S. Stock - A pooled separate account which is comprised of equity 
               securities.

     .    Money Market - A pooled separate account which is comprised of
               commercial paper, U.S. government and agency securities and other
               short-term, interest-bearing securities.

     .    Bond and Mortgage - A pooled separate account which is comprised of
               intermediate-term, commercial mortgages and mortgage-backed
               securities.

     .    Stock Index - A pooled separate account which is comprised of the 
               stocks included in the Standard & Poor's 500 Stock Index.

                                       2                             (Continued)
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                  401(K) PLAN

                   Notes to Financial Statements, Continued


(3)  Investments, Continued
     ----------------------

     Individual investments held by Principal that comprise 5% or more of the 
          Plan's net assets available for plan benefits at December 31, 1996 and
          1995 are as follows:

<TABLE> 
<CAPTION> 
                                                        1996          1995
                                                        ----          ----
          <S>                                        <C>            <C> 
          Principal Mutual Life Insurance Company:     
               Guaranteed Interest Account           $ 1,424,167    1,285,051

               U.S. Stock Account                      1,767,188    1,148,101

               Stock Index Account                       257,326            -
                                                      ==========    =========
</TABLE> 

(4)  Federal Income Taxes
     --------------------

     The Internal Revenue Service has issued a determination letter that the 
          Plan is qualified under the provisions of Sections 401(a) and 401(k)
          of the Internal Revenue Code (the "Code") and is therefore exempt from
          federal income taxes under Section 501(a) of the Code. The Plan
          sponsor has represented that the Plan has operated in conformity with
          applicable laws and regulations to maintain its tax qualified status.

(5)  Plan Termination
     ----------------

     Although it has not expressed any intent to do so, the Bank has the right 
          to discontinue its matching contribution at any time and to terminate
          the Plan subject to the provisions of ERISA. In the event of a
          termination of the Plan, participants will be entitled to the entire
          amount credited to their accounts.

                                       3


<PAGE>
 
                                                                      Schedule 1
                                                                      ----------


                             LOCKPORT SAVINGS BANK
                                  401(k) PLAN

          Item 27a - Schedule of Assets Held for Investment Purposes

                               December 31, 1996

<TABLE> 
<CAPTION> 
                                                                                                  Fair  
     Identity of issue                         Description                     Cost              Value
     -----------------                         -----------                     ----              -----
<S>                                          <C>                           <C>                 <C> 
Group annuity contract with Principal
  Mutual Life Insurance Company:*
     Guaranteed Interest Account             General investment
                                               account comprised
                                               of guaranteed 
                                               interest contracts           $ 1,428,065          1,424,167

     U.S. Stock Account                      Pooled separate account
                                               investing in equity
                                               securities                     1,176,808          1,767,188

     Money Market Account                    Pooled separate account
                                               investing in money
                                               market instruments                93,889             99,217

     Bond and Mortgage Account               Pooled separate account
                                               investing in fixed
                                               income securities                127,170            139,919

     Stock Index Account                     Pooled separate account
                                               investing in corporate
                                               stocks                           197,921            257,326
                                                                            -----------        -----------

                                                                            $ 3,023,853          3,687,817
                                                                            ===========        ===========
</TABLE> 

*Person named is a party-in-interest.

<PAGE>
 
                                                                      SCHEDULE 2
                                                                      ----------


                             LOCKPORT SAVINGS BANK
                                  401(k) PLAN

                Item 27d - Schedule of Reportable Transactions

                         Year ended December 31, 1996

<TABLE> 
<CAPTION> 
                                                                                                                Expense
                                                Number                     Number                               incurred
      Identity of          Description         of units      Purchase     of units      Selling     Lease         with
    party involved           of asset          purchased       price        sold         price      rental     transaction
    --------------         -----------         ---------     --------     --------      -------     ------     -----------
<S>                    <C>                    <C>           <C>          <C>           <C>          <C>        <C>  
Group Annuity
  contract with
  Principal Mutual
  Life Insurance
  Company:*
    Guaranteed         General investment
      Interest           account comprised
      Account**          of guaranteed
                         interest contracts       -         $  380,814       -         $317,775        -            -


    U.S Stock          Pooled separate
      Account**          account investing 
                         in equity
                         securities            1519.4946       405,909     397.5914     104,235        -            -

    Money Market       Pooled separate
      Account**          account investing
                         in money
                         market
                         instruments           2681.8994        86,982    1533.2210      49,909        -            -

    Stock Index        Pooled separate
      Account**          account investing  
                         in corporate
                         stocks                5559.6847       122,841    1210,7832      26,825        -            -
                                              ==========    ==========    =========    ========    =========    =========
<CAPTION> 
                                                               Fair
                                                             value of
                                                             asset on
      Identity of          Description       Cost of        transaction         Net
    party involved           of asset         asset             date           gain
    --------------         -----------       -------        -----------        ----
<S>                    <C>                   <C>            <C>               <C> 
Group Annuity
  contract with
  Principal Mutual
  Life Insurance
  Company:*
    Guaranteed         General investment
      Interest           account comprised
      Account**          of guaranteed
                         interest contracts    317,775         317,775          -


    U.S Stock          Pooled separate
      Account**          account investing 
                         in equity
                         securities             76,642          76,642        27,593
                                                                 
    Money Market       Pooled separate                           
      Account**          account investing                       
                         in money                                
                         market                                  
                         instruments            47,428          47,428         2,481
                                                                 
    Stock Index        Pooled separate                           
      Account**          account investing                       
                         in corporate                            
                         stocks                 22,156          22,156         4,669
                                              ========        ========       =======
</TABLE> 

*Person named is a party-in-interest.

**Series of transactions


<PAGE>
 
PROSPECTUS
UP TO 13,501,554 SHARES OF COMMON STOCK
                                                           NIAGARA BANCORP, INC.
                                                         6950 SOUTH TRANSIT ROAD
                                                                    P.O. BOX 514
                                                   LOCKPORT, NEW YORK 14095-0514
                                                                  (716) 625-7500

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

     Lockport Savings Bank, Lockport, New York is reorganizing from the mutual
form of organization to the mutual holding company form of organization. As part
of the Reorganization, Lockport Savings Bank will become a wholly-owned
subsidiary of Niagara Bancorp, Inc., a Delaware corporation, and Niagara
Bancorp, Inc. will issue a majority of its common stock to Niagara Bancorp, MHC,
a New York-chartered mutual holding company, and sell a minority of its common
stock to the public pursuant to this Prospectus. The shares of common stock of
Niagara Bancorp, Inc. are being offered to depositors and the public under the
terms of a Plan of Reorganization which must be approved by depositors of
Lockport Savings Bank and by the New York State Banking Department. In addition,
the Federal Deposit Insurance Corporation must issue a letter of nonobjection to
the Reorganization. The Reorganization will not go forward if Lockport Savings
Bank does not receive these approvals and nonobjections, or if Niagara Bancorp,
Inc. does not sell at least a minimum number of shares of its common stock.
Because the names of Niagara Bancorp, Inc. and Niagara Bancorp, MHC are so
similar, we will refer to Niagara Bancorp, Inc. as the "Company" and we will
refer to Niagara Bancorp, MHC as the "Mutual Holding Company."

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

                               TERMS OF OFFERING

     An independent appraiser has estimated that as of November 28, 1997, the
pro forma market value of the Common Stock of the Company ranged from $191.1
million to $258.8 million.  Based on the valuation, the Company will issue
between 19,125,000 and 25,875,000 shares of Common Stock in the Reorganization.
The Company intends to sell 45.4% of such shares, or between 8,677,747 and
11,740,482 shares, to depositors and the public pursuant to this Prospectus, and
issue 53.3% of such shares, or between 10,186,921 and 13,782,304 shares, to the
Mutual Holding Company.  In addition, shares are being issued to a charitable
foundation as part of the Reorganization, which will result in stockholders
other than the Mutual Holding Company owning 46.7% of the shares of the Common
Stock outstanding at the conclusion of the Reorganization.  Subject to the
approval of the New York State Banking Department and the nonobjection of the
Federal Deposit Insurance Corporation, an additional 15% above the maximum
number of shares, or a total of 29,756,250 shares, may be issued in the
Reorganization, and up to 13,501,554 shares may be sold in the Offering pursuant
to this Prospectus, in the event of an increase in the estimated pro forma
market value of the common stock of the Company.  Based on these estimates, we
are making the following offering of shares of Common Stock pursuant to this
Prospectus.

<TABLE>
<CAPTION>
     <S>                                                       <C>               <C>              <C>           
     .    Price Per Share:                                     $10.00                                           
     .    Number of Shares                                                                                      
          Minimum/Maximum/Adjusted Maximum:                     8,677,747         11,740,482       13,501,554                    
     .    Reorganization Expenses                                                                               
          Minimum/Maximum/Adjusted Maximum:                    $1,455,352,352    $1,694,858       $1,800,000                    
     .    Net Proceeds to Niagara Bancorp, Inc.                                                                 
          Minimum/Maximum/Adjusted Maximum:                    $85,322,118       $115,709,962     $133,215,540         
     .    Net Proceeds per share to Niagara Bancorp, Inc.                                                                        
          Minimum/Maximum/Adjusted Maximum:                    $9.83             $9.86            $9.87          
 
</TABLE>

PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE _____ OF THIS DOCUMENT.
<PAGE>
 
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE NEW YORK STATE BANKING
DEPARTMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

     CIBC Oppenheimer Corp. and Trident Securities, Inc. will use their best
efforts to assist the Company in selling at least the minimum number of shares
but do not guarantee that this number will be sold. All funds received from
subscribers will be held in an interest bearing savings account at Lockport
Savings Bank until the completion or termination of the Reorganization.

     For information on how to subscribe, call the Stock Information Center at
(716) 438-1198.   For additional information about the Bank, please visit our
Website at http://www.__________.com.

CIBC OPPENHEIMER CORP.                                  TRIDENT SECURITIES, INC.


                      PROSPECTUS DATED FEBRUARY  ___, 1997
<PAGE>
 
                                      MAP
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING.......................................     1
SUMMARY AND OVERVIEW.................................................................     4
SELECTED FINANCIAL INFORMATION.......................................................     8
RISK FACTORS.........................................................................    11
NIAGARA BANCORP, INC.................................................................    15
LOCKPORT SAVINGS BANK................................................................    15
REGULATORY CAPITAL COMPLIANCE........................................................    16
USE OF PROCEEDS......................................................................    17
DIVIDEND POLICY......................................................................    18
MARKET FOR THE COMMON STOCK..........................................................    19
CAPITALIZATION.......................................................................    19
PRO FORMA DATA.......................................................................    20
COMPARISON OF VALUATION AND PRO FORMA
     INFORMATION WITHOUT FOUNDATION..................................................    28
PARTICIPATION BY MANAGEMENT..........................................................    29
CONSOLIDATED STATEMENTS OF INCOME....................................................    30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
     FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................    31
BUSINESS OF THE COMPANY..............................................................    47
BUSINESS OF THE BANK.................................................................    47
FEDERAL AND STATE TAXATION...........................................................    82
REGULATION...........................................................................    83
MANAGEMENT OF THE COMPANY............................................................    92
MANAGEMENT OF THE BANK...............................................................    93
THE REORGANIZATION AND OFFERING......................................................   102
</TABLE> 

                                      (i)
<PAGE>
 
<TABLE> 
<S>                                                                                     <C> 
RESTRICTIONS ON ACQUISITION OF THE COMPANY...........................................   118
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY..........................................   120
TRANSFER AGENT AND REGISTRAR.........................................................   121
LEGAL AND TAX MATTERS................................................................   121
EXPERTS..............................................................................   122
ADDITIONAL INFORMATION...............................................................   122
CONSOLIDATED FINANCIAL STATEMENTS....................................................   F-1
</TABLE>

     This document contains forward-looking statements which involve risks and
uncertainties. Niagara Bancorp, Inc.'s actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page 11 of this Prospectus.

Please see the Glossary beginning on page G-l for the meaning of capitalized
terms that are used in this Prospectus.

                                     (ii)
<PAGE>
 
                QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING

Q:   WHAT IS THE PURPOSE OF THE OFFERING?

A:   The Offering is being made in connection with the Reorganization of
     Lockport Savings Bank from a New York-chartered mutual savings bank into
     the mutual holding company form of ownership. As part of the
     Reorganization, you will have the opportunity to become a shareholder of
     the Company, a Delaware corporation, which will allow you to share in the
     future of our savings bank. By converting to the stock form of ownership,
     the Bank will be structured in the form used by virtually all commercial
     banks and a large number of savings banks. The Offering will increase our
     capital for lending and investment activities. This will better enable us
     to continue the expansion of our retail banking franchise and to diversify
     operations. Further, as a stock savings bank operating through a holding
     company structure, we will improve our ability to access the capital
     markets. As part of the Reorganization, we are also establishing a
     Charitable Foundation that will be dedicated exclusively to supporting
     charitable causes and community development activities in Western New York
     State.

Q:   HOW DO I ORDER THE STOCK?

A:   You must complete and return the stock order form and certification to us
     together with your payment, on or before March _____, 1998.

Q:   HOW MUCH STOCK MAY I ORDER?

A:   The minimum order is 25 shares (or $250). The maximum order is 20,000
     shares for a purchase price of $200,000. In certain instances, your order
     may be grouped together with orders by other persons who are associated
     with you (such as your spouse, child or relative living in your home), or
     with whom you are acting in concert, and, in that event, you would be
     subject to an aggregate purchase limit of 40,000 shares, or $400,000. We
     may decrease or increase the maximum purchase limitation without notifying
     you. However, if we increase the maximum purchase limitation, and you
     previously subscribed for the maximum number of shares, you will be given
     the opportunity to subscribe for additional shares.

Q:   WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?

A:   If the Offering is oversubscribed, shares will be allocated based upon a
     formula set forth in the Plan of Reorganization and in accordance with New
     York law and regulations, and policies of the FDIC and New York State
     Banking Department.

Q:   WHO WILL RECEIVE SUBSCRIPTION RIGHTS?

A:   The stock will be offered on a priority basis to the following persons:

     .    Persons who had deposit accounts of at least $100 with us on August
          31, 1996. Any remaining shares will be offered to:

     .    The Company's employee stock ownership plan. Any remaining shares will
          be offered to:

     .    Persons who had deposit accounts of at least $100 with us on December
          31, 1997.

     If the above persons do not subscribe for all of the shares, the remaining
     shares will be offered to certain members of the general public, with
     preference given first to natural persons residing in the Western New York
<PAGE>
 
     counties of Niagara, Erie, Orleans and Genesee, and secondly to natural
     persons residing in the remaining  four counties of Western New York,
     Wyoming, Allegany, Cattaraugus and Chautauqua counties.

Q:   WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT TO
     BUY THE STOCK?

A:   Before you decide to purchase stock, you should read the entire Prospectus,
     including the Risk Factors section on pages _____ of this document.

Q:   AS A DEPOSITOR OF LOCKPORT SAVINGS BANK, WHAT WILL HAPPEN IF I DO NOT ORDER
     ANY STOCK?

A:   You are not required to purchase Common Stock. Your deposit accounts and
     any loans you may have with us will not be affected by the Reorganization.

Q:   WHAT IS A MUTUAL HOLDING COMPANY REORGANIZATION?

A:   Lockport Savings Bank will convert from the mutual form of organization to
     the capital stock form of organization, and establish the Company. The
     Company will issue between 19,125,000 and 29,756,250 shares of Common Stock
     in the Reorganization; 53.3% of the shares will be issued to the Mutual
     Holding Company, and 45.4% will be sold to depositors and the public
     pursuant to this Prospectus. In addition, shares are being issued to a
     charitable foundation as part of the Reorganization, which will result in
     stockholders other than the Mutual Holding Company owning 46.7% of the
     shares of the Common Stock outstanding at the conclusion of the
     Reorganization. The Mutual Holding Company is a New York-chartered mutual
     corporation without shares of capital stock, which will be regulated by the
     New York State Banking Department and the Federal Reserve Board. As part of
     the Reorganization, any liquidation or ownership-type interest that a
     depositor had in Lockport Savings Bank will become a similar interest in
     the Mutual Holding Company. Based upon the Independent Valuation, 53.3% of
     the shares of Common Stock to be issued in the Reorganization will range
     from a minimum of 10,186,921 shares to an adjusted maximum of 15,849,649
     shares, and 45.4% of the shares of Common Stock to be sold pursuant to this
     Prospectus will range from a minimum of 8,677,747 shares to an adjusted
     maximum of 13,501,554 shares.

Q:   IS A MUTUAL HOLDING COMPANY REORGANIZATION DIFFERENT FROM OTHER MUTUAL TO
     STOCK HOLDING COMPANY CONVERSIONS?

A:   The mutual holding company structure differs in significant respects from
     an ordinary savings and loan or bank holding company. The Mutual Holding
     Company is a mutual corporation without shares of capital stock.
     Furthermore, the Mutual Holding Company's Board of Trustees, in making
     certain business decisions, considers the impact of its action on a variety
     of constituencies, including the depositors of the Bank, the employees of
     the Bank, and the communities in which the Bank operates. As the majority
     stockholder of the Company, the Mutual Holding Company is also interested
     in the continued success and profitability of the Bank and the Company.
     Consequently, the Mutual Holding Company will act in a manner which
     furthers the general interest of all of its constituencies, including, but
     not limited to, the interest of the stockholders of the Company. The Mutual
     Holding Company believes that the interests of the stockholders of the
     Company, and those of the Mutual Holding Company's other constituencies,
     are in many circumstances the same, such as the increased profitability of
     the Company and the Bank and continued service to the communities in which
     the Bank operates.

Q:   CAN THE MUTUAL HOLDING COMPANY CONVERT TO STOCK FORM?

A:   Although New York law and regulations and the Plan of Reorganization permit
     the Mutual Holding Company to convert from the mutual to the capital stock
     form of organization, the Board of Trustees has no current intention or
     plan to undertake such a transaction. Moreover, there can be no assurance
     that such a transaction 

                                       2
<PAGE>
 
     will ever occur. If the Mutual Holding Company were to convert to the
     capital stock form of organization, certain depositors would receive the
     right to subscribe for additional shares of the resulting entity. In such a
     transaction, each share of Common Stock outstanding and held by persons
     other than the Mutual Holding Company would be automatically converted into
     shares of common stock of the resulting entity.

Q:   HOW DO I DECIDE WHETHER TO BUY STOCK IN THE OFFERING?

A:   In order to make an informed investment decision, you should read this
     entire Prospectus. This section highlights selected information and may not
     contain all of the information that is important to you. If you have
     questions about the Offering, you may contact:


                           STOCK INFORMATION CENTER
                             LOCKPORT SAVINGS BANK
                                55 EAST AVENUE
                                 P.O. BOX 886
                         LOCKPORT, NEW YORK 14095-0886
                                (716) 438-1198

                                       3
<PAGE>
 
                             SUMMARY AND OVERVIEW

     GENERALLY, this summary highlights selected information from this document
and does not contain all the information that you need to know before making an
informed investment decision. To understand the Offering fully, you should read
carefully this entire Prospectus, including the consolidated financial
statements and the notes to the consolidated financial statements of Lockport
Savings Bank. References in this document to "we", "us", or "our" refer to
Lockport Savings Bank. In certain instances where appropriate, "us" or "our"
refers collectively to Niagara Bancorp, Inc. and Lockport Savings Bank.
References in this document to the "Bank" refer to Lockport Savings Bank.
References in this document to the "Company" refer to Niagara Bancorp, Inc.
References to the "Mutual Holding Company" refer to Niagara Bancorp, MHC.

     USE OF DEFINED TERMS.  You should note as you read this Prospectus that at
times we use capitalized terms. These capitalized terms are generally defined in
the Glossary that appears at the back of this Prospectus. We use these defined
terms so that we can clearly differentiate between various components of the
transaction, and so that we don't have to describe exactly what we mean each
time we use a term. For example, to avoid confusion, we refer to all of the
steps that are part of this transaction as the "Reorganization," and we refer to
the issuance of 45.4% of the Company's Common Stock pursuant to this Prospectus
as the "Offering." The term "Reorganization" includes the Offering, but the term
"Offering" does not include the Reorganization. To further assist you, in
addition to including a Glossary of all defined terms, we usually will define
each term the first time that it is used in the Prospectus.

THE COMPANIES

                             Niagara Bancorp, Inc.
                            6950 South Transit Road
                                 P.O. Box 514
                         Lockport, New York 14095-0514
                                (716) 625-7500

     The Company was formed to be our holding company, and has not had any
operations to date. Upon completion of the Reorganization, the Company will own
all of Lockport Savings Bank's common stock, the public (including depositors
and the Foundation) will own a minority of the shares of Common Stock of the
Company, and the Mutual Holding Company will be the Company's majority
stockholder. The holding company structure will provide us greater flexibility
in terms of operations, expansion and diversification. See page _____.

                             Lockport Savings Bank
                            6950 South Transit Road
                                 P.O. Box 514
                         Lockport, New York 14095-0514
                                (716) 625-7500

     The Bank was organized in 1870 as a New York-chartered mutual savings bank.
At September 30, 1997, we had total assets of $1.2 billion, total deposits of
$992.2 million, and net worth of $126.7 million. We are a community- and
customer-oriented savings bank that operates fifteen full-service branch offices
in the Western New York counties of Niagara, Orleans, Erie and Genesee, which we
consider to be our primary market area. We also consider the remaining four
counties of Western New York, Wyoming, Allegany, Cattaraugus and Chautauqua
counties, as our market area. Through our "Person to Person Commitment" approach
to retail banking, we emphasize personal service and customer convenience in
serving the financial needs of the individuals, families and businesses residing
in Western New York. We offer the convenience and product mix of a larger, super
regional bank while providing the responsiveness and community orientation of a
smaller, local institution.

                                       4
<PAGE>
 
      Lockport is located on the historic Erie Canal and is 20 miles northeast
of Buffalo and 15 miles east of Niagara Falls. More than 9 million people reside
within the 125-mile radius of the city of Buffalo and the region is the 45th
largest metropolitan area in the nation and the 3rd largest in New York State.
 
     Based on FDIC-published data, as of June 30, 1996 we had the second largest
deposit market share in each of Niagara and Orleans counties, the fifth largest
share in Genesee county, and the eighth largest share in Erie County. We have
customer relationships with over 76,000 households in our primary market area,
representing approximately 17% of all households therein. For 1996, we were the
fourth leading originator of residential mortgage loans in Erie County. In the
eight county Western New York region, we had the fifth largest aggregate deposit
market share. Those banks having a larger aggregate market share in Western New
York are significantly larger, super regional financial institutions. Management
considers the Bank to be the dominant independent community bank focused
exclusively on serving the banking needs of the Western New York region.

     Since 1990, when the Bank acquired the savings bank life insurance ("SBLI")
operations of another Western New York savings bank, the Bank's life insurance
department has grown to become one of the largest servicers of SBLI in New York
State. These insurance products, along with the sale of various annuity
products, were expanded in 1997 as the Bank added the sale of mutual funds to
its non-deposit product line. Additional opportunities in the non-deposit field,
such as the sale of property and casualty insurance, should continue to enhance
the Bank's position as a full service provider of financial services in the near
future.

     Our business strategy is designed to enhance our profitability and
strengthen our position as the dominant, independent community bank in Western
New York. The highlights of our strategy include the following:

     .    Expansion of the retail banking franchise. We are continuing to focus
          on expanding our retail banking franchise and increasing the number of
          households served within our market area and the number of bank
          products used per customer. Since 1994 we have opened five full-
          service branch offices and our Board has authorized the establishment
          of three additional branch offices in 1998. We operate two full-
          service supermarket branch offices, provide customer access to ATMs,
          including the Bank's fourteen ATMs, without a service charge, provide
          telephone customer service, and provide 24-hour telephone account
          access. We have established a Website and are developing plans to
          introduce home computer banking services. Under the direction of our
          new head of retail banking, hired in 1997, additional emphasis and
          training is being directed toward greater cross-selling of bank
          products.

     .    Loan portfolio growth. Our loan portfolio consists of one- to four-
          family residential mortgage loans, commercial and multi-family real
          estate loans, consumer and other loans, and commercial business loans.
          At September 30, 1997, our loan portfolio totaled $622.5 million, an
          increase of $263.0 million, or 73.2%, since December 31, 1992. The
          loan portfolio represented 52.9% of total assets and 62.7% of total
          deposits at September 30, 1997, compared to 43.1% of total assets and
          48.2% of deposits at December 31, 1992. We intend to continue to
          increase our loan portfolio as a percentage of assets. Further, while
          maintaining our position as a leading originator of residential loans
          in our market, we plan to build upon our position as the dominant
          independent community bank to increase our market share of higher
          margin multi-family, commercial real estate, consumer and commercial
          business loans.

     .    Maintaining asset quality. Because we believe that asset quality is a
          critical component of long-term financial success, we have remained
          committed to a conservative credit culture. During the past five
          years, and including the nine month period ended September 30, 1997,
          non-performing assets have averaged 0.59% of total assets. At
          September 30, 1997, our non-performing loans totaled $1.9 million,
          representing 0.31% of the loan portfolio, and our non-performing
          assets totaled $2.2 million, representing 0.19% of assets. Our
          allowance for loan losses amounted to $6.4 million at September 30,
          1997, and represented 1.02% of our loan portfolio and 330.0% of non-
          performing loans.

                                       5
<PAGE>
 
     .    Managing interest rate risk. Although our liabilities are more
          sensitive to changes in interest rates than our assets, we seek to
          manage our exposure to interest rate risk by originating and retaining
          adjustable-rate loans in both the residential and commercial real
          estate loan portfolios, and by originating short-term and medium-term
          fixed-rate consumer loans. We also use our investment and mortgage
          related securities portfolios to manage our interest rate risk
          exposure. As of September 30, 1997, our securities available for sale
          totaled $465.0 million, or 39.5% of total assets, with an average life
          of 4.27 years, and our securities held to maturity totaled $37.5
          million, or 3.2% of total assets, with an average life of .07 years.

THE STOCK OFFERING

     The Company is offering for sale between 8,677,747 and 11,740,482 shares of
its Common Stock, for a price per share of $10.00 (the "Subscription Price"),
pursuant to this Prospectus. This Offering may be increased to 13,501,554 shares
without further notice to you if market or financial conditions change prior to
the completion of this Offering.

STOCK PURCHASE PRIORITIES

     The Company will offer shares of its Common Stock to the Bank's depositors
who held deposit accounts as of certain dates and to the ESOP (the "Subscription
Offering").  Any shares not subscribed for will be offered to certain members of
the general public in a community offering, with preference given first to
natural persons residing in the Western New York counties of Niagara, Erie,
Orleans and Genesee, and secondly to natural persons residing in the remaining
four counties of Western New York, Wyoming, Allegany, Cattaraugus and Chautauqua
counties (the "Community Offering").  See pages _____ to _____.  We have engaged
CIBC Oppenheimer Corp. and Trident Securities, Inc. to assist us on a best
efforts basis in selling the Common Stock in the Offering.

PROHIBITION ON TRANSFER OF SUBSCRIPTION RIGHTS

     Selling or assigning your subscription rights is illegal. All persons
exercising their subscription rights will be required to certify that they are
purchasing shares solely for their own account and that they have no agreement
or understanding regarding the sale or transfer of such shares. We intend to
pursue any and all legal and equitable remedies in the event we become aware of
the transfer of subscription rights and we will not honor orders known by us to
involve the transfer of such rights. In addition, persons who violate the
purchase limitations may be subject to sanctions and penalties imposed by the
New York State Banking Department (the "Department").

STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED

     The Plan of Reorganization and federal and state regulations require that
the aggregate purchase price of the Common Stock sold in the Offering must be
based on the appraised pro forma market value of the Company's Common Stock, as
determined by an independent valuation (the "Independent Valuation"). The Bank
has retained RP Financial, LC, Arlington, Virginia to make such valuation. The
Independent Valuation prepared by RP Financial states that as of November 28,
1997, the estimated pro forma market value of the Company's Common Stock to be
issued in the Reorganization ranged from a minimum of $191,250,000 to a maximum
of $258,750,000 with a midpoint of $225,000,000. To avoid confusion, we will
refer to this range of estimated values as the "Estimated Valuation Range."
Based on the Estimated Valuation Range and the $10 per share Subscription Price,
the number of shares of Common Stock that the Company will issue will range from
between 19,125,000 shares and 25,875,000 shares, with a midpoint of 22,500,000
shares. We have determined to offer 45.4% of such shares, or between 8,677,747
shares and 11,740,482 shares with a midpoint of 10,209,115 shares (the "Offering
Range"), to depositors and the public pursuant to this Prospectus. In addition,
shares are being issued to the Foundation as part of the Reorganization, which
will result in stockholders other than the Mutual Holding Company ("Minority
Stockholders") owning 46.7% of the shares of the 

                                       6
<PAGE>
 
Common Stock outstanding at the conclusion of the Reorganization. The 53.3% of
the shares of the Company's Common Stock that are not sold in the Offering or
contributed to the Foundation will be issued to the Mutual Holding Company.

     Following commencement of the Offering, the maximum of the Estimated
Valuation Range may be increased by up to 15% to up to $297,562,500, which will
result in a corresponding increase in the maximum of the Offering Range to up to
13,501,554 shares, to reflect changes in the market and financial conditions and
demand for the Common Stock following commencement of the Offering, without the
resolicitation of subscribers. The minimum of the Estimated Valuation Range and
the minimum of the Offering Range may not be decreased without a resolicitation
of subscribers. THE INDEPENDENT VALUATION, HOWEVER, IS NOT INTENDED, AND MUST
NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SHARES. BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES
AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM
TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SUCH SHARES IN
THE OFFERING WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE
THE SUBSCRIPTION PRICE.

TERMINATION OF THE OFFERING

     The Subscription Offering will terminate at ___________, New York time, on
March __, 1998. The concurrent Community Offering may terminate on or after
March ___, 1998, but in any event, no later than May ___, 1998, unless an
extension is granted by the FDIC and the Department.  If the Reorganization and
Offering is not completed by May ___, 1998 all subscribers will be notified and
will be given the opportunity to cancel or modify their order.

BENEFITS TO MANAGEMENT FROM THE OFFERING

     Our full-time employees will participate in our employee stock ownership
plan (the "ESOP"), which is a form of retirement plan that will purchase shares
of Common Stock in the Offering. We also intend to implement a recognition and
retention plan and a stock option plan following completion of the
Reorganization, which will benefit our officers and directors. If we adopt the
recognition and retention plan, certain officers and directors will be awarded
shares of Common Stock without paying for the shares. However, the recognition
and retention plan and stock option plan may not be adopted until at least six
months after completion of the Reorganization and are subject to shareholder
approval.  See pages _____ to _____.

THE CHARITABLE FOUNDATION

     In furtherance of our commitment to our local community, we intend to
establish a charitable foundation (the "Foundation") as part of the
Reorganization. We will make a contribution to the Foundation, in the form of
shares of Common Stock and cash, in a total amount equal to 5% of the aggregate
Subscription Price of the shares of Common Stock sold in the Offering. The
number of shares of Common Stock to be contributed to the Foundation will equal
3% of the shares sold in the Offering. The balance of the contribution will
consist of cash. Due to the issuance of additional shares of Common Stock to the
Foundation, persons purchasing shares in the Offering will have their ownership
and voting interests in the Company diluted by 1.3%. As a result of the
establishment and funding of the Foundation, the Company will recognize an
expense equal to the full amount of the contribution, offset in part by a
corresponding tax benefit, during the quarter in which the contribution is made,
which is expected to be the first or second quarter of 1998. Such expense will
reduce earnings and have a material impact on the Company's earnings for such
quarter and for the year. The board of directors of the Foundation initially
will consist of persons who are also directors of the Company and the Bank. See
"Risk Factors--The Expense and Dilutive Effect of the Contribution of Shares and
Cash to the Charitable Foundation," "Pro Forma Data," and "The Reorganization
and Offering--Establishment of the Charitable Foundation."

                                       7
<PAGE>
 
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK

     The Company will use the net proceeds from the Offering as follows.  The
percentages we use are estimates:

     .    50% will be used to buy all the capital stock of Lockport Savings
          Bank.
     .    8% will be loaned to the ESOP to fund its purchase of Common Stock.
     .    42% will be retained as a possible source of funds for the payment of
          dividends to shareholders, the repurchase of stock, and for other
          general corporate purposes.

     The proceeds to be received by the Bank will be available for continued
expansion of the retail banking franchise through de novo branching or deposit
or bank acquisitions, continued growth in the loan portfolio, and the purchase
of investment and mortgage related securities, in addition to general corporate
purposes.

     See pages _____ to _____.

PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON STOCK

     To ensure that eligible account holders and supplemental eligible account
holders are properly identified as to their stock purchase priorities, such
parties must list all deposit accounts on the order form, giving all names on
each deposit account and the account numbers at the applicable date. THE FAILURE
TO PROVIDE ACCURATE AND COMPLETE ACCOUNT INFORMATION ON THE ORDER FORM MAY
RESULT IN A REDUCTION OR ELIMINATION OF YOUR ORDER.

     Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original order form. THE COMPANY IS NOT OBLIGATED TO ACCEPT AN
ORDER SUBMITTED ON PHOTOCOPIED OR TELECOPIED ORDER FORMS. WE WILL NOT ACCEPT
ORDER FORMS IF THE CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE ORDER FORM
IS NOT EXECUTED.

DIVIDENDS

     Niagara Bancorp, Inc. intends to pay an annual cash dividend of $0.12
payable quarterly at $0.03 per share. The payment of dividends is expected to
commence following the first full quarter after completion of the
Reorganization.

MARKET FOR THE COMMON STOCK

     The Company has never issued capital stock. Consequently, there is no
current market for the Common Stock. The Company has received conditional
approval to have the Common Stock quoted on the Nasdaq National Market under the
symbol "NBCP." CIBC Oppenheimer Corp. and Trident Securities, Inc. intend to
make a market in the Common Stock, and we expect that additional market makers
will be identified.

IMPORTANT RISKS IN PURCHASING AND OWNING THE COMPANY'S COMMON STOCK

     Before you decide to purchase stock in the Offering, you should read the
Risk Factors section on pages _____ of this Prospectus, in addition to the other
sections of this Prospectus.

                                       8
<PAGE>
 
                        SELECTED FINANCIAL INFORMATION

     The selected data presented below under the captions "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years in the five-year period ended December 31, 1996, are derived from
the audited consolidated financial statements of Lockport Savings Bank and
subsidiaries. The consolidated financial statements as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
are included elsewhere in this prospectus. The selected data presented below as
of and for the nine-month periods ended September 30, 1997 and 1996 are derived
from the unaudited consolidated financial statements of Lockport Savings Bank
and subsidiaries included elsewhere in this prospectus.

<TABLE> 
<CAPTION> 
                                                  SEPTEMBER 30,                                DECEMBER 31, 
                                                                 -----------------------------------------------------------
                                                     1997           1996        1995         1994         1993         1992
                                                  -----------    -----------  -----------  ----------   ----------   -------
                                                                                               (IN THOUSANDS)
<S>                                               <C>            <C>          <C>          <C>          <C>          <C>           
SELECTED FINANCIAL CONDITION DATA:
---------------------------------

  Total assets..............................      $ 1,176,451    $ 1,093,358  $   994,291  $  916,185   $  914,910   $  834,764
  Loans, net................................          622,487        598,486      535,971     474,191      421,061      359,442
  Securities available for sale(1):
    Mortgage related securities.............          285,762        284,860      261,543     273,280      300,582      323,105
    Other securities........................          179,211        130,269       84,867      65,733       67,903       27,520
  Securities held to maturity...............           37,500         38,000       46,700      43,838       51,927       33,809
  Deposits..................................          992,219        920,072      861,065     819,690      812,939      746,345
  Other borrowed funds......................           28,740         32,008            -           -            -            -
  Net worth.................................          126,720        115,664      107,653      81,322       87,195       75,722
</TABLE> 

<TABLE> 
<CAPTION> 
                                                     NINE MONTHS
                                                 ENDED SEPTEMBER 30,                       YEARS ENDED DECEMBER 31,
                                             -----------------------  --------------------------------------------------------------
                                                1997         1996         1996        1995         1994         1993          1992
                                             ----------   ----------  -----------  -----------  ----------   ----------     --------
                                                                                        (IN THOUSANDS)
<S>                                          <C>          <C>         <C>          <C>          <C>          <C>          <C> 
SELECTED OPERATIONS DATA:
------------------------
  Interest income.........................   $   61,310   $   55,458  $   75,062   $  69,856    $   63,144   $   61,681   $   61,096
  Interest expense........................       33,335       30,024      40,655      39,034(2)     31,754       32,597       34,281
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
    Net interest income...................       27,975       25,434      34,407      30,822        31,390       29,084       26,815
  Provision for loan losses...............          975        1,861       2,187       1,016           948        1,522        1,398
                                             ----------   ----------  ----------   ----------   ----------   ----------   ----------
  Net interest income after               
    provision for loan losses.............       27,000       23,573      32,220      29,806        30,442       27,562       25,417
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Fees and service charges................        3,037        2,564       3,495       2,692         2,283        2,293        1,774

  Net gain (loss) on sale of              
    securities available for sale.........          875          532         576       1,477          (849)       3,601        5,732
  Other operating income..................        1,044        1,223       1,681       1,237           952        1,149          172
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Total other operating income............        4,956        4,319       5,752       5,406         2,386        7,043        7,678
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Operating and other expenses............       18,416       14,999      20,926      20,143        18,399       16,666       15,689
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Income before taxes and cumulative      
    effect of change in accounting        
    principle.............................       13,540       12,893      17,046      15,069        14,429       17,939       17,406
  Income taxes............................        4,905        4,667       6,278       5,144         4,704        6,595        6,184
  Cumulative effect of change in          
    accounting principle..................            -            -           -           -          (924)(3)      129(4)         -
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Net income..............................   $    8,635   $    8,226  $   10,768   $   9,925    $    8,801   $   11,473   $   11,222
                                             ==========   ==========  ==========   =========    ==========   ==========   ==========
</TABLE> 

__________________________
(1)   The Bank adopted the provisions set forth in SFAS No. 115 on January 1,
      1994, which requires securities available for sale to be carried at fair
      value. At December 31, 1993 and 1992, securities held for sale were
      carried at amortized cost.
(2)   Includes $1.25 million paid as a special interest payment in 1995, which
      was paid on a prorata basis on all interest-bearing savings, NOW, money
      market and certificate of deposit accounts in recognition of the Bank's
      125th anniversary.
(3)   Cumulative effect of change in accounting for postretirement health care
      and life insurance benefits. 
(4)   Cumulative effect of change in accounting for income taxes.

                                       9
<PAGE>
 
<TABLE> 
<CAPTION> 
                                               AT OR FOR THE NINE MONTHS
                                                 ENDED SEPTEMBER 30,                 AT OR FOR THE YEARS ENDED DECEMBER 31,
                                               -----------------------  -----------------------------------------------------------
                                                 1997(1)      1996(1)       1996        1995         1994         1993         1992
                                               ----------   ----------  -----------  -----------  ----------   ----------   -------
<S>                                            <C>          <C>         <C>          <C>          <C>          <C>          <C> 
SELECTED FINANCIAL RATIOS AND OTHER DATA:
----------------------------------------

PERFORMANCE RATIOS:
Return on assets (ratio of net
    income to average total assets).........     1.01%        1.06%        1.03%        1.04%        0.95%       1.31%        1.47%
Return on net worth (ratio
    of net income to average net worth).....     9.58        10.20         9.84        10.25        10.41       14.01        16.02
Interest rate spread information:
   Average during period....................     2.83         2.83         2.82         2.88         3.07        3.10         3.17
   End of period............................     2.84         2.97         3.03         2.83         3.18        3.04         3.25
Net interest margin (2).....................     3.38         3.38         3.38         3.44         3.50        3.49         3.64
Ratio of operating expenses to
   average total assets.....................     2.16         1.94         2.01         2.10         1.99        1.92         2.05
Ratio of average interest-earning assets
    to average interest- bearing liabilities   113.63       113.80       113.93       113.92       112.30      109.95       110.27

ASSET QUALITY RATIOS:
Non-performing loans to total loans.........     0.31%        0.91%        0.78%        0.74%        0.89%       1.10%        0.75%
Non-performing assets to total
   assets...................................     0.19         0.54         0.48         0.97         0.56        0.69         0.70
Allowance for loan losses to non-
   performing loans.........................   330.03       118.58       138.60       119.01        99.29       88.61       102.20
Allowance for loan losses to total loans....     1.02         1.08         1.09         0.88         0.88        0.96         0.75

CAPITAL RATIOS:
Net worth to total assets...................    10.77%       10.15%       10.58%       10.92%        8.88%       9.53%        9.07%
Average net worth to
   average assets...........................    10.60        10.43        10.49        10.11         9.17        9.37         9.15

OTHER DATA:
Number of full-service offices..............       15           12           13           11           10          10            8
Number of deposit accounts..................  141,088      127,843      129,087      122,464      114,464     107,242      108,146
Loans serviced for others...................   $145.7       $123.8       $129.0       $110.4        $85.1       $69.5        $35.6
   (in millions)
Residential loan originations...............    $77.4        $83.0       $110.9       $107.6        $84.1      $134.5       $110.3
   (in millions)
Full time equivalent employees..............    353.0        312.0        325.0        276.5        243.5       238.5        224.0
</TABLE> 

___________________________
(1)   Ratios for nine month periods have been annualized.  
(2)   Net interest income divided by average interest earning assets.
(3)   Averages presented are monthly averages.

                                       10
<PAGE>
 
                                 RISK FACTORS

     In addition to the other information in this Prospectus, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.

DECREASED RETURN ON AVERAGE EQUITY IMMEDIATELY AFTER REORGANIZATION

     At September 30, 1997, Lockport Savings Bank's ratio of net worth to total
assets was 10.77%. Our equity position will significantly increase as a result
of the net proceeds that we receive in the Offering. On a pro forma basis as of
September 30, 1997, assuming the sale of Common Stock at the midpoint of the
Offering Range, the Company's consolidated ratio of equity to assets would be
approximately 16.8%. We currently anticipate that it will take time to prudently
deploy such capital. As a result, our return on average equity (net income
divided by average equity) is expected to be significantly below the industry
average initially after the Reorganization.

POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT

     Our results of operations and financial condition are significantly
affected by changes in interest rates. Our results of operations are
substantially dependent on our net interest income, which is the difference
between the interest income earned on our interest-earning assets and the
interest expense paid on our interest-bearing liabilities. Because as a general
matter our interest-bearing liabilities reprice or mature more quickly than our
interest-earning assets, an increase in interest rates generally would result in
a decrease in our average interest rate spread and net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Management of Interest Rate Risk."

     Changes in interest rates also affect the value of our interest-earning
assets, and in particular our investment securities portfolio. Generally, the
value of investment securities fluctuates inversely with changes in interest
rates. At September 30, 1997, our securities portfolio totaled $502.5 million,
including $465.0 million of securities available for sale. Unrealized gains and
losses on securities available for sale are reported on a quarterly basis as a
separate component of equity. Decreases in the fair value of securities
available for sale therefore could have an adverse affect on stockholders'
equity. See "Business of the Bank--Securities Investment Activities."

     We are also subject to reinvestment risk relating to interest rate
movements. Changes in interest rates can affect the average life of loans and
mortgage related securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage related securities, as borrowers refinance to
reduce borrowing costs. Under these circumstances, we are subject to
reinvestment risk to the extent that we are not able to reinvest such
prepayments at rates that are comparable to the rates on the maturing loans or
securities.

LENDING RISKS ASSOCIATED WITH COMMERCIAL REAL ESTATE, MULTI-FAMILY AND CONSUMER
LENDING

     At September 30, 1997, our portfolio of multi-family loans totaled $72.8
million, or 11.6% of total loans, our portfolio of commercial real estate loans
totaled $69.6 million, or 11.1% of total loans, and our portfolio of consumer
and other loans totaled $65.4 million, or 10.5% of total loans. Most industry
experts believe that multi-family, commercial real estate and consumer loans
expose a lender to a greater risk of loss than one- to four-family residential
loans. See "Business of the Bank -Lending Activities" and "-Delinquencies and
Classified Assets."

MINORITY PUBLIC OWNERSHIP AND CERTAIN ANTI-TAKEOVER PROVISIONS

     Voting Control of the Mutual Holding Company. Under New York law, the Plan
of Reorganization, and our governing corporate instruments, at least 51% of the
Company's voting shares must be owned by the Mutual Holding Company. The Mutual
Holding Company will be controlled by its Board of Trustees, who will consist of
persons who are members of the Board of Directors of the Company and the Bank.
The Mutual Holding Company will elect all

                                       11
<PAGE>
 
members of the Board of Directors of the Company, and as a general matter, will
control the outcome of all matters presented to the stockholders of the Company
for resolution by vote, except for matters that require a vote greater than a
majority. The Mutual Holding Company, acting through its Board of Trustees, will
be able to control the business and operations of the Company and the Bank and
will be able to prevent any challenge to the ownership or control of the Company
by stockholders other than the Mutual Holding Company ("Minority Stockholders").
Accordingly, a change in control of the Company and the Bank cannot occur unless
the Mutual Holding Company first converts to the stock form of organization.
Although New York law, applicable regulations and the Plan of Reorganization
permit the Mutual Holding Company to convert from the mutual to the capital
stock form of organization, it is not anticipated that a conversion of the
Mutual Holding Company will occur in the foreseeable future. There can be no
assurance when, if ever, a conversion of the Mutual Holding Company will occur.

     Provisions in the Company's and the Bank's Governing Instruments. In
addition, certain provisions of the Company's certificate of incorporation and
bylaws, particularly a provision limiting voting rights, as well as certain
federal and state regulations, assist the Company in maintaining its status as
an independent publicly owned corporation. These provisions provide for, among
other things, supermajority voting, staggered boards of directors, noncumulative
voting for directors, limits on the calling of special meetings of shareholders,
and limits on the ability of Minority Stockholders to vote Common Stock in
excess of 5% of the issued and outstanding shares (inclusive of shares issued to
the Mutual Holding Company). The New York State Banking Regulations prohibit,
for a period of one year following the date of the Reorganization, offers to
acquire or the acquisition of beneficial ownership of more than 10% of the
outstanding stock of the Bank or the Company. The Bank's restated organization
certificate also prohibits, for three years, the acquisition, directly or
indirectly, of the beneficial ownership of more than 10% of the Bank's or the
Company's equity securities.

DIVIDEND WAIVERS BY THE MUTUAL HOLDING COMPANY

     It has been the policy of many mutual holding companies to waive the
receipt of dividends declared by its subsidiary. In connection with its approval
of the Reorganization, however, the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") imposed certain conditions on the waiver by
the Mutual Holding Company of dividends paid on the Common Stock. In particular,
the Mutual Holding Company must obtain prior Federal Reserve Board approval
before it may waive any dividends. As of the date hereof, management does not
believe that the Federal Reserve Board has given its approval to any waiver of
dividends by any mutual holding company that has requested its approval. The
cumulative amount of waived dividends, if any, must be maintained in a
restricted capital account which would be added to any liquidation account of
the Bank, and would not be available for distribution to Minority Stockholders.
The Plan of Reorganization also provides that if the Mutual Holding Company
converts to stock form in the future, any waived dividends would reduce the
percentage of the converted company's shares of Common Stock issued to Minority
Stockholders in connection with any such transaction. See "Regulation--Mutual
Holding Company Regulation--Conversion of the Mutual Holding Company to Stock
Form." It is not currently intended that the Mutual Holding Company will waive
dividends declared by the Company.

POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES

     Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of the Company following consummation of
the Reorganization, as noted below.

     The number of shares to be sold in the Reorganization may be increased as a
result of an increase in the Estimated Valuation Range of up to 15% to reflect
changes in the market and financial conditions and demand for the stock
following the commencement of the Offering. In the event that the Estimated
Valuation Range is so increased, it is expected that the Company will issue up
to 29,756,250 shares of Common Stock, including 13,501,554 shares of Common
Stock to depositors and the public pursuant to this Prospectus. An increase in
the number of shares will decrease net income per share and stockholders' equity
per share on a pro forma basis and will increase the Company's consolidated
stockholders' equity and net income. See "Capitalization" and "Pro Forma Data."

                                       12
<PAGE>
 
     The ESOP intends to purchase 8.0% of the Common Stock sold in the Offering.
In the event that there are insufficient shares available to fill the ESOP's
order due to an oversubscription by eligible account holders, the Company may
issue authorized but unissued shares of Common Stock to the ESOP in an amount
sufficient to fill the ESOP's order and/or the ESOP may purchase such shares in
the open market. In the event that additional shares of Common Stock are issued
to the ESOP to fill its order, stockholders would experience dilution of their
ownership interests (by up to 3.6% at the adjusted maximum of the Estimated
Valuation Range, assuming the ESOP purchased no shares in the Offering and
excluding shares expected to be issued to the Foundation) and per share
stockholders' equity and per share net income would decrease. See "Management of
the Bank--Benefit Plans--Employee Stock Ownership Plan and Trust" and "The
Reorganization and Offering--The Offering."

     The recognition and retention plan intends to acquire an amount of Common
Stock equal to 4.0% of the shares of Common Stock sold in the Offering. Such
shares of Common Stock may be acquired in the open market with funds provided by
the Company, if permissible, or from authorized but unissued shares of Common
Stock. The issuance of authorized but unissued shares of Common Stock to the
recognition and retention plan in an amount equal to 4% of the Common Stock sold
in the Offering would dilute the voting interests of existing stockholders by
approximately 1.8%, and net income per share and stockholders' equity per share
would be decreased by a corresponding amount. See "Pro Forma Data" and
"Management the Bank--Benefit Plans--Recognition and Retention Plan."

     The Company's stock option plan will reserve for future issuance pursuant
to such plan a number of shares of Common Stock equal to an aggregate of 10% of
the Common Stock sold in the Offering (1,174,048 shares, based on the maximum of
the Estimated Valuation Range). The issuance of authorized but unissued shares
of Common Stock pursuant to the stock option plan in an amount equal to 10% of
the Common Stock sold in the Offering would dilute the voting interests of
existing stockholders by approximately 4.5%, and net income per share and
stockholders' equity per share would be decreased by a corresponding amount. See
"Pro Forma Data" and "Management of the Bank--Benefit Plans--Stock Option Plan."

THE EXPENSE AND DILUTIVE EFFECT OF THE CONTRIBUTION OF SHARES AND CASH TO THE
CHARITABLE FOUNDATION

     Pursuant to the Plan, we intend to establish a Charitable Foundation in
connection with the Reorganization. We will make a contribution to the
Foundation, in the form of shares of Common Stock and cash, in a total amount
equal to 5% of the aggregate Subscription Price of the shares of Common Stock
sold in the Offering. The number of shares of Common Stock to be contributed to
the Foundation will equal 3% of the shares sold in the Offering. The balance of
the contribution will consist of cash. Due to the issuance of additional shares
of Common Stock to the Foundation, persons purchasing shares in the Offering
will have their ownership and voting interests in the Company diluted by 1.3%.
The contribution of Common Stock to the Foundation will be dilutive to the
interests of stockholders and the aggregate contribution will have an adverse
impact on the reported earnings of the Company in 1998, the fiscal year in which
the Foundation is to be established and the contribution made. If the Foundation
had been established and the contribution made at September 30, 1997, and
assuming the sale of the Common Stock at the midpoint of the Estimated Valuation
Range, we would have reported net income of $5.3 million, rather than reporting
net income of $8.6 million for the nine months ended September 30, 1997. Upon
completion of the Reorganization, the Foundation will own 1.4% of the total
shares of the Common Stock to be issued and outstanding (including shares to be
owned by the Mutual Holding Company). See "The Reorganization and Offering--
Establishment of the Charitable Foundation."

POTENTIAL INCREASED COMPENSATION EXPENSES AFTER THE REORGANIZATION

     In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-6 entitled "Employers' Accounting for Employee
Stock Ownership Plans," which requires an employer to record compensation
expense in an amount equal to the fair market value of shares committed to be
released to employees from an employee stock ownership plan, instead of an
amount equal to the cost basis of such shares. If the shares of Common Stock
appreciate in value over time, this will result in increased compensation
expense with respect to the ESOP. It

                                       13
<PAGE>
 
is impossible to determine at this time the extent of such impact on future net
income. See "Pro Forma Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Accounting
Pronouncements." In addition, after completion of the Reorganization, the
Company intends to implement, subject to stockholder approval (which approval
cannot be obtained earlier than six months subsequent to the Reorganization),
the Recognition and Retention Plan. Upon implementation, the award of shares of
Common Stock from the Recognition and Retention Plan will result in significant
additional compensation expense. See "Pro Forma Data" and "Management of the
Bank--Benefit Plans--Recognition and Retention Plan."

STRONG COMPETITION WITHIN THE BANK'S MARKET AREA

     Competition in the banking and financial services industry is intense. In
our market area, we compete with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere. Many of these competitors have substantially greater
resources and lending limits than Lockport Savings Bank and may offer certain
services that we do not or cannot provide. Our profitability depends upon our
continued ability to successfully compete in our market area.

REGULATORY OVERSIGHT AND LEGISLATION

     We are subject to extensive regulation, supervision and examination by the
New York State Banking Department (our chartering authority), and by the FDIC as
insurer of deposits up to applicable limits. We are also a member of the Federal
Home Loan Bank System and are subject to certain limited regulations promulgated
by the Federal Home Loan Bank. As bank holding companies, the Company and the
Mutual Holding Company also will be subject to regulation and oversight by the
Federal Reserve Board. Such regulation and supervision govern the activities in
which an institution and its holding company may engage and are intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have extensive discretion in connection with their supervisory and
enforcement activities which are intended to strengthen the financial condition
of the banking and thrift industries, including the imposition of restrictions
on the operation of an institution, the classification of assets by the
institution and the adequacy of an institution's allowance for loan losses. Any
change in such regulation and oversight whether in the form of regulatory
policy, regulations, or legislation, could have a material impact on Lockport
Savings Bank, the Company, and our operations. See "Regulation."

UNCERTAINTY AS TO FUTURE GROWTH OPPORTUNITIES

     In an effort to fully deploy the capital we raise in the Offering, and to
increase our loan and deposit growth, we may seek to further expand our banking
franchise by acquiring other financial institutions or branches in Western New
York. Our ability to grow through selective acquisitions of other financial
institutions or branches of such institutions will depend on successfully
identifying, acquiring and integrating such institutions or branches. We can not
assure prospective purchasers of Common Stock that we will be able to generate
internal growth or identify attractive acquisition candidates, make acquisitions
on favorable terms or successfully integrate any acquired institutions or
branches into the Company. We currently have no specific plans, arrangements or
understandings regarding any such expansions or acquisitions, nor have we
established criteria to identify potential candidates for acquisition.

ABSENCE OF MARKET FOR COMMON STOCK

     The Company, as a newly organized company, has never issued capital stock
and, consequently, there is no established market for the Common Stock at this
time. The Company has received approval to have its Common Stock quoted on the
Nasdaq National Market under the symbol "NBCP" conditioned on the consummation
of the Offering. CIBC Oppenheimer Corp. and Trident Securities, Inc. intend to
make a market in the Common Stock, and we expect that additional market makers
will be identified.

                                       14
<PAGE>
 
IRREVOCABILITY OF ORDERS; POTENTIAL DELAY IN COMPLETION OF OFFERINGS

     Orders submitted in the Offering are irrevocable. Funds submitted in
connection with any purchase of Common Stock in the Offering will be held by the
Company until the completion or termination of the Reorganization, including any
extension of the expiration date. Because completion of the Reorganization will
be subject to an update of the independent appraisal prepared by RP Financial,
among other factors, there may be one or more delays in the completion of the
Reorganization. Subscribers will have no access to subscription funds and/or
shares of Common Stock until the Reorganization is completed or terminated.

CAPABILITY OF THE BANK'S DATA INFORMATION SYSTEMS TO ACCOMMODATE THE YEAR 2000

     Like many financial institutions, the Bank relies upon computers for the
daily conduct of its business and for information systems processing generally.
There is concern among industry experts that on January 1, 2000 computers will
be unable to "read" the new year and there may be widespread computer
malfunctions. The Bank generally relies on software and hardware developed by
independent third parties to provide the information systems used by the Bank,
and we have been advised by our information systems providers that the issue is
being addressed. Based on these representations, management does not believe
that significant additional costs will be incurred in connection with the year
2000 issue.

                             NIAGARA BANCORP, INC.

     Niagara Bancorp, Inc. was recently organized for the purpose of acquiring
all of the capital stock of Lockport Savings Bank upon completion of the
Reorganization. The Company has received approval from the Federal Reserve Board
to become a bank holding company and, upon completion of the Reorganization,
will be subject to regulation by the Federal Reserve Board. See "The
Reorganization and Offering--Description of and Reasons for the Reorganization"
and "Regulation--Holding Company Regulation." Upon completion of the
Reorganization, the Company will have no significant assets other than the
shares of the Bank's common stock and an amount equal to 50% of the net proceeds
of the Offering, including the loan to the ESOP, and will have no significant
liabilities. The Company intends to use a portion of the net proceeds it retains
to loan to the ESOP funds to enable the ESOP to purchase up to 8% of the stock
sold in the Offering. See "Use of Proceeds." The management of the Company is
set forth under "Management of the Company." Initially, the Company will neither
own nor lease any property, but will instead use the premises, equipment and
furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than certain officers who are currently officers of the
Bank and will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands its business in the future.

     Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of, or mergers
with, other financial institutions and financial services related companies.
There are no current arrangements, understandings or agreements regarding any
such opportunities. However, subsequent to the Reorganization, the Company will
be in a position, subject to regulatory limitations and the Company's financial
position, to take advantage of any such acquisition and expansion opportunities
that may arise. The initial activities of the Company are anticipated to be
funded by the proceeds to be retained by the Company, income thereon and through
dividends from the Bank.

     The Company's executive office is located at the administrative offices of
the Bank, at 6950 South Transit Road, P.O. Box 514, Lockport, New York 14095-
0514. Its telephone number is (716) 625-7500.



                                       15
<PAGE>
                             LOCKPORT SAVINGS BANK
 
     The Bank was organized in 1870 as a New York-chartered mutual savings bank.
The Bank's deposits are insured by the Bank Insurance Fund, as administered by
the FDIC, up to the maximum amount permitted by law. We are a community-oriented
savings bank engaged primarily in the business of accepting deposits from
customers through our fifteen branch offices in the Western New York counties of
Niagara, Orleans, Erie and Genesee, and investing those deposits, together with
funds generated from operations and borrowings, in one-to four-family
residential, multi-family residential and commercial real estate loans,
commercial business loans, consumer and other loans, and investment and mortgage
related securities.

     Through our "Person to Person Commitment" approach to retail banking, we
emphasize personal service and customer convenience in serving the financial
needs of the individuals, families and businesses residing in Western New York.
Our business strategy is designed to improve our profitability, expand our
retail banking franchise, and remain an independent community bank.

     At September 30, 1997, the Bank had total assets of $1.2 billion, total
deposits of $992.2 million and net worth of $126.7 million. At September 30,
1997, $386.5 million, or 61.8%, of the Bank's total loans were collateralized by
one- to four-family residential real estate. The Bank also originates multi-
family residential and commercial real estate loans, which totaled $72.8 million
and $69.6 million, or 11.6% and 11.1%, respectively, of the Bank's total loans
at September 30, 1997. Consumer and other loans totaled $65.4 million, or 10.5%
of the Bank's total loans, at September 30, 1997. The Bank's investment and
mortgage related securities portfolios totaled $502.5 million at September 30,
1997, representing 42.7% of total assets at such date.

     The Bank's executive office is located at 6950 South Transit Road,
Lockport, New York 14095-0514. The Bank's telephone number is (716) 625-7500.

                         REGULATORY CAPITAL COMPLIANCE

     At September 30, 1997, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
FDIC capital standards as of September 30, 1997, on a historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the Recognition and Retention Plan are deducted from
pro forma regulatory capital.

<TABLE> 
<CAPTION> 
                                                     PRO FORMA AT SEPTEMBER 30, 1997, BASED UPON THE SALE AT $10.00 PER SHARE OF
                                                     -----------------------------------------------------------------------------
                                    HISTORICAL AT           8,677,747                   10,209,115                  11,740,482      
                                 SEPTEMBER 30, 1997          SHARES                       SHARES                     SHARES 
                             ----------------------- ------------------------        ------------------        ------------------
                                          PERCENT                  PERCENT                   PERCENT                   PERCENT  
                                            OF                       OF                        OF                        OF     
                                 AMOUNT   ASSETS (2)     AMOUNT     ASSETS (2)        AMOUNT  ASSETS (2)        AMOUNT  ASSETS (2) 
                                 ------   ----------   -----------  ----------        ------  ----------        ------  ---------- 
                                                                 (DOLLARS IN THOUSANDS)                       
<S>                            <C>          <C>          <C>          <C>          <C>         <C>          <C>         <C> 
GAAP capital.................  $ 126,720       10.77%    $  157,740      12.99%    $  163,300     13.37%    $   168,860     13.75%
                               =========    ========     ==========   ========     ==========   =======     ===========  ======== 
                                                                                                                                  
Leverage capital:                                                                                                                 
  Capital level (3)..........  $ 125,383       20.69%    $  156,403      25.01%    $  161,963     25.75%    $   167,523     26.49%
  Requirement(4).............     24,235        4.00%        25,017       4.00%        25,156      4.00%         25,296      4.00%
                               ---------    --------     ----------   --------     ----------   -------     -----------  -------- 
    Excess...................  $101,148        16.69%    $  131,386      21.01%    $  136,806     21.75%    $   142,227     22.49%
                               ========     ========     ==========   ========     ==========   =======     ===========  ======== 
Risk-based capital:                                                                                                               
  Tier 1 Capital level (3)(5)  $ 131,736       21.74%    $  162,756      26.02%    $  168,316     26.76%    $   173,876     27.49%
  Requirement................     48,469        8.00%        50,033       8.00%        50,313      8.00%         50,592      8.00%
                               ---------    --------     ----------   --------     ----------   -------     -----------  -------- 
    Excess...................  $  83,267       13.74%    $  112,722      18.02%    $  118,003     18.76%    $   123,284     19.49%
                               =========    ========     ==========   ========     ==========   =======     ===========  ======== 
                                                                                                                                  
  Total capital level (3)(5).  $ 125,383       10.75%    $  156,403      12.99%    $  161,963     13.37%    $   167,523     13.76%
  Requirement................     34,991        3.00%        36,129       3.00%        36,333      3.00%         36,537      3.00%
                               ---------    --------     ----------   --------     ----------   -------     -----------  -------- 
  Excess.....................  $  90,392        7.75%    $  120,273       9.99%    $  125,630     10.37%    $   130,986     10.76%
                               =========    ========     ==========   ========     ==========   =======     ===========  ======== 

<CAPTION> 
                                        13,501,554
                                        SHARES(1)
                                   -------------------
                                              PERCENT
                                                OF
                                   AMOUNT    ASSETS(2)
                                   ------    ---------
                             
<S>                              <C>         <C> 
GAAP capital.................    $ 175,271     14.18%
                                 =========    ======
                             
Leverage capital:            
  Capital level (3)..........    $ 173,934     27.33%
  Requirement(4).............       25,457      4.00%
                                 ---------    ------
    Excess...................    $ 148,476     23.33%
                                 =========    ======
Risk-based capital:          
  Tier 1 Capital level (3)(5)    $ 180,287     28.33%
  Requirement................       50,915      8.00%
                                 ---------    ------
    Excess...................    $ 129,372     20.33%
                                 =========    ======

  Total capital level (3)(5).    $ 173,934     14.19%
  Requirement................       36,771      3.00%
                                 ---------    ------
  Excess.....................    $ 137,163     11.19%
                                 =========    ======
</TABLE> 

                                       16
<PAGE>
 
___________________________
(1)   As adjusted to give effect to an increase in the number of shares which
      could occur due to an increase in the Estimated Valuation Range of up to
      15% as a result of regulatory considerations, demand for the shares, or
      changes in market conditions or general financial and economic conditions
      following the commencement of the Subscription and Community Offerings.
(2)   Leverage capital levels are shown as a percentage of tangible assets. 
      Risk-based capital levels are calculated on the basis of a percentage of
      risk-weighted assets.
(3)   Pro forma capital levels assume: funding by the Bank of the Recognition
      and Retention Plan to enable the plan to acquire a number of shares equal
      to 4% of the Common Stock sold in the Offering; the purchase by the ESOP
      of 8% of the shares sold in the Offering; and the capitalization of the
      Mutual Holding Company by the Bank with $100,000. See "Management of the
      Bank--Benefit Plans" for a discussion of the Recognition and Retention
      Plan and ESOP.
(4)   The current leverage capital requirement for savings banks is 3% of total
      adjusted assets for savings banks that receive the highest supervisory
      rating for safety and soundness and that are not experiencing or
      anticipating significant growth. The current leverage capital ratio
      applicable to all other savings banks is 4% to 5%. See "Regulation--FDIC
      Regulations--Capital Requirements.
(5)   Assumes net proceeds are invested in assets that carry a risk-weighting
      equal to the average risk weighting of the Bank's risk-weighted assets as
      of September 30, 1997.

                                USE OF PROCEEDS

     Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Offering is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $85.3 million
and $115.7 million (or $133.2 million if the Estimated Valuation Range is
increased by 15%). See "Pro Forma Data" and "The Reorganization and Offering--
Stock Pricing and Number of Shares to Be Issued" as to the assumptions used to
arrive at such amounts. The Company will be unable to utilize any of the net
proceeds of the Offering until the consummation of the Reorganization.

     The Company will contribute approximately 50% of the net proceeds of the
Offering to the Bank, or approximately $42.7 million to $66.6 million at the
minimum and adjusted maximum of the Estimated Valuation Range, respectively.
Such portion of net proceeds received by the Bank from the Company will be used
by the Bank for general corporate purposes, including investments in short- and
medium-term, investment grade debt securities, mortgage related securities and
marketable equity securities, and to increase the origination of mortgage,
consumer and commercial business loans. The Bank may also use such funds for the
continued expansion of its retail banking franchise, and to expand operations
through acquisitions of other financial institutions, branch offices or other
financial services companies. To the extent that the stock-based benefit
programs which the Company intends to adopt subsequent to the Offering are not
funded with authorized but unissued shares of Common Stock of the Company, the
Company or Bank may use net proceeds from the Offering to fund the purchase of
stock to be awarded under such stock benefit programs. See "Risk Factors--
Possible Dilutive Effect of Issuance of Additional Shares" and "Management of
the Bank--Benefit Plans--Stock Option Plan" and "--Recognition and Retention
Plan. "

     The Company intends to use a portion of the net proceeds it retains to make
a loan directly to the ESOP to enable the ESOP to purchase 8% of the shares sold
in the Offering. Based upon the sale of 8,677,747 shares or 11,740,482 shares at
the minimum and maximum of the Offering Range, the amount of the loan to the
ESOP would be $6.9 million or $9.4 million, respectively (or $10.8 million if
the Estimated Valuation Range is increased by 15%). See "Management of the 
Bank--Benefit Plans--Employee Stock Ownership Plan and Trust." The remaining net
proceeds retained by the Company will initially be invested in short- and 
medium- term debt obligations, mortgage related securities and other marketable
equity securities.

     The net proceeds retained by the Company may also be used to support the
future expansion of operations through the acquisition of financial institutions
or their assets, including those located within the Bank's market area, or
diversification into other banking related businesses. However, the Company and
the Bank have no current arrangements, understandings or agreements regarding
any such transactions. Upon completion of the Reorganization, the Company will
be a bank holding company, and will be permitted to engage only in those
activities that are permissible for bank holding companies under the Bank
Holding Company Act, as administered by the Federal Reserve

                                       17
<PAGE>
 
Board. See "Regulation --Bank Holding Company Regulation" for a description of
certain regulations applicable to the Company.

     Upon completion of the Reorganization, the Board of Directors of the
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Pursuant to New York regulations, and
without the prior approval of the Department, the Company may not repurchase any
Common Stock, in the first year after the Reorganization, and during each of the
next two following years, may not repurchase more than 5% of its shares
outstanding. In addition, the FDIC prohibits an insured savings bank which has
converted from the mutual to stock form of ownership from repurchasing its
capital stock within one year following the date of its Offering to stock form,
except that stock repurchases of no greater than 5% of a bank's outstanding
capital stock may be repurchased during this one-year period where compelling
and valid business reasons are established to the satisfaction of the FDIC.
Based upon facts and circumstances following completion of the Reorganization
and subject to applicable regulatory requirements, the Board of Directors may
determine to repurchase stock in the future. Such facts and circumstances may
include but not be limited to: (i) market and economic factors such as the price
at which the stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to repurchase
stock, such repurchases may be made at market prices which may be in excess of
the Subscription Price in the Offering. Any stock repurchases will be subject to
the determination of the Company's Board of Directors that both the Company and
the Bank will be capitalized in excess of all applicable regulatory requirements
after any such repurchases and that such capital will be adequate, taking into
account, among other things, the level of non-performing and other risk assets,
the Company's and the Bank's current and projected results of operations and
asset/liability structure, the economic environment, tax and other
considerations.

                                DIVIDEND POLICY

     Upon completion of the Offering, the Board of Directors of the Company will
have the authority to declare dividends on the Common Stock, subject to
statutory and regulatory requirements. The Company intends to pay an annual cash
dividend of $0.12, payable quarterly at $0.03 per share. The payment of
dividends is expected to begin following the first full quarter after the
completion of the Reorganization.

     Under Delaware law, the Company is permitted to pay cash dividends,
provided that the amount of cash dividends paid may not exceed that amount by
which the net assets of the Company (the amount by which total assets exceed
total liabilities) exceeds its statutory capital, or if there is no such excess,
the net profits for the current and/or immediately preceding fiscal year. The
Company's source for the payment of cash dividends may in the future depend on
the receipt of cash dividends from the Bank. The Bank will not be permitted to
pay dividends on its common stock or repurchase shares of its common stock if
its stockholders' equity would be reduced below the amount required for the
liquidation account. See "The Reorganization and Offering--Liquidation Rights."
Under New York Banking Law, dividends may be declared and paid only out of the
net profits of the Bank. The approval of the Superintendent is required if the
total of all dividends declared in any calendar year will exceed net profits for
that year plus the retained net profits of the preceding two years, less any
required transfer to surplus or a fund for the retirement of any preferred
stock. In addition, no dividends may be declared, credited or paid if the effect
thereof would cause the Bank's capital to be reduced below the amount required
by the Superintendent or the FDIC. See "Regulation." Subsequent to the Offering,
the availability of the Bank's funds for the payment of dividends may be limited
by the liquidation account. See "The Reorganization and Offering--Liquidation
Rights." Dividends in excess of the Bank's current and accumulated earnings
could result in the realization by the Bank of taxable income. See "Federal and
State Taxation--Federal Taxation."

                                       18
<PAGE>
 
     Additionally, in connection with the Reorganization, the Company and Bank
have committed to the FDIC that during the one-year period following the
consummation of the Reorganization, the Company will not declare an
extraordinary dividend to stockholders which would be treated by recipient
stockholders as a tax-free return of capital for federal income tax purposes
without prior approval of the FDIC.

                            MARKET FOR COMMON STOCK

     The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
received conditional approval to have its Common Stock quoted on the Nasdaq
National Market under the symbol "NBCP" subject to the completion of the
Offering and compliance with certain conditions including the presence of at
least three registered and active market makers. The Company will seek to
encourage and assist at least three market makers to make a market in its Common
Stock. CIBC Oppenheimer Corp. and Trident Securities, Inc. intend to make a
market in the Common Stock and we expect that additional market makers will be
identified .

                                CAPITALIZATION

     The following table presents the historical capitalization of the Bank at
September 30, 1997, and the pro forma consolidated capitalization of the Company
after giving effect to the Offering, including the issuance of shares to the
Foundation, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data."

                                       19
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                     COMPANY PRO FORMA BASED UPON THE SALE AT $10.00 PER SHARE
                               ---------------------------------------------------------------------------------------------
                                                                                                                 13,501,554
                                                   8,677,747           10,209,115           11,740,482              SHARES        
                                                    SHARES               SHARES               SHARES               (ADJUSTED      
                               HISTORICAL         (MINIMUM)           (MIDPOINT)            (MAXIMUM)            MAXIMUM)(1)     
                               -----------       -----------         ------------          -----------          ------------    
                                                                     (IN THOUSANDS)                                               
<S>                           <C>                <C>                 <C>                   <C>                  <C> 
Deposits(2)................   $   992,219        $   992,219         $    992,219          $   992,219            $    992,219    
Other borrowings...........        28,740             28,740               28,740               28,740                  28,740    
                              -----------        -----------         ------------          -----------            ------------    
Total deposits and                                                                                                                
 other borrowed funds......   $ 1,020,959        $ 1,020,959         $  1,020,959          $ 1,020,959            $  1,020,959    
                              ===========        ===========         ============          ===========            ============    

Stockholders' equity:
   Preferred Stock, $.01
     par value, 1,000,000
     shares authorized;
     none to be issued.....   $        --            $    --              $    --            $      --              $       --
   Common Stock, $.01 par
     value, ___,000,000
     shares authorized;
     shares to be issued
     as reflected..........            --                191                  225                  259                     298
   Additional paid-in
     capital(3)............            --             87,735              103,354              118,973                 136,968
   Retained earnings(4)....       125,325            125,225              125,225              125,225                 125,225
 Less:
   Expenses of contribution to
     Foundation............            --             (4,339)              (5,105)              (5,870)                 (6,751)
Plus:
   Tax benefit of contribution to
     Foundation (5)........            --              1,519                1,787                2,055                   2,363
   Net unrealized gain on
     securities available-
     for-sale, net of taxes         1,395              1,395                1,395                1,395                   1,395
Less:
   Common Stock acquired
     by the ESOP(6)........            --             (6,942)              (8,167)              (9,392)                (10,801)
   Common Stock
     acquired by the
     Recognition and Retention
      Plan(7)..............            --             (3,471)              (4,084)              (4,696)                 (5,401)
                              -----------         ----------           ----------          -----------             -----------

Total stockholders'
 equity....................   $   126,720          $ 201,313            $ 214,630          $   227,949             $   243,296
                              ===========         ==========           ==========          ===========             ============
</TABLE> 

________________
(1)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Valuation Range of up to
     15% as a result of regulatory considerations, demand for the shares, or
     changes in market or general financial and economic conditions following
     the commencement of the Offering.
(2)  Does not reflect withdrawals from deposit accounts for the purchase of
     Common Stock in the Offering. Such withdrawals would reduce pro forma
     deposits by the amount of such withdrawals.
(3)  Reflects the sale of shares in the Offering. No effect has been given to
     the issuance of additional shares of Common Stock pursuant to the stock
     option plan to be adopted by the Company and presented for approval of
     stockholders following the Offering. The stock option plan would provide
     for the grant of stock options to purchase a number of shares of Common
     Stock equal to 10% of the shares of Common Stock sold in the Offering. See
     "Management of the Bank--Benefit Plans--Stock Option Plan."
(4)  The retained earnings of the Bank will be substantially restricted after
     the Offering. See "The Reorganization and Offering--Liquidation Rights."
     Assumes that the Mutual Holding Company will be capitalized by the Bank
     with $100,000.
(5)  Represents the tax effect of the contribution to the Foundation based on a
     35% tax rate. The realization of the deferred tax benefit is limited
     annually to 10% of the Company's annual taxable income, subject to the
     ability of the Company to carry forward any unused portion of the deduction
     for five years following the year in which the contribution is made.
(6)  Assumes that 8% of the shares sold in the Offering will be purchased by the
     ESOP and that the funds used to acquire the ESOP shares will be borrowed
     from the Company. The Common Stock acquired by the ESOP is reflected as a
     reduction of stockholders' equity. See "Management of the Bank--Benefit
     Plans--Employee Stock Ownership Plan and Trust."
(7)  Assumes that, subsequent to the Offering, an amount equal to 4% of the
     shares of Common Stock sold in the Offering is purchased by the Recognition
     and Retention Plan through open market purchases at $10.00 per share. The
     Common Stock to be purchased by the Recognition and Retention Plan is
     reflected as a reduction to stockholders' equity. See "Risk Factors--
     Dilutive Effect of Issuance of Additional Shares," and Footnote 3 to the
     tables under "Pro Forma Data" and "Management of the Bank--Benefit Plans--
     Stock Plans."

                                       20
<PAGE>
 
                                PRO FORMA DATA

     The actual net proceeds from the sale of the Common Stock cannot be
determined until the Offering is completed. However, net proceeds are currently
estimated to be between $85.3 million and $115.7 million (or up to $133.2
million) based upon the following assumptions: (i) $3.0 million will be sold to
executive officers and trustees of the Bank and Company, the ESOP will purchase
8% of the Common Stock sold in the Offering, and the remaining shares will be
sold in the Subscription and Community Offerings; (ii) CIBC Oppenheimer Corp.
and Trident Securities, Inc. will receive an aggregate fee equal to .95% of the
aggregate Subscription Price of shares sold to persons other than directors,
executive officers and the ESOP; (iii) the Foundation will be funded with a
total contribution equal to 5% of the aggregate Subscription Price of the Common
Stock sold in the Offering, consisting of 3% of the shares of Common Stock sold
in the Offering and 2% in cash; (iv) Reorganization expenses, excluding the fees
payable to CIBC Oppenheimer Corp. and Trident Securities, Inc., will be
approximately $800,000; and (v) the Mutual Holding Company will be capitalized
by the Bank with $100,000. Actual expenses may vary from those estimated.

     Pro forma consolidated net income of the Company for the nine months ended
September 30, 1997 and for the year ended December 31, 1996 have been calculated
as if the Common Stock had been sold at the beginning of the respective periods
and the net proceeds had been invested at 5.44% and 5.49% (the one year U.S.
Treasury bill rate as of September 30, 1997 and December 31, 1996). The tables
do not reflect the effect of withdrawals from deposit accounts for the purchase
of Common Stock. The pro forma after-tax yield for the Company and the Bank is
assumed to be 3.54% for the nine months ended September 30, 1997, and 3.57% for
the year ended December 31, 1996 (based on an assumed tax rate of 35%).
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock, as adjusted to give effect to the purchase of shares by the ESOP. No
effect has been given in the pro forma stockholders' equity calculations for the
assumed earnings on the net proceeds. As discussed under "Use of Proceeds," the
Company will retain 50% of the net proceeds from the Offering.

     The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.

     The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the nine months ended September 30, 1997, and at
or for the year ended December 31, 1996, based on the assumptions set forth
above and in the table and should not be used as a basis for projections of
market value of the Common Stock following the Offering. The tables below give
effect to the Recognition and Retention Plan, which is expected to be adopted by
the Company following the Offering and presented to stockholders for approval.
See Footnote 3 to the tables and "Management of the Bank--Benefit Plans--
Recognition and Retention Plan." No effect has been given in the tables to the
possible issuance of additional shares reserved for future issuance pursuant to
the stock option plan to be adopted by the Board of Directors of the Company and
presented to stockholders for approval, nor does book value as presented give
any effect to the liquidation account to be established for the benefit of
Eligible Account Holders or Supplemental Eligible Account Holders or, in the
event of liquidation of the Bank, to the tax effect of the bad debt reserve and
other factors. See Footnote 4 to the tables below, "The Reorganization and
Offering--Liquidation Rights" and "Management of the Bank--Benefit Plans--Stock
Option Plan."

                                       21
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                        AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997                         
                                   -----------------------------------------------------------------------------------------
                                       8,677,747              10,209,115             11,740,482            13,501,554      
                                    SHARES SOLD AT         SHARES SOLD AT          SHARES SOLD AT        SHARES SOLD AT        
                                   $10.00 PER SHARE        $10.00 PER SHARE       $10.00 PER SHARE      $10.00 PER SHARE      
                                      (MINIMUM)              (MIDPOINT)               (MAXIMUM)       (ADJUSTED MAXIMUM)(8) 
                                   ----------------        ----------------       ----------------    --------------------- 
                                                              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                <C>                     <C>                    <C>                 <C> 
Gross proceeds...................... $   86,777                $  102,091              $  117,405            $  135,016
 Plus:  Shares acquired by
     Foundation.....................      2,603                     3,063                   3,522                 4,050
                                     ----------                ----------              ----------            ----------
Pro forma market capitalization..... $   89,380                $  105,154              $  120,927            $  139,066
                                     ==========                ==========               =========             =========

Gross proceeds...................... $   86,777                $  102,091              $  117,405            $  135,016
Less: Cash contribution
        to Foundation...............      1,736                     2,042                   2,348                 2,700
      Expenses......................      1,455                     1,575                   1,695                 1,800
                                     ----------                ----------              ----------            ----------

Estimated net proceeds..............     83,586                    98,474                 113,362               130,516
Less: Common Stock pur-
       chased by ESOP...............     (6,942)                   (8,167)                 (9,392)              (10,801)
       Common Stock purchased
       by recognition
      and retention plan............     (3,471)                   (4,084)                 (4,696)               (5,401)
                                     ----------                ----------              ----------            ----------

Estimated net proceeds,
   as adjusted...................... $   73,173                $   86,223              $   99,274            $  114,314
                                     ==========                ==========              ==========            ==========

Consolidated net income:
   Historical....................... $    8,635                $    8,635              $    8,635            $    8,635
   Pro forma income on net
     proceeds, as adjusted..........      1,938                     2,284                   2,630                 3,029
   Pro forma ESOP
     adjustment(2)..................       (226)                     (265)                   (305)                 (351)
   Pro forma recognition
     and retention plan
     adjustment(3)..................       (338)                     (398)                   (450)                 (527)
                                     ----------                ----------              ----------            ----------

Pro forma net income(1)............. $   10,009                $   10,256              $   10,510            $   10,786
                                     ==========                ==========              ==========            ==========

Per share net income(6):
   Historical....................... $     0.47                $     0.40              $     0.35            $     0.30
   Pro forma income on net
     proceeds, as adjusted..........       0.11                      0.11                    0.11                  0.11
   Pro forma ESOP
     adjustment(1)..................      (0.01)                    (0.01)                  (0.01)                (0.01)
   Pro forma recognition and
     retention plan
     adjustment.....................      (0.02)                    (0.02)                  (0.02)                (0.02)
                                     ----------                ----------              ----------            ----------

Pro forma net income
   per share........................ $     0.55                $     0.48              $     0.43            $     0.38
                                     ==========                ==========              ==========            ==========
</TABLE> 

                                       22
<PAGE>
 
<TABLE> 
<S>                                   <C>                      <C>                     <C>                   <C> 
Stockholders' equity:
Historical..........................  $ 126,720                $  126,670              $  126,720            $  126,720
Estimated net proceeds..............     83,587                    98,474                 113,362               130,515
  Plus: Shares issued to Foundation.      2,603                     3,063                   3,522                 4,050
  Less: Contribution to Foundation..     (2,603)                   (3,063)                 (3,522)               (4,050)
  Plus: Tax benefit of contribution to
          Foundation................      1,519                     1,787                   2,055                 2,363
  Less: Common Stock ac-
         quired by ESOP(2)..........     (6,942)                   (8,167)                 (9,392)              (10,801)
          Common Stock
         acquired by
         recognition and
         retention plan(3)..........     (3,471)                   (4,084)                 (4,696)               (5,401)
                                     ----------                ----------              ----------            ----------

Pro forma stockholders'
   equity(3)(4)(5).................. $  201,313                $  214,630              $  227,949            $  243,296
                                     ==========                ==========              ==========            ==========

Stockholders' equity per
   share(6):
Historical.......................... $     6.63                $     5.64              $     4.90            $     4.27
Estimated net proceeds..............       4.37                      4.38                    4.38                  4.39
  Plus:  Shares issued to Foundation       0.14                      0.14                    0.14                  0.14
  Less: Contribution  to Foundation.      (0.14)                    (0.14)                  (0.14)                (0.14)
  Plus: Tax benefit of contribution to
          Foundation................       0.08                      0.08                    0.08                  0.08
  Less: Common Stock
          acquired by ESOP(2).......      (0.36)                    (0.36)                  (0.36)                (0.36)
        Common Stock acquired
         by recognition and
         retention plan ............      (0.18)                    (0.18)                  (0.18)                (0.18)
                                     ----------                ----------              ----------            ----------

Pro forma stockholders'
   equity per
   share(3)(4)(5)................... $    10.53                $     9.55              $     8.81            $     8.19
                                     ==========                ==========              ==========            ==========

Offering price to pro
   forma net income per
   share(7).........................      13.64x                    15.63x                  17.44x                19.74x

Offering price as a per-
   centage of pro forma
   stockholders' equity
   per share........................      94.97%                   104.71%                 113.51%               122.10%
</TABLE> 

___________________
(1)  Does not give effect to the non-recurring expense that will be recognized
     in 1998 as a result of the establishment of the Foundation. The Company
     will recognize an after-tax expense for the amount of the contribution to
     the Foundation which is expected to be $2.8 million, $3.3 million, $3.8
     million and $4.4 million at the minimum, midpoint, maximum and adjusted
     maximum of the Estimated Valuation Range, respectively. Assuming the
     contribution to the Foundation was incurred during the nine months ended
     September 30, 1997, pro forma net income per share would be $0.38, $0.32,
     $0.27 and $0.22 at the minimum, midpoint, maximum and adjusted maximum,
     respectively. Per share net income data is based on 18,448,136,
     21,703,689,24,959,243 and 28,703,128 shares outstanding, which represents
     shares sold in the Reorganization, shares contributed to the Foundation and
     shares to be allocated or distributed under the ESOP and Recognition and
     Retention Plan for the period presented.
(2)  It is assumed that 8% of the shares sold in the Offering will be purchased
     by the ESOP. For purposes of this table, the funds used to acquire such
     shares are assumed to have been borrowed by the ESOP from the Company. The
     amount to be borrowed is reflected as a reduction to stockholders' equity.
     The Bank intends to make annual contributions to the ESOP in an amount at
     least equal to the principal and interest requirement of the debt. The
     Bank's total annual payment of the ESOP debt is based upon fifteen equal
     annual installments of principal, with an assumed interest rate at 8.5%.
     The pro forma net income assumes: (i) that the Bank's contribution to the
     ESOP is equivalent to the debt service requirement for the nine months
     ended September 30, 1997, and was made at the end of the period; (ii) that
     17,355, 20,418, 23,481 and 27,003 shares at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively, were
     committed to be released during the nine months ended September 30, 1997,
     at an average fair value of $10.00 per share in accordance with Statement
     of Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
     released were considered outstanding for purposes of the net income per
     share calculations. See "Management of the Bank--Benefit Plans--Employee
     Stock Ownership Plan and Trust."
(3)  Gives effect to the Recognition and Retention Plan expected to be adopted
     by the Company following the Offering. This plan intends to acquire a
     number of shares of Common Stock equal to 4% of the shares of Common Stock
     sold in the Offering or 347,110, 408,365, 469,619 and 540,061

                                       23
<PAGE>
 
     shares of Common Stock at the minimum, midpoint, maximum and adjusted
     maximum of the Estimated Valuation Range, respectively, either through open
     market purchases, if permissible, or from authorized but unissued shares of
     Common Stock or treasury stock of the Company, if any. Funds used by the
     Recognition and Retention Plan to purchase the shares will be contributed
     to the plan by the Bank. In calculating the pro forma effect of the
     Recognition and Retention Plan, it is assumed that the shares were acquired
     by the Recognition and Retention Plan at the beginning of the period
     presented in open market purchases at the Subscription Price and that 20%
     of the amount contributed was an amortized expense during such period. The
     issuance of authorized but unissued shares of the Company's Common Stock to
     the Recognition and Retention Plan instead of open market purchases would
     dilute the voting interests of existing stockholders by approximately 1.88%
     and pro forma net income per share would be $0.54, $0.47, $0.42 and $0.32
     at the minimum, midpoint, maximum and adjusted maximum of the Estimated
     Valuation Range, respectively, and pro forma stockholders' equity per share
     would be $10.51, $9.55, $8.83 and $8.21 at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively. There
     can be no assurance that the actual purchase price of the shares granted
     under the Recognition and Retention Plan will be equal to the Subscription
     Price. See "Management of the Bank--Benefit Plans--Recognition and
     Retention Plan."
(4)  No effect has been given to the issuance of additional shares of Common
     Stock pursuant to the stock option plan expected to be adopted by the
     Company following the Offering. Under the stock option plan, an amount
     equal to 10% of the Common Stock sold in the Offering, or 867,775,
     1,020,912, 1,174,048 and 1,350,155 shares at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively, will
     be reserved for future issuance upon the exercise of options to be granted
     under the stock option plan. The issuance of Common Stock pursuant to the
     exercise of options under the stock option plan will result in the dilution
     of existing stockholders' interests. Assuming all options were exercised at
     the end of the period at an exercise price of $10.00 per share, the pro
     forma net income per share would be $0.53, $0.46, $0.41 and $0.37,
     respectively, and the pro forma stockholders' equity per share would be
     $10.50, $9.56, $8.87 and $8.26, respectively. See "Management of the Bank--
     Benefit Plans--Stock Option Plan."
(5)  The retained earnings of the Bank will continue to be substantially
     restricted after the Offering. See "Dividend Policy," "The Reorganization
     and Offering-- Liquidation Rights" and "Regulation--New York Bank
     Regulation."
(6)  Stockholders' equity per share data is based upon 19,125,000, 22,500,000,
     and 25,875,000 and 29,756,250 shares outstanding representing shares sold
     in the Offering, shares purchased by the ESOP and the Recognition and
     Retention Plan, and shares contributed to the Foundation.
(7)  Based on pro forma net income for the nine months ended September 30, 1997
     that have been annualized.
(8)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Valuation Range of up to
     15% as a result of regulatory considerations, demand for the shares, or
     changes in market or general financial and economic conditions following
     the commencement of the Subscription and Community Offerings.

                                       24
<PAGE>
 
<TABLE> 
<CAPTION>
                                                         AT OR FOR THE YEAR ENDED DECEMBER 31, 1996                             
                               -------------------------------------------------------------------------------------------------
                                  8,677,747               10,209,115                 11,740,482                 13,501,554      
                                SHARES SOLD AT          SHARES SOLD AT             SHARES SOLD AT             SHARES SOLD AT    
                               $10.00 PER SHARE        $10.00 PER SHARE           $10.00 PER SHARE           $10.00 PER SHARE   
                                  (MINIMUM)               (MIDPOINT)                 (MAXIMUM)            (ADJUSTED MAXIMUM)(7) 
                               ----------------        ----------------          ------------------       --------------------- 
                                                       (Dollars in Thousands, Except per Share Amounts)                          
<S>                            <C>                     <C>                       <C>                      <C> 
Gross proceeds............        $   86,777                $  102,091                  $  117,405          $   135,016
 Plus: Shares acquired by                                                                                              
          Foundation......             2,603                     3,063                       3,522                4,050
                                  ----------                ----------                  ----------          ----------- 
Pro forma market capitalization   $   89,380                $  105,154                  $  120,927          $   139,066
                                  ----------                ==========                   =========          ===========
                                                                                                                       
Gross proceeds............        $   86,777                $  102,091                  $  117,405          $   135,016
Less: Cash contribution to                                                                                             
        Foundation .......             1,736                     2,042                       2,348                2,700
       Expenses...........             1,455                     1,575                       1,695                1,800
                                  ----------                ----------                  ----------          -----------
                                                                                                                       
Estimated net proceeds....            83,586                    98,474                     113,362              130,515
Less: Common Stock pur-                                                                                                
          chased by ESOP..            (6,942)                   (8,167)                     (9,392)             (10,801)
        Common Stock purchased                                                                                         
          by recognition and                                                                                           
        retention plan....            (3,471)                   (4,084)                     (4,696)              (5,401)
                                  ----------                ----------                  ----------          ----------- 

Estimated net proceeds,
   as adjusted............        $   73,143                $   86,223                  $   99,274          $   114,314
                                  ==========                ==========                  ==========          ===========
                                                                                                                       
Consolidated net income(1):                                                                                            
   Historical.............        $   10,768                $   10,768                  $   10,768          $    10,768
   Pro forma income on net                                                                                             
     proceeds, as adjusted             2,608                     3,073                       3,539                4,076
   Pro forma ESOP                                                                                                      
     adjustment(2)........              (301)                     (354)                       (407)                (468)
   Pro forma recognition and                                                                                           
      retention plan                                                                                                
     adjustment(3)........              (451)                     (531)                       (611)                (702)
                                  ----------                ----------                  ----------          -----------
                                                                                                                       
Pro forma net income(1)...        $   12,624                $   12,956                  $   13,289          $    13,674
                                  ==========                ==========                  ==========          ===========
                                                                                                                       
Per share net income:                                                                                                  
   Historical.............        $     0.58                $     0.50                  $     0.43          $      0.38 
Pro forma income on net
   proceeds, as adjusted..              0.14                      0.14                        0.14                 0.14
Pro forma ESOP                                                                                                         
   adjustment(1)..........             (0.02)                    (0.02)                      (0.02)               (0.02)
Pro forma recognition  and                                                                                             
   retention plan                                                                                                      
   adjustment.............             (0.02)                    (0.02)                      (0.02)               (0.02)
                                  ----------                ----------                  ----------          -----------
                                                                                                                       
Pro forma net income                                                                                                   
   per share..............        $     0.68                $     0.60                  $     0.53          $      0.48
                                  ==========                ==========                  ==========          ===========
                                                                                                                       
Stockholders' equity:                                                                                                  
   Historical.............        $  115,564                $  115,564                  $  115,564          $   115,564
   Estimated net proceeds.            83,587                    98,474                     113,362              130,515 
  Plus: Shares issued to Foundation    2,603                     3,063                       3,522                4,050 
  Less: Contribution to Foundation    (2,603)                   (3,063)                     (3,522)              (4,050) 
  Plus: Tax benefit of contribution to
    Foundation............             1,519                     1,787                       2,055                2,363 
  Less: Common Stock ac-                                                                                                
   quired by ESOP(2)......            (6,942)                   (8,167)                     (9,392)             (10,801)
  Less: Common Stock                                                                                                    
   acquired by recognition and                                                                                          
   retention plan(3)......            (3,471)                   (4,084)                     (4,696)              (5,401) 
                                  ----------                ----------                  ----------          -----------
                                                                                                                       
Pro forma stockhold-                                                                                                   
   ers' equity(3)(4)(5)...        $  190,257                $  203,574                  $  216,893          $   232,240
                                  ==========                ==========                  ==========          =========== 
</TABLE> 

                                       25
<PAGE>
 
<TABLE> 
<S>                               <C>                       <C>                         <C>                 <C>  
Stockholders' equity per
   share(6):
   Historical.............        $     6.04                $     5.14                  $     4.47          $      3.88
Estimated net proceeds....              4.37                      4.38                        4.38                 4.39 
  Plus: Shares issued to Foundation     0.14                      0.14                        0.14                 0.14 
  Less: Contributions to Foundation    (0.14)                    (0.14)                      (0.14)               (0.14) 
  Plus: Tax benefit of contribution to
          Foundation......              0.08                      0.08                        0.08                 0.08 
  Less: Common Stock                                                                                                    
          acquired by ESOP(2)          (0.36)                    (0.36)                      (0.36)               (0.36)
         Common Stock acquired                                                                                          
           by recognition and                                                                                           
           retention plan(3)           (0.18)                    (0.18)                      (0.18)               (0.18) 
                                  ----------                ----------                  ----------          ----------- 

Pro forma stockholders'
   equity per
   share(3)(4)(5).........        $     9.95                $     9.06                  $     8.39          $      7.81 
                                  ==========                ==========                  ==========          =========== 
                                                                                                                        
Offering price to pro                                                                                                   
   forma net income per                                                                                                 
   share..................             14.71x                    16.67x                      18.87x               20.83x
                                                                                                                        
Offering price as a per-                                                                                                
   centage of pro forma                                                                                                 
   stockholders' equity                                                                                                 
   per share(6)...........            100.50%                   110.38%                     119.19%              128.04% 
</TABLE> 

__________________________
(1)  Does not give effect to the non-recurring expense that will be recognized
     in 1998 as a result of the establishment of the Foundation. The Company
     will recognize an after-tax expense for the amount of the contribution to
     the Foundation which is expected to be $2.8 million, $3.3 million, $3.8
     million and $4.4 million at the minimum, midpoint, maximum and adjusted
     maximum of the Estimated Valuation Range, respectively. Assuming the
     contribution to the Foundation was incurred during the year ended December
     31, 1996, pro forma net income per share would be $0.52, $0.44, $0.38 and
     $0.32, at the minimum, midpoint, maximum and adjusted maximum,
     respectively. Per share net income data is based on 18,453,921, 21,710,495,
     24,967,070 and 28,712,129 shares outstanding which represents shares issued
     in the Reorganization, shares contributed to the Foundation and shares to
     be allocated or distributed under the ESOP and recognition and retention
     plan to the for the period presented.
(2)  It is assumed that 8% of the shares sold in the Offering will be purchased
     by the ESOP. For purposes of this table, the funds used to acquire such
     shares are assumed to have been borrowed by the ESOP from the Company. The
     amount to be borrowed is reflected as a reduction of stockholders' equity.
     The Bank intends to make annual contributions to the ESOP in an amount at
     least equal to the principal and interest requirement of the debt. The
     Bank's total annual payment of the ESOP debt is based upon fifteen equal
     annual installments of principal, with an assumed interest rate at 8.5%.
     The pro forma net income assumes: (i) that the Bank's contribution to the
     ESOP is equivalent to the debt service requirement for the year ended
     December 31, 1996, and was made at the end of the period; (ii) that 23,141,
     27,224, 31,308 and 36,004 shares at the minimum, midpoint, maximum and
     adjusted maximum of the Estimated Valuation Range, respectively, were
     committed to be released during the year ended December 31, 1996, at an
     average fair value of $10.00 per share in accordance with Statement of
     Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
     released were considered outstanding for purposes of the net income per
     share calculations. See "Management of the Bank--Benefit Plans--Employee
     Stock Ownership Plan and Trust."
(3)  Gives effect to the Recognition and Retention Plan expected to be adopted
     by the Company following the Offering. This plan intends to acquire a
     number of shares of Common Stock equal to 4% of the shares of Common Stock
     sold in the Offering, or 347,110, 408,365, 469,619 and 540,062 shares of
     Common Stock at the minimum, midpoint, maximum and adjusted maximum of the
     Estimated Valuation Range, respectively, either through open market
     purchases, if permissible, or from authorized but unissued shares of Common
     Stock or treasury stock of the Company, if any. Funds used by the
     Recognition and Retention Plan to purchase the shares will be contributed
     to the plan by the Bank. In calculating the pro forma effect of the
     Recognition and Retention Plan, it is assumed that the shares were acquired
     by the Recognition and Retention Plan at the beginning of the period
     presented in open market purchases at the Subscription Price and that 20%
     of the amount contributed was an amortized expense during such period. The
     issuance of authorized but unissued shares of the Company's Common Stock to
     the recognition and retention plan instead of open market purchases would
     dilute the voting interests of existing stockholders by approximately 1.88%
     and pro forma net income per share would be $0.68, $0.60, $0.53 and $0.48
     at the minimum, midpoint, maximum and adjusted maximum of the Estimated
     Valuation Range, respectively, and pro forma stockholders' equity per share
     would be $9.94, $9.06, $8.41 and $7.84 at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively. There
     can be no assurance that the actual purchase price of the shares granted
     under the Recognition and Retention Plan will be equal to the Subscription
     Price. See "Management of the Bank--Benefit Plans--Recognition and
     Retention Plan."
(4)  No effect has been given to the issuance of additional shares of Common
     Stock pursuant to the stock option plan expected to be adopted by the
     Company following the Offering. Under the stock option plan, an amount
     equal to 10% of the Common Stock sold in the Offering, or 867,775,
     1,020,912, 1,174,048 and 1,350,155 shares at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively, will
     be reserved for future issuance upon the exercise of options to be granted
     under the stock option plan. The issuance of Common Stock pursuant to the
     exercise of options under the stock option plan will result in the dilution
     of existing stockholders' interests. Assuming all

                                       26
<PAGE>
 
     options were exercised at the end of the period at an exercise price of
     $10.00 per share, the pro forma net income per share would be $0.53, $0.46,
     $0.41 and $0.37, respectively, and the pro forma stockholders' equity per
     share would be $10.50, $9.56, $8.87 and $8.26, respectively. See
     "Management of the Bank--Benefit Plans--Stock Option Plan."
(5)  The retained earnings of the Bank will continue to be substantially
     restricted after the Offering. See "Dividend Policy," "The Reorganization
     and Offering-- Liquidation Rights" and "Regulation--New York Bank
     Regulation."
(6)  Stockholders' equity per share data is based upon 19,125,000, 22,500,000,
     and 25,875,000 and 29,756,250 shares outstanding representing shares sold
     in the Offering, shares purchased by the ESOP and retention and Recognition
     and Retention Plan, and shares contributed to the Foundation.
(7)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Valuation Range of up to
     15% as a result of regulatory considerations, demand for the shares, or
     changes in market or general financial and economic conditions following
     the commencement of the Subscription and Community Offerings.

                                       27
<PAGE>
 
     COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION

     In the event that the Foundation was not being established as part of the
Reorganization, RP Financial has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $110.4 million at the
midpoint, which is approximately $5.2 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included,
and would result in an approximately $8.3 million increase in the amount of
Common Stock offered for sale in the Reorganization. The pro forma price to book
ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Foundation. Further, assuming the midpoint of the Estimated
Valuation Range, pro forma stockholders' equity per share and pro forma net
income per share would be substantially the same at $9.55 and $9.26,
respectively, and $0.48 and $0.45, respectively, with the Foundation or without
the Foundation. The pro forma price to book ratio and the pro forma price to
earnings ratio are substantially the same with and without the Foundation at the
midpoint at 104.71% and 107.99%, respectively, and 15.63x and 16.67x,
respectively. There is no assurance that in the event the Foundation was not
formed that the appraisal prepared at the time would have concluded that the pro
forma market value of the Company would be the same as that estimated herein.
Any appraisals prepared at that time would be based on the facts and
circumstances existing at that time, including, among other things, market and
economic conditions.

     For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, assuming the Reorganization was
completed at September 30, 1997.

<TABLE> 
<CAPTION> 
                                                                                  Minimum                    Midpoint          
                                                                        --------------------------   ------------------------- 
                                                                            With          Without       With          Without   
                                                                         Foundation     Foundation   Foundation     Foundation  
                                                                        -----------     ----------   ----------     ----------
                                                                           (Dollars in Thousands, Except Per Share Amounts)
<S>                                                                     <C>             <C>          <C>            <C> 
Estimated offering amount.............................................  $    86,777         93,840      102,091        110,400  
Pro forma market capitalization.......................................       89,380         93,840      105,154        110,400  
Total assets..........................................................    1,251,043      1,257,419    1,264,361      1,271,863  
Total liabilities.....................................................    1,049,731      1,049,731    1,049,731      1,049,731  
Pro forma stockholders' equity........................................      201,313        207,688      214,630        222,132  
Pro forma net income..................................................       10,009         10,172       10,256         10,447  
Pro forma stockholders' equity per share..............................        10.53          10.19         9.55           9.26  
Pro forma net income per share........................................         0.55           0.52         0.48           0.45  
                                                                                                                                
Pro forma pricing ratios:                                                                                                       
------------------------                                                                                                        
Offering price as a percentage of pro forma stockholders' equity per                                                            
 share................................................................        94.97%         98.14%      104.71%        107.99% 
Offering price to pro forma net income per share (1)..................        13.64          14.42        15.63          16.67  
Pro forma market capitalization to assets.............................         7.14%          7.46%        8.32%          8.68% 
                                                                                                                                
Pro forma financial ratios:                                                                                                     
--------------------------                                                                                                      
Return on assets (2)..................................................         1.07%          1.08%        1.08%          1.10% 
Return on equity (3)..................................................         6.63%          6.53%        6.37%          6.27% 
Equity to assets......................................................        16.09%         16.52%       16.98%         17.47% 


<CAPTION> 
                                                                                Maximum                 Adjusted Maximum
                                                                       -------------------------   --------------------------   
                                                                          With           Without      With           Without
                                                                       Foundation     Foundation   Foundation      Foundation
                                                                       ----------     ----------   ----------      ----------
                                                                          (Dollars in Thousands, Except Per Share Amounts)
<S>                                                                    <C>            <C>          <C>             <C> 
Estimated offering amount.............................................    117,405         126,960      135,016        146,004
Pro forma market capitalization.......................................    120,927         126,960      139,066        146,004
Total assets..........................................................  1,277,697       1,286,306    1,293,027      1,303,035
Total liabilities.....................................................  1,049,731       1,049,731    1,049,731      1,049,731
Pro forma stockholders' equity........................................    227,949         236,575      243,296        253,304
Pro forma net income..................................................     10,510          10,723       10,786         11,043
Pro forma stockholders' equity per share..............................       8.81            8.58         8.19           7.98
Pro forma net income per share........................................       0.43            0.40         0.38           0.36
                                                                       
Pro forma pricing ratios:                                              
------------------------                                               
Offering price as a percentage of pro forma stockholders' equity per   
 share................................................................     113.51%         116.55%      122.10%        125.31%
Offering price to pro forma net income per share (1)..................      17.44           18.75        19.74          20.83
Pro forma market capitalization to assets.............................       9.46%           9.87%       10.76%         11.20%
                                                                       
Pro forma financial ratios:                                            
--------------------------                                             
Return on assets (2)..................................................       1.10%           1.11%        1.11%          1.13%
Return on equity (3)..................................................       6.14%           6.04%        5.91%          5.81%
Equity to assets......................................................      17.84%          18.39%       18.82%         19.44% 
</TABLE> 


----------
(1)  If the contribution to the Foundation had been incurred during the nine
     months ended September 30, 1997, the offering price to pro forma net income
     per share would have been 26.04x,31.28x,37.83x, and 44.86x at the minimum,
     midpoint, maximum and adjusted maximum, respectively.
(2)  If the contribution to the Foundation had been incurred during the nine
     months ended September 30, 1997, return on assets would have been 0.79%,
     0.73%, 0.70%, and 0.66% at the minimum, midpoint, maximum and adjusted
     maximum, respectively.
(3)  If the contribution to the Foundation had been incurred during the nine
     months ended September 30, 1997, return on equity would have been
     4.71%,4.31%, 3.91%, and 3.51%, respectively.

                                       28
<PAGE>
 
                          PARTICIPATION BY MANAGEMENT

     The following table sets forth information regarding intended Common Stock
purchases by each of the Trustees and executive officers of the Bank and their
families, and by all Trustees and executive officers as a group. In the event
the individual maximum purchase limitation is increased, persons subscribing for
the maximum amount may increase their purchase order. This table excludes shares
to be purchased by the ESOP, as well as any Recognition and Retention Plan
awards or stock option grants that may be made no earlier than six months after
the completion of the Reorganization. See "Management of the Bank--Benefit 
Plans--Recognition and Retention Plan" and "--Stock Option Plan." The Trustees
and officers of the Bank have indicated their intention to purchase in the
Offering an aggregate of $3.0 million of Common Stock, equal to 3.4%, 2.9%,
2.5%, and 2.2% of the number of shares to be issued in the Subscription and
Community Offering, at the minimum, midpoint, maximum and adjusted maximum of
the Estimated Valuation Range, respectively.

<TABLE> 
<CAPTION> 
                                                AGGREGATE      NUMBER      PERCENT                           
                                                PURCHASE         OF          AT                              
NAME                                            PRICE (1)    SHARES (1)   MIDPOINT                           
----                                            ---------    ----------   --------                           
<S>                                           <C>            <C>         <C>                                
Gordon P. Assad                               $    50,000         5,000         *                            
Diane Allegro                                     200,000        20,000        .2                            
G. Gary Berner                                    100,000        10,000        .1                            
Christa R. Caldwell                                75,000         7,500        .1                            
James W. Currie                                   400,000        40,000        .4                            
Gary B. Fitch                                      10,000         1,000         *                            
David W. Heinrich                                 400,000        40,000        .4                            
Daniel W. Judge                                   200,000        20,000        .2                            
Paul J. Kolkmeyer                                 300,000        30,000        .3                            
B. Thomas Mancuso                                 200,000        20,000        .2                            
James Miklinski                                   200,000        20,000        .2                            
Kathleen P. Monti                                 200,000        20,000        .2                            
Barton G. Smith                                    50,000         5,000         *                            
William E. Swan                                   400,000        40,000        .4                            
Robert G. Weber                                   200,000        20,000        .2                            
                                              -----------    ----------  --------                            
                                                                                                             
    All Trustees and executive officers                                                                      
    as a group                                $ 2,985,000       298,500       3.0%                           
                                              ===========    ==========  ========                             
</TABLE> 

________________
*less than 1%
(1)  Includes purchases by associates.

                                       29
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                       CONSOLIDATED STATEMENTS OF INCOME

     The following Consolidated Statements of Income of the Bank for each of the
years in the three year period ended December 31, 1996 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere in this Prospectus. With respect to information for the nine
months ended September 30, 1997 and 1996, which is unaudited, in the opinion of
management, all adjustments necessary for a fair presentation of such periods
have been included and are of a normal recurring nature. Results for the nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. These statements
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus.

<TABLE> 
<CAPTION> 
                                                                            NINE MONTHS ENDED
                                                                              SEPTEMBER 30,              YEAR ENDED DECEMBER 31,
                                                                        ---------------------      --------------------------------
                                                                          1997         1996         1996         1995         1994
                                                                        --------     --------      ------      -------      -------
                                                                                (UNAUDITED)
                                                                                                 (IN THOUSANDS)
<S>                                                                     <C>          <C>          <C>          <C>          <C> 
Interest income:
  Federal funds sold..................................................  $    825     $  1,087     $  1,313     $  1,726     $   849
  Securities available for sale.......................................    20,866       18,177       24,766       22,002      22,197
  Securities held to maturity.........................................     1,258        1,293        1,698        2,780       2,394
  Real estate loans...................................................    33,072       29,844       40,440       36,948      31,985
  Other loans.........................................................     5,289        5,057        6,845        6,400       5,719
                                                                        --------     --------     --------     --------    --------
    Total interest income.............................................    61,310       55,458       75,062       69,856      63,144

Interest expense:
  Deposits (note 7)...................................................    32,145       29,551       39,814       39,034      31,754
  Other borrowed funds (note 8).......................................     1,190          473          841           --          --
                                                                        --------     --------     --------     --------    --------
    Total interest expense............................................    33,335       30,024       40,655       39,034      31,754
                                                                        --------     --------     --------     --------    --------

    Net interest income...............................................    27,975       25,434       34,407       30,822      31,390

Provision for loan losses (note 4)....................................       975        1,861        2,187        1,016         948
                                                                        --------     --------     --------     --------    --------

    Net interest income after provision for loan losses...............    27,000       23,573       32,220       29,806      30,442
                                                                        --------     --------     --------     --------    --------

Other operating income:
  Banking service charges and fees....................................     2,223        1,785        2,468        1,837       1,567
  Loan fees...........................................................       814          779        1,027          855         716
  Net gain (loss) on sale of securities available for sale (note 2)...       875          532          576        1,477        (849)
  Other...............................................................     1,044        1,223        1,681        1,237         952
                                                                        --------     --------     --------     --------    --------
    Total other operating income......................................     4,956        4,319        5,752        5,406       2,386
                                                                        --------     --------     --------     --------    --------

Operating and other expenses:
  Salaries and employee benefits (note 11)............................     9,735        8,439       11,477        9,706       9,259
  Occupancy and equipment (note 5)....................................     2,689        2,327        3,178        2,635       2,298
  Network interchange fees............................................       882          730          984          877         723
  Deposit insurance...................................................        90            2            2          983       1,873
  Marketing and advertising...........................................     1,017          934        1,355          978         951
  Other (note 6)......................................................     4,003        2,567        3,930        4,964       3,295
                                                                        --------     --------     --------     --------    --------
    Total operating and other expenses................................    18,416       14,999       20,926       20,143      18,399
                                                                        --------     --------     --------     --------    --------

    Income before income taxes and cumulative effect
     of change in accounting principle................................    13,540       12,893       17,046       15,069      14,429


Income taxes (note 10)................................................     4,905        4,667        6,278        5,144       4,704
                                                                        --------     --------     --------     --------    --------


    Income before cumulative effect of change in accounting principle.     8,635        8,226       10,768        9,925       9,725


Cumulative effect of change in accounting principle (note 11).........        --           --           --           --        (924)
                                                                        --------     --------     --------     --------     --------


    Net income........................................................  $  8,635     $  8,226     $ 10,768     $  9,925     $ 8,801
                                                                        ========     ========     ========     ========     ========
</TABLE> 

See accompanying notes to consolidated financial statements.

                                       30
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

     The Company has only recently been formed and accordingly, has no results
of operations. Our results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan and
securities portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
provision for loan losses, securities and loan sale activities, loan servicing
activities and service charges and fees collected on its deposit accounts. Our
non-interest expense primarily consists of salaries and employee benefits,
occupancy and equipment expense, federal deposit insurance premiums, marketing
expenses and other expenses. Results of operations are also significantly
affected by general economic and competitive conditions, particularly changes in
interest rates, government policies and actions of regulatory authorities.

MANAGEMENT OF INTEREST RATE RISK

     The principal objective of our interest rate risk management is to evaluate
the interest rate risk inherent in certain assets and liabilities, determine the
appropriate level of risk given our business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the Board's approved guidelines to reduce the vulnerability
of its operations to changes in interest rates. The Asset/Liability Committee is
comprised of senior management under the direction of the Board, with senior
management responsible for reviewing with the Board its activities and
strategies, the effect of those strategies on our net interest margin, the fair
value of the portfolio and the effect that changes in interest rates will have
on the portfolio and our exposure limits. See "Risk Factors --Potential Effects
of Changes in Interest Rates and the Current Interest Rate Environment."

     In recent years, we have used the following strategies to manage interest
rate risk: (1) emphasizing the origination and retention of residential monthly
and bi-weekly fixed-rate mortgage loans having terms to maturity of not more
than twenty years, residential and commercial adjustable-rate mortgage loans,
and consumer loans consisting primarily of mobile home loans, home equity loans
and student loans; (2) selling substantially all newly originated 25-30 year
fixed-rate, residential mortgage loans into the secondary market without
recourse and on a servicing retained basis (except for such loans with interest
rates of 9% or greater, which the Bank retains in its portfolio); and (3)
investing in shorter term securities which generally bear lower yields as
compared to longer term investments, but which better position the Bank for
increases in market interest rates. Shortening the maturities of our interest-
earning assets by increasing shorter term investments better matches the
maturities of our deposit accounts, in particular our certificates of deposit
that mature in one year or less, which, at September 30, 1997 totaled $364.5
million, or 36.4% of total interest-bearing liabilities. These strategies may
adversely impact net interest income due to lower initial yields on these
investments in comparison to longer term, fixed rate loans and investments.
However, management believes that reducing the exposure to interest rate
fluctuations will enhance long-term profitability.

     Gap Analysis. 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 a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time 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 same
time period. At September 30, 1997, the Bank's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was a negative 22.2%. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position is likely to experience a decline in net interest income
as the

                                       31
<PAGE>
 
cost of its interest-bearing liabilities increase at a rate faster than its
yield on interest-earning assets. In comparison, an institution with a positive
gap is likely to realize an increase in its net interest income in a rising
interest rate environment. Given the Bank's existing liquidity position and its
ability to sell securities from its available for sale portfolio, management
believes that its negative gap position will not have a material adverse effect
on its operating results or liquidity position. If interest rates decrease,
there may be a positive effect on the Bank's interest rate spread and
corresponding operating results.

     The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "GAP Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of the
repricing date or the contractual maturity of the asset or liability. The table
sets forth an approximation of the projected repricing of assets and liabilities
at September 30, 1997, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within the selected time intervals.
For adjustable and fixed-rate loans on residential properties, prepayment rates
were assumed to range from 3.6% to 10.44% annually. Mortgage related securities
were assumed to prepay at rates between 7.56% and 12.00% annually. Savings
accounts were assumed to decay at 10.24%, 10.24%, 20.48%, 12.28%, 9.72%, 16.36%
and 20.69%; NOW checking accounts were assumed to decay at 22.14%, 22.14%,
44.28%, 2.38%, 1.89%, 3.17% and 4.01%; and money market savings accounts were
assumed to decay at 46.49%, 4.86%, 9.73%, 38.92%, 0%, 0%, and 0% for the periods
of three months or less, three to six months, six to 12 months, one to three
years, three to five years, five to ten years and more than ten years,
respectively. Prepayment and deposit decay rates can have a significant impact
on the Bank's estimated gap. While the Bank believes such assumptions to be
reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual future loan prepayment and deposit withdrawal
activity. See "Business of the Bank - Lending Activities", "-Securities
Investment Activities" and "-- Sources of Funds".

                                       32
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                 Amounts Maturing or Repricing as of September 30, 1997
                                                     -----------------------------------------------------------------------------  

                                                       Less Than
                                                        Three          3-6       6 Months to                                       
                                                       Three Months   Months       1 Year      1-3 Years   3-5 Years    5-10 Years 
                                                     --------------------------  -----------  ----------   ---------    ----------
                                                                                              (Dollars in thousands)             
<S>                                                 <C>            <C>          <C>          <C>          <C>          <C> 
Interest-earning assets:                                                                                                           
   Federal funds sold..........................     $    2,200             -            -            -           -             -   
   Mortgage related securities (1).............         10,883        11,538       25,536      117,436      84,516        35,095   
   Investment securities (1)...................         58,956         6,700       19,092      101,801      21,627             -   
   Loans (2)    ...............................         80,597        50,228       95,074      156,079      94,751       119,235   
                                                    ----------     ---------    ---------    ---------    --------     ---------   
                                                                                                                                   
        Total interest-earning assets..........        152,636        68,466      139,702      375,316     200,894       154,330   
                                                    ----------     ---------    ---------    ---------    --------     ---------   
                                                                                                                                   
Interest-bearing liabilities:                                                                                                      
   Savings accounts............................         32,680        31,273       62,544       36,581      28,975        48,750   
   Interest-bearing checking...................         52,361        17,948       35,897       33,667       1,186         1,996   
   Certificate accounts........................        107,203        92,612      164,641      138,500      11,530         2,382   
   Mortgagor's payments held in escrow.........            269         2,424        2,694            -           -             -   
   Other borrowed funds........................          9,906         8,935          105          454       5,518         1,637   
                                                    ----------     ---------    ---------    ---------    --------     ---------   
                                                                                                                                   
        Total interest-bearing liabilities.....        202,419       153,192      265,881      209,202      47,209        54,765   
                                                    ----------     ---------    ---------    ---------    --------     ---------   
                                                                                                                                   
Interest sensitivity gap.......................       ($49,783)     ($84,726)   ($126,179)    $166,114    $153,685       $99,565   
                                                    ===========    ==========   ==========   =========    ========     =========   
                                                                                                                                   
Cumulative interest rate sensitivity gap.......       ($49,783)    ($134,509)   ($260,688)    ($94,574)    $59,111      $158,676   
                                                    ===========    ==========   ==========   ==========   ========     =========   
                                                                                                                                   
Ratio of cumulative gap to total assets........         (4.23)%      (11.43)%     (22.16)%       (8.04)%      5.02%        13.49%  
Ratio of interest-earning assets to                                                                                                
   interest-bearing liabilities................          75.41%        44.69%       52.54%      179.40%     425.54%       281.80%  

<CAPTION> 
                                                                 Amounts Maturing or Repricing as of September 30, 1997
                                                     -----------------------------------------------------------------------------  

                                                      Over 10               
                                                       Years               Total                          
                                                     ---------          ---------                         
<S>                                                  <C>                <C> 
Interest-earning assets:                                                                                  
   Federal funds sold..........................              -          $   2,200                          
   Mortgage related securities (1).............              -            285,004                         
   Investment securities (1)...................          6,892            215,068                         
   Loans (2)    ...............................         30,861            626,825                                           
                                                     ---------          ---------                                         
                                                                                                                            
        Total interest-earning assets..........         37,753          1,129,097                         
                                                     ---------          ---------                         
                                                                                                          
Interest-bearing liabilities:                                                                             
   Savings accounts............................         61,644            302,447                         
   Interest-bearing checking...................          2,524            145,579                         
   Certificate accounts........................              -            516,868                         
   Mortgagor's payments held in escrow.........          3,000              8,387                         
   Other borrowed funds........................          2,185             28,740                         
                                                     ---------          ---------                         
                                                                                                          
        Total interest-bearing liabilities.....         69,353          1,002,021                         
                                                     ---------          ---------                         
                                                                                                          
Interest sensitivity gap.......................       ($31,600)          $127,076                         
                                                    ==========          =========                         
                                                                                                          
Cumulative interest rate sensitivity gap.......       $127,076                                            
                                                     =========                                            
                                                                                                          
Ratio of cumulative gap to total assets........          10.80%                                           
Ratio of interest-earning assets to                                                                       
   interest-bearing liabilities................          54.44%            112.68%                         
</TABLE> 
                                                        
_____________________
(1)  Amounts shown are amortized cost.
(2)  Amounts shown include principal balance net of deferred loan fees and
     expenses, unamortized premiums and discounts, and non-accruing loans.

     Certain shortcomings are inherent in the method of analysis presented in
the GAP Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates, both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.

     Net Portfolio Value. The Bank's interest rate sensitivity is also monitored
by management through the use of a net portfolio value model which generates
estimates of the change in the Bank's net portfolio value ("NPV") over a range
of interest rate scenarios. NPV is the present value of expected cash flows from
assets and liabilities. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the fair value of assets in the
same scenario. The model assumes estimated loan prepayment rates, reinvestment
rates and deposit decay rates similar to the assumptions utilized for the GAP
Table. The following sets forth the Bank's NPV as of September 30, 1997.

                                       33
<PAGE>
 
<TABLE> 
<CAPTION> 
                    CHANGE IN                                                          NET PORTFOLIO VALUE
                                                                   -----------------------------------------------------
                 INTEREST RATES
                 IN BASIS POINTS                                       AMOUNT           $ CHANGE            % CHANGE
                                                                   -------------      ------------        ------------
                  (RATE SHOCK)                                                    (DOLLARS IN THOUSANDS)
                 --------------
                 <S>                                               <C>                <C>                 <C> 
                       400          ..........................         105,002           (44,100)           (29.6)%       
                       300          ..........................         116,614           (32,488)           (21.8)%       
                       200          ..........................         127,969           (21,133)           (14.2)%       
                       100          ..........................         139,230            (9,872)            (6.6)%       
                     Static         ..........................         149,102                --               --         
                      (100)         ..........................         156,097             6,995              4.7%        
                      (200)         ..........................         157,353             8,251              5.5%        
                      (300)         ..........................         162,851            13,749              9.2%        
                      (400)         ..........................         174,889            25,787             17.3%         
</TABLE> 

     As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV requires the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV Table presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV Table provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.

ANALYSIS OF NET INTEREST INCOME

     Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
also depends on the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rate earned or paid on them, respectively.

     Average Balance Sheet. The following table sets forth certain information
relating to the Bank at September 30, 1997 and for the nine months ended
September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and
1994. For the periods indicated, the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, is expressed both in
dollars and rates. No tax equivalent adjustments were made. The average balance
for federal funds sold is an average daily balance, while all other average
balances are monthly averages. Non-accruing loans have been excluded from the
yield calculations in this table.

                                       34
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                        NINE  MONTHS ENDED SEPTEMBER 30, 
                                                                       ---------------------------------
                                                AT SEPTEMBER 30, 1997                  1997                              
                                               ----------------------  ---------------------------------- 
                                                                         AVERAGE     INTEREST             
                                               OUTSTANDING   YIELD/    OUTSTANDING    EARNED/     YIELD/  
                                                 BALANCE      RATE       BALANCE       PAID        RATE    
                                               -----------   ------    -----------   --------     ------  
                                                                                    (DOLLARS IN THOUSANDS)
<S>                                           <C>           <C>       <C>           <C>            <C>    
Interest-earning assets:                                                                                  
  Federal funds sold......................    $      2,200   6.50%    $    19,936    $    825      5.52%  
  Investment securities (1)...............         215,068   5.78         185,660       7,816      5.61   
  Mortgage related securities (1).........         285,004   6.81         286,991      14,308      6.65   
  Loans (2)...............................         626,825   8.39         611,517      38,361      8.36   
                                              ------------            -----------    --------             
    Total interest-earning assets.........       1,129,097   7.49       1,104,104      61,310      7.40   
                                              ------------  -----     -----------    --------     -----   
                                                                                                          
Interest-bearing liabilities:                                                                             
  Savings accounts (3)....................         302,447   3.34         304,106       7,626      3.34   
  Interest-bearing checking (3)...........         145,579   3.19         120,413       2,436      2.70   
  Certificates of deposit (3).............         516,868   5.82         510,124      21,964      5.74   
  Mortgagor's payments held in escrow.....           8,387   1.55           8,116         119      1.95   
  Other borrowed funds....................          28,740   5.85          28,919       1,190      5.49   
                                              ------------            -----------    --------             
    Total interest-bearing liabilities....       1,002,021   4.65         971,678      33,335      4.57   
                                              ------------   ----     -----------    --------     -----   
                                                                                                          
Net interest income.......................                                           $ 27,975             
                                                                                     ========             
                                                                                                          
Net interest rate spread..................                   2.84%                                 2.83%  
                                                            =====                                 =====   
                                                                                                          
Net earning assets........................    $    127,076            $   132,426                         
                                              ============            ===========                         
                                                                                                                         
Net interest income as a percentage                                                                                      
  of average interest-earning assets......                                               3.38%                           
                                                                                     ========                            
                                                                                                                         
Ratio of average interest-earning assets                                                                                 
  to average interest-bearing                                                                                            
    liabilities...........................                                             113.63%                           
                                                                                     ========    
<CAPTION> 
                                                 NINE  MONTHS ENDED SEPTEMBER 30, 
                                             ---------------------------------------                              
                                                             1996                     
                                             ---------------------------------------                               
                                                 AVERAGE    INTEREST                         
                                              OUTSTANDING     EARNED/        YIELD/               
                                                BALANCE        PAID           RATE                
                                             -------------  --------       --------- 
                                                             (DOLLARS IN THOUSANDS)                                            
<S>                                          <C>            <C>            <C> 
Interest-earning assets:                                  
  Federal funds sold......................   $     27,420   $  1,087         5.29%
  Investment securities (1)...............        142,727      5,695         5.32
  Mortgage related securities (1).........        280,241     13,775         6.55
  Loans (2)...............................        554,199     34,901         8.40
                                             ------------   --------             
    Total interest-earning assets.........      1,004,587     55,458         7.36
                                             ------------   --------        -----
                                                                                 
Interest-bearing liabilities:                                                    
  Savings accounts (3)....................        310,040      7,814         3.36
  Interest-bearing checking (3)...........        104,782      2,147         2.73
  Certificates of deposit (3).............        446,521     19,467         5.81
  Mortgagor's payments held in escrow.....          8,308        123         1.97
  Other borrowed funds....................         13,147        473         4.80
                                             ------------   --------             
    Total interest-bearing liabilities....        882,798     30,024         4.53
                                             ------------   --------         ----
                                                                                 
Net interest income.......................                  $ 25,434             
                                                            ========             
                                                                                 
Net interest rate spread..................                                   2.83%
                                                                            ===== 
                                                          
Net earning assets........................   $    121,789 
                                             ============  
                                           
Net interest income as a percentage        
  of average interest-earning assets......                      3.38%
                                                             ========
                                           
Ratio of average interest-earning assets   
  to average interest-bearing   
    liabilities...........................                    113.80% 
                                                            ========    
</TABLE>                                     

                                                        (Footnotes on next page)

                                      35
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                    YEAR ENDED DECEMBER 31, 
                                           ---------------------------------------------------------------------------       
                                                           1996                                   1995                     
                                           -----------------------------------    ------------------------------------     
                                             AVERAGE     INTEREST                   AVERAGE     INTEREST                   
                                           OUTSTANDING   EARNED/       YIELD/     OUTSTANDING    EARNED/      YIELD/  
                                             BALANCE      PAID          RATE        BALANCE       PAID         RATE   
                                           -----------   --------      -------    ------------  --------      --------
                                                                     (DOLLARS IN THOUSANDS)      
<S>                                       <C>         <C>              <C>      <C>        <C>                <C> 
Interest-earning assets:                                                                                              
  Federal funds sold................      $   24,683  $     1,313         5.32%    $   31,357   $    1,726       5.50%    
  Investment securities(1)..........         147,220        7,916         5.38        119,100        6,843       5.75     
  Mortgage related securities(1)....         281,843       18,547         6.58        275,448       17,939       6.51     
  Loans (2).........................         564,049       47,286         8.38        506,600       43,348       8.56     
                                          ----------  -----------                  ----------   ----------                
    Total interest-earning assets...       1,017,795       75,062         7.37        932,505       69,856       7.49     
                                          ----------  -----------        -----     ----------   ----------     ------     
                                                                                                                          
Interest-bearing liabilities:                                                                                             
  Savings accounts (3)..............         307,530       10,353         3.37        326,125       11,154       3.42     
  Interest-bearing checking (3).....         105,717        2,871         2.72         96,551        2,909       3.01     
  Certificates of deposit (3).......         455,230       26,432         5.81        386,648       23,546       6.09     
  Mortgagor's payments held                                                                                               
    in escrow.......................           8,174          158         1.93          9,222          174       1.89     
  Other borrowed funds..............          16,674          841         5.04              -            -          -     
                                          ----------  -----------                  ----------   ----------                
    Total interest-bearing 
      liabilities...................         893,325       40,655         4.55        818,546       37,783       4.61     
                                          ----------  -----------        -----     ----------   ----------     ------      
                                                                                                                          
Net interest income.................                  $    34,407                               $   32,073                
                                                      ===========                               ==========                
                                                                                                                          
Net interest rate spread............                                      2.82%                                  2.88%    
                                                                         =====                                 ======     
                                                                                                                          
Net earning assets..................      $  124,470                               $  113,959                             
                                          ==========                               ==========                             
                                                                                                                          
Net interest income as a percentage of                                                                                    
  average interest-earning assets...                         3.38%                                    3.44%               
                                                             ====                                     ====                
                                                                                                                          
Ratio of average interest-earning assets                                                                                  
  to average interest-bearing liabilities                  113.93%                                  113.92%               
                                                           ======                                   ======                
<CAPTION> 
                                               YEAR ENDED DECEMBER 31, 
                                           ----------------------------------
                                                         1994                          
                                           ---------------------------------- 
                                              AVERAGE     INTEREST                
                                            OUTSTANDING    EARNED/    YIELD/    
                                              BALANCE       PAID       RATE      
                                            -----------   --------    -------  
                                                 (DOLLARS IN THOUSANDS)      
<S>                                        <C>          <C>            <C>                                           
Interest-earning assets:                  
  Federal funds sold................       $   20,740   $     849      4.09%
  Investment securities(1)..........          124,155       6,317      5.09
  Mortgage related securities(1)....          302,430      18,274      6.04
  Loans (2).........................          448,902      37,704      8.40
                                           ----------   ---------
    Total interest-earning assets...          896,227      63,144      7.05
                                           ----------   ---------     -----
                                          
Interest-bearing liabilities:             
  Savings accounts (3)..............          415,843      12,869      3.09
  Interest-bearing checking (3).....           86,057       2,283      2.65
  Certificates of deposit (3).......          287,661      16,443      5.72
  Mortgagor's payments held               
    in escrow.......................            8,471         159      1.88
  Other borrowed funds..............                -           -         -
                                           ----------   ---------
    Total interest-bearing 
      liabilities...................          798,032      31,754      3.98                                      
                                           ----------   ---------      ----                                       
Net interest income.................                    $  31,390
                                                        =========
                                          
Net interest rate spread............                                   3.07%
                                                                      =====
                                          
Net earning assets..................       $   98,195
                                           ==========
                                          
Net interest income as a percentage of    
  average interest-earning assets...                         3.50%
                                                             ====

Ratio of average interest-earning assets                                                                               
  to average interest-bearing liabilities                  112.30%
                                                           ====== 
</TABLE> 

__________________________
(1)    Amounts shown are amortized cost.
(2)    Net of deferred loan fees and expenses, loan discounts, loans in process
       and non-accruing loans.
(3)    Excludes $1.25 million paid for a special interest payment in 1995 which
       was approved by the Bank's Board of Trustees and paid on a pro rata basis
       on all interest-bearing savings, NOW, money market, and certificate
       accounts in recognition of the Bank's 125th anniversary.


           Rate/Volume Analysis. The following table presents the extent to
which changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Bank's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to : (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.

                                      36
<PAGE>
 
<TABLE> 
<CAPTION> 
                                             NINE MONTHS ENDED SEPTEMBER 30,           YEAR ENDED DECEMBER 31,  
                                          ------------------------------------   ------------------------------------
                                                      1997 VS. 1996                          1996 VS. 1995             
                                          ------------------------------------   ------------------------------------    
                                             INCREASE (DECREASE)       TOTAL       INCREASE (DECREASE)        TOTAL      
                                                   DUE TO            INCREASE            DUE TO             INCREASE   
                                          -----------------------                -----------------------               
                                            VOLUME        RATE      (DECREASE)     VOLUME         RATE      (DECREASE) 
                                          -----------  ----------   ----------   ----------    ----------   ---------  
                                                                         (IN THOUSANDS)             
<S>                                       <C>         <C>          <C>          <C>         <C>           <C>   
Interest-earning assets:                                                                                               
   Federal funds sold..................   $  (330)    $     68     $   (262)    $   (280)    $   (133)    $   (413)    
   Investment securities...............     1,793          328        2,121        1,535         (461)       1,074     
   Mortgage related securities.........       335          198          533          419          189          608     
   Loans...............................     3,683         (223)       3,460        4,830         (893)       3,937     
                                          -------     ---------    --------     --------     --------     --------     
      Total interest-earning assets....     5,481          371        5,852        6,504       (1,298)       5,206     
                                          -------     --------     --------     --------     --------     --------     
                                                                                                                       
Interest-bearing liabilities:                                                                                          
   Savings accounts....................      (149)         (39)        (188)        (628)        (173)        (801)    
   Interest-bearing checking...........       332          (43)         289          263         (301)         (38)    
   Certificates of deposit.............     2,888         (391)       2,497        4,022       (1,136)       2,886     
   Mortgagors' payments held in escrow.        (3)          (1)          (4)         (20)           4          (16)    
   Other borrowed funds................       631           86          717          841            -          841     
                                          -------     --------     --------     --------     --------     --------     
      Total interest-bearing  
        liabilities....................   $ 3,699     $   (388)    $  3,311     $  4,478     $ (1,606)    $  2,872      
                                          =======     =========    ========     ========     ========     ========     
                                                                                                                       
Net interest income....................                            $  2,541                               $  2,334     
                                                                   ========                               ========     

<CAPTION> 
                                                  YEAR ENDED DECEMBER 31,  
                                            -------------------------------------           
                                                        1995 VS. 1994           
                                            -------------------------------------           
                                              INCREASE (DECREASE)        TOTAL  
                                                    DUE TO             INCREASE 
                                            ---------------------
                                               VOLUME      RATE       (DECREASE)
                                            -----------  --------     ---------- 
                                                      (IN THOUSANDS)                                           
<S>                                         <C>          <C>          <C> 
Interest-earning assets:                  
   Federal funds sold..................       $   410      $   467     $    877
   Investment securities...............          (265)         791          526
   Mortgage related securities.........        (1,698)       1,363         (335)
   Loans...............................         4,925          719        5,644
                                              -------      -------     --------
      Total interest-earning assets....         3,372        3,340        6,712
                                              -------      -------     --------
                                          
Interest-bearing liabilities:             
   Savings accounts....................        (2,973)       1,258       (1,715)
   Interest-bearing checking...........           296          330          626
   Certificates of deposit.............         5,969        1,134        7,103
   Mortgagors' payments held in escrow.            14            1           15
   Other borrowed funds................             -            -            -
                                              -------      -------     --------
      Total interest-bearing 
        liabilities....................       $ 3,306      $ 2,723     $  6,029
                                              =======      =======     ======== 
Net interest income....................                                $    683
                                                                       ========
</TABLE> 

     Calculations for the above table exclude $1.25 million paid as a special
interest payment in 1995, which was paid on a pro rata basis on all interest-
bearing savings, NOW, money market and certificate accounts in recognition of
the Bank's 125th anniversary.


COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996

     Total assets increased by $83.1 million, or 7.6%, from $1.093 billion at
December 31, 1996 to $1.176 billion at September 30, 1997. The growth in assets
is primarily attributable to a $48.9 million increase in debt, equity and asset-
backed securities available for sale, a $31.5 million increase in real estate
loans and a $9.0 million increase in accrued interest receivable, premises and
equipment, and other assets, primarily the building of the Bank's new
administrative center. Asset growth was funded through deposit inflows resulting
from the continued expansion of the Bank's branch network. The asset growth was
partially offset by a $7.9 million decrease in consumer loans which resulted
from a $12.5 million early repayment of the automobile lease portfolio.
Investment securities at September 30, 1997, totaled $216.7 million, an increase
of $48.4 million, compared to $168.3 million at December 31, 1996. Substantially
all the increase in these securities was attributable to purchases of one- to
three-year weighted average life, fixed-rate corporate bonds and asset-backed
securities, as well as common stock of corporate issuers. While the rates earned
on these securities is lower than rates earned on longer-term securities, the
Bank was specifically looking to shorten its interest rate risk exposure and
obtain more consistent cash flows in this low rate, flat yield curve
environment. Real estate loans increased from $524.4 million at December 31,
1996 to $555.9 million at September 30, 1997, primarily due to increased one- to
four-family, bi-weekly residential mortgage loans, an enhanced home equity loan
product, and increased originations in commercial real estate loans as we
continued to emphasize the expansion of our real estate lending. Premises and
equipment increased by $8.8 million, or 66.3%, primarily due to the construction
of a new building which was occupied in August 1997 and provides office space
for our administrative functions and lending departments.

     At September 30, 1997, the Bank's allowance for possible loan losses as a
percentage of total non-performing loans was 330.0%, compared to 118.6% at
September 30, 1996, due to a slight increase in the provision and a significant
decrease in non-performing loans from $5.3 million at September 30, 1996 to $1.9
million at September 30, 1997. This decrease was attributable to repayments,
writedowns to net realizable values, a settlement with a bankruptcy trustee and
an aggressive approach to address past due and non-performing loans. At
September 30, 1997, the Bank's allowance for possible loan losses as a
percentage of total loans was 1.02%. While management uses available information
to

                                      37
<PAGE>
 
recognize losses on loans, future loan loss provisions may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses and may require the Bank to recognize additional provisions
based on their judgement of information available to them at the time of their
examination. See "Risk Factors - Lending Risks Associated With Commercial Real
Estate, Multi-Family and Consumer Lending" and "Business of the Bank -
Delinquencies and Classified Assets" and "- Allowance for Possible Loan Losses".

     Total deposits at September 30, 1997 were $992.2 million, an increase of
$72.1 million, or 7.8%, compared to $920.1 million at December 31, 1996. The
increase was primarily due to the introduction of a new money market deposit
account, which from a rate perspective competes against mutual fund money market
accounts, and grew to $34.4 million by September 30, 1997. The Bank's
certificates of deposit grew from $484.7 million at December 31, 1996 to $516.9
million at September 30, 1997. The increase in certificates of deposit was
primarily attributable to the Bank's strategy of offering introductory rates on
certain certificates of deposit whenever a new branch is opened, as was the case
in both March and May of 1997. Offsetting these increases, borrowed funds
decreased $3.3 million, or 10.3%, from $32.0 million at December 31, 1996 to
$28.7 million at September 30, 1997. This decrease was primarily attributable to
the payment of a short-term FHLB advance of $7.0 million, which matured in early
January. Another $5.0 million, fifteen year, amortizing FHLB borrowing was
obtained in July 1997 at a rate of 6.59%. Other borrowings, primarily in the
form of reverse repurchase agreements, declined $1.3 million. These borrowings
are used to fund the Bank's borrowing/reinvestment program which takes advantage
of low rate short-term borrowings, typically three- to six- month repos, and
invests in one- to two-year securities, primarily U.S. Treasury securities, to
earn additional net interest income. The relatively flat yield curve in 1997
made it less attractive to enter into more borrowing/reinvestment transactions
due to the very low spreads the Bank could earn.

     Net worth increased to $126.7 million at September 30, 1997 from $115.7
million at December 31, 1996. This increase was the result of net income of $8.6
million and a $2.4 million increase in the after-tax net unrealized gain on
available for sale securities due to the lower market interest rates at
September 30, 1997 which positively affected the market value of the Bank's
securities.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995

     Total assets at December 31, 1996 were $1.093 billion as compared to total
assets of $994.3 million at December 31, 1995, an increase of $99.1 million, or
10.0%. The asset growth was primarily attributable to a $63.4 million increase
in real estate and consumer loans, and a $60.0 million increase in securities.
Asset growth was funded with a $59.0 million increase in deposits and a $32.0
million increase in other borrowings. Federal funds sold decreased $20.6 million
as proceeds were invested in loans and securities. Asset growth during the year
ended December 31, 1996 was concentrated in one- to four-family and commercial
real estate loans, vehicle loans, mortgage related securities and U.S. Treasury
securities. Net loans increased $62.5 million, from $536.0 million at December
31, 1995 to $598.5 million on December 31, 1996. One- to four-family real estate
loans increased $41.2 million, commercial real estate loans increased $6.5
million, and vehicle loans increased $6.2 million. The increase in the one- to
four-family real estate loans was primarily the result of $13.9 million in
additional adjustable rate loans and $19.1 million in additional bi-weekly fixed
rate loans, as we continued to originate and hold in portfolio one- to four-
family real estate loans which meet the asset/liability management objectives of
either variable rate or shorter term mortgage loans. The commercial real estate
loan portfolio increased from $62.0 million at December 31, 1995 to $68.6
million at December 31, 1996, as the Bank continued its emphasis on originating
assets which provide higher yields and are more sensitive to current market
interest rates than those obtainable on one- to four-family, long term, fixed
rate real estate loans. Consumer and other loans increased $10.0 million from
$63.3 million at December 31, 1995 to $73.3 million at December 31, 1996. This
increase was primarily the result of the $6.2 million increase in vehicle loans
and auto lease financing. While consumer loans generally entail greater credit
risk than one- to four-family real estate loans, they are also shorter term,
higher yielding assets which also meet the asset/liability objectives of the
Bank.

                                      38
<PAGE>
 
     The securities portfolio increased by $60.0 million, from $393.1 million at
December 31, 1995 to $453.1 million at December 31, 1996. The growth in the
securities portfolio was primarily in U.S. Treasury securities, assetbacked
securities and mortgage related securities. The $29.5 million increase in U.S.
Treasury securities was a result of the Bank's continued development of a five
year laddered portfolio of U.S. Treasuries and the start-up of the Bank's
borrowing/reinvestment program. The $22.7 million increase in asset-backed
securities was required to meet the need for shorter term average life
securities with tighter payment windows than most mortgage related securities.
The $23.3 million increase in mortgage related assets was largely funded with
deposits and borrowings during 1996. It represented a repositioning of assets
from the lower yielding, short-term CMO sector and federal funds sold into
mortgage related securities.

     The increase in deposit growth was attributable to the net deposit inflows
of $19.9 million and interest credited to deposit accounts of $39.1 million
during the period. The composition of the Bank's deposits continued to change,
as reflected in the shift out of lower yielding savings accounts and into higher
yielding certificates of deposit as the Bank paid slightly lower rates on
transaction accounts in 1996. The Bank's cost of funds for certificates of
deposit was also lower in 1996 than 1995 although the balances increased from
$422.5 million at December 31, 1995 to $484.7 million at December 31, 1996. The
generally lower interest rate environment in 1996, as well as approximately
$19.0 million in long-term, high interest rate (9.00%-10.00%) certificates of
deposit maturities in the first four months of 1996 assisted in lowering the
overall cost of funds. On the other hand, two new branch openings in 1996
increased the cost of funds as the Bank used certificates of deposit promotions
to attract new customers. In 1996, we initiated a wholesale borrowing strategy
on two fronts. After joining the FHLB in 1995, the Bank entered into its first
$5.0 million, 5-year FHLB advance at 5.72% in January 1996. By year end, $12.0
million in FHLB advances were recorded on the Bank's books. In June 1996, we
initiated a borrowing/reinvestment program and entered into $20.0 million in
reverse repurchase agreements by December 31, 1996. See "Management of Interest
Rate Risk".

     Net worth increased to $115.7 million at December 31, 1996 from $107.7
million at December 31, 1995. This increase was the result of net income of
$10.8 million, partially offset by a $2.8 million decrease in the after-tax net
unrealized gain on available for sale securities. As interest rates increased at
December 31, 1996, the market value of the Bank's securities was negatively
affected.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996.

     General. The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of residential and commercial real
estate loans, consumer loans, securities available for sale and securities held
to maturity, and the interest paid on interest-bearing liabilities, consisting
primarily of deposits and other borrowed funds. Net interest income is a
function of the Bank's interest rate spread, which is the difference between the
average yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. The Bank's
earnings also are affected by its level of service charges and gains on sale of
loans and securities, as well as its level of operating and other expenses,
including salaries and employee benefits, occupancy and equipment costs, and
marketing and advertising costs.

     Net income for the nine months ended September 30, 1997 increased by
$409,000, or 5.0%, from $8.2 million for the nine months ended September 30,
1996 to $8.6 million for the same period in 1997. The increase was due primarily
to an increase in interest income which resulted from an increase in the average
balance of interest-earning assets, as well as an increase in other operating
income related to fees and service charges on deposits, increased gains on the
sale of securities available for sale, and lower provisions for loan losses. The
increases were partially offset by increased interest expense which resulted
primarily from an increase in average interest-bearing liabilities and a $3.4
million increase in operating and other expenses reflecting the expansion of the
Bank's branch network.

     Interest Income. Interest income increased by $5.8 million, or 10.6%, to
$61.3 million for the nine months ended September 30, 1997 from $55.5 million
for the nine months ended September 30, 1996. The increase was

                                      39
<PAGE>
 
primarily due to a $3.5 million increase in income from loans, a $2.1 million
increase in income from investment securities, and a $533,000 increase in income
from mortgage related securities. These increases were partially offset by a
$262,000 decrease in income from federal funds sold. The increase in income from
loans was attributable to a $57.3 million increase in the average balance of
loans to $611.5 million from $554.2 million, partially offset by a 4 basis point
decrease in the average yield on loans from 8.40% to 8.36%. The continued
origination and portfolio growth of the Bank's one- to four-family real estate
loans was responsible for over 60% of the loan increase. The increase in income
from investment securities was attributable to a $42.9 million increase in the
average balance of investment securities to $185.6 million from $142.7 million,
and a 29 basis point increase in the average yield on investment securities to
5.61% from 5.32%. The Bank invested in U.S. Treasury securities and asset-backed
securities during the first nine months of 1997 to take advantage of their
shorter weighted average lives and their 6.00% or higher yields which increased
the Bank's overall yield on its investment securities. The increase in income
from mortgage related securities was attributable to a $6.8 million increase in
the average balance of mortgage related securities to $287.0 million from $280.2
million, and a 10 basis point increase in the average yield on mortgage related
securities to 6.65% from 6.55%. As interest rates increased during the first
four months of 1997, the Bank invested in CMO's, 7-year balloons and 30-year
mortgage related securities which provided yields of 6.93% to 7.03% and
increased the Bank's overall yield on its mortgage related securities. The
decrease in income from federal funds sold was due to a $7.5 million decrease in
the average balance of federal funds sold to $19.9 million from $27.4 million,
partially offset by a 23 basis point increase in the yield on the Bank's federal
funds sold to 5.52% from 5.29%. This decrease was the result of the redeployment
of excess funds, mainly in investment securities.

     Interest Expense. Interest expense increased by $3.3 million, or 11.0%, to
$33.3 million for the nine months ended September 30, 1997 from $30.0 million
for the nine months ended September 30, 1996. This increase was the result of an
$88.9 million increase in the average balance of interest-bearing liabilities in
the 1997 period compared to the 1996 period, and a 4 basis point increase in the
average rate paid on such liabilities over the same period. In particular, the
increase resulted primarily from a $2.5 million increase in interest expense on
certificates of deposit, a $717,000 increase in interest expense on other
borrowings, and a $289,000 increase in interest expense on interest-bearing
checking accounts. These increases were partially offset by a $188,000 decrease
in interest expense on savings accounts. The increase in interest expense
attributable to certificates of deposit resulted from a $63.6 million increase
in the average balance of certificates of deposit to $510.1 million in 1997 from
$446.5 million in 1996, which was partially offset by a 7 basis point decrease
in the average cost of certificates of deposit from 5.81% to 5.74%. Assisting
the decline was the slightly lower interest rate environment during the 1997
period, as well as the Bank closely monitoring maturing certificates of deposit
with high rates and promoting alternative certificates of deposit to lower the
overall rate paid on these accounts. Two new branch openings in early 1997 and
one new branch opening in late 1996 contributed to the large increase in average
certificates of deposit balances. The increase in interest expense attributable
to other borrowings resulted from a $15.8 million increase in the average
balance of other borrowings to $28.9 million in 1997 from $13.1 million in 1996
and a 69 basis point increase in the average borrowing cost to 5.49% from 4.80%.
The increase in other borrowed funds in 1997 reflects management's decision to
implement a borrowing/reinvestment program which utilizes reverse repurchase
agreements to fund investments in securities as long as such agreements are a
cost effective source of funds. As short-term interest rates increased and the
yield curve flattened in mid-1997, the rates being paid on these borrowings
increased and the spread earned on the transactions began to narrow, thus
reducing the attractiveness of these transactions. The increase in interest
expense attributable to interest-bearing checking accounts resulted from a $15.6
million increase in the average balance of interest-bearing checking accounts to
$120.4 million in 1997 from $104.8 million in 1996, partially offset by a 3
basis point decrease in the average cost of interest-bearing checking accounts
to 2.70% from 2.73%. The decrease in interest expense attributable to savings
accounts resulted from a $5.9 million decrease in the average balance of total
savings accounts to $304.1 million from $310.0 million, and a 2 basis point
decrease in the average cost of savings accounts to 3.34% from 3.36%. See
"Business of the Bank - Source of Funds -Borrowed Funds".

     Provision for Loan Losses. The Bank establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed appropriate to absorb future charge-offs of
loans deemed uncollectible. In determining the appropriate level of the
allowance for loan losses, management

                                      40
<PAGE>
 
considers past and anticipated loss experience, evaluations of real estate
collateral, current and anticipated economic conditions, volume and type of
lending and the levels of non-performing and other classified loans. The amount
of the allowance is based on estimates and the ultimate losses may vary from
such estimates. Management of the Bank assesses the allowance for loan losses on
a quarterly basis and makes provisions for loan losses in order to maintain the
adequacy of the allowance.

     The Bank provided $975,000 and $1.9 million in loan loss provisions during
the nine months ended September 30, 1997 and September 30, 1996, respectively.
During the first nine months of 1996, management provided $800,000 of provisions
for potential losses on approximately $1.8 million of loans to a borrower that
had filed for bankruptcy protection. The Bank charged-off $486,000 of this loan
during 1997 after a settlement was reached with the bankruptcy trustee. This
amount is reflected in the increase in the net charge-offs to average loans
outstanding to .19% from .04% during the nine months ending September 30, 1997
and September 30, 1996, respectively.

     Other Operating Income. Other operating income is composed of fee income
for bank services and profits from the sale of loans and securities. Total other
operating income for the nine months ended September 30, 1997 increased
$637,000, or 14.7%, from $4.3 million for the nine months ended September 30,
1996 to $5.0 million for the nine months ended September 30, 1997. The primary
reasons for the improvement were net gains of $875,000 on the sale of securities
available for sale during the nine months ended September 30, 1997 as compared
to net gains of $532,000 in the comparable period for 1996. The increases are
primarily reflective of the Bank's desire to realize some of the gains on
marketable equity securities which occurred in 1997 as a result of the strong
performance of the stock market. Bank service charges and fees on deposit
accounts increased $438,000 for the nine months ending September 30, 1997 to
$2.2 million from $1.8 million for the nine months ending September 30, 1996.
This increase was primarily the result of increased fee income of $148,000 on
the Bank's debit card which was introduced in 1995 and continues to see
significant growth in customer acceptance and usage. In addition, service
charges and charges for insufficient funds on checking accounts increased
$267,000 from September 30, 1996 to September 30, 1997 as a result of the Bank's
continued promotion of its low fee checking account products. Other changes in
other operating income included a $35,000 increase in loan origination and
servicing fees and increased commissions of $38,000 on the sale of annuities and
mutual funds. These increases were partially offset by writedowns taken in 1997,
on real estate owned ("REO") and investments in real estate development
projects, which totaled $387,000 in 1997 in comparison to $18,000 in 1996. These
properties were written-down to their revised net realizable values.

     Operating and Other Expenses. Operating and other expenses increased by
$3.4 million, or 22.8%, to $18.4 million for the nine months ended September 30,
1997 from $15.0 million for the nine months ended September 30, 1996. The
increase was due to a $1.4 million increase in other expenses, a $1.3 million
increase in salaries and employee benefits, a $362,000 increase in occupancy and
equipment, a $152,000 increase in network interchange fees, an $88,000 increase
in deposit insurance and an $83,000 increase in marketing and advertising.

     Other expenses increased to $4.0 million for the nine months ended
September 30, 1997 from $2.6 million for the nine months ended September 30,
1996. The September 30, 1996 other expenses reflects the benefit recognized for
the reversal of a $600,000 provision for possible loss on demand balances held
at Nationar, Inc. ("Nationar"), which had originally been made in 1995. This is
discussed further in the comparison of operating results for fiscal years 1996
and 1995. Without this reversal, the net increase in other expenses would have
been $836,000 including professional fees mainly associated with the
implementation of various tax planning strategies, additional charitable
contributions, additional costs incurred as a result of the growth in the number
of checking accounts, and expenses associated with settling a real estate tax
escrow lawsuit. Salaries and employee benefits increased to $9.7 million for the
nine months ended September 30, 1997 from $8.4 million for the same period in
1996. The increase is primarily a result of an additional 41 full time
equivalent employees hired by the Bank, primarily at the three new branch
locations established by the Bank since August of 1996. These new branches also
contributed to the increase in occupancy and equipment to $2.7 million for the
nine months ended September 30, 1997 from $2.3 million for the same period in
1996. Included in occupancy and equipment is $417,000 of depreciation on the
furniture and equipment and leasehold improvements for the new facilities and
$234,000 of building-related operating expenses. Occupancy and equipment also
reflects

                                      41
<PAGE>
 
approximately $79,000 of technology equipment writedowns related to the Bank's
continued upgrading of its technology, communications and information systems,
primarily personal computers and related software. Network interchange fees
increased to $882,000 for the nine months ended September 30, 1997 from $730,000
for the same period in 1996 reflecting the costs associated with the continued
growth in the number of customer transactions performed utilizing the Bank's
debit card product. Deposit insurance increased to $90,000 for the nine months
ended September 30, 1997 from $2,000 for the same period in 1996, resulting from
the FDIC's decision to raise the assessment for deposit insurance in 1997 to
$0.013/per one hundred dollars of deposits from the minimal assessment in 1996.
Marketing and advertising costs increased to $1.0 million for the nine months
ended September 30, 1997 from $934,000 for the nine months ended September 30,
1996 and was primarily due to promotional costs relating to the Bank's opening
of the new branches.

     Income Taxes. Income tax expense was $4.9 million for the nine months ended
September 30, 1997 compared to $4.7 million for the same period in 1996.
The effective tax rate was 36.2% for both periods.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995

     General. Net income for the year ended December 31, 1996 increased by
$843,000, or 8.5%, from $9.9 million for the year ended December 31, 1995 to
$10.8 million for the fiscal year 1996. The increase was due primarily to an
increase in interest income which primarily resulted from an increase in the
average balance of interest-earning assets and an increase in other operating
income related to fees and service charges on deposits. The increases were
partially offset by increased interest expense which resulted primarily from an
increase in average interest-bearing liabilities, decreased gains on the sale of
securities available for sale, higher provisions for loan losses, increases in
operating and other expenses, and increased income taxes.

     Interest Income. Interest income increased by $5.2 million, or 7.5%, to
$75.1 million for the year ended December 31, 1996 from $69.9 million for the
year ended December 31, 1995. The increase was primarily due to a $3.9 million
increase in income from loans, a $1.1 million increase in income from investment
securities, and a $608,000 increase in income from mortgage related securities.
These increases were partially offset by a $413,000 decrease in income from
federal funds sold. The increase in income from loans was attributable to a
$57.4 million increase in the average balance of loans to $564.0 million from
$506.6 million, partially offset by an 18 basis point decrease in the average
yield on loans from 8.56% to 8.38%. The origination and portfolio growth of the
Bank's one- to four-family real estate loans was responsible for over 64% of the
total loan growth. Since interest rates decreased throughout 1995, refinancings
increased during the last quarter of 1995 and into early 1996 which assisted in
lowering the total portfolio yield in 1996. The increase in income from
investment securities was attributable to a $28.1 million increase in the
average balance of investment securities to $147.2 million from $119.1 million,
partially offset by a 37 basis point decrease in the average yield on investment
securities to 5.38% from 5.75%. The $1.1 million increase in 1996 interest
income was the result of the development of a five year laddered portfolio of
U.S. Treasury securities and the start-up of the Bank's borrowing/reinvestment
program which was initiated in 1996 and mainly invested in two year U.S.
Treasury securities. The increase in income from mortgage related securities was
attributable to a $6.4 million increase in the average balance of mortgage
related securities to $281.8 million from $275.4 million, and a 7 basis point
increase in the average yield on mortgage related securities to 6.58% from
6.51%. The $608,000 increase in 1996 interest income is attributable to the
repositioning of the Bank's mortgage related securities in early 1996 to achieve
a higher yielding portfolio. The decrease in income from federal funds sold was
due to a $6.7 million decrease in the average balance of federal funds sold to
$24.7 million from $31.4 million, and an 18 basis point decrease in the yield on
the Bank's federal funds sold to 5.32% from 5.50%. This decrease was the result
of our continuing deployment of excess funds, mainly in investment securities.

     Interest Expense. Interest expense increased by $1.7 million, or 4.2%, to
$40.7 million for the year ended December 31, 1996 from $39.0 million for the
year ended December 31, 1995. Interest expense for the year ended December 31,
1995 includes a special interest payment of $1.25 million paid in connection
with our 125th anniversary. Excluding this special interest payment, interest
expense increased by $2.9 million, or 7.6%, to $40.7 million from $37.8

                                      42
<PAGE>
 
million for the prior year. Overall, the average balance of interest-bearing
liabilities increased by $74.8 million in 1996, while the average rate paid on
these liabilities decreased 6 basis points since year end 1995. In particular,
this increase resulted primarily from a $2.9 million increase in interest
expense on certificates of deposit, and an $841,000 increase in interest expense
on other borrowings. These were partially offset by an $801,000 decrease in
interest expense on savings accounts and a decrease of $38,000 in interest
expense on interest-bearing checking accounts. The increase in interest expense
attributable to certificates of deposit resulted from a $68.6 million increase
in the average balance of certificates of deposit to $455.2 million in 1996 from
$386.6 million in 1995 which was partially offset by a 28 basis point decrease
in the average cost of certificates of deposit to 5.81% from 6.09%. The Bank's
customers continued to move deposits from core savings accounts into
certificates of deposit as a result of the higher rates being paid on
certificates of deposit. The Bank benefitted from $19.0 million of matured 9% to
10% interest-bearing certificates of deposit which occurred in early 1996 and
helped to reduce the Bank's overall cost of funds. The increase in interest
expense on other borrowings was due to the Bank's average borrowings of $16.7
million during 1996, as compared to no borrowings during 1995. The Bank's first
FHLB advance, a 5-year advance, was recorded in January 1996 when interest rates
declined to their lowest point since late 1993. In addition, the Bank initiated
a short-term borrowing/reinvestment program during 1996 which included
borrowings with reverse repurchase agreements and corresponding investments
mainly in short-term U.S. Treasury securities. By year end 1996, the Bank had
averaged over $11.1 million in reverse repurchase agreements. The decrease in
interest expense attributable to savings accounts was due to an $18.6 million
decrease in the average balance of total savings accounts to $307.5 million in
1996 from $326.1 million in 1995, and a 5 basis point decrease in the average
cost of savings accounts to 3.37% from 3.42%.

     Provision for Loan Losses. The Bank's provision for loan losses increased
by $1.2 million, from $1.0 million for the year ended December 31, 1995 to $2.2
million for the year ended December 31, 1996. As previously indicated, the
increase in the provision was due primarily to management's assessment of the
potential losses that ultimately would be recognized on the $1.8 million of
loans to a borrower that had filed for bankruptcy protection. The increase is
also reflective of management's objective to increase the allowance for loan
losses as a percentage of total loans due to the growth in the loan portfolios.

     Other Operating Income. Total other operating income was $5.8 million for
the year ended December 31, 1996, a $346,000, or 6.4%, increase from $5.4
million for the year ended December 31, 1995. Banking service charges and fees
on deposit accounts increased $631,000 for the year ended December 31, 1996,
from $1.8 million for 1995 to $2.5 million for 1996. The increase was primarily
attributable to a $222,000 increase in fees charged for insufficient funds on
the Bank's checking accounts resulting from modifications to the Bank's
insufficient funds policy, $220,000 in additional revenue generated because of
the increased usage of the Bank's new debit card product, and $138,000 of
additional service charges received due to the growth in the Bank's interest-
bearing checking accounts. Loan origination and servicing fees increased
$172,000 for the year ended December 31, 1996, to $1.0 million from $855,000 for
1995, reflective of the Bank's increased loan origination activity.
Additionally, all other operating income increased $444,000, from $1.2 million
for 1995 to $1.7 million for 1996. This increase was primarily due to an
additional $218,000 of commissions received on increased sales of annuity
products during 1996. The 1995 amount is also reflective of $200,000 in reserves
that were charged to operations in connection with the Bank's investments in
real estate development projects. These increases were partially offset by a
$901,000 decline in net gains on the sale of securities available for sale from
$1.5 million during 1995 to $576,000 during 1996 due to the market driven
reduced sales opportunities in 1996.

     Operating and Other Expenses. Operating and other expenses increased by
$783,000, or 3.9%, to $20.9 million for the year ended December 31, 1996 from
$20.1 million for the year ended December 31, 1995. The increase was due to a
$1.8 million increase in salaries and employee benefits, a $543,000 increase in
occupancy and equipment, a $377,000 increase in marketing and advertising and a
$107,000 increase in network interchange fees. These increases were partially
offset by a $981,000 decrease in deposit insurance and a $1.0 million decrease
in other expenses.

     Salaries and employee benefits increased to $11.5 million for 1996 from
$9.7 million for 1995. Occupancy and equipment expenses increased to $3.2
million in 1996 from $2.6 million for 1995. Both expense categories were

                                      43
<PAGE>
 
impacted by the opening of two new branch locations during 1996. Besides the
costs related to expansion, salaries and employee benefits and occupancy and
equipment reflects the first full year of operating costs related to the 1995
start up and implementation of the Bank's new item processing center and
telephone service center. The item processing center, designed to be the first
area bank to utilize imaging technology, was established to perform check
clearing and statement rendering functions previously outsourced to a third
party. The telephone service center was established to enhance the Bank's retail
delivery system by minimizing the number of telephone calls into the branches
thereby enabling branch personnel to focus on more personalized service and
cross selling opportunities to branch walk-in customers.

     The increase in marketing and advertising, to $1.4 million for 1996 from
$978,000 for 1995, was attributable to the Bank's efforts to expand its
marketing coverage area to include localities where the Bank had opened new
branches, primarily in Erie County. The significant decrease in deposit
insurance, from $983,000 for 1995 to $2,000 for 1996, reflects the FDIC's
decision to lower the insurance premiums paid by BIF-insured institutions to the
legal minimum effective January 1, 1996. The Bank's "well capitalized" risk
classification allowed the Bank to pay the minimum annual assessment during
1996.

     Other operating expenses decreased from $5.0 million for 1995 to $3.9
million for 1996. The significant decrease was related to circumstances
involving the Bank's relationship with Nationar. On February 6, 1995, the
Superintendent of Banks for the State of New York seized Nationar, a checking-
clearing and trust company, placing it in receivership, and freezing all of its
assets. The Bank and its Savings Bank Life Insurance affiliate had $5.8 million
of demand deposits at Nationar frozen by this action. Since there were numerous
uncertainties regarding the total amount of claims filed against Nationar, the
priorities thereof, the proceeds remaining after disposition of assets and the
ultimate cost of the liquidation, management believed there to be reasonable
likelihood that the Bank would not recover all amounts due it from Nationar.
Because of these uncertainties, a $600,000 loss provision was reflected in other
operating expenses for 1995. However, during 1996 the Bank received all funds
due from Nationar and therefore reversed the allowance for possible loss with
the benefit reflected as a reduction in other operating expenses.

     Income Taxes. Income tax expense was $6.3 million for the year ended
December 31, 1996 compared to $5.1 million for the year ended December 31, 1995.
The effective tax rate increased from 34.1% for 1995 to 36.8% for 1996,
primarily related to a decrease in tax-exempt income and an increase in the
valuation allowance on its deferred tax assets.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994

     General. Net income for the year ended December 31, 1995 was $9.9 million,
compared to $8.8 million for the year ended December 31, 1994. Interest rates
rose sharply in early 1994, then gradually declined after January 1995,
resulting in a higher yield on interest-earning assets and a higher cost of
interest-bearing liabilities in 1995 than in 1994. In addition, the yield curve
narrowed significantly from December 31, 1994 to December 31, 1995, which caused
added pressure on spreads during 1995. The increase in net income for 1995 as
compared to 1994 resulted primarily from increases in interest income, other
operating income, and gains on the sale of securities available for sale, which
were partially offset by increases in interest expense and operating and other
expenses. Additionally, net income in 1994 was negatively impacted by the
recognition of the cumulative effect of implementing the provisions of SFAS 106,
"Employers' Accounting for Post Retirement Benefits Other Than Pensions".

     Interest Income. Interest income increased by $6.7 million, or 10.6%, to
$69.9 million for the year ended December 31, 1995 from $63.2 million for the
year ended December 31, 1994. The increase was primarily due to a $5.6 million
increase in income from loans, an $877,000 increase in income from federal funds
sold, and a $526,000 increase in income from investment securities. These
increases were partially offset by a $335,000 decease in income from mortgage
related securities. The increase in income from loans was attributable to a
$57.7 million increase in the average balance of loans to $506.6 million from
$448.9 million, and a 16 basis point increase in the average yield on loans to
8.56% from 8.40%. The Bank continued its focus on growing the loan portfolio in
1995 as one- to four-family,

                                      44
<PAGE>
 
multi-family and commercial real estate loans, and consumer loans had 7% to 15%
increases in year end portfolios, which combined with the higher rates in early
1995, assisted in increasing the overall yields on all loans. The increase in
income from federal funds sold was attributable to a $10.7 million increase in
the average balance of federal funds sold to $31.4 million from $20.7 million,
and a 141 basis point increase in the average yield on federal funds sold to
5.50% from 4.09%. The increase in income from investment securities was
attributable to a 66 basis point increase in the average yield on investment
securities to 5.75% from 5.09%, partially offset by a $5.1 million decrease in
the average balance of investment securities to $119.1 million from $124.2
million. The decrease in income from mortgage related securities was due to a
$27.0 million decrease in the average balance of mortgage related securities to
$275.4 million from $302.4 million, partially offset by a 47 basis point
increase in the average yield for mortgage related securities to 6.51% from
6.04%. Both investment securities as well as mortgage related securities
decreased during 1995 as the Bank sold securities to assist in funding its loan
portfolio growth. In addition, as spreads narrowed throughout 1995, the risk was
greater than the reward for investing long-term, so the Bank maintained higher
balances in federal funds sold which were earning close to 6.00% at year end.

     Interest Expense. Interest expense increased by $7.3 million, or 22.9%, to
$39.0 million for the year ended December 31, 1995 from $31.8 million for the
year ended December 31, 1994. Excluding the $1.25 million special interest
payment in 1995, interest expense increased $6.0 million to $37.8 million for
the year ended December 31, 1995 from $31.8 million for the year ended December
31, 1994. This increase resulted primarily from a $7.1 million increase in
interest expense on certificates of deposit, and a $626,000 increase in interest
expense on interest-bearing checking accounts. These increases were partially
offset by a $1.7 million decrease in interest expense on savings accounts. The
increase in interest expense on certificates of deposit was the result of a
$98.9 million increase in the average balance of certificates of deposit to
$386.6 million from $287.7 million, and a 37 basis point increase in the average
cost of certificates of deposit to 6.09% from 5.72%,. The increase in interest
expense on interest-bearing checking accounts was the result of a $10.5 million
increase in the average balance of interest-bearing checking accounts to $96.6
million from $86.1 million, and a 36 basis point increase in the average cost of
interest-bearing checking accounts to 3.01% from 2.65%. The decrease in interest
expense on savings accounts was due to an $89.7 million decrease in the average
balance of total savings accounts to $326.1 million from $415.8 million,
partially offset by a 33 basis point increase in the average cost of savings
accounts to 3.42% from 3.09%. The increase in the average balance of
certificates of deposit accounts and the decrease in the average balance of
savings accounts was due primarily to customers shifting funds from lower
yielding savings accounts to higher yielding certificates of deposit.

     Provision for Loan Losses. The Bank's provision for loan losses increased
from $948,000 for the year ended December 31, 1994 to $1.0 million for the year
ended December 31, 1995. This increase enabled the Bank to maintain an adequate
ratio of allowance for loan losses to total loans at the end of each period.

     Other Operating Income. Total other operating income was $5.4 million for
the year ended December 31, 1995, a $3.0 million increase from $2.4 million for
the year ended December 31, 1994. This increase was primarily due to a $2.3
million increase in net gains on sales of securities available for sale. For the
year ended December 31, 1994, $849,000 of net securities losses were recognized
as the Bank repositioned its securities portfolio to provide more consistent
cash flows and to increase the yield. During 1995, the Bank took advantage of
market conditions and recognized $1.5 million in net securities gains. Banking
service charges and fees on deposit accounts increased $270,000, from $1.6
million for 1994 to $1.8 million for 1995. This increase was primarily
attributed to an additional $230,000 in service fees and charges collected on
the Bank's checking accounts as the Bank promoted its various checking account
products and introduced the Bank's debit card product. Loan origination and
servicing fees increased $139,000, from $716,000 for 1994 to $855,000 for 1995.
This increase reflects an additional $52,000 in service fee income collected for
servicing loans sold on the secondary market and increased service charges
collected due to the restructuring of the Bank's variable rate line-of-credit
product. All other operating income increased $285,000, from $952,000 for 1994
to $1.2 million for 1995. This increase resulted primarily from $134,000 in
additional fees received for providing various management services to the Bank's
Savings Bank Life Insurance Department and an increase of $87,000 for
commissions received on sales of annuities.

                                      45
<PAGE>
 
     Operating and Other Expenses. Operating and other expenses increased by
$1.7 million, or 9.5%, to $20.1 million for the year ended December 31, 1995
from $18.4 million for the year ended December 31, 1994. The increase was due to
a $1.7 million increase in other expenses, a $447,000 increase in salaries and
employee benefits, a $337,000 increase in occupancy and equipment, a $154,000
increase in network interchange fees, and a $27,000 increase in marketing and
advertising. These increases were partially offset by an $890,000 decrease in
deposit insurance.

     Other expenses increased from $3.3 million for the year ended December 31,
1994 to $5.0 million for 1995. As previously discussed, the increase in
operating and other expenses for fiscal 1995 reflect the $600,000 provision for
possible loss on the Bank's demand deposits held by Nationar. In addition to the
provision for possible loss, the Bank incurred increased charges for the various
services formerly performed by Nationar as the Bank was required to contract
with various other third party servicers. As a result, the Bank accelerated its
plans to bring in-house many of the previously outsourced check clearing and
statement rendering functions. In August 1995, the Bank opened its item
processing center incurring costs associated with the implementation of this new
operation, including expenses relating to a reissuance of checks to all of our
checking account customers. Additionally, in June of 1995, the Bank introduced
its new debit card product, requiring the Bank to incur costs associated with
the reissue of all of its account access cards. Salaries and employee benefits
increased from $9.3 million for 1994 to $9.7 million for 1995. Occupancy and
equipment increased from $2.3 million for 1994 to $2.6 million for 1995. The
increases in both of these expense categories reflect the costs related to the
establishment of the item processing center, telephone service center and one
additional new branch. The increase in network interchange fees, from $723,000
for 1994 to $877,000 for 1995, reflect the transactional costs incurred related
to the customer usage of the new debit card product. The marketing and
advertising increase, from $951,000 for 1994 to $978,000 for 1995, resulted from
the promotional activity relating to the debit card product and new branch
opening. The significant decrease in deposit insurance, from $1.9 million for
1994 to $983,000 for 1995, reflects a 50% reduction in the insurance premium
charged by the FDIC, which impacted most BIF-insured banks.

     Income Taxes. Income tax expense was $5.1 million for the year ended
December 31, 1995 compared to $4.7 million for the year ended December 31, 1994.
The effective tax rate increased from 32.6% for 1994 to 34.1% for 1995.

     Cumulative Effect of Change in Accounting Principle. As of January 1, 1994,
the Bank adopted SFAS 106, "Employers' Accounting for Post Retirement Benefits
Other Than Pensions". The transition obligation related to the adoption of this
standard of $1,224,000 was recognized in the 1994 Consolidated Statement of
Income, net of $300,000 previously accrued for this liability.

IMPACT OF NEW ACCOUNTING STANDARDS

     In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Share". SFAS No. 128 supersedes APB Opinion No. 15
"Earnings Per Share" and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
stock or potential common stock. Essentially, this standard replaces the primary
EPS and fully diluted EPS presentations under APB Opinion No. 15 with a basic
EPS and diluted EPS presentation. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997,
earlier application is not permitted.

     In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". SFAS No. 129 summarizes previously issued disclosure
guidance contained within APB Opinions Nos. 10 and 15 as well as SFAS No. 47.
There will be no changes to the Bank's disclosures pursuant to the adoption of
SFAS No. 129. This statement is effective for financial statements for periods
ending after December 15, 1997.

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of

                                      46
<PAGE>
 
unrealized gains or losses on securities available for sale is expected to be
disclosed as an additional component of the Bank's income under the requirements
of SFAS No. 130. This statement is effective for fiscal years beginning after
December 15, 1997.

     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after December
15, 1997.

                            BUSINESS OF THE COMPANY

GENERAL

     In October 1997, the Board of Trustees of the Bank adopted the Plan of
Reorganization. Under the Plan, the Bank organized the Company. The Bank will be
a wholly-owned subsidiary of the Company, the majority of whose shares will be
held by the Mutual Holding Company. See "Niagara Bancorp, Inc." and 
"Regulation -Holding Company Regulation."

     The Company is currently not an operating company. Following the
Reorganization, in addition to directing, planning and coordinating the business
activities of the Bank, the Company will initially invest net proceeds it
retains primarily in short and medium-term debt securities and marketable equity
securities. The Company also intends to fund the loan to the ESOP to enable the
ESOP to purchase 8% of the Common Stock sold in the Offering. In the future, the
Company may acquire or organize other operating subsidiaries, including other
financial institutions and financial services companies. See "Use of Proceeds."
Presently, there are no agreements or understandings for an expansion of the
Company's operations. Initially, the Company will neither own nor lease any
property from any third party, but will instead use the premises, equipment and
furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than certain officers of the Bank, who will not be
separately provided cash compensation by the Company. The Company may utilize
support staff of the Bank from time to time, if needed. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.

                             BUSINESS OF THE BANK

GENERAL

     The Bank's principal business consists of attracting retail deposits from
the general public in the areas surrounding its branches and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans, multi-family and
commercial real estate loans, mortgage related securities and various other
investment securities. The Bank also invests in consumer and other loans,
including home equity and second mortgage loans, mobile home loans, student
loans and commercial business loans. The Bank's revenues are derived principally
from the interest on its mortgage, consumer and commercial loans, securities,
loan origination and servicing fees and service charges and fees collected on
its deposit accounts. The Bank's primary sources of funds are deposits, other
borrowings and principal and interest payments on loans and securities.

MANAGEMENT STRATEGY

     The Bank was organized in 1870 as a New York-chartered mutual savings bank.
At September 30, 1997, we had total assets of $1.2 billion, total deposits of
$992.2 million, and net worth of $126.7 million. We are a community-and 
customer-oriented savings bank that operates fifteen full-service branch offices
in the Western New York counties of Niagara, Orleans, Erie and Genesee, which we
consider to be our primary market area. We also consider the

                                      47
<PAGE>
 
remaining four counties of Western New York, Wyoming, Allegany, Cattaraugus and
Chautauqua counties, as our market area. Through our "Person to Person
Commitment" approach to retail banking, we emphasize personal service and
customer convenience in serving the financial needs of the individuals, families
and businesses residing in Western New York State. We offer the convenience and 
product mix of a larger, super regional bank while providing the responsiveness 
and community orientation of a smaller, local institution.

     Lockport is located on the historic Erie Canal and is 20 miles northeast of
Buffalo and 15 miles east of Niagara Falls. Within the Buffalo Standard
Metropolitan Statistical Area, which includes Erie and Niagara Counties, there
is a population of approximately 1.2 million people. More than 9 million people
reside within the 125-mile radius of the city of Buffalo and the region is the
45th largest metropolitan area in the nation and the 3rd largest in New York
State.

     Based on FDIC-published data, as of June 30, 1996 we had the second largest
deposit market share in each of Niagara and Orleans counties, the fifth largest
deposit market share in Genesee county, and the eighth largest deposit market
share in Erie County. In the eight county Western New York region, we had the
fifth largest deposit market share. For 1996, we were the fourth leading
originator of residential mortgage loans in Erie County. Those banks having
larger market shares in Western New York are significantly larger, multi-
regional financial institutions. Management considers the Bank to be the
dominant independent community bank focused exclusively on serving the banking
needs of the Western New York region.

     Our business strategy is designed to enhance our profitability and
strengthen our position as the dominant, independent community bank in Western
New York. We offer the convenience and product mix of a larger, super regional
bank while providing the responsiveness and community orientation of a small,
local institution. The highlights of our strategy include the following:

 .    Expansion of the retail banking franchise. We are continuing to focus on
     expanding our retail banking franchise and increasing the number of
     households served within our market area. Since 1994 we have opened five
     full-service branch offices and our Board has authorized the establishment
     of three additional branch offices in 1998. We operate two full-service
     supermarket branch offices, provide customer access to ATMs, including the
     Bank's fourteen ATMs, without a service charge, provide telephone customer
     service, and provide 24-hour telephone account access. We have customer
     relationships with over 76,000 households in our primary market area,
     representing approximately 16.9 % of all households therein. Our goal is to
     increase the number of Bank products used per customer.

 .    Loan portfolio growth. Our loan portfolio consists of one- to four-family
     residential mortgage loans, commercial and multi-family real estate loans,
     consumer and other loans, and commercial business loans. At September 30,
     1997, our loan portfolio totaled $622.5 million, an increase of $263.0
     million, or 73.2%, since December 31, 1992. The loan portfolio represented
     52.9% of total assets and 62.7% of total deposits at September 30, 1997,
     compared to 43.1% of total assets and 48.2% of deposits at December 31,
     1992. We intend to continue to increase our loan portfolio as a percentage
     of assets , and to continue our origination of higher margin multi-family,
     commercial real estate and consumer loans.

 .    Maintaining asset quality. Because we believe that asset quality is a
     critical component of long-term financial success, we have remained
     committed to a conservative credit culture. During the past five years, and
     including the nine month period ended September 30, 1997, non-performing
     assets have averaged 0.59% of total assets. At September 30, 1997, our non-
     performing loans totaled $1.9 million, representing 0.31% of the loan
     portfolio, and our non-performing assets totaled $2.2 million, representing
     0.19% of assets. Our allowance for loan losses amounted to $6.4 million at
     September 30, 1997, and represented 1.02% of our loan portfolio and 330.0%
     of non-performing loans.

                                      48
<PAGE>
 
 .    Managing interest rate risk. Although our liabilities are more sensitive to
     changes in interest rates than our assets, we seek to manage our exposure
     to interest rate risk by originating and retaining adjustable-rate loans in
     both the residential and commercial real estate loan portfolios, and by
     originating short-term and medium-term fixed-rate consumer loans. We also
     use our investment and mortgage related securities portfolios to manage our
     interest rate risk exposure. As of September 30, 1997, our securities
     available for sale totaled $465.0 million, or 39.5% of total assets, and
     had an average life of 4.27 years and our securities held to maturity
     totaled $37.5 million, or 3.2% of total assets, and had an average life of
     .07 years.

MARKET AREA

     The Bank has been, and intends to continue to be, a community-oriented
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank currently operates fifteen full service banking
offices in Erie, Niagara, Orleans and Genesee Counties, of Western New York, and
has authorized the establishment of three additional branch offices to be
located in Erie County in 1998. The Bank's primary deposit gathering area is
currently concentrated around the areas where its full service banking offices
are located. The Bank's primary lending area has also historically been
concentrated in the same Western New York counties.

     Within the Buffalo Standard Metropolitan Statistical Area, which includes
Erie and Niagara Counties, there is a population of approximately 1.2 million
people. Within a five-hundred mile radius of the region lies 62% of the Canadian
and 55% of the United States population. More than 9 million people reside
within the 125-mile radius of the City of Buffalo and the region is the 45th
largest metropolitan area in the nation and the 3rd largest in New York State.

     Historically an industrial-based economy, the Buffalo/Niagara region has
experienced significant job losses in the manufacturing sector since the 1970s.
The decline in manufacturing jobs has slowed in recent years, and there has been
significant growth in retail trade, financial services, health services and in
the auto parts manufacturing industry. The United States - Canadian trading
relationship is the largest of its kind in the world, and thirty percent of that
trade is handled by the region's six international bridges.

FUTURE ACQUISITION AND EXPANSION ACTIVITY

     Both nationally and in New York, the banking industry is undergoing a
period of consolidation marked by numerous mergers and acquisitions. Although we
do not have a formal program to acquire other banking or thrift institutions, we
may from time to time be presented with opportunities to acquire institutions or
bank branches that could expand and strengthen our market position. If such an
opportunity arises, we may from time to time engage in discussions or
negotiations and we may conduct a business investigation of a target
institution. Acquisitions typically involve the payment of a premium over book
and market values, and therefore, some dilution of the Company's book value and
net income per share may occur in connection with a future acquisition.

LENDING ACTIVITIES

     General. Historically, the principal lending activity of the Bank has been
the origination, for retention in its portfolio, of fixed-rate and adjustable-
rate mortgage loans collateralized by one- to four-family residential real
estate located within its primary market area. The Bank also originates multi-
family residential real estate loans, commercial real estate loans and consumer
loans. To a lesser extent the Bank also originates construction, home equity and
commercial business loans.

     In an effort to manage interest rate risk, the Bank has sought to make its
interest-earning assets more interest rate sensitive by originating adjustable-
rate loans in both the residential and commercial real estate loan portfolios,
and by originating variable rate, short-term and medium-term fixed-rate consumer
loans. In originating residential fixed-rate loans, the Bank has successfully
marketed to its customers, the attractive shorter-term maturity features of its
various

                                      49
<PAGE>
 
bi-weekly mortgage programs where the accelerated principal amortization
schedules of these loans have played a significant role in ameliorating the
traditional interest rate risk that is inherent in a community based Bank's
residential lending portfolio. The Bank currently sells in the secondary market
a limited amount of 20-30 year monthly and 25-30 year bi-weekly residential
mortgage loans, and retains for portfolio all adjustable-rate mortgage loans and
fixed-rate monthly residential mortgage loans with maturities of 15 years or
less, together with all fixed-rate bi-weekly mortgage loans with maturities of
20 years or less. However, the Bank is primarily a portfolio lender and at any
one time the Bank holds only a nominal amount of loans identified as held-for-
sale. The Bank has historically retained the servicing rights on all mortgage
loans it sells and realizes monthly service fee income. The Bank retains in its
portfolio all multi-family residential loans, commercial real estate loans,
commercial business loans, and consumer loans that it originates with the
exception of student loans which, as they enter their repayment phase, are sold
to the Student Loan Marketing Association ("Sallie Mae").

     Bi-weekly Lending. We have been extremely successful in marketing our bi-
weekly mortgage/loan product, which we introduced in early 1992 and which has a
significantly shorter repayment schedule than a conventional monthly loan. The
accelerated repayment schedule that accompanies a bi-weekly loan results in
significant savings to the borrower, and allows for a more rapid increase in
home equity. The bi-weekly mortgage reduces interest payments and shortens the
repayment time in two ways. First, a borrower makes the equivalent of an extra
monthly payment per year by paying half the monthly mortgage payment every two
weeks. The borrower makes the equivalent of 13 monthly payments per year instead
of 12. Also, in paying half the payment two weeks in advance, the borrower
reduces the mortgage interest that is paid over the life of the loan. For
example, an 8%, $100,000, 20-year bi-weekly mortgage loan is fully repaid in
16.2 years. An additional benefit is that repayment of the loan is made through
an automatic deduction from the borrower's savings or checking account, which
enables us to avoid the cost of processing payments. As of September 30, 1997,
$165.7 million or 42.9% of the Bank's residential loan portfolio was comprised
of bi-weekly loans.

                                      50
<PAGE>
 
     Loan Portfolio Composition. Set forth below is selected information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for losses) as of the dates indicated.

<TABLE> 
<CAPTION> 
                                   AT SEPTEMBER 30,                                  AT DECEMBER 31,   
                               -----------------------   ---------------------------------------------------------------------------
                                         1997                      1996                     1995                      1994         
                               -----------------------   -----------------------   -----------------------  ------------------------
                                 AMOUNT       PERCENT      AMOUNT       PERCENT      AMOUNT       PERCENT      AMOUNT      PERCENT 
                               -----------  ----------   ----------   ----------   ----------   ----------  -----------  -----------

                                                                                                (DOLLARS IN THOUSANDS)             
<S>                            <C>          <C>          <C>          <C>          <C>          <C>         <C>           <C> 
Real Estate Loans:                                                                                                                 
  One-to four-family ........  $ 386,494       61.79%    $ 360,573       59.85%    $ 319,340      59.31%    $ 277,010       58.12% 
  Home equity................     13,047        2.09        11,337        1.88        10,234       1.90        10,729        2.25  
  Multi-family...............     72,843       11.64        71,397       11.85        71,489      13.28        66,972       14.05  
  Commercial real estate.....     69,571       11.12        68,601       11.38        62,005      11.52        55,946       11.74  
  Construction (1)...........     13,964        2.23        12,493        2.07         7,891       1.47         3,454        0.72  
                               ---------    --------     ---------    --------     ---------    -------     ---------    --------  
    Total real estate loans..    555,919       88.87       524,401       87.03       470,959      87.48       414,111       86.88  
                               ---------    --------     ---------    --------     ---------    -------     ---------    --------  
                                                                                                                                   
Consumer and Other Loans:....                                                                                                      
  Mobile home................     22,675        3.63        21,406        3.55        20,630       3.83        20,662        4.33  
  Vehicle....................      7,326        1.17        18,747        3.11        12,591       2.34         9,391        1.97  
  Personal...................     14,776        2.37        13,596        2.26        11,485       2.13        10,213        2.14  
  Home improvement...........      7,725        1.23         6,879        1.14         7,046       1.31         6,517        1.37  
  Other consumer.............      1,964        0.31         1,937        0.32         1,698       0.32         1,841        0.39  
  Guaranteed student.........     10,907        1.74        10,702        1.78         9,874       1.83         9,951        2.09  
                               ---------    --------     ---------    --------     ---------    -------     ---------    --------  
    Total consumer and                                                                                                             
        other loans..........     65,373       10.45        73,267       12.16        63,324      11.76        58,575       12.29  
                                                                                                                                   
Commercial business loans....      4,275        0.68         4,895        0.81         4,085       0.76         3,948        0.83  
                               ---------    --------     ---------    --------     ---------    -------     ---------    --------  
                                                                                                                                   
    Total loans..............    625,567      100.00%      602,563      100.00%      538,368     100.00%      476,634      100.00% 
                               ---------    ========     ---------    ========     ---------    =======     ---------    ========  

  Net deferred costs.........      3,376                     2,809                     2,349                    1,749        
  Unearned discounts.........       (103)                     (347)                      (39)                      --        
  Allowance for losses.......     (6,353)                   (6,539)                   (4,707)                  (4,192)       
                               ---------                 ---------                 ---------                ---------       
  Loans, net.................  $ 622,487                 $ 598,486                 $ 535,971                $ 474,191        
                               =========                 =========                 =========                =========        

<CAPTION> 
                                                  AT DECEMBER 31,   
                                  ------------------------------------------------
                                            1993                     1992
                                  -----------------------   ----------------------
                                    Amount       Percent      Amount       Percent
                                  ----------   ----------   ----------   ---------
<S>                               <C>          <C>          <C>          <C> 
Real Estate Loans:             
  One-to four-family ........     $ 248,324       58.66%    $ 202,230      56.02%
  Home equity................        10,832        2.56        11,902       3.30
  Multi-family...............        59,943       14.16        62,909      17.43
  Commercial real estate.....        42,326       10.00        30,825       8.54
  Construction (1)...........         6,910        1.63         3,740       1.04
                                  ---------    --------     ---------    -------
    Total real estate loans..       368,335       87.01       311,606      86.33
                                  ---------    --------     ---------    -------
                               
Consumer and Other Loans:....  
  Mobile home................        19,785        4.68        15,992       4.43
  Vehicle....................         7,275        1.72         7,992       2.21
  Personal...................         8,402        1.98         7,450       2.06
  Home improvement...........         6,028        1.42         5,822       1.61
  Other consumer.............         2,059        0.49         2,163       0.60
  Guaranteed student.........         8,123        1.92         6,517       1.81
                                  ---------    --------     ---------    -------
    Total consumer and         
        other loans..........        51,672       12.21        45,936      12.72
                               
Commercial business loans....         3,321        0.78         3,432       0.95
                                  ---------    --------     ---------    -------
                               
    Total loans..............       423,328      100.00%      360,974     100.00%
                                  ---------    ========     ---------    =======
                               
  Net deferred costs.........         1,763                     1,157
  Unearned discounts.........            --                        --
  Allowance for losses.......        (4,030)                   (2,689)
                                  ---------                 ---------
  Loans, net.................     $ 421,061                 $ 359,442
                                  =========                 =========
</TABLE> 

____________________
(1) Includes loans for the construction of one-to-four family residential, 
    multi-family and commercial real estate properties. At September 30, 1997,
    construction loans included $4,046,000 of one-to-four family loans and
    $9,918,000 of commercial real estate and multi-family loans.

                                       51
<PAGE>
 
     Loan Maturity and Repricing Schedule. The following table sets forth
certain information as of September 30, 1997, regarding the amount of loans
maturing or repricing in the Bank's portfolio. Demand loans having no stated
schedule of repayment and no stated maturity, and overdrafts are reported as due
in one year or less. Adjustable- and floating-rate loans are included in the
period in which interest rates are next scheduled to adjust rather than the
period in which they contractually mature, and fixed-rate loans are included in
the period in which the final contractual repayment is due.

<TABLE> 
<CAPTION> 
                                                            ONE         THREE        FIVE          TEN
                                             WITHIN       THROUGH      THROUGH      THROUGH      THROUGH      BEYOND
                                               ONE         THREE        FIVE          TEN        TWENTY       TWENTY
                                              YEAR         YEARS        YEARS        YEARS        YEARS        YEARS        TOTAL
                                            ---------    ---------    ---------    ---------    ---------    ---------    ---------
                                                                                 (IN THOUSANDS)
<S>                                         <C>          <C>          <C>        <C>            <C>         <C>          <C>  
Real Estate Loans:
   One- to four-family....................  $  88,513    $  13,436    $   6,309    $  23,558    $ 185,517   $  69,161    $ 386,494
   Home equity............................      8,815          146          648        1,987        1,451          --       13,047
   Multi-family...........................     26,785       23,184       21,583          732          559          --       72,843
   Commercial.............................     21,045       25,817       15,668        4,453        2,588          --       69,571
   Construction...........................     10,402          167            -        1,743          430       1,222       13,964
                                            ---------    ---------    ---------    ---------    ---------   ---------    ---------
      Total real estate loans.............    155,560       62,750       44,208       32,473      190,545      70,383      555,919
                                            ---------    ---------    ---------    ---------    ---------   ---------    ---------

Consumer and other loans..................     17,407        8,732        9,931       11,323       17,584         396       65,373

Commercial business loans.................      2,949          323          340          545           --         118        4,275
                                            ---------    ---------    ---------    ---------    ---------   ---------    ---------

      Total loans.........................  $ 175,916    $  71,805    $  54,479    $  44,341    $ 208,129   $  70,897    $ 625,567
                                            =========    =========    =========    =========    =========   =========    =========
</TABLE> 

     Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
September 30, 1997, the dollar amount of all fixed-rate and adjustable-rate
loans due after September 30, 1998. Adjustable- and floating-rate loans are
included based on contractual maturities.

<TABLE> 
<CAPTION> 
                                                                            DUE AFTER SEPTEMBER 30, 1998
                                                               ------------------------------------------------------
                                                                  FIXED             ADJUSTABLE              TOTAL
                                                               ------------         ------------         ------------
                                                                                   (IN THOUSANDS)
<S>                                                            <C>                 <C>                   <C> 
Real Estate Loans:
      One- to four-family.............................         $    284,306         $     13,675         $    297,981
      Home equity.....................................                4,232                   --                4,232
      Multi-family....................................               13,823               32,235               46,058
      Commercial......................................               11,080               37,446               48,526
      Construction....................................                3,395                  167                3,562
                                                               ------------         ------------         ------------
           Total real estate loans....................              316,836               83,523              400,359
                                                               ------------         ------------         ------------

Consumer and other loans .............................               47,966                   --               47,966

Commercial business loans.............................                1,326                   --                1,326
                                                               ------------         ------------         ------------

           Total loans................................         $    366,128         $     83,523         $    449,651
                                                               ============         ============         ============
</TABLE> 

                                       52
<PAGE>
 
     One- to Four-Family Real Estate Lending. The Bank's primary lending
activity has been the origination, for retention in the Bank's portfolio, of
mortgage loans to enable borrowers to purchase one- to four-family, owner-
occupied properties located in our primary market area. We offer conforming and
non-conforming, fixed-rate and adjustable-rate, residential mortgage loans with
maturities up to 30 years and maximum loan amounts generally up to $500,000. The
Bank's residential mortgage loan originations are generally obtained from our
loan representatives operating in our branch offices through their contacts with
local realtors, existing or past loan customers, depositors of the Bank, and
referrals from attorneys, accountants and independent mortgage brokers who refer
loan applications from the general public.

     We currently offer both fixed and adjustable rate conventional and
government guaranteed (Federal Housing Administration ("FHA"), Veterans
Administration ("VA"), Farmers Home Assistance ("FMHA")) mortgage loans with
terms of 10-30 years that are fully amortizing with monthly or bi-weekly loan
payments. One- to four-family residential loans are generally underwritten
according to the Federal National Mortgage Association ("FNMA"), and Freddie Mac
uniform guidelines. The Bank generally originates both fixed-rate and 
adjustable-rate loans in amounts up to the maximum conforming loan limits as
established by FNMA and Freddie Mac secondary market standards, currently
$214,600 for one-family homes up to a maximum of $412,450 for four-family homes.
Private mortgage insurance ("PMI") is required for loans with loan-to-value
ratios in excess of 80%. Loans in excess of conforming loan limits, in amounts
up to $500,000, are also underwritten to both FNMA and Freddie Mac secondary
market standards, and are eligible for sale to various conduit firms that
specialize in the purchase of such non-conforming loans.

     Fixed-rate mortgage loans originated by the Bank include due-on-sale
clauses which provide the Bank with the contractual right to deem our loan
immediately due and payable in the event the borrower transfers ownership of the
property without the Bank's consent. Due-on-sale clauses are an important means
of adjusting the yields on our Bank's fixed-rate portfolio, and we generally
exercise our rights under these clauses.

     The Bank generally sells its newly originated conventional, conforming 20-
30 year monthly fixed, and 25-30 year bi-weekly, loans in the secondary market
to government sponsored enterprises such as FNMA and Freddie Mac, and its non-
conforming, fixed-rate mortgage loans to private sector secondary market
purchasers. To reinforce its commitment to customer service and also to generate
fee income, as a matter of policy we retain the servicing rights on all such
loans sold. For the nine months ended September 30, 1997 and for the year ended
December 31, 1996, the Bank sold mortgage loans totaling $23.2 million and $26.1
million, respectively. As of September 30, 1997, our portfolio of fixed-rate
loans serviced for others totaled $139.8 million. We intend to continue to sell
into the secondary market our newly originated, 25-30 year fixed-rate mortgage
loans to assist in our asset/liability management.

     In an effort to provide financing for low and moderate income buyers, we
actively participates in residential mortgage programs and products sponsored by
FNMA, Freddie Mac, and the State of New York Mortgage Agency ("SONYMA"). The
SONYMA mortgage programs provide low and moderate income households with fixed-
rate loans which are generally set below prevailing fixed-rate mortgage loans
and which allow below-market down payments. These loans are sold by the Bank to
SONYMA, with the Bank retaining the contractual servicing rights.

     We currently offer several one- to four-family, adjustable-rate mortgage
loan ("ARM") products secured by residential properties with rates that adjust
every one, three, or seven years. The one- to four-family ARMs are offered with
terms of up to 30 years. After origination, the interest rate on one- to four-
family ARMs currently offered is reset based upon a contractual spread or margin
above the average yield on United States Treasury Securities, adjusted to a
Constant Maturity (the "U.S. Treasury Constant Maturity Index"), as published
weekly by the Federal Reserve Board. The appropriate index utilized at each
interest rate change date corresponds to the initial one, three, or seven year
adjustment period of the loan.

     ARMs are generally subject to limitations on interest rate increases of 2%
per adjustment period, and an aggregate adjustment of 6% over the life of the
loan. The ARMs require that any payment adjustment resulting from a change in
the interest rate be sufficient to result in full amortization of the loan by
the end of the loan term, and thus,

                                       53
<PAGE>
 
do not permit any of the increased payment to be added to the principal amount
of the loan, commonly referred to as negative amortization.

     The retention of ARMs, as opposed to longer term, fixed-rate residential
mortgage loans, in the Bank's portfolio helps reduce our exposure to interest
rate risk. However, ARMs generally pose credit risks different from the credit
risks inherent in fixed-rate loans primarily because as interest rates rise, the
underlying debt service payments of the borrowers rise, thereby increasing the
potential for default. In order to minimize this risk, borrowers of one- to 
family one year adjustable-rate loans are qualified at the rate which would be
four-in effect after the first interest rate adjustment, if that rate is higher
than the initial rate. We believe that these risks, which have not had a
material adverse effect on the Bank to date, generally are less onerous than the
interest rate risks associated with holding 25-30 year fixed-rate loans. Certain
of the Bank's conforming ARMs can be converted at a later date to a fixed-rate
mortgage loan with interest rates based upon the then-current market rates plus
a predetermined margin or spread that was established at the loan closing. The
Bank sells ARM loans which are converted to 25-30 year fixed-rate term loans, to
either FNMA or Freddie Mac.

     While one- to four-family residential loans typically are originated with
20-30 year terms, the Bank permits its ARM loans to be assumed throughout the
life of the loan by qualified buyers. Such loans generally remain outstanding in
our loan portfolio for substantially shorter periods of time because borrowers
often prepay their loans in full upon sale of the property pledged as security
or upon refinancing the loan. Thus, average loan maturity is a function of,
among other factors, the level of purchase and sale activity in the Western New
York real estate market, prevailing interest rates, and the interest rates
payable on outstanding loans. As of September 30, 1997, over 97%, of our total
residential real estate loan portfolio was secured by properties that are
located within the eight county area that comprises Western New York State.

     We require title insurance on all of our one- to four- family mortgage
loans, and also require that fire and extended coverage casualty insurance (and,
if appropriate, flood insurance) be maintained in an amount at least equal to
the lesser of the loan balance or the replacement cost of the improvements.
Loans with loan-to-value ratios in excess of 80% must have a mortgage escrow
account from which disbursements are made for real estate taxes, hazard and
flood insurance, and PMI.

     We also originate two types of residential constructions loans: (i)
construction/spec loans, and (ii) construction/permanent loans. Annual
originations of residential construction loans have averaged $4.7 million over
the past five years. At September 30, 1997, our residential construction loan
portfolio consisted of 16 construction/spec loans with an aggregate outstanding
balance of $2.0 million and 31 construction/permanent loans with an aggregate
outstanding balance of $3.8 million.

     Construction/spec loans are made to area home builders who do not have, at
the time of loan origination, a signed contract with a home buyer who has a
commitment for permanent financing with either the Bank or another lender for a
finished home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to carry the debt
service payments and finance real estate taxes and other holding costs of the
completed home for a significant time after the completion of construction and
until the home buyer is identified. We lend on an ongoing basis to approximately
ten local area residential home builders who, at any given time, may have one or
two construction/spec loans outstanding from the Bank. All construction/spec
loans carry the full personal guaranty of the builder, who must have a previous
satisfactory history of completing construction/permanent loans with the Bank.
These loans are generally originated for a term of twelve months, with interest
rates ranging from 1.0% to 1.5% above the prime lending rate, and with a 
loan-to-value ratio of no more than 75% of the lower of cost or the appraised
estimated value of the completed property. Loan advances are disbursed on a
three-draw basis as construction is completed. At September 30, 1997, the
largest outstanding concentration of credit to one builder consisted of 2
construction/spec loans with an aggregate balance of $421,200, which were
performing in accordance with their terms.

                                       54
<PAGE>
 
     Construction/permanent loans are also made to either a home builder or a
home owner who, at the time of construction, has a signed contract together with
a commitment for permanent financing from the Bank for the finished home. The
construction phase of a loan generally lasts 4-6 months, and the interest rate
charged generally corresponds to the rate of the committed permanent loan, with
loan-to-value ratios of up to 80% (or up to 90% with PMI) of the appraised
estimated value of the completed property or cost, whichever is less. When we
issue the corresponding commitment to provide permanent financing upon
completion of construction, the interest rate charged on the construction loan
generally includes an additional 1/8% to 1/4% rate premium as protection against
the construction loan risk and the additional rate exposure to the Bank of an
increase in interest rates before the permanent loan is funded and eligible for
sale to either FNMA or Freddie Mac. At September 30, 1997, the largest single
outstanding construction loan of this type had an outstanding balance of
$560,000 and was performing in accordance with its terms.

     Construction lending generally involves a greater degree of risk than other
one- to four-family mortgage lending. The repayment of the construction loan is,
to a great degree, dependent upon the successful and timely completion of the
construction of the subject property. Construction delays or the financial
impairment of the builder may further impair the borrower's ability to repay the
loan.

     In order to facilitate a competitive relationship with several of the
Bank's major residential builders, we will, on an exception basis, originate
land development loans to area home builders that are secured by individual
unimproved or improved residential building lots. Land loans are generally
offered with variable prime based rates with terms of up to two years. The
maximum loan-to-value ratio is 65% of the lower of cost or appraised value.

     Home Equity Lending. We offer both fixed-rate, fixed-term, home equity and
second mortgage loans, and prime rate, variable rate home equity lines of credit
(HELOCs) in its market area. Both fixed rate and floating rate home equity loans
are offered in amounts up to 80% of the appraised value of the property
(including the first mortgage) with a maximum loan amount of $100,000. Fixed-
rate home equity loans are offered with repayment terms of up to fifteen years
and HELOCs are offered for terms up to thirty years, with interest-only payments
during the first ten years and repayment of principal and interest during the
final twenty years. As of September 30, 1997, fixed-rate second mortgage and
home equity loans totaled $4.2 million or 0.7% of the Bank's total loan
portfolio. The disbursed portion of home equity lines of credit totaled $8.8
million or 1.4% of the Bank's loan portfolio, with $6.3 million remaining
undisbursed.

     As is the case with residential one- to four-family first mortgage lending,
the underwriting standards employed by the Bank for both fixed-rate second
mortgage loans and HELOCs are formatted to the standard secondary marketing
guidelines as established by FNMA and Freddie Mac.

     Commercial Real Estate and Multi-family Lending. We originate real estate
loans secured predominantly by first liens on apartment houses, office
complexes, and commercial and industrial real estate. Loans collateralized by
commercial real estate totaled $69.6 million, or 11.1% of our total loan
portfolio as of September 30, 1997. Loans collateralized by multi-family
residential real estate totaled $72.8 million, or 11.6%, of the total loan
portfolio as of September 30, 1997, and consisted of 207 loans outstanding with
an average loan balance of $351,898. Our largest multi-family real estate loan
relationship at September 30, 1997 had a principal balance of $2.2 million, and
was performing in accordance with its terms. The commercial real estate loans
are predominately secured by nonresidential properties such as office buildings,
shopping centers, retail strip centers, industrial and warehouse properties and
to a lesser extent by more specialized properties such as churches, mobile home
parks, restaurants, motel/hotels and auto dealerships. At September 30, 1997, we
had 196 non-multi-family commercial real estate loans outstanding with an
average loan balance of approximately $354,954. Our largest commercial real
estate loan at September 30, 1997 had a principal balance of $4.1 million and
was collateralized by an office building located in our primary lending area.
This loan is performing in accordance with its terms.

     At September 30, 1997, approximately 74% of our commercial real estate and
multi-family loans were secured by properties located in our primary market
area. Our current policy with regard to such loans is to emphasize geographic
distribution within our primary market area, diversification of property type
and minimization of credit risk.

                                       55
<PAGE>
 
     As part of our ongoing strategic initiatives to minimize interest rate
risk, commercial and multi-family real estate loans originated for the Bank's
portfolio are generally limited to one, three or five year ARM products which
are priced at prevailing market interest rates. The initial interest rates are
subsequently reset after completion of the initial one, three or five year
adjustment period at new market rates that generally range between 200 and 300
basis points over the then current one, three or five year United States
Treasury Constant Maturity Index. The maximum term for commercial real estate
loans is generally not more than 10 years, with a prepayment schedule based on
not more than a 25 year amortization schedule for multi-family loans, and 20
years for commercial real estate loans.

     In our underwriting of commercial real estate loans, we may lend up to 80%
of the property's appraised value on apartments, and up to 75% on other
commercial properties. Appraised values initially are estimated by staff
underwriters and confirmed by independent, professionally designated qualified
appraisers, to determine that the property to be mortgaged satisfies the Bank's
loan-to-value requirements. Decisions to lend are based on the economic
viability of the property and the creditworthiness of the borrower.
Creditworthiness is determined by considering the character, experience,
management and financial strength of the borrower, and the ability of the
property to generate adequate funds to cover both operating expenses and debt
service. In evaluating a commercial real estate loan, we place primary emphasis
on the ratio of net cash flow to debt service for the property, generally
requiring a ratio of at least 1.20%, computed after deduction for a vacancy
factor and property expenses deemed appropriate by the Bank. In addition, we
generally require a personal guarantee of the loan principal from the borrower.

     On all real estate loans, we require title insurance insuring the priority
of its lien, fire and extended coverage casualty insurance, and flood insurance,
if appropriate, in order to protect its security. In connection with
substantially all commercial real estate lending, in addition to staff review,
we employ independent engineering firms to review plans, specifications and draw
disbursements, employs consulting firms to review the economic feasibility of
the project, and employs environmental assessment firms to evaluate the
environmental risks that may be associated with either the building or the site.

     We also offer commercial real estate and multi-family construction mortgage
loans. Most construction loans are made as "construction/permanent" loans, which
provide for disbursement of loan funds during construction and automatic
conversion to permanent loans upon completion of construction and the attainment
of either tenant lease-up provisions or prescribed debt service coverage ratios.
The construction phase of the loan is made on a short-term basis, usually not
exceeding two years, with floating interest rate levels generally established at
a spread in excess of the prime rate. The construction loan application process
includes the same criteria which are required for permanent commercial mortgage
loans, as well as a submission to the Bank of completed plans, specifications
and cost estimates related to the proposed construction. These items are used as
an additional basis to determine the appraised value of the subject property.
Appraisal reports are completed by independent, professionally designated
appraisers. All appraisal reports are reviewed by our commercial loan
underwriting staff. Loans are based on the lesser of the current appraised value
of loan and improvements or the cost of construction. Generally, the loan-to-
value ratio for construction loans does not exceed 75%. At September 30, 1997,
$13.8 million was committed for commercial real estate and multi-family
construction loans, of which $3.4 million was outstanding.

     Among the reasons for our continued emphasis on commercial real estate and
multi-family lending is a desire to invest in assets bearing interest rates
which are generally higher than those obtainable on residential mortgage loans
and which are more rate sensitive to changes in market interest rates.
Commercial real estate and multi-family loans, however, entail significant
additional risk as compared with one- to four-family residential mortgage
lending, as they typically involve large loan balances concentrated with single
borrowers or groups of related borrowers. In addition, the payment experience on
loans secured by income producing properties is typically dependent on the
successful operation of the related real estate project and thus may be subject
to a greater extent to adverse conditions in the real estate market or in the
economy generally. Construction loans involve additional risks attributable to
the fact that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays

                                       56
<PAGE>
 
arising from labor problems, material shortages, and other unpredictable
contingencies, it is relatively difficult to evaluate accurately the total loan
funds required to complete a project and the related loan-to-value ratios.

     Consumer and Other Loans. We originate a variety of consumer and other
loans, including home improvement loans, new and used automobile loans, mobile
home loans, student loans, boat and RV loans, personal unsecured loans,
including both fixed-rate installment loans and prime floating variable rate
lines-of-credit, and savings account "passbook" loans. As of September 30, 1997,
consumer loans totaled $65.4 million, or 10.5% of the total loan portfolio.

     At September 30, 1997, the largest group of consumer loans consisted of
$22.7 million of loans secured by mobile homes owned by individuals,
representing 34.7% of the consumer loan portfolio. We have been engaged in
mobile home lending for over eight years. While we generally lend throughout the
State of New York with respect to mobile homes, the majority of the portfolio,
$12.0 million, or 54%, is located within the Bank's primary market area. The
mobile home units (both new and used) are primarily located in well-managed
mobile home parks reviewed and inspected by our management team as part of its
ongoing underwriting process. Mobile home loans have shorter terms to maturity
than traditional 30-year residential loans and higher yields than single-family
residential mortgage loans. Although we generally offer mobile home loans with
fixed-rate, fully amortizing loan terms for 10-20 years, mobile home units
manufactured prior to 1991 are restricted to a maximum term of no more than
fifteen years. We anticipate that it will continue to be an active originator of
mobile home loans.

     We will generally finance up to 90% of the purchase price of a new mobile
home unit, not to exceed 140% of the dealer invoice. We also require a UCC-1
filing perfecting the Bank's lien for all mobile home loans, and requires
homeowner's insurance at least equal to the amount financed. We have contracted
with an independent third-party to generate all mobile home loan applications
but, prior to funding, all mobile home loan originations must be underwritten
and approved by designated Bank underwriters. As part of a negotiated servicing
contract, the third party originator will at the request of the Bank, contact
borrowers who become delinquent in their payments to the Bank and, when
necessary, will oversee the repossession and sale of mobile homes on our behalf.
For such services, and as part of the origination and servicing contract, we pay
the originator a fee at loan funding, of which generally one-half is deposited
into a non-interest bearing escrow loss account, and is under the sole control
of the Bank to absorb future losses which may be incurred on the loans.

     Mobile home lending generally entails greater risk than traditional single-
family residential mortgage lending, due to the type and nature of the
collateral, which may depreciate over time as compared to the typical
appreciation of houses securing single-family residential loans, and because
mobile home borrowers often have lower income levels than single-family
residential mortgage loan borrowers. In many cases, repossessed collateral for a
defaulted mobile home loan will not provide an adequate source of repayment of
the outstanding loan balance because of depreciation or improper repair and
maintenance of the underlying security. The Bank attempts to minimize such risk
through the loss escrow arrangement with the third-party originator.

     The next largest group of loans in the consumer loan portfolio are $14.8
million of personal loans, $9.3 million of which are secured and unsecured
installment loans, and $5.5 million of which are prime based variable rate 
lines-of-credit. Unsecured installment loans generally have shorter terms than
secured consumer loans and generally have higher interest rates than rates
charged on secured installment loans with comparable terms.

     The next largest group of consumer loans are home improvement loans, the
total of which amounted to $7.7 million at September 30, 1997. We offer fully
amortizing, fixed-rate property improvement loans for terms of up to 15 years
and with loan-to-value ratios of up to 80% (or 100% as to FHA loans) when taking
into account any outstanding first mortgage loan balance. For property
improvement loans in excess of $7,500, the Bank generally obtains a second lien
position as additional collateral security.

     The next largest group of consumer loans are loans secured by new or used
automobiles which, as of September 30, 1997, totaled $7.3 million. We originate
automobile loans directly to our customers and we have no outstanding

                                       57
<PAGE>
 
agreement with automobile dealerships to generate indirect loans. The maximum
term for an automobile loan is generally 60 months for a new car, and 36-48
months for a used car. We will generally lend up to 90% of the purchase price of
a new car, and, with respect to used cars, up to 90% of the lesser of the
purchase price or the National Automobile Dealers' Association book rate. We
require all borrowers to maintain collision insurance on automobiles securing
loans in excess of $5,000, with the Bank listed as loss payee. In those
instances where the borrower fails to maintain adequate insurance coverage, the
Bank is further protected against loss by vendors single interest insurance
coverage.

     We have been, and continue to be, an active originator of student loans. As
of September 30, 1997, the Bank had $10.9 million of variable-rate student loans
in its portfolio. Substantially all of the loans are originated under the
auspices of the New York State Higher Education Services Corporation
("NYSHESC"). Under the terms of these loans, no repayment is due until the
student graduates, with 98% of the principal guaranteed by NYSHESC. Our general
practice is to sell these student loans to the Student Loan Marketing
Association ("Sallie Mae") as the loans reach repayment status. The Bank
generally receives a premium of .25% to 1% on the sale of these loans.

     Our procedures for underwriting consumer loans include an assessment of the
applicant's payment history on other debts and the ability to meet existing
obligations and payments on the proposed loans. Although the applicant's
creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral security, if any, to the
proposed loan amount.

     Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate, such as automobiles, boats, recreational
vehicles and mobile homes. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continued financial stability, and
this is more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various Federal and State
laws including Federal and State bankruptcies and insolvency laws may limit the
amount which can be recovered on such loans. We add a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.

     Commercial Business Loans. We currently offer commercial business loans to
existing customers in our market area, some of which are secured in part by
additional real estate collateral. In an effort to expand our customer account
relationships and develop a broader base of more interest rate sensitive assets,
we make various types of secured and unsecured commercial loans for the purpose
of financing equipment acquisition, expansion, working capital and other general
business purposes. The terms of these loans generally range from less than one
year to seven years. The loans are either negotiated on a fixed-rate basis or
carry variable interest rates indexed to the prime rate. At September 30, 1997,
we had 83 commercial business loans outstanding with an aggregate balance of
$4.3 million, or .68%, of the total loan portfolio. As of September 30, 1997,
the average commercial business loan balance was approximately $51,506. The
largest commercial business loan had a principal balance of $300,000 and is
performing in accordance with its terms.

     Commercial credit decisions are based upon a complete credit appraisal of
the loan applicant. A determination is made as to the applicant's ability to
repay in accordance with the proposed terms as well as an overall assessment of
the risks involved. An investigation is made of the applicant to determine
character and capacity to manage. Personal guarantees of the principals are
generally required. In addition to an evaluation of the loan applicant's
financial statements, a determination is made of the probable adequacy of the
primary and secondary sources of repayment to be relied upon in the transaction.
Credit agency reports of the applicant's credit history as well as bank checks
and trade investigations supplement the analysis of the applicant's
creditworthiness. Collateral supporting a secured transaction is also analyzed
to determine its marketability and liquidity. Commercial business loans
generally bear higher interest

                                       58
<PAGE>
 
rates than residential loans, but they also may involve a higher risk of default
since their repayment is generally dependent on the successful operation of the
borrower's business.

     Loan Originations, Purchases, Sales and Servicing. While we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan
depends upon relative borrower demand and the pricing levels as set in the local
marketplace by competing banks, thrifts, credit unions, and mortgage banking
companies, as well as life insurance companies, and Wall Street conduits who
also actively compete for local product in the commercial real estate loan area.
Loan originations are derived from a number of sources, such as real estate
broker referrals, existing customers, borrowers, builders, attorneys, and walk-
in customers. In addition, the residential lending area currently employs seven
loan originators to augment our traditional sources of loan applications. All of
our loan originators are on a base salary plus commission. We also rely on a
small number of select area mortgage brokers, who are authorized to accept and
process residential mortgage loan applications on our behalf. All completed loan
applications are forwarded to our centralized residential loan origination area
for underwriting, approval, commitment, and closing.

     In the past, to augment our direct origination of loans in our primary
lending area, we have purchased one- to four-family residential whole loans and
commercial real estate whole loans and participations which are originated and
serviced by other financial institutions. As of September 30, 1997, the Bank's
combined commercial real estate, multi-family and residential portfolio of loans
serviced by other financial institutions consisted of 230 loans with an
aggregate outstanding balance of $7.6 million. Although we have not actively
purchased residential loans since 1986, we may from time to time purchase loans
from the secondary market to supplement our origination of local mortgage loans,
particularly in the residential loan area.

     We generally sell the conforming, residential conventional monthly fixed-
rate loans that it originates with maturities of 20 years or more, and
conventional bi-weekly fixed-rate loans with maturities of 25 years or more to
both FNMA and Freddie Mac as part of its ongoing asset/liability management
strategy. Non-conforming fixed-rate loans with principal balances in excess of
the maximum limits as established annually by FNMA and Freddie Mac, currently
$214,600 for single-family homes, are sold to private sector secondary market
purchasers. In addition to removing a level of interest rate risk from the
balance sheet, the operation of a secondary marketing function within the
lending area allows us the flexibility to continue to make loans available to
customers when savings flows decline or funds are not otherwise available for
lending purposes. However, we assume an increased level of risk if such loans
cannot be sold in a timely basis in a rapidly rising interest rate environment.
Changes in the level of interest rates and the condition of the local and
national economies also affect the amount of loans originated by the Bank and
impact the level of buying demand by investors to whom the loans are sold.

     Generally, our loan origination and sale activity, and therefore, our
results of operations, may be adversely affected by an increasing rate
environment to the extent that such environment results in a decreased level of
loan demand by borrowers. Accordingly, the volume of loan originations and the
profitability of this activity can vary from period to period. One- to four-
family residential mortgage loans are generally underwritten to current FNMA and
Freddie Mac seller/servicer guidelines. One- to four-family loans are also
closed on standard FNMA/Freddie Mac documents and sales are conducted utilizing
standard FNMA/Freddie Mac purchase contracts and master commitments as
applicable. Mortgage loans are sold both to FNMA and Freddie Mac on a non-
recourse basis whereby foreclosure losses are generally the responsibility of
either FNMA or Freddie Mac and not the Bank.

     We are qualified loan servicer for both FNMA and Freddie Mac. For all loans
sold, we will retain the servicing rights and will continue to collect payments
on the loans, maintain tax escrows and applicable fire and flood insurance
coverage, and to supervise foreclosure proceedings if necessary. We retain a
portion of the interest paid by the borrower on the loans, generally 1/4% - 3/8%
as consideration for its servicing activities.

     The following table sets forth the loan origination, purchase and repayment
activities of the Bank for the periods indicated.

                                       59
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                   Nine Months
                                                               ENDED SEPTEMBER 30,               YEAR ENDED DECEMBER 31,
                                                              --------------------        ----------------------------------------
                                                               1997           1996          1996             1995          1994
                                                              ------         ------       ---------       ---------     ----------
                                                                                       (IN THOUSANDS)
<S>                                                         <C>           <C>            <C>             <C>            <C>         
Originations by Type:                                                                                                               
--------------------
    Real estate:                                                                                                                    
       One- to four-family...............................   $   77,381     $   82,951     $    110,894    $   107,618   $    84,096 
       Home equity.......................................        2,334          1,070            1,357            852           404 
       Commercial and multi-family.......................       18,012         17,570           27,168         24,880        27,462 
    Consumer and other...................................       20,323         23,784           31,688         25,053        26,507 
    Commercial business..................................        3,991          4,693            5,972          2,767         2,684 
                                                            ----------     ----------     ------------    -----------   ----------- 
          Total loans originated.........................      122,041        130,068          177,079        161,170       141,153 
                                                            ----------     ----------     ------------    -----------   ----------- 

Sales:                                                                                                                              
-----
    Real estate:                                                                                                                    
       One- to four- family..............................       23,191         19,290           26,148         30,141        19,527 
    Consumer and other...................................        4,126          3,871            4,749          4,948         3,679 
                                                            ----------     ----------     ------------    -----------   ----------- 
          Total loans sold...............................       27,317         23,161           30,897         35,089        23,206 
                                                            ----------     ----------     ------------    -----------   ----------- 

Repayments:                                                                                                                         
----------
    Real estate:                                                                                                                    
       One- to four-family...............................       29,755         32,920           42,323         32,959        36,911 
       Home equity.......................................          624            400              254          1,347           507 
       Commercial and multi-family.......................       12,225         14,619           17,066         11,716         8,558 
    Consumer and other...................................       25,247(1)      12,295           16,247         15,141        15,783 
    Commercial business..................................        4,058          3,526            5,169          2,630         2,057 
                                                            ----------     ----------     ------------    -----------   ----------- 
          Total repayments...............................       71,909         63,760           81,059         63,793        63,816 
                                                            ----------     ----------     ------------    -----------   ----------- 

          Total reductions...............................       99,226         86,921          111,956         98,882        87,022 

Increase (decrease) in other items, net (2)..............        1,000           (420)            (776)             7          (839)
                                                            ----------     ----------     ------------    -----------   ----------- 

          Net increase...................................   $   23,815     $   42,727     $     64,347    $    62,295   $    53,292 
                                                            ==========     ==========     ============    ===========   ===========
</TABLE> 

________________________________
(1) Includes the early  repayment of loans secured by pledges and assignments of
    automobile  leases.  
(2) Other items include charge-offs, deferred fees and expenses, and discounts
    and premiums.

                                       60
<PAGE>
 
          Loan Approval Authority and Underwriting. The Board establishes
lending authorities for individual officers and certain delegated underwriters
as to the various types of residential and consumer loan products. In the
commercial real estate and business lending area, the Board has authorized
specific lending officers to individually approve loans and/or concentrations of
credit not to exceed $250,000. Loans in excess of $250,000, up to $750,000, may
be approved by the President or Chief Lending Officer plus one additional
authorized lending officer. Loan approvals in excess of $750,000, and up to $2.0
million, require the approval of both the President and the Chief Lending
Officer, plus one additional authorized lending officer. All individual loans
and or aggregate concentrations of credit to one borrower which exceed $2.0
million must be approved by the Loan Committee of the Board. In addition, our
loan policy limits the amount of credit that can be extended to any one borrower
to 10% of total capital. See "Loans-to-One Borrower".

          The lending activities of the residential, consumer, commercial and
multi-family real estate, and commercial business lending areas of the Bank are
subject to written underwriting standards and loan origination procedures that
are updated and separately reviewed annually by both management and the Bank's
Board of Trustees. In particular, to assure the maximum salability of our
residential loan products for possible resale into the secondary mortgage
markets, we have formally adopted both the underwriting, appraisal, and
servicing guidelines of FNMA and Freddie Mac as part of our standard loan policy
and procedures manual.

          We require that a property appraisal be obtained in connection with
all mortgage loans. Property appraisals in both the residential and commercial
and multi-family real estate areas are performed by an independent appraiser
from a list approved by the Bank's Board of Trustees. The appraisals are then
reviewed for accuracy and completeness by the appropriate loan underwriting
areas of the Bank. In conformity with secondary market guidelines, the Bank
requires that title insurance (except for home equity lines of credit) and
hazard insurance be maintained on all security properties and that flood
insurance be maintained if the property is within a designated flood plain.

          We currently maintain escrows for the payment of real estate taxes on
approximately 70% of all mortgage loans currently held in portfolio. If an
escrow waiver is granted, the borrower must pay a one-time fee at loan closing
for the property to be enrolled in a tax service which reports the tax payment
status of these loans on an annual basis to the Bank for the life of the loan.

          Loan Origination Fees and Other Income. In addition to interest earned
on loans, we also receive loan origination fees. To the extent that loans are
originated or acquired for the Bank's portfolio, Statement of Financial
Accounting Standards (SFAS) No. 91 requires that we defer loan origination fees
and costs and amortize such amounts as an adjustment of yield over the life of
the loan by use of the level yield method. At September 30, 1997, we had $3.4
million of net deferred loan origination costs. Such fees and costs vary with
the volume and type of loans and commitments made and purchased, principal
repayments, and competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.

          In addition to loan origination fees, we also receive other fees,
service charges, and other income that consist primarily of deposit transaction
account service charges, late charges and credit card fees.

          Loans-to-One Borrower. Savings banks are subject to the same loans-to-
one borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired net worth on an unsecured basis, and an additional amount equal to
10% of unimpaired net worth if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
Our policy provides that loans to one borrower (or related borrowers) should not
exceed 10% of the Bank's capital.

          At September 30, 1997, the largest aggregate amount loaned by the Bank
to one borrower consisted of seven commercial mortgage loans in an amount of
$9.6 million and was secured by eight suburban office park properties.

                                       61
<PAGE>
 
          The second largest aggregate amount loaned by the Bank to one borrower
consisted of one commercial mortgage and one business loan, in the aggregate
amount of $5.1 million, secured by two suburban office park properties.

          The third largest aggregate amount loaned by the Bank to one borrower
consisted of four commercial mortgage loans in the amount of $4.9 million,
secured by two retail centers, one office building and one restaurant.

          The fourth largest aggregate amount loaned by the Bank to one borrower
consisted of one commercial mortgage loan in an amount of $4.1 million and was
secured by a medical office building.

          The fifth largest aggregate amount loaned by the Bank to one borrower
consisted of four commercial mortgage loans in the amount of $2.9 million and
was secured by four apartment projects.

          All of the loans discussed above are performing in accordance with
their terms.

DELINQUENCIES AND CLASSIFIED ASSETS

          Collection Procedures. A computer generated late notice is sent by the
17th day of the month requesting the payment due plus the late charge that was
assessed. After the late notices have been mailed, accounts are assigned to
collectors by the automated collection system for follow-up to determine reasons
for delinquency and explore payment options. Additional system-generated
collection letters are sent to customers on the 30th and 45th days for consumer
loans, and by the 45th day for mortgage loans. Notwithstanding ongoing
collection efforts, all consumer loans are fully charged-off after 210 days.

          These mortgage loan collection procedures pertain to loans held in the
Bank's portfolio. All of the residential mortgage loan servicing performed for
both government issued FHA and VA loans, together with residential loans sold in
the secondary market, are in full compliance with their own respective loan
servicing requirements.

          Loans Past Due and Non-performing Assets. Loans are reviewed on a
regular basis and are placed on nonaccrual status when, in the opinion of
management, the collection of additional interest is doubtful. Loans are placed
on nonaccrual status when either principal or interest is 90 days or more past
due. Interest accrued and unpaid at the time a loan is placed on a nonaccrual
status is reversed from interest income. At September 30, 1997, we had non-
performing loans of $1.9 million, and a ratio of non-performing loans to total
loans of 0.31%.

          Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as REO until such time as it is sold. When real estate
is acquired through foreclosure or by deed in lieu of foreclosure, it is
recorded at its fair value, less estimated costs of disposal. If the value of
the property is less than the loan, less any related specific loan loss
provisions, the difference is charged against the allowance for loan losses. Any
subsequent write-down of REO is charged against earnings. At September 30, 1997,
we had REO, net of allowances, of approximately $268,000. At September 30, 1997,
we had total non-performing assets of $2.2 million and a ratio of non-performing
assets to total assets of 0.19%.

                                       62
<PAGE>
 
          The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated. When a loan is delinquent 90 days or more,
the Bank fully reverses all accrued interest thereon and ceases to accrue
interest thereafter. For all the dates indicated, the Bank did not have any
material restructured loans within the meaning of SFAS 114.

<TABLE> 
<CAPTION> 
                                                    At September 30, 1997                        At December 31, 1996
                                        -------------------------------------------- -------------------------------------------
                                              60-89 Days          90 Days or More          60-89 Days         90 Days or More
                                        ---------------------- --------------------- --------------------- ---------------------
                                                     Principal             Principal             Principal             Principal
                                          Number      Balance    Number     Balance    Number     Balance    Number     Balance 
                                         of Loans    of Loans   of Loans   of Loans   of Loans   of Loans   of Loans   of Loans 
                                        ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
                                                                          (Dollars in thousands)      
<S>                                     <C>        <C>         <C>        <C>        <C>        <C>        <C>       <C> 
One- to four-family....................     12     $    493         16    $    659        9     $    373       17     $   473   
Home equity............................      1           15          1          57        1           13        1          58   
Commercial real estate and multi-family      3          567          4         692       --           --        8       1,822   
Consumer and other.....................     56          221         55         123       73          296       89         257   
Commercial business....................      5           84         10         394       --           --       13       2,108   
                                        ------     --------    -------    --------   ------     --------   ------     -------   
   Total   ............................     77     $  1,380         86    $  1,925       83     $    682      128     $ 4,718   
                                        ======     ========    =======    ========   ======     ========   ======     =======   
                                                                                                                                
Delinquent loans to total loans (1) (2)                0.22%                  0.31%                 0.11%                0.78%  
                                                   ========               ========              ========              =======   
</TABLE> 

<TABLE> 
<CAPTION> 
                                                    At December 31, 1995                        At December 31, 1994   
                                        ------------------------------------------- ------------------------------------------
                                             60-89 Days          90 Days or More          60-89 Days       90 Days or More   
                                        -------------------- ---------------------- -------------------- ---------------------
                                                   Principal              Principal            Principal             Principal  
                                          Number    Balance    Number      Balance    Number    Balance    Number     Balance   
                                         of Loans  of Loans   of Loans    of Loans   of Loans  of Loans   of Loans   of Loans   
                                        ---------- --------- ----------- ---------- ---------- --------- ---------- ---------- 
                                                                         (Dollars in thousands)  
<S>                                     <C>        <C>       <C>         <C>        <C>        <C>       <C>        <C> 
One- to four-family....................      6    $   147         25     $  1,100       16     $    344       17     $   715    
Home equity............................      2         21          1           34        4           86        1          12    
Commercial real estate and multi-family     --         --         10        2,436        2          613        9       3,133    
Consumer and other.....................     70        212         60          166       29          108       39         117    
Commercial business....................     --         --          1          219       --           --        1         245    
                                        ------    -------    -------     --------   ------     --------   ------     -------    
   Total   ............................     78    $   380         97     $  3,955       51     $  1,151       67     $ 4,222    
                                        ======    =======    =======     ========   ======     ========   ======     ======= 
                                                                                                                                
Delinquent loans to total loans (1) (2)              0.07%                   0.74%                0.24%                0.89%    
                                                  =======                ========             ========              =======     
</TABLE> 

___________________________________

(1)    Total loans include principal balance net of the deferred loan fees and
       expenses and unamortized premiums and discounts.
(2)    Excludes loans that had matured and as to which the Bank had not formally
       extended the maturity date. Regular principal and interest payments
       continued in accordance with the original terms of the loan. The Bank
       continued to accrue interest on these loans as long as regular payments
       received were less than 90 days delinquent. These loans totaled $312,000,
       $3.9 million, $3.1 million and $2.7 million at September 30, 1997 and
       December 31, 1996, 1995 and 1994, respectively.

                                       63
<PAGE>
 
          Non-Accrual Loans and Non-Performing Assets. The following table sets
forth information regarding nonaccrual loans and other non-performing assets.

<TABLE> 
<CAPTION> 
                                                         At Sept. 30,                       At December 31,
                                                                      ----------------------------------------------------------
                                                            1997         1996         1995         1994         1993        1992
                                                         ----------   ----------   ----------   ----------  -----------  -------
                                                                                          (Dollars in thousands)
<S>                                                      <C>          <C>          <C>          <C>         <C>          <C> 
Non-accruing loans (1):
   One- to four-family..............................     $     659    $     473    $   1,100    $     715   $     689    $     342
   Home equity......................................            57           58           34           12           9           --
   Commercial real estate and multi-family..........           692        1,822        2,436        3,133       3,611        2,094
   Consumer and other...............................           123          257          166          117         140          129
   Commercial business..............................           394        2,108          219          245          99           66
                                                         ---------    ---------    ---------    ---------   ---------    ---------
      Total.........................................         1,925        4,718        3,955        4,222       4,548        2,631
                                                         ---------    ---------    ---------    ---------   ---------    ---------

Non-performing assets:
 Other real estate owned (2):
   One- to four-family..............................            22          155           --           --          15           51
   Commercial real estate and multi-family..........           246          162          257          259         922        2,281
 Other non-performing assets:
   Investments in affiliates........................            --          157          264          629         789          920
   Nationar receivable (3)..........................            --           --        5,053           --          --           --
                                                         ---------    ---------    ---------    ---------   ---------    ---------
      Total.........................................           268          474        5,574          888       1,726        3,252
                                                         ---------    ---------    ---------    ---------   ---------    ---------

Total non-performing assets.........................     $   2,193    $   5,192    $   9,529    $   5,110   $   6,274    $   5,883
                                                         =========    =========    =========    =========   =========    =========

Total non-performing assets as a percentage of total
 assets ............................................          0.19%        0.48%        0.97%        0.56%       0.69%        0.70%
                                                         =========    =========    =========    =========   =========    =========

Total non-performing loans to total loans (4).......          0.31%        0.78%        0.74%        0.89%       1.10%        0.75%
                                                         =========    =========    =========    =========   =========    =========
</TABLE> 

_______________________

(1)   Loans are placed on non-accrual status when they become 90 days or more
      past due or if they have been identified by the Bank as presenting
      uncertainty with respect to the collectibility of interest or principal.
(2)   Other real estate owned balances are shown net of related allowances. 
(3)   On February 6, 1995, the Superintendent seized Nationar, a check-clearing
      and trust company, freezing all of Nationar's assets. As of December 31,
      1995, the Bank had $5.7 million in demand deposits held in receivership by
      the New York State Banking Department. As of December 31, 1996, the Bank
      had received all funds due from Nationar.
(4)   Excludes loans that had matured and the Bank had not formally extended the
      maturity date. Regular principal and interest payments continued in
      accordance with the original terms of the loan. The Bank continued to
      accrue interest on these loans as long as regular payments received were
      less than 90 days delinquent. These loans totaled $312,000, $3.9 million,
      $3.1 million, $2.7 million, $1.5 million and $245,000 at September 30,
      1997 and December 31, 1996, 1995, 1994, 1993 and 1992, respectively.

          For the nine months ended September 30, 1997 and for the year ended
December 31, 1996, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms amounted
to $133,000 and $325,000, respectively. No interest income on nonaccrual loans
was included in income during such periods except for $22,000 and $39,000 of
cash interest payments received for the Bank's largest non-performing loan for
the nine months ended September 30, 1997 and the year ended December 31, 1996,
respectively.

          Classification of Assets. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets such as
investment securities, considered to be of lesser quality as "substandard,"
"doubtful," or "loss" assets. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the savings institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified "substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve

                                       64
<PAGE>
 
is not warranted. Assets that do not expose the savings institution to risk
sufficient to warrant classification in one of the aforementioned categories,
but which possess some weaknesses, are required to be designated "special
mention" by management.

          When we classify problem assets as either substandard or doubtful, we
establish general valuation allowances or "loss reserves" in an amount deemed
prudent by management. General allowances represent loss allowances that have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When the Bank classifies problem assets as "loss," it
is required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge-off such amount. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowance is subject to review by its regulatory agencies, which can
order the establishment of additional general or specific loss allowances. We
regularly review our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations.

          On the basis of management's review of its assets, at September 30,
1997, we had classified a total of $6.7 million of loans as follows (in
thousands):

<TABLE> 
           <S>                                                 <C> 
           Special Mention...............................      $       3,891
           Substandard...................................              2,765
           Doubtful......................................                  -
           Loss..........................................                  -
                                                               -------------
                Total classified.........................      $       6,656
                                                               =============
                                                                            
           Allowance for loan losses.....................      $       6,353
                                                               =============
</TABLE> 

          Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risk inherent in the loan portfolio and current economic conditions. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan loss allowance. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and valuation of REO.
Such agencies may require us to recognize additions to the allowance based on
their judgment about information available to them at the time of their
examination. The Bank's provisions for loan losses are described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." At September 30, 1997, the total allowance was $6.4 million, which
amounted to 1.02% of total loans and 330.0% of non-performing loans which have
decreased to $1.9 million at this date. The allowance is established based upon
our evaluation of the risks inherent in the loan portfolio, the general economy
and the general trend within the savings industry to increase allowances for
losses as a percentage of total loans. We will continue to monitor and modify
the level of the allowance for loan losses in order to maintain it at a level
which management considers adequate to provide for potential loan losses. For
the nine months ended September 30, 1997 and the years ended December 31, 1996
and 1995, the Bank had charge-offs of $1.3 million, $436,000 and $556,000,
respectively, against this allowance.

                                       65
<PAGE>
 
     Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.

<TABLE> 
<CAPTION> 
                                                NINE MONTHS ENDED
                                                  SEPTEMBER 30,                           YEAR ENDED DECEMBER 31,
                                            -----------------------   -----------------------------------------------------------
                                               1997         1996         1996         1995         1994         1993         1992
                                            ----------   ----------   ----------   ----------   ----------  -----------  --------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                         <C>          <C>          <C>          <C>          <C>         <C>          <C> 
Balance at the beginning of period........  $  6,539     $  4,707     $  4,707     $ 4,192      $ 4,030     $  2,689     $  1,888

Charge-offs:
   One- to four-family....................        43           28           28          17           --           --           --
   Multi-family...........................       265           39          122         215          223           --           --
   Commercial real estate.................       107           35           35         108          460           --           --
   Construction or development............        --           --           --          --           --           --          526
   Consumer and other.....................       303          185          251         216          142          160          123
   Commercial business (1)................       553           --           --          --           --           66           --
                                            --------     --------     --------     -------      -------     --------     --------
                                               1,271           287         436         556          825          226          649
                                            --------     ---------    --------     -------      -------     --------     --------

Recoveries:
   One- to four-family....................        --            --          --          --           --           --           --
   Multi-family...........................        33            --          --          --           --           --           --
   Commercial real estate.................        --            --          25          --           --           --           --
   Construction or development............        --            --          --          --           --           --           --
   Consumer and other.....................        68            37          56          55           30           42           52
   Commercial business....................         9            --          --          --            9            3           --
                                            --------     ---------    --------     -------      -------     --------     --------
                                                 110            37          81          55           39           45           52
                                            --------     ---------    --------     -------      -------     --------     --------

Net charge-offs...........................     1,161           250         355         501          786          181          597
Provision for loan losses.................       975         1,861       2,187       1,016          948        1,522        1,398
                                            --------     ---------    --------     -------      -------     --------     --------
Balance at end of period..................  $  6,353     $   6,318    $  6,539     $ 4,707      $ 4,192     $  4,030     $  2,689
                                            ========     =========    ========     =======      =======     ========     ========

Ratio of net charge-offs during the period
   to average loans outstanding during
    the period............................      0.19%         0.04%       0.06%       0.10%        0.17%        0.05%        0.18%
                                            ========     =========    ========     =======      =======     ========     ========

Allowance for loan losses to total loans..      1.02%         1.08%       1.09%       0.88%        0.88%        0.96%        0.75%
                                            ========     =========    ========     =======      =======     ========     ========

Allowance for loan losses to
  non-performing loans....................    330.03%       118.58%     138.60%     119.01%       99.29%       88.61%      102.20%
                                            ========     =========    ========     =======      =======     ========     ========
</TABLE> 

_____________________

(1)   Included in commercial business loan charge-offs for 1997 is $486,000
      related to a settlement that the Bank had reached with the bankruptcy
      trustee relating to loans to a borrower that had filed for bankruptcy
      protection.

                                       66
<PAGE>
 
     Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the allowance for loan losses by loan category for the periods
indicated.

<TABLE> 
<CAPTION> 
                                                                                                    AT DECEMBER 31,
                                                                                    ----------------------------------------------
                                                          AT SEPTEMBER 30, 1997               1996                  1995 
                                                          -----------------------   ----------------------------------------------
                                                                          PERCENT                   PERCENT                  PERCENT
                                                                         OF LOANS                  OF LOANS                 OF LOANS
                                                            AMOUNT        IN EACH      AMOUNT       IN EACH     AMOUNT      IN EACH
                                                         OF ALLOWANCE   CATEGORY    OF ALLOWANCE  CATEGORY   OF ALLOWANCE   CATEGORY
                                                             FOR         TO TOTAL       FOR        TO TOTAL       FOR       TO TOTAL
                                                         LOAN LOSSES      LOANS     LOAN LOSSES      LOANS    LOAN LOSSES    LOANS
                                                         ------------   ---------   ------------  ---------   -----------  ---------
                                                                                    (DOLLARS IN THOUSANDS)
<S>                                                      <C>            <C>         <C>           <C>        <C>           <C>
One- to four-family.................................      $    436         62.43%     $   412       60.77%    $    367      60.14%
Home equity.........................................            31          2.09           27        1.88           24       1.90
Commercial real estate and multi-family.............           356         24.35          374       24.38          630      25.44
Consumer and other..................................           342         10.45          385       12.16          302      11.76
Commercial business.................................           421          0.68        1,432        0.81          164       0.76
Unallocated (1).....................................         4,767            --        3,909          --        3,220         --
                                                          --------      --------      -------     -------     --------   --------
            Total...................................      $  6,353        100.00%     $ 6,539      100.00%    $  4,707     100.00%
                                                          ========      ========      =======     =======     ========   ========



                                                                                       AT DECEMBER 31,
                                                         -------------------------------------------------------------------------
                                                                   1994                     1993                      1992
                                                         -----------------------   -----------------------  ----------------------
                                                                          PERCENT                  PERCENT                  PERCENT
                                                                         OF LOANS                 OF LOANS                 OF LOANS
                                                            AMOUNT        IN EACH     AMOUNT       IN EACH     AMOUNT       IN EACH
                                                         OF ALLOWANCE   CATEGORY   OF ALLOWANCE  CATEGORY   OF ALLOWANCE   CATEGORY
                                                             FOR         TO TOTAL      FOR        TO TOTAL       FOR       TO TOTAL
                                                         LOAN LOSSES      LOANS    LOAN LOSSES     LOANS     LOAN LOSSES    LOANS
                                                        ------------    --------   ------------  --------    -----------   -------
                                                                                    (DOLLARS IN THOUSANDS)

One- to four-family.................................      $    350         58.59%     $   290       59.43%    $    235     56.67%
Home equity.........................................            26          2.25           26        2.56           29      3.30
Commercial real estate and multi-family.............           736         26.04        1,367       25.02          993     26.35
Consumer and other..................................           298         12.29          286       12.21          233     12.73
Commercial business.................................           164          0.83          119        0.78           68      0.95
Unallocated (1).....................................         2,618             -        1,942           -        1,131         -
                                                          --------      --------      -------     -------     --------   -------
            Total...................................      $  4,192        100.00%     $ 4,030      100.00%    $  2,689    100.00%
                                                          ========      ========      =======     =======     ========   =======
</TABLE>


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

(1)   The unallocated amount represents the amount of the allowance for loan
      losses that is in excess of the minimum amount required as calculated by
      the Bank. As our non-performing and classified loans decrease as a
      percentage of total loans, this unallocated amount becomes a larger
      percentage of the loan loss allowance.

                                       67
<PAGE>
 
Securities Investment Activities

     Our securities investment policy is established by the Board of Trustees.
This policy dictates that investment decisions will be made based on the safety
of the investment, liquidity requirements, potential returns, cash flow targets,
and desired risk parameters. In pursuing these objectives, we consider the
ability of an investment to provide earnings consistent with factors of quality,
maturity, marketability and risk diversification. The Finance Committee of the
Board supervises the Bank's securities investment program. This supervision
entails the evaluation of all investment activities for safety and soundness and
the ongoing evaluation of investment policy and objectives. The Treasurer is
responsible for making securities investment portfolio decisions in accordance
with established policies. While the Treasurer has the authority to conduct
trades within specific guidelines established by the investment policy, all
transactions are reviewed and approved by the Finance Committee of the Board on
a monthly basis.

     Our current policies generally limit securities investments to U.S.
Government and agency securities, municipal bonds, corporate debt obligations
and corporate equity securities. In addition, our policy permits investments in
mortgage related securities, including securities issued and guaranteed by FNMA,
Freddie Mac, GNMA and privately-issued collateralized mortgage obligations
(CMOs). Also permitted are investments in asset-backed securities ("ABS"),
backed by auto loans, credit card receivables, home equity and home improvement
loans. Our current securities investment strategy utilizes a risk management
approach of diversified investing between three categories: short-, 
intermediate-and long-term. The emphasis of this approach is to increase overall
investment securities yields while managing interest rate risk. To accomplish
these objectives, we focus on investments in mortgage related securities, CMOs
and ABSs. In addition, U.S. Government and other non-amortizing securities are
utilized for call protection and liquidity.

     At September 30, 1997, we had $502.5 million in investment securities,
consisting primarily of U.S. Government obligations, mortgage related
securities, municipal, public utility and corporate obligations, preferred and
common stocks, and asset-backed securities. SFAS No. 115 requires the Bank to
designate its securities as held to maturity, available for sale or trading,
depending on the Bank's ability and intent regarding its investments. We do not
have a trading portfolio. As of September 30, 1997, $465.0 million of the
securities portfolio, or 39.5% of total assets, was classified as available for
sale, with a weighted average life of 4.27 years. At such date, $37.5 million of
the securities portfolio, or 3.2% of total assets, was classified as held to
maturity, with a fair value of $37.5 million and a weighted average life of .07
years. Since December 1995, the Bank has only designated money market preferred
stock as held to maturity due to its 49 and 90 day maturities. All other
securities have been classified as available for sale.

     Amortized Cost and Fair Value of Investment and Mortgage Related
Securities. The following table sets forth certain information regarding the
amortized cost and fair values of the Bank's debt, equity, asset-backed and
mortgage related securities as of the dates indicated.

                                       68
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                            AT DECEMBER 31,
                                                       AT SEPTEMBER 30,       -----------------------------------------------   
                                                             1997                      1996                      1995           
                                                     ----------------------   -----------------------  ----------------------  
                                                     AMORTIZED     FAIR       AMORTIZED      FAIR      AMORTIZED      FAIR        
                                                       COST        VALUE        COST         VALUE       COST         VALUE    
                                                     ---------     -----      ---------      -----     ---------      -----  
                                                                               (DOLLARS IN THOUSANDS)                
<S>                                                  <C>         <C>          <C>         <C>          <C>          <C>    
Investment Securities:                                                                                                          
Securities held to maturity:                                                                                                    
   Money market preferred stock.................    $  37,500    $  37,500    $  38,000   $  38,000    $  46,700    $  46,700   
   States and political subdivisions............           --           --           --          --           --           --   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
      Total securities held to maturity.........       37,500       37,500       38,000      38,000       46,700       46,700   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
                                                                                                                                
Debt securities available for sale:                                                                                             
   U.S. Treasury................................       84,856       85,531       84,716      85,220       54,839       55,745   
   U.S. government agencies.....................        5,008        5,002        5,012       5,004           --           --   
   States and political subdivisions............        1,761        1,870        1,942       2,041        9,118        9,317   
   Corporate bonds..............................        6,927        7,034          999       1,000        6,035        6,035   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
      Total debt securities available for sale..       98,552       99,437       92,669      93,265       69,992       71,097   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
                                                                                                                                
Equity securities available for sale:                                                                                           
   Common stock.................................        5,391        6,139        3,115       3,612        3,382        3,566   
   FHLB stock...................................        6,392        6,392        5,394       5,394        4,926        4,926   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
      Total equity securities available for sale       11,783       12,531        8,509       9,006        8,308        8,492   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
                                                                                                                                
Asset-backed securities available for sale......       67,270       67,243       28,090      27,998        5,350        5,278   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
                                                                                                                                
      Total investment securities...............    $ 215,105    $ 216,711    $ 167,268   $ 168,269    $ 130,350    $ 131,567   
                                                    =========    =========    =========   =========    =========    =========   
                                                                                                                                
Average remaining life of investment                                                                                            
  securities (2)................................    1.51 years                1.97 years               1.38 years               
                                                    ==========                ==========               ==========               
                                                                                                                                
Mortgage related securities:                                                                                                    
   Available for sale:                                                                                                          
      Freddie Mac...............................    $ 118,469    $ 118,639    $ 109,903   $ 108,832    $  43,000    $  43,392   
      GNMA......................................       33,461       34,542       44,966      45,780       51,104       52,984   
      FNMA......................................       25,330       25,393       28,487      28,256       33,170       33,575   
      CMOs......................................      107,744      107,188      104,244     101,992      132,550      131,592   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
         Total mortgage related  securities                                                                                     
          available for sale:..................     $ 285,004    $ 285,762    $ 287,600   $ 284,860    $ 259,824    $ 261,543  
                                                    =========    =========    =========   =========    =========    =========   
                                                                                                                                
Average remaining life of                                                                                                       
 mortgage related securities....................    5.69 years                7.56 years               6.21 years               
                                                    ==========                ==========               ==========               
                                                                                                                                
Net unrealized gains (losses) on                                                                                                
   securities available for sale................    $   2,364    $      --    $  (1,739)  $      --    $   2,936    $      --   
                                                                                                                                
Total securities................................    $ 502,473    $ 502,473    $ 453,129   $ 453,129    $ 393,110    $ 393,110   
                                                    =========    =========    =========   =========    =========    =========   
                                                                                                                                
Average remaining life of securities (2)........    3.94 years                5.60 years               4.64 years               
                                                    ==========                ==========               ==========           

<CAPTION> 
                                                          At December 31,
                                                       ---------------------
                                                                 1994
                                                       ---------------------
                                                       Amortized       Fair
                                                          Cost        Value
                                                       ----------     ------ 
<S>                                                    <C>          <C> 
Investment Securities:                              
Securities held to maturity:                        
   Money market preferred stock.................       $  28,836    $  28,836
   States and political subdivisions............          15,002       15,484
                                                       ---------    ---------
      Total securities held to maturity.........          43,838       44,320
                                                       ---------    ---------
                                                    
Debt securities available for sale:                 
   U.S. Treasury................................          49,878       47,877
   U.S. government agencies.....................              --           --
   States and political subdivisions............              --           --
   Corporate bonds..............................           5,173        5,002
                                                       ---------    ---------
      Total debt securities available for sale..          55,051       52,879
                                                       ---------    ---------
                                                    
Equity securities available for sale:               
   Common stock.................................           8,486        8,315
   FHLB stock...................................              --           --
                                                       ---------    ---------
      Total equity securities available for 
      sale......................................           8,486        8,315
                                                       ---------    ---------         
Asset-backed securities available for sale......           4,888        4,539
                                                       ---------    ---------
                                                    
      Total investment securities...............       $ 112,263    $ 110,053
                                                       =========    =========
                                                    
Average remaining life of investment                
  securities (2)................................       3.96 years
                                                       ==========
                                                    
Mortgage related securities:                        
   Available for sale:                              
      Freddie Mac...............................       $  35,157    $  33,000
      GNMA......................................          61,199       58,462
      FNMA......................................          46,730       43,898
      CMOs......................................         151,000      137,920
                                                       ---------    ---------
         Total mortgage related  securities         
           available for sale:..................       $ 294,086    $ 273,280
                                                       =========    =========
                                                    
Average remaining life of                           
 mortgage related securities....................       4.73 years
                                                       ==========
                                                    
Net unrealized gains (losses) on                    
   securities available for sale................       $ (23,498)   $      --
                                                    
Total securities................................       $ 382,851    $ 383,333
                                                       =========    =========
                                                    
Average remaining life of securities (2)........       4.52 years
                                                       ==========
</TABLE> 

_______________________

(1)   The Bank adopted the provisions set forth in SFAS No. 115 on January 1,
      1994, which requires entities to carry securities available for sale at
      their fair value.
(2)   Average remaining life does not include common stock and FHLB stock.

                                       69
<PAGE>
 
     The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
securities portfolio as of September 30, 1997. Adjustable-rate mortgage related
securities are included in the period in which interest rates are next scheduled
to adjust. No tax equivalent adjustments were made to the weighted average
yields. Amounts are shown at amortized cost for held to maturity securities and
at fair value for available for sale securities.

<TABLE> 
<CAPTION> 

                                                                               AT SEPTEMBER 30, 1997 
                                                     ------------------------------------------------------------------------------ 
                                                                                      MORE THAN ONE           MORE THAN FIVE
                                                          ONE YEAR OR LESS         YEAR TO FIVE YEARS       YEARS TO TEN YEARS   
                                                     ------------------------------------------------------------------------------
                                                                    WEIGHTED                  WEIGHTED                   WEIGHTED  
                                                       CARRYING      AVERAGE     CARRYING      AVERAGE     CARRYING       AVERAGE 
                                                         VALUE        YIELD       VALUE         YIELD       VALUE          YIELD   
                                                     -----------    ---------    --------    ---------     --------    ------------ 
                                                                                 (DOLLARS IN THOUSANDS)  
<S>                                                  <C>            <C>          <C>         <C>          <C>          <C> 
Available for sale:                                                                                                              
   Mortgage related securities:                                                                                                  
      Freddie Mac...................................  $      --           --%   $  18,394         6.20%   $  45,447         6.83%
      GNMA..........................................         --           --           54         6.78          386         7.92 
      FNMA..........................................         --           --        3,475         6.88       16,761         6.80 
      CMOs..........................................         --           --        3,282         5.66        1,540         4.98 
                                                      ---------                 ---------                 ---------              
        Total mortgage related securities...........         --           --       25,205         6.23       64,134         6.78 
                                                      ---------                 ---------                 ---------              
                                                                                                                                 
   Debt securities:                                                                                                              
      U.S. treasury.................................      9,983         5.52       75,548         6.31           --           -- 
      U.S. government agencies......................         --           --        5,002         6.63           --           -- 
      States and political subdivisions.............        941         4.07          331         4.94           --           -- 
      Corporate bonds...............................         --           --        7,034         6.84           --           -- 
                                                      ---------                 ---------                 ---------              
        Total debt securities.......................     10,924         5.40       87,915         6.37           --           -- 
                                                      ---------                 ---------                 ---------              
                                                                                                                                 
   Equity securities:                                                                                                            
      Common stock..................................         --           --           --           --           --           -- 
      FHLB stock....................................         --           --           --           --           --           -- 
                                                      ---------                 ---------                 ---------              
        Total equity securities.....................         --           --           --           --           --           -- 
                                                      ---------                 ---------                 ---------              
                                                                                                                                 
   Asset-backed securities..........................         --           --        8,833         6.41       18,162         5.87 
                                                                                                                                 
        Total securities available for sale.........     10,924         5.40      121,953         6.34       82,296         6.58 
                                                      ---------                 ---------                 ---------              
                                                                                                                                 
   Held to maturity:                                                                                                             
      Money market preferred stock..................     37,500         4.10           --           --           --           -- 
                                                      ---------                 ---------                 ---------               
                                                                                                                                  
   Total securities.................................  $  48,424                 $ 121,953                 $  82,296               
                                                      =========                 =========                 =========               

<CAPTION> 

                                                                           AT SEPTEMBER 30, 1997 
                                                            ------------------------------------------------------      
                                                                  AFTER TEN YEARS                TOTAL                  
                                                            ------------------------------------------------------ 
                                                                            WEIGHTED                    WEIGHTED              
                                                              CARRYING       AVERAGE    CARRYING         AVERAGE           
                                                                VALUE         YIELD       VALUE           YIELD              
                                                            -----------     --------    --------        ----------               
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                         <C>             <C>         <C>             <C>          
Available for sale:                                                                                                  
   Mortgage related securities:                                                                                
      Freddie Mac...................................          $  54,798        7.07%   $ 118,639          6.84%                 
      GNMA..........................................             34,102        8.09       34,542          8.09                  
      FNMA..........................................              5,157        6.31       25,393          6.71                  
      CMOs..........................................            102,366        6.40      107,188          6.36                  
                                                              ---------                ---------                                
        Total mortgage related securities...........            196,423        6.88      285,762          6.80                  
                                                              ---------                ---------                                
                                                                                                                                
   Debt securities:                                                                                                             
      U.S. treasury.................................                 --          --       85,531          6.22                  
      U.S. government agencies......................                 --          --        5,002          6.63                  
      States and political subdivisions.............                598        8.30        1,870          5.58                  
      Corporate bonds...............................                 --          --        7,034          6.84                  
                                                              ---------                ---------                                
        Total debt securities.......................                598        8.30       99,437          6.27                  
                                                              ---------                ---------                                
                                                                                                                                
   Equity securities:                                                                                                           
      Common stock..................................                 --          --        6,139          2.14                  
      FHLB stock....................................                 --          --        6,392          6.75                  
                                                              ---------                ---------                                
        Total equity securities.....................                 --          --       12,531          4.49                  
                                                              ---------                ---------                                
                                                                                                                                
   Asset-backed securities..........................             40,248        6.36       67,243          6.23                  
                                                                                                                                
        Total securities available for sale.........            237,269        6.79      464,973          6.54                  
                                                              ---------                ---------                                
                                                                                                                                
   Held to maturity:                                                                                                            
      Money market preferred stock..................                 --          --       37,500          4.10                      
                                                              ---------                ---------                  
                                                                                                                  
   Total securities.................................          $ 237,269                $ 502,473                  
                                                              =========                =========                   
</TABLE> 
                                                                              

                                       70
<PAGE>
 
     Mortgage Related Securities. We purchase mortgage related securities in
order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower our credit risk as a result of the guarantees
provided by Freddie Mac, FNMA, and GNMA; (iii) utilize these securities as
collateral for borrowing; and (iv) increase liquidity. We also invest primarily
in mortgage related securities issued or sponsored by FNMA, Freddie Mac, and
GNMA. We also invest in CMOs issued or sponsored by FNMA and Freddie Mac as well
as private issuers. At September 30, 1997, mortgage related securities totaled
$285.8 million or 24.3% of total assets, all of which were classified as
available for sale. At September 30, 1997, all of the mortgage related
securities were fixed rate. The mortgage related securities portfolio had coupon
rates ranging from 5.0% to 10.0%, a weighted average yield of 6.80% and a
weighted average life of 5.69 years at September 30, 1997. The estimated fair
value of the Bank's mortgage related securities at September 30, 1997 was $285.8
million which was $758,000 greater than the amortized cost of $285.0 million.

     Mortgage related securities are created by the pooling of mortgages and the
issuance of a security with an interest rate that is less than the interest rate
on the underlying mortgages. Mortgage related securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage related securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including FNMA,
Freddie Mac and GNMA) pool and resell the participation interests in the form of
securities to investors, such as the Bank, and guarantee the payment of
principal and interest to these investors. Mortgage related securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage related
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage related securities involve a risk that actual
prepayments will be greater than estimated over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. We review prepayment estimates for our mortgage
related securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the securities at issue and
current interest rates and to determine the yield and estimated maturity of our
mortgage related security portfolio. Of the Bank's $285.7 million mortgage
related securities portfolio at September 30, 1997, $25.2 million with a
weighted average yield of 6.23% had contractual maturities within five years,
$64.1 million with a weighted average yield of 6.78% had contractual maturities
of five to ten years, and $196.4 million with a weighted average yield of 6.88%
had contractual maturities of over ten years. However, the actual maturity of a
mortgage related security may be less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the
rate of prepayments. During periods of declining mortgage interest rates,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, we may be subject
to reinvestment risk because, to the extent that the Bank's mortgage related
securities prepay faster than anticipated, we may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate of return.
Conversely, in a rising interest rate environment prepayments may decline,
thereby extending the estimated life of the security and depriving the Bank of
the ability to reinvest cash flows at the increased rates of interest.

     CMOs are a type of debt security issued by a special-purpose entity that
aggregates pools of mortgages and mortgage related securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class possessing different
risk characteristics. The cash flows from the underlying collateral are
generally divided into "tranches" or classes whereby tranches have descending
priorities with respect to the distribution of principal and interest repayment
of the underlying mortgages and mortgage related securities, as opposed to pass
through mortgage-backed securities where cash flows are distributed pro rata to
all security holders. In contrast to mortgage-backed securities from which cash
flow is received (and hence, prepayment risk is shared) pro rata by all
securities holders, the cash flow from the mortgages or mortgage related
securities underlying

                                       71
<PAGE>
 
CMOs is paid in accordance with predetermined priority to investors holding
various tranches of such securities or obligations. A particular tranche of CMOs
may therefore carry prepayment risk that differs from that of both the
underlying collateral and other tranches. Accordingly, CMOs attempt to moderate
risks associated with conventional mortgage related securities resulting from
unexpected prepayment activity. Investments in CMOs involve a risk that actual
prepayments will differ from those estimated in pricing the security, which may
result in adjustments to the net yield on such securities. Additionally, the
market value of such securities may be adversely affected by changes in the
market interest rates. Management believes these securities may represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.

     At September 30, 1997, our CMO portfolio totaled $107.2 million, or 9.1%,
of total assets and 9.5% of total interest-earning assets, and consisted of
$10.4 million of CMOs issued by private issuers and $96.8 million issued by
government sponsored agencies such as FNMA and Freddie Mac. The entire CMO
portfolio is classified as available for sale and had an estimated weighted
average life of 3.31 years and a weighted average yield of 6.36% at September
30, 1997. It is our practice to limit purchases of privately issued CMOs to non-
high risk securities rated "AAA" by a nationally recognized credit rating
agency, investing primarily in the early to intermediate tranches which have the
greatest credit support. Our current policy with respect to CMOs limits
investments to non-high risk securities unless approval is given by the Board of
Trustees and an analysis is provided on how a high risk CMO will improve the
overall interest rate risk of the Bank. High risk CMOs are defined as those
securities exhibiting significantly greater volatility of estimated average life
and price relative to interest rates than do 30-year, fixed rate securities. We
also limit the amount of investment in CMOs per issue to 15% of our net worth,
and in conjunction with ABSs, to 20% of assets in the aggregate.

     Purchases, Sales, and Repayments of Mortgage Related Securities. Set forth
below is information relating to the Bank's purchases, sales and repayments of
principal of mortgage related securities for the periods indicated.

<TABLE> 
<CAPTION> 
                                                                Nine Months
                                                            Ended September 30,            Years Ended December 31,
                                                            ---------------------    ------------------------------------------
                                                              1997         1996           1996             1995           1994
                                                            -------     ---------    -----------         -------        -------
                                                                               (In thousands)
<S>                                                      <C>            <C>             <C>            <C>             <C> 
Purchases:
    Adjustable-rate (1).............................     $    7,918     $      --     $       --     $        --     $   10,104
    Fixed-rate (1)..................................         23,563        65,729         85,506          32,885         44,164
    CMOs............................................         35,859            --             --          13,490         58,027
                                                         ----------    ----------     ----------     -----------     ----------
       Total purchases..............................         67,340        65,729         85,506          46,375        112,295
                                                                       
Sales:                                                                 
    Adjustable-rate (1).............................        (15,726)           --             --         (16,110)            --
    Fixed-rate (1)..................................         (8,409)       (4,590)       (11,421)        (17,964)       (16,507)
    CMOs............................................        (20,354)       (1,941)       (13,125)        (18,377)       (24,951)
                                                         -----------   ----------     ----------     -----------     ----------
       Total sales..................................        (44,489)       (6,531)       (24,546)        (52,451)       (41,458)
                                                                       
Principal Repayments:                                                  
    Principal repayments............................        (25,359)      (25,466)       (33,026)        (28,056)       (76,816)
    Increase in other items, net (2)................            (88)         (118)          (158)           (130)          (517)
    Change in unrealized gains (losses)                                
       on mortgage related securities...............          3,498        (8,184)        (4,459)         22,525        (20,806)
                                                         ----------    ----------     ----------     -----------     ----------
          Net increase (decrease)...................     $      902     $  25,430     $   23,317     $   (11,737)    $  (27,302)
                                                         ==========    ==========     ==========     ===========     ==========
</TABLE> 

___________________
(1)  Consists of pass-through securities.
(2)  Other items represent amortization and accretion of premiums and discounts.

                                       72
<PAGE>
 
     U.S. Government and Agency Obligations. At September 30, 1997, our U.S.
Treasury securities portfolio totaled $85.5 million, all of which was classified
as available for sale. This portfolio consists primarily of short- to medium-
term (maturities of one to five years) securities. The current investment
strategy, however, is to maintain investments in such instruments to such extent
as can be used for liquidity purposes, as collateral for borrowings, and for
prepayment protection. At September 30, 1997, the agency securities portfolio
totaled $5.0 million, all of which was classified as available for sale and
consisted of agency callable debentures. The agency debentures are callable on a
semi-annual basis following a holding period of twelve months. We do not
generally purchase structured notes.

     Corporate Bonds. The corporate bond portfolio, which at September 30, 1997
totaled $7.0 million, all of which was classified as available for sale, was
composed primarily of short- and medium-term, fixed-rate investment grade
corporate and utility issues. At September 30, 1997, the portfolio had an
average life of approximately 2.9 years and a weighted average yield of 6.84%.
Our policy limits investments in corporate bonds with maturities of twelve years
or less to bonds rated "BBB/Baa" or better by at least one nationally recognized
rating agency and to a total investment of 15% of the Bank's assets, with a 6%
of Bank net worth limitation per issue. Our policy limits investments in
corporate bonds with maturities over twelve years to bonds rated "BBB/Baa" or
better by at least one nationally recognized rating agency and a total
investment of no more than 15% of the Bank's assets with a limitation of 4% of
Bank net worth per issue. Consistent with the Bank's current securities
investment strategy, the Bank has not emphasized investments in corporate debt
obligations.

     States and Political Subdivisions. At September 30, 1997 we had a portfolio
of bonds issued by states and political subdivisions consisting of 10 bonds
totaling $1.8 million, which had an estimated fair value of $1.9 million. All of
such securities were classified as available for sale and were comprised of
general obligation bonds (i.e., obligations backed by the general credit of the
issuer). All of the bonds are currently rated "AAA" with the exception of two
non-rated local bonds with an estimated fair value of $194,130. At September 30,
1997 the average life of the portfolio was approximately 5.65 years and the
portfolio had a weighted average yield of 5.58%, before tax equivalent yield
adjustments. Interest earned on municipal bonds is exempt from federal income
taxes. Some of the bonds additionally benefit from state income tax exemptions.

     Equity Securities. At September 30, 1997, our equity securities portfolio
totaled $12.5 million, all of which was classified as available for sale. The
portfolio consisted of $6.1 million of common stock issued by nationally
recognized companies and $6.4 million of stock issued by the FHLB as a condition
of membership. The Bank benefits from its investment in common and preferred
stock due to a tax deduction the Bank receives with regard to dividends paid by
domestic corporate issuers on equity securities held by other corporate
entities, such as the Bank. The Bank's policy limit for common stock investments
is 7.5% of total assets and the amount invested in any single issuer may not
exceed 4% of net worth. The Bank's current policies permit the purchase of
common stock rated "B+" or better.

     Asset-Backed Securities. Our ABS portfolio at September 30, 1997 totaled
$67.2 million, all of which were classified as available or sale, representing
5.72% of total assets and 5.96% of total interest-earning assets. The Bank
purchases shorter average life tranches with pass-through or sequential
structures, tight payment windows and senior positions. Issues will generally
have third party guarantees by monoline credit insurers and/or some form of
internal credit protection (i.e., reserve funds, excess spread accounts or
subordination). The Bank's current policy limits investment in ABSs in
conjunction with non-high risk mortgage derivative products to 20% of the Bank's
total assets.

     ABSs are a type of debt security collateralized by various loans and assets
including; automobile loans, equipment leases, credit card receivables, home
equity and improvement loans, manufactured housing, student loans and other
consumer loans. Issuance of an ABS begins with creation of a special purpose
bankruptcy-remote trust to hold collateral on behalf of investors and to
administer the distribution of cash flows. The business of a bankruptcy-remote
ABS trust is restricted to the purchase of loans and issuance of debt
collateralized by those loans. Because consumer loans are amortizing, alternate
principal cash flow structures can be created and tranched in a very similar
manner as CMOs. There are several typical structures available to investors in
the ABS market. They are excess spread, senior/subordinated, reserve funds and
surety bond guaranteed. Excess spread is the first line of protection for most
ABS

                                       73
<PAGE>
 
and is the difference between interest cash flow from the underlying loans and
the combined investor coupon, servicing fee, charge-offs and trust costs.
Senior/subordinated structures are internal credit support designating one
portion of the transaction as junior to the remaining portion. Obligations to
the senior class are honored prior to junior class obligations in the event of a
cash flow shortfall from the collateral. A reserve fund is, in effect, part of
the subordinated piece retained, in a declining balance, by the trust so that a
portion of the junior class may be rated investment grade. Surety bond or
guarantee structures are guarantees by third party AAA-rated monoline insurance
companies. Insurers generally guarantee (or wrap) the principal and interest
payments of 100% of a transaction, not just the subordinated class. Assetbacked
securitizations provide the Bank with a broad selection of fixed-income
alternatives, most with higher credit ratings and less downgrade risk than
corporate bonds and more stable cash flows than mortgage related securities.
Prepayments and structure risk of ABSs are less of a concern than CMO securities
due to the shorter maturities of the underlying collateral promoting greater
stability of payments.

     Money Market Preferred Stock. At September 30, 1997, the Bank held $37.5
million of money market preferred stock ("MMPS") exclusively in its held to
maturity portfolio. The portfolio represents 3.19% of total assets and 3.32% of
total interest-earning assets, and has a weighted average rate of 4.10%. The
portfolio consisted primarily of shares of major utility companies. Investments
in these securities are used by the Bank as a higher yielding cash alternative
to federal funds sold and as a source of second-tier liquidity due to their 49
and 90 day maturities (dividend resets). Rates are set on these securities by
means of Dutch Auction, are priced on a predetermined formula at a percentage of
commercial paper and are used by corporations as a lower rate funding
alternative. We benefit from an investment in common and preferred stock due to
the 70% dividends- received tax deduction we recognize with regard to dividends
paid by U.S. corporate issuers on equity securities held by other corporate
entities, such as the Bank. The yield is therefore higher on these securities on
an after-tax basis than the quoted yield. The Bank's policy limit for its MMPS
investments is $5 million per issue and $50 million in aggregate.

SOURCES OF FUNDS

     General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, and proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes. To a lesser extent
we use borrowed funds, primarily FHLB advances, to fund our operations.

     Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposit accounts consist of savings, NOW accounts, checking
accounts, money market accounts, school savings and club accounts and
certificates of deposit. We offer certificates of deposit with balances in
excess of $100,000 at preferential rates (jumbo certificates) and also offer
Individual Retirement Accounts ("IRAs") and other qualified plan accounts. To
enhance the deposit products it offers, we offer commercial checking accounts
for small to moderately-sized commercial businesses, as well as a low-cost
checking account services for low-income customers.

     At September 30, 1997, our deposits totaled $992.2 million or 99.0% of
interest-bearing liabilities. For the nine months ended September 30, 1997, the
average balance of savings and transaction account deposits totaled $452.1
million, or 47.0% of total average deposits. At September 30, 1997, we had a
total of $516.9 million in certificates of deposit, of which $364.5 million had
maturities of one year or less, reflecting the shift in deposit accounts from
savings accounts to shorter-term certificates of deposit that has occurred in
the last three years. In 1996, the average balance of savings and transaction
account deposits represented approximately 49.1% of total deposits and
certificates of deposit represented 50.9%. Although the Bank has a significant
portion of its deposits in shorter term certificates of deposit, management
monitors activity on these accounts and, based on historical experience and the
Bank's current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.

     The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Our deposits are obtained predominantly from the areas in which its
branch offices are located. We rely primarily on competitive pricing of our
deposit products and customer service and

                                       74
<PAGE>
 
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits. In addition, the Bank has periodically paid a special interest payment
on all deposit accounts, ranging from 10 to 25 basis points. For the year ended
December 31, 1995, we paid a special interest payment of 15 basis points on all
deposit accounts in commemoration of its 125th anniversary, which totaled $1.25
million. While 1995 was the most recent year in which a special interest payment
was paid, the Bank has made no decision as to whether such special interest
payments will occur in any future year. The Bank uses traditional means of
advertising its deposit products, including radio and print media and generally
does not solicit deposits from outside its market area. While certificates of
deposit in excess of $100,000 are accepted by the Bank, and may be subject to
preferential rates, we do not actively solicit such deposits as they are more
difficult to retain than core deposits. Historically, the Bank has not used
brokers to obtain deposits. 

     The following table sets forth the deposit activities of the Bank for the
periods indicated.

<TABLE> 
<CAPTION> 
                                                                Nine Months
                                                           Ended September 30,                   Years Ended December 31,
                                                         --------------------------     -----------------------------------------
                                                            1997            1996           1996           1995            1994
                                                         ----------   -------------     ----------     -----------     ----------
                                                                                (Dollars in thousands)
<S>                                                     <C>             <C>             <C>            <C>             <C> 
Opening balance.....................................    $   920,072     $   861,065     $  861,065     $   819,690     $  812,939
Deposits............................................      1,751,818       1,244,359      1,736,655       1,508,173      1,182,400
Withdrawals.........................................     (1,711,656)     (1,215,860)    (1,716,709)     (1,502,621)    (1,207,280)
Interest credited...................................         31,985          29,489         39,061          35,823         31,631
                                                        -----------     -----------     ----------     -----------     ----------

Ending balance......................................        992,219         919,053        920,072         861,065        819,690
                                                        -----------     -----------     ----------     -----------     ----------

Net increase........................................    $    72,147     $    57,988     $   59,007     $    41,375     $    6,751
                                                        ===========     ===========     ==========     ===========     ==========

Percent increase....................................           7.84%           6.73%          6.85%           5.05%          0.83%
                                                        ===========     ===========     ==========     ===========     ==========
</TABLE> 

     The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of September 30, 1997.

<TABLE> 
<CAPTION> 
                                                                                        Maturity
                                                        ----------------------------------------------------------
                                                          3 Months     Over 3 to 6     Over 6 to 12     Over 12
                                                           or Less         Months         Months         Months           Total
                                                        -----------     -----------    -----------    ------------   ------------
                                                                                       (In thousands)
<S>                                                     <C>             <C>            <C>            <C>            <C> 
Certificates of deposit less than $100,000..........    $    89,252     $    81,223    $   142,291    $    113,661   $    426,427
Certificates of deposit of $100,000 or more.........         17,951          11,389         22,350          38,751         90,441
                                                        -----------     -----------    -----------    ------------   ------------

Total of certificates of deposit....................    $   107,203     $    92,612    $   164,641    $    152,412   $    516,868
                                                        ===========     ===========    ===========    ============   ============
</TABLE> 

                                       75
<PAGE>
 
     The following tables set forth information, by various rate categories,
regarding the average balance of deposits by types of deposit for the periods
indicated.

<TABLE> 
<CAPTION> 
                                                               For the Nine Months Ended                 For the Year Ended
                                                                     September 30,                          December 31,
                                                         ------------------------------------   ----------------------------------  
                                                                         1997                                   1996
                                                         ------------------------------------   ----------------------------------
                                                                        Percent                                Percent
                                                                       of Total     Weighted                  of Total    Weighted
                                                           Average      Average      Average      Average      Average     Average
                                                           Balance     Deposits       Rate        Balance     Deposits      Rate
                                                         ---------    ---------    ---------    ---------    ---------   ---------  
                                                                                   (Dollars in thousands)
<S>                                                      <C>          <C>          <C>          <C>          <C>         <C>     
Money market accounts.................................   $   60,173       6.25%        3.57%     $  53,999      6.04%        3.55%
Savings accounts......................................      304,106       31.60        3.34        307,530     34.36         3.37
NOW accounts..........................................       60,240        6.26        1.82         51,718      5.78         1.85
Non-interest-bearing accounts.........................       27,629        2.87          --         26,273      2.94           --
                                                         ----------  ----------                -----------  --------             

   Total..............................................      452,148       46.98        2.96        439,520     49.12         3.01
                                                         ----------  ----------                ------------ --------                
                                                                                            
Certificates of deposit:                                                                    
Less than six months..................................      188,291       19.58          --        176,787     19.76           --
Over six through 12 months............................      124,360       12.92          --        106,793     11.94           --
Over 12 through 24 months.............................       81,310        8.45          --         53,409      5.97           --
Over 24 months........................................       28,417        2.95          --         38,486      4.30           --
Certificates over $100,000............................       87,746        9.12          --         79,755      8.91           --
                                                         ----------  ----------                 ---------- ---------
                                                                                          
   Total certificates of deposit......................      510,124       53.02        5.74        455,230     50.88         5.81
                                                         ----------  ----------                 ---------- ---------
                                                                                
      Total average deposits..........................   $  962,272      100.00%      4.44%     $  894,750    100.00%        4.43%
                                                         ==========   =========                 ==========  =========
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                               For the Year Ended December 31,
                                                               ------------------------------------------------------------------- 
                                                                        1995//1//                               1994
                                                               ------------------------------   ----------------------------------
                                                                        Percent                                Percent
                                                                       of Total     Weighted                  of Total    Weighted
                                                           Average      Average      Average      Average      Average     Average
                                                           Balance     Deposits       Rate        Balance     Deposits      Rate
                                                           -------     --------     --------      -------    ---------    --------
                                                                                    (Dollars in thousands)
<S>                                                      <C>           <C>          <C>          <C>         <C>          <C>     
Money market accounts.................................   $   52,528       6.27%       3.96%      $  49,671      6.05%        3.09%
Savings accounts......................................      326,125      38.91        3.42         415,843     50.68         3.09
NOW accounts..........................................       44,023       5.25        1.89          36,386      4.43         2.06
Non-interest-bearing accounts.........................       28,720       3.43          --          30,996      3.78           --
                                                         ----------  ---------                  ----------  --------
   Total..............................................      451,396      53.86        3.12         532,896     64.94         2.84
                                                         ----------   --------                  ----------  --------

Certificates of deposit:
Less than six months..................................      117,584      14.03          --          64,323      7.85           --
Over six through 12 months............................       94,366      11.26          --          56,520      6.89           --
Over 12 through 24 months.............................       55,039       6.57          --          46,226      5.63           --
Over 24 months........................................       50,891       6.07          --          62,147      7.57           --
Certificates over $100,000............................       68,768       8.21          --          58,445      7.12           --
                                                         ----------   --------                  ----------  --------

   Total certificates of deposit......................      386,648      46.14        6.09         287,661     35.06         5.72
                                                         ----------   --------                  ----------  --------

      Total average deposits..........................   $  838,044     100.00%       4.49%     $  820,557    100.00%        3.85%
                                                         ==========   ========                  ==========  ========
</TABLE> 

___________________________
(1)   Calculations for this table exclude a $1.25 million special interest
      payment in 1995 which was approved by the Bank's Board of Trustees and
      paid on a pro rata basis on all interest-bearing savings, NOW, money
      market and certificate of deposit accounts in recognition of the Bank's
      125th anniversary.

                                       76
<PAGE>
 
     Certificates of Deposit Maturities. The following table sets forth the
     amount and maturities of certificates of deposit at September 30, 1997
 
<TABLE> 
<CAPTION> 
                                                                       Period to Maturity from September 30, 1997                 
                                                      --------------------------------------------------------------------------- 
                                                          Less                                  Three        Four                 
                                                          Than       One to       Two to         to           to          Five    
                                                           One         Two         Three        Four         Five       Years or  
                                                          Year        Years        Years        Years        Years        More  
                                                      -----------  -----------  ----------   ----------   ----------  ----------
                                                                                                                    (In thousands) 

<S>                                                   <C>          <C>          <C>          <C>          <C>         <C>         
Rate:                                                                                                                             
0 to 4.00%..........................................  $     1,142  $        --  $        2   $       --   $       --   $        4 
4.01 to 5.00%.......................................       22,935          496          65           --           --          103
5.01 to 6.00%.......................................      322,677       79,103      13,173        4,397          877        1,758
6.01 to 7.00%.......................................       11,670        4,136       1,141          211           30          413
7.01 to 8.00%.......................................        1,948          327         111        4,415           --           --
8.01 to 9.00%.......................................        4,069       10,406       3,084        1,600           --           --
Over 9.01%..........................................           15       26,455          --           --           --          105
                                                      -----------  -----------  ----------   ----------   ----------   ----------
   Total ...........................................  $   364,456  $   120,923  $   17,576   $   10,623   $      907   $    2,383
                                                      ===========  ===========  ==========   ==========   ==========   ========== 

<CAPTION> 
                                                                          At December 31  
                                                                    -------------------------
                                                                                             
                                                             At                              
                                                          Sept. 30,                          
                                                            1997         1996        1995        1994    
                                                         ----------   ----------  ----------   ---------
<S>                                                      <C>          <C>         <C>          <C>    
Rate:                                                                                                                        
0 to 4.00%..........................................     $    1,148   $    1,567  $   5,222   $63,605
4.01 to 5.00%.......................................         23,599       57,140     46,340    64,416
5.01 to 6.00%.......................................        421,985      351,270    202,715   107,776 
6.01 to 7.00%.......................................         17,601       23,173     94,957     5,922      
7.01 to 8.00%.......................................          6,801        7,456     10,662    11,195 
8.01 to 9.00%.......................................         19,159       18,775     19,765    19,209
Over 9.01%..........................................         26,575       25,340     42,875    48,296 
                                                         ----------   ----------   ---------- --------
   Total ...........................................     $  516,868  $   484,721  $ 422,536  $302,419
                                                         ==========  ===========  =========== ======== 
</TABLE> 

                                       77
<PAGE>
 
     Borrowed Funds. At September 30, 1997, the Bank had $28.7 million of
borrowed funds, which primarily consisted of FHLB advances and reverse
repurchase agreements entered into with nationally recognized securities
brokerage firms. Reverse repurchase agreements are contracts for the sale of
securities owned or borrowed by the Bank, with an agreement to repurchase those
securities at an agreed upon price and date. We use reverse repurchase
agreements in periods when we can generate securities investments with yields in
excess of the cost of such borrowings. Our policies limit the use of reverse
repurchase agreements to collateral consisting of U.S. Treasury obligations,
U.S. agency obligations or mortgage related securities. Securities brokers
utilized by the Bank in these agreements must meet the Securities Exchange Act
Uniform Net Capital Rule 15c3-1 requirements with a public securities
association master repurchase agreement on file. There was $20.0 million of
reverse repurchase agreements outstanding as of December 31, 1996, and the Bank
averaged approximately $11.1 million outstanding pursuant to such agreements
during the year ended December 31, 1996. At September 30, 1997, $18.7 million of
reverse repurchase agreements were outstanding. In 1994, the Bank became
eligible to obtain advances from the FHLB of New York upon the security of the
common stock it owns in that bank and certain of its residential mortgage loans,
provided certain standards related to credit worthiness have been met. Such
advances are available pursuant to several credit programs, each of which has
its own interest rate and range of maturities. There were $12.0 million of FHLB
advances outstanding as of December 31, 1996, and the Bank averaged
approximately $5.6 million of FHLB advances during the year ended December 31,
1996. As of September 30, 1997, $10.0 million of FHLB advances were outstanding.
At September 30, 1997, the Bank had $117.8 million available under a line of
credit with the FHLB of New York.

     The following table sets forth the maximum month-end balance and average
monthly balance of FHLB advances and securities sold under agreements to
repurchase for the periods indicated. The Bank had no outstanding borrowings at
December 31, 1995 and 1994.

<TABLE> 
<CAPTION> 
                                                                 Nine Months              Year Ended
                                                              Ended September 30,        December 31,
                                                              ------------------   
                                                                 1997            1996        1996
                                                              ----------      ----------   ---------
                                                                         (Dollars in thousands)
<S>                                                           <C>             <C>          <C>       
Maximum Balance:
---------------
FHLB advances.......................................          $   10,000      $    5,000   $   12,000
Securities sold under agreements
 to repurchase......................................              28,961          24,675       24,675

Average Balance:
---------------
FHLB advances.......................................               6,889           5,000        5,583
Securities sold under agreements
 to repurchase......................................              22,030           8,147       11,091

Weighted Average Interest Rate:
------------------------------
FHLB advances.......................................                5.93%           5.72%        5.78%
Securities sold under agreements
 to repurchase......................................                5.59            5.35         5.38
</TABLE> 

                                       78
<PAGE>
 
     The following table sets forth certain information as to the Bank's
     borrowings at the dates indicated.

<TABLE> 
<CAPTION> 
                                                                                               At              At
                                                                                          September 30,     December 31,
                                                                                              1997            1996
                                                                                          ------------      -----------
                                                                                                   (In thousands)
<S>                                                                                       <C>               <C> 
FHLB advances......................................................................       $    10,000       $   12,000
Securities sold under agreements to repurchase.....................................            18,740           20,008
                                                                                          -----------       ----------
    Total borrowings...............................................................       $    28,740       $   32,008
                                                                                          ===========       ==========

Weighted average interest rate of FHLB advances....................................              6.16%            6.03%

Weighted average interest rate of securities sold
    under agreements to repurchase.................................................              5.68%            5.42%
</TABLE> 

SAVINGS BANK LIFE INSURANCE

     The Bank, through its Savings Bank Life Insurance ("SBLI") department,
engages in group life insurance coverage for individuals under the SBLI
Financial Institution Group Life insurance policy. The SBLI department's
activities are segregated from the Bank and, while they do not materially affect
the Bank's earnings, management believes that offering SBLI is beneficial to the
Bank's relationship with its depositors and the general public. The SBLI
department pays its own expenses and reimburses the Bank for expenses incurred
on its behalf. At September 30, 1997, the SBLI Department had policies totaling
$1.7 billion in force.

OTHER FEE BASED ACTIVITIES

     We offer annuity and mutual fund products through designated employees who
are registered representatives. The annuity and mutual funds, which are products
of unrelated insurance and mutual fund companies, are offered to customers and
to members of the general public who are interested in non-deposit investments.
We began offering mutual fund products in 1997. We earn fees from the annuity
and mutual fund providers for attracting and retaining these customers. During
the nine months ended September 30, 1997, and the years ended December 31, 1996,
1995 and 1994, we had revenues of $339,000, $448,000, $230,000 and $143,000,
respectively from annuity and mutual fund sales.

SUBSIDIARY ACTIVITIES

     LSB Realty, Inc. LSB Realty, Inc. is a wholly-owned real estate development
subsidiary of the Bank which was established in 1984 for the purpose of
investing in and lending to real estate development projects. At this time, the
subsidiary is in the process of divesting its last five projects and selling the
remaining properties it has developed. The portfolio was developed in the 1980's
with other New York State savings banks and invested primarily in residential
real estate development partnerships in the Hudson Valley region of New York
State. As of September 30, 1997, there is no remaining asset value reflected in
the financial statements for these projects.

     LSB Associates, Inc. LSB Associates, Inc., a wholly-owned subsidiary of the
Bank incorporated in 1984, is engaged in the sale of annuities, life insurance,
and mutual funds. LSB Associates, Inc. acts as an agent for third party
insurance companies to sell their products.

                                       79
<PAGE>
 
     Other Subsidiaries. The Bank has two other wholly-owned subsidiaries. LSB
Funding, Inc. is a real estate investment trust ("REIT") and LSB Securities,
Inc. is a New York State Article 9A company which is primarily involved in the
investment in U.S. Treasury obligations.

COMPETITION

     The Bank faces significant competition in both making loans and attracting
deposits. The Western New York area has a high density of financial
institutions, most of which are branches of significantly larger institutions
which have greater financial resources than the Bank, and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions and insurance companies
and other financial service companies. Its most direct competition for deposits
has historically come from savings and loan associations, savings banks,
commercial banks and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Further competition may
arise as restrictions on the interstate operations of financial institutions are
removed.

PROPERTIES

     The Bank currently conducts its business through fifteen full service
banking offices. The following table sets forth the Bank's offices as of
September 30, 1997 and does not include the three branch office facilities which
the Bank plans to initiate subsequent to such date, which are expected to open
in the first or second quarter of 1998.

<TABLE> 
<CAPTION> 
     LOCATION              LEASED    ORIGINAL     DATE OF       NET BOOK VALUE
                             OR        YEAR        LEASE        OF PROPERTY OR
                            OWNED   LEASED OR    EXPIRATION        LEASEHOLD    
                                     ACQUIRED                  IMPROVEMENTS AT 
                                                              SEPTEMBER 30,1997 
--------------------------------------------------------------------------------
                                                                (In thousands)
<S>                        <C>      <C>          <C>          <C>    
ADMINISTRATIVE/HOME OFFICE:
                     
Administrative Center
6950 South Transit Road
Lockport, NY  14094         Owned      1996          N/A            $7,986


BRANCH OFFICES:

Loan Center Office
80 Washburn Street
Lockport, NY  14094         Owned      1968          N/A              $538

Main Office (1)
55 East Avenue
Lockport, NY  14094         Owned      1968          N/A            $1,385

Town of Lockport Office (2)
5737 South Transit Road
Lockport, NY  14094         Leased     1973      4/30/12              $639

                            
Town of Lockport Office (2)
Drive Thru Facility
6210 Shimer Drive
Lockport, NY  14094         Leased     1993      9/30/12              $218

Batavia Office
401 West Main Street
Batavia, NY 14020           Owned      1977          N/A              $413 
</TABLE> 

                                       80
<PAGE>
 
<TABLE> 
<S>                         <C>        <C>         <C>              <C>     
Cheektowaga Office
1455 French Road
Depew, NY  14043             Owned     1991          N/A            $813

Clarence Office
6409 Transit Road
East Amherst, NY 14051      Leased     1989       12/31/09           $25

Depew Office
570 Dick Roadb
NY  14043                   Leased     1996       12/31/99          $208

Hamburg Office
5751 South Park Avenue
Hamburg, NY  14075           Owned     1995          N/A            $897

Medina Office
327 Main Street
Medina, NY  14103            Owned     1975          N/A            $319

Niagara Falls Office
Tops Int'l Super Center
7200 Niagara Falls Blvd.
Niagara Falls, NY 14304     Leased     1993        3/31/08          $124

North Tonawanda Office
100 River Road
North Tonawanda, NY 14120    Owned     1994          N/A            $728

Ransomville Office
2547 Youngstown/Lockport Rd.
Ransomville, NY 14131        Owned     1985          N/A             $71

Tonawanda Office
Sheridan/Delaware Plaza             
Tonawanda, NY  14223        Leased     1997        3/31/17          $336

West Amherst Office       
Tops Super Center
3035 Niagara Falls Blvd.
Amherst, NY  14228          Leased     1993        9/30/08          $137

West Seneca Office
1251 Union Road             Leased     1996        8/31/06          $254
West Seneca, NY  14224 


North Buffalo Office
2141 Elmwood Avenue
Buffalo, NY  14207          Leased     1997        3/31/17          $292
</TABLE> 

________________
(1)  The Main Office Branch building also houses certain administrative offices.
(2)  The Bank owns the building but leases the land.


LEGAL PROCEEDINGS

     The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition or operations of the Bank.

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PERSONNEL

     As of September 30, 1997, the Bank had 305 full-time employees and 96 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good. See
"Management of the Bank - Benefit Plans" for a description of certain
compensation and benefit programs offered to the Bank's employees.

                          FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     General. The Mutual Holding Company, the Company and the Bank will be
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Bank.

     Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.

     Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of September 30, 1997, was approximately
$4.2 million

           Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a bank
charter.

     At September 30, 1997, the Bank's total federal pre-1988 reserve was
approximately $6.9 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.

     Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.

     Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At September 30, 1997, the Bank
had no net operating loss carryforwards for federal income tax purposes.

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     Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Following completion of the Reorganization and
Offering, it is expected that the Mutual Holding Company will own less than 80%
of the outstanding Common Stock of the Company. As such, the Mutual Holding
Company will not be permitted to file a consolidated federal income tax return
with the Company and the Bank. The corporate dividends-received deduction is 80%
in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated return, and corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct only
70% of dividends received or accrued on their behalf.

STATE TAXATION

     New York State Taxation. The Company and the Bank will report income on a
combined calendar year basis to New York State. New York State Franchise Tax on
corporations is imposed in an amount equal to the greater of (a) 9% of "entire
net income" allocable to New York State (b) 3% of "alternative entire net
income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications. Alternative
entire net income is equal to entire net income without certain modifications.

     Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.

                                  REGULATION

GENERAL

     The Bank is a New York-chartered mutual savings bank and its deposit
accounts are insured up to applicable limits by the Bank Insurance Fund ("BIF")
of the FDIC. The Bank is subject to extensive regulation by the Department, as
its chartering agency; and by the FDIC, as its deposit insurer. The Bank is
required to file reports with, and is periodically examined by, the FDIC and the
Superintendent concerning its activities and financial condition and must obtain
regulatory approvals prior to entering into certain transactions, including, but
not limited to, mergers with or acquisitions of other savings institutions. The
Bank is a member of the FHLB of New York and is subject to certain regulations
by the Federal Home Loan Bank System. Both the Company and the Mutual Holding
Company, as bank holding companies, will be subject to regulation by the Federal
Reserve Board and will be required to file reports with the Federal Reserve
Board. Any change in such regulations, whether by the Department, the FDIC, or
the Federal Reserve Board could have a material adverse impact on the Bank, the
Company, or the Mutual Holding Company.

     Certain of the regulatory requirements applicable to the Bank, the Company
and the Mutual Holding Company are referred to below or elsewhere
herein.

NEW YORK BANK REGULATION

     The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by FDIC
regulations and other federal law and regulations. In particular, the applicable
provisions of New York State Banking Law and regulations governing the
investment authority and activities of an FDIC insured state-chartered savings
bank have been substantially limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued
pursuant thereto.

     The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Banking Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial

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<PAGE>
 
loans, certain types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and agencies,
certain types of corporate equity securities and certain other assets. Under the
statutory authority for investing in equity securities, a savings bank may
invest up to 7.5% of its assets in corporate stock, with an overall limit of 5%
of its assets invested in common stock. Investment in the stock of a single
corporation is limited to the lesser of 2% of the outstanding stock of such
corporation or 1% of the savings bank's assets, except as set forth below. Such
equity securities must meet certain earnings ratios and other tests of financial
performance. A savings bank's lending powers are not subject to percentage of
assets limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" power, make investments not
otherwise permitted under the New York State Banking Law. This power permits
investments in otherwise impermissible investments of up to 1% of assets in any
single investment, subject to certain restrictions and to an aggregate limit for
all such investments of up to 5% of assets. Additionally, in lieu of investing
in such securities in accordance with and reliance upon the specific investment
authority set forth in the New York State Banking Law, savings banks are
authorized to elect to invest under a "prudent person" standard in a wider range
of investment securities as compared to the types of investments permissible
under such specific investment authority. However, in the event a savings bank
elects to utilize the "prudent person" standard, it will be unable to avail
itself of the other provisions of the New York State Banking Law and regulations
which set forth specific investment authority. The Bank has not elected to
conduct its investment activities under the "prudent person" standard. A savings
bank may also exercise trust powers upon approval of the Department.

     New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Department. Investment by a savings bank in the stock,
capital notes and debentures of its service corporations is limited to 3% of the
bank's assets, and such investments, together with the bank's loans to its
service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire Board of Trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.

     Under the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Superintendent or the Department against the Bank or any of
its trustees or officers.

INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC

     The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Superintendent an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.

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<PAGE>
 
     In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semi-annual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category.

     As a result of legislation passed in 1996, relating to the recapitalization
of the SAIF, from 1997 through 1999, FDIC-insured institutions will pay an
insurance premium of approximately 1.3 basis points of their BIF-assessable
deposits. The Bank's insurance premiums, which had amounted to the minimum
$2,000 annual fee for its BIF-insured deposits, were increased to 1.3 basis
points. Based upon assessable deposits at September 30, 1997, the Bank would
expect to pay $31,400 in insurance premiums per quarter during 1998.

REGULATORY CAPITAL REQUIREMENTS

     The FDIC has adopted risk-based capital guidelines to which the Bank is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. The Bank is required to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
such regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified offbalance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.

     These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain non-
cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.

     In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.

STANDARDS FOR SAFETY AND SOUNDNESS

     The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted additions to the Guidelines which require institutions to examine asset
quality and earnings standards. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required

                                       85
<PAGE>
 
by federal law. The final regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.

LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS

     The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. New York law also
restricts the Bank from declaring a dividend which would reduce its capital
below (i) the amount required to be maintained by state and federal law and
regulations, or (ii) the amount of the Bank's liquidation account established in
connection with the Reorganization.

PROMPT CORRECTIVE ACTION

     The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).

     Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.

ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS

     Federal law generally limits the activities and equity investments of FDIC-
insured, state-chartered banks to those that are permissible for national banks,
notwithstanding state laws. Under regulations dealing with equity investments,
an insured state bank generally may not, directly or indirectly, acquire or
retain any equity investment of a type, or in an amount, that is not permissible
for a national bank. An insured state bank is not prohibited from, among other
things, (i) acquiring or retaining a majority interest in a subsidiary; (ii)
investing as a limited partner in a partnership the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation, or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets; (iii)
acquiring up to 10% of the voting stock of a company that solely provides or
reinsures directors', trustees', and officers' liability insurance coverage or
bankers' blanket bond group insurance coverage for insured depository
institutions; and (iv) acquiring or retaining the voting shares of a depository
institution if certain requirements are met.

     Federal law and FDIC regulations permit certain exceptions to the foregoing
limitation. For example, certain state-chartered banks, such as the Bank, may
continue to invest in common or preferred stock listed on a National Securities
Exchange or the National Market System of NASDAQ, and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. Such banks may also continue to sell savings bank life insurance. As of
September 30, 1997, the Bank had $6.1 million of securities pursuant to this
exception.

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<PAGE>
 
TRANSACTIONS WITH AFFILIATES

     Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.

     Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the Board of Directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal shareholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.

HOLDING COMPANY REGULATION

     FEDERAL BANK HOLDING COMPANY REGULATION. Upon consummation of the
Reorganization, the Company, as the sole shareholder of the Bank, and the Mutual
Holding Company, as indirect controlling shareholder of the Bank, will become
bank holding companies. Bank holding companies are subject to comprehensive
regulation and regular examinations by the Federal Reserve Board under the BHCA,
and the regulations of the Federal Reserve Board. The Federal Reserve Board also
has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.

     Under Federal Reserve Board policy, a bank holding company must serve as a
source of strength for its subsidiary bank. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.

     Under the BHCA, a bank holding company must obtain Federal Reserve Board
approval before: (i) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such

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<PAGE>
 
shares); (ii) acquiring all or substantially all of the assets of another bank
or bank holding company; or (iii) merging or consolidating with another bank
holding company.

     The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
Board includes, among other things, operating a savings association, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Company and the Mutual Holding Company
have no present plans to engage in any of these activities.

     Interstate Banking and Branching. Federal law allows the Federal Reserve
Board to approve an application of an adequately capitalized and adequately
managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of the bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Federal Reserve Board is prohibited from approving an application if
the applicant (and its depository institution affiliates) controls or would
control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch. Individual states continue to have authority
to limit the percentage of total insured deposits in the state which may be held
or controlled by a bank or bank holding company to the extent such limitation
does not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% state-wide concentration limit referred
to above.

     Additionally, beginning on June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks "opted out" by adopting a law which applies equally to all out-
of-state banks and expressly prohibits merger transactions involving out-of-
state banks. Interstate acquisitions of branches are permitted only if the law
of the state in which the branch is located permits such acquisitions. In
response to Riegle-Neal, the State of New York enacted laws allowing interstate
mergers and branching on a reciprocal basis.

     Federal law authorizes the FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The appropriate federal banking agencies are required to
prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and Federal Reserve Board have adopted such regulations. These
regulations include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve. Should the FDIC determination that a
bank interstate branch is not reasonably helping to meet the credit needs of the
communities serviced by an interstate, the FDIC is authorized to close the
interstate branch or not permit the bank to open a new branch in the state in
which the bank previously opened an interstate branch.

     Dividends. The Federal Reserve Board has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve Board's view that a bank holding company should pay cash dividends only
to the extent that the holding company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the holding company's capital needs, asset quality and

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<PAGE>
 
overall  financial  condition.  The Federal Reserve Board also indicated that it
would be inappropriate for a company  experiencing serious financial problems to
borrow funds to pay dividends.  Furthermore,  under the prompt corrective action
regulations  adopted by the Federal Reserve Board, the Federal Reserve Board may
prohibit a bank  holding  company  from  paying  any  dividends  if the  holding
company's bank subsidiary is classified as "undercapitalized."

     Bank holding companies are required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.

     NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal
bank holding company regulations, a bank holding company organized or doing
business in New York State also may be subject to regulation under the New York
State Banking Law. The term "bank holding company," for the purposes of the New
York State Banking Law, is defined generally to include any person, company or
trust that directly or indirectly either controls the election of a majority of
the directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions. In general, a bank holding company
controlling, directly or indirectly, only one banking institution will not be
deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the Banking
Department is required before: (1) any action is taken that causes any company
to become a bank holding company; (2) any action is taken that causes any
banking institution to become or be merged or consolidated with a subsidiary of
a bank holding company; (3) any bank holding company acquires direct or indirect
ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate with another
bank holding company. Additionally, certain restrictions apply to New York State
bank holding companies regarding the acquisition of banking institutions which
have been chartered five years or less and are located in smaller communities.
Officers, directors and employees of New York State bank holding companies are
subject to limitations regarding their affiliation with securities underwriting
or brokerage firms and other bank holding companies and limitations regarding
loans obtained from its subsidiaries. Although the Company will not be a bank
holding company for purposes of New York State law upon the Effective Date of
the Reorganization, any future acquisition of ownership, control, or the power
to vote 10% or more of the voting stock of another bank or bank holding company
would cause it to become such.

     MUTUAL HOLDING COMPANY REGULATION. Under New York law, the Mutual Holding
Company may exercise all powers and privileges of a New York chartered mutual
savings bank. As a bank holding company, the Mutual Holding Company is also
authorized to exercise all powers and in engage in all activities permitted to a
bank holding company under the Bank Holding Company Act, except that it may not
directly or indirectly engage in the sale or underwriting of insurance.

     Dividend Waivers by the Mutual Holding Company. It has been the policy of
many mutual holding companies to waive the receipt of dividends declared by any
savings institution subsidiary. In connection with its approval of the
Reorganization, however, the Federal Reserve Board imposed certain conditions on
the waiver by the Mutual Holding Company of dividends paid on the Common Stock.
In particular, the Mutual Holding Company must obtain prior Federal Reserve
Board approval before it may waive any dividends. As of the date hereof,
management does not believe that the Federal Reserve Board has given its
approval to any waiver of dividends by any mutual holding company that has
requested its approval.

                                       89
<PAGE>
 
     The terms of the Federal Reserve Board approval of the Reorganization also
require that the amount of any waived dividends will not be available for
payment to Minority Stockholders and will be excluded from capital for purposes
of calculating dividends payable to Minority Stockholders. Moreover, the
cumulative amount of waived dividends must be maintained in a restricted capital
account which would be added to any liquidation account of the Bank, and would
not be available for distribution to Minority Stockholders. The restricted
capital account and liquidation account amounts would not be reflected in the
Bank's financial statements or the notes thereto, but would be considered as a
notational or memorandum account of the Bank, and would be maintained in
accordance with the rules, regulations and policy of the Office of Thrift
Supervision except that such rules would be administered by the Federal Reserve
Board, and any other rules and regulations adopted by the Federal Reserve Board.
The Plan of Reorganization also provides that if the Mutual Holding Company
converts to stock form in the future, any waived dividends would reduce the
percentage of the converted company's shares of common stock issued to Minority
Stockholders in connection with any such transaction. See "Conversion of the
Mutual Holding Company to Stock Form."

     Management does not believe that the Mutual Holding Company will initially
waive dividends declared by the Company. If the Mutual Holding Company decides
that it is in its best interest to waive a particular dividend to be paid by the
Company, and the Federal Reserve Board approves such waiver, then the Company
would pay such dividend only to Minority Stockholders, and the amount of the
dividend waived by the Mutual Holding Company would be treated in the manner
described above. The Mutual Holding Company's decision as to whether or not to
waive a particular dividend, if such waiver is approved by the Federal Reserve
Board, will depend on a number of factors, including the Mutual Holding
Company's capital needs, the investment alternatives available to the Mutual
Holding Company as compared to those available to the Company, and regulatory
approvals. There can be no assurance (i) that after the Reorganization the
Mutual Holding Company will waive dividends paid by the Company, (ii) that the
Federal Reserve Board will approve any dividend waivers by the Mutual Holding
Company or (iii) of the terms that may be imposed by the Federal Reserve Board
on any dividend waiver.

     Conversion of the Mutual Holding Company to Stock Form. New York law,
regulations of the Department and the Plan of Reorganization permit the Mutual
Holding Company to convert from the mutual to the capital stock form of
organization (a "Conversion Transaction"). There can be no assurance when, if
ever, a Conversion Transaction will occur, and the Board of Trustees has no
current intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction, the Mutual Holding Company would merge with and into the Bank or
the Company, with the Bank or the Company as the resulting entity, and certain
depositors of the Bank would receive the right to subscribe for additional
shares of the resulting entity. In a Conversion Transaction, each share of
Common Stock outstanding immediately prior to the completion of the Conversion
Transaction held by persons other than the Mutual Holding Company (a "Minority
Share") would be automatically converted into and become the right to receive a
number of shares of common stock of the resulting entity determined pursuant an
exchange ratio that ensures that after the conversion transaction, subject to
the Dividend Waiver Adjustment described below and a slight adjustment to
reflect the receipt of cash in lieu of fractional shares, the percentage of the
to-be outstanding shares of the resulting entity issued to Minority Stockholders
in exchange for their Common Stock would be equal to the percentage of the
outstanding shares of Common Stock held by Minority Stockholders immediately
prior to the Conversion Transaction. The total number of shares held by Minority
Stockholders after the Conversion Transaction would also be affected by any
purchases by such persons in the offering that would be conducted as part of the
Conversion Transaction.

     The Dividend Waiver Adjustment would adjust the percentage of the to-be
outstanding shares of the resulting entity issued in exchange for minority
shares to reflect (i) the aggregate amount of dividends waived by the Mutual
Holding Company and (ii) assets other than Common Stock held by the Mutual
Holding Company. Pursuant to the Dividend Waiver Adjustment, the percentage of
the to-be outstanding shares of the resulting entity issued to Minority
Stockholders in exchange for their minority shares (the "Adjusted Minority
Ownership Percentage") is equal to the percentage of the outstanding shares of
Common Stock held by Minority Stockholders multiplied by the Dividend Waiver
Fraction. The Dividend Waiver Fraction is equal to the product of (a) a
fraction, of which the numerator is equal to the Company's stockholders' equity
at the time of the Conversion Transaction less the aggregate amount of dividends

                                       90
<PAGE>
 
waived by the Mutual Holding Company and the denominator is equal to the
Company's stockholders' equity at the time of the Conversion Transaction, and
(b) a fraction, of which the numerator is equal to the appraised pro forma
market value of the resulting entity minus the value of the Mutual Holding
Company's assets other than Common Stock and the denominator is equal to the pro
forma market value of the resulting entity.

FEDERAL SECURITIES LAW

     The Common Stock of the Company to be issued in the Offering will be
registered with the Securities and Exchange Commission ("SEC") under the
Exchange Act. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.

     Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At September
30, 1997, the Bank was in compliance with these reserve requirements.

COMMUNITY REINVESTMENT ACT

     Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a savings bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating was "satisfactory."

     New York State Regulation. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA") which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Banking Department. The
NYCRA requires the Banking Department to make an annual written assessment of a
bank's compliance with the NYCRA, utilizing a four-tiered rating system, and
make such assessment available to the public. The NYCRA also requires the
Superintendent to consider a bank's NYCRA rating when reviewing a bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application.

     The Bank's NYCRA rating as of its latest examination was "satisfactory."

FEDERAL HOME LOAN BANK SYSTEM

     The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the

                                       91
<PAGE>
 
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.

     As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At September 30, 1997, the Bank had $6.4 million of FHLB
stock. In past years, the Bank has received dividends on its FHLB stock. The
dividend yield from FHLB stock was 6.75% at September 30, 1997. No assurance can
be given that such dividends will continue in the future at such levels.

     Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.

                           MANAGEMENT OF THE COMPANY

DIRECTORS OF THE COMPANY

     The Board of Directors of the Company consists of eleven members, each of
whom is currently serving as a Trustee of the Bank. Directors of the Company
will serve three-year staggered terms so that approximately one-third of the
Directors will be elected at each annual meeting of stockholders. The class of
directors whose term of office expires at the first annual meeting of
shareholders following completion of the Reorganization consists of Directors
Currie, Heinrich, Mancuso and Weber. The class of directors whose term expires
at the second annual meeting of shareholders following completion of the
Reorganization consists of Directors Caldwell, Fitch, Judge and Miklinski. The
class of directors whose term of office expires at the third annual meeting of
shareholders following the completion of the Reorganization consists of
Directors Assad, Smith and Swan. The biographical information regarding these
individuals is set forth under "Management of the Bank-Biographical
Information."

EXECUTIVE OFFICERS OF THE COMPANY

     The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names. The biographical information
for each executive officer is set forth under "Management of the Bank--
Biographical Information."



Name                   Age*            Position
-----------------      ---------       -------------------------------------
William E. Swan        50              President and Chief Executive Officer
Paul J. Kolkmeyer      44              Executive Vice President and Chief
                                        Financial Officer
G. Gary Berner         49              Senior Vice President
Kathleen P. Monti      49              Senior Vice President
Diane Allegro          42              Senior Vice President


_________________________
*As of September 30, 1997

                                       92
<PAGE>
 
     The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation, retirement or removal by the Board.

     Since the formation of the Company, none of the executive officers has
received remuneration from the Company. It is not anticipated that the executive
officers of the Company will initially receive any remuneration in his or her
capacity as an executive officer. For information concerning compensation of
executive officers of the Bank, see "Management of the Bank."

INDEMNIFICATION AND LIMITATION OF LIABILITY

     The certificate of incorporation of the Company provides that a director or
officer of the Company shall be indemnified by the Company to the fullest extent
authorized by the Delaware General Corporation Law ("DGCL") against all
expenses, liability and loss reasonably incurred or suffered by such person in
connection with his activities as a director or officer or as a director or
officer of another company, if the director or officer held such position at the
request of the Company. Delaware law requires that such director, officer,
employee or agent, in order to be indemnified, must have acted in good faith and
in a manner reasonably believed to be not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, either had
reasonable cause to believe such conduct was lawful or did not have reasonable
cause to believe his conduct was unlawful.

     In addition, the certificate of incorporation and Delaware law also provide
that the Company may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Company or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Company has the power to indemnify such
person against such expense, liability or loss under the DGCL. The Company
intends to obtain such insurance.

     The certificate of incorporation also provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law (which relates to unlawful dividends or
stock purchases or redemptions), or (iv) for any transaction from which the
director derived an improper personal benefit.

                            MANAGEMENT OF THE BANK

Directors of the Bank

     Upon completion of the Reorganization, the initial directors of the Bank
will consist of those persons who currently serve on the Board of Trustees of
the Bank. The directors of the Bank will have three year terms which will be
staggered to provide for the election of approximately one-third of the board
members each year. Directors of the Bank will be elected by the Company as sole
stockholder of the Bank. The proposed directors of the Bank are as follows:

<TABLE> 
<CAPTION> 

Director                             Age*      Occupation                                        Term Expires
--------                             ----      ----------                                        ------------
<S>                                  <C>       <C>                                               <C>  
Gordon P. Assad                       49       President and Chief Executive Officer,            2001
                                               Erie & Niagara Insurance  Association
Christa R. Caldwell                   63       Director (Retired),                               2000
                                               Lockport Public Library
James W. Currie                       56       President,                                        1999
                                               Ag Pak, Inc.
Gary B. Fitch                         62       Owner-Manager,                                    2000
                                               Ontario Orchards, Inc.
</TABLE> 

                                       93
<PAGE>
 
<TABLE> 
<S>                                   <C>      <C>                                               <C> 
David W. Heinrich                     61       President,                                        1999
                                               Heinrich Chevrolet Corp.
Daniel W. Judge                       55       President and Chief Executive Officer,            2000
                                               I.D. ONE, Inc.
B. Thomas Mancuso                     41       President,                                        1999
                                               Joseph L. Mancuso & Sons, Inc.
James Miklinski                       54       General Manager,                                  2000
                                               Niagara Milk Cooperative
Barton G. Smith                       67       Paul Garrick, Inc. (Retired)                      2001
William E. Swan                       50       President and Chief Executive Officer,            2001
                                               Lockport Savings Bank                             
Robert G. Weber                       60       Managing Partner (Retired),                       1999
                                               KPMG Peat Marwick LLP
</TABLE> 

________________
* As of September 30, 1997

EXECUTIVE OFFICERS OF THE BANK

     The following table sets forth certain information (as of September 30,
1997) regarding the executive officers of the Bank, all of whom currently serve
in their indicated position as executive officers of the Bank.

<TABLE> 
<CAPTION> 
Name                                      Age       Position
<S>                                       <C>       <C> 
William E. Swan                           50        President and Chief Executive Officer
Paul J. Kolkmeyer                         44        Executive Vice President and Chief
                                                      Financial Officer
G. Gary Berner                            49        Senior Vice President and Chief Lending Officer
Kathleen P. Monti                         49        Senior Vice President/HR & Administration
Diane Allegro                             42        Senior Vice President / Retail Banking
</TABLE> 

     The executive officers of the Bank will be elected annually and will hold
office until the next annual meeting of the Board of Directors of the Bank held
immediately after the annual meeting of stockholders of the Bank, and until
their successors are elected and qualified, or until death, resignation,
retirement or removal by the Board of Directors.

BIOGRAPHICAL INFORMATION

     Directors of the Bank

     Gordon P. Assad has served as a Trustee of the Bank since 1995. Mr. Assad
is the President and Chief Executive Officer of Erie & Niagara Insurance
Association and has served in that position since 1972.

     Christa R. Caldwell has served as a Trustee of the Bank since 1986. Ms.
Caldwell is retired and was the Director of the Lockport Public Library from
1967 to 1996.

     James W. Currie has served as a Trustee of the Bank since 1987. Mr. Currie
is the President of Ag Pak, Inc., a manufacturer of produce packaging machines,
and has served in that position since 1974.

     Gary B. Fitch has served as a Trustee of the Bank since 1981. Mr. Fitch is
the Owner-Manager of Ontario Orchards, Inc., and has served in that position
since 1976. Mr. Fitch also serves as the Executive Secretary of Agricultural
Affiliates, Inc. and has served in that position since 1991.

                                       94
<PAGE>
 
     David W. Heinrich served as a Trustee of the Bank from 1969 to 1991. He was
re-elected to the Board in June of 1993. Mr. Heinrich is the President of
Heinrich Chevrolet Corp.

     Daniel W. Judge has served as a Trustee of the Bank since 1992. Mr. Judge
is the President and Chief Executive Officer of I.D. ONE, Inc., a purchasing and
marketing cooperative of independent industrial distributors, and has served in
that position since 1996. Mr. Judge served as the Executive Director of I.D.
ONE, Inc. from 1993 to 1996. Mr. Judge has also served as President and Manager
of Dansam, Inc., a business management services company, since 1990.

     B. Thomas Mancuso has served as a Trustee of the Bank since 1990. Mr.
Mancuso is the President of Joseph L. Mancuso & Sons, Inc., a real estate
development company.

     James Miklinski has served as a Trustee of the Bank since 1996. Mr.
Miklinski is the General Manager of Niagara Milk Cooperative, and has served in
that position since 1990.

     Barton G. Smith has served as a Trustee of the Bank since 1986. Mr. Smith
is retired from Paul Garrick, Inc.

     William E. Swan has served as a Trustee of the Bank since 1996. Mr. Swan is
the President and Chief Executive Officer of Lockport Savings Bank, and has
served in that position since 1989. Prior to joining the Bank in 1988, he served
as an Administrative Vice President of Manufacturers and Traders Trust Company.

     Robert G. Weber has served as a Trustee of the Bank since 1996. Mr. Weber
is a retired Buffalo Office Managing Partner of KPMG Peat Marwick LLP where he
served from 1959 to 1995.

     Executive Officers of the Bank Who Are Not Directors

     Paul J. Kolkmeyer has served as Executive Vice President and Chief
Financial Officer of the Bank since 1995. Prior to that time, Mr. Kolkmeyer
served as Senior Vice President and Chief Financial Officer of the Bank. He has
worked for the Bank since 1990. Prior to 1990, he served as a Vice President at
Morgan Guaranty Trust Company.

     Kathleen P. Monti has served as Senior Vice President of Human Resources
and Administration of the Bank since 1995. From 1993 to 1995 Ms. Monti served as
Vice President of Human Resources of the Bank. Prior to 1993, she served as an
Administrative Vice President-Regional Human Resource Manager at Marine Midland
Bank.

     G. Gary Berner has served as Senior Vice President and Chief Lending
Officer of the Bank since 1992. Prior to joining the Bank in 1992, he was Vice
President, Asset Management Group at Key Bank of New York, N.A.

     Diane Allegro has been Senior Vice President of Retail Banking since
October 1997. From 1994 to October 1997, she was Vice President-Retail Sales &
Delivery Systems at Rochester Community Savings Bank. Prior to 1994, she was
employed by First Federal Savings and Loan Association of Rochester.

MEETINGS AND COMMITTEES OF THE BANK'S BOARD

     The Board of Trustees of the Bank meets monthly and may have additional
special meetings as may be called by the Chairman or as otherwise provided by
law. During the year ended December 31, 1996, the Board held ___ meetings. No
trustee attended fewer than 75% in the aggregate of the total number of meetings
of the Board or Board Committees on which such Trustee served during 1996. The
Board of Trustees of the Bank has the following standing committees: Loan
Committee, Audit Committee, CRA Committee, Finance Committee and Board Affairs
Committee.

                                       95
<PAGE>
 
BOARD OF DIRECTORS AND COMMITTEES OF THE COMPANY AFTER REORGANIZATION

     Following the Reorganization, the Board of Directors of the Company is
expected to meet quarterly, or more often as may be necessary. The Board of
Directors initially is expected to have a standing Executive Committee and an
Audit Committee. The Board of Directors may, by resolution, designate one or
more additional committees.

     The Executive Committee initially will consist of the following five
Directors of the Company: Messrs. Heinrich, Swan, Assad, Judge and Weber. The
Executive Committee is expected to meet as necessary when the Board is not in
session to exercise general control and supervision in all matters pertaining to
the interests of the Company, subject at all times to the direction of the Board
of Directors. The Executive Committee may also serve as the nominating committee
for the purpose of identifying, evaluating and recommending potential candidates
for election to the Board.

     The Audit Committee initially will consist of the following Directors of
the Company: Weber, Currie, Mancuso, Miklinski and Heinrich. The Audit Committee
is expected to meet at least quarterly to examine and approve the audit report
prepared by the independent auditors of the Bank, to review and recommend the
independent auditors to be engaged by the Company, to review the internal audit
function and internal accounting controls of the Company, and to review and
approve audit policies.

COMPENSATION OF TRUSTEES AND DIRECTORS

     Directors of the Bank receive a retainer fee of $12,000 ($17,000 for the
Chairman), plus a fee of $700 per Board meeting attended and $400 per meeting
for attendance at committee meetings. Directors who are also employees of the
Bank are not eligible to receive Board fees. Directors of the Company will
receive an annual retainer fee of $5,000 and a fee of $400 per meeting for
attendance at Board and committee meetings.

     TRUSTEES DEFERRED FEES PLAN. The Trustees Deferred Fee Plan ("Trustees
Plan") is a non-qualified deferred compensation plan into which a Trustee can
defer up to 100% of his or her Board fees earned during the calendar year. All
amounts deferred by a Trustee are fully vested at all times. Amounts credited to
a deferred fee account are invested in equity securities, fixed income
securities, money market accounts, and cash, at the sole discretion of the Bank.
Upon cessation of a Trustee's service with the Bank, the Bank will pay the
Trustee the amounts credited to their account. The amounts will be paid in five
to ten substantially equal annual installments, as selected by the Trustee,
provided, however, that the annual payments will not be less than $25,000, and
if necessary, the number of payments and the amount of the final payment will be
adjusted accordingly.

     If the Trustee dies before all payments have been made, the remaining
payments will be made to the Trustee's designated beneficiary. In the event of
the Trustee's death prior to commencement of benefits, the Bank shall pay the
Trustee's beneficiary the amounts credited to the benefit of the Trustee under
the Trustee's Plan, in five substantially equal annual payments of not less than
$25,000, and if necessary, the payments will be adjusted in the same manner as
paid, as applicable.

EXECUTIVE COMPENSATION

     Summary Compensation Table. The following table sets forth for the year
ended December 31, 1996, certain information as to the total remuneration paid
by the Bank to the Chief Executive Officer of the Bank, as well as to the four
most highly compensated executive officers of the Bank at December 31, 1996
other than the Chief Executive Officer who received total annual compensation in
excess of $100,000 (together, the "Named Executive Officers").

                                       96
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                     Annual Compensation                   Long-Term Compensation
                                               -------------------------------     ------------------------------------
                                                                                          Awards          Payouts
                                                                                   -------------------- ---------------
                                                                        Other
                                     Year                               Annual       Restricted    Options/              
                                     Ended                           Compensation      Stock        SARS         LTIP  
  Name and Principal Position       12/31(1)    Salary     Bonus(2)      (3)          Awards(4)    (#)(5)       Payouts  
-------------------------------   ----------   --------  -----------  -----------    ---------- ------------   ---------- 
<S>                               <C>          <C>       <C>          <C>            <C>        <C>            <C>      
William E. Swan                      1996     $239,194      $93,764           --            --           --           --   
President and Chief Executive                                                                                             
 Officer                                                                                                                  
Paul J. Kolkmeyer                    1996      135,034       46,286           --            --           --           --   
 Executive Vice President and                                                                                             
  Chief Financial Officer                                                                                                 
G. Gary Berner                       1996      108,534       37,653           --            --           --           --   
 Senior Vice President and                                                                                                
  Chief Lending Officer                                                                                                   
Kathleen Monti                       1996       80,464       28,519       12,317             --           --          --   
 Senior Vice President--         
  Human Resources and Administration

<CAPTION>

                                                      All Other
                                                    Compensation
  Name and Principal Position                            (6) 
-------------------------------                     ------------- 
<S>                                                 <C> 
William E. Swan                              
President and Chief Executive                           $74,259
 Officer                                     
Paul J. Kolkmeyer                            
 Executive Vice President and                            38,867
  Chief Financial Officer                    
G. Gary Berner                               
 Senior Vice President and                               38,261
  Chief Lending Officer                      
Kathleen Monti                               
 Senior Vice President--                                 30,536 
  Human Resources and Administration
</TABLE> 


___________________________________
(1)  In accordance with the rules on executive officer and director compensation
     disclosure adopted by the SEC, Summary Compensation information is excluded
     for the fiscal years ended December 31, 1995 and 1994, as the Bank was not
     a public company during such periods.
(2)  Includes payments under the Bank's Management Incentive Program.
(3)  The Bank also provides certain members of senior management with the use of
     an automobile, club membership dues, and certain other personal benefits.
     Except in the case of Ms. Monti, the aggregate value of such personal
     benefits did not exceed the lesser of $50,000 or 10% of the total annual
     salary and bonus reported for each officer.

(4)  Does not include awards pursuant to the Recognition and Retention Plan, as
     such awards were not earned, vested or granted in 1996. For a discussion of
     the terms of the Recognition Plan which are intended to be adopted by the
     Company, see "--Benefit Plans--Recognition and Retention Plan."

(5)  No stock options or SARs were earned or granted in 1996. For a discussion
     of the Stock Option Plan which is intended to be adopted by the Company,
     see "--Benefit Plans--Stock Option Plan."
(6)  Includes the Bank's contributions or allocations (but not earnings)
     pursuant to the Bank's 401(k) Plan, non-qualified deferred compensation
     plan, split dollar life insurance plans, and income imputed on group term
     life insurance in excess of $50,000 per employee.


REPORT OF INDEPENDENT COMPENSATION CONSULTANT

     Pursuant to regulations of the Department applicable to the Reorganization,
the Bank must obtain the opinion of an independent compensation consultant as to
whether or not the total compensation for the executive officers and
Trustees/Directors of the Bank, viewed as a whole and on an individual basis, is
reasonable and proper in comparison to the compensation provided to executive
officers and directors of similar publicly-traded financial institutions. The
Bank has obtained an opinion from William M. Mercer, Incorporated, which
indicates that, based upon published professional survey data of similarly
situated publicly-traded financial institutions operating in the relevant
markets as of August 1, 1997, with respect to the total cash compensation (base
salary and annual incentive) for executive officers and total compensation for
Trustees of the Bank, such compensation, viewed as a whole on an individual
basis, is reasonable and proper in comparison to the compensation provided to
similarly situated publicly-traded financial institutions, and that, with
respect to the amount of shares of Common Stock expected to be reserved under
the ESOP, the Recognition and Retention Plan and Stock Option Plan as a whole,
such amounts reserved for granting are reasonable in comparison to similar
publicly-traded financial institutions.

EMPLOYMENT AGREEMENTS

     The Bank intends to enter into employment agreements with the Named
Executive Officers and Diane Allegro. The employment agreements will have terms
ranging from twelve to thirty-six months. On each anniversary date, an
employment agreement may be extended for an additional twelve months, so that
the remaining term shall be from twelve to thirty-six months. If the agreement
is not renewed, the agreement will expire at the end of its term. Under the
employment agreements, the current Base Salary for Messrs. Swan, Kolkmeyer,
Berner and for Ms. Monti and Ms.

                                       97
<PAGE>
 
Allegro will be $____________, $ ____________, $ __________, $ __________, and
__________, respectively. The Base Salary may be increased but not decreased.
The employment agreements also provide that the executive will be entitled to
participate in an equitable manner with other executive officers in
discretionary bonuses declared by the Board. In addition to the Base Salary and
bonus, the employment agreements provide for, among other things, participation
in retirement plans and other employee and fringe benefits applicable to
executive personnel. The agreements provide for termination by the Bank for
cause at any time. In the event the Bank involuntarily terminates the
executive's employment for reasons other than for cause, the executive, or in
the event of death, his or her beneficiary would be entitled to severance pay in
an amount equal to three times Base Salary (in the case of Messrs. Swan and
Kolkmeyer), two times Base Salary (in the case of Mr. Berner and Ms. Monti), and
one times Base Salary (in the case of Ms. Allegro). For these purposes,
involuntary termination includes a constructive termination where the Bank (i)
fails to appoint or reappoint the executive to his or her present position, (ii)
materially changes the executive's functions, duties or responsibilities, which
change would cause the executive's position to become one of lesser
responsibility, importance or scope, (iii) relocates the executive's place of
employment by more than 100 miles, (iv) liquidates or dissolves other than in
connection with a reorganization that does not affect the executive's status, or
(v) a breach of the employment agreement. The Bank would also continue the
executive's health coverage through the remaining term of the employment
agreement. In the event the payments to the executive would include an "excess
parachute payment" as defined by Code Section 280G (relating to payments made in
connection with a change in control), the payments would be reduced in order to
avoid having an excess parachute payment.

     In the event of an executive's death while employed under an employment
agreement, the Bank will pay the executive's estate the executive's salary
through the end of the calendar month in which the executive dies. If the
executive becomes disabled (as defined in the Bank's disability plan), the
employment agreement will remain in effect through the term of the agreement,
except that the executive's salary payments will be reduced by any disability
insurance payments made to the executive.

BENEFIT PLANS

     The Bank's current tax-qualified employee pension benefit plans consist of
a defined benefit pension plan and a profit sharing plan with a salary deferral
feature under section 401(k) of the Code. As a result of the Reorganization, the
Company and the Bank will be able to compensate employees with stock-based
compensation pursuant to the ESOP, and employees, officers and directors with
stock-based compensation pursuant to a Recognition and Retention Plan and the
Stock Option Plan described below.

     DEFERRED COMPENSATION PLAN. The Bank has adopted the Lockport Savings Bank
Deferred Compensation Plan ("Non-qualified Plan") for the benefit of certain
senior executives of the Bank that it has designated to participate in the plan.
Under the Non-qualified Plan, the Bank annually credits an executive's deferred
compensation account with an amount determined in the sole discretion of the
Board. The amounts credited to the executive's deferred compensation account are
annually credited with earnings, at a rate determined in the sole discretion of
the Board. An executive will vest in amounts credited to his account at the rate
of 20% per year, beginning in the second year of participation in the Non-
qualified Plan until the executive is fully vested after 6 years of
participation. For these purposes, an executive's years of participation will be
equal to the executive's number of whole years of employment with the Bank
measured from the date that an Executive becomes a participant under the Plan.
Notwithstanding the above, an Executive shall be fully vested in his deferred
compensation account upon attaining age 60 with five years of participation or
in the event of a change in control of the Bank. Benefits are payable to the
executive in fifteen substantially equal annual payments commencing (i) 30 days
after the executive has attained age 60, or (ii) 30 days after the executive
terminates employment, if after age 60, or due to disability. In the event of
the executive's death after benefits commence, the Bank will pay the remaining
benefits to the executive's beneficiary over the remainder of the payment term.
In the event of the executive's death after termination of employment but prior
to commencement of benefit payments, the Bank will pay the executive's benefit
to the executive's beneficiary in fifteen substantially equal annual payments
commencing within 30 days of the executive's death. In the event of the
executive's death prior to termination of employment, the executive will forfeit
all benefits under the Non-qualified Plan. In the event of an unforeseeable
emergency which will result in a severe financial

                                       98
<PAGE>
 
hardship, the executive may request a distribution of all or part of his
benefits or may request an acceleration of benefits that are being paid to him,
as applicable.

     Messrs. Swan, Kolkmeyer, and Berner and Ms. Monti are participants in the
Non-qualified Plan. As of December 31, 1996, Messrs. Swan, Kolkmeyer, and Berner
and Ms. Monti, had $102,380, $41,754, and $21,396 and $7,643, respectively,
credited to their deferred compensation accounts.

     Defined Benefit Pension Plan. The Bank maintains the Retirement Plan of
Lockport Savings Bank in RSI Retirement Trust ("Retirement Plan") which is a
qualified, tax-exempt defined benefit plan. Employees age 21 or older who have
worked at the Bank for a period of one year and have been credited with 1,000 or
more hours of service with the Bank during the year are eligible to accrue
benefits under the Retirement Plan, provided, however that leased employees,
employees paid on an hourly or contract basis, and employees employed off-site
in connection with the operation or maintenance of properties acquired through
foreclosure or deed are not eligible to participate. The Bank contributes each
year, if necessary, an amount to the Retirement Plan to satisfy the actuarially
determined minimum funding requirements in accordance with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). For the plan year
ending September 30, 1997, a contribution of $105,827 was required to be made to
the Retirement Plan. At September 30, 1997, the market value of the Retirement
Plan trust fund equaled approximately $9.2 million.

     In the event of retirement at normal retirement age (i.e., the later of age
65 or the 5th anniversary of participation in the Retirement Plan), the plan is
designed to provide a single life annuity. For a married participant, the normal
form of benefit is an actuarially reduced joint and survivor annuity where, upon
the participant's death, the participant's spouse is entitled to receive a
benefit equal to 50% of that paid during the participant's lifetime.
Alternatively, a participant may elect (with proper spousal consent, if
necessary) a joint and 100% survivor annuity, or an annuity payable for a period
certain and life. All forms in which a participant's benefit may be paid will be
actuarially equivalent to the single life annuity. The retirement benefit
provided is an amount equal to 2% (1.25% as of October 1, 1998) of a
participant's average annual earnings multiplied by the participant's years of
credited service (up to a maximum of 30 years). Retirement benefits are also
payable upon retirement due to early and late retirement or death. A reduced
benefit is payable upon early retirement at age 60, at or after age 55 and the
completion of 20 years of vested service with the Bank, or after completion of
30 years of vested service. Upon termination of employment other than as
specified above, a participant who has five years of vested service after age 18
is eligible to receive his or her accrued benefit commencing, generally, on such
participant's normal retirement date.

     The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1997, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.

<TABLE> 
<CAPTION> 
              Final
             Average                          Years of Service and Benefit Payable at Retirement
                                              --------------------------------------------------
           Compensation                           15            20           25            30
           ------------                       -----------  -----------  -----------  -----------
           <S>                            <C>            <C>             <C>             <C> 
             $50,000                      $    15,000    $     20,000    $    25,000     $   30,000
             $75,000                      $    22,500    $     30,000    $    37,500     $   45,000
            $100,000                      $    30,000    $     40,000    $    50,000     $   60,000
            $125,000                      $    37,500    $     50,000    $    62,500     $   75,000
       $160,000 and above                 $    48,000    $     64,000    $    80,000     $   96,000
</TABLE> 

     As of September 30, 1997, Messrs. Swan, Kolkmeyer and Berner and Ms. Monti
had 10, 7, 6 and 4 years of credited service (i.e., benefit service) under the
Retirement Plan, respectively.

     401(K) PLAN. The Bank maintains the Lockport Savings Bank 401(k) Plan (the
"401(k) Plan") which is a qualified, tax-exempt profit sharing plan with a
salary deferral feature under Section 401(k) of the Code. All employees

                                       99
<PAGE>
 
who have attained age 21 and have completed one year of employment during which
they worked at least 1,000 hours are eligible to participate. Eligible employees
are entitled to enter the 401(k) Plan on a monthly basis.

     Under the 401(k) Plan, participants are permitted to make salary reduction
contributions (in whole percentages) equal to the lesser of (i) from 1% to 15%
of compensation or (ii) $9,500 (as indexed annually). For these purposes,
"compensation" includes wages reported on federal income tax form W-2, excluding
bonuses, but does not include compensation in excess of the Code Section
401(a)(17) limits (i.e., $160,000 in 1997). The Bank will match 50% of the first
6% of salary that a participant contributes to the 401(k) Plan. All
contributions and earnings are fully and immediately vested. A participant may
withdraw salary reduction contributions (and earnings) in the event the
participant suffers a financial hardship.

     The 401(k) Plan permits employees to direct the investment of his or her
own accounts into various investment options. In connection with the Offering,
the 401(k) Plan intends to offer participants the opportunity to invest in an
"Employer Stock Fund" which intends to purchase Common Stock in the Offering.
Each participant who directs the Trustee to invest all or part of his or her
account in the Employer Stock Fund will have assets in his or her account
applied to the purchase of shares of Common Stock. Participants will be entitled
to direct the Trustee as to how to vote his or her allocable shares of Common
Stock.

     Plan benefits will be paid to each participant in the form of a single life
annuity (or joint and survivor annuity if married) upon retirement unless an
alternate form of distribution (single sum annuity for a period certain or life,
or equal payments over a fixed period) is selected. Normal retirement age under
the plan is age 65. Early retirement age is the earliest of age 59 1/2 or the
date on which a participant ceases working for the Bank.

     At December 31, 1996, the market value of the 401(k) Plan equaled
approximately $3.7 million. The Bank's matching contribution to the 401(k) Plan
for the Plan year ended December 31, 1996, was approximately $169,000.

     EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank intends to implement an
Employee Stock Ownership Plan (the "ESOP") in connection with the
Reorganization. Employees with at least one year of employment with the Bank and
who have attained age 21 are eligible to participate. As part of the
Reorganization, the ESOP intends to borrow funds from the Company and use those
funds to purchase a number of shares equal to up to 8.0% of the Common Stock to
be sold in the Offering. Collateral for the loan will be the Common Stock
purchased by the ESOP. The loan will be repaid principally from the Bank's
discretionary contributions to the ESOP over a period of up to 30 years. It is
anticipated that the interest rate for the loan will be equal to the prime rate
published in The Wall Street Journal at the time of the Offering. Shares
purchased by the ESOP will be held in a suspense account for allocation among
participants as the loan is repaid.

     Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of compensation in the year of allocation. For
this purpose, compensation is defined as wages reported on federal income tax
form W-2 but not in excess of the Code Section 401(a)(17) limit. Participants in
the ESOP will receive credit for up to 2 years of service prior to the effective
date of the ESOP. Benefits generally vest over a six year period at the rate of
20% per year, beginning in the second year of service, until a participant is
100% vested after six years or upon normal retirement (as defined in the ESOP),
disability, or death of the participant. A participant who terminates employment
for reasons other than death, retirement, or disability prior to six years of
credited service will forfeit the nonvested portion of his benefits under the
ESOP. Benefits will be payable in the form of Common Stock and cash upon death,
retirement, early retirement, disability or separation from service. The Bank's
contributions to the ESOP are discretionary, subject to the loan terms and tax
law limits, and, therefore, benefits payable under the ESOP cannot be estimated.
In November 1993, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 93-6, which requires the Bank to
record compensation expense in an amount equal to the fair market value of the
shares released from the suspense account each year.

                                      100
<PAGE>
 
     In connection with the establishment of the ESOP, the Bank will establish a
committee of non-employee directors to administer the ESOP. The Bank will either
appoint its non-employee directors or an independent financial institution to
serve as trustee of the ESOP. The ESOP committee may instruct the trustee
regarding investment of funds contributed to the ESOP. The ESOP trustee, subject
to its fiduciary duty, must vote all allocated shares held in the ESOP in
accordance with the instructions of participating employees. Under the ESOP,
nondirected shares, and shares held in the suspense account, will be voted in a
manner calculated to most accurately reflect the instructions it has received
from participants regarding the allocated stock so long as such vote is in
accordance with the provisions of ERISA.

     STOCK OPTION PLAN. At a meeting of the Company's shareholders to be held no
earlier than six months after the completion of the Reorganization, the Board of
Directors intends to submit for shareholder approval a Stock Option Plan for
directors and officers of the Bank and of the Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10% of the shares
sold in the Offering would be reserved for issuance by the Company upon the
exercise of the stock options granted under the Stock Option Plan. Ten percent
of the shares sold in the Offering would amount to867,747 shares, 1,020,911
shares, 1,174,048 shares or 1,350,155 shares at the minimum, mid-point, maximum
and adjusted maximum of the Estimated Valuation Range, respectively. If the plan
is approved within one year of the completion of the Reorganization, no options
would be granted under the Stock Option Plan until the date on which shareholder
approval is received.

     The exercise price of the options granted under the Stock Option Plan will
be equal to the fair market value of the shares on the date of grant of the
stock options. If the Stock Option Plan is adopted within one year following the
Offering, options will become exercisable at a rate of 20% at the end of each
twelve (12) months of service with the Bank after the date of grant, subject to
early vesting in the event of death or disability. Options granted under the
Stock Option Plan would be adjusted for capital changes such as stock splits and
stock dividends. Notwithstanding the foregoing, awards will be 100% vested upon
termination of employment due to death or disability, and if the Stock Option
Plan is adopted more than 12 months after the Offering, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
Under FDIC rules, if the Stock Option Plan is adopted within the first 12 months
after completion of the Offering, no individual officer can receive more than
25% of the awards under the plan, no outside director can receive more than 5%
of the awards under the plan, and all outside directors as a group can receive
no more than 30% of the awards under the plan in the aggregate.

     The Stock Option Plan would be administered by a Committee of non-employee
members of the Company's Board of Directors. Options granted under the Stock
Option Plan to employees could be "incentive" stock options designed to result
in a beneficial tax treatment to the employee but no tax deduction to the
Company. Non-qualified stock options could also be granted under the Stock
Option Plan, and will be granted to the non-employee directors who receive
grants of stock options. In the event an option recipient terminated his
employment or service as an employee or director, the options would terminate
during certain specified periods.

     RECOGNITION AND RETENTION PLAN. At a meeting of the Company's shareholders
to be held no earlier than six months after the completion of the
Reorganization, the Board of Directors also intends to submit a Recognition and
Retention Plan for shareholder approval. The Recognition and Retention Plan will
provide the Bank's directors and officers an ownership interest in the Company
in a manner designed to encourage them to continue his or her service with the
Bank. The Bank will contribute funds to the Recognition and Retention Plan from
time to time to enable it to acquire an aggregate amount of Common Stock equal
to up to 4% of the shares of Common Stock sold in the Offering, either directly
from the Company or in open market purchases. Four percent of the shares sold in
the Offering would amount to 347,109 shares, 408,364 shares, 469,619 shares or
540,062 shares at the minimum, midpoint, maximum and adjusted maximum of the
Estimated Valuation Range, respectively. In the event that additional authorized
but unissued shares would be acquired by the Recognition and Retention Plan
after the Offering, the interests of existing shareholders would be diluted. The
executive officers and directors will be awarded Common Stock under the
Recognition and Retention Plan without having to pay cash for the shares. If the
plan is adopted within one year of completion of the Reorganization, no awards
under the Recognition and Retention Plan would be made until the date the
Recognition and Retention Plan is approved by the Company's shareholders.

                                      101
<PAGE>
 
     Awards under the Recognition and Retention Plan would be nontransferable
and nonassignable, and during the lifetime of the recipient could only be earned
by the director or officer. If the Recognition and Retention Plan is adopted
within one year following completion of the Offering, the shares which are
subject to an award would vest and be earned by the recipient at a rate of 20%
of the shares awarded at the end of each full twelve (12) months of service with
the Bank after the date of grant of the award. Awards would be adjusted for
capital changes such as stock dividends and stock splits. Notwithstanding the
foregoing, awards would be 100% vested upon termination of employment or service
due to death or disability, and if the Recognition and Retention Plan is adopted
more than 12 months after completion of the Reorganization, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
If employment or service were to terminate for other reasons, the award
recipient would forfeit any nonvested award. If employment or service is
terminated for cause (as would be defined in the Recognition and Retention
Plan), shares not already delivered under the Recognition and Retention Plan
would be forfeited. Under FDIC rules, if the Recognition and Retention Plan is
adopted within the first 12 months after completion of the Reorganization and
Offering, no individual officer can receive more than 25% of the awards under
the plan, no outside Trustee can receive more than 5% of the awards under the
plan, and all outside Trustees as a group can receive no more than 30% of the
awards under the plan in the aggregate.

     When shares become vested under the Recognition and Retention Plan, the
participant will recognize income equal to the fair market value of the Common
Stock earned, determined as of the date of vesting, unless the recipient makes
an election under ss. 83(b) of the Code to be taxed earlier. The amount of
income recognized by the participant would be a deductible expense for tax
purposes for the Company. If the Recognition and Retention Plan is adopted
within one year following completion of the Reorganization and Offering,
dividends and other earnings will accrue and be payable to the award recipient
when the shares vest. If the Recognition and Retention Plan is adopted within
one year following completion of the Reorganization and Offering, shares not yet
vested under the Recognition and Retention Plan will be voted by the trustee of
the Recognition and Retention Plan, taking into account the best interests of
the recipients of the Recognition and Retention Plan awards. If the Recognition
and Retention Plan is adopted more than one year following completion of the
Reorganization and Offering, dividends declared on unvested shares will be
distributed to the participant when paid, and the participant will be entitled
to vote the unvested shares.

INDEBTEDNESS OF MANAGEMENT

     Under New York Banking law, the Bank, as a mutual institution, cannot make
a loan to a Trustee or a person who is an "executive officer" for regulatory
purposes, except for loans made to executive officers that are secured by a
first mortgage on a primary residence or by a deposit account at the Bank. Any
such loans that are outstanding have been made in the ordinary course of
business on the same terms and conditions as the Bank would make to any other
customer and do not involve more than a normal risk of collectibility or present
other unfavorable features. Following the Reorganization, the Bank will not be
subject to this restriction in connection with loans to Directors and executive
officers.

                        THE REORGANIZATION AND OFFERING

     THE  SUPERINTENDENT  HAS  APPROVED  THE PLAN AND THE  OFFERING OF THE
COMMON  STOCK  SUBJECT  TO  THE  APPROVAL  OF  THE  BANK'S  DEPOSITORS  AND  THE
SATISFACTION OF CERTAIN CONDITIONS IMPOSED BY THE SUPERINTENDENT.  HOWEVER, SUCH
APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION  OR ENDORSEMENT OF THE OFFERING OR
THE PLAN BY THE SUPERINTENDENT.

DESCRIPTION OF AND REASONS FOR THE REORGANIZATION

     Our Board of Trustees unanimously adopted the Plan and the Superintendent
has approved the Plan of Reorganization (the "Plan"). Pursuant to our Plan, we
will reorganize into what we call a "two-tier" mutual holding company structure.
We call it a two-tier structure because we will have two levels of holding
companies--a "mid-tier" stock holding company and a "top-tier" mutual holding
company. Under the terms of the Plan (i) we will form the Company as a Delaware
corporation; (ii) we will form the Mutual Holding Company as a New York mutual
holding

                                      102
<PAGE>
 
company; (iii) we will reorganize the Bank into a capital stock form of
organization and issue 100% of our to-be outstanding common stock to the
Company; and (iv) the Company will issue shares of Common Stock to the public
and the Mutual Holding Company. The number of shares of Common Stock sold to
depositors and the public pursuant to this Prospectus will be equal to 45.4% of
the shares issued in the Reorganization and the number of shares issued to the
Mutual Holding Company will be equal to 53.3% of the shares issued in the
Reorganization. In this Prospectus we will refer to all of these steps that are
part of this transaction as the "Reorganization," and we will refer to the
issuance of 45.4% of the Company's Common Stock pursuant to this Prospectus as
the "Offering." The two-tier mutual holding company structure is most easily
understood by considering the following schematic:

                                                                               
       ------------------------            ----------------------              
                                                                               
          The Mutual Holding                         Public                    
               Company                            Stockholders                 
          (a New York mutual                                                   
            holding company)                                                   
       ------------------------            -----------------------             
                      54% of the                     46% of the                
                       Common                         Common                   
                        Stock                          Stock                   
       -----------------------------------------------------------             
                                                                               
                  The Company (a Delaware corporation)                         
                                                                               
       -----------------------------------------------------------             
                                      100% of the                              
                                     Common Stock                              
                                                                               
       -----------------------------------------------------------             
                                                                               
                                The Bank                                       
                      (a New York stock savings bank)                          
                                                                               
        ----------------------------------------------------------              


     In adopting the Plan, our Board of Trustees determined that the
Reorganization is in the best interest of the Bank. The primary purpose of the
Reorganization is to establish a structure that will enable us to compete and
expand more effectively in the financial services marketplace, and that will
enable our depositors, employees, management and trustees to obtain an equity
ownership interest in the Bank. Our new structure will permit the Company to
issue capital stock, which is a source of capital not available to a mutual
savings bank, and we will take advantage of this new ability by issuing Common
Stock in the Offering. Since the Company is not offering all of its Common Stock
for sale to depositors and the public in the Offering (but is issuing a majority
of its stock to the Mutual Holding Company), the Reorganization will result in
less capital raised in comparison to a standard mutual-to-stock conversion. The
Reorganization, however, will also offer the Bank the opportunity to raise
additional capital since the stock held by the Mutual Holding Company will be
available for sale in the future in the event of the Mutual Holding Company
decides to convert to the capital stock form of organization. See "Regulation--
Mutual Holding Company Regulation." The Reorganization will also give us greater
flexibility to structure and finance the expansion of our operations, including
the potential acquisition of other financial institutions, and to diversify into
other financial services. The holding company form of organization is expected
to provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, as well as other companies. Although
we have no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. Lastly, the Reorganization
will enable us to better manage our capital by giving us broader investment
opportunities through the holding company structure, and enable us to distribute
capital to stockholders of the Company in the form of dividends and stock
repurchases. Because only a minority of the Common

                                      103
<PAGE>
 
Stock will be offered for sale in the Offering, our current mutual form of
ownership and our ability to remain an independent savings bank and to provide
community-oriented financial services will be preserved through the mutual
holding company structure.

     The Board of Trustees believes that these advantages outweigh the potential
disadvantages of the mutual holding company structure, which may include: (i)
the inability of stockholders other than the Mutual Holding Company to obtain
majority ownership of the Company and the Bank, which may result in the
perpetuation of the management and Board of Directors of the Bank and the
Company; and (ii) that the mutual holding company structure is a relatively new
form of corporate ownership, and new regulatory policies relating to the mutual
interest in the Mutual Holding Company that may be adopted from time-to-time may
have an adverse impact on minority stockholders. A majority of the voting stock
of the Company will be owned by the Mutual Holding Company, which is a mutual
institution that will be controlled by the existing Board of Trustees of the
Bank. While this structure will permit management to focus on the Company's and
the Bank's long-term business strategy for growth and capital redeployment
without undue pressure from stockholders, it will also serve to perpetuate the
existing management and trustees of the Bank. The Mutual Holding Company will be
able to elect all members of the Board of Directors of the Company, and will be
able to control the outcome of all matters presented to the stockholders of the
Company for resolution by vote except for certain matters that must be approved
by more than a majority of stockholders of the Company. No assurance can be
given that the Company will not take action adverse to the interests of the
minority stockholders. For example, the Company could revise the dividend policy
or defeat a candidate for the Board of Directors of the Bank or other proposals
put forth by the minority stockholders.

     The Reorganization does not preclude the conversion of the Mutual Holding
Company from the mutual to stock form of organization which would be effected
through a merger of the Mutual Holding Company into the Company or the Bank and
the concurrent sale of the shares held by the Mutual Holding Company in a
subscription offering. A conversion of the Mutual Holding Company from the
mutual to stock form of organization is not anticipated for the foreseeable
future.

     Following the completion of the Reorganization, all depositors who had
liquidation rights with respect to the Bank as of the effective date of the
Reorganization will continue to have such rights solely with respect to the
Mutual Holding Company so long as they continue to hold deposit accounts with
the Bank. In addition, all persons who become depositors of the Bank subsequent
to the Reorganization will have such liquidation rights with respect to the
Mutual Holding Company. Borrowers currently do not have ownership or voting
rights in the Bank and will not receive ownership or voting rights with respect
to the Mutual Holding Company.

     All insured deposit accounts of the Bank that are transferred to the Bank
will continue to be federally insured by the FDIC and the BIF up to the legal
maximum limit in the same manner as deposit accounts existing in the Bank
immediately prior to the Reorganization. Upon completion of the Reorganization,
the Bank may exercise any and all powers, rights and privileges of, and shall be
subject to all limitations applicable to, capital stock savings banks under New
York law. As long as the Mutual Holding Company is in existence, the Mutual
Holding Company will be required to own at least 51% of the voting stock of the
Company, and the Company will own 100% of the voting stock of the Bank. The Bank
and the Company may issue any amount of non-voting stock or debt to persons
other than the Mutual Holding Company.

THE OFFERING

     Concurrent with the Reorganization, the Company is offering shares of
Common Stock to persons other than the Mutual Holding Company. An offering of
between 8,677,747 and 11,740,482 shares of the Common Stock (subject to
adjustment to up to pursuant to this Prospectus is being made concurrently with
the Reorganization. The shares of Common Stock that will be sold in the Offering
will constitute no more than 45.4% of the shares that will be outstanding after
the Offering (the "Minority Ownership Interest"). Following the Reorganization
and the Offering, the Company also will be authorized to issue additional Common
Stock or preferred stock to persons other than the Mutual Holding Company,
without prior approval of the holders of the Common Stock.

                                      104
<PAGE>
 
     The shares of Common Stock are being offered for sale at a fixed price of
$10.00 per share in the Subscription Offering pursuant to subscription rights in
the following order of priority to: (i) holders of deposit accounts with a
balance of $100 or more on August 31, 1996 ("Eligible Account Holders"); (ii)
the Bank's Employee Plans, including the ESOP; and (iii) depositors whose
accounts in the Bank totaled $100 or more on December 31, 1997 ("Supplemental
Eligible Account Holders"). Concurrently, and subject to the prior rights of
holders of subscription rights, any shares of Common Stock not subscribed for in
the Subscription Offering are being offered in the Community Offering at $10.00
per share to certain members of the general public, with a preference given to
natural persons residing in Niagara, Orleans, Erie and Genesee Counties, New
York. Subscription rights will expire if not exercised by 5:00 p.m., New York
time, on March _____, 1998 unless extended by the Bank and the Company.

STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED

     The Plan of Reorganization and Federal and state regulations require that
the aggregate purchase price of the Common Stock sold in the Offering must be
based on the appraised pro forma market value of the Common Stock, as determined
by an independent valuation. The Bank has retained RP Financial to make such
valuation. For its services in making such appraisal, RP Financial will receive
a fee of $55,000 (which amount does not include a fee of $7,500 to be paid to RP
Financial for assistance in preparation of a business plan). The Bank and the
Company have agreed to indemnify RP Financial and its employees and affiliates
against certain losses (including any losses in connection with claims under the
federal securities laws) arising out of its services as appraiser, except where
RP Financial's liability results from its negligence or bad faith.

     The Independent Valuation was prepared by RP Financial in reliance upon the
information contained in the Prospectus, including the Consolidated Financial
Statements. RP Financial also considered the following factors, among others:
the present and projected operating results and financial condition of the Bank
and the economic and demographic conditions in the Bank's existing marketing
area; certain historical, financial and other information relating to the Bank;
a comparative evaluation of the operating and financial statistics of the Bank
with those of other publicly traded savings mutual holding companies; the
aggregate size of the Offering; the impact of the Reorganization on the Bank's
stockholders' equity and earnings potential; the proposed dividend policy of the
Company; and the trading market for securities of comparable institutions and
general conditions in the market for such securities.

     The Independent Valuation states that as of November 28, 1997, the
estimated pro forma market value of the Common Stock ranged from a minimum of
$191,125,000 to a maximum of $258,750,000 with a midpoint of $225,000,000 (the
Estimated Valuation Range). The Board determined to offer the shares in the
Offering at the Subscription Price of $10.00 per share. Based on the Estimated
Valuation Range and the Subscription Price, the number of shares of Common Stock
that the Company will issue will range from between 19,125,000 shares to
25,875,000 shares, with a midpoint of 22,500,000 shares. The Board determined to
offer 45.4% of such shares, or between 8,677,747 shares and 11,740,482 shares
with a midpoint of 10,209,115 shares (the Offering Range), to depositors and the
public pursuant to this Prospectus. In addition, shares are being issued to the
Foundation as part of the Reorganization, which will result in Minority
Stockholders owning 46.7% of the shares of the Common Stock outstanding at the
conclusion of the Reorganization. The 53.3% of the shares of the Company's
Common Stock that are not sold in the Offering or contributed to the Foundation
will be issued to the Mutual Holding Company.

     The Board reviewed the Independent Valuation and, in particular, considered
(i) the Bank's financial condition and results of operations for the nine months
ended September 30, 1997, and the year ended December 31, 1996, (ii) financial
comparisons of the Bank in relation to other financial institutions primarily
including other publicly traded mutual holding companies, and (iii) stock market
conditions generally and in particular for financial institutions, all of which
are set forth in the Independent Valuation. The Board also reviewed the
methodology and the assumptions used by RP Financial in preparing the
Independent Valuation. The Estimated Valuation Range may be amended with the
approval of the Superintendent and the FDIC (if required), if necessitated by
subsequent developments in the financial condition of the Bank or market
conditions generally.

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     Following commencement of the Subscription Offering, the maximum of the
Estimated Valuation Range may be increased by up to 15% to up to $297,562,500,
which will result in a corresponding increase in the maximum of the Offering
Range to up to 13,501,554 shares to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
Estimated Valuation Range and the minimum of the Offering Range may not be
decreased without a resolicitation of subscribers. The Subscription Price of
$10.00 per share will remain fixed. See "--Limitations on Common Stock
Purchases" as to the method of distribution and allocation of additional shares
that may be issued in the event of an increase in the Offering Range to fill
unfilled orders in the Subscription and Community Offerings.

     The Independent Valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the Consolidated
Financial Statements and other information provided by the Bank, nor did RP
Financial value independently the assets or liabilities of the Bank. The
Independent Valuation considers the Bank as a going concern and should not be
considered as an indication of the liquidation value of the Bank. Moreover,
because such valuation is necessarily based upon estimates and projections of a
number of matters, all of which are subject to change from time to time, no
assurance can be given that persons purchasing such shares in the Offering will
thereafter be able to sell such shares at prices at or above the Subscription
Price.

     The Independent Valuation will be updated at the time of the completion of
the Offering. If the update to the Independent Valuation at the conclusion of
the Offering results in an increase in the maximum of the Estimated Valuation
Range to more than $297,562,500 and a corresponding increase in the Offering
Range to more than 13,501,554 shares, or a decrease in the minimum of the
Estimated Valuation Range to less than $191,250,000 and a corresponding decrease
in the Offering Range to fewer than 8,677,747 shares, then the Company, after
consulting with the Superintendent and the FDIC, may terminate the Plan and
return all funds promptly with interest at the Bank's passbook rate of interest
on payments made by check, certified or teller's check, bank draft or money
order, extend or hold a new Subscription Offering, Community Offering, or both,
establish a new Offering Range, commence a resolicitation of subscribers or take
such other actions as permitted by the Superintendent and the FDIC in order to
complete the Reorganization and the Offering. In the event that a resolicitation
is commenced, unless an affirmative response is received within a reasonable
period of time, all funds will be promptly returned to investors as described
above. A resolicitation, if any, following the conclusion of the Subscription
and Community Offerings would not exceed 45 days unless further extended by the
Superintendent and the FDIC for periods of up to 90 days not to extend beyond 24
months following the special meeting of depositors, or ____________, 2000.

     An increase in the Independent Valuation and the number of shares to be
issued in the Offering would decrease both a subscriber's ownership interest and
the Company's pro forma earnings and stockholders equity on a per share basis
while increasing pro forma earnings and stockholder's equity on an aggregate
basis. A decrease in the Independent Valuation and the number of shares to be
issued in the Offering would increase both a subscriber's ownership interest and
the Company's pro forma earnings and stockholder's equity on a per share basis
while decreasing pro forma net income and stockholder's equity on an aggregate
basis. For a presentation of the effects of such changes, see "Pro Forma Data."

     Copies of the appraisal report of RP Financial and the detailed memorandum
of the appraiser setting forth the method and assumptions for such appraisal are
available for inspection at the Main Office of the Bank and the other locations
specified under "Additional Information."

     No sale of shares of Common Stock may be consummated unless, prior to such
consummation, RP confirms to the Bank and the Superintendent that, to the best
of its knowledge, nothing of a material nature has occurred that, taking into
account all relevant factors, would cause RP to conclude that the Independent
Valuation is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the conclusion of the Offering. Any change that
would result in an aggregate purchase price that is below the minimum or above
the maximum of the Estimated Valuation Range would be subject to
Superintendent's approval. If such confirmation is not received, the Bank may
extend the Offering, reopen or commence a new offering, establish a new 
Estimated Valuation Range and commence

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a resolicitation of all purchasers with the approval of the Superintendent or
take such other actions as permitted by the Superintendent in order to complete
the Offering.

PURCHASE PRIORITIES AND METHOD OF OFFERING SHARES

     The Bank shall have the right, in its sole discretion, to determine whether
prospective purchasers are "residents," "associates," or "acting in concert" as
defined by the Plan and in interpreting any and all other provisions of the
Plan. All such determinations are in the sole discretion of the Bank, and may be
based on whatever evidence the Bank chooses to use in making any such
determination.

     Subject to the preceding paragraph and the limitations set forth in the "--
Limitations upon Purchases of Common Stock" section, the priorities for the
purchase of shares are as follows:

     PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder be given
the opportunity to purchase up to 20,000 shares, or $200,000, of Common Stock;
provided that the Company may, in its sole discretion and without further notice
to or solicitation of subscribers or other prospective purchasers, increase such
maximum purchase limitation to up to 5% of the maximum number of shares issued
in the Offering or decrease such maximum purchase limitation to as low as 0.1%
of the maximum number of shares issued in the Offering, subject to the overall
purchase limitation set forth in the section herein titled "Limitations upon
Purchases of Common Stock." If there are insufficient shares available to
satisfy all subscriptions of Eligible Account Holders, shares will be allocated
to Eligible Account Holders so as to permit each such subscribing Eligible
Account Holder to purchase a number of shares sufficient to make his total
allocation equal to the lesser of 100 shares or the number of shares subscribed
for. Thereafter, unallocated shares will be allocated pro rata to remaining
subscribing Eligible Account Holders whose subscriptions remain unfilled in the
same proportion that each such subscriber's aggregate deposit account balances
as of the Eligibility Record Date ("Qualifying Deposits") bears to the total
amount of Qualifying Deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled. Subscription rights to purchase Common Stock
received by executive officers and trustees of the Bank including associates of
executive officers and trustees, based on their increased deposits in the Bank
in the one year preceding the Eligibility Record Date, shall be subordinated to
the subscription rights of other Eligible Account Holders. To ensure proper
allocation of stock, each Eligible Account Holder must list on their
subscription order form all deposit accounts in which they had an ownership
interest as of the Eligibility Record Date.

     PRIORITY 2: TAX-QUALIFIED EMPLOYEE PLANS. The Tax-Qualified Employee Plans
shall be given the opportunity to purchase in the aggregate up to 10% of the
Common Stock issued in the Offering. In the event of an oversubscription in the
Offering, subscriptions for shares by the Tax-Qualified Employee Plans may be
satisfied, in whole or in part, out of authorized but unissued shares of the
Company subject to the maximum purchase limitations applicable to such plans as
set forth in the section herein titled "Limitations Upon Purchases of Common
Stock," or may be satisfied, in whole or in part, through open market purchases
by the Tax-Qualified Employee Plans subsequent to the closing of the Offering.

     PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the Tax-Qualified Employee Plans, each Supplemental Eligible
Account Holder shall have the opportunity to purchase up to 20,000 shares, or
$200,000, of Common Stock; provided that the Company may, in its sole discretion
and without further notice to or solicitation of subscribers or other
prospective purchasers, increase such maximum purchase limitation to up to 5% of
the maximum number of shares issued in the Offering or decrease such maximum
purchase limitation to as low as 0.1% of the maximum number of shares issued in
the Offering subject to the overall purchase limitations set forth in the
section herein titled "Limitations Upon Purchases of Common Stock." In the event
Supplemental Eligible Account Holders subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders and the Tax-
Qualified Employee Plans, exceed available shares, the shares of Common Stock
will be allocated among subscribing Supplemental Eligible Account Holders so as
to permit each subscribing Supplemental Eligible Account Holder to purchase a
number of shares sufficient to make their total allocation equal to the lesser
of 100 shares or the number of shares subscribed for. Thereafter, unallocated
shares will be allocated to each subscribing Supplemental Eligible Account
Holder whose subscription remains unfilled in the

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same proportion that such subscriber's aggregate deposit account balances as of
the Supplemental Eligibility Record Date ("Supplemental Qualifying Deposits")
bear to the total amount of Supplemental Qualifying Deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled.

ESTABLISHMENT OF THE CHARITABLE FOUNDATION

     General. In furtherance of our commitment to the communities that we serve,
we intend to voluntarily establish a charitable foundation in connection with
the Reorganization. The Plan provides that the Bank and the Company will
establish the Foundation, which will be incorporated under Delaware law as a 
non-stock corporation and will be funded with cash and shares of Common Stock
contributed by the Company. We will make a contribution to the Foundation, in
the form of shares of Common Stock and cash, in a total amount equal to 5% of
the aggregate Subscription Price of the shares of Common Stock sold in the
Offering. The number of shares of Common Stock to be contributed to the
Foundation will equal 3% of the shares sold in the Offering. The balance of the
contribution will consist of cash. The contribution of Common Stock to the
Foundation will be dilutive to the interests of stockholders and will have an
adverse impact on the reported earnings of the Company in 1998, the year in
which the Foundation is established.

     Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and development
activities within the communities that we serve. The Foundation is being formed
as a complement to our existing community activities, not as a replacement for
such activities. While we intend to continue to emphasize community lending and
development activities following the Reorganization, such activities are not our
sole corporate purpose. The Foundation, conversely, will be completely dedicated
to community activities and the promotion of charitable causes, and may be able
to support such activities in ways that are not currently available to the Bank.
We believe that the Foundation will enable the Company and the Bank to assist
our local community in areas beyond community lending and development. We
believe the establishment of a charitable foundation is consistent with the
Bank's commitment to community service. The Board further believes that the
funding of the Foundation with Common Stock of the Company is a means of
enabling the communities served by us to share in the growth and success of the
Company long after completion of the Reorganization. The Foundation will
accomplish that goal by providing for continued ties between the Foundation and
Bank, thereby forming a partnership with the Bank's community. The establishment
of the Foundation will also enable the Company and the Bank to develop a unified
charitable donation strategy and will centralize the responsibility for
administration and allocation of corporate charitable funds. Charitable
foundations have been formed by other financial institutions for this purpose,
among others. We do not, however, expect the contribution to the Foundation to
take the place of our traditional community lending activities.

     Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's initial board of directors will be comprised of persons who are
existing directors and officers of the Company. Subsequent to the
Reorganization, other individuals may be chosen in light of their commitment and
service to charitable and community purposes. The members of the Foundation, who
are comprised of its board members, will elect the directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee. Only
persons serving as directors of the Foundation qualify as members of the
Foundation, with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms. The certificate of incorporation
of the Foundation provides that the corporation is organized exclusively for
charitable purposes, including community development, as set forth in Section
501(c)(3) of the Code. The Foundation's certificate of incorporation further
provides that no part of the net earnings of the Foundation will inure to the
benefit of, or be distributable to its directors, officers or members.

     The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purpose for which the
Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's board of directors will adopt such
a policy upon establishment of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be

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<PAGE>
 
bound by their fiduciary duty to advance the Foundation's charitable goals, to
protect the assets of the Foundation and to act in a manner consistent with the
charitable purpose for which the Foundation is established. The directors of the
Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock of the Company and the
cash held by the Foundation. However, as a condition to receiving the
nonobjection of the Reorganization, the Foundation has been required to commit
to the FDIC and the Department that all shares of Common Stock held by the
Foundation will be voted in the same ratio as all other shares of the Company's
Common Stock on all proposals considered by stockholders of the Company;
provided, however, that, consistent with such condition, the FDIC and the
Department would waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (i) cause a violation of the law
of the State of Delaware; (ii) would cause the Foundation to lose its tax-exempt
status, or cause the Internal Revenue Service to deny the Foundation's request
for a determination that it is an exempt organization or otherwise have a
material and adverse tax consequence on the Foundation; or (iii) would cause the
Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the FDIC and the Department to waive such voting restriction, the
Company's or the Foundation's legal counsel would be required to render an
opinion satisfactory to the FDIC and the Department that compliance with the
voting requirement would have the effect described in clauses (i), (ii) or (iii)
above. Under those circumstances, the FDIC and the Department would grant
waivers of the voting restriction upon submission of such legal opinion(s) by
the Company or the Foundation that are satisfactory to the FDIC and the
Department. In the event that the FDIC and the Department were to waive the
voting requirement, the directors would direct the voting of the Common Stock
held by the Foundation.

     The Foundation's place of business will be located at the Bank's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the Bank.
The board of directors of the Foundation will appoint such officers as may be
necessary to manage the operation of the Foundation. In this regard, it is
expected that the Bank will be required to provide the FDIC with a commitment
that, to the extent applicable, the Bank will comply with the affiliate
restrictions set forth in Sections 23A and 23B of the Federal Reserve Act with
respect to any transactions between the Bank and the Foundation.

     As a private foundation under Section 501(c)(3) of the Code, the Foundation
will be required to distribute annually in grants or donations, a minimum of 5%
of the average fair market value of its net investment assets. One of the
conditions imposed on the gift of Common Stock by the Company is that the amount
of Common Stock that may be sold by the Foundation in any one year shall not
exceed 5% of the average market value of the assets held by the Foundation,
except where the board of directors of the Foundation determines that the
failure to sell an amount of common stock greater than such amount would result
in a longer-term reduction of the value of the Foundation's assets and as such
would jeopardize the Foundation's capacity to carry out its charitable purposes.
Upon completion of the Reorganization and the contribution of shares to the
Foundation, the Company would have 19,125,000, 22,500,000 and 25,875,000 shares
issued and outstanding at the minimum, midpoint and maximum of the Estimated
Valuation Range. Because the Company will have an increased number of shares
outstanding, the voting and ownership interests of shareholders in the Company's
Common Stock would be diluted by 1.3%, as compared to their interests in the
Company if the Foundation was not established. For additional discussion of the
dilutive effect, see "Pro Forma Data."

     Impact on Earnings. The contribution of Common Stock to the Foundation will
have an adverse impact on the Company's and the Bank's earnings in the year in
which the contribution is made. The Company will recognize the full expense in
the amount of the contribution of cash and Common Stock to the Foundation in the
quarter in which it occurs, which is expected to be the second quarter of 1998.
The amount of the contribution will range from $4.3 million to $5.9 million,
based on the minimum and maximum of the Estimated Valuation Range, respectively.
The contribution expense will be partially offset by the tax benefit related to
the expense. The Company and the Bank have been advised by their independent tax
advisors that the contribution to the Foundation will be tax deductible, subject
to an annual limitation based on 10% of the Company's annual taxable income.
Assuming an aggregate contribution of $5.8 million (based on the maximum of the
Estimated Valuation Range), the Company estimates a net tax effected expense of
$3.8 million (based upon a 35% tax rate). Management cannot predict earnings for
1998, but expects that the establishment and funding of the Foundation will have
an adverse impact on the Company's earnings for the year. In addition to the
contribution to the Foundation, the Bank expects in the future to continue
making ordinary charitable contributions within its community

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<PAGE>
 
but the Company and the Bank do not currently anticipate making additional
contributions to the Foundation within the first five years following the
initial contribution.

     Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
would qualify as a Section 501(c)(3) exempt organization under the Internal
Revenue Code of 1986, as amended (the "Code"), and would be classified as a
private foundation. The Foundation will submit a request to the IRS to be
recognized as an exempt organization. The Company and the Bank have received an
opinion of their independent tax advisors that the Foundation would qualify as a
Section 501(c)(3) exempt organization under the Code, except that such opinion
does not consider the impact of the condition to be agreed to by the Foundation
that Common Stock issued to the Foundation be voted in the same ratio as all
other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. Consistent with this condition, in the event that
the Company or the Foundation receives an opinion of their legal counsel that
compliance with the voting restriction would have the effect of causing the
Foundation to lose its tax-exempt status, or otherwise have a material and
adverse tax consequence on the Foundation or subject the Foundation to an excise
tax under Section 4941 of the Code, the FDIC shall waive such voting restriction
upon submission of a legal opinion by the Company or the Foundation that is
satisfactory to the FDIC. The independent tax advisors' opinion further provides
that there is substantial authority for the position that the Company's
contribution of its own stock to the Foundation would not constitute an act of
self-dealing, and that the Company would be entitled to a deduction in the
amount of the fair market value of the stock at the time of the contribution
less the nominal par value that the Foundation is required to pay to the Company
for such stock, subject to an annual limitation based on 10% of the Company's
annual taxable income. The Company, however, would be able to carry forward any
unused portion of the deduction for five years following the contribution.
Assuming the sale of Common Stock at the adjusted maximum of the Estimated
Valuation Range, the Company estimates that all of the deduction should be
deductible over the six-year period. Although the Company and the Bank have
received an opinion of their independent tax advisors that the Company will be
entitled to the deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Foundation as a Section 501(c)(3)
exempt organization or that the deduction will be permitted. In such event, the
Company's tax benefit related to the Foundation would have to be fully expensed,
resulting in a further reduction in earnings in the year in which the IRS makes
such a determination.

     As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the Foundation's fiscal year to maintain its tax-exempt status. The Foundation
will be required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of such
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the Foundation's managers and a concise statement of the purpose of each
grant. The Foundation will also be required to file an annual report with the
Charities Bureau of the Office of the Attorney General of the State of New York.

     Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Reorganization. The establishment of the Foundation
was taken into account by RP Financial in determining the estimated pro forma
market value of the Common Stock of the Company. The aggregate price of the
shares of Common Stock being offered in the subscription and community offerings
is based upon the independent appraisal conducted by RP Financial of the
estimated pro forma market value of the Common Stock of the Company. The pro
forma aggregate price of the Common Stock being offered for sale in the
Reorganization is currently estimated to be between $86.8 million and $117.4
million, with a midpoint of $102.1 million. The pro forma price to book ratio
and the pro forma price to earnings ratio, at and for the nine months ended
September 30, 1997, are 104.7% and 15.6x, respectively, at the midpoint of the
Estimated Valuation Range. In the event that the Reorganization did not include
the Foundation, RP Financial has estimated that the estimated pro forma market
value of the Common Stock being offered for sale in the Offering would be $110.4
million at the midpoint based on a pro forma price to book ratio and the pro
forma price to earnings ratio that of 108.0% and 16.7x, respectively. The amount
of Common Stock being offered for sale in the Reorganization at the

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<PAGE>
 
midpoint of the Estimated Valuation Range is approximately $8.3 million less
than the estimated amount of Common Stock that would be sold in the Offering
without the Foundation based on the estimate provided by RP Financial.
Accordingly, certain accountholders of the Bank who subscribe to purchase Common
Stock in the Subscription Offering would receive fewer shares depending on the
size of a depositor's stock order and the amount of his or her qualifying
deposits in the Bank and the overall level of subscriptions. See "Comparison of
Valuation and Pro Forma Information Without Foundation." This estimate by RP
Financial was prepared solely for purposes of providing subscribers with
information with which to make an informed decision on the Reorganization.

     The decrease in the amount of Common Stock being offered as a result of the
contribution of Common Stock to the Foundation will not have a significant
effect on the Company or the Bank's capital position. The Bank's regulatory
capital is significantly in excess of its regulatory capital requirements and
will further exceed such requirements following the Reorganization. The Bank's
leverage and risk-based capital ratios at September 30, 1997 were 10.75% and
21.74%, respectively. Assuming the sale of shares at the midpoint of the
Estimated Valuation Range, the Bank's pro forma leverage and risk-based capital
ratios at September 30, 1997 would be 13.5% and 26.9%, respectively. On a
consolidated basis, the Company's pro forma stockholders' equity would be $214.6
million, or approximately 17.3% of pro forma consolidated assets, assuming the
sale of shares at the midpoint of the Estimated Price Range. Pro forma
stockholders' equity per share and pro forma net income per share would be $9.55
and $0.48, respectively. If the Foundation was not being established in the
Reorganization, based on the RP Financial estimate, the Company's pro forma
stockholders' equity would be approximately $222.1 million, or approximately
17.5% of pro forma consolidated assets at the midpoint of the estimate, and pro
forma stockholder's equity per share and pro forma net income per share would be
substantially similar with the Foundation as without the establishment of the
Foundation. See "Comparison of Valuation and Pro Forma Information with No
Foundation."

     Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions agreed to by the Foundation in
writing as a condition to receiving the FDIC's non-objection to and
Superintendent's approval of the Reorganization: (i) the Foundation will be
subject to examination by the FDIC and the Department; (ii) the Foundation must
comply with supervisory directives imposed by the FDIC and the Department; (iii)
the Foundation will operate in accordance with written policies adopted by the
board of directors, including a conflict of interest policy; and (iv) any shares
of Common Stock held by the Foundation must be voted in the same ratio as all
other outstanding shares of Common Stock on all proposals considered by
stockholders of the Company; provided, however, that, consistent with the
condition, the FDIC and the Department would waive this voting restriction under
certain circumstances if compliance with the voting restriction would: (a) cause
a violation of the law of the State of Delaware; (b) would cause the Foundation
to lose its tax-exempt status or otherwise have a material and adverse tax
consequence on the Foundation; or (c) would cause the Foundation to be subject
to an excise tax under Section 4941 of the Code. In order for the Foundation's
legal counsel would be required to render an opinion satisfactory to the FDIC
and the Department. There can be no assurances that a legal opinion addressing
these issues could be rendered, or if rendered, that the FDIC and the Department
would grant unconditional waivers of the voting restriction. In no event would
the voting restriction survive the sale of shares of the Common Stock held by
the Foundation.

     Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion of a mutual savings institution to stock form
has only recently occurred. As such, the Foundation, and the Superintendent's
approval of the Reorganization and the FDIC's nonobjection to the Reorganization
may be subject to potential challenges notwithstanding that the Board of
Directors of the Company and the Board of Trustees of the Bank have carefully
considered the various factors involved in the establishment of the Foundation
in reaching their determination to establish the Foundation as part of the
Reorganization. If challenges were to be instituted seeking to require the Bank
to eliminate establishment of the Foundation in connection with the
Reorganization, no assurances can be made that the resolution of such challenges
would not result in a delay in the consummation of the Reorganization or that
any objecting persons would not be ultimately successful in obtaining such
removal or other relief against the Company or the Bank. Additionally, if the
Company and the Bank are forced to eliminate the Foundation, the Company may be
required to resolicit subscribers in the Offerings. 

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COMMUNITY OFFERING

     Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered for sale in a Community Offering. This will involve an offering
of all unsubscribed shares directly to the general public. The Community
Offering, if any, shall be for a period of not more than 45 days unless extended
by the Company and the Bank, and shall commence concurrently with, during or
promptly after the Subscription Offering. The Common Stock will be offered and
sold in the Community Offering, in accordance with FDIC and Department
regulations, so as to achieve the widest distribution of the Common Stock. No
person, by himself or herself, or with an associate or group of persons acting
in concert, may subscribe for or purchase more than $200,000 of Common Stock
offered in the Community Offering. Further, the Company may limit total
subscriptions so as to assure that the number of shares available for the public
offering may be up to a specified percentage of the number of shares of Common
Stock. Finally, the Company may reserve shares offered in the Community Offering
for sales to institutional investors.

     In the event of an oversubscription for shares in the Community Offering,
shares will be allocated (to the extent shares remain available) first to
natural persons residing in Niagara, Orleans, Erie and Genesee Counties, New
York and secondly to natural persons residing in the remaining four counties of
Western New York, Wyoming, Allegany, Cattaraugus and Chautauqua counties (the
"Community"), and then to cover any reservation of shares for institutional
orders, and then to cover the orders of any other person subscribing for shares
in the Community Offering so that each such person may receive 1,000 shares, and
thereafter, on a pro rata basis to such persons based on the amount of their
respective subscriptions.

     The terms "residence," "reside," "resided" or "residing" as used herein
with respect to any person shall mean any person who occupied a dwelling within
the Bank's Community, has an intent to remain within the Community for a period
of time, and manifests the genuineness of that intent by establishing an ongoing
physical presence within the Community together with an indication that such
presence within the Community is something other than merely transitory in
nature.

     The Bank may utilize deposit or loan records or such other evidence
provided to it to make a determination as to whether a person is a resident. In
all cases, however, such a determination shall be in the sole discretion of the
Bank.

     The Bank and the Holding Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person.

SYNDICATED COMMUNITY OFFERING

     Any shares of Common Stock not sold in the Subscription Offering or in the
Community Offering, if any, may be offered for sale to the general public by a
selling group of broker-dealers in a Syndicated Community Offering, subject to
terms, conditions and procedures as may be determined by the Bank and the
Company in a manner that is intended to achieve the widest distribution of the
Common Stock subject to the rights of the Company to accept or reject in whole
or in part all order in the Syndicated Community Offering. It is expected that
the Syndicated Community Offering will commence as soon as practicable after
termination of the Subscription Offering and the Community Offering, if any. The
Syndicated Community Offering shall be completed within 45 days after the
termination of the Subscription Offering, unless such period is extended as
provided herein.

     If for any reason a Syndicated Community Offering of unsubscribed shares of
Common Stock cannot be effected and any shares remain unsold after the
Subscription Offering and the Community Offering, if any, the Boards of
Directors of the Company and the Bank will seek to make other arrangements for
the sale of the remaining shares. Such other arrangements will be subject to the
approval of the Department and the FDIC and to compliance with applicable state
and federal securities laws.

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RESTRICTIONS ON SALE OF STOCK BY TRUSTEES AND OFFICERS

     All shares of the Common Stock purchased by Trustees and officers of the
Bank or the Company in the Offering will be subject to the restriction that such
shares may not be sold or otherwise disposed of for value for a period of one
year following the date of purchase, except for any disposition of such shares
(i) following the death of the original purchaser or (ii) by reason of an
exchange of securities in connection with a merger or acquisition approved by
the applicable regulatory authorities. Sales of shares of the Common Stock by
the Company's directors and officers will also be subject to certain insider
trading and other transfer restrictions under the federal securities laws. See
"Regulation--Federal Securities Laws" and "Description of Capital Stock."

     Each certificate for such restricted shares will bear a legend prominently
stamped on its face giving notice of the restrictions on transfer, and
instructions will be issued to the Company's transfer agent to the effect that
any transfer within such time period of any certificate or record ownership of
such shares other than as provided above is a violation of the restriction. Any
shares of common stock issued pursuant to a stock dividend, stock split or
otherwise with respect to restricted shares will be subject to the same
restrictions on sale.


RESTRICTIONS ON AGREEMENTS OR UNDERSTANDINGS REGARDING TRANSFER OF COMMON STOCK
TO BE PURCHASED IN THE OFFERING

     Prior to the completion of the Offering, no depositor or borrower may
transfer or enter into an agreement or understanding to transfer the legal or
beneficial ownership of the shares of Common Stock to be purchased by such
person in the Offering. Each depositor and borrower who submits an Order Form
will be required to certify that the purchase of Common Stock by such person is
solely for the purchaser's own account and there is no agreement or
understanding regarding the sale or transfer of such shares. The Bank intends to
pursue any and all legal and equitable remedies in the event it becomes aware of
any such agreement or understanding, and will not honor orders reasonably
believed by the Bank to involve such an agreement or understanding.

PROCEDURE FOR PURCHASING SHARES

     To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date, Prospectuses may not be mailed any later than five
days prior to such date or be hand delivered any later than two days prior to
such date. Order forms may only be distributed with a Prospectus.

     Expiration Date. The Offering will terminate at 5:00 p.m. New York Time on
March __, 1998, unless extended by the Bank for up to an additional 45 days or,
if approved by the Superintendent, for an additional period after such 45- day
extension (as so extended, the "Expiration Date"). The Bank is not required to
give purchasers notice of any extension unless the Expiration Date is later than
__________, 1998, in which event purchasers will be given the right to increase,
decrease, confirm, or rescind their orders. If the minimum number of shares
issued in the Offering (_________ shares) is not sold by the Expiration Date,
the Bank may terminate the Offering and promptly refund all orders for Common
Stock. A reduction in the number of shares below the minimum of the Estimated
Valuation Range will not require the approval of depositors or an amendment to
the Independent Valuation. If the number of shares is reduced below the minimum
of the Estimated Valuation Range, purchasers will be given an opportunity to
increase, decrease, or rescind their orders.

     Use of Order Forms. In order to purchase the Common Stock, each purchaser
must complete an Order Form except for certain persons purchasing in the
Syndicated Community Offering as more fully described below. Any person
receiving an Order Form who desires to purchase Common Stock may do so by
delivering (by mail or in person) to the Bank a properly executed and completed
Order Form, together with full payment for the shares purchased. The Order Form
must be received prior to 5:00 p.m. New York Time on March __, 1998. Once
tendered, an Order Form cannot be modified or revoked without the consent of the
Bank. Each person ordering shares is required to represent that they

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are purchasing such shares for their own account. The interpretation by the Bank
of the terms and conditions of the Plan and of the acceptability of the Order
Forms will be final. The Bank is not required to accept copies of Order Forms.

     Payment for Shares. Payment for all shares will be required to accompany
all completed Order Forms for the purchase to be valid. Payment for shares may
be made by (i) check or money order, or (ii) authorization of withdrawal from a
deposit account maintained with the Bank. Appropriate means by which such
withdrawals may be authorized are provided in the Order Forms. Once such a
withdrawal amount has been authorized, a hold will be placed on such funds,
making them unavailable to the depositor until the Offering has been completed
or terminated. In the case of payments authorized to be made through withdrawal
from deposit accounts, all funds authorized for withdrawal will continue to earn
interest at the contract rate until the Offering is completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares; however, if a
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal without penalty, and the remaining balance will earn interest
at the Bank's passbook rate subsequent to the withdrawal. In the case of
payments made by check or money order, such funds will be placed in a segregated
savings account and interest will be paid by the Bank at the Bank's passbook
rate, which was 3.4% on the date of this Prospectus, from the date payment is
received until the Offering is completed or terminated. Such interest will be
paid by check, on all funds held, including funds accepted as payment for shares
of Common Stock, promptly upon completion or termination of the Offering. An
executed Order Form, once received by the Bank, may not be modified, amended or
rescinded without the consent of the Bank, unless the Offering is not completed
by __________, 1998, in which event purchasers may be given the opportunity to
increase, decrease, confirm or rescind their orders for a specified period of
time.

     Depending on market conditions, the Common Stock may be offered for sale to
the general public on a best efforts basis in the Syndicated Community Offering
by a selling group (the "Selling Group") of broker-dealers ("Selected Dealers")
to be managed by CIBC Oppenheimer Corp. and Trident Securities, Inc. CIBC
Oppenheimer Corp. and Trident Securities, Inc., in their discretion, will
instruct Selected Dealers as to the number of shares to be allocated to each
Selected Dealer. Only upon allocation of shares to Selected Dealers may Selected
Dealers take orders from their customers. Investors who desire to purchase
shares in the Community Offering directly through a Selected Dealer, which may
include CIBC Oppenheimer Corp. and Trident Securities, Inc., are advised that
the members of the Selling Group are required either (a) upon receipt of an
executed Order Form or direction to execute an Order Form on behalf of an
investor, to forward the appropriate purchase price to the Bank for deposit in a
segregated account on or before twelve noon, prevailing time, of the business
day next following such receipt or execution; or (b) upon receipt of
confirmation by such member of the Selling Group of an investor's interest in
purchasing shares, and following a mailing of an acknowledgment by such member
to such investor on the business day next following receipt of confirmation, to
debit the account of such investor on the fifth business day next following
receipt of confirmation and to forward the appropriate purchase price to the
Bank for deposit in the segregated account on or before twelve noon, prevailing
time, of the business day next following such debiting. Payment for any shares
purchased pursuant to alternative (a) above must be made by check in full
payment therefor. Payment for shares purchased pursuant to alternative (b) above
may be made by wire transfer to the Bank.

     Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Offering. Individuals who are participants in 
self-directed tax qualified plans maintained by self-employed individuals
("Keogh Plans") may use the assets in their self-directed Keogh Plan accounts to
purchase shares of Common Stock in the Offering. In addition, the provisions of
ERISA and IRS regulations require that executive officers, trustees, and 10%
stockholders who use self-directed IRA funds and/or Keogh Plan accounts to
purchase shares of Common Stock in the Offering, make such purchase for the
exclusive benefit of the IRA and/or Keogh Plan participant.

     If the ESOP purchases shares of the Common Stock, such plan will not be
required to pay for such shares until consummation of the Offering.

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<PAGE>
 
     Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Offering will be mailed by the Bank to the persons entitled
thereto at the registration address noted on the Order Form, as soon as
practicable following consummation of the Offering. Any certificates returned as
undeliverable will be held by the Bank until claimed by persons legally entitled
thereto or otherwise disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of stock which they ordered.

PLAN OF DISTRIBUTION AND SELLING COMMISSIONS

     Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
offices and by CIBC Oppenheimer Corp. and Trident Securities, Inc. All
prospective purchasers are to send payment directly to the Bank, where such
funds will be held in a segregated special escrow account and not released until
the Offering is completed or terminated.

     To assist in the marketing of the Common Stock, the Bank has retained CIBC
Oppenheimer Corp. and Trident Securities, Inc., both of which are broker-dealers
registered with the NASD. CIBC Oppenheimer Corp. and Trident Securities, Inc.
will assist the Bank in the Offering as follows: (i) in training and educating
the Bank's employees regarding the mechanics and regulatory requirements of the
Offering; (ii) in conducting informational meetings for employees, customers and
the general public; (iii) in coordinating the selling efforts in the Bank's
local communities; and (iv) in soliciting orders for Common Stock. For these
services, CIBC Oppenheimer Corp. and Trident Securities, Inc. will receive an
aggregate fee of .95% of the dollar amount of the Common Stock sold in the
Offering to residents of Niagara, Orleans, Erie and Genesee Counties, New York
(and counties contiguous thereto) and .75% of the dollar amount of the Common
Stock sold in the Offering to other persons. If there is a Syndicated Community
Offering, the aggregate fee shall not exceed 4.5% of the Common Stock sold by
CIBC Oppenheimer Corp. and Trident Securities, Inc. and other NASD member firms
under selected dealer agreements.

     The Bank also will reimburse CIBC Oppenheimer Corp. and Trident Securities,
Inc. for its reasonable out-of-pocket expenses (including legal fees and
expenses up to a maximum of $85,000) associated with its marketing effort. The
Bank has made an advance payment of $10,000 to each of CIBC Oppenheimer Corp.
and Trident Securities, Inc. If the Plan is terminated by the Bank, the Offering
is not completed by __________, 1998, or if CIBC Oppenheimer Corp. and Trident
Securities, Inc. terminate their agreement with the Bank in accordance with the
provisions of the agreement, CIBC Oppenheimer Corp. and Trident Securities, Inc.
will only receive reimbursement of their reasonable out-of-pocket expenses. The
Bank will indemnify CIBC Oppenheimer Corp. and Trident Securities, Inc. against
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the Common Stock, including
liabilities under the Securities Act of 1933.

     Trustees and executive officers of the Bank may participate in the
solicitation of offers to purchase Common Stock. Other trained employees of the
Bank may participate in the Offering in ministerial capacities, providing
clerical work in effecting a sales transaction or answering questions of a
ministerial nature. Other questions of prospective purchasers will be directed
to executive officers or registered representatives. The Bank will rely on Rule
3a4-1 of the Exchange Act, so as to permit officers, trustees, and employees to
participate in the sale of the Common Stock. No officer, trustee, or employee of
the Bank will be compensated for his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the Common Stock.

     A Stock Information Center will be established at the Bank's main office,
in an area separated from the Bank's banking operations. Employees will inform
prospective purchasers to direct their questions to the Stock Information Center
and will provide such persons with the telephone number of the Center.

     Other Restrictions. Notwithstanding any other provision of the Plan, no
person is entitled to purchase any Common Stock to the extent such purchase
would be illegal under any federal or state law or regulation (including state

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<PAGE>
 
"blue-sky" laws and regulations), or would violate regulations or policies of
the NASD, particularly those regarding free riding and withholding. The Bank
and/or its agents may ask for an acceptable legal opinion from any purchaser as
to the legality of such purchase and may refuse to honor any such purchase order
if such opinion is not timely furnished. The Plan prohibits the Bank from
lending funds or extending credit to any persons to purchase Common Stock in the
Offering.

LIMITATIONS UPON PURCHASES OF COMMON STOCK

     The following additional limitations have been imposed upon purchases of
shares of Common Stock. Defined terms used in this section and not otherwise
defined in this Prospectus shall have the meaning set forth in the Plan.

     A.   The aggregate amount of outstanding Common Stock of the Company owned
          or controlled by persons other than Mutual Holding Company at the
          close of the Offering shall not exceed 49% of the Company's total
          outstanding Common Stock.

     B.   No Person or group of persons Acting in Concert, may purchase more
          than 40,000 shares, or $400,000, of Common Stock in the Offering,
          except that: (i) the Company may, in its sole discretion and without
          further notice to or solicitation of subscribers or other prospective
          purchasers, increase such maximum purchase limitation to up to 5% of
          the number of shares issued in the Offering; (ii) Tax-Qualified
          Employee Plans may purchase up to 10% of the shares issued in the
          Offering; and (iii) for purposes of this paragraph shares to be held
          by any Tax-Qualified Employee Plan and attributable to a person shall
          not be aggregated with other shares purchased directly by or otherwise
          attributable to such person.

     C.   The aggregate amount of Common Stock acquired in the Offering by all
          Management Persons and their Associates, exclusive of any stock
          acquired by such persons in the secondary market, shall not exceed 25%
          of the outstanding shares of Common Stock of the Company sold in the
          Offering. In calculating the number of shares held by Management
          Persons and their Associates under this paragraph or under the
          provisions of paragraph D below, shares held by any Tax-Qualified
          Employee Benefit Plan or any Non-Tax-Qualified Employee Benefit Plan
          of the Bank that are attributable to such persons shall not be
          counted.

     D.   The aggregate amount of Common Stock acquired in the Offering by all
          Management Persons and their Associates, exclusive of any Common Stock
          acquired by such persons in the secondary market, shall not exceed 25%
          of the stockholders' equity of the Bank. In calculating the number of
          shares held by Management Persons and their Associates under this
          paragraph or under the provisions of paragraph C of this section,
          shares held by any Tax-Qualified Employee Benefit Plan or any Non-Tax-
          Qualified Employee Benefit Plan of the Bank that are attributable to
          such persons shall not be counted.

     E.   The Boards of Directors of the Bank and the Company may, in their sole
          discretion, increase the maximum purchase limitation set forth in
          paragraph B to up to 9.9%, provided that orders for Common Stock in
          excess of 5% of the number of shares of Common Stock issued in the
          Offering shall not in the aggregate exceed 10% of the total shares of
          Common Stock issued in the Offering (except that this limitation shall
          not apply to purchases by Tax-Qualified Employee Plans). If such 5%
          limitation is increased, subscribers for the maximum amount will be,
          and certain other large subscribers in the sole discretion of the
          Company and the Bank may be, given the opportunity to increase their
          subscriptions up to the then applicable limit. Requests to purchase
          additional shares of Common Stock under this provision will be
          determined by the Board of Directors of the Company, in its sole
          discretion.

     F.   In the event of an increase in the total number of shares offered in
          the Subscription Offering due to an increase in the maximum of the
          Estimated Valuation Range of up to 15% (the "Adjusted Maximum"), the
          additional shares will be issued in the following order of priority:
          (i) to fill the Employee Plans' subscription to the Adjusted Maximum;
          (ii) in the event that there is an oversubscription at the Eligible

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<PAGE>
 
          Account Holder, Supplemental Eligible Account Holder, or employee,
          officer and trustee categories, to fill unfulfilled subscriptions of
          such subscribers according to their respective priorities set forth in
          the Plan.

     G.   Notwithstanding any other provision of the Plan, no person shall be
          entitled to purchase any Common Stock to the extent such purchase
          would be illegal under any federal law or state law or regulation or
          would violate regulations or policies of the National Association of
          Securities Dealers, Inc., particularly those regarding free riding and
          withholding. The Company and/or its agents may ask for an acceptable
          legal opinion from any purchaser as to the legality of such purchase
          and may refuse to honor any purchase order if such opinion is not
          timely furnished.

     H.   The Board of Directors of the Company has the right in its sole
          discretion to reject any order submitted by a person whose
          representations the Board of Directors believes to be false or who it
          otherwise believes, either alone or acting in concert with others, is
          violating, circumventing, or intends to violate, evade or circumvent
          the terms and conditions of the Plan.

     The Company, in its sole discretion, may make reasonable efforts to comply
with the securities laws of any state in the United States in which its
depositors reside, and will only offer and sell the Common Stock in states in
which the offers and sales comply with such states' securities laws. However, no
person will be offered or allowed to purchase any Common Stock under the Plan if
they resides in a foreign country or in a state of the United States with
respect to which any of the following apply: (i) a small number of persons
otherwise eligible to purchase shares under the Plan reside in such state or
foreign county; (ii) the offer or sale of shares of Common Stock to such persons
would require the Bank or its employees to register, under the securities laws
of such state or foreign country, as a broker or dealer or to register or
otherwise qualify its securities for sale in such state or foreign country; or
(iii) such registration or qualification would be impracticable for reasons of
cost or otherwise.

LIQUIDATION RIGHTS

     In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive his pro rata share of
any assets of the Bank remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). To the extent there are remaining assets, a depositor may have a
claim to receive a pro rata share of the remaining assets in the same proportion
as the value of such depositor's deposit accounts to the total value of all
deposit accounts in the Bank at the time of liquidation, subject to the right of
the State of New York to garnish such assets. After the Reorganization, each
depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, this claim would be
solely in the amount of the balance in the deposit account plus accrued
interest. A depositor would not have an interest in the value or assets of the
Bank above that amount.

     The Plan provides for the establishment, upon the completion of the
Reorganization, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Offering Circular used in connection with the
Reorganization. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would, on a complete liquidation of the Bank, have a claim to an interest in the
liquidation account after payment of all creditors prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder would have an initial interest in such liquidation account for
each deposit account, with a balance of $100 or more held in the Bank on August
31, 1996 and December 31, 1997, respectively ("Deposit Account"). Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a claim to a
pro rata interest in the total liquidation account for each of his Deposit
Accounts based on the proportion that the balance of each such Deposit Account
on August 31, 1996 and December 31, 1997, respectively, bore to the balance of
all Deposit Accounts in the Bank on such date.

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<PAGE>
 
     If, however, on any December 31 annual closing date of the Bank, commencing
after December 31, 1996, the amount in any Deposit Account is less than the
amount in such Deposit Account on December 31, 1996 or any other annual closing
date, then such person's interest in the liquidation account relating to such
Deposit Account would be reduced from time to time by the proportion of any such
reduction, and such interest will cease to exist if such Deposit Account is
withdrawn or closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Deposit
Account.

FEDERAL AND STATE TAX CONSEQUENCES OF THE REORGANIZATION

     Consummation of the Reorganization is conditioned on prior receipt by the
Bank of (i) either an IRS ruling or an opinion of counsel with respect to the
federal income tax consequences of the Reorganization, and (ii) either a ruling
from the New York Department of Revenue or an opinion of counsel or tax advisor
with respect to the New York tax consequences of the Reorganization. Unlike
private letter rulings, opinions of counsel are not binding on the IRS or the
New York Department of Revenue, and either agency could disagree with such
opinions. In the event of such disagreement, there can be no assurance that the
Bank or the depositors would prevail in a judicial proceeding.

     In the following discussion, "Mutual Bank" refers to the Bank before the
Reorganization and "Stock Bank" refers to the Bank after the Reorganization. The
Mutual Bank will receive an opinion of counsel from Luse Lehman Gorman Pomerenk
& Schick, A Professional Corporation, to the effect that, for federal income tax
purposes, (1) the conversion of the De Novo Bank into the Mutual Holding
Company, a New York mutual holding company, will qualify as a tax-free
Reorganization under Code Section 368(a)(1)(F); (2) provided that the merger of
the Mutual Bank into the Stock Bank qualifies as a merger under New York law,
the merger of the Bank into the Stock Bank with the Stock Bank as the survivor
and the transfer of the depositors' equity interest in the Bank to the Mutual
Holding Company in exchange for equity interests in the Mutual Holding Company
qualifies as a tax-free reorganization described in Code Sections 368(a)(1)(A)
and 368(a)(2)(D). The Bank, Stock Bank and Mutual Holding Company are each "a
party to the reorganization," as defined in Code Section 368(b); (3) the Bank
will recognize no gain or loss upon the transfer of substantially all its assets
to the Stock Bank solely in exchange for equity interests (voting and
liquidation rights) in the Mutual Holding Company and the Stock Bank's
assumption of its liabilities, if any; (4) neither the Stock Bank nor the Mutual
Holding Company will recognize gain or loss upon the receipt by the Stock Bank
of substantially all of the assets of the Bank in exchange for equity interests
in the Mutual Holding Company and the Stock Bank's assumption of the Bank's
liabilities; (5) the Mutual Holding Company's basis in the stock of the Stock
Bank will increase by an amount equal to the Bank's net basis in the property
transferred to the Stock Bank; (6) the Stock Bank's basis in the property
received from the Bank will be the same as the basis of such property in the
hands of the Bank immediately prior to the Reorganization; (7) the Stock Bank's
holding period for the property received from the Bank will include the period
during which such property was held by the Bank; (8) subject to the conditions
and limitations set forth in Code Sections 381, 382, 383, and 384 and the
Treasury regulations promulgated thereunder, the Stock Bank will succeed to and
take into account the items of the Bank described in Code Section 381(c); (9) no
gain or loss will be recognized by the depositors of the Bank on the receipt of
equity interests with respect to the Mutual Holding Company in exchange for
their equity interests surrendered therefor; (10) each depositor's aggregate
basis, if any, in the Mutual Holding Company equity interest received in the
exchange will equal the aggregate basis, if any, of each depositor's equity
interest in the Bank; (11) the holding period of the Mutual Holding Company
equity interests received by the depositors of Bank will include the period
during which the Bank equity interests surrendered in exchange therefor were
held; (12) the Mutual Holding Company and the minority stockholders of the
Company ("Minority Stockholders") will recognize no gain or loss upon the
transfer of the Stock Bank stock and cash, respectively, to the Company in
exchange for stock of the Company; (13) the Company will recognize no gain or
loss upon its receipt of property from the Mutual Holding Company and Minority
Stockholders in exchange for Common Stock of the Company; (14) the Mutual
Holding Company will increase its basis in its shares of the Company Common
Stock by the Mutual Holding Company's basis in its Stock Bank stock. The tax
opinions set forth above are based in part on the letter from RP Financial
concluding that the subscription rights to be received by eligible account
holders and supplemental eligible account holders do not have any economic value
at the time of distribution or the time the subscription rights are exercised,
and are given in reliance thereon.

                                      118
<PAGE>
 
                  RESTRICTIONS ON ACQUISITION OF THE COMPANY

     The Mutual Holding Company Structure. Under New York law, the Plan of
Reorganization, and our governing corporate instruments, at least 51% of the
Company's voting shares must be owned by the Mutual Holding Company. The Mutual
Holding Company will be controlled by its Board of Trustees, who will consist of
persons who also are members of the Board of Directors of the Company and the
Bank. The Mutual Holding Company will be able to elect all members of the Board
of Directors of the Company, and as a general matter, will be able to control
the outcome of all matters presented to the stockholders of the Company for
resolution by vote, except for matters that require a vote greater than a
majority. The Mutual Holding Company, acting through its Board of Trustees, will
be able to control the business, and operations of the Company and the Bank, and
will be able to prevent any challenge to the ownership or control of the Company
by Minority Stockholders. Accordingly, a change in control of the Company and
the Bank cannot occur unless the Mutual Holding Company first converts to the
stock form of organization. Although New York law, applicable regulations and
the Plan of Reorganization permit the Mutual Holding Company to convert from the
mutual to the capital stock form of organization, it is not anticipated that a
conversion of the Mutual Holding Company will occur in the foreseeable future.

     In addition to the anti-takeover aspects of the Mutual Holding Company
structure, the following is a general summary of certain provisions of the
Company's certificate of incorporation and bylaws and certain other regulatory
provisions which will restrict the ability of stockholders to influence
management policies, and which may be deemed to have an "anti-takeover" effect.
The following description of certain of these provisions is necessarily general
and, with respect to provisions contained in the Company's certificate of
incorporation and bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's application to the Superintendent and the Company's
Registration Statement filed with the SEC. See "Additional Information." The
following discussion does not reflect the powers and provisions of the Bank's
charter following the Bank offering.

PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS

     Restrictions on Call of Special Meetings. The certificate of incorporation
provides that a special meeting of stockholders may be called by the Chairman of
the Board of the Company or pursuant to a resolution adopted by a majority of
the Board of Directors. Stockholders are not authorized to call a special
meeting of stockholders.

     Absence of Cumulative Voting. The certificate of incorporation provides
that there shall be no cumulative voting rights in the election of directors.

     Authorization of Preferred Stock (the "Preferred Stock"). The certificate
of incorporation authorizes 5,000,000 shares of serial preferred stock, par
value $0.01 per share. The Company is authorized to issue Preferred Stock from
time to time in one or more series subject to applicable provisions of law; and
the Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
offering rights of such shares (which could be a multiple or as a separate
class). In the event of a proposed merger, tender offer or other attempt to gain
control of the Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
Preferred Stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any Preferred Stock but
it may issue any Preferred Stock on terms which the Board deems to be in the
best interests of the Company and its stockholders.

     Limitation on Voting Rights. The certificate of incorporation provides that
(i) no person shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 5% of any class of equity security of the

                                      119
<PAGE>
 
Company, inclusive of shares of such class held by the Mutual Holding Company
(provided that such limitation shall not apply to the Mutual Holding Company or
any tax-qualified employee stock benefit plans maintained by the Company); and
that (ii) shares beneficially owned in violation of the stock ownership
restriction described above shall not be entitled to vote and shall not be voted
by any person or counted as voting stock in connection with any matter submitted
to a vote of stockholders. For these purposes, a person (including management)
who has obtained the right to vote shares of the Common Stock pursuant to
revocable proxies shall not be deemed to be the "beneficial owner" of those
shares if that person is not otherwise deemed to be a beneficial owner of those
shares.

     Amendments to Certificate of Incorporation and Bylaws. Amendments to the
certificate of incorporation must be approved by the Company's Board of
Directors and also by a majority of the outstanding shares of the Company's
voting stock; provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to the call of special stockholder meetings, cumulative
voting, limitation on voting rights and director liability).

     The bylaws may be amended by the affirmative vote of the total number of
directors of the Company or the affirmative vote of at least 80% of the total
votes eligible to be voted at a duly constituted meeting of stockholders.

FEDERAL RESERVE BOARD REGULATIONS

     The Change in Bank Control Act and the BHCA, together with the Federal
Reserve Board regulations under those acts, require that the consent of the
Federal Reserve Board be obtained prior to any person or company acquiring
"control" of a bank holding company. Control is conclusively presumed to exist
if an individual or company acquires more than 25% of any class of voting stock
of the bank holding company. Control is rebuttably presumed to exist if the
person acquires more than 10% of any class of voting stock of a bank holding
company if either (i) the Company has registered securities under Section 12 of
the Exchange Act or (ii) no other person will own a greater percentage of that
class of voting securities immediately after the transaction. The regulations
provide a procedure to rebut the rebuttable control presumption. Since the
Company's Common Stock will be registered under Section 12 of the Exchange Act,
any acquisition of 10% or more of the Company's Common Stock will give rise to a
rebuttable presumption that the acquiror of such stock controls the Company,
requiring the acquiror, prior to acquiring such stock, to rebut the presumption
of control to the satisfaction of the Federal Reserve Board or obtain Federal
Reserve Board approval for the acquisition of control. Restrictions applicable
to the operations of bank holding companies may deter companies from seeking to
obtain control of the Company. See "Regulation."

NEW YORK BANKING LAW

     In addition to federal law, the New York State Banking Law generally
requires prior approval of the New York State Banking Board before any action is
taken that causes any entity or person to acquire direct or indirect control of
a banking institution which is organized in New York State. Control is presumed
to exist if any company or person directly or indirectly owns, controls or holds
with power to vote 10% or more of the voting stock of a banking institution or
of any company or person that owns, controls or holds with power to vote 10% or
more of the voting stock of a banking institution.

                  DESCRIPTION OF CAPITAL STOCK OF THE COMPANY

GENERAL

     The Company is authorized to issue 45,000,000 shares of Common Stock having
a par value of $.01 per share and 5,000,000 shares of serial Preferred Stock
having a par value of $.01 per share. The Company currently expects to issue
between 19,125,000 and 25,875,000 shares, with an adjusted maximum of 29,756,250
shares, of Common Stock and no shares of Preferred Stock in the Reorganization.
Each share of the Common Stock will have the same relative rights as, and will
be identical in all respects with, each other share of the Common Stock. Upon
payment of the purchase

                                      120
<PAGE>
 
price for the Common Stock, in accordance with the Plan, all such stock will be
duly authorized, fully paid, validly issued, and non-assessable.

     The Common Stock of the Company will represent nonwithdrawable will not be
an account of an insurable type, and will not be insured by the FDIC.

COMMON STOCK

     Voting Rights. Under Delaware law, the holders of the Common Stock will
possess exclusive voting power in the Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
except as discussed in Restrictions on Acquisitions of the Company--Limitations
on Voting Rights." If the Company issues Preferred Stock, subsequent to the
Reorganization, holders of the Preferred Stock may also possess voting rights.

     Dividends. Upon consummation of the Reorganization, the Company's only
asset will be the net proceeds, the ESOP loan and the Bank's Common Stock. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy." The holders of Common
Stock will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Company out of funds legally available
therefore. If the Company issues Preferred Stock, the holders thereof may have a
priority over the holders of the Common Stock with respect to dividends.

     Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive -- after payment or provision for payment of all debts and liabilities
of the Company (including all deposits in the Bank and accrued interest thereon)
and after distribution of the liquidation account established upon stock
offering for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders who continue their deposit accounts at the Bank -- all assets of
the Company available for distribution, in cash or in kind. See "The
Reorganization and Offering--Liquidation Rights." If preferred stock is issued
subsequent to the Offering, the holders thereof may have a priority over the
holders of Common Stock in the event of liquidation or dissolution.

     No Preemptive Rights. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Company of the full purchase price therefor, each share of the Common Stock will
be fully paid and nonassessable.

     Preferred Stock. None of the 5,000,000 authorized shares of Preferred Stock
of the Company will be issued in the Reorganization. The Company's Board of
Directors is authorized, without stockholder approval, to issue serial preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares. If and when issued, the serial preferred stock
may rank senior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full, limited or no voting rights.
Accordingly, the issuance of preferred stock could adversely affect the voting
and other rights of holders of Common Stock.

                         TRANSFER AGENT AND REGISTRAR

     Chase Mellon Shareholder Services, L.L.C. will act as the transfer agent
and registrar for the Common Stock.

                                      121
<PAGE>
 
                             LEGAL AND TAX MATTERS

     The legality of the Common Stock and the federal income tax consequences of
the Reorganization will be passed upon for the Bank and the Company by the firm
of Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C., special counsel
to the Company and the Bank. The New York income tax consequences of the
Reorganization will be passed upon for the Company and the Bank by KPMG Peat
Marwick LLP. The federal income tax consequences of certain matters relating to
the establishment of the Foundation will be passed upon for the Company and the
Bank by KPMG Peat Marwick LLP. Certain legal matters will be passed upon for
CIBC Oppenheimer Corp. and Trident Securities, Inc. by Silver, Freedman & Taff,
L.L.C., Washington, D.C.

                                    EXPERTS

     The consolidated financial statements of Lockport Savings Bank and
subsidiaries as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as "Experts" in accounting and auditing.

     RP Financial has consented to the publication herein of the summary of its
report to the Bank and the Company setting forth its opinion as to the estimated
pro forma market value of the Common Stock upon Reorganization and its valuation
with respect to Subscription Rights.

                            ADDITIONAL INFORMATION

     We have filed with the SEC a registration statement under the Securities
Act with respect to the Common Stock offered hereby. As permitted by the rules
and regulations of the SEC, this Prospectus does not contain all the information
set forth in the registration statement. Such information can be examined
without charge at the public reference facilities of the SEC located at 450
Fifth Street, NW, Washington, D.C. 20549, and copies of such material can be
obtained from the SEC at prescribed rates. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The address of this web
site is http://www.sec.gov. The statements contained herein as to the contents
of any contract or other document filed as an exhibit to the registration
statement are, of necessity, brief descriptions thereof and are not necessarily
complete but do contain all material information regarding such documents; each
such statement is qualified by reference to such contract or document.

     We have filed an Application with the Department with respect to the
Reorganization. Pursuant to the rules and regulations of the Department, this
Prospectus omits certain information contained in that Application. The
Application may be examined at the office of the Department, 2 Rector Street,
New York, New York, and at our Administrative Center, at 6950 South Transit
Road, Lockport, New York, 14095-0514 without charge.

     In connection with the Offering, the Company will register the Common Stock
with the SEC under Section 12(g) of the Exchange Act; and, upon such
registration, the Company and the holders of its Common Stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other requirements
of the Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Reorganization.

     A copy of the certificate of incorporation and bylaws of the Company are
available without charge from the Bank.

                                      122
<PAGE>
 
                             LOCKPORT SAVINGS BANK

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                               Page
                                                                                              ------
<S>                                                                                           <C>
Independent Auditor's Report.................................................................   F-2
 
Consolidated Statements of Condition as of September 30, 1997 (unaudited) and
     December 31, 1996 and 1995..............................................................   F-3
 
Consolidated Statements of Income for the nine months ended September 30, 1997 and 1996
     (unaudited) and the years ended December 31, 1996, 1995 and 1994........................    30
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996
     (unaudited) and the years ended December 31, 1996, 1995 and 1994........................   F-4
 
Notes to Consolidated Financial Statements...................................................   F-6
</TABLE>

     All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements or
notes thereto.

     The financial statements of Niagara Bancorp, Inc. have been omitted because
Niagara Bancorp, Inc. has not yet issued any stock, has no assets and no
liabilities, and has not conducted any business other than of an organizational
nature.

                                      F-1
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT


The Board of Trustees
Lockport Savings Bank:

     We have audited the accompanying consolidated statements of condition of
Lockport Savings Bank and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income and cash flows for each of the years
in the three-year period ended December 31, 1996.  These consolidated financial
statements are the responsibility of the Bank's management.  Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lockport
Savings Bank and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

 
                                              KPMG PEAT MARWICK LLP

Buffalo, New York
January 17, 1997

                                      F-2
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CONDITION

               SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      SEPTEMBER 30,         DECEMBER 31,
                                                                      ------------------------
Assets                                                    1997           1996          1995   
------                                                ------------    ----------    ----------
<S>                                                   <C>             <C>           <C> 
                                                      (UNAUDITED)                            
                                                                                              
Cash and cash equivalents:                                                                    
 Cash and due from banks                                $   14,804        11,219        13,873
 Federal funds sold                                          2,200         5,000        25,550 
                                                        ----------     ---------       ------- 
   Total cash and cash equivalents                          17,004        16,219        39,423 
                                                                                               
Securities available for sale (note 2)                     464,973       415,129       346,410 
Securities held to maturity (note 3)                        37,500        38,000        46,700 
Loans, net (note 4)                                        622,487       598,486       535,971 
Accrued interest receivable                                  7,343         6,348         5,622 
Premises and equipment, net (note 5)                        22,022        13,240        11,377 
Other assets (notes 6, 10 and 11)                            5,122         5,936         8,788 
                                                        ----------     ---------       ------- 
                                                        $1,176,451     1,093,358       994,291 
                                                        ==========     =========       ======= 
 
 
Liabilities and Net Worth
-----------------------------------------------------
 
Liabilities:
 Deposits (note 7)                                      $  992,219       920,072       861,065
 Mortgagors' payments held in escrow                         8,387         8,773        10,189
 Other borrowed funds (note 8):                                                               
 Short-term                                                 18,740        27,008            --
 Long-term                                                  10,000         5,000            --
 Other liabilities (notes 10 and 11)                        20,385        16,841        15,384
                                                        ----------     ---------       -------
                                                         1,049,731       977,694       886,638
                                                        ----------     ---------       ------- 
 
Commitments and contingencies (notes 4 and 5)
 
Net worth (note 9):
 Surplus and undivided profits                             125,325       116,690       105,921
 Net unrealized gain (loss) on securities available                                           
  for sale, net of deferred income taxes                     1,395        (1,026)        1,732
                                                        ----------     ---------       -------
                                                           126,720       115,664       107,653
                                                        ----------     ---------       -------
                                                        $1,176,451     1,093,358       994,291
                                                        ==========     =========       ======= 
 </TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
               AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          NINE MONTHS ENDED
                                                                            SEPTEMBER 30,             YEARS ENDED DECEMBER 31,
                                                                        ---------------------  -------------------------------------

                                                                           1997       1996         1996          1995        1994
                                                                        ----------  ---------  ------------  ------------  ---------

                                                                             (UNAUDITED)   
<S>                                                                     <C>         <C>        <C>           <C>           <C>
Cash flows from operating activities:
  Net income                                                            $   8,635      8,226        10,768         9,925      8,801
  Adjustments to reconcile net income to net cash provided by
   operating activities:
   Depreciation of premises and equipment                                   1,635      1,400         1,911         1,607      1,256
   Amortization and accretion of fees and discounts                          (312)      (513)         (717)          554        653
   Provision for loan losses                                                  975      1,861         2,187         1,016        948
   Other provisions for losses                                                336         20            23           834        380
   Net (gain) loss on sale of securities available for sale                  (875)      (532)         (576)       (1,477)       849
   Deferred income taxes                                                     (164)      (449)         (387)         (253)        43
   (Increase) decrease in:
Accrued interest receivable                                                  (995)      (733)         (726)         (198)      (345)

Other assets                                                               (1,040)     3,657         3,824        (5,464)       767
   Increase (decrease) in other liabilities                                 3,544      8,343         2,661         8,607       (508)
                                                                        ---------   --------      --------      --------   --------
 
   Net cash provided by operating activities                               11,739     21,280        18,968        15,151     12,844
                                                                        ---------   --------      --------      --------   --------
 
Cash flows from investing activities:
  Purchase of investment securities available for sale                    (85,275)   (75,453)      (91,772)      (16,696)   (39,870)
  Proceeds from sales of investment securities available for sale          22,326      6,695        16,803        11,892     35,470
  Purchase of mortgage-backed securities available for sale               (67,340)   (65,729)      (85,506)      (46,375)  (112,295)
  Proceeds from sales of mortgage-backed securities available for sale     44,513      6,981        24,924        50,755     41,072
  Principal payments on mortgage-backed securities available for sale      29,729     27,111        35,522        29,780     80,142
  Proceeds from maturities of investment securities available for sale     11,175     22,215        27,215            --         --
  Purchase of securities held to maturity                                (177,100)  (185,700)     (249,700)     (239,100)  (244,179)
  Proceeds from maturities of securities held to maturity                 177,600    193,400       258,400       227,368    252,257
  Net increase in loans                                                   (22,815)   (43,147)      (65,123)      (62,288)   (54,131)
  Other                                                                   (12,260)    (1,056)       (2,534)       (3,647)    (2,290)
                                                                        ---------   --------      --------      --------   --------
 
Net cash used by investing activities                                   $ (79,447)  (114,683)     (131,771)      (48,311)   (43,824)
                                                                        ---------   --------      --------      --------   --------
 
Cash flows from financing activities:
</TABLE> 

                                      F-4
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

<TABLE> 
<CAPTION> 
                                                                          NINE MONTHS ENDED
                                                                            SEPTEMBER 30,             YEARS ENDED DECEMBER 31,
                                                                        ---------------------  -------------------------------------

                                                                           1997       1996         1996          1995        1994
                                                                        ----------  ---------  ------------  ------------  ---------

                                                                             (UNAUDITED)   
<S>                                                                     <C>         <C>        <C>           <C>           <C>
 Net increase in deposits                                               $  72,147     57,988        59,007        41,375      6,751
 Net increase (decrease) in mortgagors' payments held in escrow              (386)    (3,153)       (1,416)          589        905
 Proceeds from (repayment of) short-term borrowings                        (8,268)    24,675        27,008            --         --
 Proceeds from long-term borrowings                                         5,000      5,000         5,000            --         --
                                                                        ---------   --------      --------      --------   --------
 
    Net cash provided by financing activities                              68,493     84,510        89,599        41,964      7,656
                                                                        ---------   --------      --------      --------   --------
 
    Net increase (decrease) in cash and cash equivalents                      785     (8,893)      (23,204)        8,804    (23,324)

 
Cash and cash equivalents at beginning of period                           16,219     39,423        39,423        30,619     53,943
                                                                        ---------   --------      --------      --------   --------
 
Cash and cash equivalents at end of period                              $  17,004     30,530        16,219        39,423     30,619
                                                                        =========   ========      ========      ========   ========
 
Supplemental disclosure of cash flow information:
    Cash paid during the year:
       Income taxes                                                     $   3,850      4,942         6,597         4,110      5,283
       Interest expense                                                    33,107     29,851        40,485        38,972     31,361
                                                                        =========   ========      ========      ========   ========
 </TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
               AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


(1)  Summary of Significant Accounting Policies
-----------------------------------------------

     The accounting and reporting policies of Lockport Savings Bank, a New York
     State chartered FDIC insured mutual savings bank, and its subsidiaries
     conform to general practices within the banking industry and to generally
     accepted accounting principles. The following is a description of the more
     significant accounting policies.

          (a)  Principles of Consolidation
          --------------------------------

               The consolidated financial statements include the accounts of
               Lockport Savings Bank (LSB) and its subsidiaries (the Bank), LSB
               Associates, Inc., an agent for third party mutual fund and
               annuity sales; LSB Realty, Inc., a real estate development
               company; LSB Funding, Inc., a real estate investment trust; and
               LSB Securities, Inc., a securities investment company. All
               significant intercompany balances and transactions have been
               eliminated in consolidation.

          (b)  Investment Securities
          --------------------------

               Debt securities and marketable equity securities are classified
               as either available for sale or held to maturity. Held to
               maturity securities are those that the Bank has the positive
               intent and ability to hold to maturity. All other securities are
               classified as available for sale.

               Securities available for sale are carried at fair value with
               unrealized gains and losses, net of the related deferred tax
               effect, excluded from earnings and reported as a separate
               component of net worth. Realized gains and losses are determined
               using the specific identification method.

               Securities held to maturity are recorded at cost with discounts
               accreted and premiums amortized to maturity using a method that
               approximates the level-yield method. If permanent impairment of a
               security exists, that security is written down to fair value with
               a charge to earnings.

          (c)  Loans
          ----------

               Loans are stated at the principal amount outstanding, adjusted
               for net unamortized deferred fees and costs which are accrued to
               income on the interest method. Accrual of interest income on
               loans is discontinued after payments become more than ninety days
               delinquent, unless the status of a particular loan clearly
               indicates earlier discontinuance is more appropriate. All
               uncollected interest income previously recognized on non-accrual
               loans is reversed and subsequently recognized only to the extent
               payments are received. In those instances where there is doubt as
               to the collectibility of principal, interest payments are applied
               to principal.

          (d)  Real Estate Owned
          ----------------------

               Real estate owned consists of property acquired in settlement of
               loans which are initially valued at the lower of cost or fair
               value based on appraisals at foreclosure and are periodically
               adjusted to the lower of adjusted cost or net realizable value
               throughout the remaining period.

                                      F-6
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(1)  Summary of Significant Accounting Policies, Continued
----------------------------------------------------------

          (e)  Allowance for Loan Losses
          ------------------------------

               The allowance for loan losses is established through charges to
               earnings. Management's determination of the balance of the
               allowance is based on many factors including credit evaluation of
               the loan portfolio, current and expected economic conditions and
               past loss experience. While management uses available information
               to recognize losses on loans, future additions to the allowance
               may be necessary based on changes in economic conditions. In
               addition, various regulatory agencies, as an integral part of
               their examination process, periodically review the allowance for
               loan losses and may require the Bank to recognize additions to
               the allowance based on their judgment of information available to
               them at the time of their examination.

               In 1995, the Bank adopted Statement of Financial Accounting
               Standards No. 114, "Accounting by Creditors for Impairment of a
               Loan", as amended by Statement of Financial Accounting Standards
               No. 118, "Accounting by Creditors for Impairment of a Loan -
               Income Recognition Disclosures". These new standards require that
               an impaired loan be measured based on the present value of
               expected future cash flows discounted at the loan's effective
               interest rate or, as a practical expedient, the loan's observable
               market price or the fair value of the underlying collateral if
               the loan is collateral dependent. These new standards also made
               certain changes to existing accounting principles applicable to
               in-substance foreclosures (ISF) and troubled debt restructurings
               involving modifications of terms. SFAS 114 generally does not
               apply to those smaller-balance homogeneous loans that are
               collectively evaluated for impairment which for the Bank, include
               one- to four-family residential mortgage loans, student loans and
               consumer loans, other than those modified in a troubled debt
               restructuring. The adoption of these standards did not have a
               material impact on the Bank's consolidated financial statements.

               In accordance with SFAS 114, the Bank considers a loan impaired
               when, based upon current information and events, it is possible
               that it will be unable to collect all amounts due, both principal
               and interest. The measurement value of the Bank's impaired loans
               was based on the fair value of the underlying collateral. The
               Bank identifies and measures impaired loans in conjunction with
               its review of the adequacy of its allowance for loan losses.
               Specific factors utilized in the identification of impaired loans
               include, but are not limited to, delinquency status, loan-to-
               value ratio, the condition of the underlying collateral, credit
               history and debt coverage.

          (f)  Premises and Equipment
          ---------------------------

               Premises and equipment are carried at cost, net of accumulated
               depreciation and amortization. Depreciation is computed on the
               straight-line method over the estimated useful lives of the
               assets. Leasehold improvements are amortized on the straight-line
               method over the lesser of the life of the improvements or the
               lease term.

          (g)  Employee Benefits
          ----------------------

               The Bank maintains a non-contributory, qualified, defined benefit
               pension plan that covers substantially all full time employees.
               The actuarially determined pension benefits in the form of a life
               annuity are based on the employee's combined years of service,
               age and compensation. The Bank's policy is to fund the minimum
               amount required by government regulations.

                                      F-7
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(1)  Summary of Significant Accounting Policies, Continued
----------------------------------------------------------

          (g)  Employee Benefits (continued)
          ----------------------------------

               The Bank also provides certain post-retirement benefits,
               principally health care and group life insurance, to employees
               and their beneficiaries and dependents. The Bank accrues for the
               expected cost of providing these post-retirements benefits during
               an employee's active years of service.

          (h)  Income Taxes
          -----------------

               Income taxes are accounted for under the asset and liability
               method. Deferred tax assets and liabilities are reflected at
               currently enacted income tax rates applicable to the period in
               which the deferred tax assets or liabilities are expected to be
               realized or settled. As changes in tax laws or rates are enacted,
               deferred tax assets and liabilities are adjusted through the
               provision for income taxes.

          (i)  Transfers and Servicing of Financial Assets and Extinguishments
               ---------------------------------------------------------------
of Liabilities
--------------

               In June 1996, the Financial Accounting Standards Board issued
               SFAS No. 125, "Accounting for Transfers and Servicing of
               Financial Assets and Extinguishments of Liabilities." SFAS No.
               125 provides accounting and reporting standards for transfers and
               servicing of financial assets and extinguishments of liabilities
               based on consistent application of a financial-components
               approach that focuses on control. It distinguishes transfers of
               financial assets that are sales from transfers that are secured
               borrowings. The adoption of SFAS No. 125 as of January 1, 1997
               did not have a material impact on the Bank's financial position,
               results of operations, or liquidity.

          (j)  Use of Estimates
          ---------------------

               Management of the Bank has made a number of estimates and
               assumptions relating to the reporting of assets and liabilities
               and disclosure of contingent assets and liabilities to prepare
               these financial statements in conformity with generally accepted
               accounting principles. Actual results could differ from those
               estimates.

                                      F-8
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(2)  Securities Available for Sale
----------------------------------

     The amortized cost and approximate fair value of securities available for
     sale at September 30, 1997 (unaudited) are summarized as follows (in
     thousands):

<TABLE>
<CAPTION>
                                             AMORTIZED  UNREALIZED   UNREALIZED    FAIR
                                               COST        GAINS       LOSSES      VALUE
                                             ---------  -----------  -----------  -------
<S>                                          <C>        <C>          <C>          <C>
Debt securities:
 U.S. Treasury                                $ 84,856         776         (101)   85,531
 U.S. government agencies                        5,008          --           (6)    5,002
 States and political subdivisions               1,761         109           --     1,870
 Corporate                                       6,927         107           --     7,034
                                              --------      ------      -------   -------
                                                98,552         992         (107)   99,437
                                              --------      ------      -------   -------
 
Mortgage-backed securities:
 Collateralized mortgage obligations           107,744         522       (1,078)  107,188
 Government National Mortgage Association       33,461       1,095          (14)   34,542
 Federal National Mortgage Association          25,330         136          (73)   25,393
 Freddie Mac                                   118,469         717         (547)  118,639
                                              --------      ------      -------   -------
                                               285,004       2,470       (1,712)  285,762
                                              --------      ------      -------   -------
 
Asset-backed securities:
 Home equity                                    53,482          54          (72)   53,464
 Student Loans                                   9,741          --          (27)    9,714
 Auto                                            4,047          18           --     4,065
                                              --------      ------      -------   -------
                                                67,270          72          (99)   67,243
                                              --------      ------      -------   -------
 
Equity securities:
 FHLB stock                                      6,392          --           --     6,392
 Common stock                                    5,391         909         (161)    6,139
                                              --------      ------      -------   -------
                                                11,783         909         (161)   12,531
                                              --------      ------      -------   -------
                                              $462,609       4,443       (2,079)  464,973
                                              ========      ======      =======   =======
</TABLE>

Scheduled contractual maturities of securities, other than equity securities, at
September 30, 1997 (unaudited) are as follows (in thousands):

<TABLE>
<CAPTION>
                                                AMORTIZED       FAIR  
                                                  COST          VALUE 
                                                ---------      -------
<S>                                             <C>            <C>    
Within one year                                  $ 10,932       10,924
After one year through five years                 121,266      121,953
After five years through ten years                 82,012       82,296
After ten years                                   236,616      237,269
                                                 --------      ------- 
                                                 $450,826      452,442
                                                 ========      =======
</TABLE>

                                      F-9
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(2)  Securities Available for Sale, Continued
---------------------------------------------

     The amortized cost and approximate fair value of securities available for
     sale at December 31, 1996 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                 AMORTIZED    UNREALIZED    UNREALIZED    FAIR 
                                                   COST         GAINS         LOSSES      VALUE     
                                                 ---------    ----------    ----------    -----      
<S>                                              <C>          <C>           <C>           <C>
Debt securities:
   U.S. Treasury                                 $ 84,716            723          (219)   85,220                                    
   U.S. government agencies                         5,012             --            (8)    5,004                                    
   States and political subdivisions                1,942             99            --     2,041                                    
   Corporate                                          999              1            --     1,000  
                                                 --------        -------       -------   -------  
                                                   92,669            823          (227)   93,265  
                                                 --------        -------       -------   -------  
 
 Mortgage-backed securities:
   Collateralized mortgage obligations            104,244            133        (2,385)  101,992      
   Government National Mortgage Association        44,966            931          (117)   45,780                                   
   Federal National Mortgage Association           28,487             20          (251)   28,256                                   
   Freddie Mac                                    109,903            475        (1,546)  108,832    
                                                 --------        -------       -------   -------    
                                                  287,600          1,559        (4,299)  284,860    
                                                 --------        -------       -------   -------    
 Asset-backed securities:                                                                           
   Home equity                                     28,090             36          (128)   27,998    
                                                 --------        -------       -------   -------    
                                                                                                    
 Equity securities:                                                                                 
   FHLB stock                                       5,394             --            --     5,394    
   Common stock                                     3,115            594           (97)    3,612    
                                                 --------        -------        -------  -------    
                                                    8,509            594           (97)    9,006    
                                                 --------        -------       -------   -------    
                                                 $416,868          3,012        (4,751)  415,129    
                                                 ========        =======       =======   =======     
 
Scheduled contractual maturities of debt securities at December 31, 1996 are as
follows (in thousands):
 
                                                        AMORTIZED       FAIR
                                                          COST          VALUE
                                                        ---------     ---------
 
  Within one year                                         $16,167      16,177
  After one year through five years                        76,002      76,497
  After ten years                                             500         591
                                                         --------     -------
                                                         $ 92,669      93,265
                                                         ========     =======
</TABLE>

                                     F-10
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED



(2) Securities Available for Sale, Continued
---------------------------------------------

    The amortized cost and approximate fair value of securities available for
    sale at December 31, 1995 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
 
                                                        AMORTIZED  UNREALIZED   UNREALIZED       FAIR   
                                                          COST        GAINS       LOSSES         VALUE  
                                                        ---------  -----------  -----------     ------- 
<S>                                                     <C>        <C>          <C>             <C>     
Debt securities:                                                                                        
   U.S. Treasury                                         $ 54,839       1,005          (99)      55,745 
   U.S. government agencies                                    --          --           --           -- 
   States and political subdivisions                        9,118         200           (1)       9,317 
   Corporate                                                6,035           5           (5)       6,035 
                                                         --------      ------      -------      ------- 
                                                           69,992       1,210         (105)      71,097 
                                                         --------      ------      -------      ------- 
Mortgage-backed securities:                                                                             
   Collateralized mortgage obligations                    132,550         714       (1,672)     131,592 
   Government National Mortgage Association                51,104       1,881           (1)      52,984 
   Federal National Mortgage Association                   33,170         415          (10)      33,575 
   Freddie Mac                                             43,000         456          (64)      43,392 
                                                         --------      ------      -------      ------- 
                                                          259,824       3,466       (1,747)     261,543 
                                                         --------    --------      -------      ------- 
Asset-backed securities:                                                                                
   Home equity                                              5,350          --          (72)       5,278 
                                                         --------      ------      -------      ------- 
Equity securities:                                                                                      
   FHLB stock                                               4,926          --           --        4,926 
   Common stock                                             3,382         396         (212)       3,566 
                                                         --------      ------      -------      ------- 
                                                            8,308         396         (212)       8,492 
                                                         --------    --------      -------      ------- 
                                                         $343,474       5,072       (2,136)     346,410 
                                                         ========    ========      =======      =======  
</TABLE>

                                     F-11
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(2) Securities Available for Sale, Continued
---------------------------------------------

    Gross realized gains (losses) on sales of securities available for sale are
    summarized as follows (in thousands):

<TABLE>
<CAPTION>
 
                                        NINE MONTHS ENDED
                                           SEPTEMBER 30,           YEARS ENDED DECEMBER 31,
                                        ------------------         ------------------------
                                          1997       1996           1996      1995    1994
                                        -------    -------         ------    ------  ------
                                           (UNAUDITED)
<S>                                     <C>        <C>             <C>       <C>     <C>
Realized gains                          $1,152         646          896       2,442     617
Realized losses                           (277)       (114)        (320)       (965) (1,466)
                                        ======        ====         ====       =====  ======
</TABLE>

At September 30, 1997, approximately $5.0 million of U.S. Treasury Notes were
pledged under a collateral agreement with the Federal Reserve Treasury, Tax and
Loan Program and $20 million of U.S. Treasury Notes were pledged as collateral
under repurchase agreements.

In November 1995, the Financial Accounting Standards Board issued a Special
Report, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities".  This supplemental guidance provided
a one-time opportunity to reassess the appropriateness of the Bank's
classifications of all securities held at that time with any resulting
reclassifications being accounted for at fair value and occurring on a single
date no later than December 31, 1995, without calling into question the intent
of the Bank to hold other debt securities to maturity in the future.  As a
result of this one-time reassessment the Bank reclassified $9.2 million of state
and political subdivision debt securities as available for sale securities from
the held to maturity portfolio and recognized $199,000 of net unrealized
appreciation on these securities, net of related deferred taxes, as an increase
to net worth on December 31, 1995.

                                     F-12
<PAGE>
 
(3)  Securities Held To Maturity
--------------------------------

     The Bank's held to maturity securities consist of money market preferred
     stock. The amortized cost and approximate fair value of the money market
     preferred stock at September 30, 1997 and December 31, 1996 and 1995, are
     summarized as follows (in thousands):

<TABLE>
<CAPTION>
               SEPTEMBER           YEARS ENDED DECEMBER 31,
                              -------------------------------------
                 1997                 1996               1995
          ------------------  -------------------------------------
              (UNAUDITED)
          Amortized   Fair    Amortized  Fair   Amortized      Fair
            cost      value     cost     value    cost         value
          <S>       <C>       <C>      <C>      <C>        <C>
          --------  --------  -------- -------  --------   --------
          $ 37,500    37,500    38,000  38,000    46,700     46,700
          ========  ========  ======== =======  ========   ========
</TABLE>

     The money market preferred stock held by the Bank matures approximately
     every 49 days. Each maturity and subsequent reinvestment in the stock
     during the year is included in the accompanying consolidated statements of
     cash flows as maturities and purchases, respectively, of securities held to
     maturity. Aside from the rollover of that investment, there were no
     maturities of held to maturity securities for the nine months ended
     September 30, 1997 and the year ended December 31, 1996. There were
     $5,152,000 of maturities of held to maturity securities in 1995. There were
     no sales of, or transfers to or from, securities classified as held to
     maturity other than those described in Note 2 in any of the periods.

                                     F-13
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(4)  Loans
------------

     Loans receivable at September 30, 1997, December 31, 1996 and 1995 consist
     of the following (in thousands):

<TABLE>
<CAPTION>
                                  SEPTEMBER 30,      DECEMBER 31,
                                                  ------------------
                                       1997         1996      1995
                                       ----         ----      ----
                                   (UNAUDITED)
<S>                               <C>             <C>       <C>
Real Estate:
   Residential conventional            $359,628   337,402   301,327
   Residential FHA insured and
    VA guaranteed                        26,866    23,171    18,013
   Residential home equity               13,047    11,337    10,234
   Commercial                           142,414   139,998   133,494
   Construction                          13,964    12,493     7,891
                                       --------   -------   -------
                                        555,919   524,401   470,959
                                       --------   -------   -------
Other:
   Mobile home                           22,675    21,406    20,630
   Vehicle                                7,326    18,747    12,591
   Other consumer                        24,465    22,412    20,229
   Guaranteed student                    10,907    10,702     9,874
   Commercial                             4,275     4,895     4,085
                                       --------   -------   -------
                                         69,648    78,162    67,409
                                       --------   -------   -------
  Total loans                           625,567   602,563   538,368
 
Net deferred costs                        3,376     2,809     2,349
Unearned discount                          (103)     (347)      (39)
Allowance for loan losses                (6,353)   (6,539)   (4,707)
                                       --------   -------   -------
Loans, net                             $622,487   598,486   535,971
                                       ========   =======   =======
</TABLE>

                                     F-14
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(4)  Loans, Continued
---------------------
 
     Non-accrual loans amounted to $1,925,000 (unaudited), $4,718,000 and
     $3,955,000 at September 30, 1997 and December 31, 1996 and 1995,
     respectively, representing .31%, .78% and .74% of total loans at such
     dates, respectively. Interest income that would have been recorded if the
     loans had been performing in accordance with their original terms amounted
     to $133,000 and $318,000 during the nine month periods ended September 30,
     1997 and 1996 (unaudited) respectively, and $325,000, $367,000 and $315,000
     in 1996, 1995 and 1994, respectively.
 
     Mortgages serviced for others by the Bank amounted to $145.7 million
     (unaudited), $129.0 million and $110.4 million at September 30, 1997 and
     December 31, 1996 and 1995, respectively. At September 30, 1997, the Bank
     maintained $3 million in fidelity blanket bond coverage and under its
     mortgage impairment insurance policy, maintained errors and omissions
     coverage of $2 million per commercial and residential mortgage occurrence.

     At September 30, 1997 (unaudited), the Bank had outstanding commitments to
     originate mortgage and other loans of approximately $46.5 million with
     $18.9 million at fixed rates and $27.6 million at variable rates.

     Changes in the allowance for loan losses for the nine months ended
     September 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and
     1994 were as follows (in thousands):

<TABLE>
<CAPTION>
                                        NINE MONTHS ENDED                YEARS ENDED               
                                          SEPTEMBER 31,                  DECEMBER 31,
                                       -------------------        ---------------------------
                                        1997          1996        1996       1995        1994
                                        ----          ----        ----       ----        ----
<S>                                    <C>           <C>         <C>         <C>        <C>   
                                        (unaudited)                                           
Balance, beginning of period           $ 6,539       4,707       4,707       4,192      4,030                
Provision for loan losses                  975       1,861       2,187       1,016        948                
Charge-offs                             (1,271)       (287)       (436)       (556)      (825)               
Recoveries on loans previously                                                                               
 charged-off                                                                                                 
                                           110          37          81          55         39                
                                       -------       -----       -----       -----      -----                
   Balance, end of period              $ 6,353       6,318       6,539       4,707      4,192                
                                       =======       =====       =====       =====      =====                 
</TABLE>

     Approximately 96% of the Bank's loans are mortgage and consumer loans in
     New York State. Accordingly, the ultimate collectibility of a substantial
     portion of the Bank's loan portfolio is susceptible to changes in market
     conditions in this primary market area.

                                     F-15
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(5)  Premises and Equipment
---------------------------

     A summary of premises and equipment at September 30, 1997, December 31,
     1996 and 1995 follows (in thousands):

<TABLE>
<CAPTION>
                                                  SEPTEMBER 30,    DECEMBER 31,
                                                                  --------------
                                                       1997        1996    1995
                                                  --------------  ------  ------
                                                   (UNAUDITED)
      <S>                                         <C>             <C>     <C>
      Land                                              $ 1,049    1,049     771
      Buildings and improvements                         20,027   10,996   8,943
      Furniture and equipment                            11,128    9,785   8,893
                                                        -------   ------  ------
                                                         32,204   21,830  18,607
      Less accumulated depreciation and amortization     10,182    8,590   7,230
                                                        -------   ------  ------
                                                        $22,022   13,240  11,377
                                                        =======   ======  ======
</TABLE>

     Minimum rental commitments for premises and equipment under noncancellable
     operating leases at December 31, 1996 follows (in thousands):

<TABLE>
<CAPTION>
                     YEAR ENDING DECEMBER 31:                    
                     ------------------------               
                     <S>                             <C>    
                      1997                            $  586
                      1998                               522
                      1999                               523
                      2000                               514
                      2001                               519
                      Later years                      5,193
                                                      ------
                      Total minimum lease payments    $7,857
                                                      ====== 
</TABLE>

     Real estate taxes, insurance and maintenance expenses related to these
     leases are obligations of the Bank. Rent expense was $419,000 and $325,000
     during the nine months ended September 30, 1997 and 1996 (unaudited) and
     $414,000, $271,000 and $251,000 in 1996, 1995 and 1994, respectively, and
     is included in occupancy expense.

     During 1997, the Bank completed construction of a new Administrative
     Center. Buildings and improvements at September 30, 1997 and December 31,
     1996 include $10.2 million (unaudited) and $1.8 million, respectively, of
     costs relating to this new facility.

                                     F-16
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(6)  Other Assets
-----------------
     The significant components of other assets at September 30, 1997, December
     31, 1996 and 1995 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                  SEPTEMBER 30,   DECEMBER 31,
                                                                  ------------
                                                       1997       1996   1995
                                                  --------------  -----  -----
                                                   (UNAUDITED)
     <S>                                          <C>             <C>    <C>
     Deferred income taxes, net (note 10)                $  685   2,204      -
     Nationar receivable                                      -       -  5,053
     Investments in affiliates                                -     157    264
     Real estate owned, net of allowance for losses         268     317    257
     Prepaid expenses                                     1,577   1,165  1,383
     Other                                                2,592   2,093  1,831
                                                         ------   -----  -----
                                                         $5,122   5,936  8,788
                                                         ======   =====  =====
</TABLE>

     On February 6, 1995, the Superintendent of Banks for the State of New York
     seized Nationar, a check-clearing and trust company, freezing all of
     Nationar's assets. As of December 31, 1995, the Bank had $5.7 million in
     demand deposits held in receivership by the New York State Banking
     Department. Management established a $600,000 allowance for possible loss
     as of December 31, 1995, the provision for which was reflected in other
     operating expenses in the 1995 Consolidated Statement of Income. During
     1996, the Bank received all funds due from Nationar and therefore reversed
     the allowance for possible loss, with the benefit reflected as a reduction
     of other operating expenses. 

                                     F-17
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(7)  Deposits
-------------

     Deposits consist of the following at September 30, 1997, December 31, 1996
     and 1995 (in thousands):

<TABLE>
<CAPTION>
                                            SEPTEMBER 30, 1997
                                          -----------------------
                                          WEIGHTED
                                          AVERAGE
                                             RATE       BALANCE
                                          ---------     -------  
                                                (UNAUDITED)
     <S>                                  <C>          <C>
     Savings accounts                           3.34%    $302,447
                                                ----     --------
                                                 
     Certificates maturing:                  
      Within one year                           5.45      364,456
      After one year, through two years         6.80      120,923
      After two years, through three years      6.21       17,576
      After three years, through four years     6.75       10,623
      After four years, through five years      5.77          907
      After five years                          6.05        2,383
                                                ----     --------
                                                5.82      516,868
                                                ----     --------
                                             
                                             
     Checking accounts:                      
      Non-interest bearing                         -       27,325
      Interest-bearing:                      
      NOW accounts                              2.00       62,913
      Money market accounts                     4.10       82,666
                                                         --------
                                                          172,904
                                                         --------
                                                4.52%    $992,219
                                                ====     ========
</TABLE>

                                     F-18
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(7)  Deposits, Continued
------------------------

<TABLE>                                                            
<CAPTION>                                                          
                                                  DECEMBER 31, 1996     
                                              ------------------------- 
                                                WEIGHTED                
                                                AVERAGE                 
                                                  RATE        BALANCE   
                                              -----------   ----------- 
     <S>                                      <C>           <C>         
     Savings accounts                            3.34%         $300,747 
                                                 ----          -------- 
     Certificates maturing:                                             
      Within one year                            5.33           356,401 
      After one year, through two years          6.01            69,923 
      After two years, through three years       8.16            42,054 
      After three years, through four years      6.96             8,992 
      After four years, through five years       6.89             5,905 
      After five years                           6.17             1,446 
                                                 ----          -------- 
                                                 5.72           484,721 
                                                 ----          -------- 
                                                                        
     Checking accounts:                                                 
      Non-interest bearing                          -            25,382 
      Interest-bearing:                                                 
          NOW accounts                           2.00            55,901 
          Money market accounts                  3.54            53,321 
                                                               -------- 
                                                                134,604 
                                                               -------- 
                                                           
                                                 4.43%         $920,072 
                                                 ====          ======== 
</TABLE>                                                            

                                      F-19
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(7)  Deposits, Continued
------------------------

<TABLE>                                                           
<CAPTION>                                                         
                                                  DECEMBER 31, 1996    
                                              -------------------------
                                                WEIGHTED               
                                                AVERAGE                
                                                  RATE        BALANCE  
                                              -----------   -----------
     <S>                                      <C>           <C>        
     Savings accounts                             3.34%        $308,842
                                                  ----         --------
     Certificates maturing:                                            
      Within one year                             5.90          293,987
      After one year, through two years           5.55           60,712
      After two years, through three years        6.92           26,659
      After three years, through four years       8.88           30,735
      After four years, through five years        7.88            5,111
      After five years                            7.17            5,332
                                                  ----         --------
                                                  6.17          422,536
                                                  ----         --------
                                                                       
     Checking accounts:                                                
      Non-interest bearing                           -           28,374
      Interest-bearing:                                                
          NOW accounts                            2.00           47,995
          Money market accounts                   3.68           53,318
                                                               --------
                                                                129,687
                                                               --------

                                                  4.57%        $861,065
                                                  ====         ======== 
</TABLE>                                                           

                                      F-20
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(7)  Deposits, Continued
------------------------

     Generally, interest rates on certificates of deposit range from 3.34% to
     9.50% at September 30, 1997 (unaudited).

     Interest expense for the nine months ended September 30, 1997 and 1996 and
     the years ended December 31, 1996, 1995 and 1994 is summarized as follows
     (in thousands):

<TABLE>
<CAPTION>
                                              NINE MONTHS ENDED             YEAR ENDED
                                                SEPTEMBER 30,              DECEMBER 31,
                                              -----------------      -----------------------
                                               1997       1996        1996     1995    1994    
                                              ------     ------      ------   ------  ------   
                                                 (unaudited)                                    
     <S>                                      <C>        <C>         <C>      <C>     <C>    
     Savings accounts                         $ 7,626     7,814      10,353   11,636  12,869   
     Certificates                              21,964    19,467      26,432   24,159  16,443   
     Money market accounts                      1,612     1,443       1,916    2,164   1,533   
     NOW accounts                                 824       704         955      901     750   
     Mortgagors' payments held in escrow          119       123         158      174     159   
                                              -------    ------      ------   ------  ------   
                                              $32,145    29,551      39,814   39,034  31,754   
                                              =======    ======      ======   ======  ======    
</TABLE>

     Included in 1995 interest expense is a special interest payment of
     $1,251,000 which was approved by the Board of Trustees of the Bank and paid
     on a pro rata basis on all interest-bearing accounts in recognition of the
     Bank's 125th anniversary.

     Certificates issued in amounts over $100,000 amounted to $90.4 million and
     $83.3 million at September 30, 1997 and 1996 (unaudited), respectively, and
     $83.9 million, $75.2 million and $62.3 million at December 31, 1996, 1995
     and 1994, respectively. Interest expense thereon approximated $3.8 million
     and $3.4 million during the nine month periods ended September 30, 1997 and
     1996 (unaudited) and $4.6 million, $4.2 million and $3.2 million in 1996,
     1995 and 1994, respectively.

                                      F-21
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(8)  Other Borrowed Funds
-------------------------
 
     The Bank has a $127.8 million line of credit with the Federal Home Loan
     Bank (FHLB), secured by FHLB stock and the residential mortgage portfolio,
     which was established in 1995. This borrowing capacity provides a secondary
     funding source for real estate lending, liquidity, and asset/liability
     management. The Bank also pledged, to broker-dealers, U.S. Treasury Notes
     as collateral under agreements to repurchase. Under these agreements, the
     broker-dealers are required to transfer securities to the Bank upon
     maturity of the agreements, generally within 90 to 180 days after the
     transaction date. Information relating to the borrowings and repurchase
     agreements at September 30, 1997 and December 31, 1996 is summarized as
     follows (in thousands):

<TABLE>
<CAPTION>
                                                                             September 30,   December 31, 
                                                                                  1997           1996     
                                                                             -------------   ------------ 
                                                                              (unaudited)                 
     <S>                                                                     <C>             <C>          
     Short-term advances from Federal Home Loan Bank                          $         -           7,000 
     Reverse repurchase agreements                                                  18,740         20,008 
                                                                                   -------         ------ 
                                                                                    18,740         27,008 
     Long-term advances from the FHLB bearing fixed interest rates:                                       
      5.72%, maturing on January 29, 2001                                            5,000          5,000 
      6.59%, amortizing through July 31, 2012                                        5,000             -- 
                                                                                   -------         ------ 
                                                                                   $28,740         32,008 
                                                                                   =======         ======  
</TABLE>

     The aggregate maturities of FHLB advances for each of the five years
     subsequent to September 30, 1997 are as follows (unaudited): 1998,
     $206,000; 1999, $220,000; 2000, $235,000; 2001, $5,251,000; and 2002,
     $268,000.

     Information relating to the repurchase agreements at September 30, 1997
     (unaudited) and December 31, 1996 is summarized as follows:

<TABLE>
     <S>                                                                 <C>       <C>
     Weighted average interest rate of reverse repurchase agreements        5.68%    5.42
 
     Maximum outstanding at any month end                                $28,961   24,675
     Average amount outstanding during the period                         22,030   11,091
                                                                         =======   ======
</TABLE>

     The average amounts outstanding are computed using weighted monthly
     averages. Related interest expense for the nine month periods ended
     September 30, 1997 and 1996 (unaudited) was $916,000 and $281,000,
     respectively, and $576,000 for the year ended December 31, 1996. The Bank
     had no outstanding borrowings at December 31, 1995 and 1994.

                                      F-22
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(9)  Net Worth
--------------

     The changes in net worth for the nine months ended September 30, 1997 and
     for the years ended December 31, 1996, 1995 and 1994 follow (in thousands):

<TABLE>
<CAPTION>
                                                          NINE MONTHS ENDED            YEAR ENDED           
                                                            SEPTEMBER 30,             DECEMBER 31,          
                                                                                -----------------------     
                                                                1997             1996     1995    1994      
                                                                ----            ------   ------  ------     
                                                             (unaudited)                                     
     <S>                                                  <C>                   <C>      <C>     <C>    
     Net worth, beginning of period                           $115,664          107,653   81,322  87,195 
     Net income                                                  8,635           10,768    9,925   8,801 
     Net unrealized gain (loss)                                                                           
       on securities available for sale, net of taxes            2,421           (2,757)  16,406 (14,674) 
                                                              --------          -------  -------         
     Net worth, end of period                                 $126,720          115,664  107,653  81,322 
                                                              ========          =======  ======= =======  
</TABLE>

     The Bank is subject to various regulatory capital requirements administered
     by the Federal banking agencies. Failure to meet minimum capital
     requirements can initiate certain mandatory - and possibly additional
     discretionary - actions by regulators that, if undertaken, could have a
     direct material effect on the Bank's financial statements. Under capital
     adequacy guidelines and the regulatory framework for prompt corrective
     action, the Bank must meet specific guidelines that involve quantitative
     measures of the Bank's assets, liabilities, and certain off-balance-sheet
     items as calculated under regulatory accounting practices. The Bank's
     capital amounts and classifications are also subject to qualitative
     judgements by the regulators about components, risk weightings, and other
     factors.

     Quantitative measures established by regulation to ensure capital adequacy
     require the Bank to maintain minimum amounts and ratios (set forth in the
     table below) of total and Tier 1 capital to risk-weighted assets and of
     Tier 1 capital to average assets. As of September 30, 1997, the Bank meets
     all capital adequacy requirements to which it is subject.

     As of September 30, 1997, the most recent notification from the Federal
     Deposit Insurance Corporation categorized the Bank as well capitalized
     under the regulatory framework for prompt corrective action. To be
     categorized as adequately capitalized the Bank must maintain minimum total
     risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
     the following table. There are no conditions or events since that
     notification that management believes have changed the Bank's category.

                                      F-23
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(9)  Net Worth
--------------

     The Bank's actual capital amounts and ratios are presented in the following
     table (in thousands):

<TABLE>
<CAPTION>
                                                                                          
                                                                      FOR CAPITAL                         
                                                                       ADEQUACY           
                                   ACTUAL                              PURPOSES           
                              --------------             --------------------------------------                   
                              AMOUNT   RATIO             AMOUNT                           RATIO      
                              ------   -----             ------                           -----      
<S>                          <C>       <C>      <C>                             <C>                  
As of September 30, 1997:                                                              
(unaudited):                                                                           
Total capital to                                greater than                    greater than
brisk-weighted assets         $131,736  21.74%  or equal to        $48,470      or equal to     8.00%
                                                                                                                           
Tier 1 capital to                               greater than                    greater than        
risk-weighted assets          125,383  20.69    or equal to        24,235       or equal to    4.00%  
                                                                                                    
Tier 1 capital to                               greater than                    greater than
average assets                125,383  10.75    or equal to        34,990       or equal to    3.00            
                                                                                                               
As of December 31, 1996:                                                               
Total capital to                                greater than                    greater than
risk-weighted assets          123,229  22.84    or equal to        43,160       or equal to    8.00             
                                                                                                   
Tier 1 capital to                               greater than                    greater than
risk-weighted assets          116,690  21.63    or equal to        21,580       or equal to    4.00   
                                                                                                
Tier 1 capital to                               greater than                    greater than    
average assets                116,690  10.77    or equal to        32,492       or equal to    3.00
                                                                                                
As of December 31, 1995:                                                                        
Total capital to                                greater than                    greater than    
risk-weighted assets          110,778  22.34    or equal to        39,672       or equal to    8.00
                                                                                       
Tier 1 capital to                               greater than                    greater than
risk-weighted assets          106,071  21.39    or equal to        19,836       or equal to    4.00          
                                                                                                          
Tier 1 capital to                               greater than                    greater than              
average assets                106,071  10.86    or equal to        29,292       or equal to    3.00           

<CAPTION> 

                                                       TO BE WELL               
                                                    CAPITALIZED UNDER     
                                                    PROMPT CORRECTIVE     
                                                    ACTION PROVISIONS      
                                           -----------------------------------    
                                           AMOUNT                        RATIO       
                                           -------                       -----       
<S>                             <C>                           <C>          
As of September 30, 1997:                                                 
(unaudited):                                                                          
Total capital to                greater than                  greater than  
brisk-weighted assets           or equal to      $60,588      or equal to   10.00%     
                                                                                       
Tier 1 capital to               greater than                  greater than             
risk-weighted assets            or equal to       36,353      or equal to    6.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
average assets                  or equal to       58,316      or equal to    5.00      
                                                                                       
As of December 31, 1996:                                                               
Total capital to                greater than                  greater than             
risk-weighted assets            or equal to       53,950      or equal to   10.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
risk-weighted assets            or equal to       32,370      or equal to    6.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
average assets                  or equal to       54,154      or equal to    5.00      
                                                                                       
As of December 31, 1995:                                                               
Total capital to                greater than                  greater than             
risk-weighted assets            or equal to       49,590      or equal to   10.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
risk-weighted assets            or equal to       29,754      or equal to    6.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
average assets                  or equal to       48,820      or equal to    5.00       
</TABLE> 













                                      F-24
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(10) Income Taxes
-----------------

     Total income taxes for the nine months ended September 30, 1997 and 1996,
     and for the years ended December 31, 1996, 1995 and 1994 were allocated as
     follows (in thousands):


<TABLE>   
<CAPTION> 
                                              NINE MONTHS             YEARS ENDED        
                                             SEPTEMBER 30,            DECEMBER 31,       
                                            ----------------  ---------------------------
                                             1997     1996     1996      1995      1994  
                                            -------  -------  -------   -------   -------
                                              (UNAUDITED)                                 
     <S>                                    <C>      <C>      <C>       <C>       <C>      
     Income from operations                  $4,905   4,667    6,278      5,144    4,704 
                                                                                         
     Net worth, for unrealized gain/loss                                                 
        on securities available for sale      1,682  (3,719)  (1,917)    10,028   (8,824)
                                             ======  ======   ======     ======   ====== 
</TABLE>


     The components of income taxes attributable to income from operations for
     the nine months ended September 30, 1997 and 1996 and for the years ended
     December 31, 1996, 1995 and 1994 are as follows (in thousands):

<TABLE>                                                              
<CAPTION>                                                            
                    NINE MONTHS             YEARS ENDED              
                   SEPTEMBER 30,            DECEMBER 31,             
                  ----------------  ---------------------------      
                   1997     1996     1996      1995      1994        
                  -------  -------  -------   -------   -------      
                     (UNAUDITED)                                  
     <S>          <C>      <C>      <C>       <C>       <C>       
     Current:                                                        
                                                                 
      Federal      $4,356   4,316    5,640     4,353      3,729        
      State           713     800    1,025     1,044        932        
                   ------   -----    -----     -----      -----        
                    5,069   5,116    6,665     5,397      4,661        
                   ------   -----    -----     -----      -----        
     Deferred:                                                         
                                                                       
      Federal        (164)   (449)    (387)     (253)        43        
                   ------   -----    -----     -----      -----        
                   $4,905   4,667    6,278     5,144      4,704        
                   ======   =====    =====     =====      =====         
</TABLE>

                                      F-25
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(10) Income Taxes, Continued
----------------------------

     Income tax expense attributable to income from operations for the nine
     months ended September 30, 1997 and 1996 and the years ended December 31,
     1996, 1995 and 1994 differs from the expected tax expense (computed by
     applying the Federal corporate tax rate of 35% to income before income
     taxes) as follows (in thousands):

<TABLE>                                                              
<CAPTION>                                                            
                                                            NINE MONTHS             YEARS ENDED        
                                                           SEPTEMBER 30,            DECEMBER 31,       
                                                          ----------------  ---------------------------
                                                           1997     1996     1996      1995      1994  
                                                          -------  -------  -------   -------   ------- 
                                                             (UNAUDITED)                               
     <S>                                                  <C>      <C>      <C>       <C>       <C>    
     Expected tax expense                                 $4,739    4,513    5,966     5,274     5,050   
        Increase (decrease) attributable to:
          State income taxes, net of
           Federal benefit                                   463      520      666       679       606       
          Dividends received deduction                      (326)    (331)    (434)     (436)     (411)      
          Non-taxable interest income                        (25)     (59)     (68)     (386)     (400)      
          Other                                               15     (142)    (116)      (31)     (342)       
          Increase in valuation allowance
            for deferred tax assets allocated
            to income tax expense                             39      166      264        44       201
                                                           -----    -----    -----     -----     ----- 
                                                          $4,905    4,667    6,278     5,144     4,704
                                                           =====    =====    =====     =====     =====
</TABLE> 

                                      F-26
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(10) Income Taxes, Continued
----------------------------

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     September 30, 1997 and December 31, 1996 and 1995 are presented below:

<TABLE>
<CAPTION>
                                                                  SEPTEMBER 30,     DECEMBER 31,      
                                                                                  ----------------    
                                                                       1997        1996     1995      
                                                                  --------------  -------  -------    
                                                                   (UNAUDITED)                        
      <S>                                                         <C>             <C>      <C>        
      Deferred tax assets:                                                                            
          Financial reporting allowance for loan losses                 $ 2,605     2681     1930     
          Deferred compensation                                             701      576      501     
          Post-retirement benefits obligations                              670      638      587     
          Losses on investments in affiliates                               540      490      405     
          Net unrealized loss on securities available for sale                -      713        -     
          Deferred mortgage fees                                            218      283      371     
          Excess of financial reporting depreciation over tax                                         
             depreciation                                                   178        -        -     
          Other                                                             342      376      659     
                                                                        -------   ------   ------     
                 Total gross deferred tax assets                          5,254    5,757    4,453     
                 Less valuation allowance                                (1,341)  (1,302)  (1,038)    
                                                                        -------   ------   ------     
                 Net deferred tax assets                                  3,913    4,455    3,415     
                                                                        -------   ------   ------     
                                                                                                      
      Deferred tax liabilities:                                                                       
          Tax allowance for loan losses, in excess of base                                            
             year amount                                                 (1,884)  (1,790)  (1,768)    
          Net unrealized gain on securities available for sale             (969)       -   (1,204)    
          Prepaid pension costs                                            (285)    (301)    (287)    
          Excess of tax depreciation over financial reporting                                         
             depreciation                                                     -      (56)    (119)    
          Other                                                             (90)    (104)    (137)    
                                                                        -------   ------   ------     
                 Total gross deferred tax liabilities                    (3,228)  (2,251)  (3,515)    
                                                                        -------   ------   ------     
      Net deferred tax asset (liability)                                $   685    2,204     (100)    
                                                                        =======   ======   ======      
</TABLE>

                                      F-27
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(10) Income Taxes, Continued
----------------------------
 
     The net increase in the total valuation allowance for the nine month period
     ended September 30, 1997 and the year ended December 31, 1996 of $39,000
     and $264,000, respectively, is attributable to income from operations. The
     net decrease in the total valuation allowance for the year ended December
     31, 1995 of $766,000 includes an increase of $44,000 attributable to income
     from operations, net of a decrease of $810,000 related to the unrealized
     gain on securities available for sale.

     In assessing the realizability of deferred tax assets, management considers
     whether it is more likely than not that some portion or all of the deferred
     tax assets will not be realized. The ultimate realization of deferred tax
     assets is dependent upon the generation of future taxable income during the
     periods in which those temporary differences become deductible. Management
     considers the scheduled reversal of deferred tax liabilities, availability
     of operating loss carrybacks, projected future taxable income, and tax
     planning strategies in making this assessment. Based upon the level of
     historical taxable income, the opportunity for net operating loss
     carrybacks, and projections for future taxable income over the periods
     which deferred tax assets are deductible, management believes it is more
     likely than not the Bank will realize the benefits of these deductible
     differences, net of the existing valuation allowance, at September 30,
     1997.

     At December 31, 1996, net worth includes approximately $11.1 million
     representing bad debt deductions taken under the provisions of the Internal
     Revenue Code. Recent Federal legislation repealed this provision of the Tax
     Code thereby requiring the Bank to recapture $4.2 million in additions to
     the tax bad debt reserve for periods after the 1987 base year. At December
     31, 1996, the deferred tax liability related to the tax allowance for loan
     losses in excess of the base year amount includes $1.5 million of Federal
     income taxes which the Bank will repay over tax years 1998 through 2003.

                                      F-28
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(11) Benefit Plans
------------------

     Pension Plan
     ------------

     The funded status of the Bank's pension plan and the amounts recognized in
     the financial statements as of December 31, 1996 and 1995 follow (in
     thousands):

<TABLE>
<CAPTION>
                                                                    1996     1995  
                                                                   -------  -------
      <S>                                                          <C>      <C>    
      Actuarial present value of benefit obligation:                               
         Vested                                                     $4,174    3952  
         Non-vested                                                    467     376  
                                                                    ------   -----  
            Total accumulated benefit obligation                    $4,641   4,328  
                                                                    ======   =====  
      Projected benefit obligation for service rendered to date     $6,084    5652  
      Plan assets at fair value                                       7602    6664  
                                                                    ------   -----  
      Plan assets in excess of projected benefit obligation           1518    1012  
      Unrecognized net asset being recognized over 10 years            122     184  
      Unrecognized net gain                                            799     258  
      Prior service cost not yet recognized in net periodic                         
         pension costs                                                  14      18  
                                                                    ------   -----  
            Prepaid pension costs, included in other assets         $  611     588  
                                                                    ======   =====  
</TABLE>


     Net pension cost for years ended December 31, 1996, 1995 and 1994 is
     comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                          1996   1995  1994    
                                                          -----  ----  -----   
      <S>                                                 <C>    <C>   <C>     
      Service cost, benefits earned during the period     $ 340   277   286    
      Interest cost on projected benefit obligation         422   385   346    
      Actual return on plan assets                          949  1133     7    
      Net amortization and deferral                         366   640  (476)   
                                                          -----  ----  ----    
                                                                               
              Net periodic pension cost                   $ 179   169   149    
                                                          =====  ====  ====     
</TABLE>

                                      F-29
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(11) Benefit Plans, Continued
-----------------------------

     The principal actuarial assumptions used in 1996, 1995 and 1994 were as
     follows:
     
<TABLE>
<CAPTION>
                                                            1996   1995  1994  
                                                            -----  ----  ----  
     <S>                                                    <C>    <C>   <C>   
     Discount rate                                          7.75%  7.50  8.25  
     Expected long-term rate of return on assets            8.00   8.00  8.00  
     Assumed rate of future compensation increase           5.50   5.50  6.00  
                                                            ====   ====  ====   
</TABLE>

     The plan assets are in mutual funds consisting primarily of listed stocks
     and bonds, government securities and cash equivalents.

     401(k) Plan
     -----------

     All employees are also eligible to participate in a Bank sponsored 401(k)
     plan. Participants may make contributions to the Plan in the form of salary
     reductions of up to 15% of their eligible compensation subject to the
     Internal Revenue Code limit. The Bank contributes an amount to the Plan
     equal to 50% of employee contributions, up to a maximum of 6% of the
     employee's eligible compensation. The Bank's contribution was $143,000 and
     $123,000 for the nine month periods ended September 30, 1997 and 1996
     (unaudited), respectively, and $169,000, $143,000 and $128,000 in 1996,
     1995 and 1994, respectively.

     Other Post-retirement Benefits
     ------------------------------

     In addition to providing pension benefits, the Bank provides post-
     retirement health care and life insurance benefits for substantially all of
     the Bank's full-time employees and their beneficiaries and dependents if
     they reach normal retirement age while working for the Bank.

     The components of net periodic post-retirement benefit cost for the years
     ended December 31, 1996, 1995, and 1994 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                  1996      1995      1994   
                                                  -----     ----      ----   
                    <S>                           <C>       <C>       <C>    
                    Service cost                  $  64       49        52   
                    Interest cost                   105      101        96   
                                                  -----     ----      ----   
                              Total cost          $ 169      150       148   
                                                  =====     ====      ====    
</TABLE>

                                      F-30
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                              AND SUBSIDIARIES   

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(11) Benefit Plans, Continued
-----------------------------

     The accumulated post-retirement benefit obligation recognized as of
     December 31, 1996 and 1995 is as follows (in thousands): 


<TABLE> 
<CAPTION>
                                                                  1996    1995  
                                                                 -------  ----- 
      <S>                                                        <C>      <C>   
                                                                                
      Fully eligible active participants                          $   45    113 
      Active participants not yet eligible                           427    423 
      Retirees                                                       798    894 
      Unrecognized net gain                                          285      2 
                                                                   -----  ----- 
         Total accumulated post-retirement benefit obligation,                  
             included in other liabilities                       $ 1,555  1,432 
                                                                  ======  ===== 
</TABLE>


     The post-retirement benefit obligation was determined using a discount rate
     of 8.0% for 1996 and 7.5% for 1995. The assumed health care cost trend rate
     used in measuring the accumulated post-retirement benefit obligation was
     10% in 1997, decreasing by 1% per year to an ultimate rate of 5.0% in 2002
     and thereafter, over the projected payout of benefits. The health care cost
     trend rate assumption can have a significant effect on the amounts
     reported. If the health care cost trend rate were increased one percent,
     the accumulated post-retirement benefit obligation as of December 31, 1996
     would have increased by 2.3% and the aggregate of service and interest cost
     would increase by 2.6%. However, the plan limits the increase in the Bank's
     annual contributions to the plan for most participants to the increase in
     base compensation for active employees.

     As of January 1, 1994, the Bank adopted SFAS 106 "Employers' Accounting for
     Post-retirement Benefits Other Than Pensions". The transition obligation
     related to the adoption of this standard of $1,224,000 was recognized in
     the 1994 Consolidated Statement of Income, net of $300,000 previously
     accrued for this liability.

     Other Plans
     -----------

     The Bank also sponsors two non-qualified compensation plans, one for
     officers and one for employees. Awards are payable if certain earnings and
     performance objectives are met. The Bank had accrued $886,000 and $890,000
     for awards under these plans for the nine month periods ended September 30,
     1997 and 1996 (unaudited), respectively. Awards under these plans were
     $1,202,000, $1,173,000 and $1,363,000 in 1996, 1995 and 1994, respectively.

     The Bank also maintains a supplemental benefit plan for certain executive
     officers that is funded by the Bank through life insurance contracts. 

                                     F-31
<PAGE>
 
                             LOCKPORT SAVINGS BANK
                              AND SUBSIDIARIES   

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(12) Fair Value of Financial Instruments
----------------------------------------

     The carrying value and estimated fair values of the Bank's financial
     instruments, all of which are non-trading, are as follows (in thousands):

<TABLE> 
<CAPTION> 
                                                   SEPTEMBER 30, 1997    
                                                   ------------------    
                                                             ESTIMATED   
                                                  CARRYING     FAIR      
                                                    VALUE      VALUE     
                                                    -----      -----     
                                                      (UNAUDITED)        
     <S>                                          <C>        <C>         
     Financial assets:                                                   
      Cash and cash equivalents                    $ 17,004   17,004     
      Securities available for sale                 464,973  464,973     
      Securities held to maturity                    37,500   37,500     
      Loans                                         622,487  628,908     
      Accrued interest receivable                     7,343    7,343     
                                                                         
     Financial liabilities:                                              
      Deposits                                     $992,219  995,217     
      Mortgagors' payments held in escrow             8,387    8,387     
      Other borrowed funds                           28,740   28,688     
      Accrued interest payable                          558      558     
                                                                         
     Unrecognized financial instruments:                                 
      Commitments to extend credit                 $ 46,513   46,513     
</TABLE>                                                                 
                                                                         
                                                                         
<TABLE>                                                                  
<CAPTION>                                                                
                                                   DECEMBER 31, 1996     
                                                   -----------------     
                                                            ESTIMATED    
                                                  CARRYING     FAIR      
                                                    VALUE      VALUE     
                                                    -----      -----     
     <S>                                          <C>       <C>          
     Financial assets:                                                   
      Cash and cash equivalents                    $ 16,219   16,219      
      Securities available for sale                 415,129  415,129     
      Securities held to maturity                    38,000   38,000     
      Loans                                         598,486  604,000     
      Accrued interest receivable                     6,348    6,348     
                                                                         
     Financial liabilities:                                              
      Deposits                                     $920,072  923,796     
      Mortgagors' payments held in escrow             8,773    8,773     
      Other borrowed funds                           32,008   31,863     
      Accrued interest payable                          330      330     
                                                                         
     Unrecognized financial instruments:                                 
      Commitments to extend credit                  $34,193   34,193      
</TABLE> 

                                     F-32
<PAGE>
 
                            LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


(12) Fair Value of Financial Instruments, Continued
---------------------------------------------------

<TABLE> 
<CAPTION> 
                                             DECEMBER 31, 1995     
                                             -----------------     
                                                      ESTIMATED     
                                             CARRYING   FAIR       
                                              VALUE     VALUE      
                                             --------  -------     
     <S>                                     <C>       <C>         
     Financial assets:                                             
      Cash and cash equivalents              $ 31,374   31,374     
      Securities available for sale           346,410  346,410     
      Securities held to maturity              46,700   46,700     
      Loans                                   535,971  546,592     
      Accrued interest receivable               5,622    5,622     
      Nationar receivable                       5,053      N/A     
                                                                   
     Financial liabilities:                                        
      Deposits                               $861,065  869,265     
      Mortgagors' payments held in escrow      10,189   10,189     
      Accrued interest payable                    160      160     
                                                                   
     Unrecognized financial instruments:                           
      Commitments to extend credit            $30,583   30,583      
</TABLE> 
 

     Fair value estimates are based on existing on and off balance sheet
     financial instruments without attempting to estimate the value of
     anticipated future business and the value of assets and liabilities that
     are not considered financial instruments. In addition, the tax
     ramifications related to the realization of the unrealized gains and losses
     can have a significant effect on fair value estimates and have not been
     considered in these estimates. Fair value estimates, methods, and
     assumptions are set forth below for each type of financial instrument.

     Fair value estimates are made at a specific point in time, based on
     relevant market information and information about the financial instrument,
     including judgments regarding future expected loss experience, current
     economic conditions, risk characteristics of various financial instruments,
     and other factors. These estimates are subjective in nature and involve
     uncertainties and matters of significant judgment and therefore cannot be
     determined with precision. Changes in assumptions could significantly
     affect the estimates. 

     Cash and Cash Equivalents
     -------------------------

     The carrying value approximates the fair value because the instruments
     mature in 90 days or less.

     Securities
     ----------

     The fair values are estimated based on quoted market prices supplied by the
     Bank's custody agent and investment broker (notes 2 and 3).

                                     F-33
<PAGE>
 
                            LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED



(12) Fair Value of Financial Instruments, Continued
---------------------------------------------------

     Loans
     -----

     Residential revolving home equity and personal and commercial open ended
     lines of credit reprice as the prime rate changes. Therefore, the carrying
     values of such loans, totaling $15.4 million (unaudited), $14.0 million and
     $12.2 million at September 30, 1997, December 31, 1996 and 1995,
     respectively, approximate their fair value.

     The fair value of fixed-rate performing loans is calculated by discounting
     scheduled cash flows through the estimated maturity using the Bank's
     current origination rates. The estimate of maturity is based on the Bank's
     contractual cash flows adjusted for prepayment estimates based on current
     economic and lending conditions. Fair value for significant nonperforming
     loans is based on carrying value which does not exceed recent external
     appraisals of any underlying collateral.

     Deposits
     --------

     The fair value of deposits with no stated maturity, such as savings, money
     market, checking, as well as mortgagors' payments held in escrow, is equal
     to the amount payable on demand as of September 30, 1997, December 31, 1996
     and 1995. The fair value of certificates of deposit is based on the
     discounted value of contractual cash flows, using rates currently offered
     for deposits of similar remaining maturities.

     Other Borrowed Funds
     --------------------

     The fair value of the Bank's other borrowed funds is calculated by
     discounting scheduled cash flows through the estimated maturity using
     current market rates.

     Other Assets and Liabilities
     ----------------------------

     The fair value of the Bank's accrued interest receivable on loans and
     investments and accrued interest payable to depositors approximates the
     carrying value because all interest is payable or receivable in 90 to 120
     days.

     Commitments to Extend Credit
     ----------------------------

     The fair value of the Bank's commitments to extend credit approximates the
     notional amount of the agreements because of the short-term (90 to 120
     days) commitment period or because they reprice as market rates change.

                                     F-34
<PAGE>
 
                            LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED


(13) Plan of Reorganization and Stock Issuance
---------------------------------------------

     On September 15, 1997, the Board of Trustees of LSB unanimously adopted a
     Plan of Reorganization (the Plan) whereby LSB will be reorganized into a
     New York chartered two-tiered mutual holding company. 

     The Reorganization will be accomplished in the following manner: (i) LSB
     will organize an interim stock savings bank as a wholly-owned subsidiary
     ("Interim One"); (ii) Interim One will organize an interim stock savings
     bank as a wholly-owned subsidiary ("Interim Two"); (iii) Interim One will
     organize Niagara Bancorp, Inc. (the Company) as a wholly-owned subsidiary;
     (iv) LSB will exchange its charter for a New York stock savings bank
     charter to become the Stock Bank and Interim One will exchange its charter
     for a New York mutual holding company charter to become the MHC; (v)
     simultaneously with step (iv), Interim Two will merge with and into the
     Stock Bank with the Stock Bank as the resulting institution; (vi) all of
     the initially issued stock of the Stock Bank will be transferred to the MHC
     in exchange for membership interests in the MHC; and (vii) the MHC will
     contribute the capital stock of the Stock Bank to the Company, and the
     Stock Bank will become a wholly-owned subsidiary of the Company.
     Contemporaneously with the Reorganization, the Company will offer for sale
     in the Stock Offering shares of Common Stock representing the pro forma
     market value of the Company and the Bank. Each savings account of LSB at
     the time of Reorganization will become a savings account in the newly-
     formed bank in the same amount and upon the same terms and conditions,
     except the holder of each such deposit account will have liquidation rights
     with respect to the Mutual Holding Company rather than the Bank. 
 
     LSB will be applying to the Federal Reserve Board, the New York State
     Banking Department, the FDIC and the SEC for approval of transactions
     contemplated by the Plan. The Plan authorizes the stock holding company to
     offer stock in one or more stock offerings up to a maximum of 49% of the
     issued and outstanding shares of its common stock. The common stock will be
     offered on a priority basis to depositors, employee benefit plans of LSB,
     certain other eligible subscribers, the community and a charitable
     foundation to be established pursuant to the Plan.

     The Company proposes to fund the foundation by contributing a number of
     authorized but unissued shares of common stock or grants of cash,
     securities or other assets to the foundation, immediately following the
     conversion. Such contribution, once made, will not be recoverable by the
     Company or the Stock Bank. The Company will recognize expense equal to the
     fair value of the stock, cash, securities or other assets in the quarter in
     which the contribution occurs, which is expected to be the first or second
     quarter of 1998. Such expense will reduce earnings and have a material
     impact on the Company's earnings for such quarter and for 1998.

     Conversion costs will be deferred and reduce the proceeds from the shares
     sold in the conversion. If the conversion is not completed, all costs will
     be charged to expense.

                                     F-35
<PAGE>
 
                                   GLOSSARY

1933 Act                     Securities Act of 1933, as amended

1934 Act                     Securities Exchange Act of 1934, as amended

Associate                    The term "Associate" of a person is defined to mean

                             (i) any corporation or organization (other than the
                             Bank or its subsidiaries or the Company) of which
                             such person is a director, officer, partner or 10%
                             shareholder;

                             (ii) any trust or other estate in which such person
                             has a substantial beneficial interest or serves as
                             trustee or in a similar fiduciary capacity;
                             provided, however that such term shall not include
                             any employee stock benefit plan of the Company or
                             the Bank in which such a person has a substantial
                             beneficial interest or as a trustee or in a similar
                             fiduciary capacity, and

                             (iii) any relative or spouse of such person, or
                             relative of such spouse, who either has the same
                             home as such person or who is a director or officer
                             of the Bank or its subsidiaries or the Company

ATM                          Automated Teller Machine

Bank                         Lockport Savings Bank

BIF                          Bank Insurance Fund of the FDIC

Code                         The Internal Revenue Code of 1986, as amended

Community Offering           Offering for sale to members of the general public
                             of any shares of common stock not subscribed for in
                             the Subscription Offering, with preference given to
                             natural persons residing in Niagara, Orleans, Erie
                             and Genesee Counties, New York

Common Stock                 Common Stock, par value of $.01 per share, offered
                             by Niagara Bancorp, Inc. in connection with the
                             Reorganization

Company                      Niagara Bancorp, Inc., the parent holding company
                             for Lockport Savings Bank, and the issuer of the
                             shares of Common Stock in the Offering

Department                   The New York State Banking Department

Eligible Account  Holders    Holders of deposit accounts with Lockport Savings
                             Bank with account balances of at least $100 as of
                             the close of business on August 31, 1996

ERISA                        Employee Retirement Income Security Act of 1974, as
                             amended

ESOP                         The Niagara Bancorp, Inc. Employee Stock Ownership
                             Plan and Trust

Estimated Valuation Range    Estimated pro forma market value of the Common
                             Stock ranging from

                                      G-1
<PAGE>
 
                             $191,250,000 to $258,750,000. The estimated
                             valuation range may be increased to $297,562,500
                             without a resolicitation of subscribers

Expiration Date              ______ noon, New York Time, on March ___, 1997

FASB                         Financial Accounting Standards Board

Federal Reserve Board        Board of Governors of the Federal Reserve System

FDIC                         Federal Deposit Insurance Corporation

FDICIA                       Federal Deposit Insurance Corporation Improvement
                             Act of 1991, as amended

Freddie Mac                  Freddie Mac

FHLB of New York             Federal Home Loan Bank of New York

Foundation                   The Lockport Savings Bank Charitable Foundation to
                             be established by Lockport Saving Bank and Niagara
                             Bancorp, Inc. and to which the Bank and the Company
                             will contribute cash and shares of Common Stock

FNMA                         Federal National Mortgage Association

Independent Valuation        The appraisal of the pro forma market value of the
                             Company's Common Stock as determined by RP
                             Financial, LC as of November __, 1997

IRA                          Individual retirement account or arrangement

IRS                          Internal Revenue Service

Minority Shares              The shares of Common Stock sold to the depositors
                             and the public in the Offering pursuant to the
                             Prospectus, which will represent, in the aggregate,
                             a minority ownership position in the Company

MMDA                         Money Market Demand Account

Mutual Holding  Company      Niagara Bancorp, MHC, a New York chartered mutual
                             corporation, which will own, and which by law must
                             own, a majority of the shares of Common Stock of
                             the Company

NASD                         National Association of Securities Dealers, Inc.

Nasdaq System                National Association of Securities Dealers
                             Automated Quotation System

NOW account                  Negotiable Order of Withdrawal Account

NPV                          Net portfolio value

Offering                     The offer and sale of Common Stock to depositors
                             and the public pursuant to the Prospectus

                                      G-2
<PAGE>
 
Offering Range               The offer and sale by the Company of between
                             8,677,747 and 11,740,482 shares (subject to
                             adjustment to 13,501,554 shares) of Common Stock
                             pursuant to the Prospectus

Order Form                   Form for ordering stock accompanied by a
                             certification concerning certain matters

Plan Reorganization          Lockport Savings Bank Plan of Reorganization from a
                             Mutual Savings Bank to a Mutual Holding Company and
                             Stock Issuance Plan

Reorganization               The reorganization of the Bank from the mutual to
                             the stock form of organization, the organization of
                             the Company, the issuance of all of the Bank's
                             common stock to the Company, the issuance of a
                             majority of the Company's Common Stock to the
                             Mutual Holding Company, and the offer and sale of
                             the Minority Shares to depositors and the public
                             pursuant to the Prospectus

REO                          Real Estate Owned

Recognition and
Retention Plan               The Recognition and Retention Plan to be submitted
                             for approval at a meeting of the Company's
                             shareholders to be held no earlier than six months
                             after the completion of the Reorganization

SAIF                         Savings Association Insurance Fund of the FDIC

SEC                          Securities and Exchange Commission

Special Meeting              Special Meeting of depositors of the Bank called
                             for the purpose of approving the Plan of
                             Reorganization

Stock Option Plan            The Stock Option Plan for directors and officers to
                             be submitted for approval at a meeting of the
                             Company' shareholders to be held no earlier than
                             six months after the completion of the conversion

Subscription Offering        Offering of non-transferable rights to subscribe
                             for the common stock, in order of priority, to
                             eligible account holders, the ESOP, and
                             supplemental eligible account holders

Supplemental Eligible
Account Holders              Depositors of the Bank, who are not eligible
                             account holders, with account balances of at least
                             $100 on December 31, 1997

Superintendent               The Superintendent of Banks of the State of New
                             York


Voting Record  Date          The close of business on January __, 1998, the date
                             for determining depositors entitled to vote at the
                             Special Meeting

                                      G-3
<PAGE>
 
================================================================================

          No person has been authorized to give any information or to make any
representation other than as contained in this prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or the Bank. This prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any security other than the
shares of common stock offered hereby to any person in any jurisdiction in which
such offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
prospectus nor any sale hereunder shall, under any circumstances, create any
implication that information herein is correct as of any time subsequent to the
date hereof.


                             NIAGARA BANCORP, INC.

                         (Proposed Holding Company for
                            Lockport Savings Bank)


                         Up to 13,501,55482,125 Shares


                                 Common Stock
                          ($.01 par value per share)


                               _________________

                                  PROSPECTUS

                               _________________

                            CIBC OPPENHEIMER CORP.
                           TRIDENT SECURITIES, INC.

                                February , 1998

                 THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
                  AND ARE NOT FEDERALLY INSURED OR GUARANTEED

Until March __, 1998 or 25 days after the commencement of the Offering, all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
 
PART II:  INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION


<TABLE>
<CAPTION>
                                                                                       Amount    
                                                                                       ------    
       <S>                                                                       <C>                 
       *    Legal fees and Expenses...................................           $    165,000    
       *    Printing, Postage and Mailing.............................                300,000    
       *    Appraisal and Business Plan Fees and Expenses.............                 67,500    
       *    Accounting Fees and Expenses..............................                100,000    
       **   Marketing Fees and Expenses...............................              1,060,000    
       *    Filing Fees (SEC, NASD and New York State                                            
             Department of Banking)...................................                 60,000    
       *    Other Expenses............................................                137,500    
                                                                                 ------------    
       **   Total.....................................................           $  1,800,000    
                                                                                 ============
</TABLE> 

__________________
*      Estimated
**     The Bank and the Company have retained CIBC Oppenheimer Corp. and Trident
       Securities, Inc. to assist in the sale of common stock on a best efforts
       basis in the Subscription and Community Offerings. For  purposes of 
       computing estimated expenses, it has been assumed that CIBC Oppenheimer 
       Corp. and Trident Securities, Inc. will receive fees of approximately
       $1,000,000, exclusive of attorneys' fees and expenses of $60,000.

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

       Article NINTH of the Certificate of Incorporation of Niagara Bancorp, 
Inc. (the "Corporation") sets forth circumstances under which directors, 
officers, employees and agents of the Corporation may be insured or indemnified 
against liability which they incur in their capacities as such:

       NINTH:
       -----

       A. Each person who was or is made a party or is threatened to be made a 
party to or is otherwise involved in any action, suit or proceeding, whether 
civil, criminal, administrative or investigative (hereinafter a "proceeding"), 
by reason of the fact that he or she is or was a Director or an Officer of the 
Corporation or is or was serving at the request of the Corporation as a 
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an 
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such 
proceeding is alleged action in an official capacity as a Director, Officer, 
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to 
the fullest extent authorized by the Delaware General Corporation Law, as the 
same exists or may hereafter be amended (but, in the case of any such 
amendment, only to the extent that such amendment permits the Corporation to 
provide broader indemnification rights than such law permitted the Corporation 
to provide prior to such amendment), against all expense, liability and loss 
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such 
indemnitee in connection therewith; provided, however, that, except as provided 
in Section C hereof with respect to proceedings to enforce rights to 
indemnification, the Corporation shall indemnify any such indemnitee in 
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.

       B. The right to indemnification conferred in Section A of this Article 
NINTH shall include the right to be paid by the Corporation the expenses 
incurred in defending any such proceeding in advance of its final disposition 
(hereinafter an "advancement of expenses"); provided, however, if required under
the Delaware General Corporation Law, that an advancement of expenses incurred 
by an indemnitee in his or her capacity as a Director of Officer (and not in 
any other capacity in which service was or is rendered by such indemnitee, 
including, without limitation, service to an employee benefit plan) shall be 
made only upon delivery to the Corporation of and undertaking (hereinafter an 
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so 
advanced if it shall ultimately be determined by final judicial decision from 
which there is no further appeal (hereinafter a "final)

<PAGE>

adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise. The rights to indemnification and to
the advancement of expenses conferred in Sections A and B of this Article NINTH
shall be contract rights and such rights shall continue as to an indemnitee who
has ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.

     C.   If a claim under Section A or B of this Article NINTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be 
entitled to be paid also the expense of prosecuting or defending such suit. In 
(i) any suit brought by the indemnitee to enforce a right to indemnification 
hereunder (but not in a suit brought by the indemnitee to enforce a right to an 
advancement of expenses), it shall be a defense that, and (ii) in any suit by
the Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the Corporation shall be entitled to recover such expenses upon
a final adjudication that, the indemnitee has not met any applicable standard
for indemnification set forth in the Delaware General Corporation Law. Neither
the failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or is stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article NINTH or otherwise, shall be on the Corporation.

     D.   The rights to indemnification and to the advancement of expenses
conferred in this Article NINTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.

     E.   The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.

     F.   The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article NINTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES.

          Not Applicable
     
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:

          The exhibits and financial statement schedules filed as part of this 
registration statement are as follows:

          (a)  LIST OF EXHIBITS

1.1  Form of Agency Agreement among Niagara Bancorp, Inc., Lockport Savings
     Bank, Trident Securities, Inc. and CIBC Oppenheimer Corp.*

<PAGE>
 
2    Plan of Reorganization

3.1  Certificate of Incorporation of Niagara Bancorp, Inc. (Incorporated herein 
     by reference to Exhibit B of the Plan of Reorganization)

3.2  Bylaws of Niagara Bancorp, Inc. (Incorporated herein by reference to 
     Exhibit B of the Plan of Reorganization)

4    Form of Common Stock Certificate of Niagara Bancorp, Inc.

5    Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality 
     of securities being registered 

8.1  Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.

8.2  Form of State Tax Opinion.*

8.3  Letter from RP Financial, Inc. with respect to Subscription Rights

10.1 Form of Employment Agreement

10.2 Lockport Savings Bank Deferred Compensation Plan

10.3 Employee Stock Ownership Plan

21   Subsidiaries of the Registrant*

23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in opinion
     filed as Exhibit 5)

23.2 Consents of KPMG Peat Marwick LLP

23.3 Consent of RP Financial, Inc.

24   Power of Attorney (set forth on Signature Page)

27   EDGAR Financial Data Schedule

99.1 Appraisal Report of RP Financial, Inc.* 

99.2 Marketing Materials

99.3 Order and Acknowledgment Form*

__________________
*To be filed supplementally or by amendment.

          (b)  FINANCIAL STATEMENT SCHEDULES

          No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.


ITEM 17.  UNDERTAKINGS

          The undersigned Registrant hereby undertakes:

          (1)  To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

<PAGE>
 
          (i)    To include any prospectus required by Section 10(a)(3) of the 
          Securities Act of 1933;

          (ii)   To reflect in the prospectus any facts or events arising after 
          the effective date of the registration statement (or the most recent
          post-effective amendment thereof) which, individually or in the
          aggregate, represent a fundamental change in the information set forth
          in the registration statement;

          (iii)  To include any material information with respect to the plan of
          distribution not previously disclosed in the registration statement or
          any material change to such information in the registration statement.

          (2)  That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

          (3)  To remove from registration by means of post-effective amendment 
any of the securities being registered which remain unsold at the termination of
the offering.

          (4)  To provide to the underwriter at the closing specified in the 
underwriting agreements, certificates in such denominations and registered in 
such names as required by the underwriter to permit prompt delivery to each 
purchaser.

          Insofar as indemnification for liabilities arising under the 
Securities Act of 1933 may be permitted to directors, officers and controlling 
persons of the Registrant pursuant to the foregoing provisions, or otherwise, 
the Registrant has been advised that in the opinion of the Securities and 
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933, the registrant 
has duly caused this registration statement to be signed on its behalf by the 
undersigned, thereunto duly authorized, in Lockport, New York on December 16, 
1997.

                                   NIAGARA BANCORP, INC.


                                   By:    /s/ William E. Swan
                                          -------------------
                                          William E. Swan
                                          President and Chief Executive Officer
                                          (Duly Authorized Representative)

                               POWER OF ATTORNEY

     We, the undersigned directors and officers of Niagara Bancorp, Inc. (the 
"Company") hereby severally constitute and appoint William E. Swan as our true 
and lawful attorney and agent, to do any and all things in our names in the 
capacities indicated below which said William E. Swan may deem necessary or 
advisable to enable the Company to comply with the Securities Act of 1933, and 
any rules, regulations and requirements of the Securities and Exchange 
Commission, in connection with the registration statement on Form S-1 relating 
to the offering of the Company's Common Stock, including specifically, but not 
limited to, power and authority to sign for us in our names in the capacities 
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm 
all that said William E. Swan shall do or cause to be done by virtue thereof.

     Pursuant to the requirements of the Securities Act of 1933, this 
registration statement has been signed below by the following persons in the 
capacities and as of the dates indicated.

     Signatures                     Title                          Date
     ----------                     -----                          ----

/s/ William E. Swan        President, and Chief Executive     December 16, 1997
-------------------        Officer (Principal Executive
William E. Swan            Officer) and Director


/s/ Paul J. Kolkmeyer      Executive Vice President and       December 16, 1997
---------------------      Chief Financial Officer 
Paul J. Kolkmeyer                                  


/s/ Gordon P. Assad        Director                           December 16, 1997
-------------------
Gordan P. Assad


/s/ Christa P. Caldwell    Director                           December 16, 1997
-----------------------
Christa P. Caldwell


/s/ James W. Currie        Director                           December 16, 1997 
-------------------
James W. Currie

<PAGE>
 
          Signatures                    Title                         Date
          ----------                    -----                         ----

/s/ Gary B. Fitch                  Director                 December 16, 1997
---------------------              
Gary B. Fitch


/s/ David W. Heinrich              Director                 December 16, 1997
---------------------
David W. Heinrich             


/s/ Daniel W. Judge                Director                 December 16, 1997
---------------------
Daniel W. Judge


/s/ B. Thomas Mancuso              Director                 December 16, 1997
---------------------
B. Thomas Mancuso


/s/ James Miklinski                Director                 December 16, 1997
---------------------
James Miklinski


/s/ Barton G. Smith                Director                 December 16, 1997
---------------------
Barton G. Smith


/s/ Robert G. Weber                Director                 December 16, 1997
---------------------
Robert G. Weber
<PAGE>
 
     As filed with Securities and Exchange Commission on December 22, 1997

                                                           Registration No. 333-

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

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549



                           _________________________



                                   EXHIBITS
                                      TO 
                            REGISTRATION STATEMENT
                                      ON
                                   FORM S-1


                           _________________________





                             NIAGARA BANCORP, INC.





================================================================================
<PAGE>
 
                                 EXHIBIT INDEX


1.1   Form of Agency Agreement among Niagara Bancorp, Inc., Lockport Savings 
      Bank, Trident Securities, Inc. and CIBC Oppenheimer Corp.*

2     Plan of Reorganization

3.1   Certificate of Incorporation of Niagara Bancorp, Inc. (incorporated herein
      by reference to Exhibit B of the Plan of Reorganization)

3.2   Bylaws of Niagara Bancorp, Inc. (Incorporated herein by reference to
      Exhibit B of the Plan of Reorganization)

4     Form of Common Stock Certificate of Niagara Bancorp, Inc.

5     Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality 
      of securities being registered

8.1   Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.

8.2   Form of State Tax Opinion.*

8.3   Letter from RP Financial, Inc. with respect to Subscription Rights

10.1  Form of Employment Agreement 

10.2  Lockport Savings Bank Deferred Compensation Plan

10.3  Employee Stock Ownership Plan

21    Subsidiaries of the Registrant*

23.1  Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in 
      opinion filed as Exhibit 5)

23.2  Consents of KPMG Peat Marwick LLP

23.3  Consent of RP Financial Inc.

24    Power of Attorney (set forth on Signature Page)

27    EDGAR Financial Data Schedule

99.1  Appraisal Report of RP Financial, Inc.*

99.2  Marketing Materials 

99.3  Order and Acknowledge Form*

___________________________
*To be filed supplementally or by amendment.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 879867}]
{"company-data": {"conformed-name": "NIAGARA BANCORP INC", "cik": "0001051741", "assigned-sic": ""}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-42977", "film-number": "97742618"}, "business-address": {"street1": "6950 SOUTH TRANSIT", "city": "LOCKPORT", "state": "NY", "zip": "14095", "phone": "7166257500"}, "mail-address": {"street1": "6950 SOUTH TRANSIT", "city": "LOCKPORT", "state": "NY", "zip": "14095"}}
As filed with the Securities and Exchange Commission on December 22, 1997
                                                       Registration No. 333-
================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933

                             NIAGARA BANCORP, INC.
            (Exact name of registrant as specified in its charter)
DELAWARE                          6712                  (TO BE APPLIED FOR)
(State or other jurisdiction of       (Primary standard              (I.R.S Employer
incorporation or organization)     industry classification)       indentification number)
6950 SOUTH TRANSIT ROAD, P.O. BOX 514
                         LOCKPORT, NEW YORK 14095-0514
                                (716) 625-7500
         (Address, including zip code, and telephone number, including
            area code, of registrant's principal executive offices)

                                WILLIAM E. SWAN
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                             NIAGARA BANCORP, INC.
                     6950 SOUTH TRANSIT ROAD, P.O. BOX 514
                         LOCKPORT, NEW YORK 14095-0514
                                (716) 625-7500
          (Name, address, including zip code, and telephone number, 
                  including area code, of agent for service)

                                  Copies to:
                             JOHN J. GORMAN, ESQ.
                            KENNETH R. LEHMAN, ESQ.
                     LUSE LEHMAN GORMAN POMERENK & SCHICK
                          5335 WISCONSIN AVENUE, N.W.
                                   SUITE 400
                            WASHINGTON, D.C. 20015

Approximate date of commencement of proposed sale to the public: As soon as 
practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a 
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, 
check the following box: [X]

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the 
Securities Act registration statement number of the earlier effective 
registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c) under 
the Securities Act, check the following box and list the Securities Act 
registration statement number of the earlier effective registration statement 
for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(d) under 
the Securities Act, check the following box and list the Securities Act 
registration statement number of the earlier effective registration statement 
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
                                                                  PROPOSED               PROPOSED MAXIMUM         
  TITLE OF EACH CLASS OF                  AMOUNT TO BE        MAXIMUM OFFERING               AGGREGATE              AMOUNT OF
SECURITIES TO BE REGISTERED                REGISTERED          PRICE PER SHARE           OFFERING PRICE (1)      REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share   13,501,554 shares         $10.00                 $135,015,540              $39,830
====================================================================================================================================
__________________________
(1)  Estimated solely for the purpose of calculating the registration fee.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES 
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE 
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL 
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES 
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH 
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 
8(A), MAY DETERMINE.
PROSPECTUS SUPPLEMENT

 
                             NIAGARA BANCORP, INC.

                             LOCKPORT SAVINGS BANK

                             LOCKPORT SAVINGS BANK
                                  401(K) PLAN

                           (Participation Interests)

     This Prospectus Supplement relates to the offer and sale to members (the
"Members") in the Lockport Savings Bank 401(k) Plan (the "Plan") of
participation interests and shares of common stock, par value $.01 per share
(the "Common Stock"), of Niagara Bancorp, Inc. (the "Company"), in connection
with the proposed conversion ("Conversion") of the Lockport Savings Bank (the
"Bank") from a New York state chartered mutual savings bank to a New York State
chartered stock savings bank, and the issuance of the Bank's capital stock to
the Company pursuant to the Bank's Plan of Conversion and Reorganization (the
"Plan of Conversion") and the related Subscription Offering and Direct Community
Offering (collectively, the "Offering").

     The Plan permits the investment of Plan assets in Common Stock of the
Company. The Plan permits Members to direct the trustee of the Plan (the
"Trustee") to invest in Common Stock with amounts in the Plan attributable to
such Members. Such investments in Common Stock would be by means of the Niagara
Bancorp, Inc. Stock Fund ("Employer Stock Fund"). This Prospectus Supplement
relates to the initial election of Members to direct that all or a portion of
their accounts be invested in the Employer Stock Fund in connection with the
Conversion and Offering and also to elections by Members to direct that all or a
portion of their accounts be invested in the Employer Stock Fund after the
Conversion. A Member will be able to provide alternative investment instructions
to the Trustee in the event that the Offering is oversubscribed and the total
amount allocated by a Member cannot be used by the Trustee to purchase Common
Stock.

     The Prospectus of the Company dated ____________, 1998 (the "Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion, the Common Stock and the financial condition,
results of operations and business of the Bank. This Prospectus Supplement,
which provides detailed information with respect to the Plan, should be read
only in conjunction with the Prospectus.

     THESE PARTICIPATION INTERESTS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF
NEW YORK, THE NEW YORK STATE BANKING BOARD, THE NEW YORK STATE BANKING
DEPARTMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR BY ANY OTHER FEDERAL
AGENCY, OR BY ANY STATE SECURITIES BUREAU OR OTHER STATE AGENCY, NOR HAS ANY
SUCH OFFICE, CORPORATION, COMMISSION, BUREAU OR OTHER
AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

     No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Bank or the Plan since the date hereof, or
that the information herein contained or incorporated by reference is correct as
of any time subsequent to the date hereof. This Prospectus Supplement should be
read only in conjunction with the Prospectus that is attached hereto and should
be retained for future reference.

The date of this Prospectus Supplement is__________, 1998.
TABLE OF CONTENTS
THE OFFERING.....................................................................  1

     Securities Offered..........................................................  1
     Election to Purchase Common Stock in the Offering; Priorities...............  1
     Value of Participation Interests............................................  2
     Method of Director Transfer.................................................  2
     Time for Directing Transfer.................................................  2
     Irrevocability of Transfer Direction........................................  2
     Direction to Purchase Common Stock After the Offering.......................  2
     Purchase Price of Common Stock..............................................  3
     Nature of a Members Interest in Common Stock................................  3
     Voting Rights of Common Stock...............................................  3

DESCRIPTION OF THE PLAN..........................................................  3

     Introduction................................................................  3
     Eligibility and Participation...............................................  4
     Contributions Under the Plan................................................  4
     Limitations on Contributions................................................  5
     Investment of Contributions and Account Balances............................  7
     Benefits Under the Plan.....................................................  9
     Withdrawals and Distributions From the Plan.................................  9
     Trustee..................................................................... 10
     Plan Administrator.......................................................... 10
     Reports to Plan Members..................................................... 11
     Amendment and Termination................................................... 11
     Merger, Consolidation or Transfer........................................... 11
     Federal Income Tax Consequences............................................. 11
     ERISA and Other Qualifications.............................................. 14
     SEC Reporting and Short-Swing Profit Liability.............................. 14
     Financial Information Regarding Plan Assets................................. 15

LEGAL OPINION.................................................................... 15
1
THE OFFERING

SECURITIES OFFERED

     The securities offered hereby are participation interests in the Plan. Up
to 480,000 shares (assuming a purchase price of $10.00 per share) of Common
Stock may be acquired by the Plan to be held in the Employer Stock Fund. The
Company is the issuer of the Common Stock. Only employees of the Bank may become
Members in the Plan. The Common Stock to be issued hereby is conditioned on the
consummation of the Conversion. A Member's investment in the Employer Stock Fund
in the Conversion is subject to the priority set forth in the Plan of
Conversion. Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operation and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 6950 South Transit Road, Lockport, New York 14095-0514. The Bank's telephone
number is (716) 625-7500.

ELECTION TO PURCHASE COMMON STOCK IN THE OFFERING; PRIORITIES

     The Plan permits each Member to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Plan may be
transferred to the Employer Stock Fund, an investment fund in the Plan, that
will invest in Common Stock and will be used to purchase Common Stock issued in
connection with the Offering. The Trustee of the Plan will purchase Common Stock
offered for sale in connection with the Offering in accordance with each
Member's directions. Members will be provided the opportunity to elect
alternative investments from among the six other funds offered. In the event the
Offering is oversubscribed and the Trustee is unable to use the full amount
allocated by a Member to purchase Common Stock in the Offering, Members may
either (i) elect alternative investments from among the six other funds offered,
or (ii) direct the Trustee to hold the funds transferred to the Employer Stock
Fund and purchase Common Stock in the open market after the Offering. If a
Member fails to direct the investment of his or her account balance, the
Member's account balance will remain in the other investment funds of the Plan
as directed by the Member.

     The shares of Common Stock to be sold in the Offering are being offered in
accordance with the following priorities: (i) holders of deposit accounts of the
Bank totaling $100 or more as of August 31, 1996 ("Eligible Account Holders");
(ii) the Employee Stock Ownership Plan ("ESOP"); (iii) holders of deposit
accounts of the Bank totaling $100 or more as of December 31, 1997
("Supplemental Eligible Account Holders"); (iv) certain members of the general
public with preference given to matured persons residing in Niagara, Erie,
Orleans and Genesee Counties, New York. To the extent that Members fall into one
of these categories, they are being permitted to use funds in their Plan account
to subscribe or pay for the Common Stock being acquired. Common Stock so
purchased will be placed in the Member's Employer Stock Fund within his Plan
account.

                                       1
VALUE OF PARTICIPATION INTERESTS

     The assets of the Plan were valued at approximately $3.7 million as of
December 31, 1996. Each Member was informed of the value of his or her
beneficial interest in the Plan as of September 30, 1997. The $3.7 million value
represents the aggregate market value as of December 31, 1996, of all Members'
accounts and earnings thereon, less previous withdrawals.

METHOD OF DIRECTING TRANSFER

     Each Member shall receive a form which provides for a Member to direct that
all or a portion of his or her beneficial interest in the Plan be transferred to
the Employer Stock Fund (the "Contribution and Investment Form") or to the other
investment options established under the Plan. The Member's investment in the
other investment options set forth in the Plan may be in any whole percentage
from 0% to 100%. If a Member wishes to invest all or part of his or her
beneficial interest in the assets of the Plan to the purchase of Common Stock
issued in connection with the Offering, he or she should indicate that decision
on the Contribution and Investment Form.

TIME FOR DIRECTING TRANSFER

     Directions to transfer amounts to the Employer Stock Fund in order to
purchase Common Stock issued in connection with the Offering must be returned to
the Stock Information Center at 55 East Avenue, P.O. Box 886, Lockport, New York
14095 no later than _:00 p.m. on ______________, 1998.

IRREVOCABILITY OF TRANSFER DIRECTION

     A Member's direction to transfer amounts credited to such Member's account
in the Plan to the Employer Stock Fund in order to purchase shares of Common
Stock in connection with the Offering is irrevocable. Members, however, will be
able to direct the investment of their accounts under the Plan as explained
below.

DIRECTION TO PURCHASE COMMON STOCK AFTER THE OFFERING

     After the Offering, a Member will continue to be able to direct that a
certain percentage of his or her interest in the Plan be transferred to the
Employer Stock Fund and invested in Common Stock, or to the other investment
funds available under the Plan (amounts invested in the investment funds may be
invested in any whole percentage from 0% to 100%). The allocation of a Member's
interest in a Plan Fund may be changed on a monthly basis. Special restrictions
may apply to transfers directed to and from the Employer Stock Fund by those
Members who are officers, directors and principal shareholders of the Company
who are subject to the provisions of Section 16(b) of the Securities and
Exchange Act of 1934 (the "Exchange Act"), as amended.

                                       2
PURCHASE PRICE OF COMMON STOCK

     The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Offering will be used by the Trustee to purchase
shares of Common Stock, except in the event of an oversubscription, as discussed
above. The price paid for such shares of Common Stock will be the same price as
is paid by all other persons who purchase shares of Common Stock in the
Offering.

     Subsequent to the Offering, Common Stock purchased by the Trustee will be
acquired in open market transactions. The prices paid by the Trustee for shares
of Common Stock will not exceed "adequate consideration" as defined in Section
3(18) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").

NATURE OF A MEMBER'S INTEREST IN THE COMMON STOCK

     The Common Stock will be held in the name of the Trustee for the Plan, as
Trustee. Shares of Common Stock acquired at the direction of a Member will be
allocated to the Member's account under the Plan. Therefore, earnings with
respect to a Member's account should not be affected by the investment
designations (including investments in Common Stock) of other Members. The
Trustee as record holder will vote such allocated shares, if any, as directed by
Members.

VOTING RIGHTS OF COMMON STOCK

     The Trustee generally will exercise voting rights attributable to all
Common Stock held by the Employer Stock Fund as directed by Members with
interests in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have a right to vote, each Member will be allocated
voting instruction rights reflecting such Member's proportionate interest in the
Employer Stock Fund. The number of shares of Common Stock held in the Employer
Stock Fund that are voted in the affirmative and negative on each matter shall
be proportionate to the number of voting instruction rights exercised by Members
in the affirmative and negative respectively.

DESCRIPTION OF THE PLAN

INTRODUCTION

     The Bank adopted a prototype plan effective January 1, 1990, which Plan and
related Adoption Agreement were amended, effective January 1, 1998, to include
the Employer Stock Fund as an investment alternative. The amendment transformed
the Plan into an individually designed plan. The Plan is a profit sharing plan
with a cash or deferred compensation feature established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Plan has applied for a ruling from
the Internal Revenue Service that the Plan is qualified under Section 401(a) of
the Code, and its related trust is qualified

                                       3
under Section 501(a) of the Code.

     The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations.

     Employee Retirement Income Security Act.  The Plan is an "individual
     ----------------------------------------                            
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase plan). The Plan
is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding
requirements contained in Title IV of ERISA are not applicable to Members (as
defined below) or beneficiaries under the Plan.

     Reference to full Text of Plan. The following statements are summaries of
     ------------------------------                                           
certain provisions of the Plan. They are not complete and are qualified in their
entirety by the full text of the Plan. Words capitalized but not defined in the
following discussion have the same meaning as set forth in the Plan. Copies of
the Plan are available to all employees by filing a request with the Plan
Administrator, c/o Lockport Savings Bank, 6950 South Transit Road, Lockport, New
York 14095-0514. Each employee is urged to read carefully the full text of the
Plan.

ELIGIBILITY AND PARTICIPATION

     Any employee of the Employer is eligible to become a member in the Plan on
the first day of the month following completion of one (1) year of Entry
Service, as defined, with the Bank, provided he or she has reached age 21 at
such time. A year of Entry Service is defined as the 12 month period during
which an employee completes at least 1000 hours of service with the Bank. The
plan year is January 1 to December 31 (the "Plan Year").

     As of December 31, 1996, there were approximately 314 employees eligible to
participate in the Plan, and 277 employees participating by making elective
deferral contributions.

CONTRIBUTIONS UNDER THE PLAN

     401(k) Plan Contributions. Each Member of the Plan is permitted to elect to
     -------------------------                                                  
defer such Member's Pay (as defined below) on a pre-tax basis up to the lesser
of 15% of annual Pay (expressed in terms of whole percentages) or the applicable
limit under the Code (for 1998, the applicable limit is $10,000) and subject to
certain other restrictions imposed by the Code, and to have that amount
contributed to the Plan on such Member's behalf. For purposes of the Plan, "Pay"
means, generally, a Member's total pay received from the Bank as reported on IRS
Form W-2 for purposes of income-tax withholding. In 1998, the annual Pay of each
Member taken into account under the Plan was and

                                       4
is limited to $160,000. (Limits established by the IRS are subject to increase
pursuant to an annual cost of living adjustment, as permitted by the Code). A
Member may elect to modify the amount contributed to the Plan by filing a new
elective deferral agreement with the Plan Administrator on a bi-weekly basis.

     Employer Contributions. The Bank makes matching contributions to the Plan
     ----------------------                                                   
equal to 50% of the elective deferral contributions, up to a maximum of 6% of
the Member's Pay for the Plan Year.
 
LIMITATIONS ON CONTRIBUTIONS
 
     Limitation on Employee Salary Deferrals.   The annual amount of deferred
     -----------------------------------------                               
Pay of a Member (when aggregated with any elective deferrals of the Member under
a simplified employee pension plan or a tax-deferred annuity) may not exceed the
limitation contained in Section 402(g) of the Code, adjusted for increases in
the cost of living as permitted by the Code (the limitation for 1998 is
$10,000). Contributions in excess of this limitation ("excess deferrals") will
be included in the Member's gross income for federal income tax purposes in the
year they are made. In addition, any such excess deferral will again be subject
to federal income tax when distributed by the Plan to the Member, unless the
excess deferral (together with any income allocable thereto) is distributed to
the Member not later than the first April 15th following the close of the
taxable year in which the excess deferral is made. Any income on the excess
deferral that is distributed not later than such date shall be treated, for
federal income tax purposes, as earned and received by the Member in the taxable
year in which the distribution is made.

     Limitations on Annual Additions and Benefits.   Pursuant to the
     ---------------------------------------------                 
requirements of the Code, the Plan provides that the amount of contributions and
forfeitures allocated to each Member's account during any Plan Year may not
exceed the lesser of $30,000 or 25% of the Member's Compensation (as defined)
for the Plan Year. In addition, annual additions are limited to the extent
necessary to prevent contributions on behalf of any employee from exceeding the
employee's combined plan limit, i.e., a limit that takes into account the
contributions and benefits made on behalf of an employee to all plans of the
Bank. To the extent that these limitations have been exceeded with respect to a
Member, the Plan Administrator shall:

     (i)   return any elective deferral contributions to the extent that the
return would reduce the excess amount in the Member's accounts;

     (ii)  if the Member is covered by the Plan at the end of the Plan Year, any
excess amount remaining will be used to reduce Employer Contributions for such
Member in the next Plan Year, and each succeeding Plan Year if necessary;

     (iii) if an excess amount still exists, and the Member is not covered by
the Plan at the end of a Plan Year, the Excess Amount will be held unallocated
in a suspense account.  The suspense account will be applied to reduce future
Employer Contributions for all remaining Members in the

                                       5
next Plan Year, and each succeeding Plan Year if necessary;

     (iv)  if a suspense account is in existence at any time during a Plan Year,
it will participate in the allocation of the trust's investment gains or losses.
If a suspense account is in existence at any time during a particular Plan Year,
all amounts in the suspense accounts must be allocated and reallocated to
Member's Accounts before any employer or any Member contributions may be made to
the Plan for that Plan Year. Excess amounts may not be distributed to Members or
former Members.

     If, in addition to this Plan, the Member is covered under other defined
contribution plans and welfare benefit funds maintained by the Bank and annual
additions exceed the maximum permissible amount, the amount contributed or
allocated under this Plan will be reduced so that the annual additions under all
such plans and funds equal the maximum permissible amount.

     Limitation on Plan Contributions for Highly Compensated Employees.
     -----------------------------------------------------------------  
Sections 401(k) and 401(m) of the Code limits the amount of elective deferral
contributions and matching contributions that may be made to the Plan in any
Plan Year on behalf of Highly Compensated Employees (defined below) in relation
to the amount of elective deferral contributions made by or on behalf of all
other employees eligible to participate in the Plan. Specifically, the "actual
deferral percentage" ("ADP") (i.e., the average of the actual deferral ratios,
expressed as a percentage, of each eligible employee's elective deferral
contribution if any, for the Plan Year over the employee's Pay), of the Highly
Compensated Employees must meet either of the following tests: (i) the ADP of
the eligible Highly Compensated Employees is not more than 125% of the ADP of
all other eligible employees, or (ii) the ADP of the eligible Highly Compensated
Employees is not more than 200% of the ADP of all other eligible employees, and
the excess of the ADP for the eligible Highly Compensated Employees over the ADP
of all other eligible employees is not more than two percentage points.
Similarly, the actual contribution percentage ("ACP") (i.e., the average of the
actual contribution ratios, expressed as a percentage, of each eligible
employee's matching contributions, if any, for the Plan Year over the employees
Pay) of the Highly Compensated Employees must meet either of the following
tests: (i) the ACP of the eligible Highly Compensated Employees is not more than
125% of the ACP of all other eligible employees, or (ii) the ACP of the eligible
Highly Compensated Employees is not more than 200% of the ACP of all other
eligible employees, and the excess of the ACP for the eligible Highly
Compensated Employees over the ACP of all other employees is not more than two
percentage points.

     In general,  for Plan Years beginning in 1998, a Highly Compensated
Employee includes any employee, who, (1) during the Plan Year or the preceding
Plan Year, was at any time a 5% owner (i.e., owns directly or indirectly more
than 5% of the stock of an employer, or stock possessing more than 5% of the
total combined voting power of all stock of an employer), or (2) for the
preceding Plan Year, received Pay from an employer in excess of $80,000 (in
1998), and (if the employer elects for a Plan Year) was in the group consisting
of the top 20% of employees when ranked on the basis of Pay paid during the Plan
Year. The dollar amounts set forth above are adjusted annually to reflect
increases in the cost of living.

                                       6
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the ADP limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed first to Highly Compensated Employees with the
greatest dollar amount deferrals, and so on, until the Plan satisfies the ADP
test, before the close of the following Plan Year. Moreover, the Bank will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are re-
characterized or are distributed before the close of the first 2-1/2 months
following the Plan Year to which such excess contributions relate. In addition,
in order to avoid disqualification of the Plan, any contributions by Highly
Compensated Employees that exceed the average contribution limitation in any
Plan Year ("excess aggregate contributions") together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the 10% excise tax will be imposed on
the Bank with respect to any excess aggregate contributions, unless such
amounts, plus any income allocable thereto, are distributed within 2-1/2 months
following the close of the Plan Year in which they arose.

INVESTMENT OF CONTRIBUTIONS AND ACCOUNT BALANCES

     All amounts credited to Members' accounts under the Plan are held in the
Plan Trust (the "Trust") which is administered by the Trustee appointed by the
Bank's Board of Directors.

     Prior to the effective date of the Offering, Members have been provided the
opportunity to direct the investment of their accounts into one of the following
funds (the "Funds"):

A.  Guaranteed Interest Account
B.  Money Market Account
C.  Bond and Mortgage Account
D.  Stock Index 500 Account
E.  U.S. Stock Account
F.  Small Company Blend Account

     The Plan now provides that in addition to the Funds specified above, a
Member may direct the Trustee to invest all or a portion of his account in the
Employer Stock Fund.

     A Member may elect to have both past contributions (and earnings), as well
as future contributions to the Member's account invested either in the Employer
Stock Fund or among the Funds listed above. Transfers of past contributions (and
the earnings thereon) do not affect the investment mix of future contributions.
These elections will be effective on the effective date of the Member's notice
to the Plan Administrator.  Any amounts credited to a Member's account for which
investment directions are not given will be invested in the Guaranteed Interest
Account.

A.   PREVIOUS FUNDS.
 
     Prior to the effective date of the Offering, contributions under the Plan
have been invested

                                       7
in the six funds specified above.  The annual percentage return on these funds
for the prior three years was:
9/30/1997*   1996   1995   1994
                                   ---------   -----  -----  -----
A.  Guaranteed Interest Account           --     5.7   5.96   6.23
B.  Money Market Account                3.88    5.11   5.65   4.01
C.  Bond and Mortgage Account           7.34    3.94  18.41  -2.05
D.  Stock Index 500 Account            29.27   22.50  37.07   1.05
E.  U.S. Stock Account                 22.98   24.13  33.10   0.29
F.  Small Company                      28.69   18.01  29.44   3.05
*Unannualized rate of return since January 1, 1997.

     The following is a description of each of the Plan's six investment funds:

     Account A (Guaranteed Interest Account)  This Account earns a guaranteed
     --------------------------------------                                  
interest rate for a specific number of years; it offers low risk and low
earnings.

     Account B (Money Market Account)  This Account invests in high-quality
     --------------------------------                                      
commercial paper (short-term, unsecured corporate loans). The average maturity
is usually less than one month; it offers low risk and low earnings.

     Account C (Bond and Mortgage Account)  This Account makes loans to
     -------------------------------------                             
companies, most of which are bonds and commercial mortgages; it offers moderate
risk and earnings.

     Account D (Stock Index 500 Account)  This Account invests in the common 
     -----------------------------------                                     
stocks of those companies listed in the Standard & Poor's 500 Stock Index; it
offers a chance for greater reward in return for a higher degree of risk.

     Account E (U.S. Stock Account)  This Account invests money in stocks of
     ------------------------------                                         
U.S. companies of all sizes; it offers a chance for greater reward in return for
a higher degree of risk.

     Account F (Small Company Blend Account) This Account invests in stocks of
     ---------------------------------------                                  
smaller seasoned companies where potential for long-term growth is expected to
be above-average. This Account combines growth and value in a "blend" portfolio.

B.   THE EMPLOYER STOCK FUND.

     The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Offering. After the Offering, the Trustee
will, to the extent practicable, use all amounts held by it in the Employer
Stock Fund, including cash dividends paid on Common Stock held in the Employer
Stock Fund, to purchase shares of Common Stock of the Company. It is expected
that all purchases will be made at prevailing market prices. Under certain
circumstances,

                                       8
the Trustee may be required to limit the daily volume of shares purchased.
Pending investment in Common Stock, assets held in the Employer Stock Fund will
be placed in money market accounts.
 
     As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund. Performance will be dependent upon a number of
factors, including the financial condition and profitability of the Company and
the Bank and market conditions for the Common Stock generally.

     INVESTMENT IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISKS IN
INVESTMENT IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE THE PROSPECTUS.

BENEFITS UNDER THE PLAN

     Vesting.  A Member, at all times, has a fully vested, nonforfeitable
     --------                                                           
interest in his or her account under the Plan.
 
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN

     APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN MEMBER TO WITHDRAW AMOUNTS HELD FOR HIS OR HER BENEFIT
UNDER THE PLAN PRIOR TO THE MEMBER'S TERMINATION OF EMPLOYMENT WITH THE BANK. A
SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO
THE MEMBER'S ATTAINMENT OF AGE 59-1/2, REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.

     Withdrawals Prior to Termination of Employment.  A Member may make a
     -----------------------------------------------                     
withdrawal from his or her elective deferral contributions (and earnings
thereon) prior to termination of employment only in the event of financial
hardship, subject to the hardship distribution rules under the Plan. These
requirements insure that Members have a true financial need before a withdrawal
may be made.

     Distribution Upon Retirement or Disability.  Unless an optional form of
     -------------------------------------------                            
benefit has been elected, the automatic form of benefit payable to a Member who
retires, incurs a disability, or otherwise terminates employment shall be a
qualified joint and survivor annuity. In the case of a Member who dies before
the Annuity Starting Date, the automatic form of benefit to such Member's
Beneficiary shall be a qualified pre-retirement survivor annuity if the Member
is married and a lump sum payment if a Member is unmarried. The optional forms
of retirement benefit shall be the following: a straight life annuity; single
life annuities with certain periods of five, ten or fifteen years; a single life
annuity with installment refund; survivorship life annuities with installment
refund and survivor percentages of 50, 66 2/3, or 100; fixed period annuities
for any period of whole

                                       9
months which is not less than sixty and does not exceed the Life Expectancy of
the Member and the named Beneficiary where the Life Expectancy is not
recalculated; a series of installments chosen by the Member with a minimum
payment each year beginning with the year the Member turns age 70-1/2; or a
single sum payment. Benefit payments ordinarily shall commence as soon as
practicable following termination of service upon (i) retirement on or after
attainment of normal retirement age; (ii) retirement due to disability; or (iii)
death of the Member. With respect of a 5% owner, benefit payments must commence
in no event later than April 1 following the calendar year in which the Member
attains age 70-1/2.

     Distribution Upon Death.  A Member who dies prior to the benefit
     ------------------------                                        
commencement date for retirement, disability or termination of employment shall
have his or her benefits paid to the surviving spouse or beneficiary under one
or more of the forms available under the Plan.

     Distribution Upon Termination for Any Other Reason.  Distribution of
     ---------------------------------------------------                 
benefits to a Member who terminates employment for any other reason will not be
made to the Member at the time of termination but shall be made on the
occurrence of an event which would result in a distribution had the Member
remained in the employ of the Bank (i.e., upon the Member's death, disability,
or attainment of early or normal retirement age). Alternatively, at the Member's
election, a Member may receive a distribution of his account after he ceases to
be an employee.

     Nonalienation of Benefits.  Except with respect to federal income tax
     -------------------------                                            
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.

TRUSTEE

     The Trustee is appointed by the Board of Directors of the Bank to serve at
its pleasure. Delaware Charter Guarantee and Trust Company has been appointed as
trustee of the Employer Stock Fund of the Plan.

     The Trustee receives, holds and invests the contributions to the Employer
Stock Fund of the Plan in trust and distributes them to Members and
beneficiaries in accordance with the terms of the Plan and the directions of the
Plan Administrator. The Trustee is responsible for investment of the assets of
the Trust.

PLAN ADMINISTRATOR

     Pursuant to the terms of the Plan, the Plan is administered by the plan
administrator (the "Plan Administrator"). The Bank is the Plan Administrator and
has designated Kathleen P. Monti, Senior Vice President, Human Resources and
Administration, to supervise its responsibilities as such. The address and
telephone number of the Plan Administrator is c/o Lockport Savings Bank,
Attention: Ms. Kathleen P. Monti, Senior Vice President, 6950 South Transit
Road, Lockport, New York 14095-0514, Telephone number (716) 625-7500. The Plan
Administrator is responsible for the

                                       10
administration of the Plan, interpretation of the provisions of the Plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the Plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the Plan, and preparation and filing of all returns and reports relating to the
Plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to Members, beneficiaries, and
others under Sections 104 and 105 of ERISA.

REPORTS TO PLAN MEMBERS

     The Plan Administrator will furnish to each Member a statement quarterly
showing (i) the balance in the Member's account as of the end of that period,
(ii) the amount of contributions allocated to such Member's account for that
period, and (iii) the adjustments to such Member's account to reflect earnings
or losses (if any).

AMENDMENT AND TERMINATION

     It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee affected by such termination shall have a fully vested interest in
his or her accounts. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust to
be used for, or diverted to, any purpose other than the exclusive benefit of
Members or their beneficiaries; provided, however, that the Bank may make any
amendment it determines necessary or desirable, with or without retroactive
effect, to comply with ERISA.

MERGER, CONSOLIDATION OR TRANSFER

     In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that each
Member would (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).

FEDERAL INCOME TAX CONSEQUENCES

     The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Members are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.

     The Plan is qualified under Section 401(a) and 401(k) of the Code and the
related Trust is

                                       11
exempt from tax under Section 501(a) of the Code. A plan that is qualified under
these sections of the Code is afforded special tax treatment which include the
following: (1) the Bank is allowed an immediate tax deduction for the amount
contributed to the Plan each year; (2) Members pay no current income tax on
amounts contributed by the Bank on their behalf; and (3) Earnings of the Plan
are tax-exempt thereby permitting the tax-free accumulation of income and gains
on investments. The Plan will be administered to comply in operation with the
requirements of the Code as of the applicable effective date of any change in
the law. The Bank expects to timely adopt any amendments to the Plan that may be
necessary to maintain the qualified status of the Plan under the Code.

     Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:

     (a) Amounts contributed to a Member's account and the investment earnings
on the account are not includable in a Member's federal taxable income until
such contributions or earnings are actually distributed or withdrawn from the
Plan. Special tax treatment may apply to the taxable portion of any distribution
that includes Common Stock or qualifies as a Lump Sum Distribution (as described
below).

     (b) Income earned on assets held by the Trust will not be taxable to the
Trust.

     Lump Sum Distribution. A distribution from the Plan to a Member or the
     ---------------------                                                 
beneficiary of a Member will qualify as a lump sum distribution ("Lump Sum
Distribution") if it is made: (i) within one taxable year of the Member or
beneficiary; (ii) on account of the Member's death, disability or separation
from service, or after the Member attains age 59-1/2; and (ii) consists of the
balance to the credit of the Member under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum Distribution
that is required to be included in the Member's or beneficiary's taxable income
for federal income tax purposes (the"total taxable amount") consists of the
entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Member to any other profit sharing plan
maintained by the Bank which is included in such distribution.

     Averaging Rules.  The portion of the total taxable amount of a Lump Sum
     ----------------                                                       
Distribution that is attributable to participation after 1973 in the Plan or in
any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Member who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Member's death (regardless of the period of the Member's participation in the
Plan or any other profit-sharing plan maintained by the Bank), may elect to have
the ordinary income portion of such Lump Sum Distribution taxed according to a
special averaging rule ("five-year averaging"). The election of the special
averaging rules may apply only to one Lump Sum Distribution received by the
Member or beneficiary, provided such amount is received on or after the Member
turns 59-1/2 and the recipient elects to have any other Lump Sum Distribution
from a qualified plan received in the same taxable year taxed under the special
averaging rule. Under a special grandfather rule, individuals who turned 50 by
1985 may elect to have their Lump Sum Distribution taxed under either the five-
year averaging rule or under the prior law ten-year averaging

                                       12
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the Member's pre-1974 participation in the Plan
taxed at a flat 20% rate as gain from the sale of a capital asset.

     Common Stock Included in Lump Sum Distribution.  If a Lump Sum Distribution
     -----------------------------------------------                            
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over the cost or other basis to the Trust. The tax basis of such
Common Stock to the Member or beneficiary for purposes of computing gain or loss
on its subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered short-term, mid-term or long-term capital
gain depending upon the length of the holding period of the Common Stock. The
recipient of a distribution may elect to include the amount of any net
unrealized appreciation in the total taxable amount of such distribution to the
extent allowed by the regulations to be issued by the IRS.

     Contribution to Another Qualified Plan or to an IRA.  A Member may defer
     ----------------------------------------------------                    
federal income taxation of all or any portion of the total taxable amount of a
Lump Sum Distribution (including the proceeds from the sale of any Common Stock
included in the Lump Sum Distribution) to the extent that such amount, or a
portion thereof, is contributed, within 60 days after the date of its receipt by
the Member, to another qualified plan or to an individual retirement account
("IRA"). If less than the total taxable amount of a Lump Sum Distribution is
contributed to another qualified plan or to an IRA within the applicable 60-day
period, the amount not so contributed must be included in the Member's income
for federal income tax purposes and will not be eligible for the special
averaging rules or for capital gains treatment. Additionally, a Member may defer
the federal income taxation of any portion of an amount distributed from the
Plan on account of the Member's disability or separation from service,
generally, if the amount is distributed within one taxable year of the Member,
and such amount is contributed, within 60 days after the date of its receipt by
the Member, to an IRA. Prior to 1993, following the partial distribution of a
Member's account, any remaining balance under the Plan (and the balance to the
credit of the Member under any other profit sharing plan sponsored by the Bank)
would not be eligible for the special averaging rules or for capital gains
treatment. For these purposes, a "partial distribution" is a distribution within
one taxable year of the Member equal to at least 50% of the balance of a
Member's account ("Partial Distribution").

     Pursuant to a change in the law, effective January 1, 1993, virtually all
distributions from the Plan may be rolled over to another qualified Plan or to
an IRA without regard to whether the distribution is a Lump Sum Distribution or
a Partial Distribution. Effective January 1, 1993, Members have the right to
elect to have the Trustee transfer all or any portion of an "eligible rollover
distribution" directly to another plan qualified under Section 401(a) of the
Code or to an IRA. If the Member does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan or to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount

                                       13
distributed from the Plan except: (1) a distribution that is (a) one of a series
of substantially equal periodic payments made (not less frequently than 
annually) over the Member's life or the joint life of the Member and the
Member's designated beneficiary, or (b) for a specified period of ten years or
more; (2) any amount that is required to be distributed under the minimum
distribution rules; and (3) any other distributions excepted under applicable
federal law.

     The beneficiary of a Member who is the Member's surviving spouse also may
defer federal income taxation of all or any portion of a distribution from the
Plan to the extent that such amount, or a portion thereof, is contributed within
60 days after the date of its receipt by the surviving spouse, to an IRA. If all
or any portion of the total taxable amount of a Lump Sum Distribution is
contributed by the surviving spouse of a Member to an IRA within the applicable
60-day period, any subsequent distribution from the IRA will not be eligible for
the special averaging rules or for capital gains treatment. Any amount received
by the Member's surviving spouse that is not contributed to another qualified
plan or to an IRA within the applicable 60-day period, and any amount received
by a nonspouse beneficiary will be included in such beneficiary's income for
federal tax purposes in the year in which it is received.

     Additional Tax on Early Distributions.  A Member who receives a
     --------------------------------------                         
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate or a Member) on or
after the death of the Member, (ii) attributable to the Member's being disabled
within the meaning of Section 72(m)(7) of the Code, (iii) part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the Member or the joint lives (or joint
life expectancies) of the Member and his beneficiary, (iv) made to the Member
after separation from service on account of early retirement under the Plan
after attainment of age 55, (v) made to pay medical expenses to the extent
deductible for federal income tax purposes, (vi) payments made to an alternate
payee pursuant to a qualified domestic relations order, or (vii) made to effect
the distribution of excess contributions or excess deferrals.

ERISA AND OTHER QUALIFICATIONS

     As noted above, the Plan is subject to certain provisions of the ERISA and
has applied for a favorable determination that it is qualified under Section
401(a) of the Code.

     The foregoing is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Member is urged to consult a tax advisor concerning the
federal, state and local tax consequences of participating in and receiving
distributions from the Plan.

SEC REPORTING AND SHORT-SWING PROFIT LIABILITY

     Section 16 of the Exchange Act imposes reporting and liability requirements
on officers, directors, and persons beneficially owning more than 10% of public
companies such as the

                                       14
Company. Section 16(a) of the Exchange Act requires the filing of reports of
beneficial ownership. Within 10 days of becoming a person subject to the
reporting requirements of Section 16(a), a Form 3 reporting initial beneficial
ownership must be filed with the Securities and Exchange Commission ("SEC") .
Certain changes in beneficial ownership, such as purchases, sales and gifts must
be reported periodically, either on a Form 4 within 10 days after the end of the
month in which a change occurs, or annually on a Form 5 within 45 days after the
close of the Company's fiscal year. Certain discretionary transactions in and
beneficial ownership of the Common Stock through the Employer Stock Fund of the
Plan by officers, directors and persons beneficially owning more than 10% of the
Common Stock of the Company must be reported to the SEC by such individuals.

     In addition to the reporting requirements described above, Section 16(b) of
the Exchange Act as provides for the recovery by the Company of profits realized
by an officer, director or any person beneficially owning more than 10% of the
Company's Common Stock ("Section 16(b) Persons") resulting from non-exempt
purchases and sales of the Company's Common Stock within any six-month period.

     The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for all transactions in  employer securities within
an employee benefit plan, such as the Plan, provided certain requirements are
met. These requirements generally involve restrictions upon the timing of
elections to acquire or dispose of employer securities for the accounts of
Section 16(b) Persons.

     Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution and are
prohibited from directing additional purchases of units within the Employer
Stock Fund for six months after receiving such a distribution.

FINANCIAL INFORMATION REGARDING PLAN ASSETS

     Financial statements for the Plan for the year ending December 31, 1996 are
attached to the Prospectus. 

                                 LEGAL OPINION

     The validity of the issuance of the Common Stock will be passed upon by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., which firm acted as special counsel to the Bank in connection with the
Company's Conversion from a mutual savings bank to a stock based organization
and the concurrent formation of the Company.

                                       15
LOCKPORT SAVINGS BANK
                                  401(k) PLAN

                      Financial Statements and Schedules

                          December 31, 1996 and 1995

                  (With Independent Auditors' Report Thereon)
LOCKPORT SAVINGS BANK
                                  401(K) PLAN

                                     INDEX

Independent Auditors' Report

Statement of Net Assets Available for Plan Benefits
     with Fund Information as of December 31, 1996

Statement of Net Assets Available for Plan Benefits
     with Fund Information as of December 31, 1995

Statement of Changes in Net Assets Available for Plan
     Benefits with Fund Information for the year ended
     December 31, 1996

Statement of Changes in Net Assets Available for Plan
     Benefits with Fund Information for the year ended
     December 31, 1995

Notes to Financial Statements

                                                                    Schedule
                                                                    --------
 
Item 27a - Schedule of Assets Held for Investment Purposes              1
     as of December 31, 1996

Item 27d - Schedule of Reportable Transactions for the                  2
     year ended December 31, 1996

                                   * * * * *
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]

                         Independent Auditors' Report
                         ----------------------------

The Employee Benefits Committee of
 Lockport Savings Bank:

We have audited the accompanying statements of net assets available for plan 
benefits of Lockport Savings Bank 401(k) Plan as of December 31, 1996 and 1995, 
and the related statements of changes in net assets available for plan benefits 
for the years then ended. These financial statements are the responsibility of 
the Plan's management. Our responsibility is to express an opinion on these 
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the net assets available for plan benefits of Lockport 
Savings Bank 401(k) Plan as of December 31, 1996 and 1995, and the changes in 
net assets available for plan benefits for the years then ended, in conformity 
with generally accepted accounting principles.

Our audits were performed for the purpose of forming an opinion on the basic 
financial statements taken as a whole. Supplemental schedules 1 and 2 are 
presented for the purpose of additional analysis and are not a required part of 
the basic financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under 
the Employee Retirement Income Security Act of 1974. The fund information in the
statements of net assets available for plan benefits and the statements of 
changes in net assets available for plan benefits is presented for purposes of 
additional analysis rather than to present the net assets available for plan 
benefits and changes in net assets available for plan benefits of each fund. The
supplemental schedules and fund information have been subjected to the auditing 
procedures applied in the audits of the basic financial statements and, in our 
opinion, are fairly stated in all material respects in relation to the basic 
financial statements taken as a whole. 

                                                       /s/ KPMG Peat Marwick LLP

August 26, 1997
LOCKPORT SAVINGS PLAN
                                  401(k) PLAN

              Statement of Net Assets Available for Plan Benefits
                             with Fund Information

                               December 31, 1996
Guaranteed        U.S.       Money      Bond and      Stock            
                                         Interest        Stock       Market     Mortgage      Index            
                                         Account        Account     Account     Account      Account      Total
                                        ----------      -------     -------     --------     -------      -----
Investments under group
  annuity contract with
  insurance company (note 3)          $  1,424,167     1,767,188     99,217      139,919     257,326    3,687,817
                                        ----------     ---------     ------      -------     -------    --------- 
Contributions receivable:
  Employee                                       7            23       --           --          --             30
  Employer                                       3            10       --           --          --             13
                                        ----------     ---------     ------      -------     -------    --------- 

     Total Contributions receivable             10            33       --           --          --             43
                                        ----------     ---------     ------      -------     -------    --------- 

Net assets available for plan
  benefits                            $  1,427,177     1,767,221     99,217      139,919     257,326    3,687,860
                                        ==========     =========     ======      =======     =======    =========
See accompanying notes to financial statements.
LOCKPORT SAVINGS PLAN
                                  401(k) PLAN

              Statement of Net Assets Available for Plan Benefits
                             with Fund Information

                               December 31, 1995
Guaranteed        U.S.       Money      Bond and      Stock            
                                         Interest        Stock       Market     Mortgage      Index            
                                         Account        Account     Account     Account      Account      Total
                                        ----------      -------     -------     --------     -------      -----
Investments under group               
  annuity contract with
  insurance company (note 3)          $  1,285,051     1,148,101     57,957       85,276     120,865    2,697,250 
                                         ---------     ---------     ------       ------     -------    ---------
Net assets available for plan                                                                                      
  benefits                            $  1,285,051     1,148,101     57,957       85,276     120,865    2,697,250
                                         =========     =========     ======       ======     =======    =========
See accompanying notes to financial statements.
LOCKPORT SAVINGS BANK
                                  401(k) PLAN

                      Statement of Changes in Net Assets
               Available for Plan Benefits with Fund Information

                               December 31, 1996
GUARANTEED          U.S.           MONEY         BOND AND        STOCK                 
                                              INTEREST          STOCK           MARKET        MORTGAGE        INDEX                 
                                               ACCOUNT         ACCOUNT         ACCOUNT        ACCOUNT        ACCOUNT         TOTAL 
                                             ----------        -------         -------      ----------     ----------        ----- 
Contributions:
Employer                                 $    59,467           69,830         4,922          14,324         20,568        169,111
  Employee                                     179,283          208,766        15,353          43,835         61,520        508,757
                                           -----------      -----------     ---------     -----------    -----------    -----------
                                               238,750          278,596        20,275          58,159         82,088        677,868
                                           -----------      -----------     ---------     -----------    -----------    -----------

Investment income:
  Interest                                      79,970                -             -               -              -         79,970
  Net appreciation (depreciation) in fair
   value of investments, including
   realized gains and losses                    (3,893)         317,414         4,187           4,984         40,445        363,137
                                           -----------      -----------     ---------     -----------    -----------    -----------
                                                76,077          317,414         4,187           4,984         40,445        443,107
                                           -----------      -----------     ---------     -----------    -----------    -----------

     Total contributions and
          investment income                    314,827          596,010        24,462          63,143        122,533      1,120,975

Benefits paid to participants                  (65,586)         (43,286)       (2,390)         (4,401)       (14,702)      (130,365)
Transfers among funds                         (110,115)          66,396        19,188          (4,099)        28,630              -
                                           -----------      -----------     ---------     -----------    -----------    -----------

          Net increase                         139,126          619,120        41,260          54,643        136,461        990,610

Net assets available for plan benefits:
     Beginning of year                       1,285,051        1,148,101        57,957          85,276        120,865      2,697,250
                                           -----------      -----------     ---------     -----------    -----------    -----------

     End of year                           $ 1,424,177        1,767,221        99,217         139,919        257,326      3,687,860
                                           ===========      ===========     =========     ===========    ===========    ===========
See accompanying notes to financial statements.
LOCKPORT SAVINGS PLAN
                                  401(k) PLAN

                      Statement of Changes in Net Assets
               Available for Plan Benefits with Fund Information

                               December 31, 1996
Guaranteed        U.S.       Money      Bond and      Stock            
                                         Interest        Stock       Market     Mortgage      Index            
                                         Account        Account     Account     Account      Account      Total
                                        ----------      -------     -------     --------     -------      -----
Contributions:                        
  Employer                            $     59,946       56,911       3,171       10,469      12,525     143,022
  Employee                                 150,426      215,196       7,502       27,205      31,036     431,365      
                                        ----------    ---------     -------     --------     -------    -------- 
                                           210,372      272,107      10,673       37,674      43,561     574,387
                                        ----------    ---------     -------     --------     -------    -------- 

Investment income:
  Interest                                  77,159           --          --           --          --      77,159
  Net appreciation (depreciation) 
   in fair value of investments,
   including realized gains and 
   losses                                       (6)     245,443       3,207        9,026      23,004     280,674
                                        ----------    ---------     -------     --------     -------   ---------      
                                            77,153      245,443       3,207        9,026      23,004     357,833
                                        ----------    ---------     -------     --------     -------   --------- 
     Total contributions and
       investment income                   287,525      517,550      13,880       46,700      66,565     932,220

Benefits paid to participants              (37,320)     (18,207)     (4,811)          --        (109)    (60,447)
Transfers among funds                      (25,700)       3,477      13,633        3,239       5,351          --
                                        ----------    ---------     -------     --------     -------   ---------  

     Net increase                          224,505      502,820      22,702       49,939      71,807     871,773
                                   
Net assets available for plan 
 benefits:
  Beginning of year                      1,060,546      645,281      35,255       35,337      49,058   1,825,477  
                                        ----------    ---------     -------     --------     -------   --------- 

  End of year                         $  1,285,051    1,148,101      57,957       85,276     120,865   2,697,250
                                        ==========    =========     =======     ========     =======   =========
See accompanying notes to financial statements.
LOCKPORT SAVINGS BANK
                                  401(K) PLAN

                         Notes to Financial Statements

                          December 31, 1996 and 1995

(1)  Description of Plan
     -------------------

     The following description of Lockport Savings Bank 401(k) Plan (the Plan)
          is provided for general information purposes only. Participants should
          refer to the Plan document for more complete information.

     (a)  General
          -------

          The Plan is a defined contribution plan covering all employees of
               Lockport Savings Bank (the Bank). The Plan is subject to the
               provisions of the Employee Retirement Income Security Act of 1974
               (ERISA).

     (b)  Eligibility
          -----------

          Employees are eligible to participate in the Plan when they reach age
               21 and have completed one year of service during which they
               worked at least 1,000 hours.

     (c)  Contributions
          -------------

          Participants may make contributions to the Plan in the form of salary
               reductions of up to 15% of their total compensation, excluding
               bonuses. The Bank makes matching contributions of 50% of employee
               contributions, up to a maximum of 6% of the employee's total
               compensation, excluding bonuses. Participant contributions are
               limited by the maximum allowable contribution under the Internal
               Revenue Code.

     (d)  Participants' Accounts
          ----------------------

          Each participant's account is credited with contributions and a pro
               rata share of investment income.

     (e)  Vesting
          -------

          Participant and Bank matching contributions immediately vest 100% to 
               the participant.

     (f)  Distributions
          -------------

          Participants or their beneficiaries are entitled to their entire
               account balance upon death, disability or retirement, payable in
               a single sum or in an annuity.

     (g)  Administrative Expenses
          -----------------------

          All the costs of administering the Plan are borne by the Bank.

                                       1                             (Continued)
LOCKPORT SAVINGS BANK
                                  401(k) PLAN

                         Notes to Financial Statements

(2)  Summary of Significant Accounting Policies
     ------------------------------------------

     (a)  Basis of Presentation
          ---------------------

          The accompanying financial statements have been prepared on the 
               accrual basis of accounting.

     (b)  Use of Estimates
          ----------------

          The preparation of financial statements in conformity with generally
               accepted accounting principles requires the use of estimates and
               assumptions that affect the reported amounts of net assets
               available for plan benefits and changes therein. Actual results
               could differ from those estimates.

     (c)  Investments
          -----------

          Investments in the pooled separate accounts of the Principal Mutual
               Life Insurance Company (Principal) are carried at fair value
               based on the fair values of the underlying assets. The Guaranteed
               Interest Account is carried at fair value, which approximates
               contract value (original investment plus accrued interest).
               Investment income includes unrealized appreciation or
               depreciation in the value of the investments.

(3)  Investments
     -----------

     Contributions to the Plan are invested under a group annuity contract with
          Principal. Plan participants may allocate their funds among one or
          more of the following investment accounts under the contract:

     .    Guaranteed Interest - A general investment account comprised of 
               guaranteed interest contracts.

     .    U.S. Stock - A pooled separate account which is comprised of equity 
               securities.

     .    Money Market - A pooled separate account which is comprised of
               commercial paper, U.S. government and agency securities and other
               short-term, interest-bearing securities.

     .    Bond and Mortgage - A pooled separate account which is comprised of
               intermediate-term, commercial mortgages and mortgage-backed
               securities.

     .    Stock Index - A pooled separate account which is comprised of the 
               stocks included in the Standard & Poor's 500 Stock Index.

                                       2                             (Continued)
LOCKPORT SAVINGS BANK
                                  401(K) PLAN

                   Notes to Financial Statements, Continued

(3)  Investments, Continued
     ----------------------

     Individual investments held by Principal that comprise 5% or more of the 
          Plan's net assets available for plan benefits at December 31, 1996 and
          1995 are as follows:
1996          1995
                                                        ----          ----
Principal Mutual Life Insurance Company:     
               Guaranteed Interest Account           $ 1,424,167    1,285,051

               U.S. Stock Account                      1,767,188    1,148,101

               Stock Index Account                       257,326            -
                                                      ==========    =========
(4)  Federal Income Taxes
     --------------------

     The Internal Revenue Service has issued a determination letter that the 
          Plan is qualified under the provisions of Sections 401(a) and 401(k)
          of the Internal Revenue Code (the "Code") and is therefore exempt from
          federal income taxes under Section 501(a) of the Code. The Plan
          sponsor has represented that the Plan has operated in conformity with
          applicable laws and regulations to maintain its tax qualified status.

(5)  Plan Termination
     ----------------

     Although it has not expressed any intent to do so, the Bank has the right 
          to discontinue its matching contribution at any time and to terminate
          the Plan subject to the provisions of ERISA. In the event of a
          termination of the Plan, participants will be entitled to the entire
          amount credited to their accounts.

                                       3
Schedule 1
                                                                      ----------

                             LOCKPORT SAVINGS BANK
                                  401(k) PLAN

          Item 27a - Schedule of Assets Held for Investment Purposes

                               December 31, 1996
Fair  
     Identity of issue                         Description                     Cost              Value
     -----------------                         -----------                     ----              -----
Group annuity contract with Principal
  Mutual Life Insurance Company:*
     Guaranteed Interest Account             General investment
                                               account comprised
                                               of guaranteed 
                                               interest contracts           $ 1,428,065          1,424,167

     U.S. Stock Account                      Pooled separate account
                                               investing in equity
                                               securities                     1,176,808          1,767,188

     Money Market Account                    Pooled separate account
                                               investing in money
                                               market instruments                93,889             99,217

     Bond and Mortgage Account               Pooled separate account
                                               investing in fixed
                                               income securities                127,170            139,919

     Stock Index Account                     Pooled separate account
                                               investing in corporate
                                               stocks                           197,921            257,326
                                                                            -----------        -----------

                                                                            $ 3,023,853          3,687,817
                                                                            ===========        ===========
*Person named is a party-in-interest.
SCHEDULE 2
                                                                      ----------

                             LOCKPORT SAVINGS BANK
                                  401(k) PLAN

                Item 27d - Schedule of Reportable Transactions

                         Year ended December 31, 1996
Expense
                                                Number                     Number                               incurred
      Identity of          Description         of units      Purchase     of units      Selling     Lease         with
    party involved           of asset          purchased       price        sold         price      rental     transaction
    --------------         -----------         ---------     --------     --------      -------     ------     -----------
Group Annuity
  contract with
  Principal Mutual
  Life Insurance
  Company:*
    Guaranteed         General investment
      Interest           account comprised
      Account**          of guaranteed
                         interest contracts       -         $  380,814       -         $317,775        -            -

    U.S Stock          Pooled separate
      Account**          account investing 
                         in equity
                         securities            1519.4946       405,909     397.5914     104,235        -            -

    Money Market       Pooled separate
      Account**          account investing
                         in money
                         market
                         instruments           2681.8994        86,982    1533.2210      49,909        -            -

    Stock Index        Pooled separate
      Account**          account investing  
                         in corporate
                         stocks                5559.6847       122,841    1210,7832      26,825        -            -
                                              ==========    ==========    =========    ========    =========    =========
Fair
                                                             value of
                                                             asset on
      Identity of          Description       Cost of        transaction         Net
    party involved           of asset         asset             date           gain
    --------------         -----------       -------        -----------        ----
Group Annuity
  contract with
  Principal Mutual
  Life Insurance
  Company:*
    Guaranteed         General investment
      Interest           account comprised
      Account**          of guaranteed
                         interest contracts    317,775         317,775          -

    U.S Stock          Pooled separate
      Account**          account investing 
                         in equity
                         securities             76,642          76,642        27,593
                                                                 
    Money Market       Pooled separate                           
      Account**          account investing                       
                         in money                                
                         market                                  
                         instruments            47,428          47,428         2,481
                                                                 
    Stock Index        Pooled separate                           
      Account**          account investing                       
                         in corporate                            
                         stocks                 22,156          22,156         4,669
                                              ========        ========       =======
*Person named is a party-in-interest.

**Series of transactions
PROSPECTUS
UP TO 13,501,554 SHARES OF COMMON STOCK
                                                           NIAGARA BANCORP, INC.
                                                         6950 SOUTH TRANSIT ROAD
                                                                    P.O. BOX 514
                                                   LOCKPORT, NEW YORK 14095-0514
                                                                  (716) 625-7500

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

     Lockport Savings Bank, Lockport, New York is reorganizing from the mutual
form of organization to the mutual holding company form of organization. As part
of the Reorganization, Lockport Savings Bank will become a wholly-owned
subsidiary of Niagara Bancorp, Inc., a Delaware corporation, and Niagara
Bancorp, Inc. will issue a majority of its common stock to Niagara Bancorp, MHC,
a New York-chartered mutual holding company, and sell a minority of its common
stock to the public pursuant to this Prospectus. The shares of common stock of
Niagara Bancorp, Inc. are being offered to depositors and the public under the
terms of a Plan of Reorganization which must be approved by depositors of
Lockport Savings Bank and by the New York State Banking Department. In addition,
the Federal Deposit Insurance Corporation must issue a letter of nonobjection to
the Reorganization. The Reorganization will not go forward if Lockport Savings
Bank does not receive these approvals and nonobjections, or if Niagara Bancorp,
Inc. does not sell at least a minimum number of shares of its common stock.
Because the names of Niagara Bancorp, Inc. and Niagara Bancorp, MHC are so
similar, we will refer to Niagara Bancorp, Inc. as the "Company" and we will
refer to Niagara Bancorp, MHC as the "Mutual Holding Company."

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

                               TERMS OF OFFERING

     An independent appraiser has estimated that as of November 28, 1997, the
pro forma market value of the Common Stock of the Company ranged from $191.1
million to $258.8 million.  Based on the valuation, the Company will issue
between 19,125,000 and 25,875,000 shares of Common Stock in the Reorganization.
The Company intends to sell 45.4% of such shares, or between 8,677,747 and
11,740,482 shares, to depositors and the public pursuant to this Prospectus, and
issue 53.3% of such shares, or between 10,186,921 and 13,782,304 shares, to the
Mutual Holding Company.  In addition, shares are being issued to a charitable
foundation as part of the Reorganization, which will result in stockholders
other than the Mutual Holding Company owning 46.7% of the shares of the Common
Stock outstanding at the conclusion of the Reorganization.  Subject to the
approval of the New York State Banking Department and the nonobjection of the
Federal Deposit Insurance Corporation, an additional 15% above the maximum
number of shares, or a total of 29,756,250 shares, may be issued in the
Reorganization, and up to 13,501,554 shares may be sold in the Offering pursuant
to this Prospectus, in the event of an increase in the estimated pro forma
market value of the common stock of the Company.  Based on these estimates, we
are making the following offering of shares of Common Stock pursuant to this
Prospectus.
.    Price Per Share:                                     $10.00                                           
     .    Number of Shares                                                                                      
          Minimum/Maximum/Adjusted Maximum:                     8,677,747         11,740,482       13,501,554                    
     .    Reorganization Expenses                                                                               
          Minimum/Maximum/Adjusted Maximum:                    $1,455,352,352    $1,694,858       $1,800,000                    
     .    Net Proceeds to Niagara Bancorp, Inc.                                                                 
          Minimum/Maximum/Adjusted Maximum:                    $85,322,118       $115,709,962     $133,215,540         
     .    Net Proceeds per share to Niagara Bancorp, Inc.                                                                        
          Minimum/Maximum/Adjusted Maximum:                    $9.83             $9.86            $9.87
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE _____ OF THIS DOCUMENT.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE NEW YORK STATE BANKING
DEPARTMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

     CIBC Oppenheimer Corp. and Trident Securities, Inc. will use their best
efforts to assist the Company in selling at least the minimum number of shares
but do not guarantee that this number will be sold. All funds received from
subscribers will be held in an interest bearing savings account at Lockport
Savings Bank until the completion or termination of the Reorganization.

     For information on how to subscribe, call the Stock Information Center at
(716) 438-1198.   For additional information about the Bank, please visit our
Website at http://www.__________.com.

CIBC OPPENHEIMER CORP.                                  TRIDENT SECURITIES, INC.

                      PROSPECTUS DATED FEBRUARY  ___, 1997
MAP
TABLE OF CONTENTS
PAGE
                                                                                        ----
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING.......................................     1
SUMMARY AND OVERVIEW.................................................................     4
SELECTED FINANCIAL INFORMATION.......................................................     8
RISK FACTORS.........................................................................    11
NIAGARA BANCORP, INC.................................................................    15
LOCKPORT SAVINGS BANK................................................................    15
REGULATORY CAPITAL COMPLIANCE........................................................    16
USE OF PROCEEDS......................................................................    17
DIVIDEND POLICY......................................................................    18
MARKET FOR THE COMMON STOCK..........................................................    19
CAPITALIZATION.......................................................................    19
PRO FORMA DATA.......................................................................    20
COMPARISON OF VALUATION AND PRO FORMA
     INFORMATION WITHOUT FOUNDATION..................................................    28
PARTICIPATION BY MANAGEMENT..........................................................    29
CONSOLIDATED STATEMENTS OF INCOME....................................................    30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
     FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................    31
BUSINESS OF THE COMPANY..............................................................    47
BUSINESS OF THE BANK.................................................................    47
FEDERAL AND STATE TAXATION...........................................................    82
REGULATION...........................................................................    83
MANAGEMENT OF THE COMPANY............................................................    92
MANAGEMENT OF THE BANK...............................................................    93
THE REORGANIZATION AND OFFERING......................................................   102
(i)
RESTRICTIONS ON ACQUISITION OF THE COMPANY...........................................   118
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY..........................................   120
TRANSFER AGENT AND REGISTRAR.........................................................   121
LEGAL AND TAX MATTERS................................................................   121
EXPERTS..............................................................................   122
ADDITIONAL INFORMATION...............................................................   122
CONSOLIDATED FINANCIAL STATEMENTS....................................................   F-1
This document contains forward-looking statements which involve risks and
uncertainties. Niagara Bancorp, Inc.'s actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page 11 of this Prospectus.

Please see the Glossary beginning on page G-l for the meaning of capitalized
terms that are used in this Prospectus.

                                     (ii)
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING

Q:   WHAT IS THE PURPOSE OF THE OFFERING?

A:   The Offering is being made in connection with the Reorganization of
     Lockport Savings Bank from a New York-chartered mutual savings bank into
     the mutual holding company form of ownership. As part of the
     Reorganization, you will have the opportunity to become a shareholder of
     the Company, a Delaware corporation, which will allow you to share in the
     future of our savings bank. By converting to the stock form of ownership,
     the Bank will be structured in the form used by virtually all commercial
     banks and a large number of savings banks. The Offering will increase our
     capital for lending and investment activities. This will better enable us
     to continue the expansion of our retail banking franchise and to diversify
     operations. Further, as a stock savings bank operating through a holding
     company structure, we will improve our ability to access the capital
     markets. As part of the Reorganization, we are also establishing a
     Charitable Foundation that will be dedicated exclusively to supporting
     charitable causes and community development activities in Western New York
     State.

Q:   HOW DO I ORDER THE STOCK?

A:   You must complete and return the stock order form and certification to us
     together with your payment, on or before March _____, 1998.

Q:   HOW MUCH STOCK MAY I ORDER?

A:   The minimum order is 25 shares (or $250). The maximum order is 20,000
     shares for a purchase price of $200,000. In certain instances, your order
     may be grouped together with orders by other persons who are associated
     with you (such as your spouse, child or relative living in your home), or
     with whom you are acting in concert, and, in that event, you would be
     subject to an aggregate purchase limit of 40,000 shares, or $400,000. We
     may decrease or increase the maximum purchase limitation without notifying
     you. However, if we increase the maximum purchase limitation, and you
     previously subscribed for the maximum number of shares, you will be given
     the opportunity to subscribe for additional shares.

Q:   WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?

A:   If the Offering is oversubscribed, shares will be allocated based upon a
     formula set forth in the Plan of Reorganization and in accordance with New
     York law and regulations, and policies of the FDIC and New York State
     Banking Department.

Q:   WHO WILL RECEIVE SUBSCRIPTION RIGHTS?

A:   The stock will be offered on a priority basis to the following persons:

     .    Persons who had deposit accounts of at least $100 with us on August
          31, 1996. Any remaining shares will be offered to:

     .    The Company's employee stock ownership plan. Any remaining shares will
          be offered to:

     .    Persons who had deposit accounts of at least $100 with us on December
          31, 1997.

     If the above persons do not subscribe for all of the shares, the remaining
     shares will be offered to certain members of the general public, with
     preference given first to natural persons residing in the Western New York
counties of Niagara, Erie, Orleans and Genesee, and secondly to natural
     persons residing in the remaining  four counties of Western New York,
     Wyoming, Allegany, Cattaraugus and Chautauqua counties.

Q:   WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT TO
     BUY THE STOCK?

A:   Before you decide to purchase stock, you should read the entire Prospectus,
     including the Risk Factors section on pages _____ of this document.

Q:   AS A DEPOSITOR OF LOCKPORT SAVINGS BANK, WHAT WILL HAPPEN IF I DO NOT ORDER
     ANY STOCK?

A:   You are not required to purchase Common Stock. Your deposit accounts and
     any loans you may have with us will not be affected by the Reorganization.

Q:   WHAT IS A MUTUAL HOLDING COMPANY REORGANIZATION?

A:   Lockport Savings Bank will convert from the mutual form of organization to
     the capital stock form of organization, and establish the Company. The
     Company will issue between 19,125,000 and 29,756,250 shares of Common Stock
     in the Reorganization; 53.3% of the shares will be issued to the Mutual
     Holding Company, and 45.4% will be sold to depositors and the public
     pursuant to this Prospectus. In addition, shares are being issued to a
     charitable foundation as part of the Reorganization, which will result in
     stockholders other than the Mutual Holding Company owning 46.7% of the
     shares of the Common Stock outstanding at the conclusion of the
     Reorganization. The Mutual Holding Company is a New York-chartered mutual
     corporation without shares of capital stock, which will be regulated by the
     New York State Banking Department and the Federal Reserve Board. As part of
     the Reorganization, any liquidation or ownership-type interest that a
     depositor had in Lockport Savings Bank will become a similar interest in
     the Mutual Holding Company. Based upon the Independent Valuation, 53.3% of
     the shares of Common Stock to be issued in the Reorganization will range
     from a minimum of 10,186,921 shares to an adjusted maximum of 15,849,649
     shares, and 45.4% of the shares of Common Stock to be sold pursuant to this
     Prospectus will range from a minimum of 8,677,747 shares to an adjusted
     maximum of 13,501,554 shares.

Q:   IS A MUTUAL HOLDING COMPANY REORGANIZATION DIFFERENT FROM OTHER MUTUAL TO
     STOCK HOLDING COMPANY CONVERSIONS?

A:   The mutual holding company structure differs in significant respects from
     an ordinary savings and loan or bank holding company. The Mutual Holding
     Company is a mutual corporation without shares of capital stock.
     Furthermore, the Mutual Holding Company's Board of Trustees, in making
     certain business decisions, considers the impact of its action on a variety
     of constituencies, including the depositors of the Bank, the employees of
     the Bank, and the communities in which the Bank operates. As the majority
     stockholder of the Company, the Mutual Holding Company is also interested
     in the continued success and profitability of the Bank and the Company.
     Consequently, the Mutual Holding Company will act in a manner which
     furthers the general interest of all of its constituencies, including, but
     not limited to, the interest of the stockholders of the Company. The Mutual
     Holding Company believes that the interests of the stockholders of the
     Company, and those of the Mutual Holding Company's other constituencies,
     are in many circumstances the same, such as the increased profitability of
     the Company and the Bank and continued service to the communities in which
     the Bank operates.

Q:   CAN THE MUTUAL HOLDING COMPANY CONVERT TO STOCK FORM?

A:   Although New York law and regulations and the Plan of Reorganization permit
     the Mutual Holding Company to convert from the mutual to the capital stock
     form of organization, the Board of Trustees has no current intention or
     plan to undertake such a transaction. Moreover, there can be no assurance
     that such a transaction 

                                       2
will ever occur. If the Mutual Holding Company were to convert to the
     capital stock form of organization, certain depositors would receive the
     right to subscribe for additional shares of the resulting entity. In such a
     transaction, each share of Common Stock outstanding and held by persons
     other than the Mutual Holding Company would be automatically converted into
     shares of common stock of the resulting entity.

Q:   HOW DO I DECIDE WHETHER TO BUY STOCK IN THE OFFERING?

A:   In order to make an informed investment decision, you should read this
     entire Prospectus. This section highlights selected information and may not
     contain all of the information that is important to you. If you have
     questions about the Offering, you may contact:

                           STOCK INFORMATION CENTER
                             LOCKPORT SAVINGS BANK
                                55 EAST AVENUE
                                 P.O. BOX 886
                         LOCKPORT, NEW YORK 14095-0886
                                (716) 438-1198

                                       3
SUMMARY AND OVERVIEW

     GENERALLY, this summary highlights selected information from this document
and does not contain all the information that you need to know before making an
informed investment decision. To understand the Offering fully, you should read
carefully this entire Prospectus, including the consolidated financial
statements and the notes to the consolidated financial statements of Lockport
Savings Bank. References in this document to "we", "us", or "our" refer to
Lockport Savings Bank. In certain instances where appropriate, "us" or "our"
refers collectively to Niagara Bancorp, Inc. and Lockport Savings Bank.
References in this document to the "Bank" refer to Lockport Savings Bank.
References in this document to the "Company" refer to Niagara Bancorp, Inc.
References to the "Mutual Holding Company" refer to Niagara Bancorp, MHC.

     USE OF DEFINED TERMS.  You should note as you read this Prospectus that at
times we use capitalized terms. These capitalized terms are generally defined in
the Glossary that appears at the back of this Prospectus. We use these defined
terms so that we can clearly differentiate between various components of the
transaction, and so that we don't have to describe exactly what we mean each
time we use a term. For example, to avoid confusion, we refer to all of the
steps that are part of this transaction as the "Reorganization," and we refer to
the issuance of 45.4% of the Company's Common Stock pursuant to this Prospectus
as the "Offering." The term "Reorganization" includes the Offering, but the term
"Offering" does not include the Reorganization. To further assist you, in
addition to including a Glossary of all defined terms, we usually will define
each term the first time that it is used in the Prospectus.

THE COMPANIES

                             Niagara Bancorp, Inc.
                            6950 South Transit Road
                                 P.O. Box 514
                         Lockport, New York 14095-0514
                                (716) 625-7500

     The Company was formed to be our holding company, and has not had any
operations to date. Upon completion of the Reorganization, the Company will own
all of Lockport Savings Bank's common stock, the public (including depositors
and the Foundation) will own a minority of the shares of Common Stock of the
Company, and the Mutual Holding Company will be the Company's majority
stockholder. The holding company structure will provide us greater flexibility
in terms of operations, expansion and diversification. See page _____.

                             Lockport Savings Bank
                            6950 South Transit Road
                                 P.O. Box 514
                         Lockport, New York 14095-0514
                                (716) 625-7500

     The Bank was organized in 1870 as a New York-chartered mutual savings bank.
At September 30, 1997, we had total assets of $1.2 billion, total deposits of
$992.2 million, and net worth of $126.7 million. We are a community- and
customer-oriented savings bank that operates fifteen full-service branch offices
in the Western New York counties of Niagara, Orleans, Erie and Genesee, which we
consider to be our primary market area. We also consider the remaining four
counties of Western New York, Wyoming, Allegany, Cattaraugus and Chautauqua
counties, as our market area. Through our "Person to Person Commitment" approach
to retail banking, we emphasize personal service and customer convenience in
serving the financial needs of the individuals, families and businesses residing
in Western New York. We offer the convenience and product mix of a larger, super
regional bank while providing the responsiveness and community orientation of a
smaller, local institution.

                                       4
Lockport is located on the historic Erie Canal and is 20 miles northeast
of Buffalo and 15 miles east of Niagara Falls. More than 9 million people reside
within the 125-mile radius of the city of Buffalo and the region is the 45th
largest metropolitan area in the nation and the 3rd largest in New York State.
 
     Based on FDIC-published data, as of June 30, 1996 we had the second largest
deposit market share in each of Niagara and Orleans counties, the fifth largest
share in Genesee county, and the eighth largest share in Erie County. We have
customer relationships with over 76,000 households in our primary market area,
representing approximately 17% of all households therein. For 1996, we were the
fourth leading originator of residential mortgage loans in Erie County. In the
eight county Western New York region, we had the fifth largest aggregate deposit
market share. Those banks having a larger aggregate market share in Western New
York are significantly larger, super regional financial institutions. Management
considers the Bank to be the dominant independent community bank focused
exclusively on serving the banking needs of the Western New York region.

     Since 1990, when the Bank acquired the savings bank life insurance ("SBLI")
operations of another Western New York savings bank, the Bank's life insurance
department has grown to become one of the largest servicers of SBLI in New York
State. These insurance products, along with the sale of various annuity
products, were expanded in 1997 as the Bank added the sale of mutual funds to
its non-deposit product line. Additional opportunities in the non-deposit field,
such as the sale of property and casualty insurance, should continue to enhance
the Bank's position as a full service provider of financial services in the near
future.

     Our business strategy is designed to enhance our profitability and
strengthen our position as the dominant, independent community bank in Western
New York. The highlights of our strategy include the following:

     .    Expansion of the retail banking franchise. We are continuing to focus
          on expanding our retail banking franchise and increasing the number of
          households served within our market area and the number of bank
          products used per customer. Since 1994 we have opened five full-
          service branch offices and our Board has authorized the establishment
          of three additional branch offices in 1998. We operate two full-
          service supermarket branch offices, provide customer access to ATMs,
          including the Bank's fourteen ATMs, without a service charge, provide
          telephone customer service, and provide 24-hour telephone account
          access. We have established a Website and are developing plans to
          introduce home computer banking services. Under the direction of our
          new head of retail banking, hired in 1997, additional emphasis and
          training is being directed toward greater cross-selling of bank
          products.

     .    Loan portfolio growth. Our loan portfolio consists of one- to four-
          family residential mortgage loans, commercial and multi-family real
          estate loans, consumer and other loans, and commercial business loans.
          At September 30, 1997, our loan portfolio totaled $622.5 million, an
          increase of $263.0 million, or 73.2%, since December 31, 1992. The
          loan portfolio represented 52.9% of total assets and 62.7% of total
          deposits at September 30, 1997, compared to 43.1% of total assets and
          48.2% of deposits at December 31, 1992. We intend to continue to
          increase our loan portfolio as a percentage of assets. Further, while
          maintaining our position as a leading originator of residential loans
          in our market, we plan to build upon our position as the dominant
          independent community bank to increase our market share of higher
          margin multi-family, commercial real estate, consumer and commercial
          business loans.

     .    Maintaining asset quality. Because we believe that asset quality is a
          critical component of long-term financial success, we have remained
          committed to a conservative credit culture. During the past five
          years, and including the nine month period ended September 30, 1997,
          non-performing assets have averaged 0.59% of total assets. At
          September 30, 1997, our non-performing loans totaled $1.9 million,
          representing 0.31% of the loan portfolio, and our non-performing
          assets totaled $2.2 million, representing 0.19% of assets. Our
          allowance for loan losses amounted to $6.4 million at September 30,
          1997, and represented 1.02% of our loan portfolio and 330.0% of non-
          performing loans.

                                       5
.    Managing interest rate risk. Although our liabilities are more
          sensitive to changes in interest rates than our assets, we seek to
          manage our exposure to interest rate risk by originating and retaining
          adjustable-rate loans in both the residential and commercial real
          estate loan portfolios, and by originating short-term and medium-term
          fixed-rate consumer loans. We also use our investment and mortgage
          related securities portfolios to manage our interest rate risk
          exposure. As of September 30, 1997, our securities available for sale
          totaled $465.0 million, or 39.5% of total assets, with an average life
          of 4.27 years, and our securities held to maturity totaled $37.5
          million, or 3.2% of total assets, with an average life of .07 years.

THE STOCK OFFERING

     The Company is offering for sale between 8,677,747 and 11,740,482 shares of
its Common Stock, for a price per share of $10.00 (the "Subscription Price"),
pursuant to this Prospectus. This Offering may be increased to 13,501,554 shares
without further notice to you if market or financial conditions change prior to
the completion of this Offering.

STOCK PURCHASE PRIORITIES

     The Company will offer shares of its Common Stock to the Bank's depositors
who held deposit accounts as of certain dates and to the ESOP (the "Subscription
Offering").  Any shares not subscribed for will be offered to certain members of
the general public in a community offering, with preference given first to
natural persons residing in the Western New York counties of Niagara, Erie,
Orleans and Genesee, and secondly to natural persons residing in the remaining
four counties of Western New York, Wyoming, Allegany, Cattaraugus and Chautauqua
counties (the "Community Offering").  See pages _____ to _____.  We have engaged
CIBC Oppenheimer Corp. and Trident Securities, Inc. to assist us on a best
efforts basis in selling the Common Stock in the Offering.

PROHIBITION ON TRANSFER OF SUBSCRIPTION RIGHTS

     Selling or assigning your subscription rights is illegal. All persons
exercising their subscription rights will be required to certify that they are
purchasing shares solely for their own account and that they have no agreement
or understanding regarding the sale or transfer of such shares. We intend to
pursue any and all legal and equitable remedies in the event we become aware of
the transfer of subscription rights and we will not honor orders known by us to
involve the transfer of such rights. In addition, persons who violate the
purchase limitations may be subject to sanctions and penalties imposed by the
New York State Banking Department (the "Department").

STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED

     The Plan of Reorganization and federal and state regulations require that
the aggregate purchase price of the Common Stock sold in the Offering must be
based on the appraised pro forma market value of the Company's Common Stock, as
determined by an independent valuation (the "Independent Valuation"). The Bank
has retained RP Financial, LC, Arlington, Virginia to make such valuation. The
Independent Valuation prepared by RP Financial states that as of November 28,
1997, the estimated pro forma market value of the Company's Common Stock to be
issued in the Reorganization ranged from a minimum of $191,250,000 to a maximum
of $258,750,000 with a midpoint of $225,000,000. To avoid confusion, we will
refer to this range of estimated values as the "Estimated Valuation Range."
Based on the Estimated Valuation Range and the $10 per share Subscription Price,
the number of shares of Common Stock that the Company will issue will range from
between 19,125,000 shares and 25,875,000 shares, with a midpoint of 22,500,000
shares. We have determined to offer 45.4% of such shares, or between 8,677,747
shares and 11,740,482 shares with a midpoint of 10,209,115 shares (the "Offering
Range"), to depositors and the public pursuant to this Prospectus. In addition,
shares are being issued to the Foundation as part of the Reorganization, which
will result in stockholders other than the Mutual Holding Company ("Minority
Stockholders") owning 46.7% of the shares of the 

                                       6
Common Stock outstanding at the conclusion of the Reorganization. The 53.3% of
the shares of the Company's Common Stock that are not sold in the Offering or
contributed to the Foundation will be issued to the Mutual Holding Company.

     Following commencement of the Offering, the maximum of the Estimated
Valuation Range may be increased by up to 15% to up to $297,562,500, which will
result in a corresponding increase in the maximum of the Offering Range to up to
13,501,554 shares, to reflect changes in the market and financial conditions and
demand for the Common Stock following commencement of the Offering, without the
resolicitation of subscribers. The minimum of the Estimated Valuation Range and
the minimum of the Offering Range may not be decreased without a resolicitation
of subscribers. THE INDEPENDENT VALUATION, HOWEVER, IS NOT INTENDED, AND MUST
NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SHARES. BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES
AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM
TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SUCH SHARES IN
THE OFFERING WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE
THE SUBSCRIPTION PRICE.

TERMINATION OF THE OFFERING

     The Subscription Offering will terminate at ___________, New York time, on
March __, 1998. The concurrent Community Offering may terminate on or after
March ___, 1998, but in any event, no later than May ___, 1998, unless an
extension is granted by the FDIC and the Department.  If the Reorganization and
Offering is not completed by May ___, 1998 all subscribers will be notified and
will be given the opportunity to cancel or modify their order.

BENEFITS TO MANAGEMENT FROM THE OFFERING

     Our full-time employees will participate in our employee stock ownership
plan (the "ESOP"), which is a form of retirement plan that will purchase shares
of Common Stock in the Offering. We also intend to implement a recognition and
retention plan and a stock option plan following completion of the
Reorganization, which will benefit our officers and directors. If we adopt the
recognition and retention plan, certain officers and directors will be awarded
shares of Common Stock without paying for the shares. However, the recognition
and retention plan and stock option plan may not be adopted until at least six
months after completion of the Reorganization and are subject to shareholder
approval.  See pages _____ to _____.

THE CHARITABLE FOUNDATION

     In furtherance of our commitment to our local community, we intend to
establish a charitable foundation (the "Foundation") as part of the
Reorganization. We will make a contribution to the Foundation, in the form of
shares of Common Stock and cash, in a total amount equal to 5% of the aggregate
Subscription Price of the shares of Common Stock sold in the Offering. The
number of shares of Common Stock to be contributed to the Foundation will equal
3% of the shares sold in the Offering. The balance of the contribution will
consist of cash. Due to the issuance of additional shares of Common Stock to the
Foundation, persons purchasing shares in the Offering will have their ownership
and voting interests in the Company diluted by 1.3%. As a result of the
establishment and funding of the Foundation, the Company will recognize an
expense equal to the full amount of the contribution, offset in part by a
corresponding tax benefit, during the quarter in which the contribution is made,
which is expected to be the first or second quarter of 1998. Such expense will
reduce earnings and have a material impact on the Company's earnings for such
quarter and for the year. The board of directors of the Foundation initially
will consist of persons who are also directors of the Company and the Bank. See
"Risk Factors--The Expense and Dilutive Effect of the Contribution of Shares and
Cash to the Charitable Foundation," "Pro Forma Data," and "The Reorganization
and Offering--Establishment of the Charitable Foundation."

                                       7
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK

     The Company will use the net proceeds from the Offering as follows.  The
percentages we use are estimates:

     .    50% will be used to buy all the capital stock of Lockport Savings
          Bank.
     .    8% will be loaned to the ESOP to fund its purchase of Common Stock.
     .    42% will be retained as a possible source of funds for the payment of
          dividends to shareholders, the repurchase of stock, and for other
          general corporate purposes.

     The proceeds to be received by the Bank will be available for continued
expansion of the retail banking franchise through de novo branching or deposit
or bank acquisitions, continued growth in the loan portfolio, and the purchase
of investment and mortgage related securities, in addition to general corporate
purposes.

     See pages _____ to _____.

PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON STOCK

     To ensure that eligible account holders and supplemental eligible account
holders are properly identified as to their stock purchase priorities, such
parties must list all deposit accounts on the order form, giving all names on
each deposit account and the account numbers at the applicable date. THE FAILURE
TO PROVIDE ACCURATE AND COMPLETE ACCOUNT INFORMATION ON THE ORDER FORM MAY
RESULT IN A REDUCTION OR ELIMINATION OF YOUR ORDER.

     Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original order form. THE COMPANY IS NOT OBLIGATED TO ACCEPT AN
ORDER SUBMITTED ON PHOTOCOPIED OR TELECOPIED ORDER FORMS. WE WILL NOT ACCEPT
ORDER FORMS IF THE CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE ORDER FORM
IS NOT EXECUTED.

DIVIDENDS

     Niagara Bancorp, Inc. intends to pay an annual cash dividend of $0.12
payable quarterly at $0.03 per share. The payment of dividends is expected to
commence following the first full quarter after completion of the
Reorganization.

MARKET FOR THE COMMON STOCK

     The Company has never issued capital stock. Consequently, there is no
current market for the Common Stock. The Company has received conditional
approval to have the Common Stock quoted on the Nasdaq National Market under the
symbol "NBCP." CIBC Oppenheimer Corp. and Trident Securities, Inc. intend to
make a market in the Common Stock, and we expect that additional market makers
will be identified.

IMPORTANT RISKS IN PURCHASING AND OWNING THE COMPANY'S COMMON STOCK

     Before you decide to purchase stock in the Offering, you should read the
Risk Factors section on pages _____ of this Prospectus, in addition to the other
sections of this Prospectus.

                                       8
SELECTED FINANCIAL INFORMATION

     The selected data presented below under the captions "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years in the five-year period ended December 31, 1996, are derived from
the audited consolidated financial statements of Lockport Savings Bank and
subsidiaries. The consolidated financial statements as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
are included elsewhere in this prospectus. The selected data presented below as
of and for the nine-month periods ended September 30, 1997 and 1996 are derived
from the unaudited consolidated financial statements of Lockport Savings Bank
and subsidiaries included elsewhere in this prospectus.
SEPTEMBER 30,                                DECEMBER 31, 
                                                                 -----------------------------------------------------------
                                                     1997           1996        1995         1994         1993         1992
                                                  -----------    -----------  -----------  ----------   ----------   -------
                                                                                               (IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
---------------------------------

  Total assets..............................      $ 1,176,451    $ 1,093,358  $   994,291  $  916,185   $  914,910   $  834,764
  Loans, net................................          622,487        598,486      535,971     474,191      421,061      359,442
  Securities available for sale(1):
    Mortgage related securities.............          285,762        284,860      261,543     273,280      300,582      323,105
    Other securities........................          179,211        130,269       84,867      65,733       67,903       27,520
  Securities held to maturity...............           37,500         38,000       46,700      43,838       51,927       33,809
  Deposits..................................          992,219        920,072      861,065     819,690      812,939      746,345
  Other borrowed funds......................           28,740         32,008            -           -            -            -
  Net worth.................................          126,720        115,664      107,653      81,322       87,195       75,722
NINE MONTHS
                                                 ENDED SEPTEMBER 30,                       YEARS ENDED DECEMBER 31,
                                             -----------------------  --------------------------------------------------------------
                                                1997         1996         1996        1995         1994         1993          1992
                                             ----------   ----------  -----------  -----------  ----------   ----------     --------
                                                                                        (IN THOUSANDS)
SELECTED OPERATIONS DATA:
------------------------
  Interest income.........................   $   61,310   $   55,458  $   75,062   $  69,856    $   63,144   $   61,681   $   61,096
  Interest expense........................       33,335       30,024      40,655      39,034(2)     31,754       32,597       34,281
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
    Net interest income...................       27,975       25,434      34,407      30,822        31,390       29,084       26,815
  Provision for loan losses...............          975        1,861       2,187       1,016           948        1,522        1,398
                                             ----------   ----------  ----------   ----------   ----------   ----------   ----------
  Net interest income after               
    provision for loan losses.............       27,000       23,573      32,220      29,806        30,442       27,562       25,417
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Fees and service charges................        3,037        2,564       3,495       2,692         2,283        2,293        1,774

  Net gain (loss) on sale of              
    securities available for sale.........          875          532         576       1,477          (849)       3,601        5,732
  Other operating income..................        1,044        1,223       1,681       1,237           952        1,149          172
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Total other operating income............        4,956        4,319       5,752       5,406         2,386        7,043        7,678
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Operating and other expenses............       18,416       14,999      20,926      20,143        18,399       16,666       15,689
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Income before taxes and cumulative      
    effect of change in accounting        
    principle.............................       13,540       12,893      17,046      15,069        14,429       17,939       17,406
  Income taxes............................        4,905        4,667       6,278       5,144         4,704        6,595        6,184
  Cumulative effect of change in          
    accounting principle..................            -            -           -           -          (924)(3)      129(4)         -
                                             ----------   ----------  ----------   ---------    ----------   ----------   ----------
  Net income..............................   $    8,635   $    8,226  $   10,768   $   9,925    $    8,801   $   11,473   $   11,222
                                             ==========   ==========  ==========   =========    ==========   ==========   ==========
__________________________
(1)   The Bank adopted the provisions set forth in SFAS No. 115 on January 1,
      1994, which requires securities available for sale to be carried at fair
      value. At December 31, 1993 and 1992, securities held for sale were
      carried at amortized cost.
(2)   Includes $1.25 million paid as a special interest payment in 1995, which
      was paid on a prorata basis on all interest-bearing savings, NOW, money
      market and certificate of deposit accounts in recognition of the Bank's
      125th anniversary.
(3)   Cumulative effect of change in accounting for postretirement health care
      and life insurance benefits. 
(4)   Cumulative effect of change in accounting for income taxes.

                                       9
AT OR FOR THE NINE MONTHS
                                                 ENDED SEPTEMBER 30,                 AT OR FOR THE YEARS ENDED DECEMBER 31,
                                               -----------------------  -----------------------------------------------------------
                                                 1997(1)      1996(1)       1996        1995         1994         1993         1992
                                               ----------   ----------  -----------  -----------  ----------   ----------   -------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
----------------------------------------

PERFORMANCE RATIOS:
Return on assets (ratio of net
    income to average total assets).........     1.01%        1.06%        1.03%        1.04%        0.95%       1.31%        1.47%
Return on net worth (ratio
    of net income to average net worth).....     9.58        10.20         9.84        10.25        10.41       14.01        16.02
Interest rate spread information:
   Average during period....................     2.83         2.83         2.82         2.88         3.07        3.10         3.17
   End of period............................     2.84         2.97         3.03         2.83         3.18        3.04         3.25
Net interest margin (2).....................     3.38         3.38         3.38         3.44         3.50        3.49         3.64
Ratio of operating expenses to
   average total assets.....................     2.16         1.94         2.01         2.10         1.99        1.92         2.05
Ratio of average interest-earning assets
    to average interest- bearing liabilities   113.63       113.80       113.93       113.92       112.30      109.95       110.27

ASSET QUALITY RATIOS:
Non-performing loans to total loans.........     0.31%        0.91%        0.78%        0.74%        0.89%       1.10%        0.75%
Non-performing assets to total
   assets...................................     0.19         0.54         0.48         0.97         0.56        0.69         0.70
Allowance for loan losses to non-
   performing loans.........................   330.03       118.58       138.60       119.01        99.29       88.61       102.20
Allowance for loan losses to total loans....     1.02         1.08         1.09         0.88         0.88        0.96         0.75

CAPITAL RATIOS:
Net worth to total assets...................    10.77%       10.15%       10.58%       10.92%        8.88%       9.53%        9.07%
Average net worth to
   average assets...........................    10.60        10.43        10.49        10.11         9.17        9.37         9.15

OTHER DATA:
Number of full-service offices..............       15           12           13           11           10          10            8
Number of deposit accounts..................  141,088      127,843      129,087      122,464      114,464     107,242      108,146
Loans serviced for others...................   $145.7       $123.8       $129.0       $110.4        $85.1       $69.5        $35.6
   (in millions)
Residential loan originations...............    $77.4        $83.0       $110.9       $107.6        $84.1      $134.5       $110.3
   (in millions)
Full time equivalent employees..............    353.0        312.0        325.0        276.5        243.5       238.5        224.0
___________________________
(1)   Ratios for nine month periods have been annualized.  
(2)   Net interest income divided by average interest earning assets.
(3)   Averages presented are monthly averages.

                                       10
RISK FACTORS

     In addition to the other information in this Prospectus, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.

DECREASED RETURN ON AVERAGE EQUITY IMMEDIATELY AFTER REORGANIZATION

     At September 30, 1997, Lockport Savings Bank's ratio of net worth to total
assets was 10.77%. Our equity position will significantly increase as a result
of the net proceeds that we receive in the Offering. On a pro forma basis as of
September 30, 1997, assuming the sale of Common Stock at the midpoint of the
Offering Range, the Company's consolidated ratio of equity to assets would be
approximately 16.8%. We currently anticipate that it will take time to prudently
deploy such capital. As a result, our return on average equity (net income
divided by average equity) is expected to be significantly below the industry
average initially after the Reorganization.

POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT

     Our results of operations and financial condition are significantly
affected by changes in interest rates. Our results of operations are
substantially dependent on our net interest income, which is the difference
between the interest income earned on our interest-earning assets and the
interest expense paid on our interest-bearing liabilities. Because as a general
matter our interest-bearing liabilities reprice or mature more quickly than our
interest-earning assets, an increase in interest rates generally would result in
a decrease in our average interest rate spread and net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Management of Interest Rate Risk."

     Changes in interest rates also affect the value of our interest-earning
assets, and in particular our investment securities portfolio. Generally, the
value of investment securities fluctuates inversely with changes in interest
rates. At September 30, 1997, our securities portfolio totaled $502.5 million,
including $465.0 million of securities available for sale. Unrealized gains and
losses on securities available for sale are reported on a quarterly basis as a
separate component of equity. Decreases in the fair value of securities
available for sale therefore could have an adverse affect on stockholders'
equity. See "Business of the Bank--Securities Investment Activities."

     We are also subject to reinvestment risk relating to interest rate
movements. Changes in interest rates can affect the average life of loans and
mortgage related securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage related securities, as borrowers refinance to
reduce borrowing costs. Under these circumstances, we are subject to
reinvestment risk to the extent that we are not able to reinvest such
prepayments at rates that are comparable to the rates on the maturing loans or
securities.

LENDING RISKS ASSOCIATED WITH COMMERCIAL REAL ESTATE, MULTI-FAMILY AND CONSUMER
LENDING

     At September 30, 1997, our portfolio of multi-family loans totaled $72.8
million, or 11.6% of total loans, our portfolio of commercial real estate loans
totaled $69.6 million, or 11.1% of total loans, and our portfolio of consumer
and other loans totaled $65.4 million, or 10.5% of total loans. Most industry
experts believe that multi-family, commercial real estate and consumer loans
expose a lender to a greater risk of loss than one- to four-family residential
loans. See "Business of the Bank -Lending Activities" and "-Delinquencies and
Classified Assets."

MINORITY PUBLIC OWNERSHIP AND CERTAIN ANTI-TAKEOVER PROVISIONS

     Voting Control of the Mutual Holding Company. Under New York law, the Plan
of Reorganization, and our governing corporate instruments, at least 51% of the
Company's voting shares must be owned by the Mutual Holding Company. The Mutual
Holding Company will be controlled by its Board of Trustees, who will consist of
persons who are members of the Board of Directors of the Company and the Bank.
The Mutual Holding Company will elect all

                                       11
members of the Board of Directors of the Company, and as a general matter, will
control the outcome of all matters presented to the stockholders of the Company
for resolution by vote, except for matters that require a vote greater than a
majority. The Mutual Holding Company, acting through its Board of Trustees, will
be able to control the business and operations of the Company and the Bank and
will be able to prevent any challenge to the ownership or control of the Company
by stockholders other than the Mutual Holding Company ("Minority Stockholders").
Accordingly, a change in control of the Company and the Bank cannot occur unless
the Mutual Holding Company first converts to the stock form of organization.
Although New York law, applicable regulations and the Plan of Reorganization
permit the Mutual Holding Company to convert from the mutual to the capital
stock form of organization, it is not anticipated that a conversion of the
Mutual Holding Company will occur in the foreseeable future. There can be no
assurance when, if ever, a conversion of the Mutual Holding Company will occur.

     Provisions in the Company's and the Bank's Governing Instruments. In
addition, certain provisions of the Company's certificate of incorporation and
bylaws, particularly a provision limiting voting rights, as well as certain
federal and state regulations, assist the Company in maintaining its status as
an independent publicly owned corporation. These provisions provide for, among
other things, supermajority voting, staggered boards of directors, noncumulative
voting for directors, limits on the calling of special meetings of shareholders,
and limits on the ability of Minority Stockholders to vote Common Stock in
excess of 5% of the issued and outstanding shares (inclusive of shares issued to
the Mutual Holding Company). The New York State Banking Regulations prohibit,
for a period of one year following the date of the Reorganization, offers to
acquire or the acquisition of beneficial ownership of more than 10% of the
outstanding stock of the Bank or the Company. The Bank's restated organization
certificate also prohibits, for three years, the acquisition, directly or
indirectly, of the beneficial ownership of more than 10% of the Bank's or the
Company's equity securities.

DIVIDEND WAIVERS BY THE MUTUAL HOLDING COMPANY

     It has been the policy of many mutual holding companies to waive the
receipt of dividends declared by its subsidiary. In connection with its approval
of the Reorganization, however, the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") imposed certain conditions on the waiver by
the Mutual Holding Company of dividends paid on the Common Stock. In particular,
the Mutual Holding Company must obtain prior Federal Reserve Board approval
before it may waive any dividends. As of the date hereof, management does not
believe that the Federal Reserve Board has given its approval to any waiver of
dividends by any mutual holding company that has requested its approval. The
cumulative amount of waived dividends, if any, must be maintained in a
restricted capital account which would be added to any liquidation account of
the Bank, and would not be available for distribution to Minority Stockholders.
The Plan of Reorganization also provides that if the Mutual Holding Company
converts to stock form in the future, any waived dividends would reduce the
percentage of the converted company's shares of Common Stock issued to Minority
Stockholders in connection with any such transaction. See "Regulation--Mutual
Holding Company Regulation--Conversion of the Mutual Holding Company to Stock
Form." It is not currently intended that the Mutual Holding Company will waive
dividends declared by the Company.

POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES

     Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of the Company following consummation of
the Reorganization, as noted below.

     The number of shares to be sold in the Reorganization may be increased as a
result of an increase in the Estimated Valuation Range of up to 15% to reflect
changes in the market and financial conditions and demand for the stock
following the commencement of the Offering. In the event that the Estimated
Valuation Range is so increased, it is expected that the Company will issue up
to 29,756,250 shares of Common Stock, including 13,501,554 shares of Common
Stock to depositors and the public pursuant to this Prospectus. An increase in
the number of shares will decrease net income per share and stockholders' equity
per share on a pro forma basis and will increase the Company's consolidated
stockholders' equity and net income. See "Capitalization" and "Pro Forma Data."

                                       12
The ESOP intends to purchase 8.0% of the Common Stock sold in the Offering.
In the event that there are insufficient shares available to fill the ESOP's
order due to an oversubscription by eligible account holders, the Company may
issue authorized but unissued shares of Common Stock to the ESOP in an amount
sufficient to fill the ESOP's order and/or the ESOP may purchase such shares in
the open market. In the event that additional shares of Common Stock are issued
to the ESOP to fill its order, stockholders would experience dilution of their
ownership interests (by up to 3.6% at the adjusted maximum of the Estimated
Valuation Range, assuming the ESOP purchased no shares in the Offering and
excluding shares expected to be issued to the Foundation) and per share
stockholders' equity and per share net income would decrease. See "Management of
the Bank--Benefit Plans--Employee Stock Ownership Plan and Trust" and "The
Reorganization and Offering--The Offering."

     The recognition and retention plan intends to acquire an amount of Common
Stock equal to 4.0% of the shares of Common Stock sold in the Offering. Such
shares of Common Stock may be acquired in the open market with funds provided by
the Company, if permissible, or from authorized but unissued shares of Common
Stock. The issuance of authorized but unissued shares of Common Stock to the
recognition and retention plan in an amount equal to 4% of the Common Stock sold
in the Offering would dilute the voting interests of existing stockholders by
approximately 1.8%, and net income per share and stockholders' equity per share
would be decreased by a corresponding amount. See "Pro Forma Data" and
"Management the Bank--Benefit Plans--Recognition and Retention Plan."

     The Company's stock option plan will reserve for future issuance pursuant
to such plan a number of shares of Common Stock equal to an aggregate of 10% of
the Common Stock sold in the Offering (1,174,048 shares, based on the maximum of
the Estimated Valuation Range). The issuance of authorized but unissued shares
of Common Stock pursuant to the stock option plan in an amount equal to 10% of
the Common Stock sold in the Offering would dilute the voting interests of
existing stockholders by approximately 4.5%, and net income per share and
stockholders' equity per share would be decreased by a corresponding amount. See
"Pro Forma Data" and "Management of the Bank--Benefit Plans--Stock Option Plan."

THE EXPENSE AND DILUTIVE EFFECT OF THE CONTRIBUTION OF SHARES AND CASH TO THE
CHARITABLE FOUNDATION

     Pursuant to the Plan, we intend to establish a Charitable Foundation in
connection with the Reorganization. We will make a contribution to the
Foundation, in the form of shares of Common Stock and cash, in a total amount
equal to 5% of the aggregate Subscription Price of the shares of Common Stock
sold in the Offering. The number of shares of Common Stock to be contributed to
the Foundation will equal 3% of the shares sold in the Offering. The balance of
the contribution will consist of cash. Due to the issuance of additional shares
of Common Stock to the Foundation, persons purchasing shares in the Offering
will have their ownership and voting interests in the Company diluted by 1.3%.
The contribution of Common Stock to the Foundation will be dilutive to the
interests of stockholders and the aggregate contribution will have an adverse
impact on the reported earnings of the Company in 1998, the fiscal year in which
the Foundation is to be established and the contribution made. If the Foundation
had been established and the contribution made at September 30, 1997, and
assuming the sale of the Common Stock at the midpoint of the Estimated Valuation
Range, we would have reported net income of $5.3 million, rather than reporting
net income of $8.6 million for the nine months ended September 30, 1997. Upon
completion of the Reorganization, the Foundation will own 1.4% of the total
shares of the Common Stock to be issued and outstanding (including shares to be
owned by the Mutual Holding Company). See "The Reorganization and Offering--
Establishment of the Charitable Foundation."

POTENTIAL INCREASED COMPENSATION EXPENSES AFTER THE REORGANIZATION

     In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-6 entitled "Employers' Accounting for Employee
Stock Ownership Plans," which requires an employer to record compensation
expense in an amount equal to the fair market value of shares committed to be
released to employees from an employee stock ownership plan, instead of an
amount equal to the cost basis of such shares. If the shares of Common Stock
appreciate in value over time, this will result in increased compensation
expense with respect to the ESOP. It

                                       13
is impossible to determine at this time the extent of such impact on future net
income. See "Pro Forma Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Accounting
Pronouncements." In addition, after completion of the Reorganization, the
Company intends to implement, subject to stockholder approval (which approval
cannot be obtained earlier than six months subsequent to the Reorganization),
the Recognition and Retention Plan. Upon implementation, the award of shares of
Common Stock from the Recognition and Retention Plan will result in significant
additional compensation expense. See "Pro Forma Data" and "Management of the
Bank--Benefit Plans--Recognition and Retention Plan."

STRONG COMPETITION WITHIN THE BANK'S MARKET AREA

     Competition in the banking and financial services industry is intense. In
our market area, we compete with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere. Many of these competitors have substantially greater
resources and lending limits than Lockport Savings Bank and may offer certain
services that we do not or cannot provide. Our profitability depends upon our
continued ability to successfully compete in our market area.

REGULATORY OVERSIGHT AND LEGISLATION

     We are subject to extensive regulation, supervision and examination by the
New York State Banking Department (our chartering authority), and by the FDIC as
insurer of deposits up to applicable limits. We are also a member of the Federal
Home Loan Bank System and are subject to certain limited regulations promulgated
by the Federal Home Loan Bank. As bank holding companies, the Company and the
Mutual Holding Company also will be subject to regulation and oversight by the
Federal Reserve Board. Such regulation and supervision govern the activities in
which an institution and its holding company may engage and are intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have extensive discretion in connection with their supervisory and
enforcement activities which are intended to strengthen the financial condition
of the banking and thrift industries, including the imposition of restrictions
on the operation of an institution, the classification of assets by the
institution and the adequacy of an institution's allowance for loan losses. Any
change in such regulation and oversight whether in the form of regulatory
policy, regulations, or legislation, could have a material impact on Lockport
Savings Bank, the Company, and our operations. See "Regulation."

UNCERTAINTY AS TO FUTURE GROWTH OPPORTUNITIES

     In an effort to fully deploy the capital we raise in the Offering, and to
increase our loan and deposit growth, we may seek to further expand our banking
franchise by acquiring other financial institutions or branches in Western New
York. Our ability to grow through selective acquisitions of other financial
institutions or branches of such institutions will depend on successfully
identifying, acquiring and integrating such institutions or branches. We can not
assure prospective purchasers of Common Stock that we will be able to generate
internal growth or identify attractive acquisition candidates, make acquisitions
on favorable terms or successfully integrate any acquired institutions or
branches into the Company. We currently have no specific plans, arrangements or
understandings regarding any such expansions or acquisitions, nor have we
established criteria to identify potential candidates for acquisition.

ABSENCE OF MARKET FOR COMMON STOCK

     The Company, as a newly organized company, has never issued capital stock
and, consequently, there is no established market for the Common Stock at this
time. The Company has received approval to have its Common Stock quoted on the
Nasdaq National Market under the symbol "NBCP" conditioned on the consummation
of the Offering. CIBC Oppenheimer Corp. and Trident Securities, Inc. intend to
make a market in the Common Stock, and we expect that additional market makers
will be identified.

                                       14
IRREVOCABILITY OF ORDERS; POTENTIAL DELAY IN COMPLETION OF OFFERINGS

     Orders submitted in the Offering are irrevocable. Funds submitted in
connection with any purchase of Common Stock in the Offering will be held by the
Company until the completion or termination of the Reorganization, including any
extension of the expiration date. Because completion of the Reorganization will
be subject to an update of the independent appraisal prepared by RP Financial,
among other factors, there may be one or more delays in the completion of the
Reorganization. Subscribers will have no access to subscription funds and/or
shares of Common Stock until the Reorganization is completed or terminated.

CAPABILITY OF THE BANK'S DATA INFORMATION SYSTEMS TO ACCOMMODATE THE YEAR 2000

     Like many financial institutions, the Bank relies upon computers for the
daily conduct of its business and for information systems processing generally.
There is concern among industry experts that on January 1, 2000 computers will
be unable to "read" the new year and there may be widespread computer
malfunctions. The Bank generally relies on software and hardware developed by
independent third parties to provide the information systems used by the Bank,
and we have been advised by our information systems providers that the issue is
being addressed. Based on these representations, management does not believe
that significant additional costs will be incurred in connection with the year
2000 issue.

                             NIAGARA BANCORP, INC.

     Niagara Bancorp, Inc. was recently organized for the purpose of acquiring
all of the capital stock of Lockport Savings Bank upon completion of the
Reorganization. The Company has received approval from the Federal Reserve Board
to become a bank holding company and, upon completion of the Reorganization,
will be subject to regulation by the Federal Reserve Board. See "The
Reorganization and Offering--Description of and Reasons for the Reorganization"
and "Regulation--Holding Company Regulation." Upon completion of the
Reorganization, the Company will have no significant assets other than the
shares of the Bank's common stock and an amount equal to 50% of the net proceeds
of the Offering, including the loan to the ESOP, and will have no significant
liabilities. The Company intends to use a portion of the net proceeds it retains
to loan to the ESOP funds to enable the ESOP to purchase up to 8% of the stock
sold in the Offering. See "Use of Proceeds." The management of the Company is
set forth under "Management of the Company." Initially, the Company will neither
own nor lease any property, but will instead use the premises, equipment and
furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than certain officers who are currently officers of the
Bank and will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands its business in the future.

     Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of, or mergers
with, other financial institutions and financial services related companies.
There are no current arrangements, understandings or agreements regarding any
such opportunities. However, subsequent to the Reorganization, the Company will
be in a position, subject to regulatory limitations and the Company's financial
position, to take advantage of any such acquisition and expansion opportunities
that may arise. The initial activities of the Company are anticipated to be
funded by the proceeds to be retained by the Company, income thereon and through
dividends from the Bank.

     The Company's executive office is located at the administrative offices of
the Bank, at 6950 South Transit Road, P.O. Box 514, Lockport, New York 14095-
0514. Its telephone number is (716) 625-7500.

                                       15
LOCKPORT SAVINGS BANK
 
     The Bank was organized in 1870 as a New York-chartered mutual savings bank.
The Bank's deposits are insured by the Bank Insurance Fund, as administered by
the FDIC, up to the maximum amount permitted by law. We are a community-oriented
savings bank engaged primarily in the business of accepting deposits from
customers through our fifteen branch offices in the Western New York counties of
Niagara, Orleans, Erie and Genesee, and investing those deposits, together with
funds generated from operations and borrowings, in one-to four-family
residential, multi-family residential and commercial real estate loans,
commercial business loans, consumer and other loans, and investment and mortgage
related securities.

     Through our "Person to Person Commitment" approach to retail banking, we
emphasize personal service and customer convenience in serving the financial
needs of the individuals, families and businesses residing in Western New York.
Our business strategy is designed to improve our profitability, expand our
retail banking franchise, and remain an independent community bank.

     At September 30, 1997, the Bank had total assets of $1.2 billion, total
deposits of $992.2 million and net worth of $126.7 million. At September 30,
1997, $386.5 million, or 61.8%, of the Bank's total loans were collateralized by
one- to four-family residential real estate. The Bank also originates multi-
family residential and commercial real estate loans, which totaled $72.8 million
and $69.6 million, or 11.6% and 11.1%, respectively, of the Bank's total loans
at September 30, 1997. Consumer and other loans totaled $65.4 million, or 10.5%
of the Bank's total loans, at September 30, 1997. The Bank's investment and
mortgage related securities portfolios totaled $502.5 million at September 30,
1997, representing 42.7% of total assets at such date.

     The Bank's executive office is located at 6950 South Transit Road,
Lockport, New York 14095-0514. The Bank's telephone number is (716) 625-7500.

                         REGULATORY CAPITAL COMPLIANCE

     At September 30, 1997, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
FDIC capital standards as of September 30, 1997, on a historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the Recognition and Retention Plan are deducted from
pro forma regulatory capital.
PRO FORMA AT SEPTEMBER 30, 1997, BASED UPON THE SALE AT $10.00 PER SHARE OF
                                                     -----------------------------------------------------------------------------
                                    HISTORICAL AT           8,677,747                   10,209,115                  11,740,482      
                                 SEPTEMBER 30, 1997          SHARES                       SHARES                     SHARES 
                             ----------------------- ------------------------        ------------------        ------------------
                                          PERCENT                  PERCENT                   PERCENT                   PERCENT  
                                            OF                       OF                        OF                        OF     
                                 AMOUNT   ASSETS (2)     AMOUNT     ASSETS (2)        AMOUNT  ASSETS (2)        AMOUNT  ASSETS (2) 
                                 ------   ----------   -----------  ----------        ------  ----------        ------  ---------- 
                                                                 (DOLLARS IN THOUSANDS)
GAAP capital.................  $ 126,720       10.77%    $  157,740      12.99%    $  163,300     13.37%    $   168,860     13.75%
                               =========    ========     ==========   ========     ==========   =======     ===========  ======== 
                                                                                                                                  
Leverage capital:                                                                                                                 
  Capital level (3)..........  $ 125,383       20.69%    $  156,403      25.01%    $  161,963     25.75%    $   167,523     26.49%
  Requirement(4).............     24,235        4.00%        25,017       4.00%        25,156      4.00%         25,296      4.00%
                               ---------    --------     ----------   --------     ----------   -------     -----------  -------- 
    Excess...................  $101,148        16.69%    $  131,386      21.01%    $  136,806     21.75%    $   142,227     22.49%
                               ========     ========     ==========   ========     ==========   =======     ===========  ======== 
Risk-based capital:                                                                                                               
  Tier 1 Capital level (3)(5)  $ 131,736       21.74%    $  162,756      26.02%    $  168,316     26.76%    $   173,876     27.49%
  Requirement................     48,469        8.00%        50,033       8.00%        50,313      8.00%         50,592      8.00%
                               ---------    --------     ----------   --------     ----------   -------     -----------  -------- 
    Excess...................  $  83,267       13.74%    $  112,722      18.02%    $  118,003     18.76%    $   123,284     19.49%
                               =========    ========     ==========   ========     ==========   =======     ===========  ======== 
                                                                                                                                  
  Total capital level (3)(5).  $ 125,383       10.75%    $  156,403      12.99%    $  161,963     13.37%    $   167,523     13.76%
  Requirement................     34,991        3.00%        36,129       3.00%        36,333      3.00%         36,537      3.00%
                               ---------    --------     ----------   --------     ----------   -------     -----------  -------- 
  Excess.....................  $  90,392        7.75%    $  120,273       9.99%    $  125,630     10.37%    $   130,986     10.76%
                               =========    ========     ==========   ========     ==========   =======     ===========  ========
13,501,554
                                        SHARES(1)
                                   -------------------
                                              PERCENT
                                                OF
                                   AMOUNT    ASSETS(2)
                                   ------    ---------
GAAP capital.................    $ 175,271     14.18%
                                 =========    ======
                             
Leverage capital:            
  Capital level (3)..........    $ 173,934     27.33%
  Requirement(4).............       25,457      4.00%
                                 ---------    ------
    Excess...................    $ 148,476     23.33%
                                 =========    ======
Risk-based capital:          
  Tier 1 Capital level (3)(5)    $ 180,287     28.33%
  Requirement................       50,915      8.00%
                                 ---------    ------
    Excess...................    $ 129,372     20.33%
                                 =========    ======

  Total capital level (3)(5).    $ 173,934     14.19%
  Requirement................       36,771      3.00%
                                 ---------    ------
  Excess.....................    $ 137,163     11.19%
                                 =========    ======
16
___________________________
(1)   As adjusted to give effect to an increase in the number of shares which
      could occur due to an increase in the Estimated Valuation Range of up to
      15% as a result of regulatory considerations, demand for the shares, or
      changes in market conditions or general financial and economic conditions
      following the commencement of the Subscription and Community Offerings.
(2)   Leverage capital levels are shown as a percentage of tangible assets. 
      Risk-based capital levels are calculated on the basis of a percentage of
      risk-weighted assets.
(3)   Pro forma capital levels assume: funding by the Bank of the Recognition
      and Retention Plan to enable the plan to acquire a number of shares equal
      to 4% of the Common Stock sold in the Offering; the purchase by the ESOP
      of 8% of the shares sold in the Offering; and the capitalization of the
      Mutual Holding Company by the Bank with $100,000. See "Management of the
      Bank--Benefit Plans" for a discussion of the Recognition and Retention
      Plan and ESOP.
(4)   The current leverage capital requirement for savings banks is 3% of total
      adjusted assets for savings banks that receive the highest supervisory
      rating for safety and soundness and that are not experiencing or
      anticipating significant growth. The current leverage capital ratio
      applicable to all other savings banks is 4% to 5%. See "Regulation--FDIC
      Regulations--Capital Requirements.
(5)   Assumes net proceeds are invested in assets that carry a risk-weighting
      equal to the average risk weighting of the Bank's risk-weighted assets as
      of September 30, 1997.

                                USE OF PROCEEDS

     Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Offering is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $85.3 million
and $115.7 million (or $133.2 million if the Estimated Valuation Range is
increased by 15%). See "Pro Forma Data" and "The Reorganization and Offering--
Stock Pricing and Number of Shares to Be Issued" as to the assumptions used to
arrive at such amounts. The Company will be unable to utilize any of the net
proceeds of the Offering until the consummation of the Reorganization.

     The Company will contribute approximately 50% of the net proceeds of the
Offering to the Bank, or approximately $42.7 million to $66.6 million at the
minimum and adjusted maximum of the Estimated Valuation Range, respectively.
Such portion of net proceeds received by the Bank from the Company will be used
by the Bank for general corporate purposes, including investments in short- and
medium-term, investment grade debt securities, mortgage related securities and
marketable equity securities, and to increase the origination of mortgage,
consumer and commercial business loans. The Bank may also use such funds for the
continued expansion of its retail banking franchise, and to expand operations
through acquisitions of other financial institutions, branch offices or other
financial services companies. To the extent that the stock-based benefit
programs which the Company intends to adopt subsequent to the Offering are not
funded with authorized but unissued shares of Common Stock of the Company, the
Company or Bank may use net proceeds from the Offering to fund the purchase of
stock to be awarded under such stock benefit programs. See "Risk Factors--
Possible Dilutive Effect of Issuance of Additional Shares" and "Management of
the Bank--Benefit Plans--Stock Option Plan" and "--Recognition and Retention
Plan. "

     The Company intends to use a portion of the net proceeds it retains to make
a loan directly to the ESOP to enable the ESOP to purchase 8% of the shares sold
in the Offering. Based upon the sale of 8,677,747 shares or 11,740,482 shares at
the minimum and maximum of the Offering Range, the amount of the loan to the
ESOP would be $6.9 million or $9.4 million, respectively (or $10.8 million if
the Estimated Valuation Range is increased by 15%). See "Management of the 
Bank--Benefit Plans--Employee Stock Ownership Plan and Trust." The remaining net
proceeds retained by the Company will initially be invested in short- and 
medium- term debt obligations, mortgage related securities and other marketable
equity securities.

     The net proceeds retained by the Company may also be used to support the
future expansion of operations through the acquisition of financial institutions
or their assets, including those located within the Bank's market area, or
diversification into other banking related businesses. However, the Company and
the Bank have no current arrangements, understandings or agreements regarding
any such transactions. Upon completion of the Reorganization, the Company will
be a bank holding company, and will be permitted to engage only in those
activities that are permissible for bank holding companies under the Bank
Holding Company Act, as administered by the Federal Reserve

                                       17
Board. See "Regulation --Bank Holding Company Regulation" for a description of
certain regulations applicable to the Company.

     Upon completion of the Reorganization, the Board of Directors of the
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Pursuant to New York regulations, and
without the prior approval of the Department, the Company may not repurchase any
Common Stock, in the first year after the Reorganization, and during each of the
next two following years, may not repurchase more than 5% of its shares
outstanding. In addition, the FDIC prohibits an insured savings bank which has
converted from the mutual to stock form of ownership from repurchasing its
capital stock within one year following the date of its Offering to stock form,
except that stock repurchases of no greater than 5% of a bank's outstanding
capital stock may be repurchased during this one-year period where compelling
and valid business reasons are established to the satisfaction of the FDIC.
Based upon facts and circumstances following completion of the Reorganization
and subject to applicable regulatory requirements, the Board of Directors may
determine to repurchase stock in the future. Such facts and circumstances may
include but not be limited to: (i) market and economic factors such as the price
at which the stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to repurchase
stock, such repurchases may be made at market prices which may be in excess of
the Subscription Price in the Offering. Any stock repurchases will be subject to
the determination of the Company's Board of Directors that both the Company and
the Bank will be capitalized in excess of all applicable regulatory requirements
after any such repurchases and that such capital will be adequate, taking into
account, among other things, the level of non-performing and other risk assets,
the Company's and the Bank's current and projected results of operations and
asset/liability structure, the economic environment, tax and other
considerations.

                                DIVIDEND POLICY

     Upon completion of the Offering, the Board of Directors of the Company will
have the authority to declare dividends on the Common Stock, subject to
statutory and regulatory requirements. The Company intends to pay an annual cash
dividend of $0.12, payable quarterly at $0.03 per share. The payment of
dividends is expected to begin following the first full quarter after the
completion of the Reorganization.

     Under Delaware law, the Company is permitted to pay cash dividends,
provided that the amount of cash dividends paid may not exceed that amount by
which the net assets of the Company (the amount by which total assets exceed
total liabilities) exceeds its statutory capital, or if there is no such excess,
the net profits for the current and/or immediately preceding fiscal year. The
Company's source for the payment of cash dividends may in the future depend on
the receipt of cash dividends from the Bank. The Bank will not be permitted to
pay dividends on its common stock or repurchase shares of its common stock if
its stockholders' equity would be reduced below the amount required for the
liquidation account. See "The Reorganization and Offering--Liquidation Rights."
Under New York Banking Law, dividends may be declared and paid only out of the
net profits of the Bank. The approval of the Superintendent is required if the
total of all dividends declared in any calendar year will exceed net profits for
that year plus the retained net profits of the preceding two years, less any
required transfer to surplus or a fund for the retirement of any preferred
stock. In addition, no dividends may be declared, credited or paid if the effect
thereof would cause the Bank's capital to be reduced below the amount required
by the Superintendent or the FDIC. See "Regulation." Subsequent to the Offering,
the availability of the Bank's funds for the payment of dividends may be limited
by the liquidation account. See "The Reorganization and Offering--Liquidation
Rights." Dividends in excess of the Bank's current and accumulated earnings
could result in the realization by the Bank of taxable income. See "Federal and
State Taxation--Federal Taxation."

                                       18
Additionally, in connection with the Reorganization, the Company and Bank
have committed to the FDIC that during the one-year period following the
consummation of the Reorganization, the Company will not declare an
extraordinary dividend to stockholders which would be treated by recipient
stockholders as a tax-free return of capital for federal income tax purposes
without prior approval of the FDIC.

                            MARKET FOR COMMON STOCK

     The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
received conditional approval to have its Common Stock quoted on the Nasdaq
National Market under the symbol "NBCP" subject to the completion of the
Offering and compliance with certain conditions including the presence of at
least three registered and active market makers. The Company will seek to
encourage and assist at least three market makers to make a market in its Common
Stock. CIBC Oppenheimer Corp. and Trident Securities, Inc. intend to make a
market in the Common Stock and we expect that additional market makers will be
identified .

                                CAPITALIZATION

     The following table presents the historical capitalization of the Bank at
September 30, 1997, and the pro forma consolidated capitalization of the Company
after giving effect to the Offering, including the issuance of shares to the
Foundation, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data."

                                       19
COMPANY PRO FORMA BASED UPON THE SALE AT $10.00 PER SHARE
                               ---------------------------------------------------------------------------------------------
                                                                                                                 13,501,554
                                                   8,677,747           10,209,115           11,740,482              SHARES        
                                                    SHARES               SHARES               SHARES               (ADJUSTED      
                               HISTORICAL         (MINIMUM)           (MIDPOINT)            (MAXIMUM)            MAXIMUM)(1)     
                               -----------       -----------         ------------          -----------          ------------    
                                                                     (IN THOUSANDS)
Deposits(2)................   $   992,219        $   992,219         $    992,219          $   992,219            $    992,219    
Other borrowings...........        28,740             28,740               28,740               28,740                  28,740    
                              -----------        -----------         ------------          -----------            ------------    
Total deposits and                                                                                                                
 other borrowed funds......   $ 1,020,959        $ 1,020,959         $  1,020,959          $ 1,020,959            $  1,020,959    
                              ===========        ===========         ============          ===========            ============    

Stockholders' equity:
   Preferred Stock, $.01
     par value, 1,000,000
     shares authorized;
     none to be issued.....   $        --            $    --              $    --            $      --              $       --
   Common Stock, $.01 par
     value, ___,000,000
     shares authorized;
     shares to be issued
     as reflected..........            --                191                  225                  259                     298
   Additional paid-in
     capital(3)............            --             87,735              103,354              118,973                 136,968
   Retained earnings(4)....       125,325            125,225              125,225              125,225                 125,225
 Less:
   Expenses of contribution to
     Foundation............            --             (4,339)              (5,105)              (5,870)                 (6,751)
Plus:
   Tax benefit of contribution to
     Foundation (5)........            --              1,519                1,787                2,055                   2,363
   Net unrealized gain on
     securities available-
     for-sale, net of taxes         1,395              1,395                1,395                1,395                   1,395
Less:
   Common Stock acquired
     by the ESOP(6)........            --             (6,942)              (8,167)              (9,392)                (10,801)
   Common Stock
     acquired by the
     Recognition and Retention
      Plan(7)..............            --             (3,471)              (4,084)              (4,696)                 (5,401)
                              -----------         ----------           ----------          -----------             -----------

Total stockholders'
 equity....................   $   126,720          $ 201,313            $ 214,630          $   227,949             $   243,296
                              ===========         ==========           ==========          ===========             ============
________________
(1)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Valuation Range of up to
     15% as a result of regulatory considerations, demand for the shares, or
     changes in market or general financial and economic conditions following
     the commencement of the Offering.
(2)  Does not reflect withdrawals from deposit accounts for the purchase of
     Common Stock in the Offering. Such withdrawals would reduce pro forma
     deposits by the amount of such withdrawals.
(3)  Reflects the sale of shares in the Offering. No effect has been given to
     the issuance of additional shares of Common Stock pursuant to the stock
     option plan to be adopted by the Company and presented for approval of
     stockholders following the Offering. The stock option plan would provide
     for the grant of stock options to purchase a number of shares of Common
     Stock equal to 10% of the shares of Common Stock sold in the Offering. See
     "Management of the Bank--Benefit Plans--Stock Option Plan."
(4)  The retained earnings of the Bank will be substantially restricted after
     the Offering. See "The Reorganization and Offering--Liquidation Rights."
     Assumes that the Mutual Holding Company will be capitalized by the Bank
     with $100,000.
(5)  Represents the tax effect of the contribution to the Foundation based on a
     35% tax rate. The realization of the deferred tax benefit is limited
     annually to 10% of the Company's annual taxable income, subject to the
     ability of the Company to carry forward any unused portion of the deduction
     for five years following the year in which the contribution is made.
(6)  Assumes that 8% of the shares sold in the Offering will be purchased by the
     ESOP and that the funds used to acquire the ESOP shares will be borrowed
     from the Company. The Common Stock acquired by the ESOP is reflected as a
     reduction of stockholders' equity. See "Management of the Bank--Benefit
     Plans--Employee Stock Ownership Plan and Trust."
(7)  Assumes that, subsequent to the Offering, an amount equal to 4% of the
     shares of Common Stock sold in the Offering is purchased by the Recognition
     and Retention Plan through open market purchases at $10.00 per share. The
     Common Stock to be purchased by the Recognition and Retention Plan is
     reflected as a reduction to stockholders' equity. See "Risk Factors--
     Dilutive Effect of Issuance of Additional Shares," and Footnote 3 to the
     tables under "Pro Forma Data" and "Management of the Bank--Benefit Plans--
     Stock Plans."

                                       20
PRO FORMA DATA

     The actual net proceeds from the sale of the Common Stock cannot be
determined until the Offering is completed. However, net proceeds are currently
estimated to be between $85.3 million and $115.7 million (or up to $133.2
million) based upon the following assumptions: (i) $3.0 million will be sold to
executive officers and trustees of the Bank and Company, the ESOP will purchase
8% of the Common Stock sold in the Offering, and the remaining shares will be
sold in the Subscription and Community Offerings; (ii) CIBC Oppenheimer Corp.
and Trident Securities, Inc. will receive an aggregate fee equal to .95% of the
aggregate Subscription Price of shares sold to persons other than directors,
executive officers and the ESOP; (iii) the Foundation will be funded with a
total contribution equal to 5% of the aggregate Subscription Price of the Common
Stock sold in the Offering, consisting of 3% of the shares of Common Stock sold
in the Offering and 2% in cash; (iv) Reorganization expenses, excluding the fees
payable to CIBC Oppenheimer Corp. and Trident Securities, Inc., will be
approximately $800,000; and (v) the Mutual Holding Company will be capitalized
by the Bank with $100,000. Actual expenses may vary from those estimated.

     Pro forma consolidated net income of the Company for the nine months ended
September 30, 1997 and for the year ended December 31, 1996 have been calculated
as if the Common Stock had been sold at the beginning of the respective periods
and the net proceeds had been invested at 5.44% and 5.49% (the one year U.S.
Treasury bill rate as of September 30, 1997 and December 31, 1996). The tables
do not reflect the effect of withdrawals from deposit accounts for the purchase
of Common Stock. The pro forma after-tax yield for the Company and the Bank is
assumed to be 3.54% for the nine months ended September 30, 1997, and 3.57% for
the year ended December 31, 1996 (based on an assumed tax rate of 35%).
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock, as adjusted to give effect to the purchase of shares by the ESOP. No
effect has been given in the pro forma stockholders' equity calculations for the
assumed earnings on the net proceeds. As discussed under "Use of Proceeds," the
Company will retain 50% of the net proceeds from the Offering.

     The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.

     The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the nine months ended September 30, 1997, and at
or for the year ended December 31, 1996, based on the assumptions set forth
above and in the table and should not be used as a basis for projections of
market value of the Common Stock following the Offering. The tables below give
effect to the Recognition and Retention Plan, which is expected to be adopted by
the Company following the Offering and presented to stockholders for approval.
See Footnote 3 to the tables and "Management of the Bank--Benefit Plans--
Recognition and Retention Plan." No effect has been given in the tables to the
possible issuance of additional shares reserved for future issuance pursuant to
the stock option plan to be adopted by the Board of Directors of the Company and
presented to stockholders for approval, nor does book value as presented give
any effect to the liquidation account to be established for the benefit of
Eligible Account Holders or Supplemental Eligible Account Holders or, in the
event of liquidation of the Bank, to the tax effect of the bad debt reserve and
other factors. See Footnote 4 to the tables below, "The Reorganization and
Offering--Liquidation Rights" and "Management of the Bank--Benefit Plans--Stock
Option Plan."

                                       21
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997                         
                                   -----------------------------------------------------------------------------------------
                                       8,677,747              10,209,115             11,740,482            13,501,554      
                                    SHARES SOLD AT         SHARES SOLD AT          SHARES SOLD AT        SHARES SOLD AT        
                                   $10.00 PER SHARE        $10.00 PER SHARE       $10.00 PER SHARE      $10.00 PER SHARE      
                                      (MINIMUM)              (MIDPOINT)               (MAXIMUM)       (ADJUSTED MAXIMUM)(8) 
                                   ----------------        ----------------       ----------------    --------------------- 
                                                              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds...................... $   86,777                $  102,091              $  117,405            $  135,016
 Plus:  Shares acquired by
     Foundation.....................      2,603                     3,063                   3,522                 4,050
                                     ----------                ----------              ----------            ----------
Pro forma market capitalization..... $   89,380                $  105,154              $  120,927            $  139,066
                                     ==========                ==========               =========             =========

Gross proceeds...................... $   86,777                $  102,091              $  117,405            $  135,016
Less: Cash contribution
        to Foundation...............      1,736                     2,042                   2,348                 2,700
      Expenses......................      1,455                     1,575                   1,695                 1,800
                                     ----------                ----------              ----------            ----------

Estimated net proceeds..............     83,586                    98,474                 113,362               130,516
Less: Common Stock pur-
       chased by ESOP...............     (6,942)                   (8,167)                 (9,392)              (10,801)
       Common Stock purchased
       by recognition
      and retention plan............     (3,471)                   (4,084)                 (4,696)               (5,401)
                                     ----------                ----------              ----------            ----------

Estimated net proceeds,
   as adjusted...................... $   73,173                $   86,223              $   99,274            $  114,314
                                     ==========                ==========              ==========            ==========

Consolidated net income:
   Historical....................... $    8,635                $    8,635              $    8,635            $    8,635
   Pro forma income on net
     proceeds, as adjusted..........      1,938                     2,284                   2,630                 3,029
   Pro forma ESOP
     adjustment(2)..................       (226)                     (265)                   (305)                 (351)
   Pro forma recognition
     and retention plan
     adjustment(3)..................       (338)                     (398)                   (450)                 (527)
                                     ----------                ----------              ----------            ----------

Pro forma net income(1)............. $   10,009                $   10,256              $   10,510            $   10,786
                                     ==========                ==========              ==========            ==========

Per share net income(6):
   Historical....................... $     0.47                $     0.40              $     0.35            $     0.30
   Pro forma income on net
     proceeds, as adjusted..........       0.11                      0.11                    0.11                  0.11
   Pro forma ESOP
     adjustment(1)..................      (0.01)                    (0.01)                  (0.01)                (0.01)
   Pro forma recognition and
     retention plan
     adjustment.....................      (0.02)                    (0.02)                  (0.02)                (0.02)
                                     ----------                ----------              ----------            ----------

Pro forma net income
   per share........................ $     0.55                $     0.48              $     0.43            $     0.38
                                     ==========                ==========              ==========            ==========
22
Stockholders' equity:
Historical..........................  $ 126,720                $  126,670              $  126,720            $  126,720
Estimated net proceeds..............     83,587                    98,474                 113,362               130,515
  Plus: Shares issued to Foundation.      2,603                     3,063                   3,522                 4,050
  Less: Contribution to Foundation..     (2,603)                   (3,063)                 (3,522)               (4,050)
  Plus: Tax benefit of contribution to
          Foundation................      1,519                     1,787                   2,055                 2,363
  Less: Common Stock ac-
         quired by ESOP(2)..........     (6,942)                   (8,167)                 (9,392)              (10,801)
          Common Stock
         acquired by
         recognition and
         retention plan(3)..........     (3,471)                   (4,084)                 (4,696)               (5,401)
                                     ----------                ----------              ----------            ----------

Pro forma stockholders'
   equity(3)(4)(5).................. $  201,313                $  214,630              $  227,949            $  243,296
                                     ==========                ==========              ==========            ==========

Stockholders' equity per
   share(6):
Historical.......................... $     6.63                $     5.64              $     4.90            $     4.27
Estimated net proceeds..............       4.37                      4.38                    4.38                  4.39
  Plus:  Shares issued to Foundation       0.14                      0.14                    0.14                  0.14
  Less: Contribution  to Foundation.      (0.14)                    (0.14)                  (0.14)                (0.14)
  Plus: Tax benefit of contribution to
          Foundation................       0.08                      0.08                    0.08                  0.08
  Less: Common Stock
          acquired by ESOP(2).......      (0.36)                    (0.36)                  (0.36)                (0.36)
        Common Stock acquired
         by recognition and
         retention plan ............      (0.18)                    (0.18)                  (0.18)                (0.18)
                                     ----------                ----------              ----------            ----------

Pro forma stockholders'
   equity per
   share(3)(4)(5)................... $    10.53                $     9.55              $     8.81            $     8.19
                                     ==========                ==========              ==========            ==========

Offering price to pro
   forma net income per
   share(7).........................      13.64x                    15.63x                  17.44x                19.74x

Offering price as a per-
   centage of pro forma
   stockholders' equity
   per share........................      94.97%                   104.71%                 113.51%               122.10%
___________________
(1)  Does not give effect to the non-recurring expense that will be recognized
     in 1998 as a result of the establishment of the Foundation. The Company
     will recognize an after-tax expense for the amount of the contribution to
     the Foundation which is expected to be $2.8 million, $3.3 million, $3.8
     million and $4.4 million at the minimum, midpoint, maximum and adjusted
     maximum of the Estimated Valuation Range, respectively. Assuming the
     contribution to the Foundation was incurred during the nine months ended
     September 30, 1997, pro forma net income per share would be $0.38, $0.32,
     $0.27 and $0.22 at the minimum, midpoint, maximum and adjusted maximum,
     respectively. Per share net income data is based on 18,448,136,
     21,703,689,24,959,243 and 28,703,128 shares outstanding, which represents
     shares sold in the Reorganization, shares contributed to the Foundation and
     shares to be allocated or distributed under the ESOP and Recognition and
     Retention Plan for the period presented.
(2)  It is assumed that 8% of the shares sold in the Offering will be purchased
     by the ESOP. For purposes of this table, the funds used to acquire such
     shares are assumed to have been borrowed by the ESOP from the Company. The
     amount to be borrowed is reflected as a reduction to stockholders' equity.
     The Bank intends to make annual contributions to the ESOP in an amount at
     least equal to the principal and interest requirement of the debt. The
     Bank's total annual payment of the ESOP debt is based upon fifteen equal
     annual installments of principal, with an assumed interest rate at 8.5%.
     The pro forma net income assumes: (i) that the Bank's contribution to the
     ESOP is equivalent to the debt service requirement for the nine months
     ended September 30, 1997, and was made at the end of the period; (ii) that
     17,355, 20,418, 23,481 and 27,003 shares at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively, were
     committed to be released during the nine months ended September 30, 1997,
     at an average fair value of $10.00 per share in accordance with Statement
     of Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
     released were considered outstanding for purposes of the net income per
     share calculations. See "Management of the Bank--Benefit Plans--Employee
     Stock Ownership Plan and Trust."
(3)  Gives effect to the Recognition and Retention Plan expected to be adopted
     by the Company following the Offering. This plan intends to acquire a
     number of shares of Common Stock equal to 4% of the shares of Common Stock
     sold in the Offering or 347,110, 408,365, 469,619 and 540,061

                                       23
shares of Common Stock at the minimum, midpoint, maximum and adjusted
     maximum of the Estimated Valuation Range, respectively, either through open
     market purchases, if permissible, or from authorized but unissued shares of
     Common Stock or treasury stock of the Company, if any. Funds used by the
     Recognition and Retention Plan to purchase the shares will be contributed
     to the plan by the Bank. In calculating the pro forma effect of the
     Recognition and Retention Plan, it is assumed that the shares were acquired
     by the Recognition and Retention Plan at the beginning of the period
     presented in open market purchases at the Subscription Price and that 20%
     of the amount contributed was an amortized expense during such period. The
     issuance of authorized but unissued shares of the Company's Common Stock to
     the Recognition and Retention Plan instead of open market purchases would
     dilute the voting interests of existing stockholders by approximately 1.88%
     and pro forma net income per share would be $0.54, $0.47, $0.42 and $0.32
     at the minimum, midpoint, maximum and adjusted maximum of the Estimated
     Valuation Range, respectively, and pro forma stockholders' equity per share
     would be $10.51, $9.55, $8.83 and $8.21 at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively. There
     can be no assurance that the actual purchase price of the shares granted
     under the Recognition and Retention Plan will be equal to the Subscription
     Price. See "Management of the Bank--Benefit Plans--Recognition and
     Retention Plan."
(4)  No effect has been given to the issuance of additional shares of Common
     Stock pursuant to the stock option plan expected to be adopted by the
     Company following the Offering. Under the stock option plan, an amount
     equal to 10% of the Common Stock sold in the Offering, or 867,775,
     1,020,912, 1,174,048 and 1,350,155 shares at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively, will
     be reserved for future issuance upon the exercise of options to be granted
     under the stock option plan. The issuance of Common Stock pursuant to the
     exercise of options under the stock option plan will result in the dilution
     of existing stockholders' interests. Assuming all options were exercised at
     the end of the period at an exercise price of $10.00 per share, the pro
     forma net income per share would be $0.53, $0.46, $0.41 and $0.37,
     respectively, and the pro forma stockholders' equity per share would be
     $10.50, $9.56, $8.87 and $8.26, respectively. See "Management of the Bank--
     Benefit Plans--Stock Option Plan."
(5)  The retained earnings of the Bank will continue to be substantially
     restricted after the Offering. See "Dividend Policy," "The Reorganization
     and Offering-- Liquidation Rights" and "Regulation--New York Bank
     Regulation."
(6)  Stockholders' equity per share data is based upon 19,125,000, 22,500,000,
     and 25,875,000 and 29,756,250 shares outstanding representing shares sold
     in the Offering, shares purchased by the ESOP and the Recognition and
     Retention Plan, and shares contributed to the Foundation.
(7)  Based on pro forma net income for the nine months ended September 30, 1997
     that have been annualized.
(8)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Valuation Range of up to
     15% as a result of regulatory considerations, demand for the shares, or
     changes in market or general financial and economic conditions following
     the commencement of the Subscription and Community Offerings.

                                       24
AT OR FOR THE YEAR ENDED DECEMBER 31, 1996                             
                               -------------------------------------------------------------------------------------------------
                                  8,677,747               10,209,115                 11,740,482                 13,501,554      
                                SHARES SOLD AT          SHARES SOLD AT             SHARES SOLD AT             SHARES SOLD AT    
                               $10.00 PER SHARE        $10.00 PER SHARE           $10.00 PER SHARE           $10.00 PER SHARE   
                                  (MINIMUM)               (MIDPOINT)                 (MAXIMUM)            (ADJUSTED MAXIMUM)(7) 
                               ----------------        ----------------          ------------------       --------------------- 
                                                       (Dollars in Thousands, Except per Share Amounts)
Gross proceeds............        $   86,777                $  102,091                  $  117,405          $   135,016
 Plus: Shares acquired by                                                                                              
          Foundation......             2,603                     3,063                       3,522                4,050
                                  ----------                ----------                  ----------          ----------- 
Pro forma market capitalization   $   89,380                $  105,154                  $  120,927          $   139,066
                                  ----------                ==========                   =========          ===========
                                                                                                                       
Gross proceeds............        $   86,777                $  102,091                  $  117,405          $   135,016
Less: Cash contribution to                                                                                             
        Foundation .......             1,736                     2,042                       2,348                2,700
       Expenses...........             1,455                     1,575                       1,695                1,800
                                  ----------                ----------                  ----------          -----------
                                                                                                                       
Estimated net proceeds....            83,586                    98,474                     113,362              130,515
Less: Common Stock pur-                                                                                                
          chased by ESOP..            (6,942)                   (8,167)                     (9,392)             (10,801)
        Common Stock purchased                                                                                         
          by recognition and                                                                                           
        retention plan....            (3,471)                   (4,084)                     (4,696)              (5,401)
                                  ----------                ----------                  ----------          ----------- 

Estimated net proceeds,
   as adjusted............        $   73,143                $   86,223                  $   99,274          $   114,314
                                  ==========                ==========                  ==========          ===========
                                                                                                                       
Consolidated net income(1):                                                                                            
   Historical.............        $   10,768                $   10,768                  $   10,768          $    10,768
   Pro forma income on net                                                                                             
     proceeds, as adjusted             2,608                     3,073                       3,539                4,076
   Pro forma ESOP                                                                                                      
     adjustment(2)........              (301)                     (354)                       (407)                (468)
   Pro forma recognition and                                                                                           
      retention plan                                                                                                
     adjustment(3)........              (451)                     (531)                       (611)                (702)
                                  ----------                ----------                  ----------          -----------
                                                                                                                       
Pro forma net income(1)...        $   12,624                $   12,956                  $   13,289          $    13,674
                                  ==========                ==========                  ==========          ===========
                                                                                                                       
Per share net income:                                                                                                  
   Historical.............        $     0.58                $     0.50                  $     0.43          $      0.38 
Pro forma income on net
   proceeds, as adjusted..              0.14                      0.14                        0.14                 0.14
Pro forma ESOP                                                                                                         
   adjustment(1)..........             (0.02)                    (0.02)                      (0.02)               (0.02)
Pro forma recognition  and                                                                                             
   retention plan                                                                                                      
   adjustment.............             (0.02)                    (0.02)                      (0.02)               (0.02)
                                  ----------                ----------                  ----------          -----------
                                                                                                                       
Pro forma net income                                                                                                   
   per share..............        $     0.68                $     0.60                  $     0.53          $      0.48
                                  ==========                ==========                  ==========          ===========
                                                                                                                       
Stockholders' equity:                                                                                                  
   Historical.............        $  115,564                $  115,564                  $  115,564          $   115,564
   Estimated net proceeds.            83,587                    98,474                     113,362              130,515 
  Plus: Shares issued to Foundation    2,603                     3,063                       3,522                4,050 
  Less: Contribution to Foundation    (2,603)                   (3,063)                     (3,522)              (4,050) 
  Plus: Tax benefit of contribution to
    Foundation............             1,519                     1,787                       2,055                2,363 
  Less: Common Stock ac-                                                                                                
   quired by ESOP(2)......            (6,942)                   (8,167)                     (9,392)             (10,801)
  Less: Common Stock                                                                                                    
   acquired by recognition and                                                                                          
   retention plan(3)......            (3,471)                   (4,084)                     (4,696)              (5,401) 
                                  ----------                ----------                  ----------          -----------
                                                                                                                       
Pro forma stockhold-                                                                                                   
   ers' equity(3)(4)(5)...        $  190,257                $  203,574                  $  216,893          $   232,240
                                  ==========                ==========                  ==========          ===========
25
Stockholders' equity per
   share(6):
   Historical.............        $     6.04                $     5.14                  $     4.47          $      3.88
Estimated net proceeds....              4.37                      4.38                        4.38                 4.39 
  Plus: Shares issued to Foundation     0.14                      0.14                        0.14                 0.14 
  Less: Contributions to Foundation    (0.14)                    (0.14)                      (0.14)               (0.14) 
  Plus: Tax benefit of contribution to
          Foundation......              0.08                      0.08                        0.08                 0.08 
  Less: Common Stock                                                                                                    
          acquired by ESOP(2)          (0.36)                    (0.36)                      (0.36)               (0.36)
         Common Stock acquired                                                                                          
           by recognition and                                                                                           
           retention plan(3)           (0.18)                    (0.18)                      (0.18)               (0.18) 
                                  ----------                ----------                  ----------          ----------- 

Pro forma stockholders'
   equity per
   share(3)(4)(5).........        $     9.95                $     9.06                  $     8.39          $      7.81 
                                  ==========                ==========                  ==========          =========== 
                                                                                                                        
Offering price to pro                                                                                                   
   forma net income per                                                                                                 
   share..................             14.71x                    16.67x                      18.87x               20.83x
                                                                                                                        
Offering price as a per-                                                                                                
   centage of pro forma                                                                                                 
   stockholders' equity                                                                                                 
   per share(6)...........            100.50%                   110.38%                     119.19%              128.04%
__________________________
(1)  Does not give effect to the non-recurring expense that will be recognized
     in 1998 as a result of the establishment of the Foundation. The Company
     will recognize an after-tax expense for the amount of the contribution to
     the Foundation which is expected to be $2.8 million, $3.3 million, $3.8
     million and $4.4 million at the minimum, midpoint, maximum and adjusted
     maximum of the Estimated Valuation Range, respectively. Assuming the
     contribution to the Foundation was incurred during the year ended December
     31, 1996, pro forma net income per share would be $0.52, $0.44, $0.38 and
     $0.32, at the minimum, midpoint, maximum and adjusted maximum,
     respectively. Per share net income data is based on 18,453,921, 21,710,495,
     24,967,070 and 28,712,129 shares outstanding which represents shares issued
     in the Reorganization, shares contributed to the Foundation and shares to
     be allocated or distributed under the ESOP and recognition and retention
     plan to the for the period presented.
(2)  It is assumed that 8% of the shares sold in the Offering will be purchased
     by the ESOP. For purposes of this table, the funds used to acquire such
     shares are assumed to have been borrowed by the ESOP from the Company. The
     amount to be borrowed is reflected as a reduction of stockholders' equity.
     The Bank intends to make annual contributions to the ESOP in an amount at
     least equal to the principal and interest requirement of the debt. The
     Bank's total annual payment of the ESOP debt is based upon fifteen equal
     annual installments of principal, with an assumed interest rate at 8.5%.
     The pro forma net income assumes: (i) that the Bank's contribution to the
     ESOP is equivalent to the debt service requirement for the year ended
     December 31, 1996, and was made at the end of the period; (ii) that 23,141,
     27,224, 31,308 and 36,004 shares at the minimum, midpoint, maximum and
     adjusted maximum of the Estimated Valuation Range, respectively, were
     committed to be released during the year ended December 31, 1996, at an
     average fair value of $10.00 per share in accordance with Statement of
     Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
     released were considered outstanding for purposes of the net income per
     share calculations. See "Management of the Bank--Benefit Plans--Employee
     Stock Ownership Plan and Trust."
(3)  Gives effect to the Recognition and Retention Plan expected to be adopted
     by the Company following the Offering. This plan intends to acquire a
     number of shares of Common Stock equal to 4% of the shares of Common Stock
     sold in the Offering, or 347,110, 408,365, 469,619 and 540,062 shares of
     Common Stock at the minimum, midpoint, maximum and adjusted maximum of the
     Estimated Valuation Range, respectively, either through open market
     purchases, if permissible, or from authorized but unissued shares of Common
     Stock or treasury stock of the Company, if any. Funds used by the
     Recognition and Retention Plan to purchase the shares will be contributed
     to the plan by the Bank. In calculating the pro forma effect of the
     Recognition and Retention Plan, it is assumed that the shares were acquired
     by the Recognition and Retention Plan at the beginning of the period
     presented in open market purchases at the Subscription Price and that 20%
     of the amount contributed was an amortized expense during such period. The
     issuance of authorized but unissued shares of the Company's Common Stock to
     the recognition and retention plan instead of open market purchases would
     dilute the voting interests of existing stockholders by approximately 1.88%
     and pro forma net income per share would be $0.68, $0.60, $0.53 and $0.48
     at the minimum, midpoint, maximum and adjusted maximum of the Estimated
     Valuation Range, respectively, and pro forma stockholders' equity per share
     would be $9.94, $9.06, $8.41 and $7.84 at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively. There
     can be no assurance that the actual purchase price of the shares granted
     under the Recognition and Retention Plan will be equal to the Subscription
     Price. See "Management of the Bank--Benefit Plans--Recognition and
     Retention Plan."
(4)  No effect has been given to the issuance of additional shares of Common
     Stock pursuant to the stock option plan expected to be adopted by the
     Company following the Offering. Under the stock option plan, an amount
     equal to 10% of the Common Stock sold in the Offering, or 867,775,
     1,020,912, 1,174,048 and 1,350,155 shares at the minimum, midpoint, maximum
     and adjusted maximum of the Estimated Valuation Range, respectively, will
     be reserved for future issuance upon the exercise of options to be granted
     under the stock option plan. The issuance of Common Stock pursuant to the
     exercise of options under the stock option plan will result in the dilution
     of existing stockholders' interests. Assuming all

                                       26
options were exercised at the end of the period at an exercise price of
     $10.00 per share, the pro forma net income per share would be $0.53, $0.46,
     $0.41 and $0.37, respectively, and the pro forma stockholders' equity per
     share would be $10.50, $9.56, $8.87 and $8.26, respectively. See
     "Management of the Bank--Benefit Plans--Stock Option Plan."
(5)  The retained earnings of the Bank will continue to be substantially
     restricted after the Offering. See "Dividend Policy," "The Reorganization
     and Offering-- Liquidation Rights" and "Regulation--New York Bank
     Regulation."
(6)  Stockholders' equity per share data is based upon 19,125,000, 22,500,000,
     and 25,875,000 and 29,756,250 shares outstanding representing shares sold
     in the Offering, shares purchased by the ESOP and retention and Recognition
     and Retention Plan, and shares contributed to the Foundation.
(7)  As adjusted to give effect to an increase in the number of shares which
     could occur due to an increase in the Estimated Valuation Range of up to
     15% as a result of regulatory considerations, demand for the shares, or
     changes in market or general financial and economic conditions following
     the commencement of the Subscription and Community Offerings.

                                       27
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION

     In the event that the Foundation was not being established as part of the
Reorganization, RP Financial has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $110.4 million at the
midpoint, which is approximately $5.2 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included,
and would result in an approximately $8.3 million increase in the amount of
Common Stock offered for sale in the Reorganization. The pro forma price to book
ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Foundation. Further, assuming the midpoint of the Estimated
Valuation Range, pro forma stockholders' equity per share and pro forma net
income per share would be substantially the same at $9.55 and $9.26,
respectively, and $0.48 and $0.45, respectively, with the Foundation or without
the Foundation. The pro forma price to book ratio and the pro forma price to
earnings ratio are substantially the same with and without the Foundation at the
midpoint at 104.71% and 107.99%, respectively, and 15.63x and 16.67x,
respectively. There is no assurance that in the event the Foundation was not
formed that the appraisal prepared at the time would have concluded that the pro
forma market value of the Company would be the same as that estimated herein.
Any appraisals prepared at that time would be based on the facts and
circumstances existing at that time, including, among other things, market and
economic conditions.

     For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, assuming the Reorganization was
completed at September 30, 1997.
Minimum                    Midpoint          
                                                                        --------------------------   ------------------------- 
                                                                            With          Without       With          Without   
                                                                         Foundation     Foundation   Foundation     Foundation  
                                                                        -----------     ----------   ----------     ----------
                                                                           (Dollars in Thousands, Except Per Share Amounts)
Estimated offering amount.............................................  $    86,777         93,840      102,091        110,400  
Pro forma market capitalization.......................................       89,380         93,840      105,154        110,400  
Total assets..........................................................    1,251,043      1,257,419    1,264,361      1,271,863  
Total liabilities.....................................................    1,049,731      1,049,731    1,049,731      1,049,731  
Pro forma stockholders' equity........................................      201,313        207,688      214,630        222,132  
Pro forma net income..................................................       10,009         10,172       10,256         10,447  
Pro forma stockholders' equity per share..............................        10.53          10.19         9.55           9.26  
Pro forma net income per share........................................         0.55           0.52         0.48           0.45  
                                                                                                                                
Pro forma pricing ratios:                                                                                                       
------------------------                                                                                                        
Offering price as a percentage of pro forma stockholders' equity per                                                            
 share................................................................        94.97%         98.14%      104.71%        107.99% 
Offering price to pro forma net income per share (1)..................        13.64          14.42        15.63          16.67  
Pro forma market capitalization to assets.............................         7.14%          7.46%        8.32%          8.68% 
                                                                                                                                
Pro forma financial ratios:                                                                                                     
--------------------------                                                                                                      
Return on assets (2)..................................................         1.07%          1.08%        1.08%          1.10% 
Return on equity (3)..................................................         6.63%          6.53%        6.37%          6.27% 
Equity to assets......................................................        16.09%         16.52%       16.98%         17.47%
Maximum                 Adjusted Maximum
                                                                       -------------------------   --------------------------   
                                                                          With           Without      With           Without
                                                                       Foundation     Foundation   Foundation      Foundation
                                                                       ----------     ----------   ----------      ----------
                                                                          (Dollars in Thousands, Except Per Share Amounts)
Estimated offering amount.............................................    117,405         126,960      135,016        146,004
Pro forma market capitalization.......................................    120,927         126,960      139,066        146,004
Total assets..........................................................  1,277,697       1,286,306    1,293,027      1,303,035
Total liabilities.....................................................  1,049,731       1,049,731    1,049,731      1,049,731
Pro forma stockholders' equity........................................    227,949         236,575      243,296        253,304
Pro forma net income..................................................     10,510          10,723       10,786         11,043
Pro forma stockholders' equity per share..............................       8.81            8.58         8.19           7.98
Pro forma net income per share........................................       0.43            0.40         0.38           0.36
                                                                       
Pro forma pricing ratios:                                              
------------------------                                               
Offering price as a percentage of pro forma stockholders' equity per   
 share................................................................     113.51%         116.55%      122.10%        125.31%
Offering price to pro forma net income per share (1)..................      17.44           18.75        19.74          20.83
Pro forma market capitalization to assets.............................       9.46%           9.87%       10.76%         11.20%
                                                                       
Pro forma financial ratios:                                            
--------------------------                                             
Return on assets (2)..................................................       1.10%           1.11%        1.11%          1.13%
Return on equity (3)..................................................       6.14%           6.04%        5.91%          5.81%
Equity to assets......................................................      17.84%          18.39%       18.82%         19.44%
----------
(1)  If the contribution to the Foundation had been incurred during the nine
     months ended September 30, 1997, the offering price to pro forma net income
     per share would have been 26.04x,31.28x,37.83x, and 44.86x at the minimum,
     midpoint, maximum and adjusted maximum, respectively.
(2)  If the contribution to the Foundation had been incurred during the nine
     months ended September 30, 1997, return on assets would have been 0.79%,
     0.73%, 0.70%, and 0.66% at the minimum, midpoint, maximum and adjusted
     maximum, respectively.
(3)  If the contribution to the Foundation had been incurred during the nine
     months ended September 30, 1997, return on equity would have been
     4.71%,4.31%, 3.91%, and 3.51%, respectively.

                                       28
PARTICIPATION BY MANAGEMENT

     The following table sets forth information regarding intended Common Stock
purchases by each of the Trustees and executive officers of the Bank and their
families, and by all Trustees and executive officers as a group. In the event
the individual maximum purchase limitation is increased, persons subscribing for
the maximum amount may increase their purchase order. This table excludes shares
to be purchased by the ESOP, as well as any Recognition and Retention Plan
awards or stock option grants that may be made no earlier than six months after
the completion of the Reorganization. See "Management of the Bank--Benefit 
Plans--Recognition and Retention Plan" and "--Stock Option Plan." The Trustees
and officers of the Bank have indicated their intention to purchase in the
Offering an aggregate of $3.0 million of Common Stock, equal to 3.4%, 2.9%,
2.5%, and 2.2% of the number of shares to be issued in the Subscription and
Community Offering, at the minimum, midpoint, maximum and adjusted maximum of
the Estimated Valuation Range, respectively.
AGGREGATE      NUMBER      PERCENT                           
                                                PURCHASE         OF          AT                              
NAME                                            PRICE (1)    SHARES (1)   MIDPOINT                           
----                                            ---------    ----------   --------
Gordon P. Assad                               $    50,000         5,000         *                            
Diane Allegro                                     200,000        20,000        .2                            
G. Gary Berner                                    100,000        10,000        .1                            
Christa R. Caldwell                                75,000         7,500        .1                            
James W. Currie                                   400,000        40,000        .4                            
Gary B. Fitch                                      10,000         1,000         *                            
David W. Heinrich                                 400,000        40,000        .4                            
Daniel W. Judge                                   200,000        20,000        .2                            
Paul J. Kolkmeyer                                 300,000        30,000        .3                            
B. Thomas Mancuso                                 200,000        20,000        .2                            
James Miklinski                                   200,000        20,000        .2                            
Kathleen P. Monti                                 200,000        20,000        .2                            
Barton G. Smith                                    50,000         5,000         *                            
William E. Swan                                   400,000        40,000        .4                            
Robert G. Weber                                   200,000        20,000        .2                            
                                              -----------    ----------  --------                            
                                                                                                             
    All Trustees and executive officers                                                                      
    as a group                                $ 2,985,000       298,500       3.0%                           
                                              ===========    ==========  ========
________________
*less than 1%
(1)  Includes purchases by associates.

                                       29
LOCKPORT SAVINGS BANK
                       CONSOLIDATED STATEMENTS OF INCOME

     The following Consolidated Statements of Income of the Bank for each of the
years in the three year period ended December 31, 1996 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere in this Prospectus. With respect to information for the nine
months ended September 30, 1997 and 1996, which is unaudited, in the opinion of
management, all adjustments necessary for a fair presentation of such periods
have been included and are of a normal recurring nature. Results for the nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. These statements
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus.
NINE MONTHS ENDED
                                                                              SEPTEMBER 30,              YEAR ENDED DECEMBER 31,
                                                                        ---------------------      --------------------------------
                                                                          1997         1996         1996         1995         1994
                                                                        --------     --------      ------      -------      -------
                                                                                (UNAUDITED)
                                                                                                 (IN THOUSANDS)
Interest income:
  Federal funds sold..................................................  $    825     $  1,087     $  1,313     $  1,726     $   849
  Securities available for sale.......................................    20,866       18,177       24,766       22,002      22,197
  Securities held to maturity.........................................     1,258        1,293        1,698        2,780       2,394
  Real estate loans...................................................    33,072       29,844       40,440       36,948      31,985
  Other loans.........................................................     5,289        5,057        6,845        6,400       5,719
                                                                        --------     --------     --------     --------    --------
    Total interest income.............................................    61,310       55,458       75,062       69,856      63,144

Interest expense:
  Deposits (note 7)...................................................    32,145       29,551       39,814       39,034      31,754
  Other borrowed funds (note 8).......................................     1,190          473          841           --          --
                                                                        --------     --------     --------     --------    --------
    Total interest expense............................................    33,335       30,024       40,655       39,034      31,754
                                                                        --------     --------     --------     --------    --------

    Net interest income...............................................    27,975       25,434       34,407       30,822      31,390

Provision for loan losses (note 4)....................................       975        1,861        2,187        1,016         948
                                                                        --------     --------     --------     --------    --------

    Net interest income after provision for loan losses...............    27,000       23,573       32,220       29,806      30,442
                                                                        --------     --------     --------     --------    --------

Other operating income:
  Banking service charges and fees....................................     2,223        1,785        2,468        1,837       1,567
  Loan fees...........................................................       814          779        1,027          855         716
  Net gain (loss) on sale of securities available for sale (note 2)...       875          532          576        1,477        (849)
  Other...............................................................     1,044        1,223        1,681        1,237         952
                                                                        --------     --------     --------     --------    --------
    Total other operating income......................................     4,956        4,319        5,752        5,406       2,386
                                                                        --------     --------     --------     --------    --------

Operating and other expenses:
  Salaries and employee benefits (note 11)............................     9,735        8,439       11,477        9,706       9,259
  Occupancy and equipment (note 5)....................................     2,689        2,327        3,178        2,635       2,298
  Network interchange fees............................................       882          730          984          877         723
  Deposit insurance...................................................        90            2            2          983       1,873
  Marketing and advertising...........................................     1,017          934        1,355          978         951
  Other (note 6)......................................................     4,003        2,567        3,930        4,964       3,295
                                                                        --------     --------     --------     --------    --------
    Total operating and other expenses................................    18,416       14,999       20,926       20,143      18,399
                                                                        --------     --------     --------     --------    --------

    Income before income taxes and cumulative effect
     of change in accounting principle................................    13,540       12,893       17,046       15,069      14,429

Income taxes (note 10)................................................     4,905        4,667        6,278        5,144       4,704
                                                                        --------     --------     --------     --------    --------

    Income before cumulative effect of change in accounting principle.     8,635        8,226       10,768        9,925       9,725

Cumulative effect of change in accounting principle (note 11).........        --           --           --           --        (924)
                                                                        --------     --------     --------     --------     --------

    Net income........................................................  $  8,635     $  8,226     $ 10,768     $  9,925     $ 8,801
                                                                        ========     ========     ========     ========     ========
See accompanying notes to consolidated financial statements.

                                       30
MANAGEMENT'S DISCUSSION AND ANALYSIS
               OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

     The Company has only recently been formed and accordingly, has no results
of operations. Our results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan and
securities portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
provision for loan losses, securities and loan sale activities, loan servicing
activities and service charges and fees collected on its deposit accounts. Our
non-interest expense primarily consists of salaries and employee benefits,
occupancy and equipment expense, federal deposit insurance premiums, marketing
expenses and other expenses. Results of operations are also significantly
affected by general economic and competitive conditions, particularly changes in
interest rates, government policies and actions of regulatory authorities.

MANAGEMENT OF INTEREST RATE RISK

     The principal objective of our interest rate risk management is to evaluate
the interest rate risk inherent in certain assets and liabilities, determine the
appropriate level of risk given our business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the Board's approved guidelines to reduce the vulnerability
of its operations to changes in interest rates. The Asset/Liability Committee is
comprised of senior management under the direction of the Board, with senior
management responsible for reviewing with the Board its activities and
strategies, the effect of those strategies on our net interest margin, the fair
value of the portfolio and the effect that changes in interest rates will have
on the portfolio and our exposure limits. See "Risk Factors --Potential Effects
of Changes in Interest Rates and the Current Interest Rate Environment."

     In recent years, we have used the following strategies to manage interest
rate risk: (1) emphasizing the origination and retention of residential monthly
and bi-weekly fixed-rate mortgage loans having terms to maturity of not more
than twenty years, residential and commercial adjustable-rate mortgage loans,
and consumer loans consisting primarily of mobile home loans, home equity loans
and student loans; (2) selling substantially all newly originated 25-30 year
fixed-rate, residential mortgage loans into the secondary market without
recourse and on a servicing retained basis (except for such loans with interest
rates of 9% or greater, which the Bank retains in its portfolio); and (3)
investing in shorter term securities which generally bear lower yields as
compared to longer term investments, but which better position the Bank for
increases in market interest rates. Shortening the maturities of our interest-
earning assets by increasing shorter term investments better matches the
maturities of our deposit accounts, in particular our certificates of deposit
that mature in one year or less, which, at September 30, 1997 totaled $364.5
million, or 36.4% of total interest-bearing liabilities. These strategies may
adversely impact net interest income due to lower initial yields on these
investments in comparison to longer term, fixed rate loans and investments.
However, management believes that reducing the exposure to interest rate
fluctuations will enhance long-term profitability.

     Gap Analysis. 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 a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time 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 same
time period. At September 30, 1997, the Bank's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was a negative 22.2%. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position is likely to experience a decline in net interest income
as the

                                       31
cost of its interest-bearing liabilities increase at a rate faster than its
yield on interest-earning assets. In comparison, an institution with a positive
gap is likely to realize an increase in its net interest income in a rising
interest rate environment. Given the Bank's existing liquidity position and its
ability to sell securities from its available for sale portfolio, management
believes that its negative gap position will not have a material adverse effect
on its operating results or liquidity position. If interest rates decrease,
there may be a positive effect on the Bank's interest rate spread and
corresponding operating results.

     The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "GAP Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of the
repricing date or the contractual maturity of the asset or liability. The table
sets forth an approximation of the projected repricing of assets and liabilities
at September 30, 1997, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within the selected time intervals.
For adjustable and fixed-rate loans on residential properties, prepayment rates
were assumed to range from 3.6% to 10.44% annually. Mortgage related securities
were assumed to prepay at rates between 7.56% and 12.00% annually. Savings
accounts were assumed to decay at 10.24%, 10.24%, 20.48%, 12.28%, 9.72%, 16.36%
and 20.69%; NOW checking accounts were assumed to decay at 22.14%, 22.14%,
44.28%, 2.38%, 1.89%, 3.17% and 4.01%; and money market savings accounts were
assumed to decay at 46.49%, 4.86%, 9.73%, 38.92%, 0%, 0%, and 0% for the periods
of three months or less, three to six months, six to 12 months, one to three
years, three to five years, five to ten years and more than ten years,
respectively. Prepayment and deposit decay rates can have a significant impact
on the Bank's estimated gap. While the Bank believes such assumptions to be
reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual future loan prepayment and deposit withdrawal
activity. See "Business of the Bank - Lending Activities", "-Securities
Investment Activities" and "-- Sources of Funds".

                                       32
Amounts Maturing or Repricing as of September 30, 1997
                                                     -----------------------------------------------------------------------------  

                                                       Less Than
                                                        Three          3-6       6 Months to                                       
                                                       Three Months   Months       1 Year      1-3 Years   3-5 Years    5-10 Years 
                                                     --------------------------  -----------  ----------   ---------    ----------
                                                                                              (Dollars in thousands)
Interest-earning assets:                                                                                                           
   Federal funds sold..........................     $    2,200             -            -            -           -             -   
   Mortgage related securities (1).............         10,883        11,538       25,536      117,436      84,516        35,095   
   Investment securities (1)...................         58,956         6,700       19,092      101,801      21,627             -   
   Loans (2)    ...............................         80,597        50,228       95,074      156,079      94,751       119,235   
                                                    ----------     ---------    ---------    ---------    --------     ---------   
                                                                                                                                   
        Total interest-earning assets..........        152,636        68,466      139,702      375,316     200,894       154,330   
                                                    ----------     ---------    ---------    ---------    --------     ---------   
                                                                                                                                   
Interest-bearing liabilities:                                                                                                      
   Savings accounts............................         32,680        31,273       62,544       36,581      28,975        48,750   
   Interest-bearing checking...................         52,361        17,948       35,897       33,667       1,186         1,996   
   Certificate accounts........................        107,203        92,612      164,641      138,500      11,530         2,382   
   Mortgagor's payments held in escrow.........            269         2,424        2,694            -           -             -   
   Other borrowed funds........................          9,906         8,935          105          454       5,518         1,637   
                                                    ----------     ---------    ---------    ---------    --------     ---------   
                                                                                                                                   
        Total interest-bearing liabilities.....        202,419       153,192      265,881      209,202      47,209        54,765   
                                                    ----------     ---------    ---------    ---------    --------     ---------   
                                                                                                                                   
Interest sensitivity gap.......................       ($49,783)     ($84,726)   ($126,179)    $166,114    $153,685       $99,565   
                                                    ===========    ==========   ==========   =========    ========     =========   
                                                                                                                                   
Cumulative interest rate sensitivity gap.......       ($49,783)    ($134,509)   ($260,688)    ($94,574)    $59,111      $158,676   
                                                    ===========    ==========   ==========   ==========   ========     =========   
                                                                                                                                   
Ratio of cumulative gap to total assets........         (4.23)%      (11.43)%     (22.16)%       (8.04)%      5.02%        13.49%  
Ratio of interest-earning assets to                                                                                                
   interest-bearing liabilities................          75.41%        44.69%       52.54%      179.40%     425.54%       281.80%
Amounts Maturing or Repricing as of September 30, 1997
                                                     -----------------------------------------------------------------------------  

                                                      Over 10               
                                                       Years               Total                          
                                                     ---------          ---------
Interest-earning assets:                                                                                  
   Federal funds sold..........................              -          $   2,200                          
   Mortgage related securities (1).............              -            285,004                         
   Investment securities (1)...................          6,892            215,068                         
   Loans (2)    ...............................         30,861            626,825                                           
                                                     ---------          ---------                                         
                                                                                                                            
        Total interest-earning assets..........         37,753          1,129,097                         
                                                     ---------          ---------                         
                                                                                                          
Interest-bearing liabilities:                                                                             
   Savings accounts............................         61,644            302,447                         
   Interest-bearing checking...................          2,524            145,579                         
   Certificate accounts........................              -            516,868                         
   Mortgagor's payments held in escrow.........          3,000              8,387                         
   Other borrowed funds........................          2,185             28,740                         
                                                     ---------          ---------                         
                                                                                                          
        Total interest-bearing liabilities.....         69,353          1,002,021                         
                                                     ---------          ---------                         
                                                                                                          
Interest sensitivity gap.......................       ($31,600)          $127,076                         
                                                    ==========          =========                         
                                                                                                          
Cumulative interest rate sensitivity gap.......       $127,076                                            
                                                     =========                                            
                                                                                                          
Ratio of cumulative gap to total assets........          10.80%                                           
Ratio of interest-earning assets to                                                                       
   interest-bearing liabilities................          54.44%            112.68%
_____________________
(1)  Amounts shown are amortized cost.
(2)  Amounts shown include principal balance net of deferred loan fees and
     expenses, unamortized premiums and discounts, and non-accruing loans.

     Certain shortcomings are inherent in the method of analysis presented in
the GAP Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates, both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.

     Net Portfolio Value. The Bank's interest rate sensitivity is also monitored
by management through the use of a net portfolio value model which generates
estimates of the change in the Bank's net portfolio value ("NPV") over a range
of interest rate scenarios. NPV is the present value of expected cash flows from
assets and liabilities. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the fair value of assets in the
same scenario. The model assumes estimated loan prepayment rates, reinvestment
rates and deposit decay rates similar to the assumptions utilized for the GAP
Table. The following sets forth the Bank's NPV as of September 30, 1997.

                                       33
CHANGE IN                                                          NET PORTFOLIO VALUE
                                                                   -----------------------------------------------------
                 INTEREST RATES
                 IN BASIS POINTS                                       AMOUNT           $ CHANGE            % CHANGE
                                                                   -------------      ------------        ------------
                  (RATE SHOCK)                                                    (DOLLARS IN THOUSANDS)
                 --------------
400          ..........................         105,002           (44,100)           (29.6)%       
                       300          ..........................         116,614           (32,488)           (21.8)%       
                       200          ..........................         127,969           (21,133)           (14.2)%       
                       100          ..........................         139,230            (9,872)            (6.6)%       
                     Static         ..........................         149,102                --               --         
                      (100)         ..........................         156,097             6,995              4.7%        
                      (200)         ..........................         157,353             8,251              5.5%        
                      (300)         ..........................         162,851            13,749              9.2%        
                      (400)         ..........................         174,889            25,787             17.3%
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV requires the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV Table presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV Table provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.

ANALYSIS OF NET INTEREST INCOME

     Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
also depends on the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rate earned or paid on them, respectively.

     Average Balance Sheet. The following table sets forth certain information
relating to the Bank at September 30, 1997 and for the nine months ended
September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and
1994. For the periods indicated, the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, is expressed both in
dollars and rates. No tax equivalent adjustments were made. The average balance
for federal funds sold is an average daily balance, while all other average
balances are monthly averages. Non-accruing loans have been excluded from the
yield calculations in this table.

                                       34
NINE  MONTHS ENDED SEPTEMBER 30, 
                                                                       ---------------------------------
                                                AT SEPTEMBER 30, 1997                  1997                              
                                               ----------------------  ---------------------------------- 
                                                                         AVERAGE     INTEREST             
                                               OUTSTANDING   YIELD/    OUTSTANDING    EARNED/     YIELD/  
                                                 BALANCE      RATE       BALANCE       PAID        RATE    
                                               -----------   ------    -----------   --------     ------  
                                                                                    (DOLLARS IN THOUSANDS)
Interest-earning assets:                                                                                  
  Federal funds sold......................    $      2,200   6.50%    $    19,936    $    825      5.52%  
  Investment securities (1)...............         215,068   5.78         185,660       7,816      5.61   
  Mortgage related securities (1).........         285,004   6.81         286,991      14,308      6.65   
  Loans (2)...............................         626,825   8.39         611,517      38,361      8.36   
                                              ------------            -----------    --------             
    Total interest-earning assets.........       1,129,097   7.49       1,104,104      61,310      7.40   
                                              ------------  -----     -----------    --------     -----   
                                                                                                          
Interest-bearing liabilities:                                                                             
  Savings accounts (3)....................         302,447   3.34         304,106       7,626      3.34   
  Interest-bearing checking (3)...........         145,579   3.19         120,413       2,436      2.70   
  Certificates of deposit (3).............         516,868   5.82         510,124      21,964      5.74   
  Mortgagor's payments held in escrow.....           8,387   1.55           8,116         119      1.95   
  Other borrowed funds....................          28,740   5.85          28,919       1,190      5.49   
                                              ------------            -----------    --------             
    Total interest-bearing liabilities....       1,002,021   4.65         971,678      33,335      4.57   
                                              ------------   ----     -----------    --------     -----   
                                                                                                          
Net interest income.......................                                           $ 27,975             
                                                                                     ========             
                                                                                                          
Net interest rate spread..................                   2.84%                                 2.83%  
                                                            =====                                 =====   
                                                                                                          
Net earning assets........................    $    127,076            $   132,426                         
                                              ============            ===========                         
                                                                                                                         
Net interest income as a percentage                                                                                      
  of average interest-earning assets......                                               3.38%                           
                                                                                     ========                            
                                                                                                                         
Ratio of average interest-earning assets                                                                                 
  to average interest-bearing                                                                                            
    liabilities...........................                                             113.63%                           
                                                                                     ========
NINE  MONTHS ENDED SEPTEMBER 30, 
                                             ---------------------------------------                              
                                                             1996                     
                                             ---------------------------------------                               
                                                 AVERAGE    INTEREST                         
                                              OUTSTANDING     EARNED/        YIELD/               
                                                BALANCE        PAID           RATE                
                                             -------------  --------       --------- 
                                                             (DOLLARS IN THOUSANDS)
Interest-earning assets:                                  
  Federal funds sold......................   $     27,420   $  1,087         5.29%
  Investment securities (1)...............        142,727      5,695         5.32
  Mortgage related securities (1).........        280,241     13,775         6.55
  Loans (2)...............................        554,199     34,901         8.40
                                             ------------   --------             
    Total interest-earning assets.........      1,004,587     55,458         7.36
                                             ------------   --------        -----
                                                                                 
Interest-bearing liabilities:                                                    
  Savings accounts (3)....................        310,040      7,814         3.36
  Interest-bearing checking (3)...........        104,782      2,147         2.73
  Certificates of deposit (3).............        446,521     19,467         5.81
  Mortgagor's payments held in escrow.....          8,308        123         1.97
  Other borrowed funds....................         13,147        473         4.80
                                             ------------   --------             
    Total interest-bearing liabilities....        882,798     30,024         4.53
                                             ------------   --------         ----
                                                                                 
Net interest income.......................                  $ 25,434             
                                                            ========             
                                                                                 
Net interest rate spread..................                                   2.83%
                                                                            ===== 
                                                          
Net earning assets........................   $    121,789 
                                             ============  
                                           
Net interest income as a percentage        
  of average interest-earning assets......                      3.38%
                                                             ========
                                           
Ratio of average interest-earning assets   
  to average interest-bearing   
    liabilities...........................                    113.80% 
                                                            ========
(Footnotes on next page)

                                      35
YEAR ENDED DECEMBER 31, 
                                           ---------------------------------------------------------------------------       
                                                           1996                                   1995                     
                                           -----------------------------------    ------------------------------------     
                                             AVERAGE     INTEREST                   AVERAGE     INTEREST                   
                                           OUTSTANDING   EARNED/       YIELD/     OUTSTANDING    EARNED/      YIELD/  
                                             BALANCE      PAID          RATE        BALANCE       PAID         RATE   
                                           -----------   --------      -------    ------------  --------      --------
                                                                     (DOLLARS IN THOUSANDS)
Interest-earning assets:                                                                                              
  Federal funds sold................      $   24,683  $     1,313         5.32%    $   31,357   $    1,726       5.50%    
  Investment securities(1)..........         147,220        7,916         5.38        119,100        6,843       5.75     
  Mortgage related securities(1)....         281,843       18,547         6.58        275,448       17,939       6.51     
  Loans (2).........................         564,049       47,286         8.38        506,600       43,348       8.56     
                                          ----------  -----------                  ----------   ----------                
    Total interest-earning assets...       1,017,795       75,062         7.37        932,505       69,856       7.49     
                                          ----------  -----------        -----     ----------   ----------     ------     
                                                                                                                          
Interest-bearing liabilities:                                                                                             
  Savings accounts (3)..............         307,530       10,353         3.37        326,125       11,154       3.42     
  Interest-bearing checking (3).....         105,717        2,871         2.72         96,551        2,909       3.01     
  Certificates of deposit (3).......         455,230       26,432         5.81        386,648       23,546       6.09     
  Mortgagor's payments held                                                                                               
    in escrow.......................           8,174          158         1.93          9,222          174       1.89     
  Other borrowed funds..............          16,674          841         5.04              -            -          -     
                                          ----------  -----------                  ----------   ----------                
    Total interest-bearing 
      liabilities...................         893,325       40,655         4.55        818,546       37,783       4.61     
                                          ----------  -----------        -----     ----------   ----------     ------      
                                                                                                                          
Net interest income.................                  $    34,407                               $   32,073                
                                                      ===========                               ==========                
                                                                                                                          
Net interest rate spread............                                      2.82%                                  2.88%    
                                                                         =====                                 ======     
                                                                                                                          
Net earning assets..................      $  124,470                               $  113,959                             
                                          ==========                               ==========                             
                                                                                                                          
Net interest income as a percentage of                                                                                    
  average interest-earning assets...                         3.38%                                    3.44%               
                                                             ====                                     ====                
                                                                                                                          
Ratio of average interest-earning assets                                                                                  
  to average interest-bearing liabilities                  113.93%                                  113.92%               
                                                           ======                                   ======
YEAR ENDED DECEMBER 31, 
                                           ----------------------------------
                                                         1994                          
                                           ---------------------------------- 
                                              AVERAGE     INTEREST                
                                            OUTSTANDING    EARNED/    YIELD/    
                                              BALANCE       PAID       RATE      
                                            -----------   --------    -------  
                                                 (DOLLARS IN THOUSANDS)
Interest-earning assets:                  
  Federal funds sold................       $   20,740   $     849      4.09%
  Investment securities(1)..........          124,155       6,317      5.09
  Mortgage related securities(1)....          302,430      18,274      6.04
  Loans (2).........................          448,902      37,704      8.40
                                           ----------   ---------
    Total interest-earning assets...          896,227      63,144      7.05
                                           ----------   ---------     -----
                                          
Interest-bearing liabilities:             
  Savings accounts (3)..............          415,843      12,869      3.09
  Interest-bearing checking (3).....           86,057       2,283      2.65
  Certificates of deposit (3).......          287,661      16,443      5.72
  Mortgagor's payments held               
    in escrow.......................            8,471         159      1.88
  Other borrowed funds..............                -           -         -
                                           ----------   ---------
    Total interest-bearing 
      liabilities...................          798,032      31,754      3.98                                      
                                           ----------   ---------      ----                                       
Net interest income.................                    $  31,390
                                                        =========
                                          
Net interest rate spread............                                   3.07%
                                                                      =====
                                          
Net earning assets..................       $   98,195
                                           ==========
                                          
Net interest income as a percentage of    
  average interest-earning assets...                         3.50%
                                                             ====

Ratio of average interest-earning assets                                                                               
  to average interest-bearing liabilities                  112.30%
                                                           ======
__________________________
(1)    Amounts shown are amortized cost.
(2)    Net of deferred loan fees and expenses, loan discounts, loans in process
       and non-accruing loans.
(3)    Excludes $1.25 million paid for a special interest payment in 1995 which
       was approved by the Bank's Board of Trustees and paid on a pro rata basis
       on all interest-bearing savings, NOW, money market, and certificate
       accounts in recognition of the Bank's 125th anniversary.

           Rate/Volume Analysis. The following table presents the extent to
which changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Bank's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to : (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.

                                      36
NINE MONTHS ENDED SEPTEMBER 30,           YEAR ENDED DECEMBER 31,  
                                          ------------------------------------   ------------------------------------
                                                      1997 VS. 1996                          1996 VS. 1995             
                                          ------------------------------------   ------------------------------------    
                                             INCREASE (DECREASE)       TOTAL       INCREASE (DECREASE)        TOTAL      
                                                   DUE TO            INCREASE            DUE TO             INCREASE   
                                          -----------------------                -----------------------               
                                            VOLUME        RATE      (DECREASE)     VOLUME         RATE      (DECREASE) 
                                          -----------  ----------   ----------   ----------    ----------   ---------  
                                                                         (IN THOUSANDS)
Interest-earning assets:                                                                                               
   Federal funds sold..................   $  (330)    $     68     $   (262)    $   (280)    $   (133)    $   (413)    
   Investment securities...............     1,793          328        2,121        1,535         (461)       1,074     
   Mortgage related securities.........       335          198          533          419          189          608     
   Loans...............................     3,683         (223)       3,460        4,830         (893)       3,937     
                                          -------     ---------    --------     --------     --------     --------     
      Total interest-earning assets....     5,481          371        5,852        6,504       (1,298)       5,206     
                                          -------     --------     --------     --------     --------     --------     
                                                                                                                       
Interest-bearing liabilities:                                                                                          
   Savings accounts....................      (149)         (39)        (188)        (628)        (173)        (801)    
   Interest-bearing checking...........       332          (43)         289          263         (301)         (38)    
   Certificates of deposit.............     2,888         (391)       2,497        4,022       (1,136)       2,886     
   Mortgagors' payments held in escrow.        (3)          (1)          (4)         (20)           4          (16)    
   Other borrowed funds................       631           86          717          841            -          841     
                                          -------     --------     --------     --------     --------     --------     
      Total interest-bearing  
        liabilities....................   $ 3,699     $   (388)    $  3,311     $  4,478     $ (1,606)    $  2,872      
                                          =======     =========    ========     ========     ========     ========     
                                                                                                                       
Net interest income....................                            $  2,541                               $  2,334     
                                                                   ========                               ========
YEAR ENDED DECEMBER 31,  
                                            -------------------------------------           
                                                        1995 VS. 1994           
                                            -------------------------------------           
                                              INCREASE (DECREASE)        TOTAL  
                                                    DUE TO             INCREASE 
                                            ---------------------
                                               VOLUME      RATE       (DECREASE)
                                            -----------  --------     ---------- 
                                                      (IN THOUSANDS)
Interest-earning assets:                  
   Federal funds sold..................       $   410      $   467     $    877
   Investment securities...............          (265)         791          526
   Mortgage related securities.........        (1,698)       1,363         (335)
   Loans...............................         4,925          719        5,644
                                              -------      -------     --------
      Total interest-earning assets....         3,372        3,340        6,712
                                              -------      -------     --------
                                          
Interest-bearing liabilities:             
   Savings accounts....................        (2,973)       1,258       (1,715)
   Interest-bearing checking...........           296          330          626
   Certificates of deposit.............         5,969        1,134        7,103
   Mortgagors' payments held in escrow.            14            1           15
   Other borrowed funds................             -            -            -
                                              -------      -------     --------
      Total interest-bearing 
        liabilities....................       $ 3,306      $ 2,723     $  6,029
                                              =======      =======     ======== 
Net interest income....................                                $    683
                                                                       ========
Calculations for the above table exclude $1.25 million paid as a special
interest payment in 1995, which was paid on a pro rata basis on all interest-
bearing savings, NOW, money market and certificate accounts in recognition of
the Bank's 125th anniversary.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996

     Total assets increased by $83.1 million, or 7.6%, from $1.093 billion at
December 31, 1996 to $1.176 billion at September 30, 1997. The growth in assets
is primarily attributable to a $48.9 million increase in debt, equity and asset-
backed securities available for sale, a $31.5 million increase in real estate
loans and a $9.0 million increase in accrued interest receivable, premises and
equipment, and other assets, primarily the building of the Bank's new
administrative center. Asset growth was funded through deposit inflows resulting
from the continued expansion of the Bank's branch network. The asset growth was
partially offset by a $7.9 million decrease in consumer loans which resulted
from a $12.5 million early repayment of the automobile lease portfolio.
Investment securities at September 30, 1997, totaled $216.7 million, an increase
of $48.4 million, compared to $168.3 million at December 31, 1996. Substantially
all the increase in these securities was attributable to purchases of one- to
three-year weighted average life, fixed-rate corporate bonds and asset-backed
securities, as well as common stock of corporate issuers. While the rates earned
on these securities is lower than rates earned on longer-term securities, the
Bank was specifically looking to shorten its interest rate risk exposure and
obtain more consistent cash flows in this low rate, flat yield curve
environment. Real estate loans increased from $524.4 million at December 31,
1996 to $555.9 million at September 30, 1997, primarily due to increased one- to
four-family, bi-weekly residential mortgage loans, an enhanced home equity loan
product, and increased originations in commercial real estate loans as we
continued to emphasize the expansion of our real estate lending. Premises and
equipment increased by $8.8 million, or 66.3%, primarily due to the construction
of a new building which was occupied in August 1997 and provides office space
for our administrative functions and lending departments.

     At September 30, 1997, the Bank's allowance for possible loan losses as a
percentage of total non-performing loans was 330.0%, compared to 118.6% at
September 30, 1996, due to a slight increase in the provision and a significant
decrease in non-performing loans from $5.3 million at September 30, 1996 to $1.9
million at September 30, 1997. This decrease was attributable to repayments,
writedowns to net realizable values, a settlement with a bankruptcy trustee and
an aggressive approach to address past due and non-performing loans. At
September 30, 1997, the Bank's allowance for possible loan losses as a
percentage of total loans was 1.02%. While management uses available information
to

                                      37
recognize losses on loans, future loan loss provisions may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses and may require the Bank to recognize additional provisions
based on their judgement of information available to them at the time of their
examination. See "Risk Factors - Lending Risks Associated With Commercial Real
Estate, Multi-Family and Consumer Lending" and "Business of the Bank -
Delinquencies and Classified Assets" and "- Allowance for Possible Loan Losses".

     Total deposits at September 30, 1997 were $992.2 million, an increase of
$72.1 million, or 7.8%, compared to $920.1 million at December 31, 1996. The
increase was primarily due to the introduction of a new money market deposit
account, which from a rate perspective competes against mutual fund money market
accounts, and grew to $34.4 million by September 30, 1997. The Bank's
certificates of deposit grew from $484.7 million at December 31, 1996 to $516.9
million at September 30, 1997. The increase in certificates of deposit was
primarily attributable to the Bank's strategy of offering introductory rates on
certain certificates of deposit whenever a new branch is opened, as was the case
in both March and May of 1997. Offsetting these increases, borrowed funds
decreased $3.3 million, or 10.3%, from $32.0 million at December 31, 1996 to
$28.7 million at September 30, 1997. This decrease was primarily attributable to
the payment of a short-term FHLB advance of $7.0 million, which matured in early
January. Another $5.0 million, fifteen year, amortizing FHLB borrowing was
obtained in July 1997 at a rate of 6.59%. Other borrowings, primarily in the
form of reverse repurchase agreements, declined $1.3 million. These borrowings
are used to fund the Bank's borrowing/reinvestment program which takes advantage
of low rate short-term borrowings, typically three- to six- month repos, and
invests in one- to two-year securities, primarily U.S. Treasury securities, to
earn additional net interest income. The relatively flat yield curve in 1997
made it less attractive to enter into more borrowing/reinvestment transactions
due to the very low spreads the Bank could earn.

     Net worth increased to $126.7 million at September 30, 1997 from $115.7
million at December 31, 1996. This increase was the result of net income of $8.6
million and a $2.4 million increase in the after-tax net unrealized gain on
available for sale securities due to the lower market interest rates at
September 30, 1997 which positively affected the market value of the Bank's
securities.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995

     Total assets at December 31, 1996 were $1.093 billion as compared to total
assets of $994.3 million at December 31, 1995, an increase of $99.1 million, or
10.0%. The asset growth was primarily attributable to a $63.4 million increase
in real estate and consumer loans, and a $60.0 million increase in securities.
Asset growth was funded with a $59.0 million increase in deposits and a $32.0
million increase in other borrowings. Federal funds sold decreased $20.6 million
as proceeds were invested in loans and securities. Asset growth during the year
ended December 31, 1996 was concentrated in one- to four-family and commercial
real estate loans, vehicle loans, mortgage related securities and U.S. Treasury
securities. Net loans increased $62.5 million, from $536.0 million at December
31, 1995 to $598.5 million on December 31, 1996. One- to four-family real estate
loans increased $41.2 million, commercial real estate loans increased $6.5
million, and vehicle loans increased $6.2 million. The increase in the one- to
four-family real estate loans was primarily the result of $13.9 million in
additional adjustable rate loans and $19.1 million in additional bi-weekly fixed
rate loans, as we continued to originate and hold in portfolio one- to four-
family real estate loans which meet the asset/liability management objectives of
either variable rate or shorter term mortgage loans. The commercial real estate
loan portfolio increased from $62.0 million at December 31, 1995 to $68.6
million at December 31, 1996, as the Bank continued its emphasis on originating
assets which provide higher yields and are more sensitive to current market
interest rates than those obtainable on one- to four-family, long term, fixed
rate real estate loans. Consumer and other loans increased $10.0 million from
$63.3 million at December 31, 1995 to $73.3 million at December 31, 1996. This
increase was primarily the result of the $6.2 million increase in vehicle loans
and auto lease financing. While consumer loans generally entail greater credit
risk than one- to four-family real estate loans, they are also shorter term,
higher yielding assets which also meet the asset/liability objectives of the
Bank.

                                      38
The securities portfolio increased by $60.0 million, from $393.1 million at
December 31, 1995 to $453.1 million at December 31, 1996. The growth in the
securities portfolio was primarily in U.S. Treasury securities, assetbacked
securities and mortgage related securities. The $29.5 million increase in U.S.
Treasury securities was a result of the Bank's continued development of a five
year laddered portfolio of U.S. Treasuries and the start-up of the Bank's
borrowing/reinvestment program. The $22.7 million increase in asset-backed
securities was required to meet the need for shorter term average life
securities with tighter payment windows than most mortgage related securities.
The $23.3 million increase in mortgage related assets was largely funded with
deposits and borrowings during 1996. It represented a repositioning of assets
from the lower yielding, short-term CMO sector and federal funds sold into
mortgage related securities.

     The increase in deposit growth was attributable to the net deposit inflows
of $19.9 million and interest credited to deposit accounts of $39.1 million
during the period. The composition of the Bank's deposits continued to change,
as reflected in the shift out of lower yielding savings accounts and into higher
yielding certificates of deposit as the Bank paid slightly lower rates on
transaction accounts in 1996. The Bank's cost of funds for certificates of
deposit was also lower in 1996 than 1995 although the balances increased from
$422.5 million at December 31, 1995 to $484.7 million at December 31, 1996. The
generally lower interest rate environment in 1996, as well as approximately
$19.0 million in long-term, high interest rate (9.00%-10.00%) certificates of
deposit maturities in the first four months of 1996 assisted in lowering the
overall cost of funds. On the other hand, two new branch openings in 1996
increased the cost of funds as the Bank used certificates of deposit promotions
to attract new customers. In 1996, we initiated a wholesale borrowing strategy
on two fronts. After joining the FHLB in 1995, the Bank entered into its first
$5.0 million, 5-year FHLB advance at 5.72% in January 1996. By year end, $12.0
million in FHLB advances were recorded on the Bank's books. In June 1996, we
initiated a borrowing/reinvestment program and entered into $20.0 million in
reverse repurchase agreements by December 31, 1996. See "Management of Interest
Rate Risk".

     Net worth increased to $115.7 million at December 31, 1996 from $107.7
million at December 31, 1995. This increase was the result of net income of
$10.8 million, partially offset by a $2.8 million decrease in the after-tax net
unrealized gain on available for sale securities. As interest rates increased at
December 31, 1996, the market value of the Bank's securities was negatively
affected.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996.

     General. The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of residential and commercial real
estate loans, consumer loans, securities available for sale and securities held
to maturity, and the interest paid on interest-bearing liabilities, consisting
primarily of deposits and other borrowed funds. Net interest income is a
function of the Bank's interest rate spread, which is the difference between the
average yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. The Bank's
earnings also are affected by its level of service charges and gains on sale of
loans and securities, as well as its level of operating and other expenses,
including salaries and employee benefits, occupancy and equipment costs, and
marketing and advertising costs.

     Net income for the nine months ended September 30, 1997 increased by
$409,000, or 5.0%, from $8.2 million for the nine months ended September 30,
1996 to $8.6 million for the same period in 1997. The increase was due primarily
to an increase in interest income which resulted from an increase in the average
balance of interest-earning assets, as well as an increase in other operating
income related to fees and service charges on deposits, increased gains on the
sale of securities available for sale, and lower provisions for loan losses. The
increases were partially offset by increased interest expense which resulted
primarily from an increase in average interest-bearing liabilities and a $3.4
million increase in operating and other expenses reflecting the expansion of the
Bank's branch network.

     Interest Income. Interest income increased by $5.8 million, or 10.6%, to
$61.3 million for the nine months ended September 30, 1997 from $55.5 million
for the nine months ended September 30, 1996. The increase was

                                      39
primarily due to a $3.5 million increase in income from loans, a $2.1 million
increase in income from investment securities, and a $533,000 increase in income
from mortgage related securities. These increases were partially offset by a
$262,000 decrease in income from federal funds sold. The increase in income from
loans was attributable to a $57.3 million increase in the average balance of
loans to $611.5 million from $554.2 million, partially offset by a 4 basis point
decrease in the average yield on loans from 8.40% to 8.36%. The continued
origination and portfolio growth of the Bank's one- to four-family real estate
loans was responsible for over 60% of the loan increase. The increase in income
from investment securities was attributable to a $42.9 million increase in the
average balance of investment securities to $185.6 million from $142.7 million,
and a 29 basis point increase in the average yield on investment securities to
5.61% from 5.32%. The Bank invested in U.S. Treasury securities and asset-backed
securities during the first nine months of 1997 to take advantage of their
shorter weighted average lives and their 6.00% or higher yields which increased
the Bank's overall yield on its investment securities. The increase in income
from mortgage related securities was attributable to a $6.8 million increase in
the average balance of mortgage related securities to $287.0 million from $280.2
million, and a 10 basis point increase in the average yield on mortgage related
securities to 6.65% from 6.55%. As interest rates increased during the first
four months of 1997, the Bank invested in CMO's, 7-year balloons and 30-year
mortgage related securities which provided yields of 6.93% to 7.03% and
increased the Bank's overall yield on its mortgage related securities. The
decrease in income from federal funds sold was due to a $7.5 million decrease in
the average balance of federal funds sold to $19.9 million from $27.4 million,
partially offset by a 23 basis point increase in the yield on the Bank's federal
funds sold to 5.52% from 5.29%. This decrease was the result of the redeployment
of excess funds, mainly in investment securities.

     Interest Expense. Interest expense increased by $3.3 million, or 11.0%, to
$33.3 million for the nine months ended September 30, 1997 from $30.0 million
for the nine months ended September 30, 1996. This increase was the result of an
$88.9 million increase in the average balance of interest-bearing liabilities in
the 1997 period compared to the 1996 period, and a 4 basis point increase in the
average rate paid on such liabilities over the same period. In particular, the
increase resulted primarily from a $2.5 million increase in interest expense on
certificates of deposit, a $717,000 increase in interest expense on other
borrowings, and a $289,000 increase in interest expense on interest-bearing
checking accounts. These increases were partially offset by a $188,000 decrease
in interest expense on savings accounts. The increase in interest expense
attributable to certificates of deposit resulted from a $63.6 million increase
in the average balance of certificates of deposit to $510.1 million in 1997 from
$446.5 million in 1996, which was partially offset by a 7 basis point decrease
in the average cost of certificates of deposit from 5.81% to 5.74%. Assisting
the decline was the slightly lower interest rate environment during the 1997
period, as well as the Bank closely monitoring maturing certificates of deposit
with high rates and promoting alternative certificates of deposit to lower the
overall rate paid on these accounts. Two new branch openings in early 1997 and
one new branch opening in late 1996 contributed to the large increase in average
certificates of deposit balances. The increase in interest expense attributable
to other borrowings resulted from a $15.8 million increase in the average
balance of other borrowings to $28.9 million in 1997 from $13.1 million in 1996
and a 69 basis point increase in the average borrowing cost to 5.49% from 4.80%.
The increase in other borrowed funds in 1997 reflects management's decision to
implement a borrowing/reinvestment program which utilizes reverse repurchase
agreements to fund investments in securities as long as such agreements are a
cost effective source of funds. As short-term interest rates increased and the
yield curve flattened in mid-1997, the rates being paid on these borrowings
increased and the spread earned on the transactions began to narrow, thus
reducing the attractiveness of these transactions. The increase in interest
expense attributable to interest-bearing checking accounts resulted from a $15.6
million increase in the average balance of interest-bearing checking accounts to
$120.4 million in 1997 from $104.8 million in 1996, partially offset by a 3
basis point decrease in the average cost of interest-bearing checking accounts
to 2.70% from 2.73%. The decrease in interest expense attributable to savings
accounts resulted from a $5.9 million decrease in the average balance of total
savings accounts to $304.1 million from $310.0 million, and a 2 basis point
decrease in the average cost of savings accounts to 3.34% from 3.36%. See
"Business of the Bank - Source of Funds -Borrowed Funds".

     Provision for Loan Losses. The Bank establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed appropriate to absorb future charge-offs of
loans deemed uncollectible. In determining the appropriate level of the
allowance for loan losses, management

                                      40
considers past and anticipated loss experience, evaluations of real estate
collateral, current and anticipated economic conditions, volume and type of
lending and the levels of non-performing and other classified loans. The amount
of the allowance is based on estimates and the ultimate losses may vary from
such estimates. Management of the Bank assesses the allowance for loan losses on
a quarterly basis and makes provisions for loan losses in order to maintain the
adequacy of the allowance.

     The Bank provided $975,000 and $1.9 million in loan loss provisions during
the nine months ended September 30, 1997 and September 30, 1996, respectively.
During the first nine months of 1996, management provided $800,000 of provisions
for potential losses on approximately $1.8 million of loans to a borrower that
had filed for bankruptcy protection. The Bank charged-off $486,000 of this loan
during 1997 after a settlement was reached with the bankruptcy trustee. This
amount is reflected in the increase in the net charge-offs to average loans
outstanding to .19% from .04% during the nine months ending September 30, 1997
and September 30, 1996, respectively.

     Other Operating Income. Other operating income is composed of fee income
for bank services and profits from the sale of loans and securities. Total other
operating income for the nine months ended September 30, 1997 increased
$637,000, or 14.7%, from $4.3 million for the nine months ended September 30,
1996 to $5.0 million for the nine months ended September 30, 1997. The primary
reasons for the improvement were net gains of $875,000 on the sale of securities
available for sale during the nine months ended September 30, 1997 as compared
to net gains of $532,000 in the comparable period for 1996. The increases are
primarily reflective of the Bank's desire to realize some of the gains on
marketable equity securities which occurred in 1997 as a result of the strong
performance of the stock market. Bank service charges and fees on deposit
accounts increased $438,000 for the nine months ending September 30, 1997 to
$2.2 million from $1.8 million for the nine months ending September 30, 1996.
This increase was primarily the result of increased fee income of $148,000 on
the Bank's debit card which was introduced in 1995 and continues to see
significant growth in customer acceptance and usage. In addition, service
charges and charges for insufficient funds on checking accounts increased
$267,000 from September 30, 1996 to September 30, 1997 as a result of the Bank's
continued promotion of its low fee checking account products. Other changes in
other operating income included a $35,000 increase in loan origination and
servicing fees and increased commissions of $38,000 on the sale of annuities and
mutual funds. These increases were partially offset by writedowns taken in 1997,
on real estate owned ("REO") and investments in real estate development
projects, which totaled $387,000 in 1997 in comparison to $18,000 in 1996. These
properties were written-down to their revised net realizable values.

     Operating and Other Expenses. Operating and other expenses increased by
$3.4 million, or 22.8%, to $18.4 million for the nine months ended September 30,
1997 from $15.0 million for the nine months ended September 30, 1996. The
increase was due to a $1.4 million increase in other expenses, a $1.3 million
increase in salaries and employee benefits, a $362,000 increase in occupancy and
equipment, a $152,000 increase in network interchange fees, an $88,000 increase
in deposit insurance and an $83,000 increase in marketing and advertising.

     Other expenses increased to $4.0 million for the nine months ended
September 30, 1997 from $2.6 million for the nine months ended September 30,
1996. The September 30, 1996 other expenses reflects the benefit recognized for
the reversal of a $600,000 provision for possible loss on demand balances held
at Nationar, Inc. ("Nationar"), which had originally been made in 1995. This is
discussed further in the comparison of operating results for fiscal years 1996
and 1995. Without this reversal, the net increase in other expenses would have
been $836,000 including professional fees mainly associated with the
implementation of various tax planning strategies, additional charitable
contributions, additional costs incurred as a result of the growth in the number
of checking accounts, and expenses associated with settling a real estate tax
escrow lawsuit. Salaries and employee benefits increased to $9.7 million for the
nine months ended September 30, 1997 from $8.4 million for the same period in
1996. The increase is primarily a result of an additional 41 full time
equivalent employees hired by the Bank, primarily at the three new branch
locations established by the Bank since August of 1996. These new branches also
contributed to the increase in occupancy and equipment to $2.7 million for the
nine months ended September 30, 1997 from $2.3 million for the same period in
1996. Included in occupancy and equipment is $417,000 of depreciation on the
furniture and equipment and leasehold improvements for the new facilities and
$234,000 of building-related operating expenses. Occupancy and equipment also
reflects

                                      41
approximately $79,000 of technology equipment writedowns related to the Bank's
continued upgrading of its technology, communications and information systems,
primarily personal computers and related software. Network interchange fees
increased to $882,000 for the nine months ended September 30, 1997 from $730,000
for the same period in 1996 reflecting the costs associated with the continued
growth in the number of customer transactions performed utilizing the Bank's
debit card product. Deposit insurance increased to $90,000 for the nine months
ended September 30, 1997 from $2,000 for the same period in 1996, resulting from
the FDIC's decision to raise the assessment for deposit insurance in 1997 to
$0.013/per one hundred dollars of deposits from the minimal assessment in 1996.
Marketing and advertising costs increased to $1.0 million for the nine months
ended September 30, 1997 from $934,000 for the nine months ended September 30,
1996 and was primarily due to promotional costs relating to the Bank's opening
of the new branches.

     Income Taxes. Income tax expense was $4.9 million for the nine months ended
September 30, 1997 compared to $4.7 million for the same period in 1996.
The effective tax rate was 36.2% for both periods.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995

     General. Net income for the year ended December 31, 1996 increased by
$843,000, or 8.5%, from $9.9 million for the year ended December 31, 1995 to
$10.8 million for the fiscal year 1996. The increase was due primarily to an
increase in interest income which primarily resulted from an increase in the
average balance of interest-earning assets and an increase in other operating
income related to fees and service charges on deposits. The increases were
partially offset by increased interest expense which resulted primarily from an
increase in average interest-bearing liabilities, decreased gains on the sale of
securities available for sale, higher provisions for loan losses, increases in
operating and other expenses, and increased income taxes.

     Interest Income. Interest income increased by $5.2 million, or 7.5%, to
$75.1 million for the year ended December 31, 1996 from $69.9 million for the
year ended December 31, 1995. The increase was primarily due to a $3.9 million
increase in income from loans, a $1.1 million increase in income from investment
securities, and a $608,000 increase in income from mortgage related securities.
These increases were partially offset by a $413,000 decrease in income from
federal funds sold. The increase in income from loans was attributable to a
$57.4 million increase in the average balance of loans to $564.0 million from
$506.6 million, partially offset by an 18 basis point decrease in the average
yield on loans from 8.56% to 8.38%. The origination and portfolio growth of the
Bank's one- to four-family real estate loans was responsible for over 64% of the
total loan growth. Since interest rates decreased throughout 1995, refinancings
increased during the last quarter of 1995 and into early 1996 which assisted in
lowering the total portfolio yield in 1996. The increase in income from
investment securities was attributable to a $28.1 million increase in the
average balance of investment securities to $147.2 million from $119.1 million,
partially offset by a 37 basis point decrease in the average yield on investment
securities to 5.38% from 5.75%. The $1.1 million increase in 1996 interest
income was the result of the development of a five year laddered portfolio of
U.S. Treasury securities and the start-up of the Bank's borrowing/reinvestment
program which was initiated in 1996 and mainly invested in two year U.S.
Treasury securities. The increase in income from mortgage related securities was
attributable to a $6.4 million increase in the average balance of mortgage
related securities to $281.8 million from $275.4 million, and a 7 basis point
increase in the average yield on mortgage related securities to 6.58% from
6.51%. The $608,000 increase in 1996 interest income is attributable to the
repositioning of the Bank's mortgage related securities in early 1996 to achieve
a higher yielding portfolio. The decrease in income from federal funds sold was
due to a $6.7 million decrease in the average balance of federal funds sold to
$24.7 million from $31.4 million, and an 18 basis point decrease in the yield on
the Bank's federal funds sold to 5.32% from 5.50%. This decrease was the result
of our continuing deployment of excess funds, mainly in investment securities.

     Interest Expense. Interest expense increased by $1.7 million, or 4.2%, to
$40.7 million for the year ended December 31, 1996 from $39.0 million for the
year ended December 31, 1995. Interest expense for the year ended December 31,
1995 includes a special interest payment of $1.25 million paid in connection
with our 125th anniversary. Excluding this special interest payment, interest
expense increased by $2.9 million, or 7.6%, to $40.7 million from $37.8

                                      42
million for the prior year. Overall, the average balance of interest-bearing
liabilities increased by $74.8 million in 1996, while the average rate paid on
these liabilities decreased 6 basis points since year end 1995. In particular,
this increase resulted primarily from a $2.9 million increase in interest
expense on certificates of deposit, and an $841,000 increase in interest expense
on other borrowings. These were partially offset by an $801,000 decrease in
interest expense on savings accounts and a decrease of $38,000 in interest
expense on interest-bearing checking accounts. The increase in interest expense
attributable to certificates of deposit resulted from a $68.6 million increase
in the average balance of certificates of deposit to $455.2 million in 1996 from
$386.6 million in 1995 which was partially offset by a 28 basis point decrease
in the average cost of certificates of deposit to 5.81% from 6.09%. The Bank's
customers continued to move deposits from core savings accounts into
certificates of deposit as a result of the higher rates being paid on
certificates of deposit. The Bank benefitted from $19.0 million of matured 9% to
10% interest-bearing certificates of deposit which occurred in early 1996 and
helped to reduce the Bank's overall cost of funds. The increase in interest
expense on other borrowings was due to the Bank's average borrowings of $16.7
million during 1996, as compared to no borrowings during 1995. The Bank's first
FHLB advance, a 5-year advance, was recorded in January 1996 when interest rates
declined to their lowest point since late 1993. In addition, the Bank initiated
a short-term borrowing/reinvestment program during 1996 which included
borrowings with reverse repurchase agreements and corresponding investments
mainly in short-term U.S. Treasury securities. By year end 1996, the Bank had
averaged over $11.1 million in reverse repurchase agreements. The decrease in
interest expense attributable to savings accounts was due to an $18.6 million
decrease in the average balance of total savings accounts to $307.5 million in
1996 from $326.1 million in 1995, and a 5 basis point decrease in the average
cost of savings accounts to 3.37% from 3.42%.

     Provision for Loan Losses. The Bank's provision for loan losses increased
by $1.2 million, from $1.0 million for the year ended December 31, 1995 to $2.2
million for the year ended December 31, 1996. As previously indicated, the
increase in the provision was due primarily to management's assessment of the
potential losses that ultimately would be recognized on the $1.8 million of
loans to a borrower that had filed for bankruptcy protection. The increase is
also reflective of management's objective to increase the allowance for loan
losses as a percentage of total loans due to the growth in the loan portfolios.

     Other Operating Income. Total other operating income was $5.8 million for
the year ended December 31, 1996, a $346,000, or 6.4%, increase from $5.4
million for the year ended December 31, 1995. Banking service charges and fees
on deposit accounts increased $631,000 for the year ended December 31, 1996,
from $1.8 million for 1995 to $2.5 million for 1996. The increase was primarily
attributable to a $222,000 increase in fees charged for insufficient funds on
the Bank's checking accounts resulting from modifications to the Bank's
insufficient funds policy, $220,000 in additional revenue generated because of
the increased usage of the Bank's new debit card product, and $138,000 of
additional service charges received due to the growth in the Bank's interest-
bearing checking accounts. Loan origination and servicing fees increased
$172,000 for the year ended December 31, 1996, to $1.0 million from $855,000 for
1995, reflective of the Bank's increased loan origination activity.
Additionally, all other operating income increased $444,000, from $1.2 million
for 1995 to $1.7 million for 1996. This increase was primarily due to an
additional $218,000 of commissions received on increased sales of annuity
products during 1996. The 1995 amount is also reflective of $200,000 in reserves
that were charged to operations in connection with the Bank's investments in
real estate development projects. These increases were partially offset by a
$901,000 decline in net gains on the sale of securities available for sale from
$1.5 million during 1995 to $576,000 during 1996 due to the market driven
reduced sales opportunities in 1996.

     Operating and Other Expenses. Operating and other expenses increased by
$783,000, or 3.9%, to $20.9 million for the year ended December 31, 1996 from
$20.1 million for the year ended December 31, 1995. The increase was due to a
$1.8 million increase in salaries and employee benefits, a $543,000 increase in
occupancy and equipment, a $377,000 increase in marketing and advertising and a
$107,000 increase in network interchange fees. These increases were partially
offset by a $981,000 decrease in deposit insurance and a $1.0 million decrease
in other expenses.

     Salaries and employee benefits increased to $11.5 million for 1996 from
$9.7 million for 1995. Occupancy and equipment expenses increased to $3.2
million in 1996 from $2.6 million for 1995. Both expense categories were

                                      43
impacted by the opening of two new branch locations during 1996. Besides the
costs related to expansion, salaries and employee benefits and occupancy and
equipment reflects the first full year of operating costs related to the 1995
start up and implementation of the Bank's new item processing center and
telephone service center. The item processing center, designed to be the first
area bank to utilize imaging technology, was established to perform check
clearing and statement rendering functions previously outsourced to a third
party. The telephone service center was established to enhance the Bank's retail
delivery system by minimizing the number of telephone calls into the branches
thereby enabling branch personnel to focus on more personalized service and
cross selling opportunities to branch walk-in customers.

     The increase in marketing and advertising, to $1.4 million for 1996 from
$978,000 for 1995, was attributable to the Bank's efforts to expand its
marketing coverage area to include localities where the Bank had opened new
branches, primarily in Erie County. The significant decrease in deposit
insurance, from $983,000 for 1995 to $2,000 for 1996, reflects the FDIC's
decision to lower the insurance premiums paid by BIF-insured institutions to the
legal minimum effective January 1, 1996. The Bank's "well capitalized" risk
classification allowed the Bank to pay the minimum annual assessment during
1996.

     Other operating expenses decreased from $5.0 million for 1995 to $3.9
million for 1996. The significant decrease was related to circumstances
involving the Bank's relationship with Nationar. On February 6, 1995, the
Superintendent of Banks for the State of New York seized Nationar, a checking-
clearing and trust company, placing it in receivership, and freezing all of its
assets. The Bank and its Savings Bank Life Insurance affiliate had $5.8 million
of demand deposits at Nationar frozen by this action. Since there were numerous
uncertainties regarding the total amount of claims filed against Nationar, the
priorities thereof, the proceeds remaining after disposition of assets and the
ultimate cost of the liquidation, management believed there to be reasonable
likelihood that the Bank would not recover all amounts due it from Nationar.
Because of these uncertainties, a $600,000 loss provision was reflected in other
operating expenses for 1995. However, during 1996 the Bank received all funds
due from Nationar and therefore reversed the allowance for possible loss with
the benefit reflected as a reduction in other operating expenses.

     Income Taxes. Income tax expense was $6.3 million for the year ended
December 31, 1996 compared to $5.1 million for the year ended December 31, 1995.
The effective tax rate increased from 34.1% for 1995 to 36.8% for 1996,
primarily related to a decrease in tax-exempt income and an increase in the
valuation allowance on its deferred tax assets.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994

     General. Net income for the year ended December 31, 1995 was $9.9 million,
compared to $8.8 million for the year ended December 31, 1994. Interest rates
rose sharply in early 1994, then gradually declined after January 1995,
resulting in a higher yield on interest-earning assets and a higher cost of
interest-bearing liabilities in 1995 than in 1994. In addition, the yield curve
narrowed significantly from December 31, 1994 to December 31, 1995, which caused
added pressure on spreads during 1995. The increase in net income for 1995 as
compared to 1994 resulted primarily from increases in interest income, other
operating income, and gains on the sale of securities available for sale, which
were partially offset by increases in interest expense and operating and other
expenses. Additionally, net income in 1994 was negatively impacted by the
recognition of the cumulative effect of implementing the provisions of SFAS 106,
"Employers' Accounting for Post Retirement Benefits Other Than Pensions".

     Interest Income. Interest income increased by $6.7 million, or 10.6%, to
$69.9 million for the year ended December 31, 1995 from $63.2 million for the
year ended December 31, 1994. The increase was primarily due to a $5.6 million
increase in income from loans, an $877,000 increase in income from federal funds
sold, and a $526,000 increase in income from investment securities. These
increases were partially offset by a $335,000 decease in income from mortgage
related securities. The increase in income from loans was attributable to a
$57.7 million increase in the average balance of loans to $506.6 million from
$448.9 million, and a 16 basis point increase in the average yield on loans to
8.56% from 8.40%. The Bank continued its focus on growing the loan portfolio in
1995 as one- to four-family,

                                      44
multi-family and commercial real estate loans, and consumer loans had 7% to 15%
increases in year end portfolios, which combined with the higher rates in early
1995, assisted in increasing the overall yields on all loans. The increase in
income from federal funds sold was attributable to a $10.7 million increase in
the average balance of federal funds sold to $31.4 million from $20.7 million,
and a 141 basis point increase in the average yield on federal funds sold to
5.50% from 4.09%. The increase in income from investment securities was
attributable to a 66 basis point increase in the average yield on investment
securities to 5.75% from 5.09%, partially offset by a $5.1 million decrease in
the average balance of investment securities to $119.1 million from $124.2
million. The decrease in income from mortgage related securities was due to a
$27.0 million decrease in the average balance of mortgage related securities to
$275.4 million from $302.4 million, partially offset by a 47 basis point
increase in the average yield for mortgage related securities to 6.51% from
6.04%. Both investment securities as well as mortgage related securities
decreased during 1995 as the Bank sold securities to assist in funding its loan
portfolio growth. In addition, as spreads narrowed throughout 1995, the risk was
greater than the reward for investing long-term, so the Bank maintained higher
balances in federal funds sold which were earning close to 6.00% at year end.

     Interest Expense. Interest expense increased by $7.3 million, or 22.9%, to
$39.0 million for the year ended December 31, 1995 from $31.8 million for the
year ended December 31, 1994. Excluding the $1.25 million special interest
payment in 1995, interest expense increased $6.0 million to $37.8 million for
the year ended December 31, 1995 from $31.8 million for the year ended December
31, 1994. This increase resulted primarily from a $7.1 million increase in
interest expense on certificates of deposit, and a $626,000 increase in interest
expense on interest-bearing checking accounts. These increases were partially
offset by a $1.7 million decrease in interest expense on savings accounts. The
increase in interest expense on certificates of deposit was the result of a
$98.9 million increase in the average balance of certificates of deposit to
$386.6 million from $287.7 million, and a 37 basis point increase in the average
cost of certificates of deposit to 6.09% from 5.72%,. The increase in interest
expense on interest-bearing checking accounts was the result of a $10.5 million
increase in the average balance of interest-bearing checking accounts to $96.6
million from $86.1 million, and a 36 basis point increase in the average cost of
interest-bearing checking accounts to 3.01% from 2.65%. The decrease in interest
expense on savings accounts was due to an $89.7 million decrease in the average
balance of total savings accounts to $326.1 million from $415.8 million,
partially offset by a 33 basis point increase in the average cost of savings
accounts to 3.42% from 3.09%. The increase in the average balance of
certificates of deposit accounts and the decrease in the average balance of
savings accounts was due primarily to customers shifting funds from lower
yielding savings accounts to higher yielding certificates of deposit.

     Provision for Loan Losses. The Bank's provision for loan losses increased
from $948,000 for the year ended December 31, 1994 to $1.0 million for the year
ended December 31, 1995. This increase enabled the Bank to maintain an adequate
ratio of allowance for loan losses to total loans at the end of each period.

     Other Operating Income. Total other operating income was $5.4 million for
the year ended December 31, 1995, a $3.0 million increase from $2.4 million for
the year ended December 31, 1994. This increase was primarily due to a $2.3
million increase in net gains on sales of securities available for sale. For the
year ended December 31, 1994, $849,000 of net securities losses were recognized
as the Bank repositioned its securities portfolio to provide more consistent
cash flows and to increase the yield. During 1995, the Bank took advantage of
market conditions and recognized $1.5 million in net securities gains. Banking
service charges and fees on deposit accounts increased $270,000, from $1.6
million for 1994 to $1.8 million for 1995. This increase was primarily
attributed to an additional $230,000 in service fees and charges collected on
the Bank's checking accounts as the Bank promoted its various checking account
products and introduced the Bank's debit card product. Loan origination and
servicing fees increased $139,000, from $716,000 for 1994 to $855,000 for 1995.
This increase reflects an additional $52,000 in service fee income collected for
servicing loans sold on the secondary market and increased service charges
collected due to the restructuring of the Bank's variable rate line-of-credit
product. All other operating income increased $285,000, from $952,000 for 1994
to $1.2 million for 1995. This increase resulted primarily from $134,000 in
additional fees received for providing various management services to the Bank's
Savings Bank Life Insurance Department and an increase of $87,000 for
commissions received on sales of annuities.

                                      45
Operating and Other Expenses. Operating and other expenses increased by
$1.7 million, or 9.5%, to $20.1 million for the year ended December 31, 1995
from $18.4 million for the year ended December 31, 1994. The increase was due to
a $1.7 million increase in other expenses, a $447,000 increase in salaries and
employee benefits, a $337,000 increase in occupancy and equipment, a $154,000
increase in network interchange fees, and a $27,000 increase in marketing and
advertising. These increases were partially offset by an $890,000 decrease in
deposit insurance.

     Other expenses increased from $3.3 million for the year ended December 31,
1994 to $5.0 million for 1995. As previously discussed, the increase in
operating and other expenses for fiscal 1995 reflect the $600,000 provision for
possible loss on the Bank's demand deposits held by Nationar. In addition to the
provision for possible loss, the Bank incurred increased charges for the various
services formerly performed by Nationar as the Bank was required to contract
with various other third party servicers. As a result, the Bank accelerated its
plans to bring in-house many of the previously outsourced check clearing and
statement rendering functions. In August 1995, the Bank opened its item
processing center incurring costs associated with the implementation of this new
operation, including expenses relating to a reissuance of checks to all of our
checking account customers. Additionally, in June of 1995, the Bank introduced
its new debit card product, requiring the Bank to incur costs associated with
the reissue of all of its account access cards. Salaries and employee benefits
increased from $9.3 million for 1994 to $9.7 million for 1995. Occupancy and
equipment increased from $2.3 million for 1994 to $2.6 million for 1995. The
increases in both of these expense categories reflect the costs related to the
establishment of the item processing center, telephone service center and one
additional new branch. The increase in network interchange fees, from $723,000
for 1994 to $877,000 for 1995, reflect the transactional costs incurred related
to the customer usage of the new debit card product. The marketing and
advertising increase, from $951,000 for 1994 to $978,000 for 1995, resulted from
the promotional activity relating to the debit card product and new branch
opening. The significant decrease in deposit insurance, from $1.9 million for
1994 to $983,000 for 1995, reflects a 50% reduction in the insurance premium
charged by the FDIC, which impacted most BIF-insured banks.

     Income Taxes. Income tax expense was $5.1 million for the year ended
December 31, 1995 compared to $4.7 million for the year ended December 31, 1994.
The effective tax rate increased from 32.6% for 1994 to 34.1% for 1995.

     Cumulative Effect of Change in Accounting Principle. As of January 1, 1994,
the Bank adopted SFAS 106, "Employers' Accounting for Post Retirement Benefits
Other Than Pensions". The transition obligation related to the adoption of this
standard of $1,224,000 was recognized in the 1994 Consolidated Statement of
Income, net of $300,000 previously accrued for this liability.

IMPACT OF NEW ACCOUNTING STANDARDS

     In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Share". SFAS No. 128 supersedes APB Opinion No. 15
"Earnings Per Share" and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
stock or potential common stock. Essentially, this standard replaces the primary
EPS and fully diluted EPS presentations under APB Opinion No. 15 with a basic
EPS and diluted EPS presentation. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997,
earlier application is not permitted.

     In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". SFAS No. 129 summarizes previously issued disclosure
guidance contained within APB Opinions Nos. 10 and 15 as well as SFAS No. 47.
There will be no changes to the Bank's disclosures pursuant to the adoption of
SFAS No. 129. This statement is effective for financial statements for periods
ending after December 15, 1997.

     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of

                                      46
unrealized gains or losses on securities available for sale is expected to be
disclosed as an additional component of the Bank's income under the requirements
of SFAS No. 130. This statement is effective for fiscal years beginning after
December 15, 1997.

     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after December
15, 1997.

                            BUSINESS OF THE COMPANY

GENERAL

     In October 1997, the Board of Trustees of the Bank adopted the Plan of
Reorganization. Under the Plan, the Bank organized the Company. The Bank will be
a wholly-owned subsidiary of the Company, the majority of whose shares will be
held by the Mutual Holding Company. See "Niagara Bancorp, Inc." and 
"Regulation -Holding Company Regulation."

     The Company is currently not an operating company. Following the
Reorganization, in addition to directing, planning and coordinating the business
activities of the Bank, the Company will initially invest net proceeds it
retains primarily in short and medium-term debt securities and marketable equity
securities. The Company also intends to fund the loan to the ESOP to enable the
ESOP to purchase 8% of the Common Stock sold in the Offering. In the future, the
Company may acquire or organize other operating subsidiaries, including other
financial institutions and financial services companies. See "Use of Proceeds."
Presently, there are no agreements or understandings for an expansion of the
Company's operations. Initially, the Company will neither own nor lease any
property from any third party, but will instead use the premises, equipment and
furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than certain officers of the Bank, who will not be
separately provided cash compensation by the Company. The Company may utilize
support staff of the Bank from time to time, if needed. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.

                             BUSINESS OF THE BANK

GENERAL

     The Bank's principal business consists of attracting retail deposits from
the general public in the areas surrounding its branches and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans, multi-family and
commercial real estate loans, mortgage related securities and various other
investment securities. The Bank also invests in consumer and other loans,
including home equity and second mortgage loans, mobile home loans, student
loans and commercial business loans. The Bank's revenues are derived principally
from the interest on its mortgage, consumer and commercial loans, securities,
loan origination and servicing fees and service charges and fees collected on
its deposit accounts. The Bank's primary sources of funds are deposits, other
borrowings and principal and interest payments on loans and securities.

MANAGEMENT STRATEGY

     The Bank was organized in 1870 as a New York-chartered mutual savings bank.
At September 30, 1997, we had total assets of $1.2 billion, total deposits of
$992.2 million, and net worth of $126.7 million. We are a community-and 
customer-oriented savings bank that operates fifteen full-service branch offices
in the Western New York counties of Niagara, Orleans, Erie and Genesee, which we
consider to be our primary market area. We also consider the

                                      47
remaining four counties of Western New York, Wyoming, Allegany, Cattaraugus and
Chautauqua counties, as our market area. Through our "Person to Person
Commitment" approach to retail banking, we emphasize personal service and
customer convenience in serving the financial needs of the individuals, families
and businesses residing in Western New York State. We offer the convenience and 
product mix of a larger, super regional bank while providing the responsiveness 
and community orientation of a smaller, local institution.

     Lockport is located on the historic Erie Canal and is 20 miles northeast of
Buffalo and 15 miles east of Niagara Falls. Within the Buffalo Standard
Metropolitan Statistical Area, which includes Erie and Niagara Counties, there
is a population of approximately 1.2 million people. More than 9 million people
reside within the 125-mile radius of the city of Buffalo and the region is the
45th largest metropolitan area in the nation and the 3rd largest in New York
State.

     Based on FDIC-published data, as of June 30, 1996 we had the second largest
deposit market share in each of Niagara and Orleans counties, the fifth largest
deposit market share in Genesee county, and the eighth largest deposit market
share in Erie County. In the eight county Western New York region, we had the
fifth largest deposit market share. For 1996, we were the fourth leading
originator of residential mortgage loans in Erie County. Those banks having
larger market shares in Western New York are significantly larger, multi-
regional financial institutions. Management considers the Bank to be the
dominant independent community bank focused exclusively on serving the banking
needs of the Western New York region.

     Our business strategy is designed to enhance our profitability and
strengthen our position as the dominant, independent community bank in Western
New York. We offer the convenience and product mix of a larger, super regional
bank while providing the responsiveness and community orientation of a small,
local institution. The highlights of our strategy include the following:

 .    Expansion of the retail banking franchise. We are continuing to focus on
     expanding our retail banking franchise and increasing the number of
     households served within our market area. Since 1994 we have opened five
     full-service branch offices and our Board has authorized the establishment
     of three additional branch offices in 1998. We operate two full-service
     supermarket branch offices, provide customer access to ATMs, including the
     Bank's fourteen ATMs, without a service charge, provide telephone customer
     service, and provide 24-hour telephone account access. We have customer
     relationships with over 76,000 households in our primary market area,
     representing approximately 16.9 % of all households therein. Our goal is to
     increase the number of Bank products used per customer.

 .    Loan portfolio growth. Our loan portfolio consists of one- to four-family
     residential mortgage loans, commercial and multi-family real estate loans,
     consumer and other loans, and commercial business loans. At September 30,
     1997, our loan portfolio totaled $622.5 million, an increase of $263.0
     million, or 73.2%, since December 31, 1992. The loan portfolio represented
     52.9% of total assets and 62.7% of total deposits at September 30, 1997,
     compared to 43.1% of total assets and 48.2% of deposits at December 31,
     1992. We intend to continue to increase our loan portfolio as a percentage
     of assets , and to continue our origination of higher margin multi-family,
     commercial real estate and consumer loans.

 .    Maintaining asset quality. Because we believe that asset quality is a
     critical component of long-term financial success, we have remained
     committed to a conservative credit culture. During the past five years, and
     including the nine month period ended September 30, 1997, non-performing
     assets have averaged 0.59% of total assets. At September 30, 1997, our non-
     performing loans totaled $1.9 million, representing 0.31% of the loan
     portfolio, and our non-performing assets totaled $2.2 million, representing
     0.19% of assets. Our allowance for loan losses amounted to $6.4 million at
     September 30, 1997, and represented 1.02% of our loan portfolio and 330.0%
     of non-performing loans.

                                      48
.    Managing interest rate risk. Although our liabilities are more sensitive to
     changes in interest rates than our assets, we seek to manage our exposure
     to interest rate risk by originating and retaining adjustable-rate loans in
     both the residential and commercial real estate loan portfolios, and by
     originating short-term and medium-term fixed-rate consumer loans. We also
     use our investment and mortgage related securities portfolios to manage our
     interest rate risk exposure. As of September 30, 1997, our securities
     available for sale totaled $465.0 million, or 39.5% of total assets, and
     had an average life of 4.27 years and our securities held to maturity
     totaled $37.5 million, or 3.2% of total assets, and had an average life of
     .07 years.

MARKET AREA

     The Bank has been, and intends to continue to be, a community-oriented
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank currently operates fifteen full service banking
offices in Erie, Niagara, Orleans and Genesee Counties, of Western New York, and
has authorized the establishment of three additional branch offices to be
located in Erie County in 1998. The Bank's primary deposit gathering area is
currently concentrated around the areas where its full service banking offices
are located. The Bank's primary lending area has also historically been
concentrated in the same Western New York counties.

     Within the Buffalo Standard Metropolitan Statistical Area, which includes
Erie and Niagara Counties, there is a population of approximately 1.2 million
people. Within a five-hundred mile radius of the region lies 62% of the Canadian
and 55% of the United States population. More than 9 million people reside
within the 125-mile radius of the City of Buffalo and the region is the 45th
largest metropolitan area in the nation and the 3rd largest in New York State.

     Historically an industrial-based economy, the Buffalo/Niagara region has
experienced significant job losses in the manufacturing sector since the 1970s.
The decline in manufacturing jobs has slowed in recent years, and there has been
significant growth in retail trade, financial services, health services and in
the auto parts manufacturing industry. The United States - Canadian trading
relationship is the largest of its kind in the world, and thirty percent of that
trade is handled by the region's six international bridges.

FUTURE ACQUISITION AND EXPANSION ACTIVITY

     Both nationally and in New York, the banking industry is undergoing a
period of consolidation marked by numerous mergers and acquisitions. Although we
do not have a formal program to acquire other banking or thrift institutions, we
may from time to time be presented with opportunities to acquire institutions or
bank branches that could expand and strengthen our market position. If such an
opportunity arises, we may from time to time engage in discussions or
negotiations and we may conduct a business investigation of a target
institution. Acquisitions typically involve the payment of a premium over book
and market values, and therefore, some dilution of the Company's book value and
net income per share may occur in connection with a future acquisition.

LENDING ACTIVITIES

     General. Historically, the principal lending activity of the Bank has been
the origination, for retention in its portfolio, of fixed-rate and adjustable-
rate mortgage loans collateralized by one- to four-family residential real
estate located within its primary market area. The Bank also originates multi-
family residential real estate loans, commercial real estate loans and consumer
loans. To a lesser extent the Bank also originates construction, home equity and
commercial business loans.

     In an effort to manage interest rate risk, the Bank has sought to make its
interest-earning assets more interest rate sensitive by originating adjustable-
rate loans in both the residential and commercial real estate loan portfolios,
and by originating variable rate, short-term and medium-term fixed-rate consumer
loans. In originating residential fixed-rate loans, the Bank has successfully
marketed to its customers, the attractive shorter-term maturity features of its
various

                                      49
bi-weekly mortgage programs where the accelerated principal amortization
schedules of these loans have played a significant role in ameliorating the
traditional interest rate risk that is inherent in a community based Bank's
residential lending portfolio. The Bank currently sells in the secondary market
a limited amount of 20-30 year monthly and 25-30 year bi-weekly residential
mortgage loans, and retains for portfolio all adjustable-rate mortgage loans and
fixed-rate monthly residential mortgage loans with maturities of 15 years or
less, together with all fixed-rate bi-weekly mortgage loans with maturities of
20 years or less. However, the Bank is primarily a portfolio lender and at any
one time the Bank holds only a nominal amount of loans identified as held-for-
sale. The Bank has historically retained the servicing rights on all mortgage
loans it sells and realizes monthly service fee income. The Bank retains in its
portfolio all multi-family residential loans, commercial real estate loans,
commercial business loans, and consumer loans that it originates with the
exception of student loans which, as they enter their repayment phase, are sold
to the Student Loan Marketing Association ("Sallie Mae").

     Bi-weekly Lending. We have been extremely successful in marketing our bi-
weekly mortgage/loan product, which we introduced in early 1992 and which has a
significantly shorter repayment schedule than a conventional monthly loan. The
accelerated repayment schedule that accompanies a bi-weekly loan results in
significant savings to the borrower, and allows for a more rapid increase in
home equity. The bi-weekly mortgage reduces interest payments and shortens the
repayment time in two ways. First, a borrower makes the equivalent of an extra
monthly payment per year by paying half the monthly mortgage payment every two
weeks. The borrower makes the equivalent of 13 monthly payments per year instead
of 12. Also, in paying half the payment two weeks in advance, the borrower
reduces the mortgage interest that is paid over the life of the loan. For
example, an 8%, $100,000, 20-year bi-weekly mortgage loan is fully repaid in
16.2 years. An additional benefit is that repayment of the loan is made through
an automatic deduction from the borrower's savings or checking account, which
enables us to avoid the cost of processing payments. As of September 30, 1997,
$165.7 million or 42.9% of the Bank's residential loan portfolio was comprised
of bi-weekly loans.

                                      50
Loan Portfolio Composition. Set forth below is selected information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for losses) as of the dates indicated.
AT SEPTEMBER 30,                                  AT DECEMBER 31,   
                               -----------------------   ---------------------------------------------------------------------------
                                         1997                      1996                     1995                      1994         
                               -----------------------   -----------------------   -----------------------  ------------------------
                                 AMOUNT       PERCENT      AMOUNT       PERCENT      AMOUNT       PERCENT      AMOUNT      PERCENT 
                               -----------  ----------   ----------   ----------   ----------   ----------  -----------  -----------

                                                                                                (DOLLARS IN THOUSANDS)
Real Estate Loans:                                                                                                                 
  One-to four-family ........  $ 386,494       61.79%    $ 360,573       59.85%    $ 319,340      59.31%    $ 277,010       58.12% 
  Home equity................     13,047        2.09        11,337        1.88        10,234       1.90        10,729        2.25  
  Multi-family...............     72,843       11.64        71,397       11.85        71,489      13.28        66,972       14.05  
  Commercial real estate.....     69,571       11.12        68,601       11.38        62,005      11.52        55,946       11.74  
  Construction (1)...........     13,964        2.23        12,493        2.07         7,891       1.47         3,454        0.72  
                               ---------    --------     ---------    --------     ---------    -------     ---------    --------  
    Total real estate loans..    555,919       88.87       524,401       87.03       470,959      87.48       414,111       86.88  
                               ---------    --------     ---------    --------     ---------    -------     ---------    --------  
                                                                                                                                   
Consumer and Other Loans:....                                                                                                      
  Mobile home................     22,675        3.63        21,406        3.55        20,630       3.83        20,662        4.33  
  Vehicle....................      7,326        1.17        18,747        3.11        12,591       2.34         9,391        1.97  
  Personal...................     14,776        2.37        13,596        2.26        11,485       2.13        10,213        2.14  
  Home improvement...........      7,725        1.23         6,879        1.14         7,046       1.31         6,517        1.37  
  Other consumer.............      1,964        0.31         1,937        0.32         1,698       0.32         1,841        0.39  
  Guaranteed student.........     10,907        1.74        10,702        1.78         9,874       1.83         9,951        2.09  
                               ---------    --------     ---------    --------     ---------    -------     ---------    --------  
    Total consumer and                                                                                                             
        other loans..........     65,373       10.45        73,267       12.16        63,324      11.76        58,575       12.29  
                                                                                                                                   
Commercial business loans....      4,275        0.68         4,895        0.81         4,085       0.76         3,948        0.83  
                               ---------    --------     ---------    --------     ---------    -------     ---------    --------  
                                                                                                                                   
    Total loans..............    625,567      100.00%      602,563      100.00%      538,368     100.00%      476,634      100.00% 
                               ---------    ========     ---------    ========     ---------    =======     ---------    ========  

  Net deferred costs.........      3,376                     2,809                     2,349                    1,749        
  Unearned discounts.........       (103)                     (347)                      (39)                      --        
  Allowance for losses.......     (6,353)                   (6,539)                   (4,707)                  (4,192)       
                               ---------                 ---------                 ---------                ---------       
  Loans, net.................  $ 622,487                 $ 598,486                 $ 535,971                $ 474,191        
                               =========                 =========                 =========                =========
AT DECEMBER 31,   
                                  ------------------------------------------------
                                            1993                     1992
                                  -----------------------   ----------------------
                                    Amount       Percent      Amount       Percent
                                  ----------   ----------   ----------   ---------
Real Estate Loans:             
  One-to four-family ........     $ 248,324       58.66%    $ 202,230      56.02%
  Home equity................        10,832        2.56        11,902       3.30
  Multi-family...............        59,943       14.16        62,909      17.43
  Commercial real estate.....        42,326       10.00        30,825       8.54
  Construction (1)...........         6,910        1.63         3,740       1.04
                                  ---------    --------     ---------    -------
    Total real estate loans..       368,335       87.01       311,606      86.33
                                  ---------    --------     ---------    -------
                               
Consumer and Other Loans:....  
  Mobile home................        19,785        4.68        15,992       4.43
  Vehicle....................         7,275        1.72         7,992       2.21
  Personal...................         8,402        1.98         7,450       2.06
  Home improvement...........         6,028        1.42         5,822       1.61
  Other consumer.............         2,059        0.49         2,163       0.60
  Guaranteed student.........         8,123        1.92         6,517       1.81
                                  ---------    --------     ---------    -------
    Total consumer and         
        other loans..........        51,672       12.21        45,936      12.72
                               
Commercial business loans....         3,321        0.78         3,432       0.95
                                  ---------    --------     ---------    -------
                               
    Total loans..............       423,328      100.00%      360,974     100.00%
                                  ---------    ========     ---------    =======
                               
  Net deferred costs.........         1,763                     1,157
  Unearned discounts.........            --                        --
  Allowance for losses.......        (4,030)                   (2,689)
                                  ---------                 ---------
  Loans, net.................     $ 421,061                 $ 359,442
                                  =========                 =========
____________________
(1) Includes loans for the construction of one-to-four family residential, 
    multi-family and commercial real estate properties. At September 30, 1997,
    construction loans included $4,046,000 of one-to-four family loans and
    $9,918,000 of commercial real estate and multi-family loans.

                                       51
Loan Maturity and Repricing Schedule. The following table sets forth
certain information as of September 30, 1997, regarding the amount of loans
maturing or repricing in the Bank's portfolio. Demand loans having no stated
schedule of repayment and no stated maturity, and overdrafts are reported as due
in one year or less. Adjustable- and floating-rate loans are included in the
period in which interest rates are next scheduled to adjust rather than the
period in which they contractually mature, and fixed-rate loans are included in
the period in which the final contractual repayment is due.
ONE         THREE        FIVE          TEN
                                             WITHIN       THROUGH      THROUGH      THROUGH      THROUGH      BEYOND
                                               ONE         THREE        FIVE          TEN        TWENTY       TWENTY
                                              YEAR         YEARS        YEARS        YEARS        YEARS        YEARS        TOTAL
                                            ---------    ---------    ---------    ---------    ---------    ---------    ---------
                                                                                 (IN THOUSANDS)
Real Estate Loans:
   One- to four-family....................  $  88,513    $  13,436    $   6,309    $  23,558    $ 185,517   $  69,161    $ 386,494
   Home equity............................      8,815          146          648        1,987        1,451          --       13,047
   Multi-family...........................     26,785       23,184       21,583          732          559          --       72,843
   Commercial.............................     21,045       25,817       15,668        4,453        2,588          --       69,571
   Construction...........................     10,402          167            -        1,743          430       1,222       13,964
                                            ---------    ---------    ---------    ---------    ---------   ---------    ---------
      Total real estate loans.............    155,560       62,750       44,208       32,473      190,545      70,383      555,919
                                            ---------    ---------    ---------    ---------    ---------   ---------    ---------

Consumer and other loans..................     17,407        8,732        9,931       11,323       17,584         396       65,373

Commercial business loans.................      2,949          323          340          545           --         118        4,275
                                            ---------    ---------    ---------    ---------    ---------   ---------    ---------

      Total loans.........................  $ 175,916    $  71,805    $  54,479    $  44,341    $ 208,129   $  70,897    $ 625,567
                                            =========    =========    =========    =========    =========   =========    =========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
September 30, 1997, the dollar amount of all fixed-rate and adjustable-rate
loans due after September 30, 1998. Adjustable- and floating-rate loans are
included based on contractual maturities.
DUE AFTER SEPTEMBER 30, 1998
                                                               ------------------------------------------------------
                                                                  FIXED             ADJUSTABLE              TOTAL
                                                               ------------         ------------         ------------
                                                                                   (IN THOUSANDS)
Real Estate Loans:
      One- to four-family.............................         $    284,306         $     13,675         $    297,981
      Home equity.....................................                4,232                   --                4,232
      Multi-family....................................               13,823               32,235               46,058
      Commercial......................................               11,080               37,446               48,526
      Construction....................................                3,395                  167                3,562
                                                               ------------         ------------         ------------
           Total real estate loans....................              316,836               83,523              400,359
                                                               ------------         ------------         ------------

Consumer and other loans .............................               47,966                   --               47,966

Commercial business loans.............................                1,326                   --                1,326
                                                               ------------         ------------         ------------

           Total loans................................         $    366,128         $     83,523         $    449,651
                                                               ============         ============         ============
52
One- to Four-Family Real Estate Lending. The Bank's primary lending
activity has been the origination, for retention in the Bank's portfolio, of
mortgage loans to enable borrowers to purchase one- to four-family, owner-
occupied properties located in our primary market area. We offer conforming and
non-conforming, fixed-rate and adjustable-rate, residential mortgage loans with
maturities up to 30 years and maximum loan amounts generally up to $500,000. The
Bank's residential mortgage loan originations are generally obtained from our
loan representatives operating in our branch offices through their contacts with
local realtors, existing or past loan customers, depositors of the Bank, and
referrals from attorneys, accountants and independent mortgage brokers who refer
loan applications from the general public.

     We currently offer both fixed and adjustable rate conventional and
government guaranteed (Federal Housing Administration ("FHA"), Veterans
Administration ("VA"), Farmers Home Assistance ("FMHA")) mortgage loans with
terms of 10-30 years that are fully amortizing with monthly or bi-weekly loan
payments. One- to four-family residential loans are generally underwritten
according to the Federal National Mortgage Association ("FNMA"), and Freddie Mac
uniform guidelines. The Bank generally originates both fixed-rate and 
adjustable-rate loans in amounts up to the maximum conforming loan limits as
established by FNMA and Freddie Mac secondary market standards, currently
$214,600 for one-family homes up to a maximum of $412,450 for four-family homes.
Private mortgage insurance ("PMI") is required for loans with loan-to-value
ratios in excess of 80%. Loans in excess of conforming loan limits, in amounts
up to $500,000, are also underwritten to both FNMA and Freddie Mac secondary
market standards, and are eligible for sale to various conduit firms that
specialize in the purchase of such non-conforming loans.

     Fixed-rate mortgage loans originated by the Bank include due-on-sale
clauses which provide the Bank with the contractual right to deem our loan
immediately due and payable in the event the borrower transfers ownership of the
property without the Bank's consent. Due-on-sale clauses are an important means
of adjusting the yields on our Bank's fixed-rate portfolio, and we generally
exercise our rights under these clauses.

     The Bank generally sells its newly originated conventional, conforming 20-
30 year monthly fixed, and 25-30 year bi-weekly, loans in the secondary market
to government sponsored enterprises such as FNMA and Freddie Mac, and its non-
conforming, fixed-rate mortgage loans to private sector secondary market
purchasers. To reinforce its commitment to customer service and also to generate
fee income, as a matter of policy we retain the servicing rights on all such
loans sold. For the nine months ended September 30, 1997 and for the year ended
December 31, 1996, the Bank sold mortgage loans totaling $23.2 million and $26.1
million, respectively. As of September 30, 1997, our portfolio of fixed-rate
loans serviced for others totaled $139.8 million. We intend to continue to sell
into the secondary market our newly originated, 25-30 year fixed-rate mortgage
loans to assist in our asset/liability management.

     In an effort to provide financing for low and moderate income buyers, we
actively participates in residential mortgage programs and products sponsored by
FNMA, Freddie Mac, and the State of New York Mortgage Agency ("SONYMA"). The
SONYMA mortgage programs provide low and moderate income households with fixed-
rate loans which are generally set below prevailing fixed-rate mortgage loans
and which allow below-market down payments. These loans are sold by the Bank to
SONYMA, with the Bank retaining the contractual servicing rights.

     We currently offer several one- to four-family, adjustable-rate mortgage
loan ("ARM") products secured by residential properties with rates that adjust
every one, three, or seven years. The one- to four-family ARMs are offered with
terms of up to 30 years. After origination, the interest rate on one- to four-
family ARMs currently offered is reset based upon a contractual spread or margin
above the average yield on United States Treasury Securities, adjusted to a
Constant Maturity (the "U.S. Treasury Constant Maturity Index"), as published
weekly by the Federal Reserve Board. The appropriate index utilized at each
interest rate change date corresponds to the initial one, three, or seven year
adjustment period of the loan.

     ARMs are generally subject to limitations on interest rate increases of 2%
per adjustment period, and an aggregate adjustment of 6% over the life of the
loan. The ARMs require that any payment adjustment resulting from a change in
the interest rate be sufficient to result in full amortization of the loan by
the end of the loan term, and thus,

                                       53
do not permit any of the increased payment to be added to the principal amount
of the loan, commonly referred to as negative amortization.

     The retention of ARMs, as opposed to longer term, fixed-rate residential
mortgage loans, in the Bank's portfolio helps reduce our exposure to interest
rate risk. However, ARMs generally pose credit risks different from the credit
risks inherent in fixed-rate loans primarily because as interest rates rise, the
underlying debt service payments of the borrowers rise, thereby increasing the
potential for default. In order to minimize this risk, borrowers of one- to 
family one year adjustable-rate loans are qualified at the rate which would be
four-in effect after the first interest rate adjustment, if that rate is higher
than the initial rate. We believe that these risks, which have not had a
material adverse effect on the Bank to date, generally are less onerous than the
interest rate risks associated with holding 25-30 year fixed-rate loans. Certain
of the Bank's conforming ARMs can be converted at a later date to a fixed-rate
mortgage loan with interest rates based upon the then-current market rates plus
a predetermined margin or spread that was established at the loan closing. The
Bank sells ARM loans which are converted to 25-30 year fixed-rate term loans, to
either FNMA or Freddie Mac.

     While one- to four-family residential loans typically are originated with
20-30 year terms, the Bank permits its ARM loans to be assumed throughout the
life of the loan by qualified buyers. Such loans generally remain outstanding in
our loan portfolio for substantially shorter periods of time because borrowers
often prepay their loans in full upon sale of the property pledged as security
or upon refinancing the loan. Thus, average loan maturity is a function of,
among other factors, the level of purchase and sale activity in the Western New
York real estate market, prevailing interest rates, and the interest rates
payable on outstanding loans. As of September 30, 1997, over 97%, of our total
residential real estate loan portfolio was secured by properties that are
located within the eight county area that comprises Western New York State.

     We require title insurance on all of our one- to four- family mortgage
loans, and also require that fire and extended coverage casualty insurance (and,
if appropriate, flood insurance) be maintained in an amount at least equal to
the lesser of the loan balance or the replacement cost of the improvements.
Loans with loan-to-value ratios in excess of 80% must have a mortgage escrow
account from which disbursements are made for real estate taxes, hazard and
flood insurance, and PMI.

     We also originate two types of residential constructions loans: (i)
construction/spec loans, and (ii) construction/permanent loans. Annual
originations of residential construction loans have averaged $4.7 million over
the past five years. At September 30, 1997, our residential construction loan
portfolio consisted of 16 construction/spec loans with an aggregate outstanding
balance of $2.0 million and 31 construction/permanent loans with an aggregate
outstanding balance of $3.8 million.

     Construction/spec loans are made to area home builders who do not have, at
the time of loan origination, a signed contract with a home buyer who has a
commitment for permanent financing with either the Bank or another lender for a
finished home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to carry the debt
service payments and finance real estate taxes and other holding costs of the
completed home for a significant time after the completion of construction and
until the home buyer is identified. We lend on an ongoing basis to approximately
ten local area residential home builders who, at any given time, may have one or
two construction/spec loans outstanding from the Bank. All construction/spec
loans carry the full personal guaranty of the builder, who must have a previous
satisfactory history of completing construction/permanent loans with the Bank.
These loans are generally originated for a term of twelve months, with interest
rates ranging from 1.0% to 1.5% above the prime lending rate, and with a 
loan-to-value ratio of no more than 75% of the lower of cost or the appraised
estimated value of the completed property. Loan advances are disbursed on a
three-draw basis as construction is completed. At September 30, 1997, the
largest outstanding concentration of credit to one builder consisted of 2
construction/spec loans with an aggregate balance of $421,200, which were
performing in accordance with their terms.

                                       54
Construction/permanent loans are also made to either a home builder or a
home owner who, at the time of construction, has a signed contract together with
a commitment for permanent financing from the Bank for the finished home. The
construction phase of a loan generally lasts 4-6 months, and the interest rate
charged generally corresponds to the rate of the committed permanent loan, with
loan-to-value ratios of up to 80% (or up to 90% with PMI) of the appraised
estimated value of the completed property or cost, whichever is less. When we
issue the corresponding commitment to provide permanent financing upon
completion of construction, the interest rate charged on the construction loan
generally includes an additional 1/8% to 1/4% rate premium as protection against
the construction loan risk and the additional rate exposure to the Bank of an
increase in interest rates before the permanent loan is funded and eligible for
sale to either FNMA or Freddie Mac. At September 30, 1997, the largest single
outstanding construction loan of this type had an outstanding balance of
$560,000 and was performing in accordance with its terms.

     Construction lending generally involves a greater degree of risk than other
one- to four-family mortgage lending. The repayment of the construction loan is,
to a great degree, dependent upon the successful and timely completion of the
construction of the subject property. Construction delays or the financial
impairment of the builder may further impair the borrower's ability to repay the
loan.

     In order to facilitate a competitive relationship with several of the
Bank's major residential builders, we will, on an exception basis, originate
land development loans to area home builders that are secured by individual
unimproved or improved residential building lots. Land loans are generally
offered with variable prime based rates with terms of up to two years. The
maximum loan-to-value ratio is 65% of the lower of cost or appraised value.

     Home Equity Lending. We offer both fixed-rate, fixed-term, home equity and
second mortgage loans, and prime rate, variable rate home equity lines of credit
(HELOCs) in its market area. Both fixed rate and floating rate home equity loans
are offered in amounts up to 80% of the appraised value of the property
(including the first mortgage) with a maximum loan amount of $100,000. Fixed-
rate home equity loans are offered with repayment terms of up to fifteen years
and HELOCs are offered for terms up to thirty years, with interest-only payments
during the first ten years and repayment of principal and interest during the
final twenty years. As of September 30, 1997, fixed-rate second mortgage and
home equity loans totaled $4.2 million or 0.7% of the Bank's total loan
portfolio. The disbursed portion of home equity lines of credit totaled $8.8
million or 1.4% of the Bank's loan portfolio, with $6.3 million remaining
undisbursed.

     As is the case with residential one- to four-family first mortgage lending,
the underwriting standards employed by the Bank for both fixed-rate second
mortgage loans and HELOCs are formatted to the standard secondary marketing
guidelines as established by FNMA and Freddie Mac.

     Commercial Real Estate and Multi-family Lending. We originate real estate
loans secured predominantly by first liens on apartment houses, office
complexes, and commercial and industrial real estate. Loans collateralized by
commercial real estate totaled $69.6 million, or 11.1% of our total loan
portfolio as of September 30, 1997. Loans collateralized by multi-family
residential real estate totaled $72.8 million, or 11.6%, of the total loan
portfolio as of September 30, 1997, and consisted of 207 loans outstanding with
an average loan balance of $351,898. Our largest multi-family real estate loan
relationship at September 30, 1997 had a principal balance of $2.2 million, and
was performing in accordance with its terms. The commercial real estate loans
are predominately secured by nonresidential properties such as office buildings,
shopping centers, retail strip centers, industrial and warehouse properties and
to a lesser extent by more specialized properties such as churches, mobile home
parks, restaurants, motel/hotels and auto dealerships. At September 30, 1997, we
had 196 non-multi-family commercial real estate loans outstanding with an
average loan balance of approximately $354,954. Our largest commercial real
estate loan at September 30, 1997 had a principal balance of $4.1 million and
was collateralized by an office building located in our primary lending area.
This loan is performing in accordance with its terms.

     At September 30, 1997, approximately 74% of our commercial real estate and
multi-family loans were secured by properties located in our primary market
area. Our current policy with regard to such loans is to emphasize geographic
distribution within our primary market area, diversification of property type
and minimization of credit risk.

                                       55
As part of our ongoing strategic initiatives to minimize interest rate
risk, commercial and multi-family real estate loans originated for the Bank's
portfolio are generally limited to one, three or five year ARM products which
are priced at prevailing market interest rates. The initial interest rates are
subsequently reset after completion of the initial one, three or five year
adjustment period at new market rates that generally range between 200 and 300
basis points over the then current one, three or five year United States
Treasury Constant Maturity Index. The maximum term for commercial real estate
loans is generally not more than 10 years, with a prepayment schedule based on
not more than a 25 year amortization schedule for multi-family loans, and 20
years for commercial real estate loans.

     In our underwriting of commercial real estate loans, we may lend up to 80%
of the property's appraised value on apartments, and up to 75% on other
commercial properties. Appraised values initially are estimated by staff
underwriters and confirmed by independent, professionally designated qualified
appraisers, to determine that the property to be mortgaged satisfies the Bank's
loan-to-value requirements. Decisions to lend are based on the economic
viability of the property and the creditworthiness of the borrower.
Creditworthiness is determined by considering the character, experience,
management and financial strength of the borrower, and the ability of the
property to generate adequate funds to cover both operating expenses and debt
service. In evaluating a commercial real estate loan, we place primary emphasis
on the ratio of net cash flow to debt service for the property, generally
requiring a ratio of at least 1.20%, computed after deduction for a vacancy
factor and property expenses deemed appropriate by the Bank. In addition, we
generally require a personal guarantee of the loan principal from the borrower.

     On all real estate loans, we require title insurance insuring the priority
of its lien, fire and extended coverage casualty insurance, and flood insurance,
if appropriate, in order to protect its security. In connection with
substantially all commercial real estate lending, in addition to staff review,
we employ independent engineering firms to review plans, specifications and draw
disbursements, employs consulting firms to review the economic feasibility of
the project, and employs environmental assessment firms to evaluate the
environmental risks that may be associated with either the building or the site.

     We also offer commercial real estate and multi-family construction mortgage
loans. Most construction loans are made as "construction/permanent" loans, which
provide for disbursement of loan funds during construction and automatic
conversion to permanent loans upon completion of construction and the attainment
of either tenant lease-up provisions or prescribed debt service coverage ratios.
The construction phase of the loan is made on a short-term basis, usually not
exceeding two years, with floating interest rate levels generally established at
a spread in excess of the prime rate. The construction loan application process
includes the same criteria which are required for permanent commercial mortgage
loans, as well as a submission to the Bank of completed plans, specifications
and cost estimates related to the proposed construction. These items are used as
an additional basis to determine the appraised value of the subject property.
Appraisal reports are completed by independent, professionally designated
appraisers. All appraisal reports are reviewed by our commercial loan
underwriting staff. Loans are based on the lesser of the current appraised value
of loan and improvements or the cost of construction. Generally, the loan-to-
value ratio for construction loans does not exceed 75%. At September 30, 1997,
$13.8 million was committed for commercial real estate and multi-family
construction loans, of which $3.4 million was outstanding.

     Among the reasons for our continued emphasis on commercial real estate and
multi-family lending is a desire to invest in assets bearing interest rates
which are generally higher than those obtainable on residential mortgage loans
and which are more rate sensitive to changes in market interest rates.
Commercial real estate and multi-family loans, however, entail significant
additional risk as compared with one- to four-family residential mortgage
lending, as they typically involve large loan balances concentrated with single
borrowers or groups of related borrowers. In addition, the payment experience on
loans secured by income producing properties is typically dependent on the
successful operation of the related real estate project and thus may be subject
to a greater extent to adverse conditions in the real estate market or in the
economy generally. Construction loans involve additional risks attributable to
the fact that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays

                                       56
arising from labor problems, material shortages, and other unpredictable
contingencies, it is relatively difficult to evaluate accurately the total loan
funds required to complete a project and the related loan-to-value ratios.

     Consumer and Other Loans. We originate a variety of consumer and other
loans, including home improvement loans, new and used automobile loans, mobile
home loans, student loans, boat and RV loans, personal unsecured loans,
including both fixed-rate installment loans and prime floating variable rate
lines-of-credit, and savings account "passbook" loans. As of September 30, 1997,
consumer loans totaled $65.4 million, or 10.5% of the total loan portfolio.

     At September 30, 1997, the largest group of consumer loans consisted of
$22.7 million of loans secured by mobile homes owned by individuals,
representing 34.7% of the consumer loan portfolio. We have been engaged in
mobile home lending for over eight years. While we generally lend throughout the
State of New York with respect to mobile homes, the majority of the portfolio,
$12.0 million, or 54%, is located within the Bank's primary market area. The
mobile home units (both new and used) are primarily located in well-managed
mobile home parks reviewed and inspected by our management team as part of its
ongoing underwriting process. Mobile home loans have shorter terms to maturity
than traditional 30-year residential loans and higher yields than single-family
residential mortgage loans. Although we generally offer mobile home loans with
fixed-rate, fully amortizing loan terms for 10-20 years, mobile home units
manufactured prior to 1991 are restricted to a maximum term of no more than
fifteen years. We anticipate that it will continue to be an active originator of
mobile home loans.

     We will generally finance up to 90% of the purchase price of a new mobile
home unit, not to exceed 140% of the dealer invoice. We also require a UCC-1
filing perfecting the Bank's lien for all mobile home loans, and requires
homeowner's insurance at least equal to the amount financed. We have contracted
with an independent third-party to generate all mobile home loan applications
but, prior to funding, all mobile home loan originations must be underwritten
and approved by designated Bank underwriters. As part of a negotiated servicing
contract, the third party originator will at the request of the Bank, contact
borrowers who become delinquent in their payments to the Bank and, when
necessary, will oversee the repossession and sale of mobile homes on our behalf.
For such services, and as part of the origination and servicing contract, we pay
the originator a fee at loan funding, of which generally one-half is deposited
into a non-interest bearing escrow loss account, and is under the sole control
of the Bank to absorb future losses which may be incurred on the loans.

     Mobile home lending generally entails greater risk than traditional single-
family residential mortgage lending, due to the type and nature of the
collateral, which may depreciate over time as compared to the typical
appreciation of houses securing single-family residential loans, and because
mobile home borrowers often have lower income levels than single-family
residential mortgage loan borrowers. In many cases, repossessed collateral for a
defaulted mobile home loan will not provide an adequate source of repayment of
the outstanding loan balance because of depreciation or improper repair and
maintenance of the underlying security. The Bank attempts to minimize such risk
through the loss escrow arrangement with the third-party originator.

     The next largest group of loans in the consumer loan portfolio are $14.8
million of personal loans, $9.3 million of which are secured and unsecured
installment loans, and $5.5 million of which are prime based variable rate 
lines-of-credit. Unsecured installment loans generally have shorter terms than
secured consumer loans and generally have higher interest rates than rates
charged on secured installment loans with comparable terms.

     The next largest group of consumer loans are home improvement loans, the
total of which amounted to $7.7 million at September 30, 1997. We offer fully
amortizing, fixed-rate property improvement loans for terms of up to 15 years
and with loan-to-value ratios of up to 80% (or 100% as to FHA loans) when taking
into account any outstanding first mortgage loan balance. For property
improvement loans in excess of $7,500, the Bank generally obtains a second lien
position as additional collateral security.

     The next largest group of consumer loans are loans secured by new or used
automobiles which, as of September 30, 1997, totaled $7.3 million. We originate
automobile loans directly to our customers and we have no outstanding

                                       57
agreement with automobile dealerships to generate indirect loans. The maximum
term for an automobile loan is generally 60 months for a new car, and 36-48
months for a used car. We will generally lend up to 90% of the purchase price of
a new car, and, with respect to used cars, up to 90% of the lesser of the
purchase price or the National Automobile Dealers' Association book rate. We
require all borrowers to maintain collision insurance on automobiles securing
loans in excess of $5,000, with the Bank listed as loss payee. In those
instances where the borrower fails to maintain adequate insurance coverage, the
Bank is further protected against loss by vendors single interest insurance
coverage.

     We have been, and continue to be, an active originator of student loans. As
of September 30, 1997, the Bank had $10.9 million of variable-rate student loans
in its portfolio. Substantially all of the loans are originated under the
auspices of the New York State Higher Education Services Corporation
("NYSHESC"). Under the terms of these loans, no repayment is due until the
student graduates, with 98% of the principal guaranteed by NYSHESC. Our general
practice is to sell these student loans to the Student Loan Marketing
Association ("Sallie Mae") as the loans reach repayment status. The Bank
generally receives a premium of .25% to 1% on the sale of these loans.

     Our procedures for underwriting consumer loans include an assessment of the
applicant's payment history on other debts and the ability to meet existing
obligations and payments on the proposed loans. Although the applicant's
creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral security, if any, to the
proposed loan amount.

     Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate, such as automobiles, boats, recreational
vehicles and mobile homes. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continued financial stability, and
this is more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various Federal and State
laws including Federal and State bankruptcies and insolvency laws may limit the
amount which can be recovered on such loans. We add a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.

     Commercial Business Loans. We currently offer commercial business loans to
existing customers in our market area, some of which are secured in part by
additional real estate collateral. In an effort to expand our customer account
relationships and develop a broader base of more interest rate sensitive assets,
we make various types of secured and unsecured commercial loans for the purpose
of financing equipment acquisition, expansion, working capital and other general
business purposes. The terms of these loans generally range from less than one
year to seven years. The loans are either negotiated on a fixed-rate basis or
carry variable interest rates indexed to the prime rate. At September 30, 1997,
we had 83 commercial business loans outstanding with an aggregate balance of
$4.3 million, or .68%, of the total loan portfolio. As of September 30, 1997,
the average commercial business loan balance was approximately $51,506. The
largest commercial business loan had a principal balance of $300,000 and is
performing in accordance with its terms.

     Commercial credit decisions are based upon a complete credit appraisal of
the loan applicant. A determination is made as to the applicant's ability to
repay in accordance with the proposed terms as well as an overall assessment of
the risks involved. An investigation is made of the applicant to determine
character and capacity to manage. Personal guarantees of the principals are
generally required. In addition to an evaluation of the loan applicant's
financial statements, a determination is made of the probable adequacy of the
primary and secondary sources of repayment to be relied upon in the transaction.
Credit agency reports of the applicant's credit history as well as bank checks
and trade investigations supplement the analysis of the applicant's
creditworthiness. Collateral supporting a secured transaction is also analyzed
to determine its marketability and liquidity. Commercial business loans
generally bear higher interest

                                       58
rates than residential loans, but they also may involve a higher risk of default
since their repayment is generally dependent on the successful operation of the
borrower's business.

     Loan Originations, Purchases, Sales and Servicing. While we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan
depends upon relative borrower demand and the pricing levels as set in the local
marketplace by competing banks, thrifts, credit unions, and mortgage banking
companies, as well as life insurance companies, and Wall Street conduits who
also actively compete for local product in the commercial real estate loan area.
Loan originations are derived from a number of sources, such as real estate
broker referrals, existing customers, borrowers, builders, attorneys, and walk-
in customers. In addition, the residential lending area currently employs seven
loan originators to augment our traditional sources of loan applications. All of
our loan originators are on a base salary plus commission. We also rely on a
small number of select area mortgage brokers, who are authorized to accept and
process residential mortgage loan applications on our behalf. All completed loan
applications are forwarded to our centralized residential loan origination area
for underwriting, approval, commitment, and closing.

     In the past, to augment our direct origination of loans in our primary
lending area, we have purchased one- to four-family residential whole loans and
commercial real estate whole loans and participations which are originated and
serviced by other financial institutions. As of September 30, 1997, the Bank's
combined commercial real estate, multi-family and residential portfolio of loans
serviced by other financial institutions consisted of 230 loans with an
aggregate outstanding balance of $7.6 million. Although we have not actively
purchased residential loans since 1986, we may from time to time purchase loans
from the secondary market to supplement our origination of local mortgage loans,
particularly in the residential loan area.

     We generally sell the conforming, residential conventional monthly fixed-
rate loans that it originates with maturities of 20 years or more, and
conventional bi-weekly fixed-rate loans with maturities of 25 years or more to
both FNMA and Freddie Mac as part of its ongoing asset/liability management
strategy. Non-conforming fixed-rate loans with principal balances in excess of
the maximum limits as established annually by FNMA and Freddie Mac, currently
$214,600 for single-family homes, are sold to private sector secondary market
purchasers. In addition to removing a level of interest rate risk from the
balance sheet, the operation of a secondary marketing function within the
lending area allows us the flexibility to continue to make loans available to
customers when savings flows decline or funds are not otherwise available for
lending purposes. However, we assume an increased level of risk if such loans
cannot be sold in a timely basis in a rapidly rising interest rate environment.
Changes in the level of interest rates and the condition of the local and
national economies also affect the amount of loans originated by the Bank and
impact the level of buying demand by investors to whom the loans are sold.

     Generally, our loan origination and sale activity, and therefore, our
results of operations, may be adversely affected by an increasing rate
environment to the extent that such environment results in a decreased level of
loan demand by borrowers. Accordingly, the volume of loan originations and the
profitability of this activity can vary from period to period. One- to four-
family residential mortgage loans are generally underwritten to current FNMA and
Freddie Mac seller/servicer guidelines. One- to four-family loans are also
closed on standard FNMA/Freddie Mac documents and sales are conducted utilizing
standard FNMA/Freddie Mac purchase contracts and master commitments as
applicable. Mortgage loans are sold both to FNMA and Freddie Mac on a non-
recourse basis whereby foreclosure losses are generally the responsibility of
either FNMA or Freddie Mac and not the Bank.

     We are qualified loan servicer for both FNMA and Freddie Mac. For all loans
sold, we will retain the servicing rights and will continue to collect payments
on the loans, maintain tax escrows and applicable fire and flood insurance
coverage, and to supervise foreclosure proceedings if necessary. We retain a
portion of the interest paid by the borrower on the loans, generally 1/4% - 3/8%
as consideration for its servicing activities.

     The following table sets forth the loan origination, purchase and repayment
activities of the Bank for the periods indicated.

                                       59
Nine Months
                                                               ENDED SEPTEMBER 30,               YEAR ENDED DECEMBER 31,
                                                              --------------------        ----------------------------------------
                                                               1997           1996          1996             1995          1994
                                                              ------         ------       ---------       ---------     ----------
                                                                                       (IN THOUSANDS)
Originations by Type:                                                                                                               
--------------------
    Real estate:                                                                                                                    
       One- to four-family...............................   $   77,381     $   82,951     $    110,894    $   107,618   $    84,096 
       Home equity.......................................        2,334          1,070            1,357            852           404 
       Commercial and multi-family.......................       18,012         17,570           27,168         24,880        27,462 
    Consumer and other...................................       20,323         23,784           31,688         25,053        26,507 
    Commercial business..................................        3,991          4,693            5,972          2,767         2,684 
                                                            ----------     ----------     ------------    -----------   ----------- 
          Total loans originated.........................      122,041        130,068          177,079        161,170       141,153 
                                                            ----------     ----------     ------------    -----------   ----------- 

Sales:                                                                                                                              
-----
    Real estate:                                                                                                                    
       One- to four- family..............................       23,191         19,290           26,148         30,141        19,527 
    Consumer and other...................................        4,126          3,871            4,749          4,948         3,679 
                                                            ----------     ----------     ------------    -----------   ----------- 
          Total loans sold...............................       27,317         23,161           30,897         35,089        23,206 
                                                            ----------     ----------     ------------    -----------   ----------- 

Repayments:                                                                                                                         
----------
    Real estate:                                                                                                                    
       One- to four-family...............................       29,755         32,920           42,323         32,959        36,911 
       Home equity.......................................          624            400              254          1,347           507 
       Commercial and multi-family.......................       12,225         14,619           17,066         11,716         8,558 
    Consumer and other...................................       25,247(1)      12,295           16,247         15,141        15,783 
    Commercial business..................................        4,058          3,526            5,169          2,630         2,057 
                                                            ----------     ----------     ------------    -----------   ----------- 
          Total repayments...............................       71,909         63,760           81,059         63,793        63,816 
                                                            ----------     ----------     ------------    -----------   ----------- 

          Total reductions...............................       99,226         86,921          111,956         98,882        87,022 

Increase (decrease) in other items, net (2)..............        1,000           (420)            (776)             7          (839)
                                                            ----------     ----------     ------------    -----------   ----------- 

          Net increase...................................   $   23,815     $   42,727     $     64,347    $    62,295   $    53,292 
                                                            ==========     ==========     ============    ===========   ===========
________________________________
(1) Includes the early  repayment of loans secured by pledges and assignments of
    automobile  leases.  
(2) Other items include charge-offs, deferred fees and expenses, and discounts
    and premiums.

                                       60
Loan Approval Authority and Underwriting. The Board establishes
lending authorities for individual officers and certain delegated underwriters
as to the various types of residential and consumer loan products. In the
commercial real estate and business lending area, the Board has authorized
specific lending officers to individually approve loans and/or concentrations of
credit not to exceed $250,000. Loans in excess of $250,000, up to $750,000, may
be approved by the President or Chief Lending Officer plus one additional
authorized lending officer. Loan approvals in excess of $750,000, and up to $2.0
million, require the approval of both the President and the Chief Lending
Officer, plus one additional authorized lending officer. All individual loans
and or aggregate concentrations of credit to one borrower which exceed $2.0
million must be approved by the Loan Committee of the Board. In addition, our
loan policy limits the amount of credit that can be extended to any one borrower
to 10% of total capital. See "Loans-to-One Borrower".

          The lending activities of the residential, consumer, commercial and
multi-family real estate, and commercial business lending areas of the Bank are
subject to written underwriting standards and loan origination procedures that
are updated and separately reviewed annually by both management and the Bank's
Board of Trustees. In particular, to assure the maximum salability of our
residential loan products for possible resale into the secondary mortgage
markets, we have formally adopted both the underwriting, appraisal, and
servicing guidelines of FNMA and Freddie Mac as part of our standard loan policy
and procedures manual.

          We require that a property appraisal be obtained in connection with
all mortgage loans. Property appraisals in both the residential and commercial
and multi-family real estate areas are performed by an independent appraiser
from a list approved by the Bank's Board of Trustees. The appraisals are then
reviewed for accuracy and completeness by the appropriate loan underwriting
areas of the Bank. In conformity with secondary market guidelines, the Bank
requires that title insurance (except for home equity lines of credit) and
hazard insurance be maintained on all security properties and that flood
insurance be maintained if the property is within a designated flood plain.

          We currently maintain escrows for the payment of real estate taxes on
approximately 70% of all mortgage loans currently held in portfolio. If an
escrow waiver is granted, the borrower must pay a one-time fee at loan closing
for the property to be enrolled in a tax service which reports the tax payment
status of these loans on an annual basis to the Bank for the life of the loan.

          Loan Origination Fees and Other Income. In addition to interest earned
on loans, we also receive loan origination fees. To the extent that loans are
originated or acquired for the Bank's portfolio, Statement of Financial
Accounting Standards (SFAS) No. 91 requires that we defer loan origination fees
and costs and amortize such amounts as an adjustment of yield over the life of
the loan by use of the level yield method. At September 30, 1997, we had $3.4
million of net deferred loan origination costs. Such fees and costs vary with
the volume and type of loans and commitments made and purchased, principal
repayments, and competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.

          In addition to loan origination fees, we also receive other fees,
service charges, and other income that consist primarily of deposit transaction
account service charges, late charges and credit card fees.

          Loans-to-One Borrower. Savings banks are subject to the same loans-to-
one borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired net worth on an unsecured basis, and an additional amount equal to
10% of unimpaired net worth if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
Our policy provides that loans to one borrower (or related borrowers) should not
exceed 10% of the Bank's capital.

          At September 30, 1997, the largest aggregate amount loaned by the Bank
to one borrower consisted of seven commercial mortgage loans in an amount of
$9.6 million and was secured by eight suburban office park properties.

                                       61
The second largest aggregate amount loaned by the Bank to one borrower
consisted of one commercial mortgage and one business loan, in the aggregate
amount of $5.1 million, secured by two suburban office park properties.

          The third largest aggregate amount loaned by the Bank to one borrower
consisted of four commercial mortgage loans in the amount of $4.9 million,
secured by two retail centers, one office building and one restaurant.

          The fourth largest aggregate amount loaned by the Bank to one borrower
consisted of one commercial mortgage loan in an amount of $4.1 million and was
secured by a medical office building.

          The fifth largest aggregate amount loaned by the Bank to one borrower
consisted of four commercial mortgage loans in the amount of $2.9 million and
was secured by four apartment projects.

          All of the loans discussed above are performing in accordance with
their terms.

DELINQUENCIES AND CLASSIFIED ASSETS

          Collection Procedures. A computer generated late notice is sent by the
17th day of the month requesting the payment due plus the late charge that was
assessed. After the late notices have been mailed, accounts are assigned to
collectors by the automated collection system for follow-up to determine reasons
for delinquency and explore payment options. Additional system-generated
collection letters are sent to customers on the 30th and 45th days for consumer
loans, and by the 45th day for mortgage loans. Notwithstanding ongoing
collection efforts, all consumer loans are fully charged-off after 210 days.

          These mortgage loan collection procedures pertain to loans held in the
Bank's portfolio. All of the residential mortgage loan servicing performed for
both government issued FHA and VA loans, together with residential loans sold in
the secondary market, are in full compliance with their own respective loan
servicing requirements.

          Loans Past Due and Non-performing Assets. Loans are reviewed on a
regular basis and are placed on nonaccrual status when, in the opinion of
management, the collection of additional interest is doubtful. Loans are placed
on nonaccrual status when either principal or interest is 90 days or more past
due. Interest accrued and unpaid at the time a loan is placed on a nonaccrual
status is reversed from interest income. At September 30, 1997, we had non-
performing loans of $1.9 million, and a ratio of non-performing loans to total
loans of 0.31%.

          Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as REO until such time as it is sold. When real estate
is acquired through foreclosure or by deed in lieu of foreclosure, it is
recorded at its fair value, less estimated costs of disposal. If the value of
the property is less than the loan, less any related specific loan loss
provisions, the difference is charged against the allowance for loan losses. Any
subsequent write-down of REO is charged against earnings. At September 30, 1997,
we had REO, net of allowances, of approximately $268,000. At September 30, 1997,
we had total non-performing assets of $2.2 million and a ratio of non-performing
assets to total assets of 0.19%.

                                       62
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated. When a loan is delinquent 90 days or more,
the Bank fully reverses all accrued interest thereon and ceases to accrue
interest thereafter. For all the dates indicated, the Bank did not have any
material restructured loans within the meaning of SFAS 114.
At September 30, 1997                        At December 31, 1996
                                        -------------------------------------------- -------------------------------------------
                                              60-89 Days          90 Days or More          60-89 Days         90 Days or More
                                        ---------------------- --------------------- --------------------- ---------------------
                                                     Principal             Principal             Principal             Principal
                                          Number      Balance    Number     Balance    Number     Balance    Number     Balance 
                                         of Loans    of Loans   of Loans   of Loans   of Loans   of Loans   of Loans   of Loans 
                                        ---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
                                                                          (Dollars in thousands)
One- to four-family....................     12     $    493         16    $    659        9     $    373       17     $   473   
Home equity............................      1           15          1          57        1           13        1          58   
Commercial real estate and multi-family      3          567          4         692       --           --        8       1,822   
Consumer and other.....................     56          221         55         123       73          296       89         257   
Commercial business....................      5           84         10         394       --           --       13       2,108   
                                        ------     --------    -------    --------   ------     --------   ------     -------   
   Total   ............................     77     $  1,380         86    $  1,925       83     $    682      128     $ 4,718   
                                        ======     ========    =======    ========   ======     ========   ======     =======   
                                                                                                                                
Delinquent loans to total loans (1) (2)                0.22%                  0.31%                 0.11%                0.78%  
                                                   ========               ========              ========              =======
At December 31, 1995                        At December 31, 1994   
                                        ------------------------------------------- ------------------------------------------
                                             60-89 Days          90 Days or More          60-89 Days       90 Days or More   
                                        -------------------- ---------------------- -------------------- ---------------------
                                                   Principal              Principal            Principal             Principal  
                                          Number    Balance    Number      Balance    Number    Balance    Number     Balance   
                                         of Loans  of Loans   of Loans    of Loans   of Loans  of Loans   of Loans   of Loans   
                                        ---------- --------- ----------- ---------- ---------- --------- ---------- ---------- 
                                                                         (Dollars in thousands)
One- to four-family....................      6    $   147         25     $  1,100       16     $    344       17     $   715    
Home equity............................      2         21          1           34        4           86        1          12    
Commercial real estate and multi-family     --         --         10        2,436        2          613        9       3,133    
Consumer and other.....................     70        212         60          166       29          108       39         117    
Commercial business....................     --         --          1          219       --           --        1         245    
                                        ------    -------    -------     --------   ------     --------   ------     -------    
   Total   ............................     78    $   380         97     $  3,955       51     $  1,151       67     $ 4,222    
                                        ======    =======    =======     ========   ======     ========   ======     ======= 
                                                                                                                                
Delinquent loans to total loans (1) (2)              0.07%                   0.74%                0.24%                0.89%    
                                                  =======                ========             ========              =======
___________________________________

(1)    Total loans include principal balance net of the deferred loan fees and
       expenses and unamortized premiums and discounts.
(2)    Excludes loans that had matured and as to which the Bank had not formally
       extended the maturity date. Regular principal and interest payments
       continued in accordance with the original terms of the loan. The Bank
       continued to accrue interest on these loans as long as regular payments
       received were less than 90 days delinquent. These loans totaled $312,000,
       $3.9 million, $3.1 million and $2.7 million at September 30, 1997 and
       December 31, 1996, 1995 and 1994, respectively.

                                       63
Non-Accrual Loans and Non-Performing Assets. The following table sets
forth information regarding nonaccrual loans and other non-performing assets.
At Sept. 30,                       At December 31,
                                                                      ----------------------------------------------------------
                                                            1997         1996         1995         1994         1993        1992
                                                         ----------   ----------   ----------   ----------  -----------  -------
                                                                                          (Dollars in thousands)
Non-accruing loans (1):
   One- to four-family..............................     $     659    $     473    $   1,100    $     715   $     689    $     342
   Home equity......................................            57           58           34           12           9           --
   Commercial real estate and multi-family..........           692        1,822        2,436        3,133       3,611        2,094
   Consumer and other...............................           123          257          166          117         140          129
   Commercial business..............................           394        2,108          219          245          99           66
                                                         ---------    ---------    ---------    ---------   ---------    ---------
      Total.........................................         1,925        4,718        3,955        4,222       4,548        2,631
                                                         ---------    ---------    ---------    ---------   ---------    ---------

Non-performing assets:
 Other real estate owned (2):
   One- to four-family..............................            22          155           --           --          15           51
   Commercial real estate and multi-family..........           246          162          257          259         922        2,281
 Other non-performing assets:
   Investments in affiliates........................            --          157          264          629         789          920
   Nationar receivable (3)..........................            --           --        5,053           --          --           --
                                                         ---------    ---------    ---------    ---------   ---------    ---------
      Total.........................................           268          474        5,574          888       1,726        3,252
                                                         ---------    ---------    ---------    ---------   ---------    ---------

Total non-performing assets.........................     $   2,193    $   5,192    $   9,529    $   5,110   $   6,274    $   5,883
                                                         =========    =========    =========    =========   =========    =========

Total non-performing assets as a percentage of total
 assets ............................................          0.19%        0.48%        0.97%        0.56%       0.69%        0.70%
                                                         =========    =========    =========    =========   =========    =========

Total non-performing loans to total loans (4).......          0.31%        0.78%        0.74%        0.89%       1.10%        0.75%
                                                         =========    =========    =========    =========   =========    =========
_______________________

(1)   Loans are placed on non-accrual status when they become 90 days or more
      past due or if they have been identified by the Bank as presenting
      uncertainty with respect to the collectibility of interest or principal.
(2)   Other real estate owned balances are shown net of related allowances. 
(3)   On February 6, 1995, the Superintendent seized Nationar, a check-clearing
      and trust company, freezing all of Nationar's assets. As of December 31,
      1995, the Bank had $5.7 million in demand deposits held in receivership by
      the New York State Banking Department. As of December 31, 1996, the Bank
      had received all funds due from Nationar.
(4)   Excludes loans that had matured and the Bank had not formally extended the
      maturity date. Regular principal and interest payments continued in
      accordance with the original terms of the loan. The Bank continued to
      accrue interest on these loans as long as regular payments received were
      less than 90 days delinquent. These loans totaled $312,000, $3.9 million,
      $3.1 million, $2.7 million, $1.5 million and $245,000 at September 30,
      1997 and December 31, 1996, 1995, 1994, 1993 and 1992, respectively.

          For the nine months ended September 30, 1997 and for the year ended
December 31, 1996, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms amounted
to $133,000 and $325,000, respectively. No interest income on nonaccrual loans
was included in income during such periods except for $22,000 and $39,000 of
cash interest payments received for the Bank's largest non-performing loan for
the nine months ended September 30, 1997 and the year ended December 31, 1996,
respectively.

          Classification of Assets. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets such as
investment securities, considered to be of lesser quality as "substandard,"
"doubtful," or "loss" assets. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the savings institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified "substandard"
with the added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts, conditions, and
values, "highly questionable and improbable." Assets classified as "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve

                                       64
is not warranted. Assets that do not expose the savings institution to risk
sufficient to warrant classification in one of the aforementioned categories,
but which possess some weaknesses, are required to be designated "special
mention" by management.

          When we classify problem assets as either substandard or doubtful, we
establish general valuation allowances or "loss reserves" in an amount deemed
prudent by management. General allowances represent loss allowances that have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When the Bank classifies problem assets as "loss," it
is required either to establish a specific allowance for losses equal to 100% of
the amount of the assets so classified, or to charge-off such amount. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowance is subject to review by its regulatory agencies, which can
order the establishment of additional general or specific loss allowances. We
regularly review our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations.

          On the basis of management's review of its assets, at September 30,
1997, we had classified a total of $6.7 million of loans as follows (in
thousands):
Special Mention...............................      $       3,891
           Substandard...................................              2,765
           Doubtful......................................                  -
           Loss..........................................                  -
                                                               -------------
                Total classified.........................      $       6,656
                                                               =============
                                                                            
           Allowance for loan losses.....................      $       6,353
                                                               =============
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risk inherent in the loan portfolio and current economic conditions. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan loss allowance. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and valuation of REO.
Such agencies may require us to recognize additions to the allowance based on
their judgment about information available to them at the time of their
examination. The Bank's provisions for loan losses are described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." At September 30, 1997, the total allowance was $6.4 million, which
amounted to 1.02% of total loans and 330.0% of non-performing loans which have
decreased to $1.9 million at this date. The allowance is established based upon
our evaluation of the risks inherent in the loan portfolio, the general economy
and the general trend within the savings industry to increase allowances for
losses as a percentage of total loans. We will continue to monitor and modify
the level of the allowance for loan losses in order to maintain it at a level
which management considers adequate to provide for potential loan losses. For
the nine months ended September 30, 1997 and the years ended December 31, 1996
and 1995, the Bank had charge-offs of $1.3 million, $436,000 and $556,000,
respectively, against this allowance.

                                       65
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
NINE MONTHS ENDED
                                                  SEPTEMBER 30,                           YEAR ENDED DECEMBER 31,
                                            -----------------------   -----------------------------------------------------------
                                               1997         1996         1996         1995         1994         1993         1992
                                            ----------   ----------   ----------   ----------   ----------  -----------  --------
                                                                             (DOLLARS IN THOUSANDS)
Balance at the beginning of period........  $  6,539     $  4,707     $  4,707     $ 4,192      $ 4,030     $  2,689     $  1,888

Charge-offs:
   One- to four-family....................        43           28           28          17           --           --           --
   Multi-family...........................       265           39          122         215          223           --           --
   Commercial real estate.................       107           35           35         108          460           --           --
   Construction or development............        --           --           --          --           --           --          526
   Consumer and other.....................       303          185          251         216          142          160          123
   Commercial business (1)................       553           --           --          --           --           66           --
                                            --------     --------     --------     -------      -------     --------     --------
                                               1,271           287         436         556          825          226          649
                                            --------     ---------    --------     -------      -------     --------     --------

Recoveries:
   One- to four-family....................        --            --          --          --           --           --           --
   Multi-family...........................        33            --          --          --           --           --           --
   Commercial real estate.................        --            --          25          --           --           --           --
   Construction or development............        --            --          --          --           --           --           --
   Consumer and other.....................        68            37          56          55           30           42           52
   Commercial business....................         9            --          --          --            9            3           --
                                            --------     ---------    --------     -------      -------     --------     --------
                                                 110            37          81          55           39           45           52
                                            --------     ---------    --------     -------      -------     --------     --------

Net charge-offs...........................     1,161           250         355         501          786          181          597
Provision for loan losses.................       975         1,861       2,187       1,016          948        1,522        1,398
                                            --------     ---------    --------     -------      -------     --------     --------
Balance at end of period..................  $  6,353     $   6,318    $  6,539     $ 4,707      $ 4,192     $  4,030     $  2,689
                                            ========     =========    ========     =======      =======     ========     ========

Ratio of net charge-offs during the period
   to average loans outstanding during
    the period............................      0.19%         0.04%       0.06%       0.10%        0.17%        0.05%        0.18%
                                            ========     =========    ========     =======      =======     ========     ========

Allowance for loan losses to total loans..      1.02%         1.08%       1.09%       0.88%        0.88%        0.96%        0.75%
                                            ========     =========    ========     =======      =======     ========     ========

Allowance for loan losses to
  non-performing loans....................    330.03%       118.58%     138.60%     119.01%       99.29%       88.61%      102.20%
                                            ========     =========    ========     =======      =======     ========     ========
_____________________

(1)   Included in commercial business loan charge-offs for 1997 is $486,000
      related to a settlement that the Bank had reached with the bankruptcy
      trustee relating to loans to a borrower that had filed for bankruptcy
      protection.

                                       66
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the allowance for loan losses by loan category for the periods
indicated.
AT DECEMBER 31,
                                                                                    ----------------------------------------------
                                                          AT SEPTEMBER 30, 1997               1996                  1995 
                                                          -----------------------   ----------------------------------------------
                                                                          PERCENT                   PERCENT                  PERCENT
                                                                         OF LOANS                  OF LOANS                 OF LOANS
                                                            AMOUNT        IN EACH      AMOUNT       IN EACH     AMOUNT      IN EACH
                                                         OF ALLOWANCE   CATEGORY    OF ALLOWANCE  CATEGORY   OF ALLOWANCE   CATEGORY
                                                             FOR         TO TOTAL       FOR        TO TOTAL       FOR       TO TOTAL
                                                         LOAN LOSSES      LOANS     LOAN LOSSES      LOANS    LOAN LOSSES    LOANS
                                                         ------------   ---------   ------------  ---------   -----------  ---------
                                                                                    (DOLLARS IN THOUSANDS)
One- to four-family.................................      $    436         62.43%     $   412       60.77%    $    367      60.14%
Home equity.........................................            31          2.09           27        1.88           24       1.90
Commercial real estate and multi-family.............           356         24.35          374       24.38          630      25.44
Consumer and other..................................           342         10.45          385       12.16          302      11.76
Commercial business.................................           421          0.68        1,432        0.81          164       0.76
Unallocated (1).....................................         4,767            --        3,909          --        3,220         --
                                                          --------      --------      -------     -------     --------   --------
            Total...................................      $  6,353        100.00%     $ 6,539      100.00%    $  4,707     100.00%
                                                          ========      ========      =======     =======     ========   ========

                                                                                       AT DECEMBER 31,
                                                         -------------------------------------------------------------------------
                                                                   1994                     1993                      1992
                                                         -----------------------   -----------------------  ----------------------
                                                                          PERCENT                  PERCENT                  PERCENT
                                                                         OF LOANS                 OF LOANS                 OF LOANS
                                                            AMOUNT        IN EACH     AMOUNT       IN EACH     AMOUNT       IN EACH
                                                         OF ALLOWANCE   CATEGORY   OF ALLOWANCE  CATEGORY   OF ALLOWANCE   CATEGORY
                                                             FOR         TO TOTAL      FOR        TO TOTAL       FOR       TO TOTAL
                                                         LOAN LOSSES      LOANS    LOAN LOSSES     LOANS     LOAN LOSSES    LOANS
                                                        ------------    --------   ------------  --------    -----------   -------
                                                                                    (DOLLARS IN THOUSANDS)

One- to four-family.................................      $    350         58.59%     $   290       59.43%    $    235     56.67%
Home equity.........................................            26          2.25           26        2.56           29      3.30
Commercial real estate and multi-family.............           736         26.04        1,367       25.02          993     26.35
Consumer and other..................................           298         12.29          286       12.21          233     12.73
Commercial business.................................           164          0.83          119        0.78           68      0.95
Unallocated (1).....................................         2,618             -        1,942           -        1,131         -
                                                          --------      --------      -------     -------     --------   -------
            Total...................................      $  4,192        100.00%     $ 4,030      100.00%    $  2,689    100.00%
                                                          ========      ========      =======     =======     ========   =======
---------------------

(1)   The unallocated amount represents the amount of the allowance for loan
      losses that is in excess of the minimum amount required as calculated by
      the Bank. As our non-performing and classified loans decrease as a
      percentage of total loans, this unallocated amount becomes a larger
      percentage of the loan loss allowance.

                                       67
Securities Investment Activities

     Our securities investment policy is established by the Board of Trustees.
This policy dictates that investment decisions will be made based on the safety
of the investment, liquidity requirements, potential returns, cash flow targets,
and desired risk parameters. In pursuing these objectives, we consider the
ability of an investment to provide earnings consistent with factors of quality,
maturity, marketability and risk diversification. The Finance Committee of the
Board supervises the Bank's securities investment program. This supervision
entails the evaluation of all investment activities for safety and soundness and
the ongoing evaluation of investment policy and objectives. The Treasurer is
responsible for making securities investment portfolio decisions in accordance
with established policies. While the Treasurer has the authority to conduct
trades within specific guidelines established by the investment policy, all
transactions are reviewed and approved by the Finance Committee of the Board on
a monthly basis.

     Our current policies generally limit securities investments to U.S.
Government and agency securities, municipal bonds, corporate debt obligations
and corporate equity securities. In addition, our policy permits investments in
mortgage related securities, including securities issued and guaranteed by FNMA,
Freddie Mac, GNMA and privately-issued collateralized mortgage obligations
(CMOs). Also permitted are investments in asset-backed securities ("ABS"),
backed by auto loans, credit card receivables, home equity and home improvement
loans. Our current securities investment strategy utilizes a risk management
approach of diversified investing between three categories: short-, 
intermediate-and long-term. The emphasis of this approach is to increase overall
investment securities yields while managing interest rate risk. To accomplish
these objectives, we focus on investments in mortgage related securities, CMOs
and ABSs. In addition, U.S. Government and other non-amortizing securities are
utilized for call protection and liquidity.

     At September 30, 1997, we had $502.5 million in investment securities,
consisting primarily of U.S. Government obligations, mortgage related
securities, municipal, public utility and corporate obligations, preferred and
common stocks, and asset-backed securities. SFAS No. 115 requires the Bank to
designate its securities as held to maturity, available for sale or trading,
depending on the Bank's ability and intent regarding its investments. We do not
have a trading portfolio. As of September 30, 1997, $465.0 million of the
securities portfolio, or 39.5% of total assets, was classified as available for
sale, with a weighted average life of 4.27 years. At such date, $37.5 million of
the securities portfolio, or 3.2% of total assets, was classified as held to
maturity, with a fair value of $37.5 million and a weighted average life of .07
years. Since December 1995, the Bank has only designated money market preferred
stock as held to maturity due to its 49 and 90 day maturities. All other
securities have been classified as available for sale.

     Amortized Cost and Fair Value of Investment and Mortgage Related
Securities. The following table sets forth certain information regarding the
amortized cost and fair values of the Bank's debt, equity, asset-backed and
mortgage related securities as of the dates indicated.

                                       68
AT DECEMBER 31,
                                                       AT SEPTEMBER 30,       -----------------------------------------------   
                                                             1997                      1996                      1995           
                                                     ----------------------   -----------------------  ----------------------  
                                                     AMORTIZED     FAIR       AMORTIZED      FAIR      AMORTIZED      FAIR        
                                                       COST        VALUE        COST         VALUE       COST         VALUE    
                                                     ---------     -----      ---------      -----     ---------      -----  
                                                                               (DOLLARS IN THOUSANDS)
Investment Securities:                                                                                                          
Securities held to maturity:                                                                                                    
   Money market preferred stock.................    $  37,500    $  37,500    $  38,000   $  38,000    $  46,700    $  46,700   
   States and political subdivisions............           --           --           --          --           --           --   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
      Total securities held to maturity.........       37,500       37,500       38,000      38,000       46,700       46,700   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
                                                                                                                                
Debt securities available for sale:                                                                                             
   U.S. Treasury................................       84,856       85,531       84,716      85,220       54,839       55,745   
   U.S. government agencies.....................        5,008        5,002        5,012       5,004           --           --   
   States and political subdivisions............        1,761        1,870        1,942       2,041        9,118        9,317   
   Corporate bonds..............................        6,927        7,034          999       1,000        6,035        6,035   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
      Total debt securities available for sale..       98,552       99,437       92,669      93,265       69,992       71,097   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
                                                                                                                                
Equity securities available for sale:                                                                                           
   Common stock.................................        5,391        6,139        3,115       3,612        3,382        3,566   
   FHLB stock...................................        6,392        6,392        5,394       5,394        4,926        4,926   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
      Total equity securities available for sale       11,783       12,531        8,509       9,006        8,308        8,492   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
                                                                                                                                
Asset-backed securities available for sale......       67,270       67,243       28,090      27,998        5,350        5,278   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
                                                                                                                                
      Total investment securities...............    $ 215,105    $ 216,711    $ 167,268   $ 168,269    $ 130,350    $ 131,567   
                                                    =========    =========    =========   =========    =========    =========   
                                                                                                                                
Average remaining life of investment                                                                                            
  securities (2)................................    1.51 years                1.97 years               1.38 years               
                                                    ==========                ==========               ==========               
                                                                                                                                
Mortgage related securities:                                                                                                    
   Available for sale:                                                                                                          
      Freddie Mac...............................    $ 118,469    $ 118,639    $ 109,903   $ 108,832    $  43,000    $  43,392   
      GNMA......................................       33,461       34,542       44,966      45,780       51,104       52,984   
      FNMA......................................       25,330       25,393       28,487      28,256       33,170       33,575   
      CMOs......................................      107,744      107,188      104,244     101,992      132,550      131,592   
                                                    ---------    ---------    ---------   ---------    ---------    ---------   
         Total mortgage related  securities                                                                                     
          available for sale:..................     $ 285,004    $ 285,762    $ 287,600   $ 284,860    $ 259,824    $ 261,543  
                                                    =========    =========    =========   =========    =========    =========   
                                                                                                                                
Average remaining life of                                                                                                       
 mortgage related securities....................    5.69 years                7.56 years               6.21 years               
                                                    ==========                ==========               ==========               
                                                                                                                                
Net unrealized gains (losses) on                                                                                                
   securities available for sale................    $   2,364    $      --    $  (1,739)  $      --    $   2,936    $      --   
                                                                                                                                
Total securities................................    $ 502,473    $ 502,473    $ 453,129   $ 453,129    $ 393,110    $ 393,110   
                                                    =========    =========    =========   =========    =========    =========   
                                                                                                                                
Average remaining life of securities (2)........    3.94 years                5.60 years               4.64 years               
                                                    ==========                ==========               ==========
At December 31,
                                                       ---------------------
                                                                 1994
                                                       ---------------------
                                                       Amortized       Fair
                                                          Cost        Value
                                                       ----------     ------
Investment Securities:                              
Securities held to maturity:                        
   Money market preferred stock.................       $  28,836    $  28,836
   States and political subdivisions............          15,002       15,484
                                                       ---------    ---------
      Total securities held to maturity.........          43,838       44,320
                                                       ---------    ---------
                                                    
Debt securities available for sale:                 
   U.S. Treasury................................          49,878       47,877
   U.S. government agencies.....................              --           --
   States and political subdivisions............              --           --
   Corporate bonds..............................           5,173        5,002
                                                       ---------    ---------
      Total debt securities available for sale..          55,051       52,879
                                                       ---------    ---------
                                                    
Equity securities available for sale:               
   Common stock.................................           8,486        8,315
   FHLB stock...................................              --           --
                                                       ---------    ---------
      Total equity securities available for 
      sale......................................           8,486        8,315
                                                       ---------    ---------         
Asset-backed securities available for sale......           4,888        4,539
                                                       ---------    ---------
                                                    
      Total investment securities...............       $ 112,263    $ 110,053
                                                       =========    =========
                                                    
Average remaining life of investment                
  securities (2)................................       3.96 years
                                                       ==========
                                                    
Mortgage related securities:                        
   Available for sale:                              
      Freddie Mac...............................       $  35,157    $  33,000
      GNMA......................................          61,199       58,462
      FNMA......................................          46,730       43,898
      CMOs......................................         151,000      137,920
                                                       ---------    ---------
         Total mortgage related  securities         
           available for sale:..................       $ 294,086    $ 273,280
                                                       =========    =========
                                                    
Average remaining life of                           
 mortgage related securities....................       4.73 years
                                                       ==========
                                                    
Net unrealized gains (losses) on                    
   securities available for sale................       $ (23,498)   $      --
                                                    
Total securities................................       $ 382,851    $ 383,333
                                                       =========    =========
                                                    
Average remaining life of securities (2)........       4.52 years
                                                       ==========
_______________________

(1)   The Bank adopted the provisions set forth in SFAS No. 115 on January 1,
      1994, which requires entities to carry securities available for sale at
      their fair value.
(2)   Average remaining life does not include common stock and FHLB stock.

                                       69
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
securities portfolio as of September 30, 1997. Adjustable-rate mortgage related
securities are included in the period in which interest rates are next scheduled
to adjust. No tax equivalent adjustments were made to the weighted average
yields. Amounts are shown at amortized cost for held to maturity securities and
at fair value for available for sale securities.
AT SEPTEMBER 30, 1997 
                                                     ------------------------------------------------------------------------------ 
                                                                                      MORE THAN ONE           MORE THAN FIVE
                                                          ONE YEAR OR LESS         YEAR TO FIVE YEARS       YEARS TO TEN YEARS   
                                                     ------------------------------------------------------------------------------
                                                                    WEIGHTED                  WEIGHTED                   WEIGHTED  
                                                       CARRYING      AVERAGE     CARRYING      AVERAGE     CARRYING       AVERAGE 
                                                         VALUE        YIELD       VALUE         YIELD       VALUE          YIELD   
                                                     -----------    ---------    --------    ---------     --------    ------------ 
                                                                                 (DOLLARS IN THOUSANDS)
Available for sale:                                                                                                              
   Mortgage related securities:                                                                                                  
      Freddie Mac...................................  $      --           --%   $  18,394         6.20%   $  45,447         6.83%
      GNMA..........................................         --           --           54         6.78          386         7.92 
      FNMA..........................................         --           --        3,475         6.88       16,761         6.80 
      CMOs..........................................         --           --        3,282         5.66        1,540         4.98 
                                                      ---------                 ---------                 ---------              
        Total mortgage related securities...........         --           --       25,205         6.23       64,134         6.78 
                                                      ---------                 ---------                 ---------              
                                                                                                                                 
   Debt securities:                                                                                                              
      U.S. treasury.................................      9,983         5.52       75,548         6.31           --           -- 
      U.S. government agencies......................         --           --        5,002         6.63           --           -- 
      States and political subdivisions.............        941         4.07          331         4.94           --           -- 
      Corporate bonds...............................         --           --        7,034         6.84           --           -- 
                                                      ---------                 ---------                 ---------              
        Total debt securities.......................     10,924         5.40       87,915         6.37           --           -- 
                                                      ---------                 ---------                 ---------              
                                                                                                                                 
   Equity securities:                                                                                                            
      Common stock..................................         --           --           --           --           --           -- 
      FHLB stock....................................         --           --           --           --           --           -- 
                                                      ---------                 ---------                 ---------              
        Total equity securities.....................         --           --           --           --           --           -- 
                                                      ---------                 ---------                 ---------              
                                                                                                                                 
   Asset-backed securities..........................         --           --        8,833         6.41       18,162         5.87 
                                                                                                                                 
        Total securities available for sale.........     10,924         5.40      121,953         6.34       82,296         6.58 
                                                      ---------                 ---------                 ---------              
                                                                                                                                 
   Held to maturity:                                                                                                             
      Money market preferred stock..................     37,500         4.10           --           --           --           -- 
                                                      ---------                 ---------                 ---------               
                                                                                                                                  
   Total securities.................................  $  48,424                 $ 121,953                 $  82,296               
                                                      =========                 =========                 =========
AT SEPTEMBER 30, 1997 
                                                            ------------------------------------------------------      
                                                                  AFTER TEN YEARS                TOTAL                  
                                                            ------------------------------------------------------ 
                                                                            WEIGHTED                    WEIGHTED              
                                                              CARRYING       AVERAGE    CARRYING         AVERAGE           
                                                                VALUE         YIELD       VALUE           YIELD              
                                                            -----------     --------    --------        ----------               
                                                                           (DOLLARS IN THOUSANDS)
Available for sale:                                                                                                  
   Mortgage related securities:                                                                                
      Freddie Mac...................................          $  54,798        7.07%   $ 118,639          6.84%                 
      GNMA..........................................             34,102        8.09       34,542          8.09                  
      FNMA..........................................              5,157        6.31       25,393          6.71                  
      CMOs..........................................            102,366        6.40      107,188          6.36                  
                                                              ---------                ---------                                
        Total mortgage related securities...........            196,423        6.88      285,762          6.80                  
                                                              ---------                ---------                                
                                                                                                                                
   Debt securities:                                                                                                             
      U.S. treasury.................................                 --          --       85,531          6.22                  
      U.S. government agencies......................                 --          --        5,002          6.63                  
      States and political subdivisions.............                598        8.30        1,870          5.58                  
      Corporate bonds...............................                 --          --        7,034          6.84                  
                                                              ---------                ---------                                
        Total debt securities.......................                598        8.30       99,437          6.27                  
                                                              ---------                ---------                                
                                                                                                                                
   Equity securities:                                                                                                           
      Common stock..................................                 --          --        6,139          2.14                  
      FHLB stock....................................                 --          --        6,392          6.75                  
                                                              ---------                ---------                                
        Total equity securities.....................                 --          --       12,531          4.49                  
                                                              ---------                ---------                                
                                                                                                                                
   Asset-backed securities..........................             40,248        6.36       67,243          6.23                  
                                                                                                                                
        Total securities available for sale.........            237,269        6.79      464,973          6.54                  
                                                              ---------                ---------                                
                                                                                                                                
   Held to maturity:                                                                                                            
      Money market preferred stock..................                 --          --       37,500          4.10                      
                                                              ---------                ---------                  
                                                                                                                  
   Total securities.................................          $ 237,269                $ 502,473                  
                                                              =========                =========
70
Mortgage Related Securities. We purchase mortgage related securities in
order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower our credit risk as a result of the guarantees
provided by Freddie Mac, FNMA, and GNMA; (iii) utilize these securities as
collateral for borrowing; and (iv) increase liquidity. We also invest primarily
in mortgage related securities issued or sponsored by FNMA, Freddie Mac, and
GNMA. We also invest in CMOs issued or sponsored by FNMA and Freddie Mac as well
as private issuers. At September 30, 1997, mortgage related securities totaled
$285.8 million or 24.3% of total assets, all of which were classified as
available for sale. At September 30, 1997, all of the mortgage related
securities were fixed rate. The mortgage related securities portfolio had coupon
rates ranging from 5.0% to 10.0%, a weighted average yield of 6.80% and a
weighted average life of 5.69 years at September 30, 1997. The estimated fair
value of the Bank's mortgage related securities at September 30, 1997 was $285.8
million which was $758,000 greater than the amortized cost of $285.0 million.

     Mortgage related securities are created by the pooling of mortgages and the
issuance of a security with an interest rate that is less than the interest rate
on the underlying mortgages. Mortgage related securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage related securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including FNMA,
Freddie Mac and GNMA) pool and resell the participation interests in the form of
securities to investors, such as the Bank, and guarantee the payment of
principal and interest to these investors. Mortgage related securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage related
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage related securities involve a risk that actual
prepayments will be greater than estimated over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. We review prepayment estimates for our mortgage
related securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the securities at issue and
current interest rates and to determine the yield and estimated maturity of our
mortgage related security portfolio. Of the Bank's $285.7 million mortgage
related securities portfolio at September 30, 1997, $25.2 million with a
weighted average yield of 6.23% had contractual maturities within five years,
$64.1 million with a weighted average yield of 6.78% had contractual maturities
of five to ten years, and $196.4 million with a weighted average yield of 6.88%
had contractual maturities of over ten years. However, the actual maturity of a
mortgage related security may be less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the
rate of prepayments. During periods of declining mortgage interest rates,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, we may be subject
to reinvestment risk because, to the extent that the Bank's mortgage related
securities prepay faster than anticipated, we may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate of return.
Conversely, in a rising interest rate environment prepayments may decline,
thereby extending the estimated life of the security and depriving the Bank of
the ability to reinvest cash flows at the increased rates of interest.

     CMOs are a type of debt security issued by a special-purpose entity that
aggregates pools of mortgages and mortgage related securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class possessing different
risk characteristics. The cash flows from the underlying collateral are
generally divided into "tranches" or classes whereby tranches have descending
priorities with respect to the distribution of principal and interest repayment
of the underlying mortgages and mortgage related securities, as opposed to pass
through mortgage-backed securities where cash flows are distributed pro rata to
all security holders. In contrast to mortgage-backed securities from which cash
flow is received (and hence, prepayment risk is shared) pro rata by all
securities holders, the cash flow from the mortgages or mortgage related
securities underlying

                                       71
CMOs is paid in accordance with predetermined priority to investors holding
various tranches of such securities or obligations. A particular tranche of CMOs
may therefore carry prepayment risk that differs from that of both the
underlying collateral and other tranches. Accordingly, CMOs attempt to moderate
risks associated with conventional mortgage related securities resulting from
unexpected prepayment activity. Investments in CMOs involve a risk that actual
prepayments will differ from those estimated in pricing the security, which may
result in adjustments to the net yield on such securities. Additionally, the
market value of such securities may be adversely affected by changes in the
market interest rates. Management believes these securities may represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.

     At September 30, 1997, our CMO portfolio totaled $107.2 million, or 9.1%,
of total assets and 9.5% of total interest-earning assets, and consisted of
$10.4 million of CMOs issued by private issuers and $96.8 million issued by
government sponsored agencies such as FNMA and Freddie Mac. The entire CMO
portfolio is classified as available for sale and had an estimated weighted
average life of 3.31 years and a weighted average yield of 6.36% at September
30, 1997. It is our practice to limit purchases of privately issued CMOs to non-
high risk securities rated "AAA" by a nationally recognized credit rating
agency, investing primarily in the early to intermediate tranches which have the
greatest credit support. Our current policy with respect to CMOs limits
investments to non-high risk securities unless approval is given by the Board of
Trustees and an analysis is provided on how a high risk CMO will improve the
overall interest rate risk of the Bank. High risk CMOs are defined as those
securities exhibiting significantly greater volatility of estimated average life
and price relative to interest rates than do 30-year, fixed rate securities. We
also limit the amount of investment in CMOs per issue to 15% of our net worth,
and in conjunction with ABSs, to 20% of assets in the aggregate.

     Purchases, Sales, and Repayments of Mortgage Related Securities. Set forth
below is information relating to the Bank's purchases, sales and repayments of
principal of mortgage related securities for the periods indicated.
Nine Months
                                                            Ended September 30,            Years Ended December 31,
                                                            ---------------------    ------------------------------------------
                                                              1997         1996           1996             1995           1994
                                                            -------     ---------    -----------         -------        -------
                                                                               (In thousands)
Purchases:
    Adjustable-rate (1).............................     $    7,918     $      --     $       --     $        --     $   10,104
    Fixed-rate (1)..................................         23,563        65,729         85,506          32,885         44,164
    CMOs............................................         35,859            --             --          13,490         58,027
                                                         ----------    ----------     ----------     -----------     ----------
       Total purchases..............................         67,340        65,729         85,506          46,375        112,295
                                                                       
Sales:                                                                 
    Adjustable-rate (1).............................        (15,726)           --             --         (16,110)            --
    Fixed-rate (1)..................................         (8,409)       (4,590)       (11,421)        (17,964)       (16,507)
    CMOs............................................        (20,354)       (1,941)       (13,125)        (18,377)       (24,951)
                                                         -----------   ----------     ----------     -----------     ----------
       Total sales..................................        (44,489)       (6,531)       (24,546)        (52,451)       (41,458)
                                                                       
Principal Repayments:                                                  
    Principal repayments............................        (25,359)      (25,466)       (33,026)        (28,056)       (76,816)
    Increase in other items, net (2)................            (88)         (118)          (158)           (130)          (517)
    Change in unrealized gains (losses)                                
       on mortgage related securities...............          3,498        (8,184)        (4,459)         22,525        (20,806)
                                                         ----------    ----------     ----------     -----------     ----------
          Net increase (decrease)...................     $      902     $  25,430     $   23,317     $   (11,737)    $  (27,302)
                                                         ==========    ==========     ==========     ===========     ==========
___________________
(1)  Consists of pass-through securities.
(2)  Other items represent amortization and accretion of premiums and discounts.

                                       72
U.S. Government and Agency Obligations. At September 30, 1997, our U.S.
Treasury securities portfolio totaled $85.5 million, all of which was classified
as available for sale. This portfolio consists primarily of short- to medium-
term (maturities of one to five years) securities. The current investment
strategy, however, is to maintain investments in such instruments to such extent
as can be used for liquidity purposes, as collateral for borrowings, and for
prepayment protection. At September 30, 1997, the agency securities portfolio
totaled $5.0 million, all of which was classified as available for sale and
consisted of agency callable debentures. The agency debentures are callable on a
semi-annual basis following a holding period of twelve months. We do not
generally purchase structured notes.

     Corporate Bonds. The corporate bond portfolio, which at September 30, 1997
totaled $7.0 million, all of which was classified as available for sale, was
composed primarily of short- and medium-term, fixed-rate investment grade
corporate and utility issues. At September 30, 1997, the portfolio had an
average life of approximately 2.9 years and a weighted average yield of 6.84%.
Our policy limits investments in corporate bonds with maturities of twelve years
or less to bonds rated "BBB/Baa" or better by at least one nationally recognized
rating agency and to a total investment of 15% of the Bank's assets, with a 6%
of Bank net worth limitation per issue. Our policy limits investments in
corporate bonds with maturities over twelve years to bonds rated "BBB/Baa" or
better by at least one nationally recognized rating agency and a total
investment of no more than 15% of the Bank's assets with a limitation of 4% of
Bank net worth per issue. Consistent with the Bank's current securities
investment strategy, the Bank has not emphasized investments in corporate debt
obligations.

     States and Political Subdivisions. At September 30, 1997 we had a portfolio
of bonds issued by states and political subdivisions consisting of 10 bonds
totaling $1.8 million, which had an estimated fair value of $1.9 million. All of
such securities were classified as available for sale and were comprised of
general obligation bonds (i.e., obligations backed by the general credit of the
issuer). All of the bonds are currently rated "AAA" with the exception of two
non-rated local bonds with an estimated fair value of $194,130. At September 30,
1997 the average life of the portfolio was approximately 5.65 years and the
portfolio had a weighted average yield of 5.58%, before tax equivalent yield
adjustments. Interest earned on municipal bonds is exempt from federal income
taxes. Some of the bonds additionally benefit from state income tax exemptions.

     Equity Securities. At September 30, 1997, our equity securities portfolio
totaled $12.5 million, all of which was classified as available for sale. The
portfolio consisted of $6.1 million of common stock issued by nationally
recognized companies and $6.4 million of stock issued by the FHLB as a condition
of membership. The Bank benefits from its investment in common and preferred
stock due to a tax deduction the Bank receives with regard to dividends paid by
domestic corporate issuers on equity securities held by other corporate
entities, such as the Bank. The Bank's policy limit for common stock investments
is 7.5% of total assets and the amount invested in any single issuer may not
exceed 4% of net worth. The Bank's current policies permit the purchase of
common stock rated "B+" or better.

     Asset-Backed Securities. Our ABS portfolio at September 30, 1997 totaled
$67.2 million, all of which were classified as available or sale, representing
5.72% of total assets and 5.96% of total interest-earning assets. The Bank
purchases shorter average life tranches with pass-through or sequential
structures, tight payment windows and senior positions. Issues will generally
have third party guarantees by monoline credit insurers and/or some form of
internal credit protection (i.e., reserve funds, excess spread accounts or
subordination). The Bank's current policy limits investment in ABSs in
conjunction with non-high risk mortgage derivative products to 20% of the Bank's
total assets.

     ABSs are a type of debt security collateralized by various loans and assets
including; automobile loans, equipment leases, credit card receivables, home
equity and improvement loans, manufactured housing, student loans and other
consumer loans. Issuance of an ABS begins with creation of a special purpose
bankruptcy-remote trust to hold collateral on behalf of investors and to
administer the distribution of cash flows. The business of a bankruptcy-remote
ABS trust is restricted to the purchase of loans and issuance of debt
collateralized by those loans. Because consumer loans are amortizing, alternate
principal cash flow structures can be created and tranched in a very similar
manner as CMOs. There are several typical structures available to investors in
the ABS market. They are excess spread, senior/subordinated, reserve funds and
surety bond guaranteed. Excess spread is the first line of protection for most
ABS

                                       73
and is the difference between interest cash flow from the underlying loans and
the combined investor coupon, servicing fee, charge-offs and trust costs.
Senior/subordinated structures are internal credit support designating one
portion of the transaction as junior to the remaining portion. Obligations to
the senior class are honored prior to junior class obligations in the event of a
cash flow shortfall from the collateral. A reserve fund is, in effect, part of
the subordinated piece retained, in a declining balance, by the trust so that a
portion of the junior class may be rated investment grade. Surety bond or
guarantee structures are guarantees by third party AAA-rated monoline insurance
companies. Insurers generally guarantee (or wrap) the principal and interest
payments of 100% of a transaction, not just the subordinated class. Assetbacked
securitizations provide the Bank with a broad selection of fixed-income
alternatives, most with higher credit ratings and less downgrade risk than
corporate bonds and more stable cash flows than mortgage related securities.
Prepayments and structure risk of ABSs are less of a concern than CMO securities
due to the shorter maturities of the underlying collateral promoting greater
stability of payments.

     Money Market Preferred Stock. At September 30, 1997, the Bank held $37.5
million of money market preferred stock ("MMPS") exclusively in its held to
maturity portfolio. The portfolio represents 3.19% of total assets and 3.32% of
total interest-earning assets, and has a weighted average rate of 4.10%. The
portfolio consisted primarily of shares of major utility companies. Investments
in these securities are used by the Bank as a higher yielding cash alternative
to federal funds sold and as a source of second-tier liquidity due to their 49
and 90 day maturities (dividend resets). Rates are set on these securities by
means of Dutch Auction, are priced on a predetermined formula at a percentage of
commercial paper and are used by corporations as a lower rate funding
alternative. We benefit from an investment in common and preferred stock due to
the 70% dividends- received tax deduction we recognize with regard to dividends
paid by U.S. corporate issuers on equity securities held by other corporate
entities, such as the Bank. The yield is therefore higher on these securities on
an after-tax basis than the quoted yield. The Bank's policy limit for its MMPS
investments is $5 million per issue and $50 million in aggregate.

SOURCES OF FUNDS

     General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, and proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes. To a lesser extent
we use borrowed funds, primarily FHLB advances, to fund our operations.

     Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposit accounts consist of savings, NOW accounts, checking
accounts, money market accounts, school savings and club accounts and
certificates of deposit. We offer certificates of deposit with balances in
excess of $100,000 at preferential rates (jumbo certificates) and also offer
Individual Retirement Accounts ("IRAs") and other qualified plan accounts. To
enhance the deposit products it offers, we offer commercial checking accounts
for small to moderately-sized commercial businesses, as well as a low-cost
checking account services for low-income customers.

     At September 30, 1997, our deposits totaled $992.2 million or 99.0% of
interest-bearing liabilities. For the nine months ended September 30, 1997, the
average balance of savings and transaction account deposits totaled $452.1
million, or 47.0% of total average deposits. At September 30, 1997, we had a
total of $516.9 million in certificates of deposit, of which $364.5 million had
maturities of one year or less, reflecting the shift in deposit accounts from
savings accounts to shorter-term certificates of deposit that has occurred in
the last three years. In 1996, the average balance of savings and transaction
account deposits represented approximately 49.1% of total deposits and
certificates of deposit represented 50.9%. Although the Bank has a significant
portion of its deposits in shorter term certificates of deposit, management
monitors activity on these accounts and, based on historical experience and the
Bank's current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.

     The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Our deposits are obtained predominantly from the areas in which its
branch offices are located. We rely primarily on competitive pricing of our
deposit products and customer service and

                                       74
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits. In addition, the Bank has periodically paid a special interest payment
on all deposit accounts, ranging from 10 to 25 basis points. For the year ended
December 31, 1995, we paid a special interest payment of 15 basis points on all
deposit accounts in commemoration of its 125th anniversary, which totaled $1.25
million. While 1995 was the most recent year in which a special interest payment
was paid, the Bank has made no decision as to whether such special interest
payments will occur in any future year. The Bank uses traditional means of
advertising its deposit products, including radio and print media and generally
does not solicit deposits from outside its market area. While certificates of
deposit in excess of $100,000 are accepted by the Bank, and may be subject to
preferential rates, we do not actively solicit such deposits as they are more
difficult to retain than core deposits. Historically, the Bank has not used
brokers to obtain deposits. 

     The following table sets forth the deposit activities of the Bank for the
periods indicated.
Nine Months
                                                           Ended September 30,                   Years Ended December 31,
                                                         --------------------------     -----------------------------------------
                                                            1997            1996           1996           1995            1994
                                                         ----------   -------------     ----------     -----------     ----------
                                                                                (Dollars in thousands)
Opening balance.....................................    $   920,072     $   861,065     $  861,065     $   819,690     $  812,939
Deposits............................................      1,751,818       1,244,359      1,736,655       1,508,173      1,182,400
Withdrawals.........................................     (1,711,656)     (1,215,860)    (1,716,709)     (1,502,621)    (1,207,280)
Interest credited...................................         31,985          29,489         39,061          35,823         31,631
                                                        -----------     -----------     ----------     -----------     ----------

Ending balance......................................        992,219         919,053        920,072         861,065        819,690
                                                        -----------     -----------     ----------     -----------     ----------

Net increase........................................    $    72,147     $    57,988     $   59,007     $    41,375     $    6,751
                                                        ===========     ===========     ==========     ===========     ==========

Percent increase....................................           7.84%           6.73%          6.85%           5.05%          0.83%
                                                        ===========     ===========     ==========     ===========     ==========
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of September 30, 1997.
Maturity
                                                        ----------------------------------------------------------
                                                          3 Months     Over 3 to 6     Over 6 to 12     Over 12
                                                           or Less         Months         Months         Months           Total
                                                        -----------     -----------    -----------    ------------   ------------
                                                                                       (In thousands)
Certificates of deposit less than $100,000..........    $    89,252     $    81,223    $   142,291    $    113,661   $    426,427
Certificates of deposit of $100,000 or more.........         17,951          11,389         22,350          38,751         90,441
                                                        -----------     -----------    -----------    ------------   ------------

Total of certificates of deposit....................    $   107,203     $    92,612    $   164,641    $    152,412   $    516,868
                                                        ===========     ===========    ===========    ============   ============
75
The following tables set forth information, by various rate categories,
regarding the average balance of deposits by types of deposit for the periods
indicated.
For the Nine Months Ended                 For the Year Ended
                                                                     September 30,                          December 31,
                                                         ------------------------------------   ----------------------------------  
                                                                         1997                                   1996
                                                         ------------------------------------   ----------------------------------
                                                                        Percent                                Percent
                                                                       of Total     Weighted                  of Total    Weighted
                                                           Average      Average      Average      Average      Average     Average
                                                           Balance     Deposits       Rate        Balance     Deposits      Rate
                                                         ---------    ---------    ---------    ---------    ---------   ---------  
                                                                                   (Dollars in thousands)
Money market accounts.................................   $   60,173       6.25%        3.57%     $  53,999      6.04%        3.55%
Savings accounts......................................      304,106       31.60        3.34        307,530     34.36         3.37
NOW accounts..........................................       60,240        6.26        1.82         51,718      5.78         1.85
Non-interest-bearing accounts.........................       27,629        2.87          --         26,273      2.94           --
                                                         ----------  ----------                -----------  --------             

   Total..............................................      452,148       46.98        2.96        439,520     49.12         3.01
                                                         ----------  ----------                ------------ --------                
                                                                                            
Certificates of deposit:                                                                    
Less than six months..................................      188,291       19.58          --        176,787     19.76           --
Over six through 12 months............................      124,360       12.92          --        106,793     11.94           --
Over 12 through 24 months.............................       81,310        8.45          --         53,409      5.97           --
Over 24 months........................................       28,417        2.95          --         38,486      4.30           --
Certificates over $100,000............................       87,746        9.12          --         79,755      8.91           --
                                                         ----------  ----------                 ---------- ---------
                                                                                          
   Total certificates of deposit......................      510,124       53.02        5.74        455,230     50.88         5.81
                                                         ----------  ----------                 ---------- ---------
                                                                                
      Total average deposits..........................   $  962,272      100.00%      4.44%     $  894,750    100.00%        4.43%
                                                         ==========   =========                 ==========  =========
For the Year Ended December 31,
                                                               ------------------------------------------------------------------- 
                                                                        1995//1//                               1994
                                                               ------------------------------   ----------------------------------
                                                                        Percent                                Percent
                                                                       of Total     Weighted                  of Total    Weighted
                                                           Average      Average      Average      Average      Average     Average
                                                           Balance     Deposits       Rate        Balance     Deposits      Rate
                                                           -------     --------     --------      -------    ---------    --------
                                                                                    (Dollars in thousands)
Money market accounts.................................   $   52,528       6.27%       3.96%      $  49,671      6.05%        3.09%
Savings accounts......................................      326,125      38.91        3.42         415,843     50.68         3.09
NOW accounts..........................................       44,023       5.25        1.89          36,386      4.43         2.06
Non-interest-bearing accounts.........................       28,720       3.43          --          30,996      3.78           --
                                                         ----------  ---------                  ----------  --------
   Total..............................................      451,396      53.86        3.12         532,896     64.94         2.84
                                                         ----------   --------                  ----------  --------

Certificates of deposit:
Less than six months..................................      117,584      14.03          --          64,323      7.85           --
Over six through 12 months............................       94,366      11.26          --          56,520      6.89           --
Over 12 through 24 months.............................       55,039       6.57          --          46,226      5.63           --
Over 24 months........................................       50,891       6.07          --          62,147      7.57           --
Certificates over $100,000............................       68,768       8.21          --          58,445      7.12           --
                                                         ----------   --------                  ----------  --------

   Total certificates of deposit......................      386,648      46.14        6.09         287,661     35.06         5.72
                                                         ----------   --------                  ----------  --------

      Total average deposits..........................   $  838,044     100.00%       4.49%     $  820,557    100.00%        3.85%
                                                         ==========   ========                  ==========  ========
___________________________
(1)   Calculations for this table exclude a $1.25 million special interest
      payment in 1995 which was approved by the Bank's Board of Trustees and
      paid on a pro rata basis on all interest-bearing savings, NOW, money
      market and certificate of deposit accounts in recognition of the Bank's
      125th anniversary.

                                       76
Certificates of Deposit Maturities. The following table sets forth the
     amount and maturities of certificates of deposit at September 30, 1997
Period to Maturity from September 30, 1997                 
                                                      --------------------------------------------------------------------------- 
                                                          Less                                  Three        Four                 
                                                          Than       One to       Two to         to           to          Five    
                                                           One         Two         Three        Four         Five       Years or  
                                                          Year        Years        Years        Years        Years        More  
                                                      -----------  -----------  ----------   ----------   ----------  ----------
                                                                                                                    (In thousands)
Rate:                                                                                                                             
0 to 4.00%..........................................  $     1,142  $        --  $        2   $       --   $       --   $        4 
4.01 to 5.00%.......................................       22,935          496          65           --           --          103
5.01 to 6.00%.......................................      322,677       79,103      13,173        4,397          877        1,758
6.01 to 7.00%.......................................       11,670        4,136       1,141          211           30          413
7.01 to 8.00%.......................................        1,948          327         111        4,415           --           --
8.01 to 9.00%.......................................        4,069       10,406       3,084        1,600           --           --
Over 9.01%..........................................           15       26,455          --           --           --          105
                                                      -----------  -----------  ----------   ----------   ----------   ----------
   Total ...........................................  $   364,456  $   120,923  $   17,576   $   10,623   $      907   $    2,383
                                                      ===========  ===========  ==========   ==========   ==========   ==========
At December 31  
                                                                    -------------------------
                                                                                             
                                                             At                              
                                                          Sept. 30,                          
                                                            1997         1996        1995        1994    
                                                         ----------   ----------  ----------   ---------
Rate:                                                                                                                        
0 to 4.00%..........................................     $    1,148   $    1,567  $   5,222   $63,605
4.01 to 5.00%.......................................         23,599       57,140     46,340    64,416
5.01 to 6.00%.......................................        421,985      351,270    202,715   107,776 
6.01 to 7.00%.......................................         17,601       23,173     94,957     5,922      
7.01 to 8.00%.......................................          6,801        7,456     10,662    11,195 
8.01 to 9.00%.......................................         19,159       18,775     19,765    19,209
Over 9.01%..........................................         26,575       25,340     42,875    48,296 
                                                         ----------   ----------   ---------- --------
   Total ...........................................     $  516,868  $   484,721  $ 422,536  $302,419
                                                         ==========  ===========  =========== ========
77
Borrowed Funds. At September 30, 1997, the Bank had $28.7 million of
borrowed funds, which primarily consisted of FHLB advances and reverse
repurchase agreements entered into with nationally recognized securities
brokerage firms. Reverse repurchase agreements are contracts for the sale of
securities owned or borrowed by the Bank, with an agreement to repurchase those
securities at an agreed upon price and date. We use reverse repurchase
agreements in periods when we can generate securities investments with yields in
excess of the cost of such borrowings. Our policies limit the use of reverse
repurchase agreements to collateral consisting of U.S. Treasury obligations,
U.S. agency obligations or mortgage related securities. Securities brokers
utilized by the Bank in these agreements must meet the Securities Exchange Act
Uniform Net Capital Rule 15c3-1 requirements with a public securities
association master repurchase agreement on file. There was $20.0 million of
reverse repurchase agreements outstanding as of December 31, 1996, and the Bank
averaged approximately $11.1 million outstanding pursuant to such agreements
during the year ended December 31, 1996. At September 30, 1997, $18.7 million of
reverse repurchase agreements were outstanding. In 1994, the Bank became
eligible to obtain advances from the FHLB of New York upon the security of the
common stock it owns in that bank and certain of its residential mortgage loans,
provided certain standards related to credit worthiness have been met. Such
advances are available pursuant to several credit programs, each of which has
its own interest rate and range of maturities. There were $12.0 million of FHLB
advances outstanding as of December 31, 1996, and the Bank averaged
approximately $5.6 million of FHLB advances during the year ended December 31,
1996. As of September 30, 1997, $10.0 million of FHLB advances were outstanding.
At September 30, 1997, the Bank had $117.8 million available under a line of
credit with the FHLB of New York.

     The following table sets forth the maximum month-end balance and average
monthly balance of FHLB advances and securities sold under agreements to
repurchase for the periods indicated. The Bank had no outstanding borrowings at
December 31, 1995 and 1994.
Nine Months              Year Ended
                                                              Ended September 30,        December 31,
                                                              ------------------   
                                                                 1997            1996        1996
                                                              ----------      ----------   ---------
                                                                         (Dollars in thousands)
Maximum Balance:
---------------
FHLB advances.......................................          $   10,000      $    5,000   $   12,000
Securities sold under agreements
 to repurchase......................................              28,961          24,675       24,675

Average Balance:
---------------
FHLB advances.......................................               6,889           5,000        5,583
Securities sold under agreements
 to repurchase......................................              22,030           8,147       11,091

Weighted Average Interest Rate:
------------------------------
FHLB advances.......................................                5.93%           5.72%        5.78%
Securities sold under agreements
 to repurchase......................................                5.59            5.35         5.38
78
The following table sets forth certain information as to the Bank's
     borrowings at the dates indicated.
At              At
                                                                                          September 30,     December 31,
                                                                                              1997            1996
                                                                                          ------------      -----------
                                                                                                   (In thousands)
FHLB advances......................................................................       $    10,000       $   12,000
Securities sold under agreements to repurchase.....................................            18,740           20,008
                                                                                          -----------       ----------
    Total borrowings...............................................................       $    28,740       $   32,008
                                                                                          ===========       ==========

Weighted average interest rate of FHLB advances....................................              6.16%            6.03%

Weighted average interest rate of securities sold
    under agreements to repurchase.................................................              5.68%            5.42%
SAVINGS BANK LIFE INSURANCE

     The Bank, through its Savings Bank Life Insurance ("SBLI") department,
engages in group life insurance coverage for individuals under the SBLI
Financial Institution Group Life insurance policy. The SBLI department's
activities are segregated from the Bank and, while they do not materially affect
the Bank's earnings, management believes that offering SBLI is beneficial to the
Bank's relationship with its depositors and the general public. The SBLI
department pays its own expenses and reimburses the Bank for expenses incurred
on its behalf. At September 30, 1997, the SBLI Department had policies totaling
$1.7 billion in force.

OTHER FEE BASED ACTIVITIES

     We offer annuity and mutual fund products through designated employees who
are registered representatives. The annuity and mutual funds, which are products
of unrelated insurance and mutual fund companies, are offered to customers and
to members of the general public who are interested in non-deposit investments.
We began offering mutual fund products in 1997. We earn fees from the annuity
and mutual fund providers for attracting and retaining these customers. During
the nine months ended September 30, 1997, and the years ended December 31, 1996,
1995 and 1994, we had revenues of $339,000, $448,000, $230,000 and $143,000,
respectively from annuity and mutual fund sales.

SUBSIDIARY ACTIVITIES

     LSB Realty, Inc. LSB Realty, Inc. is a wholly-owned real estate development
subsidiary of the Bank which was established in 1984 for the purpose of
investing in and lending to real estate development projects. At this time, the
subsidiary is in the process of divesting its last five projects and selling the
remaining properties it has developed. The portfolio was developed in the 1980's
with other New York State savings banks and invested primarily in residential
real estate development partnerships in the Hudson Valley region of New York
State. As of September 30, 1997, there is no remaining asset value reflected in
the financial statements for these projects.

     LSB Associates, Inc. LSB Associates, Inc., a wholly-owned subsidiary of the
Bank incorporated in 1984, is engaged in the sale of annuities, life insurance,
and mutual funds. LSB Associates, Inc. acts as an agent for third party
insurance companies to sell their products.

                                       79
Other Subsidiaries. The Bank has two other wholly-owned subsidiaries. LSB
Funding, Inc. is a real estate investment trust ("REIT") and LSB Securities,
Inc. is a New York State Article 9A company which is primarily involved in the
investment in U.S. Treasury obligations.

COMPETITION

     The Bank faces significant competition in both making loans and attracting
deposits. The Western New York area has a high density of financial
institutions, most of which are branches of significantly larger institutions
which have greater financial resources than the Bank, and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions and insurance companies
and other financial service companies. Its most direct competition for deposits
has historically come from savings and loan associations, savings banks,
commercial banks and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Further competition may
arise as restrictions on the interstate operations of financial institutions are
removed.

PROPERTIES

     The Bank currently conducts its business through fifteen full service
banking offices. The following table sets forth the Bank's offices as of
September 30, 1997 and does not include the three branch office facilities which
the Bank plans to initiate subsequent to such date, which are expected to open
in the first or second quarter of 1998.
LOCATION              LEASED    ORIGINAL     DATE OF       NET BOOK VALUE
                             OR        YEAR        LEASE        OF PROPERTY OR
                            OWNED   LEASED OR    EXPIRATION        LEASEHOLD    
                                     ACQUIRED                  IMPROVEMENTS AT 
                                                              SEPTEMBER 30,1997 
--------------------------------------------------------------------------------
                                                                (In thousands)
ADMINISTRATIVE/HOME OFFICE:
                     
Administrative Center
6950 South Transit Road
Lockport, NY  14094         Owned      1996          N/A            $7,986

BRANCH OFFICES:

Loan Center Office
80 Washburn Street
Lockport, NY  14094         Owned      1968          N/A              $538

Main Office (1)
55 East Avenue
Lockport, NY  14094         Owned      1968          N/A            $1,385

Town of Lockport Office (2)
5737 South Transit Road
Lockport, NY  14094         Leased     1973      4/30/12              $639

                            
Town of Lockport Office (2)
Drive Thru Facility
6210 Shimer Drive
Lockport, NY  14094         Leased     1993      9/30/12              $218

Batavia Office
401 West Main Street
Batavia, NY 14020           Owned      1977          N/A              $413
80
Cheektowaga Office
1455 French Road
Depew, NY  14043             Owned     1991          N/A            $813

Clarence Office
6409 Transit Road
East Amherst, NY 14051      Leased     1989       12/31/09           $25

Depew Office
570 Dick Roadb
NY  14043                   Leased     1996       12/31/99          $208

Hamburg Office
5751 South Park Avenue
Hamburg, NY  14075           Owned     1995          N/A            $897

Medina Office
327 Main Street
Medina, NY  14103            Owned     1975          N/A            $319

Niagara Falls Office
Tops Int'l Super Center
7200 Niagara Falls Blvd.
Niagara Falls, NY 14304     Leased     1993        3/31/08          $124

North Tonawanda Office
100 River Road
North Tonawanda, NY 14120    Owned     1994          N/A            $728

Ransomville Office
2547 Youngstown/Lockport Rd.
Ransomville, NY 14131        Owned     1985          N/A             $71

Tonawanda Office
Sheridan/Delaware Plaza             
Tonawanda, NY  14223        Leased     1997        3/31/17          $336

West Amherst Office       
Tops Super Center
3035 Niagara Falls Blvd.
Amherst, NY  14228          Leased     1993        9/30/08          $137

West Seneca Office
1251 Union Road             Leased     1996        8/31/06          $254
West Seneca, NY  14224 

North Buffalo Office
2141 Elmwood Avenue
Buffalo, NY  14207          Leased     1997        3/31/17          $292
________________
(1)  The Main Office Branch building also houses certain administrative offices.
(2)  The Bank owns the building but leases the land.

LEGAL PROCEEDINGS

     The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition or operations of the Bank.

                                       81
PERSONNEL

     As of September 30, 1997, the Bank had 305 full-time employees and 96 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good. See
"Management of the Bank - Benefit Plans" for a description of certain
compensation and benefit programs offered to the Bank's employees.

                          FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     General. The Mutual Holding Company, the Company and the Bank will be
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Bank.

     Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.

     Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of September 30, 1997, was approximately
$4.2 million

           Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a bank
charter.

     At September 30, 1997, the Bank's total federal pre-1988 reserve was
approximately $6.9 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.

     Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.

     Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At September 30, 1997, the Bank
had no net operating loss carryforwards for federal income tax purposes.

                                       82
Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Following completion of the Reorganization and
Offering, it is expected that the Mutual Holding Company will own less than 80%
of the outstanding Common Stock of the Company. As such, the Mutual Holding
Company will not be permitted to file a consolidated federal income tax return
with the Company and the Bank. The corporate dividends-received deduction is 80%
in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated return, and corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct only
70% of dividends received or accrued on their behalf.

STATE TAXATION

     New York State Taxation. The Company and the Bank will report income on a
combined calendar year basis to New York State. New York State Franchise Tax on
corporations is imposed in an amount equal to the greater of (a) 9% of "entire
net income" allocable to New York State (b) 3% of "alternative entire net
income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications. Alternative
entire net income is equal to entire net income without certain modifications.

     Delaware State Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.

                                  REGULATION

GENERAL

     The Bank is a New York-chartered mutual savings bank and its deposit
accounts are insured up to applicable limits by the Bank Insurance Fund ("BIF")
of the FDIC. The Bank is subject to extensive regulation by the Department, as
its chartering agency; and by the FDIC, as its deposit insurer. The Bank is
required to file reports with, and is periodically examined by, the FDIC and the
Superintendent concerning its activities and financial condition and must obtain
regulatory approvals prior to entering into certain transactions, including, but
not limited to, mergers with or acquisitions of other savings institutions. The
Bank is a member of the FHLB of New York and is subject to certain regulations
by the Federal Home Loan Bank System. Both the Company and the Mutual Holding
Company, as bank holding companies, will be subject to regulation by the Federal
Reserve Board and will be required to file reports with the Federal Reserve
Board. Any change in such regulations, whether by the Department, the FDIC, or
the Federal Reserve Board could have a material adverse impact on the Bank, the
Company, or the Mutual Holding Company.

     Certain of the regulatory requirements applicable to the Bank, the Company
and the Mutual Holding Company are referred to below or elsewhere
herein.

NEW YORK BANK REGULATION

     The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by FDIC
regulations and other federal law and regulations. In particular, the applicable
provisions of New York State Banking Law and regulations governing the
investment authority and activities of an FDIC insured state-chartered savings
bank have been substantially limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued
pursuant thereto.

     The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Banking Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial

                                       83
loans, certain types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and agencies,
certain types of corporate equity securities and certain other assets. Under the
statutory authority for investing in equity securities, a savings bank may
invest up to 7.5% of its assets in corporate stock, with an overall limit of 5%
of its assets invested in common stock. Investment in the stock of a single
corporation is limited to the lesser of 2% of the outstanding stock of such
corporation or 1% of the savings bank's assets, except as set forth below. Such
equity securities must meet certain earnings ratios and other tests of financial
performance. A savings bank's lending powers are not subject to percentage of
assets limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" power, make investments not
otherwise permitted under the New York State Banking Law. This power permits
investments in otherwise impermissible investments of up to 1% of assets in any
single investment, subject to certain restrictions and to an aggregate limit for
all such investments of up to 5% of assets. Additionally, in lieu of investing
in such securities in accordance with and reliance upon the specific investment
authority set forth in the New York State Banking Law, savings banks are
authorized to elect to invest under a "prudent person" standard in a wider range
of investment securities as compared to the types of investments permissible
under such specific investment authority. However, in the event a savings bank
elects to utilize the "prudent person" standard, it will be unable to avail
itself of the other provisions of the New York State Banking Law and regulations
which set forth specific investment authority. The Bank has not elected to
conduct its investment activities under the "prudent person" standard. A savings
bank may also exercise trust powers upon approval of the Department.

     New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Department. Investment by a savings bank in the stock,
capital notes and debentures of its service corporations is limited to 3% of the
bank's assets, and such investments, together with the bank's loans to its
service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire Board of Trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.

     Under the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Superintendent or the Department against the Bank or any of
its trustees or officers.

INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC

     The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Superintendent an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.

                                       84
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semi-annual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category.

     As a result of legislation passed in 1996, relating to the recapitalization
of the SAIF, from 1997 through 1999, FDIC-insured institutions will pay an
insurance premium of approximately 1.3 basis points of their BIF-assessable
deposits. The Bank's insurance premiums, which had amounted to the minimum
$2,000 annual fee for its BIF-insured deposits, were increased to 1.3 basis
points. Based upon assessable deposits at September 30, 1997, the Bank would
expect to pay $31,400 in insurance premiums per quarter during 1998.

REGULATORY CAPITAL REQUIREMENTS

     The FDIC has adopted risk-based capital guidelines to which the Bank is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. The Bank is required to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
such regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified offbalance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.

     These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain non-
cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.

     In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.

STANDARDS FOR SAFETY AND SOUNDNESS

     The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted additions to the Guidelines which require institutions to examine asset
quality and earnings standards. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required

                                       85
by federal law. The final regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.

LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS

     The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. New York law also
restricts the Bank from declaring a dividend which would reduce its capital
below (i) the amount required to be maintained by state and federal law and
regulations, or (ii) the amount of the Bank's liquidation account established in
connection with the Reorganization.

PROMPT CORRECTIVE ACTION

     The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).

     Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.

ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS

     Federal law generally limits the activities and equity investments of FDIC-
insured, state-chartered banks to those that are permissible for national banks,
notwithstanding state laws. Under regulations dealing with equity investments,
an insured state bank generally may not, directly or indirectly, acquire or
retain any equity investment of a type, or in an amount, that is not permissible
for a national bank. An insured state bank is not prohibited from, among other
things, (i) acquiring or retaining a majority interest in a subsidiary; (ii)
investing as a limited partner in a partnership the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation, or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets; (iii)
acquiring up to 10% of the voting stock of a company that solely provides or
reinsures directors', trustees', and officers' liability insurance coverage or
bankers' blanket bond group insurance coverage for insured depository
institutions; and (iv) acquiring or retaining the voting shares of a depository
institution if certain requirements are met.

     Federal law and FDIC regulations permit certain exceptions to the foregoing
limitation. For example, certain state-chartered banks, such as the Bank, may
continue to invest in common or preferred stock listed on a National Securities
Exchange or the National Market System of NASDAQ, and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. Such banks may also continue to sell savings bank life insurance. As of
September 30, 1997, the Bank had $6.1 million of securities pursuant to this
exception.

                                       86
TRANSACTIONS WITH AFFILIATES

     Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.

     Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the Board of Directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal shareholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.

HOLDING COMPANY REGULATION

     FEDERAL BANK HOLDING COMPANY REGULATION. Upon consummation of the
Reorganization, the Company, as the sole shareholder of the Bank, and the Mutual
Holding Company, as indirect controlling shareholder of the Bank, will become
bank holding companies. Bank holding companies are subject to comprehensive
regulation and regular examinations by the Federal Reserve Board under the BHCA,
and the regulations of the Federal Reserve Board. The Federal Reserve Board also
has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.

     Under Federal Reserve Board policy, a bank holding company must serve as a
source of strength for its subsidiary bank. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.

     Under the BHCA, a bank holding company must obtain Federal Reserve Board
approval before: (i) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such

                                       87
shares); (ii) acquiring all or substantially all of the assets of another bank
or bank holding company; or (iii) merging or consolidating with another bank
holding company.

     The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
Board includes, among other things, operating a savings association, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Company and the Mutual Holding Company
have no present plans to engage in any of these activities.

     Interstate Banking and Branching. Federal law allows the Federal Reserve
Board to approve an application of an adequately capitalized and adequately
managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of the bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Federal Reserve Board is prohibited from approving an application if
the applicant (and its depository institution affiliates) controls or would
control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch. Individual states continue to have authority
to limit the percentage of total insured deposits in the state which may be held
or controlled by a bank or bank holding company to the extent such limitation
does not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% state-wide concentration limit referred
to above.

     Additionally, beginning on June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks "opted out" by adopting a law which applies equally to all out-
of-state banks and expressly prohibits merger transactions involving out-of-
state banks. Interstate acquisitions of branches are permitted only if the law
of the state in which the branch is located permits such acquisitions. In
response to Riegle-Neal, the State of New York enacted laws allowing interstate
mergers and branching on a reciprocal basis.

     Federal law authorizes the FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The appropriate federal banking agencies are required to
prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and Federal Reserve Board have adopted such regulations. These
regulations include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve. Should the FDIC determination that a
bank interstate branch is not reasonably helping to meet the credit needs of the
communities serviced by an interstate, the FDIC is authorized to close the
interstate branch or not permit the bank to open a new branch in the state in
which the bank previously opened an interstate branch.

     Dividends. The Federal Reserve Board has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve Board's view that a bank holding company should pay cash dividends only
to the extent that the holding company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the holding company's capital needs, asset quality and

                                       88
overall  financial  condition.  The Federal Reserve Board also indicated that it
would be inappropriate for a company  experiencing serious financial problems to
borrow funds to pay dividends.  Furthermore,  under the prompt corrective action
regulations  adopted by the Federal Reserve Board, the Federal Reserve Board may
prohibit a bank  holding  company  from  paying  any  dividends  if the  holding
company's bank subsidiary is classified as "undercapitalized."

     Bank holding companies are required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.

     NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal
bank holding company regulations, a bank holding company organized or doing
business in New York State also may be subject to regulation under the New York
State Banking Law. The term "bank holding company," for the purposes of the New
York State Banking Law, is defined generally to include any person, company or
trust that directly or indirectly either controls the election of a majority of
the directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions. In general, a bank holding company
controlling, directly or indirectly, only one banking institution will not be
deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the Banking
Department is required before: (1) any action is taken that causes any company
to become a bank holding company; (2) any action is taken that causes any
banking institution to become or be merged or consolidated with a subsidiary of
a bank holding company; (3) any bank holding company acquires direct or indirect
ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate with another
bank holding company. Additionally, certain restrictions apply to New York State
bank holding companies regarding the acquisition of banking institutions which
have been chartered five years or less and are located in smaller communities.
Officers, directors and employees of New York State bank holding companies are
subject to limitations regarding their affiliation with securities underwriting
or brokerage firms and other bank holding companies and limitations regarding
loans obtained from its subsidiaries. Although the Company will not be a bank
holding company for purposes of New York State law upon the Effective Date of
the Reorganization, any future acquisition of ownership, control, or the power
to vote 10% or more of the voting stock of another bank or bank holding company
would cause it to become such.

     MUTUAL HOLDING COMPANY REGULATION. Under New York law, the Mutual Holding
Company may exercise all powers and privileges of a New York chartered mutual
savings bank. As a bank holding company, the Mutual Holding Company is also
authorized to exercise all powers and in engage in all activities permitted to a
bank holding company under the Bank Holding Company Act, except that it may not
directly or indirectly engage in the sale or underwriting of insurance.

     Dividend Waivers by the Mutual Holding Company. It has been the policy of
many mutual holding companies to waive the receipt of dividends declared by any
savings institution subsidiary. In connection with its approval of the
Reorganization, however, the Federal Reserve Board imposed certain conditions on
the waiver by the Mutual Holding Company of dividends paid on the Common Stock.
In particular, the Mutual Holding Company must obtain prior Federal Reserve
Board approval before it may waive any dividends. As of the date hereof,
management does not believe that the Federal Reserve Board has given its
approval to any waiver of dividends by any mutual holding company that has
requested its approval.

                                       89
The terms of the Federal Reserve Board approval of the Reorganization also
require that the amount of any waived dividends will not be available for
payment to Minority Stockholders and will be excluded from capital for purposes
of calculating dividends payable to Minority Stockholders. Moreover, the
cumulative amount of waived dividends must be maintained in a restricted capital
account which would be added to any liquidation account of the Bank, and would
not be available for distribution to Minority Stockholders. The restricted
capital account and liquidation account amounts would not be reflected in the
Bank's financial statements or the notes thereto, but would be considered as a
notational or memorandum account of the Bank, and would be maintained in
accordance with the rules, regulations and policy of the Office of Thrift
Supervision except that such rules would be administered by the Federal Reserve
Board, and any other rules and regulations adopted by the Federal Reserve Board.
The Plan of Reorganization also provides that if the Mutual Holding Company
converts to stock form in the future, any waived dividends would reduce the
percentage of the converted company's shares of common stock issued to Minority
Stockholders in connection with any such transaction. See "Conversion of the
Mutual Holding Company to Stock Form."

     Management does not believe that the Mutual Holding Company will initially
waive dividends declared by the Company. If the Mutual Holding Company decides
that it is in its best interest to waive a particular dividend to be paid by the
Company, and the Federal Reserve Board approves such waiver, then the Company
would pay such dividend only to Minority Stockholders, and the amount of the
dividend waived by the Mutual Holding Company would be treated in the manner
described above. The Mutual Holding Company's decision as to whether or not to
waive a particular dividend, if such waiver is approved by the Federal Reserve
Board, will depend on a number of factors, including the Mutual Holding
Company's capital needs, the investment alternatives available to the Mutual
Holding Company as compared to those available to the Company, and regulatory
approvals. There can be no assurance (i) that after the Reorganization the
Mutual Holding Company will waive dividends paid by the Company, (ii) that the
Federal Reserve Board will approve any dividend waivers by the Mutual Holding
Company or (iii) of the terms that may be imposed by the Federal Reserve Board
on any dividend waiver.

     Conversion of the Mutual Holding Company to Stock Form. New York law,
regulations of the Department and the Plan of Reorganization permit the Mutual
Holding Company to convert from the mutual to the capital stock form of
organization (a "Conversion Transaction"). There can be no assurance when, if
ever, a Conversion Transaction will occur, and the Board of Trustees has no
current intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction, the Mutual Holding Company would merge with and into the Bank or
the Company, with the Bank or the Company as the resulting entity, and certain
depositors of the Bank would receive the right to subscribe for additional
shares of the resulting entity. In a Conversion Transaction, each share of
Common Stock outstanding immediately prior to the completion of the Conversion
Transaction held by persons other than the Mutual Holding Company (a "Minority
Share") would be automatically converted into and become the right to receive a
number of shares of common stock of the resulting entity determined pursuant an
exchange ratio that ensures that after the conversion transaction, subject to
the Dividend Waiver Adjustment described below and a slight adjustment to
reflect the receipt of cash in lieu of fractional shares, the percentage of the
to-be outstanding shares of the resulting entity issued to Minority Stockholders
in exchange for their Common Stock would be equal to the percentage of the
outstanding shares of Common Stock held by Minority Stockholders immediately
prior to the Conversion Transaction. The total number of shares held by Minority
Stockholders after the Conversion Transaction would also be affected by any
purchases by such persons in the offering that would be conducted as part of the
Conversion Transaction.

     The Dividend Waiver Adjustment would adjust the percentage of the to-be
outstanding shares of the resulting entity issued in exchange for minority
shares to reflect (i) the aggregate amount of dividends waived by the Mutual
Holding Company and (ii) assets other than Common Stock held by the Mutual
Holding Company. Pursuant to the Dividend Waiver Adjustment, the percentage of
the to-be outstanding shares of the resulting entity issued to Minority
Stockholders in exchange for their minority shares (the "Adjusted Minority
Ownership Percentage") is equal to the percentage of the outstanding shares of
Common Stock held by Minority Stockholders multiplied by the Dividend Waiver
Fraction. The Dividend Waiver Fraction is equal to the product of (a) a
fraction, of which the numerator is equal to the Company's stockholders' equity
at the time of the Conversion Transaction less the aggregate amount of dividends

                                       90
waived by the Mutual Holding Company and the denominator is equal to the
Company's stockholders' equity at the time of the Conversion Transaction, and
(b) a fraction, of which the numerator is equal to the appraised pro forma
market value of the resulting entity minus the value of the Mutual Holding
Company's assets other than Common Stock and the denominator is equal to the pro
forma market value of the resulting entity.

FEDERAL SECURITIES LAW

     The Common Stock of the Company to be issued in the Offering will be
registered with the Securities and Exchange Commission ("SEC") under the
Exchange Act. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.

     Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.

FEDERAL RESERVE SYSTEM

     The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At September
30, 1997, the Bank was in compliance with these reserve requirements.

COMMUNITY REINVESTMENT ACT

     Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a savings bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating was "satisfactory."

     New York State Regulation. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA") which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Banking Department. The
NYCRA requires the Banking Department to make an annual written assessment of a
bank's compliance with the NYCRA, utilizing a four-tiered rating system, and
make such assessment available to the public. The NYCRA also requires the
Superintendent to consider a bank's NYCRA rating when reviewing a bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application.

     The Bank's NYCRA rating as of its latest examination was "satisfactory."

FEDERAL HOME LOAN BANK SYSTEM

     The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the

                                       91
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.

     As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At September 30, 1997, the Bank had $6.4 million of FHLB
stock. In past years, the Bank has received dividends on its FHLB stock. The
dividend yield from FHLB stock was 6.75% at September 30, 1997. No assurance can
be given that such dividends will continue in the future at such levels.

     Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.

                           MANAGEMENT OF THE COMPANY

DIRECTORS OF THE COMPANY

     The Board of Directors of the Company consists of eleven members, each of
whom is currently serving as a Trustee of the Bank. Directors of the Company
will serve three-year staggered terms so that approximately one-third of the
Directors will be elected at each annual meeting of stockholders. The class of
directors whose term of office expires at the first annual meeting of
shareholders following completion of the Reorganization consists of Directors
Currie, Heinrich, Mancuso and Weber. The class of directors whose term expires
at the second annual meeting of shareholders following completion of the
Reorganization consists of Directors Caldwell, Fitch, Judge and Miklinski. The
class of directors whose term of office expires at the third annual meeting of
shareholders following the completion of the Reorganization consists of
Directors Assad, Smith and Swan. The biographical information regarding these
individuals is set forth under "Management of the Bank-Biographical
Information."

EXECUTIVE OFFICERS OF THE COMPANY

     The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names. The biographical information
for each executive officer is set forth under "Management of the Bank--
Biographical Information."

Name                   Age*            Position
-----------------      ---------       -------------------------------------
William E. Swan        50              President and Chief Executive Officer
Paul J. Kolkmeyer      44              Executive Vice President and Chief
                                        Financial Officer
G. Gary Berner         49              Senior Vice President
Kathleen P. Monti      49              Senior Vice President
Diane Allegro          42              Senior Vice President

_________________________
*As of September 30, 1997

                                       92
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation, retirement or removal by the Board.

     Since the formation of the Company, none of the executive officers has
received remuneration from the Company. It is not anticipated that the executive
officers of the Company will initially receive any remuneration in his or her
capacity as an executive officer. For information concerning compensation of
executive officers of the Bank, see "Management of the Bank."

INDEMNIFICATION AND LIMITATION OF LIABILITY

     The certificate of incorporation of the Company provides that a director or
officer of the Company shall be indemnified by the Company to the fullest extent
authorized by the Delaware General Corporation Law ("DGCL") against all
expenses, liability and loss reasonably incurred or suffered by such person in
connection with his activities as a director or officer or as a director or
officer of another company, if the director or officer held such position at the
request of the Company. Delaware law requires that such director, officer,
employee or agent, in order to be indemnified, must have acted in good faith and
in a manner reasonably believed to be not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, either had
reasonable cause to believe such conduct was lawful or did not have reasonable
cause to believe his conduct was unlawful.

     In addition, the certificate of incorporation and Delaware law also provide
that the Company may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Company or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Company has the power to indemnify such
person against such expense, liability or loss under the DGCL. The Company
intends to obtain such insurance.

     The certificate of incorporation also provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law (which relates to unlawful dividends or
stock purchases or redemptions), or (iv) for any transaction from which the
director derived an improper personal benefit.

                            MANAGEMENT OF THE BANK

Directors of the Bank

     Upon completion of the Reorganization, the initial directors of the Bank
will consist of those persons who currently serve on the Board of Trustees of
the Bank. The directors of the Bank will have three year terms which will be
staggered to provide for the election of approximately one-third of the board
members each year. Directors of the Bank will be elected by the Company as sole
stockholder of the Bank. The proposed directors of the Bank are as follows:
Director                             Age*      Occupation                                        Term Expires
--------                             ----      ----------                                        ------------
Gordon P. Assad                       49       President and Chief Executive Officer,            2001
                                               Erie & Niagara Insurance  Association
Christa R. Caldwell                   63       Director (Retired),                               2000
                                               Lockport Public Library
James W. Currie                       56       President,                                        1999
                                               Ag Pak, Inc.
Gary B. Fitch                         62       Owner-Manager,                                    2000
                                               Ontario Orchards, Inc.
93
David W. Heinrich                     61       President,                                        1999
                                               Heinrich Chevrolet Corp.
Daniel W. Judge                       55       President and Chief Executive Officer,            2000
                                               I.D. ONE, Inc.
B. Thomas Mancuso                     41       President,                                        1999
                                               Joseph L. Mancuso & Sons, Inc.
James Miklinski                       54       General Manager,                                  2000
                                               Niagara Milk Cooperative
Barton G. Smith                       67       Paul Garrick, Inc. (Retired)                      2001
William E. Swan                       50       President and Chief Executive Officer,            2001
                                               Lockport Savings Bank                             
Robert G. Weber                       60       Managing Partner (Retired),                       1999
                                               KPMG Peat Marwick LLP
________________
* As of September 30, 1997

EXECUTIVE OFFICERS OF THE BANK

     The following table sets forth certain information (as of September 30,
1997) regarding the executive officers of the Bank, all of whom currently serve
in their indicated position as executive officers of the Bank.
Name                                      Age       Position
William E. Swan                           50        President and Chief Executive Officer
Paul J. Kolkmeyer                         44        Executive Vice President and Chief
                                                      Financial Officer
G. Gary Berner                            49        Senior Vice President and Chief Lending Officer
Kathleen P. Monti                         49        Senior Vice President/HR & Administration
Diane Allegro                             42        Senior Vice President / Retail Banking
The executive officers of the Bank will be elected annually and will hold
office until the next annual meeting of the Board of Directors of the Bank held
immediately after the annual meeting of stockholders of the Bank, and until
their successors are elected and qualified, or until death, resignation,
retirement or removal by the Board of Directors.

BIOGRAPHICAL INFORMATION

     Directors of the Bank

     Gordon P. Assad has served as a Trustee of the Bank since 1995. Mr. Assad
is the President and Chief Executive Officer of Erie & Niagara Insurance
Association and has served in that position since 1972.

     Christa R. Caldwell has served as a Trustee of the Bank since 1986. Ms.
Caldwell is retired and was the Director of the Lockport Public Library from
1967 to 1996.

     James W. Currie has served as a Trustee of the Bank since 1987. Mr. Currie
is the President of Ag Pak, Inc., a manufacturer of produce packaging machines,
and has served in that position since 1974.

     Gary B. Fitch has served as a Trustee of the Bank since 1981. Mr. Fitch is
the Owner-Manager of Ontario Orchards, Inc., and has served in that position
since 1976. Mr. Fitch also serves as the Executive Secretary of Agricultural
Affiliates, Inc. and has served in that position since 1991.

                                       94
David W. Heinrich served as a Trustee of the Bank from 1969 to 1991. He was
re-elected to the Board in June of 1993. Mr. Heinrich is the President of
Heinrich Chevrolet Corp.

     Daniel W. Judge has served as a Trustee of the Bank since 1992. Mr. Judge
is the President and Chief Executive Officer of I.D. ONE, Inc., a purchasing and
marketing cooperative of independent industrial distributors, and has served in
that position since 1996. Mr. Judge served as the Executive Director of I.D.
ONE, Inc. from 1993 to 1996. Mr. Judge has also served as President and Manager
of Dansam, Inc., a business management services company, since 1990.

     B. Thomas Mancuso has served as a Trustee of the Bank since 1990. Mr.
Mancuso is the President of Joseph L. Mancuso & Sons, Inc., a real estate
development company.

     James Miklinski has served as a Trustee of the Bank since 1996. Mr.
Miklinski is the General Manager of Niagara Milk Cooperative, and has served in
that position since 1990.

     Barton G. Smith has served as a Trustee of the Bank since 1986. Mr. Smith
is retired from Paul Garrick, Inc.

     William E. Swan has served as a Trustee of the Bank since 1996. Mr. Swan is
the President and Chief Executive Officer of Lockport Savings Bank, and has
served in that position since 1989. Prior to joining the Bank in 1988, he served
as an Administrative Vice President of Manufacturers and Traders Trust Company.

     Robert G. Weber has served as a Trustee of the Bank since 1996. Mr. Weber
is a retired Buffalo Office Managing Partner of KPMG Peat Marwick LLP where he
served from 1959 to 1995.

     Executive Officers of the Bank Who Are Not Directors

     Paul J. Kolkmeyer has served as Executive Vice President and Chief
Financial Officer of the Bank since 1995. Prior to that time, Mr. Kolkmeyer
served as Senior Vice President and Chief Financial Officer of the Bank. He has
worked for the Bank since 1990. Prior to 1990, he served as a Vice President at
Morgan Guaranty Trust Company.

     Kathleen P. Monti has served as Senior Vice President of Human Resources
and Administration of the Bank since 1995. From 1993 to 1995 Ms. Monti served as
Vice President of Human Resources of the Bank. Prior to 1993, she served as an
Administrative Vice President-Regional Human Resource Manager at Marine Midland
Bank.

     G. Gary Berner has served as Senior Vice President and Chief Lending
Officer of the Bank since 1992. Prior to joining the Bank in 1992, he was Vice
President, Asset Management Group at Key Bank of New York, N.A.

     Diane Allegro has been Senior Vice President of Retail Banking since
October 1997. From 1994 to October 1997, she was Vice President-Retail Sales &
Delivery Systems at Rochester Community Savings Bank. Prior to 1994, she was
employed by First Federal Savings and Loan Association of Rochester.

MEETINGS AND COMMITTEES OF THE BANK'S BOARD

     The Board of Trustees of the Bank meets monthly and may have additional
special meetings as may be called by the Chairman or as otherwise provided by
law. During the year ended December 31, 1996, the Board held ___ meetings. No
trustee attended fewer than 75% in the aggregate of the total number of meetings
of the Board or Board Committees on which such Trustee served during 1996. The
Board of Trustees of the Bank has the following standing committees: Loan
Committee, Audit Committee, CRA Committee, Finance Committee and Board Affairs
Committee.

                                       95
BOARD OF DIRECTORS AND COMMITTEES OF THE COMPANY AFTER REORGANIZATION

     Following the Reorganization, the Board of Directors of the Company is
expected to meet quarterly, or more often as may be necessary. The Board of
Directors initially is expected to have a standing Executive Committee and an
Audit Committee. The Board of Directors may, by resolution, designate one or
more additional committees.

     The Executive Committee initially will consist of the following five
Directors of the Company: Messrs. Heinrich, Swan, Assad, Judge and Weber. The
Executive Committee is expected to meet as necessary when the Board is not in
session to exercise general control and supervision in all matters pertaining to
the interests of the Company, subject at all times to the direction of the Board
of Directors. The Executive Committee may also serve as the nominating committee
for the purpose of identifying, evaluating and recommending potential candidates
for election to the Board.

     The Audit Committee initially will consist of the following Directors of
the Company: Weber, Currie, Mancuso, Miklinski and Heinrich. The Audit Committee
is expected to meet at least quarterly to examine and approve the audit report
prepared by the independent auditors of the Bank, to review and recommend the
independent auditors to be engaged by the Company, to review the internal audit
function and internal accounting controls of the Company, and to review and
approve audit policies.

COMPENSATION OF TRUSTEES AND DIRECTORS

     Directors of the Bank receive a retainer fee of $12,000 ($17,000 for the
Chairman), plus a fee of $700 per Board meeting attended and $400 per meeting
for attendance at committee meetings. Directors who are also employees of the
Bank are not eligible to receive Board fees. Directors of the Company will
receive an annual retainer fee of $5,000 and a fee of $400 per meeting for
attendance at Board and committee meetings.

     TRUSTEES DEFERRED FEES PLAN. The Trustees Deferred Fee Plan ("Trustees
Plan") is a non-qualified deferred compensation plan into which a Trustee can
defer up to 100% of his or her Board fees earned during the calendar year. All
amounts deferred by a Trustee are fully vested at all times. Amounts credited to
a deferred fee account are invested in equity securities, fixed income
securities, money market accounts, and cash, at the sole discretion of the Bank.
Upon cessation of a Trustee's service with the Bank, the Bank will pay the
Trustee the amounts credited to their account. The amounts will be paid in five
to ten substantially equal annual installments, as selected by the Trustee,
provided, however, that the annual payments will not be less than $25,000, and
if necessary, the number of payments and the amount of the final payment will be
adjusted accordingly.

     If the Trustee dies before all payments have been made, the remaining
payments will be made to the Trustee's designated beneficiary. In the event of
the Trustee's death prior to commencement of benefits, the Bank shall pay the
Trustee's beneficiary the amounts credited to the benefit of the Trustee under
the Trustee's Plan, in five substantially equal annual payments of not less than
$25,000, and if necessary, the payments will be adjusted in the same manner as
paid, as applicable.

EXECUTIVE COMPENSATION

     Summary Compensation Table. The following table sets forth for the year
ended December 31, 1996, certain information as to the total remuneration paid
by the Bank to the Chief Executive Officer of the Bank, as well as to the four
most highly compensated executive officers of the Bank at December 31, 1996
other than the Chief Executive Officer who received total annual compensation in
excess of $100,000 (together, the "Named Executive Officers").

                                       96
Annual Compensation                   Long-Term Compensation
                                               -------------------------------     ------------------------------------
                                                                                          Awards          Payouts
                                                                                   -------------------- ---------------
                                                                        Other
                                     Year                               Annual       Restricted    Options/              
                                     Ended                           Compensation      Stock        SARS         LTIP  
  Name and Principal Position       12/31(1)    Salary     Bonus(2)      (3)          Awards(4)    (#)(5)       Payouts  
-------------------------------   ----------   --------  -----------  -----------    ---------- ------------   ----------
William E. Swan                      1996     $239,194      $93,764           --            --           --           --   
President and Chief Executive                                                                                             
 Officer                                                                                                                  
Paul J. Kolkmeyer                    1996      135,034       46,286           --            --           --           --   
 Executive Vice President and                                                                                             
  Chief Financial Officer                                                                                                 
G. Gary Berner                       1996      108,534       37,653           --            --           --           --   
 Senior Vice President and                                                                                                
  Chief Lending Officer                                                                                                   
Kathleen Monti                       1996       80,464       28,519       12,317             --           --          --   
 Senior Vice President--         
  Human Resources and Administration
All Other
                                                    Compensation
  Name and Principal Position                            (6) 
-------------------------------                     -------------
William E. Swan                              
President and Chief Executive                           $74,259
 Officer                                     
Paul J. Kolkmeyer                            
 Executive Vice President and                            38,867
  Chief Financial Officer                    
G. Gary Berner                               
 Senior Vice President and                               38,261
  Chief Lending Officer                      
Kathleen Monti                               
 Senior Vice President--                                 30,536 
  Human Resources and Administration
___________________________________
(1)  In accordance with the rules on executive officer and director compensation
     disclosure adopted by the SEC, Summary Compensation information is excluded
     for the fiscal years ended December 31, 1995 and 1994, as the Bank was not
     a public company during such periods.
(2)  Includes payments under the Bank's Management Incentive Program.
(3)  The Bank also provides certain members of senior management with the use of
     an automobile, club membership dues, and certain other personal benefits.
     Except in the case of Ms. Monti, the aggregate value of such personal
     benefits did not exceed the lesser of $50,000 or 10% of the total annual
     salary and bonus reported for each officer.

(4)  Does not include awards pursuant to the Recognition and Retention Plan, as
     such awards were not earned, vested or granted in 1996. For a discussion of
     the terms of the Recognition Plan which are intended to be adopted by the
     Company, see "--Benefit Plans--Recognition and Retention Plan."

(5)  No stock options or SARs were earned or granted in 1996. For a discussion
     of the Stock Option Plan which is intended to be adopted by the Company,
     see "--Benefit Plans--Stock Option Plan."
(6)  Includes the Bank's contributions or allocations (but not earnings)
     pursuant to the Bank's 401(k) Plan, non-qualified deferred compensation
     plan, split dollar life insurance plans, and income imputed on group term
     life insurance in excess of $50,000 per employee.

REPORT OF INDEPENDENT COMPENSATION CONSULTANT

     Pursuant to regulations of the Department applicable to the Reorganization,
the Bank must obtain the opinion of an independent compensation consultant as to
whether or not the total compensation for the executive officers and
Trustees/Directors of the Bank, viewed as a whole and on an individual basis, is
reasonable and proper in comparison to the compensation provided to executive
officers and directors of similar publicly-traded financial institutions. The
Bank has obtained an opinion from William M. Mercer, Incorporated, which
indicates that, based upon published professional survey data of similarly
situated publicly-traded financial institutions operating in the relevant
markets as of August 1, 1997, with respect to the total cash compensation (base
salary and annual incentive) for executive officers and total compensation for
Trustees of the Bank, such compensation, viewed as a whole on an individual
basis, is reasonable and proper in comparison to the compensation provided to
similarly situated publicly-traded financial institutions, and that, with
respect to the amount of shares of Common Stock expected to be reserved under
the ESOP, the Recognition and Retention Plan and Stock Option Plan as a whole,
such amounts reserved for granting are reasonable in comparison to similar
publicly-traded financial institutions.

EMPLOYMENT AGREEMENTS

     The Bank intends to enter into employment agreements with the Named
Executive Officers and Diane Allegro. The employment agreements will have terms
ranging from twelve to thirty-six months. On each anniversary date, an
employment agreement may be extended for an additional twelve months, so that
the remaining term shall be from twelve to thirty-six months. If the agreement
is not renewed, the agreement will expire at the end of its term. Under the
employment agreements, the current Base Salary for Messrs. Swan, Kolkmeyer,
Berner and for Ms. Monti and Ms.

                                       97
Allegro will be $____________, $ ____________, $ __________, $ __________, and
__________, respectively. The Base Salary may be increased but not decreased.
The employment agreements also provide that the executive will be entitled to
participate in an equitable manner with other executive officers in
discretionary bonuses declared by the Board. In addition to the Base Salary and
bonus, the employment agreements provide for, among other things, participation
in retirement plans and other employee and fringe benefits applicable to
executive personnel. The agreements provide for termination by the Bank for
cause at any time. In the event the Bank involuntarily terminates the
executive's employment for reasons other than for cause, the executive, or in
the event of death, his or her beneficiary would be entitled to severance pay in
an amount equal to three times Base Salary (in the case of Messrs. Swan and
Kolkmeyer), two times Base Salary (in the case of Mr. Berner and Ms. Monti), and
one times Base Salary (in the case of Ms. Allegro). For these purposes,
involuntary termination includes a constructive termination where the Bank (i)
fails to appoint or reappoint the executive to his or her present position, (ii)
materially changes the executive's functions, duties or responsibilities, which
change would cause the executive's position to become one of lesser
responsibility, importance or scope, (iii) relocates the executive's place of
employment by more than 100 miles, (iv) liquidates or dissolves other than in
connection with a reorganization that does not affect the executive's status, or
(v) a breach of the employment agreement. The Bank would also continue the
executive's health coverage through the remaining term of the employment
agreement. In the event the payments to the executive would include an "excess
parachute payment" as defined by Code Section 280G (relating to payments made in
connection with a change in control), the payments would be reduced in order to
avoid having an excess parachute payment.

     In the event of an executive's death while employed under an employment
agreement, the Bank will pay the executive's estate the executive's salary
through the end of the calendar month in which the executive dies. If the
executive becomes disabled (as defined in the Bank's disability plan), the
employment agreement will remain in effect through the term of the agreement,
except that the executive's salary payments will be reduced by any disability
insurance payments made to the executive.

BENEFIT PLANS

     The Bank's current tax-qualified employee pension benefit plans consist of
a defined benefit pension plan and a profit sharing plan with a salary deferral
feature under section 401(k) of the Code. As a result of the Reorganization, the
Company and the Bank will be able to compensate employees with stock-based
compensation pursuant to the ESOP, and employees, officers and directors with
stock-based compensation pursuant to a Recognition and Retention Plan and the
Stock Option Plan described below.

     DEFERRED COMPENSATION PLAN. The Bank has adopted the Lockport Savings Bank
Deferred Compensation Plan ("Non-qualified Plan") for the benefit of certain
senior executives of the Bank that it has designated to participate in the plan.
Under the Non-qualified Plan, the Bank annually credits an executive's deferred
compensation account with an amount determined in the sole discretion of the
Board. The amounts credited to the executive's deferred compensation account are
annually credited with earnings, at a rate determined in the sole discretion of
the Board. An executive will vest in amounts credited to his account at the rate
of 20% per year, beginning in the second year of participation in the Non-
qualified Plan until the executive is fully vested after 6 years of
participation. For these purposes, an executive's years of participation will be
equal to the executive's number of whole years of employment with the Bank
measured from the date that an Executive becomes a participant under the Plan.
Notwithstanding the above, an Executive shall be fully vested in his deferred
compensation account upon attaining age 60 with five years of participation or
in the event of a change in control of the Bank. Benefits are payable to the
executive in fifteen substantially equal annual payments commencing (i) 30 days
after the executive has attained age 60, or (ii) 30 days after the executive
terminates employment, if after age 60, or due to disability. In the event of
the executive's death after benefits commence, the Bank will pay the remaining
benefits to the executive's beneficiary over the remainder of the payment term.
In the event of the executive's death after termination of employment but prior
to commencement of benefit payments, the Bank will pay the executive's benefit
to the executive's beneficiary in fifteen substantially equal annual payments
commencing within 30 days of the executive's death. In the event of the
executive's death prior to termination of employment, the executive will forfeit
all benefits under the Non-qualified Plan. In the event of an unforeseeable
emergency which will result in a severe financial

                                       98
hardship, the executive may request a distribution of all or part of his
benefits or may request an acceleration of benefits that are being paid to him,
as applicable.

     Messrs. Swan, Kolkmeyer, and Berner and Ms. Monti are participants in the
Non-qualified Plan. As of December 31, 1996, Messrs. Swan, Kolkmeyer, and Berner
and Ms. Monti, had $102,380, $41,754, and $21,396 and $7,643, respectively,
credited to their deferred compensation accounts.

     Defined Benefit Pension Plan. The Bank maintains the Retirement Plan of
Lockport Savings Bank in RSI Retirement Trust ("Retirement Plan") which is a
qualified, tax-exempt defined benefit plan. Employees age 21 or older who have
worked at the Bank for a period of one year and have been credited with 1,000 or
more hours of service with the Bank during the year are eligible to accrue
benefits under the Retirement Plan, provided, however that leased employees,
employees paid on an hourly or contract basis, and employees employed off-site
in connection with the operation or maintenance of properties acquired through
foreclosure or deed are not eligible to participate. The Bank contributes each
year, if necessary, an amount to the Retirement Plan to satisfy the actuarially
determined minimum funding requirements in accordance with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). For the plan year
ending September 30, 1997, a contribution of $105,827 was required to be made to
the Retirement Plan. At September 30, 1997, the market value of the Retirement
Plan trust fund equaled approximately $9.2 million.

     In the event of retirement at normal retirement age (i.e., the later of age
65 or the 5th anniversary of participation in the Retirement Plan), the plan is
designed to provide a single life annuity. For a married participant, the normal
form of benefit is an actuarially reduced joint and survivor annuity where, upon
the participant's death, the participant's spouse is entitled to receive a
benefit equal to 50% of that paid during the participant's lifetime.
Alternatively, a participant may elect (with proper spousal consent, if
necessary) a joint and 100% survivor annuity, or an annuity payable for a period
certain and life. All forms in which a participant's benefit may be paid will be
actuarially equivalent to the single life annuity. The retirement benefit
provided is an amount equal to 2% (1.25% as of October 1, 1998) of a
participant's average annual earnings multiplied by the participant's years of
credited service (up to a maximum of 30 years). Retirement benefits are also
payable upon retirement due to early and late retirement or death. A reduced
benefit is payable upon early retirement at age 60, at or after age 55 and the
completion of 20 years of vested service with the Bank, or after completion of
30 years of vested service. Upon termination of employment other than as
specified above, a participant who has five years of vested service after age 18
is eligible to receive his or her accrued benefit commencing, generally, on such
participant's normal retirement date.

     The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1997, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.
Final
             Average                          Years of Service and Benefit Payable at Retirement
                                              --------------------------------------------------
           Compensation                           15            20           25            30
           ------------                       -----------  -----------  -----------  -----------
$50,000                      $    15,000    $     20,000    $    25,000     $   30,000
             $75,000                      $    22,500    $     30,000    $    37,500     $   45,000
            $100,000                      $    30,000    $     40,000    $    50,000     $   60,000
            $125,000                      $    37,500    $     50,000    $    62,500     $   75,000
       $160,000 and above                 $    48,000    $     64,000    $    80,000     $   96,000
As of September 30, 1997, Messrs. Swan, Kolkmeyer and Berner and Ms. Monti
had 10, 7, 6 and 4 years of credited service (i.e., benefit service) under the
Retirement Plan, respectively.

     401(K) PLAN. The Bank maintains the Lockport Savings Bank 401(k) Plan (the
"401(k) Plan") which is a qualified, tax-exempt profit sharing plan with a
salary deferral feature under Section 401(k) of the Code. All employees

                                       99
who have attained age 21 and have completed one year of employment during which
they worked at least 1,000 hours are eligible to participate. Eligible employees
are entitled to enter the 401(k) Plan on a monthly basis.

     Under the 401(k) Plan, participants are permitted to make salary reduction
contributions (in whole percentages) equal to the lesser of (i) from 1% to 15%
of compensation or (ii) $9,500 (as indexed annually). For these purposes,
"compensation" includes wages reported on federal income tax form W-2, excluding
bonuses, but does not include compensation in excess of the Code Section
401(a)(17) limits (i.e., $160,000 in 1997). The Bank will match 50% of the first
6% of salary that a participant contributes to the 401(k) Plan. All
contributions and earnings are fully and immediately vested. A participant may
withdraw salary reduction contributions (and earnings) in the event the
participant suffers a financial hardship.

     The 401(k) Plan permits employees to direct the investment of his or her
own accounts into various investment options. In connection with the Offering,
the 401(k) Plan intends to offer participants the opportunity to invest in an
"Employer Stock Fund" which intends to purchase Common Stock in the Offering.
Each participant who directs the Trustee to invest all or part of his or her
account in the Employer Stock Fund will have assets in his or her account
applied to the purchase of shares of Common Stock. Participants will be entitled
to direct the Trustee as to how to vote his or her allocable shares of Common
Stock.

     Plan benefits will be paid to each participant in the form of a single life
annuity (or joint and survivor annuity if married) upon retirement unless an
alternate form of distribution (single sum annuity for a period certain or life,
or equal payments over a fixed period) is selected. Normal retirement age under
the plan is age 65. Early retirement age is the earliest of age 59 1/2 or the
date on which a participant ceases working for the Bank.

     At December 31, 1996, the market value of the 401(k) Plan equaled
approximately $3.7 million. The Bank's matching contribution to the 401(k) Plan
for the Plan year ended December 31, 1996, was approximately $169,000.

     EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank intends to implement an
Employee Stock Ownership Plan (the "ESOP") in connection with the
Reorganization. Employees with at least one year of employment with the Bank and
who have attained age 21 are eligible to participate. As part of the
Reorganization, the ESOP intends to borrow funds from the Company and use those
funds to purchase a number of shares equal to up to 8.0% of the Common Stock to
be sold in the Offering. Collateral for the loan will be the Common Stock
purchased by the ESOP. The loan will be repaid principally from the Bank's
discretionary contributions to the ESOP over a period of up to 30 years. It is
anticipated that the interest rate for the loan will be equal to the prime rate
published in The Wall Street Journal at the time of the Offering. Shares
purchased by the ESOP will be held in a suspense account for allocation among
participants as the loan is repaid.

     Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of compensation in the year of allocation. For
this purpose, compensation is defined as wages reported on federal income tax
form W-2 but not in excess of the Code Section 401(a)(17) limit. Participants in
the ESOP will receive credit for up to 2 years of service prior to the effective
date of the ESOP. Benefits generally vest over a six year period at the rate of
20% per year, beginning in the second year of service, until a participant is
100% vested after six years or upon normal retirement (as defined in the ESOP),
disability, or death of the participant. A participant who terminates employment
for reasons other than death, retirement, or disability prior to six years of
credited service will forfeit the nonvested portion of his benefits under the
ESOP. Benefits will be payable in the form of Common Stock and cash upon death,
retirement, early retirement, disability or separation from service. The Bank's
contributions to the ESOP are discretionary, subject to the loan terms and tax
law limits, and, therefore, benefits payable under the ESOP cannot be estimated.
In November 1993, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 93-6, which requires the Bank to
record compensation expense in an amount equal to the fair market value of the
shares released from the suspense account each year.

                                      100
In connection with the establishment of the ESOP, the Bank will establish a
committee of non-employee directors to administer the ESOP. The Bank will either
appoint its non-employee directors or an independent financial institution to
serve as trustee of the ESOP. The ESOP committee may instruct the trustee
regarding investment of funds contributed to the ESOP. The ESOP trustee, subject
to its fiduciary duty, must vote all allocated shares held in the ESOP in
accordance with the instructions of participating employees. Under the ESOP,
nondirected shares, and shares held in the suspense account, will be voted in a
manner calculated to most accurately reflect the instructions it has received
from participants regarding the allocated stock so long as such vote is in
accordance with the provisions of ERISA.

     STOCK OPTION PLAN. At a meeting of the Company's shareholders to be held no
earlier than six months after the completion of the Reorganization, the Board of
Directors intends to submit for shareholder approval a Stock Option Plan for
directors and officers of the Bank and of the Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10% of the shares
sold in the Offering would be reserved for issuance by the Company upon the
exercise of the stock options granted under the Stock Option Plan. Ten percent
of the shares sold in the Offering would amount to867,747 shares, 1,020,911
shares, 1,174,048 shares or 1,350,155 shares at the minimum, mid-point, maximum
and adjusted maximum of the Estimated Valuation Range, respectively. If the plan
is approved within one year of the completion of the Reorganization, no options
would be granted under the Stock Option Plan until the date on which shareholder
approval is received.

     The exercise price of the options granted under the Stock Option Plan will
be equal to the fair market value of the shares on the date of grant of the
stock options. If the Stock Option Plan is adopted within one year following the
Offering, options will become exercisable at a rate of 20% at the end of each
twelve (12) months of service with the Bank after the date of grant, subject to
early vesting in the event of death or disability. Options granted under the
Stock Option Plan would be adjusted for capital changes such as stock splits and
stock dividends. Notwithstanding the foregoing, awards will be 100% vested upon
termination of employment due to death or disability, and if the Stock Option
Plan is adopted more than 12 months after the Offering, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
Under FDIC rules, if the Stock Option Plan is adopted within the first 12 months
after completion of the Offering, no individual officer can receive more than
25% of the awards under the plan, no outside director can receive more than 5%
of the awards under the plan, and all outside directors as a group can receive
no more than 30% of the awards under the plan in the aggregate.

     The Stock Option Plan would be administered by a Committee of non-employee
members of the Company's Board of Directors. Options granted under the Stock
Option Plan to employees could be "incentive" stock options designed to result
in a beneficial tax treatment to the employee but no tax deduction to the
Company. Non-qualified stock options could also be granted under the Stock
Option Plan, and will be granted to the non-employee directors who receive
grants of stock options. In the event an option recipient terminated his
employment or service as an employee or director, the options would terminate
during certain specified periods.

     RECOGNITION AND RETENTION PLAN. At a meeting of the Company's shareholders
to be held no earlier than six months after the completion of the
Reorganization, the Board of Directors also intends to submit a Recognition and
Retention Plan for shareholder approval. The Recognition and Retention Plan will
provide the Bank's directors and officers an ownership interest in the Company
in a manner designed to encourage them to continue his or her service with the
Bank. The Bank will contribute funds to the Recognition and Retention Plan from
time to time to enable it to acquire an aggregate amount of Common Stock equal
to up to 4% of the shares of Common Stock sold in the Offering, either directly
from the Company or in open market purchases. Four percent of the shares sold in
the Offering would amount to 347,109 shares, 408,364 shares, 469,619 shares or
540,062 shares at the minimum, midpoint, maximum and adjusted maximum of the
Estimated Valuation Range, respectively. In the event that additional authorized
but unissued shares would be acquired by the Recognition and Retention Plan
after the Offering, the interests of existing shareholders would be diluted. The
executive officers and directors will be awarded Common Stock under the
Recognition and Retention Plan without having to pay cash for the shares. If the
plan is adopted within one year of completion of the Reorganization, no awards
under the Recognition and Retention Plan would be made until the date the
Recognition and Retention Plan is approved by the Company's shareholders.

                                      101
Awards under the Recognition and Retention Plan would be nontransferable
and nonassignable, and during the lifetime of the recipient could only be earned
by the director or officer. If the Recognition and Retention Plan is adopted
within one year following completion of the Offering, the shares which are
subject to an award would vest and be earned by the recipient at a rate of 20%
of the shares awarded at the end of each full twelve (12) months of service with
the Bank after the date of grant of the award. Awards would be adjusted for
capital changes such as stock dividends and stock splits. Notwithstanding the
foregoing, awards would be 100% vested upon termination of employment or service
due to death or disability, and if the Recognition and Retention Plan is adopted
more than 12 months after completion of the Reorganization, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
If employment or service were to terminate for other reasons, the award
recipient would forfeit any nonvested award. If employment or service is
terminated for cause (as would be defined in the Recognition and Retention
Plan), shares not already delivered under the Recognition and Retention Plan
would be forfeited. Under FDIC rules, if the Recognition and Retention Plan is
adopted within the first 12 months after completion of the Reorganization and
Offering, no individual officer can receive more than 25% of the awards under
the plan, no outside Trustee can receive more than 5% of the awards under the
plan, and all outside Trustees as a group can receive no more than 30% of the
awards under the plan in the aggregate.

     When shares become vested under the Recognition and Retention Plan, the
participant will recognize income equal to the fair market value of the Common
Stock earned, determined as of the date of vesting, unless the recipient makes
an election under ss. 83(b) of the Code to be taxed earlier. The amount of
income recognized by the participant would be a deductible expense for tax
purposes for the Company. If the Recognition and Retention Plan is adopted
within one year following completion of the Reorganization and Offering,
dividends and other earnings will accrue and be payable to the award recipient
when the shares vest. If the Recognition and Retention Plan is adopted within
one year following completion of the Reorganization and Offering, shares not yet
vested under the Recognition and Retention Plan will be voted by the trustee of
the Recognition and Retention Plan, taking into account the best interests of
the recipients of the Recognition and Retention Plan awards. If the Recognition
and Retention Plan is adopted more than one year following completion of the
Reorganization and Offering, dividends declared on unvested shares will be
distributed to the participant when paid, and the participant will be entitled
to vote the unvested shares.

INDEBTEDNESS OF MANAGEMENT

     Under New York Banking law, the Bank, as a mutual institution, cannot make
a loan to a Trustee or a person who is an "executive officer" for regulatory
purposes, except for loans made to executive officers that are secured by a
first mortgage on a primary residence or by a deposit account at the Bank. Any
such loans that are outstanding have been made in the ordinary course of
business on the same terms and conditions as the Bank would make to any other
customer and do not involve more than a normal risk of collectibility or present
other unfavorable features. Following the Reorganization, the Bank will not be
subject to this restriction in connection with loans to Directors and executive
officers.

                        THE REORGANIZATION AND OFFERING

     THE  SUPERINTENDENT  HAS  APPROVED  THE PLAN AND THE  OFFERING OF THE
COMMON  STOCK  SUBJECT  TO  THE  APPROVAL  OF  THE  BANK'S  DEPOSITORS  AND  THE
SATISFACTION OF CERTAIN CONDITIONS IMPOSED BY THE SUPERINTENDENT.  HOWEVER, SUCH
APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION  OR ENDORSEMENT OF THE OFFERING OR
THE PLAN BY THE SUPERINTENDENT.

DESCRIPTION OF AND REASONS FOR THE REORGANIZATION

     Our Board of Trustees unanimously adopted the Plan and the Superintendent
has approved the Plan of Reorganization (the "Plan"). Pursuant to our Plan, we
will reorganize into what we call a "two-tier" mutual holding company structure.
We call it a two-tier structure because we will have two levels of holding
companies--a "mid-tier" stock holding company and a "top-tier" mutual holding
company. Under the terms of the Plan (i) we will form the Company as a Delaware
corporation; (ii) we will form the Mutual Holding Company as a New York mutual
holding

                                      102
company; (iii) we will reorganize the Bank into a capital stock form of
organization and issue 100% of our to-be outstanding common stock to the
Company; and (iv) the Company will issue shares of Common Stock to the public
and the Mutual Holding Company. The number of shares of Common Stock sold to
depositors and the public pursuant to this Prospectus will be equal to 45.4% of
the shares issued in the Reorganization and the number of shares issued to the
Mutual Holding Company will be equal to 53.3% of the shares issued in the
Reorganization. In this Prospectus we will refer to all of these steps that are
part of this transaction as the "Reorganization," and we will refer to the
issuance of 45.4% of the Company's Common Stock pursuant to this Prospectus as
the "Offering." The two-tier mutual holding company structure is most easily
understood by considering the following schematic:

                                                                               
       ------------------------            ----------------------              
                                                                               
          The Mutual Holding                         Public                    
               Company                            Stockholders                 
          (a New York mutual                                                   
            holding company)                                                   
       ------------------------            -----------------------             
                      54% of the                     46% of the                
                       Common                         Common                   
                        Stock                          Stock                   
       -----------------------------------------------------------             
                                                                               
                  The Company (a Delaware corporation)                         
                                                                               
       -----------------------------------------------------------             
                                      100% of the                              
                                     Common Stock                              
                                                                               
       -----------------------------------------------------------             
                                                                               
                                The Bank                                       
                      (a New York stock savings bank)                          
                                                                               
        ----------------------------------------------------------              

     In adopting the Plan, our Board of Trustees determined that the
Reorganization is in the best interest of the Bank. The primary purpose of the
Reorganization is to establish a structure that will enable us to compete and
expand more effectively in the financial services marketplace, and that will
enable our depositors, employees, management and trustees to obtain an equity
ownership interest in the Bank. Our new structure will permit the Company to
issue capital stock, which is a source of capital not available to a mutual
savings bank, and we will take advantage of this new ability by issuing Common
Stock in the Offering. Since the Company is not offering all of its Common Stock
for sale to depositors and the public in the Offering (but is issuing a majority
of its stock to the Mutual Holding Company), the Reorganization will result in
less capital raised in comparison to a standard mutual-to-stock conversion. The
Reorganization, however, will also offer the Bank the opportunity to raise
additional capital since the stock held by the Mutual Holding Company will be
available for sale in the future in the event of the Mutual Holding Company
decides to convert to the capital stock form of organization. See "Regulation--
Mutual Holding Company Regulation." The Reorganization will also give us greater
flexibility to structure and finance the expansion of our operations, including
the potential acquisition of other financial institutions, and to diversify into
other financial services. The holding company form of organization is expected
to provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, as well as other companies. Although
we have no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. Lastly, the Reorganization
will enable us to better manage our capital by giving us broader investment
opportunities through the holding company structure, and enable us to distribute
capital to stockholders of the Company in the form of dividends and stock
repurchases. Because only a minority of the Common

                                      103
Stock will be offered for sale in the Offering, our current mutual form of
ownership and our ability to remain an independent savings bank and to provide
community-oriented financial services will be preserved through the mutual
holding company structure.

     The Board of Trustees believes that these advantages outweigh the potential
disadvantages of the mutual holding company structure, which may include: (i)
the inability of stockholders other than the Mutual Holding Company to obtain
majority ownership of the Company and the Bank, which may result in the
perpetuation of the management and Board of Directors of the Bank and the
Company; and (ii) that the mutual holding company structure is a relatively new
form of corporate ownership, and new regulatory policies relating to the mutual
interest in the Mutual Holding Company that may be adopted from time-to-time may
have an adverse impact on minority stockholders. A majority of the voting stock
of the Company will be owned by the Mutual Holding Company, which is a mutual
institution that will be controlled by the existing Board of Trustees of the
Bank. While this structure will permit management to focus on the Company's and
the Bank's long-term business strategy for growth and capital redeployment
without undue pressure from stockholders, it will also serve to perpetuate the
existing management and trustees of the Bank. The Mutual Holding Company will be
able to elect all members of the Board of Directors of the Company, and will be
able to control the outcome of all matters presented to the stockholders of the
Company for resolution by vote except for certain matters that must be approved
by more than a majority of stockholders of the Company. No assurance can be
given that the Company will not take action adverse to the interests of the
minority stockholders. For example, the Company could revise the dividend policy
or defeat a candidate for the Board of Directors of the Bank or other proposals
put forth by the minority stockholders.

     The Reorganization does not preclude the conversion of the Mutual Holding
Company from the mutual to stock form of organization which would be effected
through a merger of the Mutual Holding Company into the Company or the Bank and
the concurrent sale of the shares held by the Mutual Holding Company in a
subscription offering. A conversion of the Mutual Holding Company from the
mutual to stock form of organization is not anticipated for the foreseeable
future.

     Following the completion of the Reorganization, all depositors who had
liquidation rights with respect to the Bank as of the effective date of the
Reorganization will continue to have such rights solely with respect to the
Mutual Holding Company so long as they continue to hold deposit accounts with
the Bank. In addition, all persons who become depositors of the Bank subsequent
to the Reorganization will have such liquidation rights with respect to the
Mutual Holding Company. Borrowers currently do not have ownership or voting
rights in the Bank and will not receive ownership or voting rights with respect
to the Mutual Holding Company.

     All insured deposit accounts of the Bank that are transferred to the Bank
will continue to be federally insured by the FDIC and the BIF up to the legal
maximum limit in the same manner as deposit accounts existing in the Bank
immediately prior to the Reorganization. Upon completion of the Reorganization,
the Bank may exercise any and all powers, rights and privileges of, and shall be
subject to all limitations applicable to, capital stock savings banks under New
York law. As long as the Mutual Holding Company is in existence, the Mutual
Holding Company will be required to own at least 51% of the voting stock of the
Company, and the Company will own 100% of the voting stock of the Bank. The Bank
and the Company may issue any amount of non-voting stock or debt to persons
other than the Mutual Holding Company.

THE OFFERING

     Concurrent with the Reorganization, the Company is offering shares of
Common Stock to persons other than the Mutual Holding Company. An offering of
between 8,677,747 and 11,740,482 shares of the Common Stock (subject to
adjustment to up to pursuant to this Prospectus is being made concurrently with
the Reorganization. The shares of Common Stock that will be sold in the Offering
will constitute no more than 45.4% of the shares that will be outstanding after
the Offering (the "Minority Ownership Interest"). Following the Reorganization
and the Offering, the Company also will be authorized to issue additional Common
Stock or preferred stock to persons other than the Mutual Holding Company,
without prior approval of the holders of the Common Stock.

                                      104
The shares of Common Stock are being offered for sale at a fixed price of
$10.00 per share in the Subscription Offering pursuant to subscription rights in
the following order of priority to: (i) holders of deposit accounts with a
balance of $100 or more on August 31, 1996 ("Eligible Account Holders"); (ii)
the Bank's Employee Plans, including the ESOP; and (iii) depositors whose
accounts in the Bank totaled $100 or more on December 31, 1997 ("Supplemental
Eligible Account Holders"). Concurrently, and subject to the prior rights of
holders of subscription rights, any shares of Common Stock not subscribed for in
the Subscription Offering are being offered in the Community Offering at $10.00
per share to certain members of the general public, with a preference given to
natural persons residing in Niagara, Orleans, Erie and Genesee Counties, New
York. Subscription rights will expire if not exercised by 5:00 p.m., New York
time, on March _____, 1998 unless extended by the Bank and the Company.

STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED

     The Plan of Reorganization and Federal and state regulations require that
the aggregate purchase price of the Common Stock sold in the Offering must be
based on the appraised pro forma market value of the Common Stock, as determined
by an independent valuation. The Bank has retained RP Financial to make such
valuation. For its services in making such appraisal, RP Financial will receive
a fee of $55,000 (which amount does not include a fee of $7,500 to be paid to RP
Financial for assistance in preparation of a business plan). The Bank and the
Company have agreed to indemnify RP Financial and its employees and affiliates
against certain losses (including any losses in connection with claims under the
federal securities laws) arising out of its services as appraiser, except where
RP Financial's liability results from its negligence or bad faith.

     The Independent Valuation was prepared by RP Financial in reliance upon the
information contained in the Prospectus, including the Consolidated Financial
Statements. RP Financial also considered the following factors, among others:
the present and projected operating results and financial condition of the Bank
and the economic and demographic conditions in the Bank's existing marketing
area; certain historical, financial and other information relating to the Bank;
a comparative evaluation of the operating and financial statistics of the Bank
with those of other publicly traded savings mutual holding companies; the
aggregate size of the Offering; the impact of the Reorganization on the Bank's
stockholders' equity and earnings potential; the proposed dividend policy of the
Company; and the trading market for securities of comparable institutions and
general conditions in the market for such securities.

     The Independent Valuation states that as of November 28, 1997, the
estimated pro forma market value of the Common Stock ranged from a minimum of
$191,125,000 to a maximum of $258,750,000 with a midpoint of $225,000,000 (the
Estimated Valuation Range). The Board determined to offer the shares in the
Offering at the Subscription Price of $10.00 per share. Based on the Estimated
Valuation Range and the Subscription Price, the number of shares of Common Stock
that the Company will issue will range from between 19,125,000 shares to
25,875,000 shares, with a midpoint of 22,500,000 shares. The Board determined to
offer 45.4% of such shares, or between 8,677,747 shares and 11,740,482 shares
with a midpoint of 10,209,115 shares (the Offering Range), to depositors and the
public pursuant to this Prospectus. In addition, shares are being issued to the
Foundation as part of the Reorganization, which will result in Minority
Stockholders owning 46.7% of the shares of the Common Stock outstanding at the
conclusion of the Reorganization. The 53.3% of the shares of the Company's
Common Stock that are not sold in the Offering or contributed to the Foundation
will be issued to the Mutual Holding Company.

     The Board reviewed the Independent Valuation and, in particular, considered
(i) the Bank's financial condition and results of operations for the nine months
ended September 30, 1997, and the year ended December 31, 1996, (ii) financial
comparisons of the Bank in relation to other financial institutions primarily
including other publicly traded mutual holding companies, and (iii) stock market
conditions generally and in particular for financial institutions, all of which
are set forth in the Independent Valuation. The Board also reviewed the
methodology and the assumptions used by RP Financial in preparing the
Independent Valuation. The Estimated Valuation Range may be amended with the
approval of the Superintendent and the FDIC (if required), if necessitated by
subsequent developments in the financial condition of the Bank or market
conditions generally.

                                      105
Following commencement of the Subscription Offering, the maximum of the
Estimated Valuation Range may be increased by up to 15% to up to $297,562,500,
which will result in a corresponding increase in the maximum of the Offering
Range to up to 13,501,554 shares to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
Estimated Valuation Range and the minimum of the Offering Range may not be
decreased without a resolicitation of subscribers. The Subscription Price of
$10.00 per share will remain fixed. See "--Limitations on Common Stock
Purchases" as to the method of distribution and allocation of additional shares
that may be issued in the event of an increase in the Offering Range to fill
unfilled orders in the Subscription and Community Offerings.

     The Independent Valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the Consolidated
Financial Statements and other information provided by the Bank, nor did RP
Financial value independently the assets or liabilities of the Bank. The
Independent Valuation considers the Bank as a going concern and should not be
considered as an indication of the liquidation value of the Bank. Moreover,
because such valuation is necessarily based upon estimates and projections of a
number of matters, all of which are subject to change from time to time, no
assurance can be given that persons purchasing such shares in the Offering will
thereafter be able to sell such shares at prices at or above the Subscription
Price.

     The Independent Valuation will be updated at the time of the completion of
the Offering. If the update to the Independent Valuation at the conclusion of
the Offering results in an increase in the maximum of the Estimated Valuation
Range to more than $297,562,500 and a corresponding increase in the Offering
Range to more than 13,501,554 shares, or a decrease in the minimum of the
Estimated Valuation Range to less than $191,250,000 and a corresponding decrease
in the Offering Range to fewer than 8,677,747 shares, then the Company, after
consulting with the Superintendent and the FDIC, may terminate the Plan and
return all funds promptly with interest at the Bank's passbook rate of interest
on payments made by check, certified or teller's check, bank draft or money
order, extend or hold a new Subscription Offering, Community Offering, or both,
establish a new Offering Range, commence a resolicitation of subscribers or take
such other actions as permitted by the Superintendent and the FDIC in order to
complete the Reorganization and the Offering. In the event that a resolicitation
is commenced, unless an affirmative response is received within a reasonable
period of time, all funds will be promptly returned to investors as described
above. A resolicitation, if any, following the conclusion of the Subscription
and Community Offerings would not exceed 45 days unless further extended by the
Superintendent and the FDIC for periods of up to 90 days not to extend beyond 24
months following the special meeting of depositors, or ____________, 2000.

     An increase in the Independent Valuation and the number of shares to be
issued in the Offering would decrease both a subscriber's ownership interest and
the Company's pro forma earnings and stockholders equity on a per share basis
while increasing pro forma earnings and stockholder's equity on an aggregate
basis. A decrease in the Independent Valuation and the number of shares to be
issued in the Offering would increase both a subscriber's ownership interest and
the Company's pro forma earnings and stockholder's equity on a per share basis
while decreasing pro forma net income and stockholder's equity on an aggregate
basis. For a presentation of the effects of such changes, see "Pro Forma Data."

     Copies of the appraisal report of RP Financial and the detailed memorandum
of the appraiser setting forth the method and assumptions for such appraisal are
available for inspection at the Main Office of the Bank and the other locations
specified under "Additional Information."

     No sale of shares of Common Stock may be consummated unless, prior to such
consummation, RP confirms to the Bank and the Superintendent that, to the best
of its knowledge, nothing of a material nature has occurred that, taking into
account all relevant factors, would cause RP to conclude that the Independent
Valuation is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the conclusion of the Offering. Any change that
would result in an aggregate purchase price that is below the minimum or above
the maximum of the Estimated Valuation Range would be subject to
Superintendent's approval. If such confirmation is not received, the Bank may
extend the Offering, reopen or commence a new offering, establish a new 
Estimated Valuation Range and commence

                                      106
a resolicitation of all purchasers with the approval of the Superintendent or
take such other actions as permitted by the Superintendent in order to complete
the Offering.

PURCHASE PRIORITIES AND METHOD OF OFFERING SHARES

     The Bank shall have the right, in its sole discretion, to determine whether
prospective purchasers are "residents," "associates," or "acting in concert" as
defined by the Plan and in interpreting any and all other provisions of the
Plan. All such determinations are in the sole discretion of the Bank, and may be
based on whatever evidence the Bank chooses to use in making any such
determination.

     Subject to the preceding paragraph and the limitations set forth in the "--
Limitations upon Purchases of Common Stock" section, the priorities for the
purchase of shares are as follows:

     PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder be given
the opportunity to purchase up to 20,000 shares, or $200,000, of Common Stock;
provided that the Company may, in its sole discretion and without further notice
to or solicitation of subscribers or other prospective purchasers, increase such
maximum purchase limitation to up to 5% of the maximum number of shares issued
in the Offering or decrease such maximum purchase limitation to as low as 0.1%
of the maximum number of shares issued in the Offering, subject to the overall
purchase limitation set forth in the section herein titled "Limitations upon
Purchases of Common Stock." If there are insufficient shares available to
satisfy all subscriptions of Eligible Account Holders, shares will be allocated
to Eligible Account Holders so as to permit each such subscribing Eligible
Account Holder to purchase a number of shares sufficient to make his total
allocation equal to the lesser of 100 shares or the number of shares subscribed
for. Thereafter, unallocated shares will be allocated pro rata to remaining
subscribing Eligible Account Holders whose subscriptions remain unfilled in the
same proportion that each such subscriber's aggregate deposit account balances
as of the Eligibility Record Date ("Qualifying Deposits") bears to the total
amount of Qualifying Deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled. Subscription rights to purchase Common Stock
received by executive officers and trustees of the Bank including associates of
executive officers and trustees, based on their increased deposits in the Bank
in the one year preceding the Eligibility Record Date, shall be subordinated to
the subscription rights of other Eligible Account Holders. To ensure proper
allocation of stock, each Eligible Account Holder must list on their
subscription order form all deposit accounts in which they had an ownership
interest as of the Eligibility Record Date.

     PRIORITY 2: TAX-QUALIFIED EMPLOYEE PLANS. The Tax-Qualified Employee Plans
shall be given the opportunity to purchase in the aggregate up to 10% of the
Common Stock issued in the Offering. In the event of an oversubscription in the
Offering, subscriptions for shares by the Tax-Qualified Employee Plans may be
satisfied, in whole or in part, out of authorized but unissued shares of the
Company subject to the maximum purchase limitations applicable to such plans as
set forth in the section herein titled "Limitations Upon Purchases of Common
Stock," or may be satisfied, in whole or in part, through open market purchases
by the Tax-Qualified Employee Plans subsequent to the closing of the Offering.

     PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent there are
sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the Tax-Qualified Employee Plans, each Supplemental Eligible
Account Holder shall have the opportunity to purchase up to 20,000 shares, or
$200,000, of Common Stock; provided that the Company may, in its sole discretion
and without further notice to or solicitation of subscribers or other
prospective purchasers, increase such maximum purchase limitation to up to 5% of
the maximum number of shares issued in the Offering or decrease such maximum
purchase limitation to as low as 0.1% of the maximum number of shares issued in
the Offering subject to the overall purchase limitations set forth in the
section herein titled "Limitations Upon Purchases of Common Stock." In the event
Supplemental Eligible Account Holders subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders and the Tax-
Qualified Employee Plans, exceed available shares, the shares of Common Stock
will be allocated among subscribing Supplemental Eligible Account Holders so as
to permit each subscribing Supplemental Eligible Account Holder to purchase a
number of shares sufficient to make their total allocation equal to the lesser
of 100 shares or the number of shares subscribed for. Thereafter, unallocated
shares will be allocated to each subscribing Supplemental Eligible Account
Holder whose subscription remains unfilled in the

                                      107
same proportion that such subscriber's aggregate deposit account balances as of
the Supplemental Eligibility Record Date ("Supplemental Qualifying Deposits")
bear to the total amount of Supplemental Qualifying Deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled.

ESTABLISHMENT OF THE CHARITABLE FOUNDATION

     General. In furtherance of our commitment to the communities that we serve,
we intend to voluntarily establish a charitable foundation in connection with
the Reorganization. The Plan provides that the Bank and the Company will
establish the Foundation, which will be incorporated under Delaware law as a 
non-stock corporation and will be funded with cash and shares of Common Stock
contributed by the Company. We will make a contribution to the Foundation, in
the form of shares of Common Stock and cash, in a total amount equal to 5% of
the aggregate Subscription Price of the shares of Common Stock sold in the
Offering. The number of shares of Common Stock to be contributed to the
Foundation will equal 3% of the shares sold in the Offering. The balance of the
contribution will consist of cash. The contribution of Common Stock to the
Foundation will be dilutive to the interests of stockholders and will have an
adverse impact on the reported earnings of the Company in 1998, the year in
which the Foundation is established.

     Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and development
activities within the communities that we serve. The Foundation is being formed
as a complement to our existing community activities, not as a replacement for
such activities. While we intend to continue to emphasize community lending and
development activities following the Reorganization, such activities are not our
sole corporate purpose. The Foundation, conversely, will be completely dedicated
to community activities and the promotion of charitable causes, and may be able
to support such activities in ways that are not currently available to the Bank.
We believe that the Foundation will enable the Company and the Bank to assist
our local community in areas beyond community lending and development. We
believe the establishment of a charitable foundation is consistent with the
Bank's commitment to community service. The Board further believes that the
funding of the Foundation with Common Stock of the Company is a means of
enabling the communities served by us to share in the growth and success of the
Company long after completion of the Reorganization. The Foundation will
accomplish that goal by providing for continued ties between the Foundation and
Bank, thereby forming a partnership with the Bank's community. The establishment
of the Foundation will also enable the Company and the Bank to develop a unified
charitable donation strategy and will centralize the responsibility for
administration and allocation of corporate charitable funds. Charitable
foundations have been formed by other financial institutions for this purpose,
among others. We do not, however, expect the contribution to the Foundation to
take the place of our traditional community lending activities.

     Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's initial board of directors will be comprised of persons who are
existing directors and officers of the Company. Subsequent to the
Reorganization, other individuals may be chosen in light of their commitment and
service to charitable and community purposes. The members of the Foundation, who
are comprised of its board members, will elect the directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee. Only
persons serving as directors of the Foundation qualify as members of the
Foundation, with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms. The certificate of incorporation
of the Foundation provides that the corporation is organized exclusively for
charitable purposes, including community development, as set forth in Section
501(c)(3) of the Code. The Foundation's certificate of incorporation further
provides that no part of the net earnings of the Foundation will inure to the
benefit of, or be distributable to its directors, officers or members.

     The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purpose for which the
Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's board of directors will adopt such
a policy upon establishment of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be

                                      108
bound by their fiduciary duty to advance the Foundation's charitable goals, to
protect the assets of the Foundation and to act in a manner consistent with the
charitable purpose for which the Foundation is established. The directors of the
Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock of the Company and the
cash held by the Foundation. However, as a condition to receiving the
nonobjection of the Reorganization, the Foundation has been required to commit
to the FDIC and the Department that all shares of Common Stock held by the
Foundation will be voted in the same ratio as all other shares of the Company's
Common Stock on all proposals considered by stockholders of the Company;
provided, however, that, consistent with such condition, the FDIC and the
Department would waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (i) cause a violation of the law
of the State of Delaware; (ii) would cause the Foundation to lose its tax-exempt
status, or cause the Internal Revenue Service to deny the Foundation's request
for a determination that it is an exempt organization or otherwise have a
material and adverse tax consequence on the Foundation; or (iii) would cause the
Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the FDIC and the Department to waive such voting restriction, the
Company's or the Foundation's legal counsel would be required to render an
opinion satisfactory to the FDIC and the Department that compliance with the
voting requirement would have the effect described in clauses (i), (ii) or (iii)
above. Under those circumstances, the FDIC and the Department would grant
waivers of the voting restriction upon submission of such legal opinion(s) by
the Company or the Foundation that are satisfactory to the FDIC and the
Department. In the event that the FDIC and the Department were to waive the
voting requirement, the directors would direct the voting of the Common Stock
held by the Foundation.

     The Foundation's place of business will be located at the Bank's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the Bank.
The board of directors of the Foundation will appoint such officers as may be
necessary to manage the operation of the Foundation. In this regard, it is
expected that the Bank will be required to provide the FDIC with a commitment
that, to the extent applicable, the Bank will comply with the affiliate
restrictions set forth in Sections 23A and 23B of the Federal Reserve Act with
respect to any transactions between the Bank and the Foundation.

     As a private foundation under Section 501(c)(3) of the Code, the Foundation
will be required to distribute annually in grants or donations, a minimum of 5%
of the average fair market value of its net investment assets. One of the
conditions imposed on the gift of Common Stock by the Company is that the amount
of Common Stock that may be sold by the Foundation in any one year shall not
exceed 5% of the average market value of the assets held by the Foundation,
except where the board of directors of the Foundation determines that the
failure to sell an amount of common stock greater than such amount would result
in a longer-term reduction of the value of the Foundation's assets and as such
would jeopardize the Foundation's capacity to carry out its charitable purposes.
Upon completion of the Reorganization and the contribution of shares to the
Foundation, the Company would have 19,125,000, 22,500,000 and 25,875,000 shares
issued and outstanding at the minimum, midpoint and maximum of the Estimated
Valuation Range. Because the Company will have an increased number of shares
outstanding, the voting and ownership interests of shareholders in the Company's
Common Stock would be diluted by 1.3%, as compared to their interests in the
Company if the Foundation was not established. For additional discussion of the
dilutive effect, see "Pro Forma Data."

     Impact on Earnings. The contribution of Common Stock to the Foundation will
have an adverse impact on the Company's and the Bank's earnings in the year in
which the contribution is made. The Company will recognize the full expense in
the amount of the contribution of cash and Common Stock to the Foundation in the
quarter in which it occurs, which is expected to be the second quarter of 1998.
The amount of the contribution will range from $4.3 million to $5.9 million,
based on the minimum and maximum of the Estimated Valuation Range, respectively.
The contribution expense will be partially offset by the tax benefit related to
the expense. The Company and the Bank have been advised by their independent tax
advisors that the contribution to the Foundation will be tax deductible, subject
to an annual limitation based on 10% of the Company's annual taxable income.
Assuming an aggregate contribution of $5.8 million (based on the maximum of the
Estimated Valuation Range), the Company estimates a net tax effected expense of
$3.8 million (based upon a 35% tax rate). Management cannot predict earnings for
1998, but expects that the establishment and funding of the Foundation will have
an adverse impact on the Company's earnings for the year. In addition to the
contribution to the Foundation, the Bank expects in the future to continue
making ordinary charitable contributions within its community

                                      109
but the Company and the Bank do not currently anticipate making additional
contributions to the Foundation within the first five years following the
initial contribution.

     Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
would qualify as a Section 501(c)(3) exempt organization under the Internal
Revenue Code of 1986, as amended (the "Code"), and would be classified as a
private foundation. The Foundation will submit a request to the IRS to be
recognized as an exempt organization. The Company and the Bank have received an
opinion of their independent tax advisors that the Foundation would qualify as a
Section 501(c)(3) exempt organization under the Code, except that such opinion
does not consider the impact of the condition to be agreed to by the Foundation
that Common Stock issued to the Foundation be voted in the same ratio as all
other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. Consistent with this condition, in the event that
the Company or the Foundation receives an opinion of their legal counsel that
compliance with the voting restriction would have the effect of causing the
Foundation to lose its tax-exempt status, or otherwise have a material and
adverse tax consequence on the Foundation or subject the Foundation to an excise
tax under Section 4941 of the Code, the FDIC shall waive such voting restriction
upon submission of a legal opinion by the Company or the Foundation that is
satisfactory to the FDIC. The independent tax advisors' opinion further provides
that there is substantial authority for the position that the Company's
contribution of its own stock to the Foundation would not constitute an act of
self-dealing, and that the Company would be entitled to a deduction in the
amount of the fair market value of the stock at the time of the contribution
less the nominal par value that the Foundation is required to pay to the Company
for such stock, subject to an annual limitation based on 10% of the Company's
annual taxable income. The Company, however, would be able to carry forward any
unused portion of the deduction for five years following the contribution.
Assuming the sale of Common Stock at the adjusted maximum of the Estimated
Valuation Range, the Company estimates that all of the deduction should be
deductible over the six-year period. Although the Company and the Bank have
received an opinion of their independent tax advisors that the Company will be
entitled to the deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Foundation as a Section 501(c)(3)
exempt organization or that the deduction will be permitted. In such event, the
Company's tax benefit related to the Foundation would have to be fully expensed,
resulting in a further reduction in earnings in the year in which the IRS makes
such a determination.

     As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the Foundation's fiscal year to maintain its tax-exempt status. The Foundation
will be required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of such
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the Foundation's managers and a concise statement of the purpose of each
grant. The Foundation will also be required to file an annual report with the
Charities Bureau of the Office of the Attorney General of the State of New York.

     Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Reorganization. The establishment of the Foundation
was taken into account by RP Financial in determining the estimated pro forma
market value of the Common Stock of the Company. The aggregate price of the
shares of Common Stock being offered in the subscription and community offerings
is based upon the independent appraisal conducted by RP Financial of the
estimated pro forma market value of the Common Stock of the Company. The pro
forma aggregate price of the Common Stock being offered for sale in the
Reorganization is currently estimated to be between $86.8 million and $117.4
million, with a midpoint of $102.1 million. The pro forma price to book ratio
and the pro forma price to earnings ratio, at and for the nine months ended
September 30, 1997, are 104.7% and 15.6x, respectively, at the midpoint of the
Estimated Valuation Range. In the event that the Reorganization did not include
the Foundation, RP Financial has estimated that the estimated pro forma market
value of the Common Stock being offered for sale in the Offering would be $110.4
million at the midpoint based on a pro forma price to book ratio and the pro
forma price to earnings ratio that of 108.0% and 16.7x, respectively. The amount
of Common Stock being offered for sale in the Reorganization at the

                                      110
midpoint of the Estimated Valuation Range is approximately $8.3 million less
than the estimated amount of Common Stock that would be sold in the Offering
without the Foundation based on the estimate provided by RP Financial.
Accordingly, certain accountholders of the Bank who subscribe to purchase Common
Stock in the Subscription Offering would receive fewer shares depending on the
size of a depositor's stock order and the amount of his or her qualifying
deposits in the Bank and the overall level of subscriptions. See "Comparison of
Valuation and Pro Forma Information Without Foundation." This estimate by RP
Financial was prepared solely for purposes of providing subscribers with
information with which to make an informed decision on the Reorganization.

     The decrease in the amount of Common Stock being offered as a result of the
contribution of Common Stock to the Foundation will not have a significant
effect on the Company or the Bank's capital position. The Bank's regulatory
capital is significantly in excess of its regulatory capital requirements and
will further exceed such requirements following the Reorganization. The Bank's
leverage and risk-based capital ratios at September 30, 1997 were 10.75% and
21.74%, respectively. Assuming the sale of shares at the midpoint of the
Estimated Valuation Range, the Bank's pro forma leverage and risk-based capital
ratios at September 30, 1997 would be 13.5% and 26.9%, respectively. On a
consolidated basis, the Company's pro forma stockholders' equity would be $214.6
million, or approximately 17.3% of pro forma consolidated assets, assuming the
sale of shares at the midpoint of the Estimated Price Range. Pro forma
stockholders' equity per share and pro forma net income per share would be $9.55
and $0.48, respectively. If the Foundation was not being established in the
Reorganization, based on the RP Financial estimate, the Company's pro forma
stockholders' equity would be approximately $222.1 million, or approximately
17.5% of pro forma consolidated assets at the midpoint of the estimate, and pro
forma stockholder's equity per share and pro forma net income per share would be
substantially similar with the Foundation as without the establishment of the
Foundation. See "Comparison of Valuation and Pro Forma Information with No
Foundation."

     Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions agreed to by the Foundation in
writing as a condition to receiving the FDIC's non-objection to and
Superintendent's approval of the Reorganization: (i) the Foundation will be
subject to examination by the FDIC and the Department; (ii) the Foundation must
comply with supervisory directives imposed by the FDIC and the Department; (iii)
the Foundation will operate in accordance with written policies adopted by the
board of directors, including a conflict of interest policy; and (iv) any shares
of Common Stock held by the Foundation must be voted in the same ratio as all
other outstanding shares of Common Stock on all proposals considered by
stockholders of the Company; provided, however, that, consistent with the
condition, the FDIC and the Department would waive this voting restriction under
certain circumstances if compliance with the voting restriction would: (a) cause
a violation of the law of the State of Delaware; (b) would cause the Foundation
to lose its tax-exempt status or otherwise have a material and adverse tax
consequence on the Foundation; or (c) would cause the Foundation to be subject
to an excise tax under Section 4941 of the Code. In order for the Foundation's
legal counsel would be required to render an opinion satisfactory to the FDIC
and the Department. There can be no assurances that a legal opinion addressing
these issues could be rendered, or if rendered, that the FDIC and the Department
would grant unconditional waivers of the voting restriction. In no event would
the voting restriction survive the sale of shares of the Common Stock held by
the Foundation.

     Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion of a mutual savings institution to stock form
has only recently occurred. As such, the Foundation, and the Superintendent's
approval of the Reorganization and the FDIC's nonobjection to the Reorganization
may be subject to potential challenges notwithstanding that the Board of
Directors of the Company and the Board of Trustees of the Bank have carefully
considered the various factors involved in the establishment of the Foundation
in reaching their determination to establish the Foundation as part of the
Reorganization. If challenges were to be instituted seeking to require the Bank
to eliminate establishment of the Foundation in connection with the
Reorganization, no assurances can be made that the resolution of such challenges
would not result in a delay in the consummation of the Reorganization or that
any objecting persons would not be ultimately successful in obtaining such
removal or other relief against the Company or the Bank. Additionally, if the
Company and the Bank are forced to eliminate the Foundation, the Company may be
required to resolicit subscribers in the Offerings. 

                                      111
COMMUNITY OFFERING

     Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered for sale in a Community Offering. This will involve an offering
of all unsubscribed shares directly to the general public. The Community
Offering, if any, shall be for a period of not more than 45 days unless extended
by the Company and the Bank, and shall commence concurrently with, during or
promptly after the Subscription Offering. The Common Stock will be offered and
sold in the Community Offering, in accordance with FDIC and Department
regulations, so as to achieve the widest distribution of the Common Stock. No
person, by himself or herself, or with an associate or group of persons acting
in concert, may subscribe for or purchase more than $200,000 of Common Stock
offered in the Community Offering. Further, the Company may limit total
subscriptions so as to assure that the number of shares available for the public
offering may be up to a specified percentage of the number of shares of Common
Stock. Finally, the Company may reserve shares offered in the Community Offering
for sales to institutional investors.

     In the event of an oversubscription for shares in the Community Offering,
shares will be allocated (to the extent shares remain available) first to
natural persons residing in Niagara, Orleans, Erie and Genesee Counties, New
York and secondly to natural persons residing in the remaining four counties of
Western New York, Wyoming, Allegany, Cattaraugus and Chautauqua counties (the
"Community"), and then to cover any reservation of shares for institutional
orders, and then to cover the orders of any other person subscribing for shares
in the Community Offering so that each such person may receive 1,000 shares, and
thereafter, on a pro rata basis to such persons based on the amount of their
respective subscriptions.

     The terms "residence," "reside," "resided" or "residing" as used herein
with respect to any person shall mean any person who occupied a dwelling within
the Bank's Community, has an intent to remain within the Community for a period
of time, and manifests the genuineness of that intent by establishing an ongoing
physical presence within the Community together with an indication that such
presence within the Community is something other than merely transitory in
nature.

     The Bank may utilize deposit or loan records or such other evidence
provided to it to make a determination as to whether a person is a resident. In
all cases, however, such a determination shall be in the sole discretion of the
Bank.

     The Bank and the Holding Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person.

SYNDICATED COMMUNITY OFFERING

     Any shares of Common Stock not sold in the Subscription Offering or in the
Community Offering, if any, may be offered for sale to the general public by a
selling group of broker-dealers in a Syndicated Community Offering, subject to
terms, conditions and procedures as may be determined by the Bank and the
Company in a manner that is intended to achieve the widest distribution of the
Common Stock subject to the rights of the Company to accept or reject in whole
or in part all order in the Syndicated Community Offering. It is expected that
the Syndicated Community Offering will commence as soon as practicable after
termination of the Subscription Offering and the Community Offering, if any. The
Syndicated Community Offering shall be completed within 45 days after the
termination of the Subscription Offering, unless such period is extended as
provided herein.

     If for any reason a Syndicated Community Offering of unsubscribed shares of
Common Stock cannot be effected and any shares remain unsold after the
Subscription Offering and the Community Offering, if any, the Boards of
Directors of the Company and the Bank will seek to make other arrangements for
the sale of the remaining shares. Such other arrangements will be subject to the
approval of the Department and the FDIC and to compliance with applicable state
and federal securities laws.

                                      112
RESTRICTIONS ON SALE OF STOCK BY TRUSTEES AND OFFICERS

     All shares of the Common Stock purchased by Trustees and officers of the
Bank or the Company in the Offering will be subject to the restriction that such
shares may not be sold or otherwise disposed of for value for a period of one
year following the date of purchase, except for any disposition of such shares
(i) following the death of the original purchaser or (ii) by reason of an
exchange of securities in connection with a merger or acquisition approved by
the applicable regulatory authorities. Sales of shares of the Common Stock by
the Company's directors and officers will also be subject to certain insider
trading and other transfer restrictions under the federal securities laws. See
"Regulation--Federal Securities Laws" and "Description of Capital Stock."

     Each certificate for such restricted shares will bear a legend prominently
stamped on its face giving notice of the restrictions on transfer, and
instructions will be issued to the Company's transfer agent to the effect that
any transfer within such time period of any certificate or record ownership of
such shares other than as provided above is a violation of the restriction. Any
shares of common stock issued pursuant to a stock dividend, stock split or
otherwise with respect to restricted shares will be subject to the same
restrictions on sale.

RESTRICTIONS ON AGREEMENTS OR UNDERSTANDINGS REGARDING TRANSFER OF COMMON STOCK
TO BE PURCHASED IN THE OFFERING

     Prior to the completion of the Offering, no depositor or borrower may
transfer or enter into an agreement or understanding to transfer the legal or
beneficial ownership of the shares of Common Stock to be purchased by such
person in the Offering. Each depositor and borrower who submits an Order Form
will be required to certify that the purchase of Common Stock by such person is
solely for the purchaser's own account and there is no agreement or
understanding regarding the sale or transfer of such shares. The Bank intends to
pursue any and all legal and equitable remedies in the event it becomes aware of
any such agreement or understanding, and will not honor orders reasonably
believed by the Bank to involve such an agreement or understanding.

PROCEDURE FOR PURCHASING SHARES

     To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date, Prospectuses may not be mailed any later than five
days prior to such date or be hand delivered any later than two days prior to
such date. Order forms may only be distributed with a Prospectus.

     Expiration Date. The Offering will terminate at 5:00 p.m. New York Time on
March __, 1998, unless extended by the Bank for up to an additional 45 days or,
if approved by the Superintendent, for an additional period after such 45- day
extension (as so extended, the "Expiration Date"). The Bank is not required to
give purchasers notice of any extension unless the Expiration Date is later than
__________, 1998, in which event purchasers will be given the right to increase,
decrease, confirm, or rescind their orders. If the minimum number of shares
issued in the Offering (_________ shares) is not sold by the Expiration Date,
the Bank may terminate the Offering and promptly refund all orders for Common
Stock. A reduction in the number of shares below the minimum of the Estimated
Valuation Range will not require the approval of depositors or an amendment to
the Independent Valuation. If the number of shares is reduced below the minimum
of the Estimated Valuation Range, purchasers will be given an opportunity to
increase, decrease, or rescind their orders.

     Use of Order Forms. In order to purchase the Common Stock, each purchaser
must complete an Order Form except for certain persons purchasing in the
Syndicated Community Offering as more fully described below. Any person
receiving an Order Form who desires to purchase Common Stock may do so by
delivering (by mail or in person) to the Bank a properly executed and completed
Order Form, together with full payment for the shares purchased. The Order Form
must be received prior to 5:00 p.m. New York Time on March __, 1998. Once
tendered, an Order Form cannot be modified or revoked without the consent of the
Bank. Each person ordering shares is required to represent that they

                                      113
are purchasing such shares for their own account. The interpretation by the Bank
of the terms and conditions of the Plan and of the acceptability of the Order
Forms will be final. The Bank is not required to accept copies of Order Forms.

     Payment for Shares. Payment for all shares will be required to accompany
all completed Order Forms for the purchase to be valid. Payment for shares may
be made by (i) check or money order, or (ii) authorization of withdrawal from a
deposit account maintained with the Bank. Appropriate means by which such
withdrawals may be authorized are provided in the Order Forms. Once such a
withdrawal amount has been authorized, a hold will be placed on such funds,
making them unavailable to the depositor until the Offering has been completed
or terminated. In the case of payments authorized to be made through withdrawal
from deposit accounts, all funds authorized for withdrawal will continue to earn
interest at the contract rate until the Offering is completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares; however, if a
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal without penalty, and the remaining balance will earn interest
at the Bank's passbook rate subsequent to the withdrawal. In the case of
payments made by check or money order, such funds will be placed in a segregated
savings account and interest will be paid by the Bank at the Bank's passbook
rate, which was 3.4% on the date of this Prospectus, from the date payment is
received until the Offering is completed or terminated. Such interest will be
paid by check, on all funds held, including funds accepted as payment for shares
of Common Stock, promptly upon completion or termination of the Offering. An
executed Order Form, once received by the Bank, may not be modified, amended or
rescinded without the consent of the Bank, unless the Offering is not completed
by __________, 1998, in which event purchasers may be given the opportunity to
increase, decrease, confirm or rescind their orders for a specified period of
time.

     Depending on market conditions, the Common Stock may be offered for sale to
the general public on a best efforts basis in the Syndicated Community Offering
by a selling group (the "Selling Group") of broker-dealers ("Selected Dealers")
to be managed by CIBC Oppenheimer Corp. and Trident Securities, Inc. CIBC
Oppenheimer Corp. and Trident Securities, Inc., in their discretion, will
instruct Selected Dealers as to the number of shares to be allocated to each
Selected Dealer. Only upon allocation of shares to Selected Dealers may Selected
Dealers take orders from their customers. Investors who desire to purchase
shares in the Community Offering directly through a Selected Dealer, which may
include CIBC Oppenheimer Corp. and Trident Securities, Inc., are advised that
the members of the Selling Group are required either (a) upon receipt of an
executed Order Form or direction to execute an Order Form on behalf of an
investor, to forward the appropriate purchase price to the Bank for deposit in a
segregated account on or before twelve noon, prevailing time, of the business
day next following such receipt or execution; or (b) upon receipt of
confirmation by such member of the Selling Group of an investor's interest in
purchasing shares, and following a mailing of an acknowledgment by such member
to such investor on the business day next following receipt of confirmation, to
debit the account of such investor on the fifth business day next following
receipt of confirmation and to forward the appropriate purchase price to the
Bank for deposit in the segregated account on or before twelve noon, prevailing
time, of the business day next following such debiting. Payment for any shares
purchased pursuant to alternative (a) above must be made by check in full
payment therefor. Payment for shares purchased pursuant to alternative (b) above
may be made by wire transfer to the Bank.

     Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Offering. Individuals who are participants in 
self-directed tax qualified plans maintained by self-employed individuals
("Keogh Plans") may use the assets in their self-directed Keogh Plan accounts to
purchase shares of Common Stock in the Offering. In addition, the provisions of
ERISA and IRS regulations require that executive officers, trustees, and 10%
stockholders who use self-directed IRA funds and/or Keogh Plan accounts to
purchase shares of Common Stock in the Offering, make such purchase for the
exclusive benefit of the IRA and/or Keogh Plan participant.

     If the ESOP purchases shares of the Common Stock, such plan will not be
required to pay for such shares until consummation of the Offering.

                                      114
Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Offering will be mailed by the Bank to the persons entitled
thereto at the registration address noted on the Order Form, as soon as
practicable following consummation of the Offering. Any certificates returned as
undeliverable will be held by the Bank until claimed by persons legally entitled
thereto or otherwise disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of stock which they ordered.

PLAN OF DISTRIBUTION AND SELLING COMMISSIONS

     Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
offices and by CIBC Oppenheimer Corp. and Trident Securities, Inc. All
prospective purchasers are to send payment directly to the Bank, where such
funds will be held in a segregated special escrow account and not released until
the Offering is completed or terminated.

     To assist in the marketing of the Common Stock, the Bank has retained CIBC
Oppenheimer Corp. and Trident Securities, Inc., both of which are broker-dealers
registered with the NASD. CIBC Oppenheimer Corp. and Trident Securities, Inc.
will assist the Bank in the Offering as follows: (i) in training and educating
the Bank's employees regarding the mechanics and regulatory requirements of the
Offering; (ii) in conducting informational meetings for employees, customers and
the general public; (iii) in coordinating the selling efforts in the Bank's
local communities; and (iv) in soliciting orders for Common Stock. For these
services, CIBC Oppenheimer Corp. and Trident Securities, Inc. will receive an
aggregate fee of .95% of the dollar amount of the Common Stock sold in the
Offering to residents of Niagara, Orleans, Erie and Genesee Counties, New York
(and counties contiguous thereto) and .75% of the dollar amount of the Common
Stock sold in the Offering to other persons. If there is a Syndicated Community
Offering, the aggregate fee shall not exceed 4.5% of the Common Stock sold by
CIBC Oppenheimer Corp. and Trident Securities, Inc. and other NASD member firms
under selected dealer agreements.

     The Bank also will reimburse CIBC Oppenheimer Corp. and Trident Securities,
Inc. for its reasonable out-of-pocket expenses (including legal fees and
expenses up to a maximum of $85,000) associated with its marketing effort. The
Bank has made an advance payment of $10,000 to each of CIBC Oppenheimer Corp.
and Trident Securities, Inc. If the Plan is terminated by the Bank, the Offering
is not completed by __________, 1998, or if CIBC Oppenheimer Corp. and Trident
Securities, Inc. terminate their agreement with the Bank in accordance with the
provisions of the agreement, CIBC Oppenheimer Corp. and Trident Securities, Inc.
will only receive reimbursement of their reasonable out-of-pocket expenses. The
Bank will indemnify CIBC Oppenheimer Corp. and Trident Securities, Inc. against
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the Common Stock, including
liabilities under the Securities Act of 1933.

     Trustees and executive officers of the Bank may participate in the
solicitation of offers to purchase Common Stock. Other trained employees of the
Bank may participate in the Offering in ministerial capacities, providing
clerical work in effecting a sales transaction or answering questions of a
ministerial nature. Other questions of prospective purchasers will be directed
to executive officers or registered representatives. The Bank will rely on Rule
3a4-1 of the Exchange Act, so as to permit officers, trustees, and employees to
participate in the sale of the Common Stock. No officer, trustee, or employee of
the Bank will be compensated for his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the Common Stock.

     A Stock Information Center will be established at the Bank's main office,
in an area separated from the Bank's banking operations. Employees will inform
prospective purchasers to direct their questions to the Stock Information Center
and will provide such persons with the telephone number of the Center.

     Other Restrictions. Notwithstanding any other provision of the Plan, no
person is entitled to purchase any Common Stock to the extent such purchase
would be illegal under any federal or state law or regulation (including state

                                      115
"blue-sky" laws and regulations), or would violate regulations or policies of
the NASD, particularly those regarding free riding and withholding. The Bank
and/or its agents may ask for an acceptable legal opinion from any purchaser as
to the legality of such purchase and may refuse to honor any such purchase order
if such opinion is not timely furnished. The Plan prohibits the Bank from
lending funds or extending credit to any persons to purchase Common Stock in the
Offering.

LIMITATIONS UPON PURCHASES OF COMMON STOCK

     The following additional limitations have been imposed upon purchases of
shares of Common Stock. Defined terms used in this section and not otherwise
defined in this Prospectus shall have the meaning set forth in the Plan.

     A.   The aggregate amount of outstanding Common Stock of the Company owned
          or controlled by persons other than Mutual Holding Company at the
          close of the Offering shall not exceed 49% of the Company's total
          outstanding Common Stock.

     B.   No Person or group of persons Acting in Concert, may purchase more
          than 40,000 shares, or $400,000, of Common Stock in the Offering,
          except that: (i) the Company may, in its sole discretion and without
          further notice to or solicitation of subscribers or other prospective
          purchasers, increase such maximum purchase limitation to up to 5% of
          the number of shares issued in the Offering; (ii) Tax-Qualified
          Employee Plans may purchase up to 10% of the shares issued in the
          Offering; and (iii) for purposes of this paragraph shares to be held
          by any Tax-Qualified Employee Plan and attributable to a person shall
          not be aggregated with other shares purchased directly by or otherwise
          attributable to such person.

     C.   The aggregate amount of Common Stock acquired in the Offering by all
          Management Persons and their Associates, exclusive of any stock
          acquired by such persons in the secondary market, shall not exceed 25%
          of the outstanding shares of Common Stock of the Company sold in the
          Offering. In calculating the number of shares held by Management
          Persons and their Associates under this paragraph or under the
          provisions of paragraph D below, shares held by any Tax-Qualified
          Employee Benefit Plan or any Non-Tax-Qualified Employee Benefit Plan
          of the Bank that are attributable to such persons shall not be
          counted.

     D.   The aggregate amount of Common Stock acquired in the Offering by all
          Management Persons and their Associates, exclusive of any Common Stock
          acquired by such persons in the secondary market, shall not exceed 25%
          of the stockholders' equity of the Bank. In calculating the number of
          shares held by Management Persons and their Associates under this
          paragraph or under the provisions of paragraph C of this section,
          shares held by any Tax-Qualified Employee Benefit Plan or any Non-Tax-
          Qualified Employee Benefit Plan of the Bank that are attributable to
          such persons shall not be counted.

     E.   The Boards of Directors of the Bank and the Company may, in their sole
          discretion, increase the maximum purchase limitation set forth in
          paragraph B to up to 9.9%, provided that orders for Common Stock in
          excess of 5% of the number of shares of Common Stock issued in the
          Offering shall not in the aggregate exceed 10% of the total shares of
          Common Stock issued in the Offering (except that this limitation shall
          not apply to purchases by Tax-Qualified Employee Plans). If such 5%
          limitation is increased, subscribers for the maximum amount will be,
          and certain other large subscribers in the sole discretion of the
          Company and the Bank may be, given the opportunity to increase their
          subscriptions up to the then applicable limit. Requests to purchase
          additional shares of Common Stock under this provision will be
          determined by the Board of Directors of the Company, in its sole
          discretion.

     F.   In the event of an increase in the total number of shares offered in
          the Subscription Offering due to an increase in the maximum of the
          Estimated Valuation Range of up to 15% (the "Adjusted Maximum"), the
          additional shares will be issued in the following order of priority:
          (i) to fill the Employee Plans' subscription to the Adjusted Maximum;
          (ii) in the event that there is an oversubscription at the Eligible

                                      116
Account Holder, Supplemental Eligible Account Holder, or employee,
          officer and trustee categories, to fill unfulfilled subscriptions of
          such subscribers according to their respective priorities set forth in
          the Plan.

     G.   Notwithstanding any other provision of the Plan, no person shall be
          entitled to purchase any Common Stock to the extent such purchase
          would be illegal under any federal law or state law or regulation or
          would violate regulations or policies of the National Association of
          Securities Dealers, Inc., particularly those regarding free riding and
          withholding. The Company and/or its agents may ask for an acceptable
          legal opinion from any purchaser as to the legality of such purchase
          and may refuse to honor any purchase order if such opinion is not
          timely furnished.

     H.   The Board of Directors of the Company has the right in its sole
          discretion to reject any order submitted by a person whose
          representations the Board of Directors believes to be false or who it
          otherwise believes, either alone or acting in concert with others, is
          violating, circumventing, or intends to violate, evade or circumvent
          the terms and conditions of the Plan.

     The Company, in its sole discretion, may make reasonable efforts to comply
with the securities laws of any state in the United States in which its
depositors reside, and will only offer and sell the Common Stock in states in
which the offers and sales comply with such states' securities laws. However, no
person will be offered or allowed to purchase any Common Stock under the Plan if
they resides in a foreign country or in a state of the United States with
respect to which any of the following apply: (i) a small number of persons
otherwise eligible to purchase shares under the Plan reside in such state or
foreign county; (ii) the offer or sale of shares of Common Stock to such persons
would require the Bank or its employees to register, under the securities laws
of such state or foreign country, as a broker or dealer or to register or
otherwise qualify its securities for sale in such state or foreign country; or
(iii) such registration or qualification would be impracticable for reasons of
cost or otherwise.

LIQUIDATION RIGHTS

     In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive his pro rata share of
any assets of the Bank remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). To the extent there are remaining assets, a depositor may have a
claim to receive a pro rata share of the remaining assets in the same proportion
as the value of such depositor's deposit accounts to the total value of all
deposit accounts in the Bank at the time of liquidation, subject to the right of
the State of New York to garnish such assets. After the Reorganization, each
depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, this claim would be
solely in the amount of the balance in the deposit account plus accrued
interest. A depositor would not have an interest in the value or assets of the
Bank above that amount.

     The Plan provides for the establishment, upon the completion of the
Reorganization, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Offering Circular used in connection with the
Reorganization. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would, on a complete liquidation of the Bank, have a claim to an interest in the
liquidation account after payment of all creditors prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder would have an initial interest in such liquidation account for
each deposit account, with a balance of $100 or more held in the Bank on August
31, 1996 and December 31, 1997, respectively ("Deposit Account"). Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a claim to a
pro rata interest in the total liquidation account for each of his Deposit
Accounts based on the proportion that the balance of each such Deposit Account
on August 31, 1996 and December 31, 1997, respectively, bore to the balance of
all Deposit Accounts in the Bank on such date.

                                      117
If, however, on any December 31 annual closing date of the Bank, commencing
after December 31, 1996, the amount in any Deposit Account is less than the
amount in such Deposit Account on December 31, 1996 or any other annual closing
date, then such person's interest in the liquidation account relating to such
Deposit Account would be reduced from time to time by the proportion of any such
reduction, and such interest will cease to exist if such Deposit Account is
withdrawn or closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Deposit
Account.

FEDERAL AND STATE TAX CONSEQUENCES OF THE REORGANIZATION

     Consummation of the Reorganization is conditioned on prior receipt by the
Bank of (i) either an IRS ruling or an opinion of counsel with respect to the
federal income tax consequences of the Reorganization, and (ii) either a ruling
from the New York Department of Revenue or an opinion of counsel or tax advisor
with respect to the New York tax consequences of the Reorganization. Unlike
private letter rulings, opinions of counsel are not binding on the IRS or the
New York Department of Revenue, and either agency could disagree with such
opinions. In the event of such disagreement, there can be no assurance that the
Bank or the depositors would prevail in a judicial proceeding.

     In the following discussion, "Mutual Bank" refers to the Bank before the
Reorganization and "Stock Bank" refers to the Bank after the Reorganization. The
Mutual Bank will receive an opinion of counsel from Luse Lehman Gorman Pomerenk
& Schick, A Professional Corporation, to the effect that, for federal income tax
purposes, (1) the conversion of the De Novo Bank into the Mutual Holding
Company, a New York mutual holding company, will qualify as a tax-free
Reorganization under Code Section 368(a)(1)(F); (2) provided that the merger of
the Mutual Bank into the Stock Bank qualifies as a merger under New York law,
the merger of the Bank into the Stock Bank with the Stock Bank as the survivor
and the transfer of the depositors' equity interest in the Bank to the Mutual
Holding Company in exchange for equity interests in the Mutual Holding Company
qualifies as a tax-free reorganization described in Code Sections 368(a)(1)(A)
and 368(a)(2)(D). The Bank, Stock Bank and Mutual Holding Company are each "a
party to the reorganization," as defined in Code Section 368(b); (3) the Bank
will recognize no gain or loss upon the transfer of substantially all its assets
to the Stock Bank solely in exchange for equity interests (voting and
liquidation rights) in the Mutual Holding Company and the Stock Bank's
assumption of its liabilities, if any; (4) neither the Stock Bank nor the Mutual
Holding Company will recognize gain or loss upon the receipt by the Stock Bank
of substantially all of the assets of the Bank in exchange for equity interests
in the Mutual Holding Company and the Stock Bank's assumption of the Bank's
liabilities; (5) the Mutual Holding Company's basis in the stock of the Stock
Bank will increase by an amount equal to the Bank's net basis in the property
transferred to the Stock Bank; (6) the Stock Bank's basis in the property
received from the Bank will be the same as the basis of such property in the
hands of the Bank immediately prior to the Reorganization; (7) the Stock Bank's
holding period for the property received from the Bank will include the period
during which such property was held by the Bank; (8) subject to the conditions
and limitations set forth in Code Sections 381, 382, 383, and 384 and the
Treasury regulations promulgated thereunder, the Stock Bank will succeed to and
take into account the items of the Bank described in Code Section 381(c); (9) no
gain or loss will be recognized by the depositors of the Bank on the receipt of
equity interests with respect to the Mutual Holding Company in exchange for
their equity interests surrendered therefor; (10) each depositor's aggregate
basis, if any, in the Mutual Holding Company equity interest received in the
exchange will equal the aggregate basis, if any, of each depositor's equity
interest in the Bank; (11) the holding period of the Mutual Holding Company
equity interests received by the depositors of Bank will include the period
during which the Bank equity interests surrendered in exchange therefor were
held; (12) the Mutual Holding Company and the minority stockholders of the
Company ("Minority Stockholders") will recognize no gain or loss upon the
transfer of the Stock Bank stock and cash, respectively, to the Company in
exchange for stock of the Company; (13) the Company will recognize no gain or
loss upon its receipt of property from the Mutual Holding Company and Minority
Stockholders in exchange for Common Stock of the Company; (14) the Mutual
Holding Company will increase its basis in its shares of the Company Common
Stock by the Mutual Holding Company's basis in its Stock Bank stock. The tax
opinions set forth above are based in part on the letter from RP Financial
concluding that the subscription rights to be received by eligible account
holders and supplemental eligible account holders do not have any economic value
at the time of distribution or the time the subscription rights are exercised,
and are given in reliance thereon.

                                      118
RESTRICTIONS ON ACQUISITION OF THE COMPANY

     The Mutual Holding Company Structure. Under New York law, the Plan of
Reorganization, and our governing corporate instruments, at least 51% of the
Company's voting shares must be owned by the Mutual Holding Company. The Mutual
Holding Company will be controlled by its Board of Trustees, who will consist of
persons who also are members of the Board of Directors of the Company and the
Bank. The Mutual Holding Company will be able to elect all members of the Board
of Directors of the Company, and as a general matter, will be able to control
the outcome of all matters presented to the stockholders of the Company for
resolution by vote, except for matters that require a vote greater than a
majority. The Mutual Holding Company, acting through its Board of Trustees, will
be able to control the business, and operations of the Company and the Bank, and
will be able to prevent any challenge to the ownership or control of the Company
by Minority Stockholders. Accordingly, a change in control of the Company and
the Bank cannot occur unless the Mutual Holding Company first converts to the
stock form of organization. Although New York law, applicable regulations and
the Plan of Reorganization permit the Mutual Holding Company to convert from the
mutual to the capital stock form of organization, it is not anticipated that a
conversion of the Mutual Holding Company will occur in the foreseeable future.

     In addition to the anti-takeover aspects of the Mutual Holding Company
structure, the following is a general summary of certain provisions of the
Company's certificate of incorporation and bylaws and certain other regulatory
provisions which will restrict the ability of stockholders to influence
management policies, and which may be deemed to have an "anti-takeover" effect.
The following description of certain of these provisions is necessarily general
and, with respect to provisions contained in the Company's certificate of
incorporation and bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's application to the Superintendent and the Company's
Registration Statement filed with the SEC. See "Additional Information." The
following discussion does not reflect the powers and provisions of the Bank's
charter following the Bank offering.

PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS

     Restrictions on Call of Special Meetings. The certificate of incorporation
provides that a special meeting of stockholders may be called by the Chairman of
the Board of the Company or pursuant to a resolution adopted by a majority of
the Board of Directors. Stockholders are not authorized to call a special
meeting of stockholders.

     Absence of Cumulative Voting. The certificate of incorporation provides
that there shall be no cumulative voting rights in the election of directors.

     Authorization of Preferred Stock (the "Preferred Stock"). The certificate
of incorporation authorizes 5,000,000 shares of serial preferred stock, par
value $0.01 per share. The Company is authorized to issue Preferred Stock from
time to time in one or more series subject to applicable provisions of law; and
the Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
offering rights of such shares (which could be a multiple or as a separate
class). In the event of a proposed merger, tender offer or other attempt to gain
control of the Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
Preferred Stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any Preferred Stock but
it may issue any Preferred Stock on terms which the Board deems to be in the
best interests of the Company and its stockholders.

     Limitation on Voting Rights. The certificate of incorporation provides that
(i) no person shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 5% of any class of equity security of the

                                      119
Company, inclusive of shares of such class held by the Mutual Holding Company
(provided that such limitation shall not apply to the Mutual Holding Company or
any tax-qualified employee stock benefit plans maintained by the Company); and
that (ii) shares beneficially owned in violation of the stock ownership
restriction described above shall not be entitled to vote and shall not be voted
by any person or counted as voting stock in connection with any matter submitted
to a vote of stockholders. For these purposes, a person (including management)
who has obtained the right to vote shares of the Common Stock pursuant to
revocable proxies shall not be deemed to be the "beneficial owner" of those
shares if that person is not otherwise deemed to be a beneficial owner of those
shares.

     Amendments to Certificate of Incorporation and Bylaws. Amendments to the
certificate of incorporation must be approved by the Company's Board of
Directors and also by a majority of the outstanding shares of the Company's
voting stock; provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to the call of special stockholder meetings, cumulative
voting, limitation on voting rights and director liability).

     The bylaws may be amended by the affirmative vote of the total number of
directors of the Company or the affirmative vote of at least 80% of the total
votes eligible to be voted at a duly constituted meeting of stockholders.

FEDERAL RESERVE BOARD REGULATIONS

     The Change in Bank Control Act and the BHCA, together with the Federal
Reserve Board regulations under those acts, require that the consent of the
Federal Reserve Board be obtained prior to any person or company acquiring
"control" of a bank holding company. Control is conclusively presumed to exist
if an individual or company acquires more than 25% of any class of voting stock
of the bank holding company. Control is rebuttably presumed to exist if the
person acquires more than 10% of any class of voting stock of a bank holding
company if either (i) the Company has registered securities under Section 12 of
the Exchange Act or (ii) no other person will own a greater percentage of that
class of voting securities immediately after the transaction. The regulations
provide a procedure to rebut the rebuttable control presumption. Since the
Company's Common Stock will be registered under Section 12 of the Exchange Act,
any acquisition of 10% or more of the Company's Common Stock will give rise to a
rebuttable presumption that the acquiror of such stock controls the Company,
requiring the acquiror, prior to acquiring such stock, to rebut the presumption
of control to the satisfaction of the Federal Reserve Board or obtain Federal
Reserve Board approval for the acquisition of control. Restrictions applicable
to the operations of bank holding companies may deter companies from seeking to
obtain control of the Company. See "Regulation."

NEW YORK BANKING LAW

     In addition to federal law, the New York State Banking Law generally
requires prior approval of the New York State Banking Board before any action is
taken that causes any entity or person to acquire direct or indirect control of
a banking institution which is organized in New York State. Control is presumed
to exist if any company or person directly or indirectly owns, controls or holds
with power to vote 10% or more of the voting stock of a banking institution or
of any company or person that owns, controls or holds with power to vote 10% or
more of the voting stock of a banking institution.

                  DESCRIPTION OF CAPITAL STOCK OF THE COMPANY

GENERAL

     The Company is authorized to issue 45,000,000 shares of Common Stock having
a par value of $.01 per share and 5,000,000 shares of serial Preferred Stock
having a par value of $.01 per share. The Company currently expects to issue
between 19,125,000 and 25,875,000 shares, with an adjusted maximum of 29,756,250
shares, of Common Stock and no shares of Preferred Stock in the Reorganization.
Each share of the Common Stock will have the same relative rights as, and will
be identical in all respects with, each other share of the Common Stock. Upon
payment of the purchase

                                      120
price for the Common Stock, in accordance with the Plan, all such stock will be
duly authorized, fully paid, validly issued, and non-assessable.

     The Common Stock of the Company will represent nonwithdrawable will not be
an account of an insurable type, and will not be insured by the FDIC.

COMMON STOCK

     Voting Rights. Under Delaware law, the holders of the Common Stock will
possess exclusive voting power in the Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
except as discussed in Restrictions on Acquisitions of the Company--Limitations
on Voting Rights." If the Company issues Preferred Stock, subsequent to the
Reorganization, holders of the Preferred Stock may also possess voting rights.

     Dividends. Upon consummation of the Reorganization, the Company's only
asset will be the net proceeds, the ESOP loan and the Bank's Common Stock. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy." The holders of Common
Stock will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Company out of funds legally available
therefore. If the Company issues Preferred Stock, the holders thereof may have a
priority over the holders of the Common Stock with respect to dividends.

     Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive -- after payment or provision for payment of all debts and liabilities
of the Company (including all deposits in the Bank and accrued interest thereon)
and after distribution of the liquidation account established upon stock
offering for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders who continue their deposit accounts at the Bank -- all assets of
the Company available for distribution, in cash or in kind. See "The
Reorganization and Offering--Liquidation Rights." If preferred stock is issued
subsequent to the Offering, the holders thereof may have a priority over the
holders of Common Stock in the event of liquidation or dissolution.

     No Preemptive Rights. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Company of the full purchase price therefor, each share of the Common Stock will
be fully paid and nonassessable.

     Preferred Stock. None of the 5,000,000 authorized shares of Preferred Stock
of the Company will be issued in the Reorganization. The Company's Board of
Directors is authorized, without stockholder approval, to issue serial preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares. If and when issued, the serial preferred stock
may rank senior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full, limited or no voting rights.
Accordingly, the issuance of preferred stock could adversely affect the voting
and other rights of holders of Common Stock.

                         TRANSFER AGENT AND REGISTRAR

     Chase Mellon Shareholder Services, L.L.C. will act as the transfer agent
and registrar for the Common Stock.

                                      121
LEGAL AND TAX MATTERS

     The legality of the Common Stock and the federal income tax consequences of
the Reorganization will be passed upon for the Bank and the Company by the firm
of Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C., special counsel
to the Company and the Bank. The New York income tax consequences of the
Reorganization will be passed upon for the Company and the Bank by KPMG Peat
Marwick LLP. The federal income tax consequences of certain matters relating to
the establishment of the Foundation will be passed upon for the Company and the
Bank by KPMG Peat Marwick LLP. Certain legal matters will be passed upon for
CIBC Oppenheimer Corp. and Trident Securities, Inc. by Silver, Freedman & Taff,
L.L.C., Washington, D.C.

                                    EXPERTS

     The consolidated financial statements of Lockport Savings Bank and
subsidiaries as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as "Experts" in accounting and auditing.

     RP Financial has consented to the publication herein of the summary of its
report to the Bank and the Company setting forth its opinion as to the estimated
pro forma market value of the Common Stock upon Reorganization and its valuation
with respect to Subscription Rights.

                            ADDITIONAL INFORMATION

     We have filed with the SEC a registration statement under the Securities
Act with respect to the Common Stock offered hereby. As permitted by the rules
and regulations of the SEC, this Prospectus does not contain all the information
set forth in the registration statement. Such information can be examined
without charge at the public reference facilities of the SEC located at 450
Fifth Street, NW, Washington, D.C. 20549, and copies of such material can be
obtained from the SEC at prescribed rates. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The address of this web
site is http://www.sec.gov. The statements contained herein as to the contents
of any contract or other document filed as an exhibit to the registration
statement are, of necessity, brief descriptions thereof and are not necessarily
complete but do contain all material information regarding such documents; each
such statement is qualified by reference to such contract or document.

     We have filed an Application with the Department with respect to the
Reorganization. Pursuant to the rules and regulations of the Department, this
Prospectus omits certain information contained in that Application. The
Application may be examined at the office of the Department, 2 Rector Street,
New York, New York, and at our Administrative Center, at 6950 South Transit
Road, Lockport, New York, 14095-0514 without charge.

     In connection with the Offering, the Company will register the Common Stock
with the SEC under Section 12(g) of the Exchange Act; and, upon such
registration, the Company and the holders of its Common Stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other requirements
of the Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Reorganization.

     A copy of the certificate of incorporation and bylaws of the Company are
available without charge from the Bank.

                                      122
LOCKPORT SAVINGS BANK

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
                                                                                              ------
Independent Auditor's Report.................................................................   F-2
 
Consolidated Statements of Condition as of September 30, 1997 (unaudited) and
     December 31, 1996 and 1995..............................................................   F-3
 
Consolidated Statements of Income for the nine months ended September 30, 1997 and 1996
     (unaudited) and the years ended December 31, 1996, 1995 and 1994........................    30
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996
     (unaudited) and the years ended December 31, 1996, 1995 and 1994........................   F-4
 
Notes to Consolidated Financial Statements...................................................   F-6
All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements or
notes thereto.

     The financial statements of Niagara Bancorp, Inc. have been omitted because
Niagara Bancorp, Inc. has not yet issued any stock, has no assets and no
liabilities, and has not conducted any business other than of an organizational
nature.

                                      F-1
INDEPENDENT AUDITORS' REPORT

The Board of Trustees
Lockport Savings Bank:

     We have audited the accompanying consolidated statements of condition of
Lockport Savings Bank and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income and cash flows for each of the years
in the three-year period ended December 31, 1996.  These consolidated financial
statements are the responsibility of the Bank's management.  Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lockport
Savings Bank and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

 
                                              KPMG PEAT MARWICK LLP

Buffalo, New York
January 17, 1997

                                      F-2
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CONDITION

               SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995
                                (IN THOUSANDS)
SEPTEMBER 30,         DECEMBER 31,
                                                                      ------------------------
Assets                                                    1997           1996          1995   
------                                                ------------    ----------    ----------
(UNAUDITED)                            
                                                                                              
Cash and cash equivalents:                                                                    
 Cash and due from banks                                $   14,804        11,219        13,873
 Federal funds sold                                          2,200         5,000        25,550 
                                                        ----------     ---------       ------- 
   Total cash and cash equivalents                          17,004        16,219        39,423 
                                                                                               
Securities available for sale (note 2)                     464,973       415,129       346,410 
Securities held to maturity (note 3)                        37,500        38,000        46,700 
Loans, net (note 4)                                        622,487       598,486       535,971 
Accrued interest receivable                                  7,343         6,348         5,622 
Premises and equipment, net (note 5)                        22,022        13,240        11,377 
Other assets (notes 6, 10 and 11)                            5,122         5,936         8,788 
                                                        ----------     ---------       ------- 
                                                        $1,176,451     1,093,358       994,291 
                                                        ==========     =========       ======= 
 
 
Liabilities and Net Worth
-----------------------------------------------------
 
Liabilities:
 Deposits (note 7)                                      $  992,219       920,072       861,065
 Mortgagors' payments held in escrow                         8,387         8,773        10,189
 Other borrowed funds (note 8):                                                               
 Short-term                                                 18,740        27,008            --
 Long-term                                                  10,000         5,000            --
 Other liabilities (notes 10 and 11)                        20,385        16,841        15,384
                                                        ----------     ---------       -------
                                                         1,049,731       977,694       886,638
                                                        ----------     ---------       ------- 
 
Commitments and contingencies (notes 4 and 5)
 
Net worth (note 9):
 Surplus and undivided profits                             125,325       116,690       105,921
 Net unrealized gain (loss) on securities available                                           
  for sale, net of deferred income taxes                     1,395        (1,026)        1,732
                                                        ----------     ---------       -------
                                                           126,720       115,664       107,653
                                                        ----------     ---------       -------
                                                        $1,176,451     1,093,358       994,291
                                                        ==========     =========       =======
See accompanying notes to consolidated financial statements.

                                      F-3
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
               AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                (IN THOUSANDS)
NINE MONTHS ENDED
                                                                            SEPTEMBER 30,             YEARS ENDED DECEMBER 31,
                                                                        ---------------------  -------------------------------------

                                                                           1997       1996         1996          1995        1994
                                                                        ----------  ---------  ------------  ------------  ---------

                                                                             (UNAUDITED)
Cash flows from operating activities:
  Net income                                                            $   8,635      8,226        10,768         9,925      8,801
  Adjustments to reconcile net income to net cash provided by
   operating activities:
   Depreciation of premises and equipment                                   1,635      1,400         1,911         1,607      1,256
   Amortization and accretion of fees and discounts                          (312)      (513)         (717)          554        653
   Provision for loan losses                                                  975      1,861         2,187         1,016        948
   Other provisions for losses                                                336         20            23           834        380
   Net (gain) loss on sale of securities available for sale                  (875)      (532)         (576)       (1,477)       849
   Deferred income taxes                                                     (164)      (449)         (387)         (253)        43
   (Increase) decrease in:
Accrued interest receivable                                                  (995)      (733)         (726)         (198)      (345)

Other assets                                                               (1,040)     3,657         3,824        (5,464)       767
   Increase (decrease) in other liabilities                                 3,544      8,343         2,661         8,607       (508)
                                                                        ---------   --------      --------      --------   --------
 
   Net cash provided by operating activities                               11,739     21,280        18,968        15,151     12,844
                                                                        ---------   --------      --------      --------   --------
 
Cash flows from investing activities:
  Purchase of investment securities available for sale                    (85,275)   (75,453)      (91,772)      (16,696)   (39,870)
  Proceeds from sales of investment securities available for sale          22,326      6,695        16,803        11,892     35,470
  Purchase of mortgage-backed securities available for sale               (67,340)   (65,729)      (85,506)      (46,375)  (112,295)
  Proceeds from sales of mortgage-backed securities available for sale     44,513      6,981        24,924        50,755     41,072
  Principal payments on mortgage-backed securities available for sale      29,729     27,111        35,522        29,780     80,142
  Proceeds from maturities of investment securities available for sale     11,175     22,215        27,215            --         --
  Purchase of securities held to maturity                                (177,100)  (185,700)     (249,700)     (239,100)  (244,179)
  Proceeds from maturities of securities held to maturity                 177,600    193,400       258,400       227,368    252,257
  Net increase in loans                                                   (22,815)   (43,147)      (65,123)      (62,288)   (54,131)
  Other                                                                   (12,260)    (1,056)       (2,534)       (3,647)    (2,290)
                                                                        ---------   --------      --------      --------   --------
 
Net cash used by investing activities                                   $ (79,447)  (114,683)     (131,771)      (48,311)   (43,824)
                                                                        ---------   --------      --------      --------   --------
 
Cash flows from financing activities:
F-4
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED
                                                                            SEPTEMBER 30,             YEARS ENDED DECEMBER 31,
                                                                        ---------------------  -------------------------------------

                                                                           1997       1996         1996          1995        1994
                                                                        ----------  ---------  ------------  ------------  ---------

                                                                             (UNAUDITED)
Net increase in deposits                                               $  72,147     57,988        59,007        41,375      6,751
 Net increase (decrease) in mortgagors' payments held in escrow              (386)    (3,153)       (1,416)          589        905
 Proceeds from (repayment of) short-term borrowings                        (8,268)    24,675        27,008            --         --
 Proceeds from long-term borrowings                                         5,000      5,000         5,000            --         --
                                                                        ---------   --------      --------      --------   --------
 
    Net cash provided by financing activities                              68,493     84,510        89,599        41,964      7,656
                                                                        ---------   --------      --------      --------   --------
 
    Net increase (decrease) in cash and cash equivalents                      785     (8,893)      (23,204)        8,804    (23,324)

 
Cash and cash equivalents at beginning of period                           16,219     39,423        39,423        30,619     53,943
                                                                        ---------   --------      --------      --------   --------
 
Cash and cash equivalents at end of period                              $  17,004     30,530        16,219        39,423     30,619
                                                                        =========   ========      ========      ========   ========
 
Supplemental disclosure of cash flow information:
    Cash paid during the year:
       Income taxes                                                     $   3,850      4,942         6,597         4,110      5,283
       Interest expense                                                    33,107     29,851        40,485        38,972     31,361
                                                                        =========   ========      ========      ========   ========
See accompanying notes to consolidated financial statements.

                                      F-5
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

           NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
               AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

(1)  Summary of Significant Accounting Policies
-----------------------------------------------

     The accounting and reporting policies of Lockport Savings Bank, a New York
     State chartered FDIC insured mutual savings bank, and its subsidiaries
     conform to general practices within the banking industry and to generally
     accepted accounting principles. The following is a description of the more
     significant accounting policies.

          (a)  Principles of Consolidation
          --------------------------------

               The consolidated financial statements include the accounts of
               Lockport Savings Bank (LSB) and its subsidiaries (the Bank), LSB
               Associates, Inc., an agent for third party mutual fund and
               annuity sales; LSB Realty, Inc., a real estate development
               company; LSB Funding, Inc., a real estate investment trust; and
               LSB Securities, Inc., a securities investment company. All
               significant intercompany balances and transactions have been
               eliminated in consolidation.

          (b)  Investment Securities
          --------------------------

               Debt securities and marketable equity securities are classified
               as either available for sale or held to maturity. Held to
               maturity securities are those that the Bank has the positive
               intent and ability to hold to maturity. All other securities are
               classified as available for sale.

               Securities available for sale are carried at fair value with
               unrealized gains and losses, net of the related deferred tax
               effect, excluded from earnings and reported as a separate
               component of net worth. Realized gains and losses are determined
               using the specific identification method.

               Securities held to maturity are recorded at cost with discounts
               accreted and premiums amortized to maturity using a method that
               approximates the level-yield method. If permanent impairment of a
               security exists, that security is written down to fair value with
               a charge to earnings.

          (c)  Loans
          ----------

               Loans are stated at the principal amount outstanding, adjusted
               for net unamortized deferred fees and costs which are accrued to
               income on the interest method. Accrual of interest income on
               loans is discontinued after payments become more than ninety days
               delinquent, unless the status of a particular loan clearly
               indicates earlier discontinuance is more appropriate. All
               uncollected interest income previously recognized on non-accrual
               loans is reversed and subsequently recognized only to the extent
               payments are received. In those instances where there is doubt as
               to the collectibility of principal, interest payments are applied
               to principal.

          (d)  Real Estate Owned
          ----------------------

               Real estate owned consists of property acquired in settlement of
               loans which are initially valued at the lower of cost or fair
               value based on appraisals at foreclosure and are periodically
               adjusted to the lower of adjusted cost or net realizable value
               throughout the remaining period.

                                      F-6
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(1)  Summary of Significant Accounting Policies, Continued
----------------------------------------------------------

          (e)  Allowance for Loan Losses
          ------------------------------

               The allowance for loan losses is established through charges to
               earnings. Management's determination of the balance of the
               allowance is based on many factors including credit evaluation of
               the loan portfolio, current and expected economic conditions and
               past loss experience. While management uses available information
               to recognize losses on loans, future additions to the allowance
               may be necessary based on changes in economic conditions. In
               addition, various regulatory agencies, as an integral part of
               their examination process, periodically review the allowance for
               loan losses and may require the Bank to recognize additions to
               the allowance based on their judgment of information available to
               them at the time of their examination.

               In 1995, the Bank adopted Statement of Financial Accounting
               Standards No. 114, "Accounting by Creditors for Impairment of a
               Loan", as amended by Statement of Financial Accounting Standards
               No. 118, "Accounting by Creditors for Impairment of a Loan -
               Income Recognition Disclosures". These new standards require that
               an impaired loan be measured based on the present value of
               expected future cash flows discounted at the loan's effective
               interest rate or, as a practical expedient, the loan's observable
               market price or the fair value of the underlying collateral if
               the loan is collateral dependent. These new standards also made
               certain changes to existing accounting principles applicable to
               in-substance foreclosures (ISF) and troubled debt restructurings
               involving modifications of terms. SFAS 114 generally does not
               apply to those smaller-balance homogeneous loans that are
               collectively evaluated for impairment which for the Bank, include
               one- to four-family residential mortgage loans, student loans and
               consumer loans, other than those modified in a troubled debt
               restructuring. The adoption of these standards did not have a
               material impact on the Bank's consolidated financial statements.

               In accordance with SFAS 114, the Bank considers a loan impaired
               when, based upon current information and events, it is possible
               that it will be unable to collect all amounts due, both principal
               and interest. The measurement value of the Bank's impaired loans
               was based on the fair value of the underlying collateral. The
               Bank identifies and measures impaired loans in conjunction with
               its review of the adequacy of its allowance for loan losses.
               Specific factors utilized in the identification of impaired loans
               include, but are not limited to, delinquency status, loan-to-
               value ratio, the condition of the underlying collateral, credit
               history and debt coverage.

          (f)  Premises and Equipment
          ---------------------------

               Premises and equipment are carried at cost, net of accumulated
               depreciation and amortization. Depreciation is computed on the
               straight-line method over the estimated useful lives of the
               assets. Leasehold improvements are amortized on the straight-line
               method over the lesser of the life of the improvements or the
               lease term.

          (g)  Employee Benefits
          ----------------------

               The Bank maintains a non-contributory, qualified, defined benefit
               pension plan that covers substantially all full time employees.
               The actuarially determined pension benefits in the form of a life
               annuity are based on the employee's combined years of service,
               age and compensation. The Bank's policy is to fund the minimum
               amount required by government regulations.

                                      F-7
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(1)  Summary of Significant Accounting Policies, Continued
----------------------------------------------------------

          (g)  Employee Benefits (continued)
          ----------------------------------

               The Bank also provides certain post-retirement benefits,
               principally health care and group life insurance, to employees
               and their beneficiaries and dependents. The Bank accrues for the
               expected cost of providing these post-retirements benefits during
               an employee's active years of service.

          (h)  Income Taxes
          -----------------

               Income taxes are accounted for under the asset and liability
               method. Deferred tax assets and liabilities are reflected at
               currently enacted income tax rates applicable to the period in
               which the deferred tax assets or liabilities are expected to be
               realized or settled. As changes in tax laws or rates are enacted,
               deferred tax assets and liabilities are adjusted through the
               provision for income taxes.

          (i)  Transfers and Servicing of Financial Assets and Extinguishments
               ---------------------------------------------------------------
of Liabilities
--------------

               In June 1996, the Financial Accounting Standards Board issued
               SFAS No. 125, "Accounting for Transfers and Servicing of
               Financial Assets and Extinguishments of Liabilities." SFAS No.
               125 provides accounting and reporting standards for transfers and
               servicing of financial assets and extinguishments of liabilities
               based on consistent application of a financial-components
               approach that focuses on control. It distinguishes transfers of
               financial assets that are sales from transfers that are secured
               borrowings. The adoption of SFAS No. 125 as of January 1, 1997
               did not have a material impact on the Bank's financial position,
               results of operations, or liquidity.

          (j)  Use of Estimates
          ---------------------

               Management of the Bank has made a number of estimates and
               assumptions relating to the reporting of assets and liabilities
               and disclosure of contingent assets and liabilities to prepare
               these financial statements in conformity with generally accepted
               accounting principles. Actual results could differ from those
               estimates.

                                      F-8
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(2)  Securities Available for Sale
----------------------------------

     The amortized cost and approximate fair value of securities available for
     sale at September 30, 1997 (unaudited) are summarized as follows (in
     thousands):
AMORTIZED  UNREALIZED   UNREALIZED    FAIR
                                               COST        GAINS       LOSSES      VALUE
                                             ---------  -----------  -----------  -------
Debt securities:
 U.S. Treasury                                $ 84,856         776         (101)   85,531
 U.S. government agencies                        5,008          --           (6)    5,002
 States and political subdivisions               1,761         109           --     1,870
 Corporate                                       6,927         107           --     7,034
                                              --------      ------      -------   -------
                                                98,552         992         (107)   99,437
                                              --------      ------      -------   -------
 
Mortgage-backed securities:
 Collateralized mortgage obligations           107,744         522       (1,078)  107,188
 Government National Mortgage Association       33,461       1,095          (14)   34,542
 Federal National Mortgage Association          25,330         136          (73)   25,393
 Freddie Mac                                   118,469         717         (547)  118,639
                                              --------      ------      -------   -------
                                               285,004       2,470       (1,712)  285,762
                                              --------      ------      -------   -------
 
Asset-backed securities:
 Home equity                                    53,482          54          (72)   53,464
 Student Loans                                   9,741          --          (27)    9,714
 Auto                                            4,047          18           --     4,065
                                              --------      ------      -------   -------
                                                67,270          72          (99)   67,243
                                              --------      ------      -------   -------
 
Equity securities:
 FHLB stock                                      6,392          --           --     6,392
 Common stock                                    5,391         909         (161)    6,139
                                              --------      ------      -------   -------
                                                11,783         909         (161)   12,531
                                              --------      ------      -------   -------
                                              $462,609       4,443       (2,079)  464,973
                                              ========      ======      =======   =======
Scheduled contractual maturities of securities, other than equity securities, at
September 30, 1997 (unaudited) are as follows (in thousands):
AMORTIZED       FAIR  
                                                  COST          VALUE 
                                                ---------      -------
Within one year                                  $ 10,932       10,924
After one year through five years                 121,266      121,953
After five years through ten years                 82,012       82,296
After ten years                                   236,616      237,269
                                                 --------      ------- 
                                                 $450,826      452,442
                                                 ========      =======
F-9
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(2)  Securities Available for Sale, Continued
---------------------------------------------

     The amortized cost and approximate fair value of securities available for
     sale at December 31, 1996 are summarized as follows (in thousands):
AMORTIZED    UNREALIZED    UNREALIZED    FAIR 
                                                   COST         GAINS         LOSSES      VALUE     
                                                 ---------    ----------    ----------    -----
Debt securities:
   U.S. Treasury                                 $ 84,716            723          (219)   85,220                                    
   U.S. government agencies                         5,012             --            (8)    5,004                                    
   States and political subdivisions                1,942             99            --     2,041                                    
   Corporate                                          999              1            --     1,000  
                                                 --------        -------       -------   -------  
                                                   92,669            823          (227)   93,265  
                                                 --------        -------       -------   -------  
 
 Mortgage-backed securities:
   Collateralized mortgage obligations            104,244            133        (2,385)  101,992      
   Government National Mortgage Association        44,966            931          (117)   45,780                                   
   Federal National Mortgage Association           28,487             20          (251)   28,256                                   
   Freddie Mac                                    109,903            475        (1,546)  108,832    
                                                 --------        -------       -------   -------    
                                                  287,600          1,559        (4,299)  284,860    
                                                 --------        -------       -------   -------    
 Asset-backed securities:                                                                           
   Home equity                                     28,090             36          (128)   27,998    
                                                 --------        -------       -------   -------    
                                                                                                    
 Equity securities:                                                                                 
   FHLB stock                                       5,394             --            --     5,394    
   Common stock                                     3,115            594           (97)    3,612    
                                                 --------        -------        -------  -------    
                                                    8,509            594           (97)    9,006    
                                                 --------        -------       -------   -------    
                                                 $416,868          3,012        (4,751)  415,129    
                                                 ========        =======       =======   =======     
 
Scheduled contractual maturities of debt securities at December 31, 1996 are as
follows (in thousands):
 
                                                        AMORTIZED       FAIR
                                                          COST          VALUE
                                                        ---------     ---------
 
  Within one year                                         $16,167      16,177
  After one year through five years                        76,002      76,497
  After ten years                                             500         591
                                                         --------     -------
                                                         $ 92,669      93,265
                                                         ========     =======
F-10
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(2) Securities Available for Sale, Continued
---------------------------------------------

    The amortized cost and approximate fair value of securities available for
    sale at December 31, 1995 are summarized as follows (in thousands):
AMORTIZED  UNREALIZED   UNREALIZED       FAIR   
                                                          COST        GAINS       LOSSES         VALUE  
                                                        ---------  -----------  -----------     -------
Debt securities:                                                                                        
   U.S. Treasury                                         $ 54,839       1,005          (99)      55,745 
   U.S. government agencies                                    --          --           --           -- 
   States and political subdivisions                        9,118         200           (1)       9,317 
   Corporate                                                6,035           5           (5)       6,035 
                                                         --------      ------      -------      ------- 
                                                           69,992       1,210         (105)      71,097 
                                                         --------      ------      -------      ------- 
Mortgage-backed securities:                                                                             
   Collateralized mortgage obligations                    132,550         714       (1,672)     131,592 
   Government National Mortgage Association                51,104       1,881           (1)      52,984 
   Federal National Mortgage Association                   33,170         415          (10)      33,575 
   Freddie Mac                                             43,000         456          (64)      43,392 
                                                         --------      ------      -------      ------- 
                                                          259,824       3,466       (1,747)     261,543 
                                                         --------    --------      -------      ------- 
Asset-backed securities:                                                                                
   Home equity                                              5,350          --          (72)       5,278 
                                                         --------      ------      -------      ------- 
Equity securities:                                                                                      
   FHLB stock                                               4,926          --           --        4,926 
   Common stock                                             3,382         396         (212)       3,566 
                                                         --------      ------      -------      ------- 
                                                            8,308         396         (212)       8,492 
                                                         --------    --------      -------      ------- 
                                                         $343,474       5,072       (2,136)     346,410 
                                                         ========    ========      =======      =======
F-11
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(2) Securities Available for Sale, Continued
---------------------------------------------

    Gross realized gains (losses) on sales of securities available for sale are
    summarized as follows (in thousands):
NINE MONTHS ENDED
                                           SEPTEMBER 30,           YEARS ENDED DECEMBER 31,
                                        ------------------         ------------------------
                                          1997       1996           1996      1995    1994
                                        -------    -------         ------    ------  ------
                                           (UNAUDITED)
Realized gains                          $1,152         646          896       2,442     617
Realized losses                           (277)       (114)        (320)       (965) (1,466)
                                        ======        ====         ====       =====  ======
At September 30, 1997, approximately $5.0 million of U.S. Treasury Notes were
pledged under a collateral agreement with the Federal Reserve Treasury, Tax and
Loan Program and $20 million of U.S. Treasury Notes were pledged as collateral
under repurchase agreements.

In November 1995, the Financial Accounting Standards Board issued a Special
Report, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities".  This supplemental guidance provided
a one-time opportunity to reassess the appropriateness of the Bank's
classifications of all securities held at that time with any resulting
reclassifications being accounted for at fair value and occurring on a single
date no later than December 31, 1995, without calling into question the intent
of the Bank to hold other debt securities to maturity in the future.  As a
result of this one-time reassessment the Bank reclassified $9.2 million of state
and political subdivision debt securities as available for sale securities from
the held to maturity portfolio and recognized $199,000 of net unrealized
appreciation on these securities, net of related deferred taxes, as an increase
to net worth on December 31, 1995.

                                     F-12
(3)  Securities Held To Maturity
--------------------------------

     The Bank's held to maturity securities consist of money market preferred
     stock. The amortized cost and approximate fair value of the money market
     preferred stock at September 30, 1997 and December 31, 1996 and 1995, are
     summarized as follows (in thousands):
SEPTEMBER           YEARS ENDED DECEMBER 31,
                              -------------------------------------
                 1997                 1996               1995
          ------------------  -------------------------------------
              (UNAUDITED)
          Amortized   Fair    Amortized  Fair   Amortized      Fair
            cost      value     cost     value    cost         value
--------  --------  -------- -------  --------   --------
          $ 37,500    37,500    38,000  38,000    46,700     46,700
          ========  ========  ======== =======  ========   ========
The money market preferred stock held by the Bank matures approximately
     every 49 days. Each maturity and subsequent reinvestment in the stock
     during the year is included in the accompanying consolidated statements of
     cash flows as maturities and purchases, respectively, of securities held to
     maturity. Aside from the rollover of that investment, there were no
     maturities of held to maturity securities for the nine months ended
     September 30, 1997 and the year ended December 31, 1996. There were
     $5,152,000 of maturities of held to maturity securities in 1995. There were
     no sales of, or transfers to or from, securities classified as held to
     maturity other than those described in Note 2 in any of the periods.

                                     F-13
LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(4)  Loans
------------

     Loans receivable at September 30, 1997, December 31, 1996 and 1995 consist
     of the following (in thousands):
SEPTEMBER 30,      DECEMBER 31,
                                                  ------------------
                                       1997         1996      1995
                                       ----         ----      ----
                                   (UNAUDITED)
Real Estate:
   Residential conventional            $359,628   337,402   301,327
   Residential FHA insured and
    VA guaranteed                        26,866    23,171    18,013
   Residential home equity               13,047    11,337    10,234
   Commercial                           142,414   139,998   133,494
   Construction                          13,964    12,493     7,891
                                       --------   -------   -------
                                        555,919   524,401   470,959
                                       --------   -------   -------
Other:
   Mobile home                           22,675    21,406    20,630
   Vehicle                                7,326    18,747    12,591
   Other consumer                        24,465    22,412    20,229
   Guaranteed student                    10,907    10,702     9,874
   Commercial                             4,275     4,895     4,085
                                       --------   -------   -------
                                         69,648    78,162    67,409
                                       --------   -------   -------
  Total loans                           625,567   602,563   538,368
 
Net deferred costs                        3,376     2,809     2,349
Unearned discount                          (103)     (347)      (39)
Allowance for loan losses                (6,353)   (6,539)   (4,707)
                                       --------   -------   -------
Loans, net                             $622,487   598,486   535,971
                                       ========   =======   =======
F-14
LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(4)  Loans, Continued
---------------------
 
     Non-accrual loans amounted to $1,925,000 (unaudited), $4,718,000 and
     $3,955,000 at September 30, 1997 and December 31, 1996 and 1995,
     respectively, representing .31%, .78% and .74% of total loans at such
     dates, respectively. Interest income that would have been recorded if the
     loans had been performing in accordance with their original terms amounted
     to $133,000 and $318,000 during the nine month periods ended September 30,
     1997 and 1996 (unaudited) respectively, and $325,000, $367,000 and $315,000
     in 1996, 1995 and 1994, respectively.
 
     Mortgages serviced for others by the Bank amounted to $145.7 million
     (unaudited), $129.0 million and $110.4 million at September 30, 1997 and
     December 31, 1996 and 1995, respectively. At September 30, 1997, the Bank
     maintained $3 million in fidelity blanket bond coverage and under its
     mortgage impairment insurance policy, maintained errors and omissions
     coverage of $2 million per commercial and residential mortgage occurrence.

     At September 30, 1997 (unaudited), the Bank had outstanding commitments to
     originate mortgage and other loans of approximately $46.5 million with
     $18.9 million at fixed rates and $27.6 million at variable rates.

     Changes in the allowance for loan losses for the nine months ended
     September 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and
     1994 were as follows (in thousands):
NINE MONTHS ENDED                YEARS ENDED               
                                          SEPTEMBER 31,                  DECEMBER 31,
                                       -------------------        ---------------------------
                                        1997          1996        1996       1995        1994
                                        ----          ----        ----       ----        ----
(unaudited)                                           
Balance, beginning of period           $ 6,539       4,707       4,707       4,192      4,030                
Provision for loan losses                  975       1,861       2,187       1,016        948                
Charge-offs                             (1,271)       (287)       (436)       (556)      (825)               
Recoveries on loans previously                                                                               
 charged-off                                                                                                 
                                           110          37          81          55         39                
                                       -------       -----       -----       -----      -----                
   Balance, end of period              $ 6,353       6,318       6,539       4,707      4,192                
                                       =======       =====       =====       =====      =====
Approximately 96% of the Bank's loans are mortgage and consumer loans in
     New York State. Accordingly, the ultimate collectibility of a substantial
     portion of the Bank's loan portfolio is susceptible to changes in market
     conditions in this primary market area.

                                     F-15
LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(5)  Premises and Equipment
---------------------------

     A summary of premises and equipment at September 30, 1997, December 31,
     1996 and 1995 follows (in thousands):
SEPTEMBER 30,    DECEMBER 31,
                                                                  --------------
                                                       1997        1996    1995
                                                  --------------  ------  ------
                                                   (UNAUDITED)
Land                                              $ 1,049    1,049     771
      Buildings and improvements                         20,027   10,996   8,943
      Furniture and equipment                            11,128    9,785   8,893
                                                        -------   ------  ------
                                                         32,204   21,830  18,607
      Less accumulated depreciation and amortization     10,182    8,590   7,230
                                                        -------   ------  ------
                                                        $22,022   13,240  11,377
                                                        =======   ======  ======
Minimum rental commitments for premises and equipment under noncancellable
     operating leases at December 31, 1996 follows (in thousands):
YEAR ENDING DECEMBER 31:                    
                     ------------------------
1997                            $  586
                      1998                               522
                      1999                               523
                      2000                               514
                      2001                               519
                      Later years                      5,193
                                                      ------
                      Total minimum lease payments    $7,857
                                                      ======
Real estate taxes, insurance and maintenance expenses related to these
     leases are obligations of the Bank. Rent expense was $419,000 and $325,000
     during the nine months ended September 30, 1997 and 1996 (unaudited) and
     $414,000, $271,000 and $251,000 in 1996, 1995 and 1994, respectively, and
     is included in occupancy expense.

     During 1997, the Bank completed construction of a new Administrative
     Center. Buildings and improvements at September 30, 1997 and December 31,
     1996 include $10.2 million (unaudited) and $1.8 million, respectively, of
     costs relating to this new facility.

                                     F-16
LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(6)  Other Assets
-----------------
     The significant components of other assets at September 30, 1997, December
     31, 1996 and 1995 are as follows (in thousands):
SEPTEMBER 30,   DECEMBER 31,
                                                                  ------------
                                                       1997       1996   1995
                                                  --------------  -----  -----
                                                   (UNAUDITED)
Deferred income taxes, net (note 10)                $  685   2,204      -
     Nationar receivable                                      -       -  5,053
     Investments in affiliates                                -     157    264
     Real estate owned, net of allowance for losses         268     317    257
     Prepaid expenses                                     1,577   1,165  1,383
     Other                                                2,592   2,093  1,831
                                                         ------   -----  -----
                                                         $5,122   5,936  8,788
                                                         ======   =====  =====
On February 6, 1995, the Superintendent of Banks for the State of New York
     seized Nationar, a check-clearing and trust company, freezing all of
     Nationar's assets. As of December 31, 1995, the Bank had $5.7 million in
     demand deposits held in receivership by the New York State Banking
     Department. Management established a $600,000 allowance for possible loss
     as of December 31, 1995, the provision for which was reflected in other
     operating expenses in the 1995 Consolidated Statement of Income. During
     1996, the Bank received all funds due from Nationar and therefore reversed
     the allowance for possible loss, with the benefit reflected as a reduction
     of other operating expenses. 

                                     F-17
LOCKPORT SAVINGS BANK
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(7)  Deposits
-------------

     Deposits consist of the following at September 30, 1997, December 31, 1996
     and 1995 (in thousands):
SEPTEMBER 30, 1997
                                          -----------------------
                                          WEIGHTED
                                          AVERAGE
                                             RATE       BALANCE
                                          ---------     -------  
                                                (UNAUDITED)
Savings accounts                           3.34%    $302,447
                                                ----     --------
                                                 
     Certificates maturing:                  
      Within one year                           5.45      364,456
      After one year, through two years         6.80      120,923
      After two years, through three years      6.21       17,576
      After three years, through four years     6.75       10,623
      After four years, through five years      5.77          907
      After five years                          6.05        2,383
                                                ----     --------
                                                5.82      516,868
                                                ----     --------
                                             
                                             
     Checking accounts:                      
      Non-interest bearing                         -       27,325
      Interest-bearing:                      
      NOW accounts                              2.00       62,913
      Money market accounts                     4.10       82,666
                                                         --------
                                                          172,904
                                                         --------
                                                4.52%    $992,219
                                                ====     ========
F-18
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(7)  Deposits, Continued
------------------------
DECEMBER 31, 1996     
                                              ------------------------- 
                                                WEIGHTED                
                                                AVERAGE                 
                                                  RATE        BALANCE   
                                              -----------   -----------
Savings accounts                            3.34%         $300,747 
                                                 ----          -------- 
     Certificates maturing:                                             
      Within one year                            5.33           356,401 
      After one year, through two years          6.01            69,923 
      After two years, through three years       8.16            42,054 
      After three years, through four years      6.96             8,992 
      After four years, through five years       6.89             5,905 
      After five years                           6.17             1,446 
                                                 ----          -------- 
                                                 5.72           484,721 
                                                 ----          -------- 
                                                                        
     Checking accounts:                                                 
      Non-interest bearing                          -            25,382 
      Interest-bearing:                                                 
          NOW accounts                           2.00            55,901 
          Money market accounts                  3.54            53,321 
                                                               -------- 
                                                                134,604 
                                                               -------- 
                                                           
                                                 4.43%         $920,072 
                                                 ====          ========
F-19
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(7)  Deposits, Continued
------------------------
DECEMBER 31, 1996    
                                              -------------------------
                                                WEIGHTED               
                                                AVERAGE                
                                                  RATE        BALANCE  
                                              -----------   -----------
Savings accounts                             3.34%        $308,842
                                                  ----         --------
     Certificates maturing:                                            
      Within one year                             5.90          293,987
      After one year, through two years           5.55           60,712
      After two years, through three years        6.92           26,659
      After three years, through four years       8.88           30,735
      After four years, through five years        7.88            5,111
      After five years                            7.17            5,332
                                                  ----         --------
                                                  6.17          422,536
                                                  ----         --------
                                                                       
     Checking accounts:                                                
      Non-interest bearing                           -           28,374
      Interest-bearing:                                                
          NOW accounts                            2.00           47,995
          Money market accounts                   3.68           53,318
                                                               --------
                                                                129,687
                                                               --------

                                                  4.57%        $861,065
                                                  ====         ========
F-20
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(7)  Deposits, Continued
------------------------

     Generally, interest rates on certificates of deposit range from 3.34% to
     9.50% at September 30, 1997 (unaudited).

     Interest expense for the nine months ended September 30, 1997 and 1996 and
     the years ended December 31, 1996, 1995 and 1994 is summarized as follows
     (in thousands):
NINE MONTHS ENDED             YEAR ENDED
                                                SEPTEMBER 30,              DECEMBER 31,
                                              -----------------      -----------------------
                                               1997       1996        1996     1995    1994    
                                              ------     ------      ------   ------  ------   
                                                 (unaudited)
Savings accounts                         $ 7,626     7,814      10,353   11,636  12,869   
     Certificates                              21,964    19,467      26,432   24,159  16,443   
     Money market accounts                      1,612     1,443       1,916    2,164   1,533   
     NOW accounts                                 824       704         955      901     750   
     Mortgagors' payments held in escrow          119       123         158      174     159   
                                              -------    ------      ------   ------  ------   
                                              $32,145    29,551      39,814   39,034  31,754   
                                              =======    ======      ======   ======  ======
Included in 1995 interest expense is a special interest payment of
     $1,251,000 which was approved by the Board of Trustees of the Bank and paid
     on a pro rata basis on all interest-bearing accounts in recognition of the
     Bank's 125th anniversary.

     Certificates issued in amounts over $100,000 amounted to $90.4 million and
     $83.3 million at September 30, 1997 and 1996 (unaudited), respectively, and
     $83.9 million, $75.2 million and $62.3 million at December 31, 1996, 1995
     and 1994, respectively. Interest expense thereon approximated $3.8 million
     and $3.4 million during the nine month periods ended September 30, 1997 and
     1996 (unaudited) and $4.6 million, $4.2 million and $3.2 million in 1996,
     1995 and 1994, respectively.

                                      F-21
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(8)  Other Borrowed Funds
-------------------------
 
     The Bank has a $127.8 million line of credit with the Federal Home Loan
     Bank (FHLB), secured by FHLB stock and the residential mortgage portfolio,
     which was established in 1995. This borrowing capacity provides a secondary
     funding source for real estate lending, liquidity, and asset/liability
     management. The Bank also pledged, to broker-dealers, U.S. Treasury Notes
     as collateral under agreements to repurchase. Under these agreements, the
     broker-dealers are required to transfer securities to the Bank upon
     maturity of the agreements, generally within 90 to 180 days after the
     transaction date. Information relating to the borrowings and repurchase
     agreements at September 30, 1997 and December 31, 1996 is summarized as
     follows (in thousands):
September 30,   December 31, 
                                                                                  1997           1996     
                                                                             -------------   ------------ 
                                                                              (unaudited)
Short-term advances from Federal Home Loan Bank                          $         -           7,000 
     Reverse repurchase agreements                                                  18,740         20,008 
                                                                                   -------         ------ 
                                                                                    18,740         27,008 
     Long-term advances from the FHLB bearing fixed interest rates:                                       
      5.72%, maturing on January 29, 2001                                            5,000          5,000 
      6.59%, amortizing through July 31, 2012                                        5,000             -- 
                                                                                   -------         ------ 
                                                                                   $28,740         32,008 
                                                                                   =======         ======
The aggregate maturities of FHLB advances for each of the five years
     subsequent to September 30, 1997 are as follows (unaudited): 1998,
     $206,000; 1999, $220,000; 2000, $235,000; 2001, $5,251,000; and 2002,
     $268,000.

     Information relating to the repurchase agreements at September 30, 1997
     (unaudited) and December 31, 1996 is summarized as follows:
Weighted average interest rate of reverse repurchase agreements        5.68%    5.42
 
     Maximum outstanding at any month end                                $28,961   24,675
     Average amount outstanding during the period                         22,030   11,091
                                                                         =======   ======
The average amounts outstanding are computed using weighted monthly
     averages. Related interest expense for the nine month periods ended
     September 30, 1997 and 1996 (unaudited) was $916,000 and $281,000,
     respectively, and $576,000 for the year ended December 31, 1996. The Bank
     had no outstanding borrowings at December 31, 1995 and 1994.

                                      F-22
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(9)  Net Worth
--------------

     The changes in net worth for the nine months ended September 30, 1997 and
     for the years ended December 31, 1996, 1995 and 1994 follow (in thousands):
NINE MONTHS ENDED            YEAR ENDED           
                                                            SEPTEMBER 30,             DECEMBER 31,          
                                                                                -----------------------     
                                                                1997             1996     1995    1994      
                                                                ----            ------   ------  ------     
                                                             (unaudited)
Net worth, beginning of period                           $115,664          107,653   81,322  87,195 
     Net income                                                  8,635           10,768    9,925   8,801 
     Net unrealized gain (loss)                                                                           
       on securities available for sale, net of taxes            2,421           (2,757)  16,406 (14,674) 
                                                              --------          -------  -------         
     Net worth, end of period                                 $126,720          115,664  107,653  81,322 
                                                              ========          =======  ======= =======
The Bank is subject to various regulatory capital requirements administered
     by the Federal banking agencies. Failure to meet minimum capital
     requirements can initiate certain mandatory - and possibly additional
     discretionary - actions by regulators that, if undertaken, could have a
     direct material effect on the Bank's financial statements. Under capital
     adequacy guidelines and the regulatory framework for prompt corrective
     action, the Bank must meet specific guidelines that involve quantitative
     measures of the Bank's assets, liabilities, and certain off-balance-sheet
     items as calculated under regulatory accounting practices. The Bank's
     capital amounts and classifications are also subject to qualitative
     judgements by the regulators about components, risk weightings, and other
     factors.

     Quantitative measures established by regulation to ensure capital adequacy
     require the Bank to maintain minimum amounts and ratios (set forth in the
     table below) of total and Tier 1 capital to risk-weighted assets and of
     Tier 1 capital to average assets. As of September 30, 1997, the Bank meets
     all capital adequacy requirements to which it is subject.

     As of September 30, 1997, the most recent notification from the Federal
     Deposit Insurance Corporation categorized the Bank as well capitalized
     under the regulatory framework for prompt corrective action. To be
     categorized as adequately capitalized the Bank must maintain minimum total
     risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
     the following table. There are no conditions or events since that
     notification that management believes have changed the Bank's category.

                                      F-23
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(9)  Net Worth
--------------

     The Bank's actual capital amounts and ratios are presented in the following
     table (in thousands):
FOR CAPITAL                         
                                                                       ADEQUACY           
                                   ACTUAL                              PURPOSES           
                              --------------             --------------------------------------                   
                              AMOUNT   RATIO             AMOUNT                           RATIO      
                              ------   -----             ------                           -----
As of September 30, 1997:                                                              
(unaudited):                                                                           
Total capital to                                greater than                    greater than
brisk-weighted assets         $131,736  21.74%  or equal to        $48,470      or equal to     8.00%
                                                                                                                           
Tier 1 capital to                               greater than                    greater than        
risk-weighted assets          125,383  20.69    or equal to        24,235       or equal to    4.00%  
                                                                                                    
Tier 1 capital to                               greater than                    greater than
average assets                125,383  10.75    or equal to        34,990       or equal to    3.00            
                                                                                                               
As of December 31, 1996:                                                               
Total capital to                                greater than                    greater than
risk-weighted assets          123,229  22.84    or equal to        43,160       or equal to    8.00             
                                                                                                   
Tier 1 capital to                               greater than                    greater than
risk-weighted assets          116,690  21.63    or equal to        21,580       or equal to    4.00   
                                                                                                
Tier 1 capital to                               greater than                    greater than    
average assets                116,690  10.77    or equal to        32,492       or equal to    3.00
                                                                                                
As of December 31, 1995:                                                                        
Total capital to                                greater than                    greater than    
risk-weighted assets          110,778  22.34    or equal to        39,672       or equal to    8.00
                                                                                       
Tier 1 capital to                               greater than                    greater than
risk-weighted assets          106,071  21.39    or equal to        19,836       or equal to    4.00          
                                                                                                          
Tier 1 capital to                               greater than                    greater than              
average assets                106,071  10.86    or equal to        29,292       or equal to    3.00
TO BE WELL               
                                                    CAPITALIZED UNDER     
                                                    PROMPT CORRECTIVE     
                                                    ACTION PROVISIONS      
                                           -----------------------------------    
                                           AMOUNT                        RATIO       
                                           -------                       -----
As of September 30, 1997:                                                 
(unaudited):                                                                          
Total capital to                greater than                  greater than  
brisk-weighted assets           or equal to      $60,588      or equal to   10.00%     
                                                                                       
Tier 1 capital to               greater than                  greater than             
risk-weighted assets            or equal to       36,353      or equal to    6.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
average assets                  or equal to       58,316      or equal to    5.00      
                                                                                       
As of December 31, 1996:                                                               
Total capital to                greater than                  greater than             
risk-weighted assets            or equal to       53,950      or equal to   10.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
risk-weighted assets            or equal to       32,370      or equal to    6.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
average assets                  or equal to       54,154      or equal to    5.00      
                                                                                       
As of December 31, 1995:                                                               
Total capital to                greater than                  greater than             
risk-weighted assets            or equal to       49,590      or equal to   10.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
risk-weighted assets            or equal to       29,754      or equal to    6.00      
                                                                                       
Tier 1 capital to               greater than                  greater than             
average assets                  or equal to       48,820      or equal to    5.00
F-24
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(10) Income Taxes
-----------------

     Total income taxes for the nine months ended September 30, 1997 and 1996,
     and for the years ended December 31, 1996, 1995 and 1994 were allocated as
     follows (in thousands):
NINE MONTHS             YEARS ENDED        
                                             SEPTEMBER 30,            DECEMBER 31,       
                                            ----------------  ---------------------------
                                             1997     1996     1996      1995      1994  
                                            -------  -------  -------   -------   -------
                                              (UNAUDITED)
Income from operations                  $4,905   4,667    6,278      5,144    4,704 
                                                                                         
     Net worth, for unrealized gain/loss                                                 
        on securities available for sale      1,682  (3,719)  (1,917)    10,028   (8,824)
                                             ======  ======   ======     ======   ======
The components of income taxes attributable to income from operations for
     the nine months ended September 30, 1997 and 1996 and for the years ended
     December 31, 1996, 1995 and 1994 are as follows (in thousands):
NINE MONTHS             YEARS ENDED              
                   SEPTEMBER 30,            DECEMBER 31,             
                  ----------------  ---------------------------      
                   1997     1996     1996      1995      1994        
                  -------  -------  -------   -------   -------      
                     (UNAUDITED)
Current:                                                        
                                                                 
      Federal      $4,356   4,316    5,640     4,353      3,729        
      State           713     800    1,025     1,044        932        
                   ------   -----    -----     -----      -----        
                    5,069   5,116    6,665     5,397      4,661        
                   ------   -----    -----     -----      -----        
     Deferred:                                                         
                                                                       
      Federal        (164)   (449)    (387)     (253)        43        
                   ------   -----    -----     -----      -----        
                   $4,905   4,667    6,278     5,144      4,704        
                   ======   =====    =====     =====      =====
F-25
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(10) Income Taxes, Continued
----------------------------

     Income tax expense attributable to income from operations for the nine
     months ended September 30, 1997 and 1996 and the years ended December 31,
     1996, 1995 and 1994 differs from the expected tax expense (computed by
     applying the Federal corporate tax rate of 35% to income before income
     taxes) as follows (in thousands):
NINE MONTHS             YEARS ENDED        
                                                           SEPTEMBER 30,            DECEMBER 31,       
                                                          ----------------  ---------------------------
                                                           1997     1996     1996      1995      1994  
                                                          -------  -------  -------   -------   ------- 
                                                             (UNAUDITED)
Expected tax expense                                 $4,739    4,513    5,966     5,274     5,050   
        Increase (decrease) attributable to:
          State income taxes, net of
           Federal benefit                                   463      520      666       679       606       
          Dividends received deduction                      (326)    (331)    (434)     (436)     (411)      
          Non-taxable interest income                        (25)     (59)     (68)     (386)     (400)      
          Other                                               15     (142)    (116)      (31)     (342)       
          Increase in valuation allowance
            for deferred tax assets allocated
            to income tax expense                             39      166      264        44       201
                                                           -----    -----    -----     -----     ----- 
                                                          $4,905    4,667    6,278     5,144     4,704
                                                           =====    =====    =====     =====     =====
F-26
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(10) Income Taxes, Continued
----------------------------

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     September 30, 1997 and December 31, 1996 and 1995 are presented below:
SEPTEMBER 30,     DECEMBER 31,      
                                                                                  ----------------    
                                                                       1997        1996     1995      
                                                                  --------------  -------  -------    
                                                                   (UNAUDITED)
Deferred tax assets:                                                                            
          Financial reporting allowance for loan losses                 $ 2,605     2681     1930     
          Deferred compensation                                             701      576      501     
          Post-retirement benefits obligations                              670      638      587     
          Losses on investments in affiliates                               540      490      405     
          Net unrealized loss on securities available for sale                -      713        -     
          Deferred mortgage fees                                            218      283      371     
          Excess of financial reporting depreciation over tax                                         
             depreciation                                                   178        -        -     
          Other                                                             342      376      659     
                                                                        -------   ------   ------     
                 Total gross deferred tax assets                          5,254    5,757    4,453     
                 Less valuation allowance                                (1,341)  (1,302)  (1,038)    
                                                                        -------   ------   ------     
                 Net deferred tax assets                                  3,913    4,455    3,415     
                                                                        -------   ------   ------     
                                                                                                      
      Deferred tax liabilities:                                                                       
          Tax allowance for loan losses, in excess of base                                            
             year amount                                                 (1,884)  (1,790)  (1,768)    
          Net unrealized gain on securities available for sale             (969)       -   (1,204)    
          Prepaid pension costs                                            (285)    (301)    (287)    
          Excess of tax depreciation over financial reporting                                         
             depreciation                                                     -      (56)    (119)    
          Other                                                             (90)    (104)    (137)    
                                                                        -------   ------   ------     
                 Total gross deferred tax liabilities                    (3,228)  (2,251)  (3,515)    
                                                                        -------   ------   ------     
      Net deferred tax asset (liability)                                $   685    2,204     (100)    
                                                                        =======   ======   ======
F-27
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(10) Income Taxes, Continued
----------------------------
 
     The net increase in the total valuation allowance for the nine month period
     ended September 30, 1997 and the year ended December 31, 1996 of $39,000
     and $264,000, respectively, is attributable to income from operations. The
     net decrease in the total valuation allowance for the year ended December
     31, 1995 of $766,000 includes an increase of $44,000 attributable to income
     from operations, net of a decrease of $810,000 related to the unrealized
     gain on securities available for sale.

     In assessing the realizability of deferred tax assets, management considers
     whether it is more likely than not that some portion or all of the deferred
     tax assets will not be realized. The ultimate realization of deferred tax
     assets is dependent upon the generation of future taxable income during the
     periods in which those temporary differences become deductible. Management
     considers the scheduled reversal of deferred tax liabilities, availability
     of operating loss carrybacks, projected future taxable income, and tax
     planning strategies in making this assessment. Based upon the level of
     historical taxable income, the opportunity for net operating loss
     carrybacks, and projections for future taxable income over the periods
     which deferred tax assets are deductible, management believes it is more
     likely than not the Bank will realize the benefits of these deductible
     differences, net of the existing valuation allowance, at September 30,
     1997.

     At December 31, 1996, net worth includes approximately $11.1 million
     representing bad debt deductions taken under the provisions of the Internal
     Revenue Code. Recent Federal legislation repealed this provision of the Tax
     Code thereby requiring the Bank to recapture $4.2 million in additions to
     the tax bad debt reserve for periods after the 1987 base year. At December
     31, 1996, the deferred tax liability related to the tax allowance for loan
     losses in excess of the base year amount includes $1.5 million of Federal
     income taxes which the Bank will repay over tax years 1998 through 2003.

                                      F-28
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(11) Benefit Plans
------------------

     Pension Plan
     ------------

     The funded status of the Bank's pension plan and the amounts recognized in
     the financial statements as of December 31, 1996 and 1995 follow (in
     thousands):
1996     1995  
                                                                   -------  -------
Actuarial present value of benefit obligation:                               
         Vested                                                     $4,174    3952  
         Non-vested                                                    467     376  
                                                                    ------   -----  
            Total accumulated benefit obligation                    $4,641   4,328  
                                                                    ======   =====  
      Projected benefit obligation for service rendered to date     $6,084    5652  
      Plan assets at fair value                                       7602    6664  
                                                                    ------   -----  
      Plan assets in excess of projected benefit obligation           1518    1012  
      Unrecognized net asset being recognized over 10 years            122     184  
      Unrecognized net gain                                            799     258  
      Prior service cost not yet recognized in net periodic                         
         pension costs                                                  14      18  
                                                                    ------   -----  
            Prepaid pension costs, included in other assets         $  611     588  
                                                                    ======   =====
Net pension cost for years ended December 31, 1996, 1995 and 1994 is
     comprised of the following (in thousands):
1996   1995  1994    
                                                          -----  ----  -----
Service cost, benefits earned during the period     $ 340   277   286    
      Interest cost on projected benefit obligation         422   385   346    
      Actual return on plan assets                          949  1133     7    
      Net amortization and deferral                         366   640  (476)   
                                                          -----  ----  ----    
                                                                               
              Net periodic pension cost                   $ 179   169   149    
                                                          =====  ====  ====
F-29
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(11) Benefit Plans, Continued
-----------------------------

     The principal actuarial assumptions used in 1996, 1995 and 1994 were as
     follows:
1996   1995  1994  
                                                            -----  ----  ----
Discount rate                                          7.75%  7.50  8.25  
     Expected long-term rate of return on assets            8.00   8.00  8.00  
     Assumed rate of future compensation increase           5.50   5.50  6.00  
                                                            ====   ====  ====
The plan assets are in mutual funds consisting primarily of listed stocks
     and bonds, government securities and cash equivalents.

     401(k) Plan
     -----------

     All employees are also eligible to participate in a Bank sponsored 401(k)
     plan. Participants may make contributions to the Plan in the form of salary
     reductions of up to 15% of their eligible compensation subject to the
     Internal Revenue Code limit. The Bank contributes an amount to the Plan
     equal to 50% of employee contributions, up to a maximum of 6% of the
     employee's eligible compensation. The Bank's contribution was $143,000 and
     $123,000 for the nine month periods ended September 30, 1997 and 1996
     (unaudited), respectively, and $169,000, $143,000 and $128,000 in 1996,
     1995 and 1994, respectively.

     Other Post-retirement Benefits
     ------------------------------

     In addition to providing pension benefits, the Bank provides post-
     retirement health care and life insurance benefits for substantially all of
     the Bank's full-time employees and their beneficiaries and dependents if
     they reach normal retirement age while working for the Bank.

     The components of net periodic post-retirement benefit cost for the years
     ended December 31, 1996, 1995, and 1994 are as follows (in thousands):
1996      1995      1994   
                                                  -----     ----      ----
Service cost                  $  64       49        52   
                    Interest cost                   105      101        96   
                                                  -----     ----      ----   
                              Total cost          $ 169      150       148   
                                                  =====     ====      ====
F-30
LOCKPORT SAVINGS BANK
                              AND SUBSIDIARIES   

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(11) Benefit Plans, Continued
-----------------------------

     The accumulated post-retirement benefit obligation recognized as of
     December 31, 1996 and 1995 is as follows (in thousands):
1996    1995  
                                                                 -------  -----
Fully eligible active participants                          $   45    113 
      Active participants not yet eligible                           427    423 
      Retirees                                                       798    894 
      Unrecognized net gain                                          285      2 
                                                                   -----  ----- 
         Total accumulated post-retirement benefit obligation,                  
             included in other liabilities                       $ 1,555  1,432 
                                                                  ======  =====
The post-retirement benefit obligation was determined using a discount rate
     of 8.0% for 1996 and 7.5% for 1995. The assumed health care cost trend rate
     used in measuring the accumulated post-retirement benefit obligation was
     10% in 1997, decreasing by 1% per year to an ultimate rate of 5.0% in 2002
     and thereafter, over the projected payout of benefits. The health care cost
     trend rate assumption can have a significant effect on the amounts
     reported. If the health care cost trend rate were increased one percent,
     the accumulated post-retirement benefit obligation as of December 31, 1996
     would have increased by 2.3% and the aggregate of service and interest cost
     would increase by 2.6%. However, the plan limits the increase in the Bank's
     annual contributions to the plan for most participants to the increase in
     base compensation for active employees.

     As of January 1, 1994, the Bank adopted SFAS 106 "Employers' Accounting for
     Post-retirement Benefits Other Than Pensions". The transition obligation
     related to the adoption of this standard of $1,224,000 was recognized in
     the 1994 Consolidated Statement of Income, net of $300,000 previously
     accrued for this liability.

     Other Plans
     -----------

     The Bank also sponsors two non-qualified compensation plans, one for
     officers and one for employees. Awards are payable if certain earnings and
     performance objectives are met. The Bank had accrued $886,000 and $890,000
     for awards under these plans for the nine month periods ended September 30,
     1997 and 1996 (unaudited), respectively. Awards under these plans were
     $1,202,000, $1,173,000 and $1,363,000 in 1996, 1995 and 1994, respectively.

     The Bank also maintains a supplemental benefit plan for certain executive
     officers that is funded by the Bank through life insurance contracts. 

                                     F-31
LOCKPORT SAVINGS BANK
                              AND SUBSIDIARIES   

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(12) Fair Value of Financial Instruments
----------------------------------------

     The carrying value and estimated fair values of the Bank's financial
     instruments, all of which are non-trading, are as follows (in thousands):
SEPTEMBER 30, 1997    
                                                   ------------------    
                                                             ESTIMATED   
                                                  CARRYING     FAIR      
                                                    VALUE      VALUE     
                                                    -----      -----     
                                                      (UNAUDITED)
Financial assets:                                                   
      Cash and cash equivalents                    $ 17,004   17,004     
      Securities available for sale                 464,973  464,973     
      Securities held to maturity                    37,500   37,500     
      Loans                                         622,487  628,908     
      Accrued interest receivable                     7,343    7,343     
                                                                         
     Financial liabilities:                                              
      Deposits                                     $992,219  995,217     
      Mortgagors' payments held in escrow             8,387    8,387     
      Other borrowed funds                           28,740   28,688     
      Accrued interest payable                          558      558     
                                                                         
     Unrecognized financial instruments:                                 
      Commitments to extend credit                 $ 46,513   46,513
DECEMBER 31, 1996     
                                                   -----------------     
                                                            ESTIMATED    
                                                  CARRYING     FAIR      
                                                    VALUE      VALUE     
                                                    -----      -----
Financial assets:                                                   
      Cash and cash equivalents                    $ 16,219   16,219      
      Securities available for sale                 415,129  415,129     
      Securities held to maturity                    38,000   38,000     
      Loans                                         598,486  604,000     
      Accrued interest receivable                     6,348    6,348     
                                                                         
     Financial liabilities:                                              
      Deposits                                     $920,072  923,796     
      Mortgagors' payments held in escrow             8,773    8,773     
      Other borrowed funds                           32,008   31,863     
      Accrued interest payable                          330      330     
                                                                         
     Unrecognized financial instruments:                                 
      Commitments to extend credit                  $34,193   34,193
F-32
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED

(12) Fair Value of Financial Instruments, Continued
---------------------------------------------------
DECEMBER 31, 1995     
                                             -----------------     
                                                      ESTIMATED     
                                             CARRYING   FAIR       
                                              VALUE     VALUE      
                                             --------  -------
Financial assets:                                             
      Cash and cash equivalents              $ 31,374   31,374     
      Securities available for sale           346,410  346,410     
      Securities held to maturity              46,700   46,700     
      Loans                                   535,971  546,592     
      Accrued interest receivable               5,622    5,622     
      Nationar receivable                       5,053      N/A     
                                                                   
     Financial liabilities:                                        
      Deposits                               $861,065  869,265     
      Mortgagors' payments held in escrow      10,189   10,189     
      Accrued interest payable                    160      160     
                                                                   
     Unrecognized financial instruments:                           
      Commitments to extend credit            $30,583   30,583
Fair value estimates are based on existing on and off balance sheet
     financial instruments without attempting to estimate the value of
     anticipated future business and the value of assets and liabilities that
     are not considered financial instruments. In addition, the tax
     ramifications related to the realization of the unrealized gains and losses
     can have a significant effect on fair value estimates and have not been
     considered in these estimates. Fair value estimates, methods, and
     assumptions are set forth below for each type of financial instrument.

     Fair value estimates are made at a specific point in time, based on
     relevant market information and information about the financial instrument,
     including judgments regarding future expected loss experience, current
     economic conditions, risk characteristics of various financial instruments,
     and other factors. These estimates are subjective in nature and involve
     uncertainties and matters of significant judgment and therefore cannot be
     determined with precision. Changes in assumptions could significantly
     affect the estimates. 

     Cash and Cash Equivalents
     -------------------------

     The carrying value approximates the fair value because the instruments
     mature in 90 days or less.

     Securities
     ----------

     The fair values are estimated based on quoted market prices supplied by the
     Bank's custody agent and investment broker (notes 2 and 3).

                                     F-33
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED

(12) Fair Value of Financial Instruments, Continued
---------------------------------------------------

     Loans
     -----

     Residential revolving home equity and personal and commercial open ended
     lines of credit reprice as the prime rate changes. Therefore, the carrying
     values of such loans, totaling $15.4 million (unaudited), $14.0 million and
     $12.2 million at September 30, 1997, December 31, 1996 and 1995,
     respectively, approximate their fair value.

     The fair value of fixed-rate performing loans is calculated by discounting
     scheduled cash flows through the estimated maturity using the Bank's
     current origination rates. The estimate of maturity is based on the Bank's
     contractual cash flows adjusted for prepayment estimates based on current
     economic and lending conditions. Fair value for significant nonperforming
     loans is based on carrying value which does not exceed recent external
     appraisals of any underlying collateral.

     Deposits
     --------

     The fair value of deposits with no stated maturity, such as savings, money
     market, checking, as well as mortgagors' payments held in escrow, is equal
     to the amount payable on demand as of September 30, 1997, December 31, 1996
     and 1995. The fair value of certificates of deposit is based on the
     discounted value of contractual cash flows, using rates currently offered
     for deposits of similar remaining maturities.

     Other Borrowed Funds
     --------------------

     The fair value of the Bank's other borrowed funds is calculated by
     discounting scheduled cash flows through the estimated maturity using
     current market rates.

     Other Assets and Liabilities
     ----------------------------

     The fair value of the Bank's accrued interest receivable on loans and
     investments and accrued interest payable to depositors approximates the
     carrying value because all interest is payable or receivable in 90 to 120
     days.

     Commitments to Extend Credit
     ----------------------------

     The fair value of the Bank's commitments to extend credit approximates the
     notional amount of the agreements because of the short-term (90 to 120
     days) commitment period or because they reprice as market rates change.

                                     F-34
LOCKPORT SAVINGS BANK
                               AND SUBSIDIARIES

                   NOTES TO FINANCIAL STATEMENTS, CONTINUED

(13) Plan of Reorganization and Stock Issuance
---------------------------------------------

     On September 15, 1997, the Board of Trustees of LSB unanimously adopted a
     Plan of Reorganization (the Plan) whereby LSB will be reorganized into a
     New York chartered two-tiered mutual holding company. 

     The Reorganization will be accomplished in the following manner: (i) LSB
     will organize an interim stock savings bank as a wholly-owned subsidiary
     ("Interim One"); (ii) Interim One will organize an interim stock savings
     bank as a wholly-owned subsidiary ("Interim Two"); (iii) Interim One will
     organize Niagara Bancorp, Inc. (the Company) as a wholly-owned subsidiary;
     (iv) LSB will exchange its charter for a New York stock savings bank
     charter to become the Stock Bank and Interim One will exchange its charter
     for a New York mutual holding company charter to become the MHC; (v)
     simultaneously with step (iv), Interim Two will merge with and into the
     Stock Bank with the Stock Bank as the resulting institution; (vi) all of
     the initially issued stock of the Stock Bank will be transferred to the MHC
     in exchange for membership interests in the MHC; and (vii) the MHC will
     contribute the capital stock of the Stock Bank to the Company, and the
     Stock Bank will become a wholly-owned subsidiary of the Company.
     Contemporaneously with the Reorganization, the Company will offer for sale
     in the Stock Offering shares of Common Stock representing the pro forma
     market value of the Company and the Bank. Each savings account of LSB at
     the time of Reorganization will become a savings account in the newly-
     formed bank in the same amount and upon the same terms and conditions,
     except the holder of each such deposit account will have liquidation rights
     with respect to the Mutual Holding Company rather than the Bank. 
 
     LSB will be applying to the Federal Reserve Board, the New York State
     Banking Department, the FDIC and the SEC for approval of transactions
     contemplated by the Plan. The Plan authorizes the stock holding company to
     offer stock in one or more stock offerings up to a maximum of 49% of the
     issued and outstanding shares of its common stock. The common stock will be
     offered on a priority basis to depositors, employee benefit plans of LSB,
     certain other eligible subscribers, the community and a charitable
     foundation to be established pursuant to the Plan.

     The Company proposes to fund the foundation by contributing a number of
     authorized but unissued shares of common stock or grants of cash,
     securities or other assets to the foundation, immediately following the
     conversion. Such contribution, once made, will not be recoverable by the
     Company or the Stock Bank. The Company will recognize expense equal to the
     fair value of the stock, cash, securities or other assets in the quarter in
     which the contribution occurs, which is expected to be the first or second
     quarter of 1998. Such expense will reduce earnings and have a material
     impact on the Company's earnings for such quarter and for 1998.

     Conversion costs will be deferred and reduce the proceeds from the shares
     sold in the conversion. If the conversion is not completed, all costs will
     be charged to expense.

                                     F-35
GLOSSARY

1933 Act                     Securities Act of 1933, as amended

1934 Act                     Securities Exchange Act of 1934, as amended

Associate                    The term "Associate" of a person is defined to mean

                             (i) any corporation or organization (other than the
                             Bank or its subsidiaries or the Company) of which
                             such person is a director, officer, partner or 10%
                             shareholder;

                             (ii) any trust or other estate in which such person
                             has a substantial beneficial interest or serves as
                             trustee or in a similar fiduciary capacity;
                             provided, however that such term shall not include
                             any employee stock benefit plan of the Company or
                             the Bank in which such a person has a substantial
                             beneficial interest or as a trustee or in a similar
                             fiduciary capacity, and

                             (iii) any relative or spouse of such person, or
                             relative of such spouse, who either has the same
                             home as such person or who is a director or officer
                             of the Bank or its subsidiaries or the Company

ATM                          Automated Teller Machine

Bank                         Lockport Savings Bank

BIF                          Bank Insurance Fund of the FDIC

Code                         The Internal Revenue Code of 1986, as amended

Community Offering           Offering for sale to members of the general public
                             of any shares of common stock not subscribed for in
                             the Subscription Offering, with preference given to
                             natural persons residing in Niagara, Orleans, Erie
                             and Genesee Counties, New York

Common Stock                 Common Stock, par value of $.01 per share, offered
                             by Niagara Bancorp, Inc. in connection with the
                             Reorganization

Company                      Niagara Bancorp, Inc., the parent holding company
                             for Lockport Savings Bank, and the issuer of the
                             shares of Common Stock in the Offering

Department                   The New York State Banking Department

Eligible Account  Holders    Holders of deposit accounts with Lockport Savings
                             Bank with account balances of at least $100 as of
                             the close of business on August 31, 1996

ERISA                        Employee Retirement Income Security Act of 1974, as
                             amended

ESOP                         The Niagara Bancorp, Inc. Employee Stock Ownership
                             Plan and Trust

Estimated Valuation Range    Estimated pro forma market value of the Common
                             Stock ranging from

                                      G-1
$191,250,000 to $258,750,000. The estimated
                             valuation range may be increased to $297,562,500
                             without a resolicitation of subscribers

Expiration Date              ______ noon, New York Time, on March ___, 1997

FASB                         Financial Accounting Standards Board

Federal Reserve Board        Board of Governors of the Federal Reserve System

FDIC                         Federal Deposit Insurance Corporation

FDICIA                       Federal Deposit Insurance Corporation Improvement
                             Act of 1991, as amended

Freddie Mac                  Freddie Mac

FHLB of New York             Federal Home Loan Bank of New York

Foundation                   The Lockport Savings Bank Charitable Foundation to
                             be established by Lockport Saving Bank and Niagara
                             Bancorp, Inc. and to which the Bank and the Company
                             will contribute cash and shares of Common Stock

FNMA                         Federal National Mortgage Association

Independent Valuation        The appraisal of the pro forma market value of the
                             Company's Common Stock as determined by RP
                             Financial, LC as of November __, 1997

IRA                          Individual retirement account or arrangement

IRS                          Internal Revenue Service

Minority Shares              The shares of Common Stock sold to the depositors
                             and the public in the Offering pursuant to the
                             Prospectus, which will represent, in the aggregate,
                             a minority ownership position in the Company

MMDA                         Money Market Demand Account

Mutual Holding  Company      Niagara Bancorp, MHC, a New York chartered mutual
                             corporation, which will own, and which by law must
                             own, a majority of the shares of Common Stock of
                             the Company

NASD                         National Association of Securities Dealers, Inc.

Nasdaq System                National Association of Securities Dealers
                             Automated Quotation System

NOW account                  Negotiable Order of Withdrawal Account

NPV                          Net portfolio value

Offering                     The offer and sale of Common Stock to depositors
                             and the public pursuant to the Prospectus

                                      G-2
Offering Range               The offer and sale by the Company of between
                             8,677,747 and 11,740,482 shares (subject to
                             adjustment to 13,501,554 shares) of Common Stock
                             pursuant to the Prospectus

Order Form                   Form for ordering stock accompanied by a
                             certification concerning certain matters

Plan Reorganization          Lockport Savings Bank Plan of Reorganization from a
                             Mutual Savings Bank to a Mutual Holding Company and
                             Stock Issuance Plan

Reorganization               The reorganization of the Bank from the mutual to
                             the stock form of organization, the organization of
                             the Company, the issuance of all of the Bank's
                             common stock to the Company, the issuance of a
                             majority of the Company's Common Stock to the
                             Mutual Holding Company, and the offer and sale of
                             the Minority Shares to depositors and the public
                             pursuant to the Prospectus

REO                          Real Estate Owned

Recognition and
Retention Plan               The Recognition and Retention Plan to be submitted
                             for approval at a meeting of the Company's
                             shareholders to be held no earlier than six months
                             after the completion of the Reorganization

SAIF                         Savings Association Insurance Fund of the FDIC

SEC                          Securities and Exchange Commission

Special Meeting              Special Meeting of depositors of the Bank called
                             for the purpose of approving the Plan of
                             Reorganization

Stock Option Plan            The Stock Option Plan for directors and officers to
                             be submitted for approval at a meeting of the
                             Company' shareholders to be held no earlier than
                             six months after the completion of the conversion

Subscription Offering        Offering of non-transferable rights to subscribe
                             for the common stock, in order of priority, to
                             eligible account holders, the ESOP, and
                             supplemental eligible account holders

Supplemental Eligible
Account Holders              Depositors of the Bank, who are not eligible
                             account holders, with account balances of at least
                             $100 on December 31, 1997

Superintendent               The Superintendent of Banks of the State of New
                             York

Voting Record  Date          The close of business on January __, 1998, the date
                             for determining depositors entitled to vote at the
                             Special Meeting

                                      G-3
================================================================================

          No person has been authorized to give any information or to make any
representation other than as contained in this prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or the Bank. This prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any security other than the
shares of common stock offered hereby to any person in any jurisdiction in which
such offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
prospectus nor any sale hereunder shall, under any circumstances, create any
implication that information herein is correct as of any time subsequent to the
date hereof.

                             NIAGARA BANCORP, INC.

                         (Proposed Holding Company for
                            Lockport Savings Bank)

                         Up to 13,501,55482,125 Shares

                                 Common Stock
                          ($.01 par value per share)

                               _________________

                                  PROSPECTUS

                               _________________

                            CIBC OPPENHEIMER CORP.
                           TRIDENT SECURITIES, INC.

                                February , 1998

                 THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
                  AND ARE NOT FEDERALLY INSURED OR GUARANTEED

Until March __, 1998 or 25 days after the commencement of the Offering, all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PART II:  INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount    
                                                                                       ------
*    Legal fees and Expenses...................................           $    165,000    
       *    Printing, Postage and Mailing.............................                300,000    
       *    Appraisal and Business Plan Fees and Expenses.............                 67,500    
       *    Accounting Fees and Expenses..............................                100,000    
       **   Marketing Fees and Expenses...............................              1,060,000    
       *    Filing Fees (SEC, NASD and New York State                                            
             Department of Banking)...................................                 60,000    
       *    Other Expenses............................................                137,500    
                                                                                 ------------    
       **   Total.....................................................           $  1,800,000    
                                                                                 ============
__________________
*      Estimated
**     The Bank and the Company have retained CIBC Oppenheimer Corp. and Trident
       Securities, Inc. to assist in the sale of common stock on a best efforts
       basis in the Subscription and Community Offerings. For  purposes of 
       computing estimated expenses, it has been assumed that CIBC Oppenheimer 
       Corp. and Trident Securities, Inc. will receive fees of approximately
       $1,000,000, exclusive of attorneys' fees and expenses of $60,000.

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

       Article NINTH of the Certificate of Incorporation of Niagara Bancorp, 
Inc. (the "Corporation") sets forth circumstances under which directors, 
officers, employees and agents of the Corporation may be insured or indemnified 
against liability which they incur in their capacities as such:

       NINTH:
       -----

       A. Each person who was or is made a party or is threatened to be made a 
party to or is otherwise involved in any action, suit or proceeding, whether 
civil, criminal, administrative or investigative (hereinafter a "proceeding"), 
by reason of the fact that he or she is or was a Director or an Officer of the 
Corporation or is or was serving at the request of the Corporation as a 
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an 
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such 
proceeding is alleged action in an official capacity as a Director, Officer, 
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to 
the fullest extent authorized by the Delaware General Corporation Law, as the 
same exists or may hereafter be amended (but, in the case of any such 
amendment, only to the extent that such amendment permits the Corporation to 
provide broader indemnification rights than such law permitted the Corporation 
to provide prior to such amendment), against all expense, liability and loss 
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such 
indemnitee in connection therewith; provided, however, that, except as provided 
in Section C hereof with respect to proceedings to enforce rights to 
indemnification, the Corporation shall indemnify any such indemnitee in 
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.

       B. The right to indemnification conferred in Section A of this Article 
NINTH shall include the right to be paid by the Corporation the expenses 
incurred in defending any such proceeding in advance of its final disposition 
(hereinafter an "advancement of expenses"); provided, however, if required under
the Delaware General Corporation Law, that an advancement of expenses incurred 
by an indemnitee in his or her capacity as a Director of Officer (and not in 
any other capacity in which service was or is rendered by such indemnitee, 
including, without limitation, service to an employee benefit plan) shall be 
made only upon delivery to the Corporation of and undertaking (hereinafter an 
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so 
advanced if it shall ultimately be determined by final judicial decision from 
which there is no further appeal (hereinafter a "final)
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise. The rights to indemnification and to
the advancement of expenses conferred in Sections A and B of this Article NINTH
shall be contract rights and such rights shall continue as to an indemnitee who
has ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.

     C.   If a claim under Section A or B of this Article NINTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be 
entitled to be paid also the expense of prosecuting or defending such suit. In 
(i) any suit brought by the indemnitee to enforce a right to indemnification 
hereunder (but not in a suit brought by the indemnitee to enforce a right to an 
advancement of expenses), it shall be a defense that, and (ii) in any suit by
the Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the Corporation shall be entitled to recover such expenses upon
a final adjudication that, the indemnitee has not met any applicable standard
for indemnification set forth in the Delaware General Corporation Law. Neither
the failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or is stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article NINTH or otherwise, shall be on the Corporation.

     D.   The rights to indemnification and to the advancement of expenses
conferred in this Article NINTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.

     E.   The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.

     F.   The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article NINTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES.

          Not Applicable
     
ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:

          The exhibits and financial statement schedules filed as part of this 
registration statement are as follows:

          (a)  LIST OF EXHIBITS

1.1  Form of Agency Agreement among Niagara Bancorp, Inc., Lockport Savings
     Bank, Trident Securities, Inc. and CIBC Oppenheimer Corp.*
2    Plan of Reorganization

3.1  Certificate of Incorporation of Niagara Bancorp, Inc. (Incorporated herein 
     by reference to Exhibit B of the Plan of Reorganization)

3.2  Bylaws of Niagara Bancorp, Inc. (Incorporated herein by reference to 
     Exhibit B of the Plan of Reorganization)

4    Form of Common Stock Certificate of Niagara Bancorp, Inc.

5    Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality 
     of securities being registered 

8.1  Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.

8.2  Form of State Tax Opinion.*

8.3  Letter from RP Financial, Inc. with respect to Subscription Rights

10.1 Form of Employment Agreement

10.2 Lockport Savings Bank Deferred Compensation Plan

10.3 Employee Stock Ownership Plan

21   Subsidiaries of the Registrant*

23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in opinion
     filed as Exhibit 5)

23.2 Consents of KPMG Peat Marwick LLP

23.3 Consent of RP Financial, Inc.

24   Power of Attorney (set forth on Signature Page)

27   EDGAR Financial Data Schedule

99.1 Appraisal Report of RP Financial, Inc.* 

99.2 Marketing Materials

99.3 Order and Acknowledgment Form*

__________________
*To be filed supplementally or by amendment.

          (b)  FINANCIAL STATEMENT SCHEDULES

          No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.

ITEM 17.  UNDERTAKINGS

          The undersigned Registrant hereby undertakes:

          (1)  To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i)    To include any prospectus required by Section 10(a)(3) of the 
          Securities Act of 1933;

          (ii)   To reflect in the prospectus any facts or events arising after 
          the effective date of the registration statement (or the most recent
          post-effective amendment thereof) which, individually or in the
          aggregate, represent a fundamental change in the information set forth
          in the registration statement;

          (iii)  To include any material information with respect to the plan of
          distribution not previously disclosed in the registration statement or
          any material change to such information in the registration statement.

          (2)  That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

          (3)  To remove from registration by means of post-effective amendment 
any of the securities being registered which remain unsold at the termination of
the offering.

          (4)  To provide to the underwriter at the closing specified in the 
underwriting agreements, certificates in such denominations and registered in 
such names as required by the underwriter to permit prompt delivery to each 
purchaser.

          Insofar as indemnification for liabilities arising under the 
Securities Act of 1933 may be permitted to directors, officers and controlling 
persons of the Registrant pursuant to the foregoing provisions, or otherwise, 
the Registrant has been advised that in the opinion of the Securities and 
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933, the registrant 
has duly caused this registration statement to be signed on its behalf by the 
undersigned, thereunto duly authorized, in Lockport, New York on December 16, 
1997.

                                   NIAGARA BANCORP, INC.

                                   By:    /s/ William E. Swan
                                          -------------------
                                          William E. Swan
                                          President and Chief Executive Officer
                                          (Duly Authorized Representative)

                               POWER OF ATTORNEY

     We, the undersigned directors and officers of Niagara Bancorp, Inc. (the 
"Company") hereby severally constitute and appoint William E. Swan as our true 
and lawful attorney and agent, to do any and all things in our names in the 
capacities indicated below which said William E. Swan may deem necessary or 
advisable to enable the Company to comply with the Securities Act of 1933, and 
any rules, regulations and requirements of the Securities and Exchange 
Commission, in connection with the registration statement on Form S-1 relating 
to the offering of the Company's Common Stock, including specifically, but not 
limited to, power and authority to sign for us in our names in the capacities 
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm 
all that said William E. Swan shall do or cause to be done by virtue thereof.

     Pursuant to the requirements of the Securities Act of 1933, this 
registration statement has been signed below by the following persons in the 
capacities and as of the dates indicated.

     Signatures                     Title                          Date
     ----------                     -----                          ----

/s/ William E. Swan        President, and Chief Executive     December 16, 1997
-------------------        Officer (Principal Executive
William E. Swan            Officer) and Director

/s/ Paul J. Kolkmeyer      Executive Vice President and       December 16, 1997
---------------------      Chief Financial Officer 
Paul J. Kolkmeyer                                  

/s/ Gordon P. Assad        Director                           December 16, 1997
-------------------
Gordan P. Assad

/s/ Christa P. Caldwell    Director                           December 16, 1997
-----------------------
Christa P. Caldwell

/s/ James W. Currie        Director                           December 16, 1997 
-------------------
James W. Currie
Signatures                    Title                         Date
          ----------                    -----                         ----

/s/ Gary B. Fitch                  Director                 December 16, 1997
---------------------              
Gary B. Fitch

/s/ David W. Heinrich              Director                 December 16, 1997
---------------------
David W. Heinrich             

/s/ Daniel W. Judge                Director                 December 16, 1997
---------------------
Daniel W. Judge

/s/ B. Thomas Mancuso              Director                 December 16, 1997
---------------------
B. Thomas Mancuso

/s/ James Miklinski                Director                 December 16, 1997
---------------------
James Miklinski

/s/ Barton G. Smith                Director                 December 16, 1997
---------------------
Barton G. Smith

/s/ Robert G. Weber                Director                 December 16, 1997
---------------------
Robert G. Weber
As filed with Securities and Exchange Commission on December 22, 1997

                                                           Registration No. 333-

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

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                           _________________________

                                   EXHIBITS
                                      TO 
                            REGISTRATION STATEMENT
                                      ON
                                   FORM S-1

                           _________________________

                             NIAGARA BANCORP, INC.

================================================================================
EXHIBIT INDEX

1.1   Form of Agency Agreement among Niagara Bancorp, Inc., Lockport Savings 
      Bank, Trident Securities, Inc. and CIBC Oppenheimer Corp.*

2     Plan of Reorganization

3.1   Certificate of Incorporation of Niagara Bancorp, Inc. (incorporated herein
      by reference to Exhibit B of the Plan of Reorganization)

3.2   Bylaws of Niagara Bancorp, Inc. (Incorporated herein by reference to
      Exhibit B of the Plan of Reorganization)

4     Form of Common Stock Certificate of Niagara Bancorp, Inc.

5     Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality 
      of securities being registered

8.1   Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.

8.2   Form of State Tax Opinion.*

8.3   Letter from RP Financial, Inc. with respect to Subscription Rights

10.1  Form of Employment Agreement 

10.2  Lockport Savings Bank Deferred Compensation Plan

10.3  Employee Stock Ownership Plan

21    Subsidiaries of the Registrant*

23.1  Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in 
      opinion filed as Exhibit 5)

23.2  Consents of KPMG Peat Marwick LLP

23.3  Consent of RP Financial Inc.

24    Power of Attorney (set forth on Signature Page)

27    EDGAR Financial Data Schedule

99.1  Appraisal Report of RP Financial, Inc.*

99.2  Marketing Materials 

99.3  Order and Acknowledge Form*

___________________________
*To be filed supplementally or by amendment.