FIRST NIAGARA FINANCIAL GROUP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 2000

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transaction period from ___________________ to ______________________

Commission File Number: 0-23975

FIRST NIAGARA FINANCIAL GROUP, INC.
-------------------------------------------
(Exact Name of Registrant as specified in
its Charter)

Delaware 16-1545669
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization

6950 South Transit Road, P.O. Box 514,
Lockport, NY 14095-0514
- ---------------------------------------- ------------------------------------
(Address of Principal Executive Officer) (Zip Code)

(716) 625-7500
-------------------------------------------
(Registrant's Telephone Number Including
Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

None
-------------------

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
-------------------------------------------
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file reports) and (2) has been subject to such requirements for the
past 90 days.
YES |X| NO |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |_|

As of March 19, 2001, there were issued and outstanding, exclusive of treasury
shares, 25,547,100 shares of the Registrant's Common Stock.

The aggregate market value of the 8,848,820 shares of voting stock held by
non-affiliates of the Registrant was $102,867,500, as computed by reference to
the last sales price on March 19, 2001, as reported by the NASDAQ National
Market. Solely for purposes of this calculation, all persons who are directors
and executive officers of the Registrant and all persons who are beneficial
owners of more than 10% of its outstanding stock have been deemed to be
affiliates.

DOCUMENTS INCORPORATED
BY REFERENCE

The following documents, in whole or in part, are specifically incorporated by
reference in the indicated Part of the Company's Proxy Statement:

Document Part
- ----------------------------------- ----------------------------------------
Proxy Statement for the 2001 Annual Part III, Item 10
Meeting of Stockholders "Directors and Executive Officers of the
Registrant"

Part III, Item 11
"Executive Compensation"

Part III, Item 12
"Security Ownership of Certain Beneficial
Owners and Management"

Part III, Item 13
"Certain Relationships and Related
Transactions"

2

TABLE OF CONTENTS

ITEM PAGE
NUMBER NUMBER
------ ------

PART I

1 Business.......................................................... 4

2 Properties........................................................ 25

3 Legal Proceedings................................................. 25

4 Submission of Matters to a Vote of Security Holders............... 25

PART II

5 Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 25

6 Selected Financial Data........................................... 26

7 Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 29

7A Quantitative and Qualitative Disclosure about Market Risk......... 40

8 Financial Statements and Supplementary Data....................... 43

9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 77

PART III

10 Directors and Executive Officers of the Registrant................ 77

11 Executive Compensation............................................ 77

12 Security Ownership of Certain Beneficial Owners and Management.... 77

13 Certain Relationships and Related Transactions.................... 77

PART IV

14 Exhibits, Financial Statement Schedules and Reports on Form 8-K... 78

Signatures............................................................. 79

3

PART I

ITEM 1. BUSINESS

GENERAL

First Niagara Financial Group, Inc. (formerly Niagara Bancorp, Inc.)

First Niagara Financial Group, Inc. ("FNFG") is a Delaware corporation, which
holds all of the capital stock of First Niagara Bank ("First Niagara"), Cortland
Savings Bank ("Cortland") and Cayuga Bank ("Cayuga") (collectively, the
"Banks"). FNFG and its consolidated subsidiaries are hereinafter referred to
collectively as "the Company." Formerly known as Niagara Bancorp, Inc., FNFG
underwent a name change during 2000 following shareholder and regulatory
approval as part of an overall branding initiative designed to more accurately
reflect its expanded scope and services. FNFG was organized by First Niagara in
connection with the conversion from a New York State chartered mutual savings
bank to a New York State chartered stock savings bank and the reorganization to
a two-tiered mutual holding company. FNFG was formed for the purpose of
acquiring all of the capital stock of First Niagara upon completion of the
reorganization. As part of the reorganization, FNFG sold approximately 43.5% of
the shares of its common stock to eligible depositors of First Niagara (the
"Offering") and issued approximately 53.3% of its shares of common stock to
First Niagara Financial Group, MHC (the "MHC"), a state-chartered mutual holding
company incorporated in New York. Concurrent with the close of the offering,
1.9% of the shares were issued to the Company's employee stock ownership plan
and 1.3% of the shares were issued to the First Niagara Bank Foundation (the
"Foundation"). At December 31, 2000, approximately 32.3% of the shares of FNFG's
common stock are held by the public and approximately 61.9% of its shares are
held by the MHC. The remaining 5.8% of FNFG's shares of common stock are held by
the Foundation and the Company's employee stock ownership plan.

The business of FNFG consists of the management of its community banks and
non-bank entities. The Banks' business is primarily accepting deposits from
customers through their branch offices and investing those deposits, together
with funds generated from operations and borrowings, in one- to four-family
residential, multi-family and commercial real estate loans, commercial business
loans, consumer loans, and investment securities. Additionally, through its
subsidiaries, FNFG has expanded its product offerings to include insurance
agency services, third-party employee benefit plan administration, investment
brokerage services, investment advisory services and trust services.

This community bank holding company structure allows each of the banks to focus
on and more effectively serve the communities in which they operate. The Company
emphasizes personal service, attention and customer convenience in serving the
financial needs of the individuals, families and businesses residing in suburban
areas of Western and Central New York.

FNFG neither owns nor leases any property, but uses the premises and equipment
of First Niagara. At the present time, FNFG does not employ any persons, but
rather, utilizes the support staff of First Niagara from time to time.
Additional employees will be hired as appropriate to the extent FNFG expands its
business in the future.

During 2000, the Company continued to expand its strategic focus in both product
offerings and market area. On January 1, 2000, First Niagara acquired Empire
National Leasing, Inc. and its affiliate (collectively "ENL"). ENL is a
nationwide provider of equipment lease financing through a network of
well-established manufacturers, distributors, vendors and customers in a variety
of industries. Subsequent to the acquisition, Empire National Leasing, Inc.'s
affiliate changed its name to First Niagara Leasing, Inc. ("FNL"). Additionally,
on May 31, 2000, First Niagara acquired Niagara Investment Advisors, Inc.
("NIA"), a provider of investment supervisory services, which has approximately
$200 million in assets under management. ENL and NIA operate as wholly-owned
subsidiaries of First Niagara. However, their products and services are also
available to customers of Cayuga and Cortland.

First Niagara Bank (formerly Lockport Savings Bank)

First Niagara was organized in 1870 as a New York State chartered mutual savings
bank. First Niagara operates as a wholly-owned subsidiary of FNFG and is a
full-service, community-oriented savings bank that provides financial services
to individuals, families and businesses located in the Western New York counties
of Niagara, Orleans, Erie, Monroe and Genesee. First Niagara has also expanded
its market area beyond its traditional Western New York counties through new and
acquired branch locations and a loan production office in the Rochester market
area. On March 24, 2000, FNFG acquired Albion Banc Corp. ("Albion") and merged
the two branches of its subsidiary, Albion Federal Savings and Loan, into First
Niagara's branch system.

4

First Niagara Bank Subsidiaries

First Niagara Financial Services, Inc. (formerly LSB Associates, Inc.) First
Niagara Financial Services, Inc., a wholly-owned subsidiary incorporated in
1997, is engaged in the sale of annuities, mutual funds and life insurance.
First Niagara Financial Services, Inc. acts as an agent for third-party
companies to sell and service their products.

First Niagara Funding, Inc. (formerly LSB Funding, Inc.) First Niagara Funding,
Inc., is a wholly-owned real estate investment trust ("REIT"), incorporated in
1997, that primarily owns commercial mortgage loans. This REIT supplements its
holdings of commercial real estate loans with fixed rate residential mortgages,
home equity loans and commercial business loans.

First Niagara Securities, Inc. (formerly LSB Securities, Inc.) First Niagara
Securities, Inc., a wholly-owned subsidiary incorporated in 1984, is a New York
State Article 9A company which is primarily involved in the investment in U.S.
Treasury obligations.

Warren-Hoffman & Associates, Inc. and Foote-Mandaville Agency, Inc.
Warren-Hoffman & Associates, Inc. ("WHA") and Foote-Mandaville Agency, Inc. were
acquired on January 1, 1999. Both subsidiaries are full service insurance
agencies engaged in the sale of insurance products including personal and
business insurance, surety bonds, risk management, life, disability and
long-term care coverage. WHA was founded in 1968 and serves commercial firms and
personal clients throughout the United States and Canada. During 2000, WHA and
Foote-Mandaville Agency, Inc. had premium revenue of approximately $8.5 million
and employed 85 personnel. Effective January 1, 2001, Foote-Mandaville Agency,
Inc. was merged into WHA. In January 2001, WHA completed its acquisition of
Allied Claim Services, Inc. ("Allied"), an independent insurance adjusting firm
and third party administrator.

NOVA Healthcare Administrators, Inc. NOVA Healthcare Administrators, Inc.
("NOVA") was acquired on January 1, 1999 and provides third-party administration
of employee benefit plans.

Empire National Leasing, Inc. and First Niagara Leasing, Inc. Empire National
Leasing, Inc. and First Niagara Leasing, Inc. were acquired on January 1, 2000.
Both subsidiaries provide point-of-sale financing in the commercial small ticket
lease market to the equipment industry. Effective January 1, 2001 FNL was merged
into ENL.

Niagara Investment Advisors, Inc. NIA, is an investment supervisory services
firm that was acquired on May 31, 2000. NIA specializes in equity, fixed-income
and balanced portfolio accounts for individuals, pension plans, corporations and
charitable institutions and serves a client base primarily located in Western
New York. However, since the acquisition of Cayuga and Cortland, services are
also marketed to consumers in Central New York.

Cortland Savings Bank

In order to implement its community bank holding company strategy and expand its
presence in Central New York, on July 7, 2000 FNFG acquired all of the common
stock of CNY Financial Corporation, the holding company for Cortland Savings
Bank. Cortland, which is a New York State chartered savings bank founded in 1866
and headquartered in Cortland, New York, operates as a wholly-owned subsidiary
of FNFG. Cortland provides full service community banking to individuals and
businesses through its branch network in Cortland County and loan production
offices in Onondaga and Tompkins Counties.

Cortland Savings Bank Subsidiary

Cortland REIT Corp. Cortland REIT Corp., is a wholly-owned real estate
investment trust that owns residential mortgage loans. This REIT supplements its
holdings of residential real estate loans with commercial mortgage, home equity
and commercial real estate loans.

Cayuga Bank

Continuing its community bank holding company strategy and expansion into
Central New York, on November 3, 2000 FNFG acquired all of the common stock of
Iroquois Bancorp, Inc., the holding company of Cayuga Bank and The Homestead
Savings FA ("Homestead"). Upon closing of the transaction, FNFG merged Homestead
into Cayuga. As a result, Cayuga is a wholly-owned subsidiary of FNFG that
operates as a New York State chartered commercial bank. Cayuga provides
community banking services to consumers and businesses primarily located in
Cayuga, Oswego and Oneida Counties.

5

Cayuga Bank Subsidiaries

Cayuga Financial Services and H.S. Service Corp. Cayuga Financial Services and
H.S. Service Corp. are engaged in the sale of annuities, mutual funds and
insurance. Cayuga Financial Services and H.S. Service Corp., act as agents for
third party companies to sell and service their products. Effective January 1,
2001, all activities previously conducted by H.S. Services Corp. have been
transferred to Cayuga Financial Services.

Cayuga Funding Corp. Cayuga Funding Corp., is a wholly-owned real estate
investment trust that owns residential mortgage loans.

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K may contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1993, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that involve substantial risks and uncertainties.
When used in this report, or in the documents incorporated by reference herein,
the words "anticipate", "believe", "estimate", "expect", "intend", "may", and
similar expressions identify such forward-looking statements. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained herein. These
forward-looking statements are based largely on the expectations of the Company
or the Company's management and are subject to a number of risks and
uncertainties, including but not limited to economic, competitive, regulatory,
and other factors affecting the Company's operations, markets, products and
services, as well as expansion strategies and other factors discussed elsewhere
in this report filed by the Company with the Securities and Exchange Commission.
Many of these factors are beyond the Company's control.

MARKET AREA AND COMPETITION

The Company has been, and intends to continue to operate under a
community-oriented bank holding company structure to meet the financial services
needs of the communities where its full service banking offices are located. The
Company's primary lending areas have also historically been concentrated in the
same counties as its branch offices.

The Company faces significant competition in both making loans and attracting
deposits. The Western and Central New York regions have a high density of
financial institutions, most of which are significantly larger institutions
which have greater financial resources than the Company, and all of which are
competitors of the Company to varying degrees. The Company's competition for
loans comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions, 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 Company 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 a
result of, among other things, Internet banking, the elimination of restrictions
on the interstate operations of financial institutions, and legislation that
permits affiliations between banks, securities firms and insurance companies.

LENDING ACTIVITIES

General. The Company's principal lending activity has been the origination, of
fixed-rate and adjustable-rate mortgage loans collateralized by one- to
four-family residential real estate located within its primary market areas. The
Company generally sells in the secondary market 15-30 year monthly and 20-30
year bi-weekly fixed rate residential mortgage loans, and retains for its
portfolio adjustable-rate loans and fixed-rate monthly 10 year residential
mortgage loans, together with fixed-rate bi-weekly mortgage loans with
maturities of 15 years or less. The Company retains the servicing rights on all
mortgage loans it sells and realizes monthly service fee income. The Company
also originates for retention in its portfolio, multi-family residential loans,
home equity loans, commercial real estate loans, commercial business loans, and
consumer loans that it originates, with the exception of education loans which,
as they enter their repayment phase, are sold to the Student Loan Marketing
Association ("Sallie Mae").

6

Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts,
purchase accounting adjustments and allowances for credit losses) as of the
dates indicated.

At December 31,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997
--------------------- --------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ----------- ------- ----------- -------
(Dollars in thousands)

Real estate loans:
One- to four-family ........ $ 1,089,607 59.21% $ 609,742 61.55% $ 456,197 60.97% $ 392,846 61.47%
Home equity ................ 104,254 5.67 22,499 2.27 15,520 2.07 13,587 2.13
Multi-family ............... 111,668 6.07 74,652 7.54 72,672 9.71 74,049 11.59
Commercial ................. 217,759 11.83 120,758 12.19 98,693 13.19 77,217 12.08
Construction ............... 35,059 1.91 28,413 2.87 19,476 2.60 10,791 1.69
----------- ------ ----------- ------ ----------- ------ ----------- ------
Total real estate loans . 1,558,347 84.69 856,064 86.42 662,558 88.54 568,490 88.96
----------- ------ ----------- ------ ----------- ------ ----------- ------

Consumer loans:
Mobile home ................ 22,987 1.25 25,957 2.62 24,983 3.34 22,747 3.56
Recreational vehicle ....... 31,246 1.70 23,389 2.36 8,906 1.19 1,553 0.24
Vehicle .................... 71,044 3.85 24,289 2.45 8,741 1.17 7,306 1.14
Personal ................... 38,024 2.06 15,771 1.59 15,642 2.09 15,157 2.37
Home improvement ........... 8,973 0.49 7,983 0.81 8,131 1.09 7,609 1.19
Guaranteed education ....... 14,242 0.77 12,564 1.27 12,314 1.65 10,975 1.72
Other consumer ............. 1,613 0.09 280 0.03 342 0.05 321 0.05
----------- ------ ----------- ------ ----------- ------ ----------- ------
Total consumer loans .... 188,129 10.21 110,233 11.13 79,059 10.58 65,668 10.27
----------- ------ ----------- ------ ----------- ------ ----------- ------
Commercial business loans ........ 93,730 5.10 24,301 2.45 6,616 0.88 4,893 0.77
----------- ------ ----------- ------ ----------- ------ ----------- ------

Total loans ............. 1,840,206 100.00% 990,598 100.00% 748,233 100.00% 639,051 100.00%
----------- ====== ----------- ====== ----------- ====== ----------- ======

Net deferred costs and
unearned discounts ........ 714 4,892 4,516 3,266
Allowance for credit losses ...... (17,746) (9,862) (8,010) (6,921)
----------- ----------- ----------- -----------
Total loans, net ........ $ 1,823,174 $ 985,628 $ 744,739 $ 635,396
=========== =========== =========== ===========

At December 31,
---------------------
1996
---------------------
Amount Percent
----------- -------
(Dollars in thousands)

Real estate loans:
One- to four-family ........ $ 360,573 59.85%
Home equity ................ 11,337 1.88
Multi-family ............... 71,397 11.85
Commercial ................. 68,601 11.38
Construction ............... 12,493 2.07
----------- ------
Total real estate loans . 524,401 87.03
----------- ------

Consumer loans:
Mobile home ................ 21,406 3.55
Recreational vehicle ....... 1,602 0.26
Vehicle .................... 18,747 3.11
Personal ................... 13,596 2.26
Home improvement ........... 6,879 1.14
Guaranteed education ....... 10,702 1.78
Other consumer ............. 335 0.06
----------- ------
Total consumer loans .... 73,267 12.16
----------- ------
Commercial business loans ........ 4,895 0.81
----------- ------

Total loans ............. 602,563 100.00%
----------- ======

Net deferred costs and
unearned discounts ........ 2,462
Allowance for credit losses ...... (6,539)
-----------
Total loans, net ........ $ 598,486
===========

One- to Four-Family Real Estate Lending. The Company's primary lending activity
has been the origination of mortgage loans to enable borrowers to finance one-
to four-family, owner-occupied properties located in its primary market areas.
The Company offers 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. Approximately 35%, or $380.0
million, of the Company's residential portfolio consists of bi-weekly mortgages,
which feature an accelerated payment structure.

The Company currently offers both fixed, and adjustable rate conventional and
government guaranteed Federal Housing Administration ("FHA") and Veterans
Administration ("VA") mortgage loans with terms of 10 to 30 years that are fully
amortizing with monthly or bi-weekly loan payments. The Company generally
originates both fixed-rate and adjustable-rate loans in amounts up to the
maximum conforming loan limits as established by Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
secondary market standards. Private mortgage insurance ("PMI") is required for
loans with loan-to-value ratios in excess of 80%.

In an effort to provide financing for low and moderate income buyers, the
Company actively participates in residential mortgage programs and products
sponsored by FNMA, FHLMC, 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
Company to SONYMA, with the Company retaining the contractual servicing rights.

The Company currently offers several one- to four-family and adjustable-rate
mortgage loan ("ARMs") products secured by residential properties. The one- to
four-family ARMs are offered with terms up to 30 years, with rates that adjust
every one, three, five, seven or ten years. After origination, the interest rate
on one- to four-family ARMs is reset based upon a contractual spread or margin
above a specified index (i.e. U.S. Treasury Constant Maturity Index).

7

ARMs are generally subject to limitations on interest rate increases of up to 2%
per adjustment period and an aggregate adjustment of up to 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, 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 in the Company's portfolio helps to reduce its 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 four-family one year adjustable-rate loans are qualified at the rate
which would be in effect after the first interest rate adjustment, if that rate
is higher than the initial rate. The Company believes that these risks, which
have not had a material adverse effect on the Company to date, generally are
less onerous than the interest rate risks associated with holding fixed-rate
loans. Certain of the Company'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 Company sells ARMs, which are converted to 15 to 30 year
fixed-rate term loans, to either FNMA or FHLMC.

Commercial Real Estate and Multi-family Lending. The Company originates real
estate loans secured predominantly by first liens on apartment houses, office
complexes, and commercial and industrial real estate. 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. The
Company's current policy with regard to such loans is to emphasize geographic
distribution within its market area, diversification of property type and
minimization of credit risk.

As part of the Company's ongoing strategic initiatives to minimize interest rate
risk, commercial and multi-family real estate loans originated for the Company'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 payment schedule based on not
more than a 25-year amortization schedule for multi-family loans, and 20 years
for commercial real estate loans.

The Company also offers 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 the construction
period and automatic conversion to a permanent loan 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 2 years, with floating
interest rate levels generally established at a spread in excess of either the
LIBOR or 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 Company 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.
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.

The Company has increased its emphasis on commercial real estate and
multi-family lending desiring to invest in assets bearing interest rates which
are generally higher than those obtainable on residential mortgage loans and
which are more 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 general
economy.

8

Home Equity Lending. The Company offers fixed-rate, fixed-term, home equity and
second mortgage loans, and variable rate home equity lines of credit ("HELOCs")
in its market areas. During the second half of 2000, the Company expanded its
product offerings to include a fixed-rate bi-weekly home equity loan due to the
popularity of its bi-weekly mortgage product. Both fixed-rate and floating rate
home equity products are offered in amounts up to 90% of the appraised value of
the property (including the first mortgage) with a maximum loan amount of
$150,000. Mortgage insurance is required for HELOCs with loan-to-value ratios in
excess of 80%. Monthly fixed-rate home equity loans are offered with repayment
terms up to 15 years and HELOCs are offered for terms up to 30 years. The line
may be drawn upon for 10 years, during which principal and interest is paid on
the outstanding balance. Repayment of the remaining principal and interest is
then amortized over the remaining 20 years. Bi-weekly fixed-rate home equity
loans are offered with repayment terms up to 20 years, however, because the loan
amortizes bi-weekly and two additional half payments are made each year, actual
loan terms are significantly less.

Consumer Loans. The Company originates a variety of fixed-rate installment and
variable rate lines-of-credit consumer loans, including home improvement loans,
new and used automobile loans, mobile home loans, education loans, boat and
recreational vehicle ("RV") loans, and personal secured and unsecured loans.

Mobile home loans have shorter terms to maturity than traditional 30-year
residential loans and higher yields than single-family residential mortgage
loans. The Company generally offers mobile home loans in New York and New Jersey
with fixed-rate, fully amortizing loan terms of 10 to 20 years. The Company has
contracted with an independent third-party to generate all mobile home loan
applications. However, prior to funding, all mobile home loan originations must
be underwritten and approved by designated Company underwriters. As part of a
negotiated servicing contract, the third party originator will, at the request
of the Company, contact borrowers who become delinquent in their payments and
when necessary, will oversee the repossession and sale of mobile homes on the
Company's behalf. For such services, and as part of the origination and
servicing contract, the Company pays the originator a fee at loan funding, of
which generally 50% is deposited into a noninterest bearing escrow account, and
is under the sole control of the Company to absorb future losses which may be
incurred on the loans.

The Company participates in indirect automobile lending programs with Western
and Central New York auto dealerships. These loans are underwritten by the
Company's consumer lending officers in accordance with Company policy. The
Company also purchases "A" quality lease paper through a third-party finance
company. While the Company retains the credit risk associated with the auto
leases, by contract, residual risk, repossessions and remarketing is the
responsibility of the financing company. Auto loans have terms up to 72 months
while auto leases have terms up to 40 months. As of December 31, 2000, Cayuga
and Cortland accounted for approximately $25.0 million of the $71.0 million
vehicle loans outstanding.

The Company originates personal secured and unsecured fixed rate installment
loans and variable rate lines of credit. Terms of the loans range from 6 to 80
months and generally do not exceed $25,000. Secured loans are collateralized by
savings accounts, certificates of deposits, vehicles or real estate. Unsecured
loans are only approved for more creditworthy customers. Unsecured personal
loans totaled $13.0 million or 34% of the personal loan category at December 31,
2000. Included in this amount are $3.0 million of unsecured credit card loans
acquired from Cayuga and Cortland that management intends to sell during 2001.
As of December 31, 2000, Cayuga and Cortland accounted for approximately $23.0
million of the $38.0 million personal loans outstanding.

The Company continues to be an active originator of education loans.
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. The Company's general practice is to sell these
education loans to Sallie Mae as the loans reach repayment status. The Company
generally receives a premium of .25% to .75% on the sale of these loans.

Commercial Business Loans. The Company offers commercial business loans to small
to medium size companies in its market area, some of which are secured in part
by additional real estate collateral. Additionally, secured and unsecured
commercial loans are made 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. The Company has recently increased its strategic
focus to allocate a greater portion of available funds to both the commercial
middle income and small business lending markets. To facilitate the Company's
expansion of these areas, the Company has added commercial business products
such as cash management, merchant services and internet banking, together with
credit scoring to enhance customer service to the small business client.

9

The Company also offers installment direct financing leases through its ENL
subsidiary. These leases, generally in amounts up to $100,000 with terms no
greater than 60 months, are guaranteed by the principals of the lessee and
collaterized by the equipment.

Commercial business lending is generally considered to involve a higher degree
of credit risk than secured real estate lending. The repayment of unsecured
commercial business loans are wholly dependent upon the success of the
borrower's business, while secured commercial business loans may be secured by
collateral that is not readily marketable.

Loan Maturity and Repricing Schedule. The following table sets forth certain
information as of December 31, 2000, regarding the amount of loans maturing or
repricing in the Company'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 (including bi-weekly loans) are
included in the period in which the final contractual repayment is due. No
adjustments have been made for amortization or prepayment of principal.

One
Within Through After
One Five Five
Year Years Years Total
---------- ---------- ---------- ----------
(In thousands)

Real estate loans:
One- to four-family ....................... $ 150,424 $ 89,328 $ 849,855 $1,089,607
Home equity ................................ 47,568 15,070 41,616 104,254
Multi-family ............................... 31,746 68,042 11,880 111,668
Commercial ................................. 53,875 97,083 66,801 217,759
Construction ............................... 26,768 4,105 4,186 35,059
---------- ---------- ---------- ----------

Total real estate loans ................. 310,381 273,628 974,338 1,558,347
---------- ---------- ---------- ----------

Consumer loans ................................. 34,685 85,077 68,367 188,129

Commercial business loans ...................... 59,989 22,403 11,338 93,730
---------- ---------- ---------- ----------

Total loans ............................. $ 405,055 $ 381,108 $1,054,043 $1,840,206
========== ========== ========== ==========

Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
December 31, 2000, the dollar amount of all fixed-rate and adjustable-rate loans
due after December 31, 2001. Adjustable and floating-rate loans are included
based on the next repricing date.

Due After December 31, 2001
------------------------------------------
Fixed Adjustable Total
---------- ---------- ----------
(In thousands)

Real estate loans:
One- to four-family ....... $ 830,420 $ 108,763 $ 939,183
Home equity ................ 56,686 -- 56,686
Multi-family ............... 20,734 59,188 79,922
Commercial ................. 55,420 108,464 163,884
Construction ............... 3,571 4,720 8,291
---------- ---------- ----------

Total real estate loans . 966,831 281,135 1,247,966
---------- ---------- ----------

Consumer loans ................. 153,444 -- 153,444

Commercial business loans ...... 33,729 12 33,741
---------- ---------- ----------

Total loans ............. $1,154,004 $ 281,147 $1,435,151
========== ========== ==========

10

Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and other non-performing assets.

At December 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands)

Non-accruing loans (1):
Real estate:
One- to four-family ...................... $3,543 $ 974 $1,459 $1,126 $ 473
Home equity .............................. 641 130 13 -- 58
Commercial and multi-family............... 926 640 1,706 1,364 1,822
Consumer .................................... 515 33 62 235 257
Commercial business ......................... 858 152 56 322 2,108
------ ------ ------ ------ ------

Total .................................. 6,483 1,929 3,296 3,047 4,718
------ ------ ------ ------ ------

Non-performing assets:
Other real estate owned (2):
One- to four-family ...................... 615 238 175 21 155
Commercial and multi-family .............. 142 835 414 202 162
Other non-performing assets:
Investments in affiliates ................ -- -- -- -- 157
------ ------ ------ ------ ------

Total .................................. 757 1,073 589 223 474
------ ------ ------ ------ ------

Total non-performing assets ................... $7,240 $3,002 $3,885 $3,270 $5,192
====== ====== ====== ====== ======

Total non-performing assets as
a percentage of total assets ................ 0.28% 0.18% 0.26% 0.28% 0.48%
====== ====== ====== ====== ======

Total non-accruing loans to
total loans (3) ............................. 0.35% 0.19% 0.43% 0.47% 0.78%
====== ====== ====== ====== ======

- ----------
(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 Company 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) Excludes loans that have matured and the Company has not formally extended
the maturity date. Regular principal and interest payments continue in
accordance with the original terms of the loan. The Company continued to
accrue interest on these loans as long as regular payments received were
less than 90 days delinquent. These loans totaled $221,000, $377,000,
$180,000 and $3.9 million at December 31, 2000, 1999, 1998 and 1996
respectively. There were no such loans at December 31, 1997.

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 nonaccrual status is reversed from interest income. As of December 31, 2000,
Cayuga and Cortland accounted for $3.7 million of non-accruing loans, of which
$1.9 million related to one- to four-family real estate loans and $641,000
related to home equity loans.

Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as Real Estate Owned ("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 carrying value of the loan, the
difference is charged against the allowance for credit losses. Any subsequent
write-down of REO is charged against earnings.

Classification of Assets. Consistent with regulatory guidelines, the Company
provides 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 Company 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 is not warranted. Assets that do
not expose the Company 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.

11

When the Company classifies problem assets as either substandard or doubtful, it
establishes a specific valuation allowance 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 Company classifies problem assets as a 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
Company'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.
The Company regularly reviews its asset portfolio to determine whether any
assets require classification in accordance with applicable regulations.

Analysis of the Allowance for Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the years indicated.

Year Ended December 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(Dollars in thousands)

Balance at beginning of year ....................... $ 9,862 $ 8,010 $ 6,921 $ 6,539 $ 4,707

Charge-offs:
Real estate:
One- to four- family .......................... 175 101 14 46 28
Home equity ................................... 28 35 -- -- --
Multi-family .................................. 53 84 177 173 122
Commercial .................................... 78 62 581 198 35
Consumer ......................................... 534 447 428 388 251
Commercial business .............................. 204 6 52 557 --
------- ------- ------- ------- -------
Total ....................................... 1,072 735 1,252 1,362 436
------- ------- ------- ------- -------
Recoveries:
Real estate:
One- to four- family .......................... 22 -- -- -- --
Home equity ................................... 13 -- -- -- --
Multi-family .................................. 30 37 -- 149 --
Commercial .................................... 1 4 155 21 25
Consumer ......................................... 224 80 98 81 56
Commercial business .............................. 47 -- 4 -- --
------- ------- ------- ------- -------
Total ....................................... 337 121 257 251 81
------- ------- ------- ------- -------
Net charge-offs .................................... 735 614 995 1,111 355
Provision for credit losses ........................ 2,258 2,466 2,084 1,493 2,187
Allowance obtained through acquisitions ............ 6,361 -- -- -- --
------- ------- ------- ------- -------
Balance at end of year ............................. $17,746 $ 9,862 $ 8,010 $ 6,921 $ 6,539
======= ======= ======= ======= =======
Ratio of net charge-offs to average
loans outstanding during the year ................ 0.06% 0.07% 0.15% 0.18% 0.06%
======= ======= ======= ======= =======
Ratio of allowance for credit losses
to total loans ................................... 0.96% 0.99% 1.06% 1.08% 1.09%
======= ======= ======= ======= =======
Ratio of allowance for credit losses
to non-accruing loans ............................ 273.73% 511.27% 243.02% 227.14% 138.60%
======= ======= ======= ======= =======

12

Allocation of Allowance for Credit Losses. The following table sets forth the
allocation of the allowance for credit losses by loan category at the dates
indicated.

At December 31,
----------------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------ -------------------------
Percent Percent Percent
of Loans of Loans of Loans
Amount of in Each Amount of in Each Amount of in Each
Allowance Category Allowance Category Allowance Category
For Credit To Total For Credit To Total For Credit To Total
Losses Loans Losses Loans Losses Loans
---------- ---------- ---------- --------- ---------- ----------
(Dollars in thousands)

One- to four-family ................... $ 3,248 59% $ 1,522 62% $ 1,155 61%
Home equity ........................... 885 6 352 2 237 2
Commercial real estate and
multi-family ........................ 4,027 19 1,944 22 1,809 25
Consumer .............................. 3,014 11 1,739 12 1,177 11
Commercial business ................... 4,307 5 1,790 2 599 1
Unallocated ........................... 2,265 -- 2,515 -- 3,033 --
------- ------- ------- ------- ------- -------
Total .............................. $17,746 100% $ 9,862 100% $ 8,010 100%
======= ======= ======= ======= ======= =======

At December 31,
------------------------------------------------------------
1997 1996
------------------------- -------------------------
Percent Percent
of Loans of Loans
Amount of in Each Amount of in Each
Allowance Category Allowance Category
For Credit To Total For Credit To Total
Losses Loans Losses Loans
---------- -------- ---------- ------
(Dollars in thousands)

One- to four-family .......................................... $ 955 62% $ 893 61%
Home equity .................................................. 204 2 169 2
Commercial real estate and multi-family ...................... 1,578 24 1,571 24
Consumer ..................................................... 1,040 11 1,130 12
Commercial business .......................................... 666 1 1,628 1
Unallocated .................................................. 2,478 -- 1,148 --
------ ------ ------ ------
Total ..................................................... $6,921 100% $6,539 100%
====== ====== ====== ======

The allowance for credit losses is established through a provision for credit
losses based on management's evaluation of the losses inherent in the loan
portfolio. 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 credit loss allowance. The
Company continues to monitor and modify the level of the allowance for credit
losses in order to maintain a level which management considers adequate to
provide for credit losses inherent in the loan portfolios. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for credit losses and valuation of
REO.

Management's evaluation of the allowance is based on a continuing review of the
loan portfolio. The methodology for determining the amount of the allowance for
possible loan losses consists of several elements. Nonaccruing, impaired and
delinquent loans are reviewed individually and the value of any underlying
collateral is considered in determining estimates of possible losses associated
with those loans. Another element involves estimating losses inherent in
categories of loans, based primarily on historical experience, industry trends
and trends in the real estate market and the current economic environment in the
Company's market areas. The last element is based on management's evaluation of
various conditions, and involves a higher degree of uncertainty because they are
not identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with this element include the following:
industry and regional conditions; seasoning of the loan portfolio and changes in
the composition of and growth in the loan portfolio; the strength and duration
of the current business cycle; existing general economic and business conditions
in the lending areas; credit quality trends, including trends in nonperforming
loans expected to result from changes in existing conditions; historical loan
charge-off experience; and the results of bank regulatory examinations.

13

INVESTMENT ACTIVITIES

General. The Company's investment policy, established by the Boards of Directors
of the Banks, provides 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,
consideration is given to the ability of an investment to provide earnings
consistent with factors of quality, maturity, marketability and risk
diversification.

The Company limits securities investments to U.S. Government and agency
securities, municipal bonds, corporate debt obligations and corporate equity
securities. In addition, the policy permits investments in mortgage-backed
securities, including securities issued and guaranteed by FNMA, FHLMC,
Government National Mortgage Association ("GNMA") and privately-issued
collateralized mortgage obligations ("CMOs"). Also permitted are investments in
asset-backed securities ("ABSs"), backed by auto loans, credit card receivables,
home equity loans, student loans, and home improvement loans. The current
investment strategy utilizes a risk management approach of diversified investing
between short-, intermediate- and long-term categories in order to increase
overall investment yields in addition to managing interest rate risk. To
accomplish these objectives, the Company's focus is on investments in
mortgage-backed securities, CMOs and ABSs, while U.S. Government and other
non-amortizing securities are utilized for call protection and liquidity
purposes. As with U.S. mortgage-backed securities, the Company attempts to
maintain a high degree of liquidity in its other securities and generally does
not invest in debt securities with expected terms to maturity in excess of 10
years. Additionally, the Company has a limited covered call option program
utilizing equity securities intended to generate premium income. The Company had
investments in mortgage-backed securities issued by Bank of America Mortgage
Securities, Norwest Asset Securities Corporation and PNC Mortgage Securities
Corp. that exceeded 10% of stockholders' equity at December 31, 2000. The
aggregate fair value of these securities at December 31, 2000 were $36.1
million, $25.1 million and $34.9 million, respectively. No other investment in
securities of a single non-U.S. Government or government agency issuer exceeded
10% of stockholders' equity at December 31, 2000.

14

Securities Portfolio. At December 31, 2000, all of the Company's security
investments were classified as available for sale in order to maintain
flexibility in satisfying future investment and lending requirements. Presently,
the Company does not have a trading or held to maturity portfolio. The following
table sets forth certain information with respect to the amortized cost and fair
values of the Company's portfolio as of the dates indicated.

At December 31,
---------------------------------------------------------------------------
2000 1999 1998
---------------------- ----------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)

Investment securities available for sale:

Debt securities:
U.S. Treasury .................................... $ 37,970 $ 38,216 $ 47,446 $ 47,406 $ 66,463 $ 67,726
U.S. government agencies ......................... 56,379 56,928 14,976 14,739 -- --
Corporate ........................................ 8,209 8,193 6,985 6,996 6,958 7,108
States and political subdivisions ................ 23,548 23,948 2,449 2,336 1,095 1,191
--------- --------- --------- --------- --------- ---------

Total debt securities ......................... 126,106 127,285 71,856 71,477 74,516 76,025
--------- --------- --------- --------- --------- ---------

Asset-backed securities ............................. 41,783 42,007 85,768 84,133 94,015 94,018
--------- --------- --------- --------- --------- ---------

Equity securities ................................... 23,547 25,764 19,028 23,534 13,570 17,733
--------- --------- --------- --------- --------- ---------

Other securities .................................. 4,453 4,444 -- -- -- --
--------- --------- --------- --------- --------- ---------

Total investment securities ......................... $ 195,889 $ 199,500 $ 176,652 $ 179,144 $ 182,101 $ 187,776
========= ========= ========= ========= ========= =========

Average remaining life of investment
securities (1) ................................... 3.75 years 2.79 years 1.42 years
========== ========== ==========

Mortgage-backed securities:
Freddie Mac .................................... $ 48,891 $ 49,526 $ 66,930 $ 65,299 $ 86,492 $ 87,576
GNMA ........................................... 22,645 23,016 15,246 15,323 21,732 22,472
FNMA ........................................... 18,668 19,447 13,379 13,074 18,126 18,360
CMOs ........................................... 215,181 210,345 306,339 290,633 264,524 264,567
--------- --------- --------- --------- --------- ---------

Total mortgage-backed securities ............... $ 305,385 $ 302,334 $ 401,894 $ 384,329 $ 390,874 $ 392,975
========= ========= ========= ========= ========= =========

Average remaining life of mortgage-
backed securities ................................ 6.41 years 5.19 years 2.75 years
========== ========== ==========

Net unrealized gains (losses) on available
for sale securities ............................... $ 560 $ (15,073) $ 7,776
--------- --------- ---------

Total securities available for sale ................. $ 501,834 $ 501,834 $ 563,473 $ 563,473 $ 580,751 $ 580,751
========= ========= ========= ========= ========= =========

Average remaining life of
securities (1) ................................... 5.46 years 4.68 years 2.33 years
========== ========== ==========

- ----------
(1) Average remaining life does not include common stock or other securities
available for sale and is computed utilizing estimated maturities and
prepayment assumptions.

15

Security Yields, Maturities and Repricing Schedule. The following table sets
forth certain information regarding the carrying value, weighted average yields
and estimated maturities, including prepayment assumptions, of the Company's
available for sale securities portfolio as of December 31, 2000. Adjustable-rate
securities are included in the period in which interest rates are next scheduled
to adjust and fixed-rate securities are included based upon the weighted average
life date. No tax equivalent adjustments were made to the weighted average
yields. Amounts are shown at fair value.

At December 31, 2000
--------------------------------------------------------------------------
More Than One More Than Five
One Year or Less Year to Five Years Years to Ten Years After Ten Years
----------------- ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)

Mortgage-backed securities:
FHLMC ............................. $ 373 6.15% $ 26,905 6.52% $ 16,659 6.54% $ 5,589 6.95%
GNMA .............................. 99 5.35 12,032 7.08 7,266 7.31 3,619 8.18
FNMA .............................. 209 8.88 7,018 6.70 11,960 6.14 260 6.21
CMOs .............................. 15,285 6.40 74,660 6.51 49,573 6.59 70,827 6.50
-------- -------- -------- --------

Total mortgage-backed securities 15,966 6.42 120,615 6.58 85,458 6.58 80,295 6.61
-------- -------- -------- --------

Debt securities:
U.S. treasury ..................... 28,072 5.95 10,144 6.68 -- -- -- --
U.S. agency bonds ................. 20,613 5.92 36,315 6.00 -- -- -- --
States and political subdivisions . 7,098 4.85 4,235 5.23 12,459 4.66 156 4.55
Corporate bonds ................... -- -- 5,391 7.75 2,344 8.11 458 8.25
-------- -------- -------- --------

Total debt securities .......... 55,783 5.80 56,085 6.23 14,803 5.21 614 7.31
-------- -------- -------- --------

Common stock (1) ..................... -- -- -- -- -- -- -- --

Asset-backed securities .............. 1,708 6.17 6,997 6.51 31,400 6.72 1,902 6.87

Other securities (1) ................. -- -- -- -- -- -- -- --
-------- -------- -------- --------

Total securities available for sale .. $ 73,457 5.94% $183,697 6.47% $131,661 6.46% $ 82,811 6.62%
======== ======== ======== ========

At December 31, 2000
-------------------

Total
------------------
Weighted
Carrying Average
Value Yield
-------- -------
(Dollars in thousands)

Mortgage-backed securities:
FHLMC ............................. $ 49,526 6.57%
GNMA .............................. 23,016 7.32
FNMA .............................. 19,447 6.37
CMOs .............................. 210,345 6.52
--------

Total mortgage-backed securities 302,334 6.58
--------

Debt securities:
U.S. treasury ..................... 38,216 6.14
U.S. agency bonds ................. 56,928 5.97
States and political subdivisions . 23,948 4.82
Corporate bonds ................... 8,193 7.88
--------

Total debt securities .......... 127,285 5.93
--------

Common stock (1) ..................... 25,764 1.80

Asset-backed securities .............. 42,007 6.67

Other securities (1) ................. 4,444 6.66
--------

Total securities available for sale .. $501,834 6.18%
========

- ----------
(1) Estimated maturities do not include common stock or other securities
available for sale.

16

SOURCES OF FUNDS

General. Deposits and borrowed funds, primarily Federal Home Loan Bank ("FHLB")
advances and reverse repurchase agreements, are the primary sources of the
Company's funds for use in lending, investing and for other general purposes. In
addition, repayments on loans, proceeds from sales of loans and securities, and
cash flows from operations have historically been additional sources of funds.

Deposits. The Company offers a variety of deposit account products with a range
of interest rates and terms. The deposit accounts consist of savings accounts,
NOW accounts, checking accounts, money market accounts, and certificates of
deposit. The Company offers certificates of deposit with balances in excess of
$100,000 at preferential rates (jumbo certificates) and also offers Individual
Retirement Accounts ("IRAs") and other qualified plan accounts. To enhance its
deposit product offerings, the Company provides commercial checking accounts for
commercial businesses, as well as a low-cost checking account service for
low-income customers. Additionally, with the addition of Cayuga Bank, the
Company now has the authority to accept municipal deposits. Such deposits
amounted to $63.0 million at December 31, 2000.

The Company has entered into interest rate swap agreements with third parties
with notional amounts totaling $50 million at December 31, 2000. Under these
agreements, the Company pays an annual fixed rate ranging from 5.97% to 7.10%
and receives a floating three-month U.S. dollar LIBOR rate. The Company entered
into these transactions to match more closely the repricing of its money market
demand product, as well as provide greater flexibility in achieving a desired
interest rate risk profile.

Average Deposits and Rates. The following tables set forth information regarding
the average daily balance and rate of deposits by type for the periods
indicated.

For the Year Ended December 31,
----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
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 ................. $ 295,588 21.56% 5.02% $ 221,800 20.44% 4.38%
Savings accounts ...................... 338,475 24.69 2.77 302,583 27.88 3.01
NOW accounts .......................... 116,190 8.48 1.02 84,828 7.82 1.40
Noninterest-bearing accounts .......... 46,799 3.41 -- 31,921 2.94 --
Mortgagors' payments held in escrow ... 14,959 1.09 1.74 10,834 1.00 1.79
---------- ------ ---------- ------

Total .............................. 812,011 59.23 3.16 651,966 60.08 3.10
---------- ------ ---------- ------

Certificates of deposit:
Less than 6 months .................... 201,279 14.67 -- 164,474 15.16 --
Over 6 through 12 months .............. 168,686 12.31 -- 107,122 9.87 --
Over 12 through 24 months ............. 83,437 6.09 -- 76,627 7.06 --
Over 24 months ........................ 18,046 1.32 -- 15,248 1.41 --
Over $100,000 ......................... 87,412 6.38 -- 69,697 6.42 --
---------- ------ ---------- ------

Total certificates of deposit ...... 558,860 40.77 5.47 433,168 39.92 5.12
---------- ------ ---------- ------

Total average deposits ............. $1,370,871 100.00% 4.10% $1,085,134 100.00% 3.91%
========== ====== ========== ======

For the Year Ended December 31,
-------------------------------
1998
-------------------------------
Percent
of Total Weighted
Average Average Average
Balance Deposits Rate
---------- -------- --------
(Dollars in thousands)

Money market accounts ................. $ 133,465 13.06% 4.39%
Savings accounts ...................... 302,313 29.58 3.17
NOW accounts .......................... 71,861 7.03 1.37
Noninterest-bearing accounts .......... 28,242 2.76 --
Mortgagors' payments held in escrow ... 9,483 0.93 1.74
---------- ------

Total .............................. 545,364 53.36 3.04
---------- ------

Certificates of deposit:
Less than 6 months .................... 178,931 17.51 --
Over 6 through 12 months .............. 128,741 12.60 --
Over 12 through 24 months ............. 63,489 6.21 --
Over 24 months ........................ 20,829 2.04 --
Over $100,000 ......................... 84,651 8.28 --
---------- ------

Total certificates of deposit ...... 476,641 46.64 5.76
---------- ------

Total average deposits ............. $1,022,005 100.00% 4.31%
========== ======

17

Maturity Schedule of Certificates of Deposit. The following table indicates the
amount of the Company's certificates of deposit by time remaining until maturity
as of December 31, 2000.

At December 31, 2000
--------------------------------------------------------------------
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 .............. $144,417 $124,827 $261,738 $151,152 $682,134
Certificates of deposit of $100,000 or more ............. 70,340 24,970 41,802 25,303 162,415
-------- -------- -------- -------- --------

Total certificates of deposit ....................... $214,757 $149,797 $303,540 $176,455 $844,549
======== ======== ======== ======== ========

Borrowed Funds. Borrowings are utilized to lock-in lower cost funding, better
match interest rates and maturities of certain assets and liabilities and
leverage capital for the purpose of improving return on equity. Such borrowings
consisted of advances and reverse repurchase agreements entered into with the
FHLB, with nationally recognized securities brokerage firms and with commercial
customers. Additionally, in connection with the funding of the Cayuga
acquisition, FNFG borrowed $6.0 million from the MHC and $10.0 million from a
commercial bank. The following table sets forth certain information as to the
Company's borrowings for the years indicated.

For the Year Ended December 31,
------------------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)

Year-end balance:
FHLB advances .......................................................... $294,876 $224,697 $ 65,539
Securities sold under agreements to repurchase ......................... 118,691 110,948 77,058
Loan payable to First Niagara Financial Group, MHC ..................... 6,000 -- --
Commercial bank loan ................................................... 10,000 -- --
-------- -------- --------

Total borrowings .................................................. $429,567 $335,645 $142,597
======== ======== ========

Maximum balance:
FHLB advances .......................................................... $314,043 $224,697 $ 65,539
Securities sold under agreements to repurchase ......................... 137,365 111,948 77,058
Loan payable to First Niagara Financial Group, MHC ..................... 6,000 -- --
Commercial bank loan ................................................... 10,000 -- --

Average balance:
FHLB advances .......................................................... $224,014 $167,279 $ 21,249
Securities sold under agreements to repurchase ......................... 121,339 94,236 48,237
Loan payable to First Niagara Financial Group, MHC ..................... 967 -- --
Commercial bank loan ................................................... 1,639 -- --

Weighted average interest rate:
FHLB advances .......................................................... 6.05% 5.81% 5.99%
Securities sold under agreements to repurchase ......................... 5.77% 5.53% 5.51%
Loan payable to First Niagara Financial Group, MHC ..................... 9.50% -- --
Commercial bank loan ................................................... 8.12% -- --

18

SEGMENT INFORMATION

Information about the Company's business segments is included in note 15 of
"Notes to Consolidated Financial Statements" filed herewith in Part II, Item 8,
"Financial Statements and Supplementary Data." Based on the "Management
Approach" model, the Company has determined that it has two primary business
segments, its banking and its insurance activities. For the year ended December
31, 1999, the Company's insurance activities consisted of those conducted
through WHA and NOVA, as well as through the Company's relationship with Saving
Bank Life Insurance ("SBLI"). Effective January 1, 2000, as a result of the
reorganization of SBLI into a mutual insurance company, the Company's insurance
activities through SBLI have been limited to the servicing of life insurance
policies and the collection of income generated by insurance sales. Beginning
January 1, 2001, the Company reduced its relationship with SBLI further to
include insurance sales only.

REGULATION

General

FNFG, as a bank holding company, is required to file certain reports with, and
otherwise comply with the rules and regulations of the Federal Reserve Board
("FRB"). First Niagara and Cortland are New York State chartered stock savings
banks, while Cayuga operates as a commercial bank, chartered as a New York State
trust company. The Banks are subject to extensive regulation by the New York
State Banking Department (the "Department"), as their chartering agency, and by
the Federal Deposit Insurance Corporation ("FDIC") as their deposit insurer. The
Banks are required to file reports with, and are periodically examined by the
FDIC and the Superintendent of Banks of the State of New York (the
"Superintendent") concerning their 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 banking
institutions. The Banks are also members of the FHLB of New York and are subject
to certain regulations by the Federal Home Loan Bank System.

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 the Company and its operations.

New York Bank Regulation

The Banks derive their lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Department. The exercise by a FDIC-insured bank of the lending and
investment powers under the New York State Banking Law is limited by FDIC
regulations and other federal laws 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 bank are
substantially limited by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant thereto.

Insurance of Accounts and Regulation by the FDIC

The Banks are members of the Bank Insurance Fund ("BIF"), which is administered
by the FDIC. While the majority of the Banks deposits are insured by the BIF,
the deposits acquired from Albion and Homestead are insured by the Savings
Association Insurance Fund ("SAIF"). 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 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.
The FDIC also has the authority to initiate enforcement actions against 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. The Banks are also subject to certain FRB regulations for the
maintenance of reserves in cash or in non-interest bearing accounts, the effect
of which is to increase the cost of funds.

During 2000, the Company paid annual insurance premiums of $276,000 compared
with $126,000 in 1999. The FDIC has established a system for setting deposit
insurance premiums based upon the risks a particular bank or savings association
posed to its deposit insurance funds. Under the risk-based deposit insurance
assessment system, the FDIC assigns an institution to one of three capital
categories based on the institution's financial information, as of the reporting
period ending six months before the assessment

19

period. The three capital categories are (1) well capitalized, (2) adequately
capitalized and (3) undercapitalized. The FDIC also assigns an institution to
supervisory subgroups within each capital group, based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds, which may
include information provided by the institution's state supervisor.

An institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under the final risk-based assessment system,
there are nine assessment risk classifications or combinations of capital groups
and supervisory subgroups, to which different assessment rates are applied.
Assessment rates for deposit insurance for both BIF and SAIF currently range
from 0 basis points to 27 basis points. The capital and supervisory subgroup to
which an institution is assigned by the FDIC is confidential and may not be
disclosed. A bank's rate of deposit insurance assessments will depend upon the
category and subcategory to which the bank is assigned by the FDIC. Any increase
in insurance assessments could have an adverse effect on earnings.

Under the Deposit Insurance Funds Act of 1996, the assessment base for the
payments on the bonds issued in the late 1980's by the Financing Corporation
("FICO") to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation was expanded to include, beginning January 1, 1997, the deposits of
institutions insured by the BIF. Until December 31, 1999, the rate of assessment
for BIF-assessable deposits was one-fifth of the rate imposed on deposits
insured by the SAIF. Full pro-rata sharing of the FICO bond payments commenced
January 1, 2000. The annual rate of assessments for the payments on the FICO
bonds is 0.0122%.

Regulatory Capital Requirements

The FRB and the FDIC have adopted risk-based capital guidelines for bank holding
companies and banks under their supervision. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations. FNFG and
the Banks are 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 "risk-based
capital ratio." Risk-based capital ratios are determined by allocating assets
and specified off-balance 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 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). 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 credit and lease losses, subject to
certain limitations, less required deductions. 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. Banks experiencing or
anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.

At December 31, 2000, FNFG and the Banks substantially exceeded all minimum
regulatory capital requirements. The current requirements and the actual levels
for FNFG and the Banks are detailed in note 9 of the Company's Financial
Statements, which is submitted herewith as an exhibit in Item 8.

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 "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; "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"; "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); "significantly undercapitalized" if it has a total
risk-based capital ratio that is

20

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 "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, FNFG, First Niagara and Cayuga are classified as "well
capitalized" institutions at December 31, 2000. Cortland was classified as
"adequately capitalized" at December 31, 2000, as its total risk-based capital
ratio of 9.91%, was below the 10.0% required to be considered "well
capitalized."

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 that 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 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 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. Under New York law, the Banks are
prohibited from paying a dividend in excess of its income for the year and the
two preceding years without the approval of the Superintendent. During 2000, the
Superintendent and the Board of Directors of First Niagara approved the payment
of $75.0 million in dividends from First Niagara to FNFG in order to fund the
Cayuga and Cortland acquisitions.

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, acquiring or retaining a majority interest in a subsidiary;
investing as a limited partner in a partnership the sole purpose of which is the
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; 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
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 Banks, 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. As of December 31, 2000, the Banks had $25.8 million of securities
pursuant to this exception.

Savings bank life insurance activities are permitted if (1) the FDIC does not
decide that such activities pose a significant risk to the applicable deposit
insurance fund, (2) the insurance underwriting is conducted through a division
that meets the definition of a separate department under FDIC regulations, and
(3) disclosures are made to the purchasers of life insurance policies and other
products that they are not insured by the FDIC, among other things.

21

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 bank is any company or entity that controls, is
controlled by, or is under common control with the bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a bank and any companies that are controlled by such parent holding
company are affiliates of the bank. Generally, Section 23A limits the extent to
which the bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such 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 bank or its subsidiary as similar
transactions with nonaffiliates.

Holding Company Regulation

Federal Bank Holding Company Regulation. FNFG, as the sole shareholder of the
Banks, is a bank holding company that is subject to comprehensive regulation and
regular examinations by the FRB under the Bank Holding Company Act of 1956, as
amended (the "BHCA"), and the regulations of the FRB. The FRB 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.

FNFG is subject to capital adequacy guidelines for bank holding companies (on a
consolidated basis) which are substantially similar to those of the FDIC for the
Banks.

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

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits
bank holding companies to engage in transactions involving interstate
acquisitions and mergers if the holding company and banking institution are
adequately capitalized. However, under the BHCA, a bank holding company must
obtain FRB approval before 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 shares); acquiring all or
substantially all of the assets of another bank or bank holding company; or
merging or consolidating with another bank holding company.

Under the Federal Change in Bank Control Act, a prior notice must be submitted
to the FRB if any person or group acting in concert seeks to acquire 10% or more
of FNFG's common stock. Under the BHCA, any company would be required to obtain
prior approval from the FRB before obtaining control of FNFG, which is defined
to include the acquisition of 25% or more of any class of voting securities of
FNFG. In addition, a bank holding company, which does not qualify as a
"financial holding company" under the Gramm-Leach-Bliley Financial Services
Modernization Act (the "GLB Act"), is generally prohibited from engaging in, or
acquiring direct or indirect control of, any company engaged in non-banking
activities. One of the principal exceptions to the prohibition is for activities
found by the FRB to be so closely related to banking or managing or controlling
banks as to be permissible. Some of the principal activities that the FRB has
determined by regulation to be so closely related to banking as to be
permissible are the making or servicing of loans; performing certain data
processing services; providing discount brokerage services; acting as fiduciary,
investment or financial advisor; leasing personal or real property; making
investments in corporations or projects designed primarily to promote community
welfare; and acquiring a savings and loan association.

Bank holding companies that do qualify as a financial holding company may engage
in activities that are financial in nature or incidental to activities which are
financial in nature, including banking, securities underwriting, insurance (both
underwriting and agency) and merchant banking. Bank holding companies may
qualify to become a financial holding company if each of its depository
institution subsidiaries is "well-capitalized;" each of its depository
institution subsidiaries is "well-managed;" each of its depository institution
subsidiaries has at least a "satisfactory" Community Reinvestment Act ("CRA")
rating at its most recent examination; and the bank holding company has filed a
certification with the FRB that it elects to become a financial holding company.

22

During 2000, the FDIC and the New York State Insurance Department issued final
regulations to implement the consumer privacy provisions of the GLB Act. On July
1, 2001, compliance with such regulations becomes mandatory for all financial
and insurance institutions. The regulations require such institutions to
disclose their policies and practices to protect the privacy of consumers'
nonpublic personal financial and health information. Currently, the Company is
in the process of implementing a corporate-wide program designed to achieve and
maintain compliance with the consumer privacy regulations. This program will be
fully implemented by July 1, 2001.

Bank holding companies and their subsidiary banks are also subject to the
provisions of the CRA. Under the terms of the CRA, the FRB (or other appropriate
bank regulatory agency) is required, in connection with its examination of a
bank, to assess such bank's record in meeting the credit needs of the
communities served by that bank, including low- and moderate- income
neighborhoods. Furthermore, such assessment is also required of any bank that
has applied, among other things, to merge or consolidate with or acquire the
assets or assume the liabilities of a federally-regulated financial institution,
or to open or relocate a branch office. In the case of a bank holding company
applying for approval to acquire a bank or bank holding company, the FRB will
assess the record of each subsidiary bank of the applicant bank holding company
in considering the application. The Banking Law contains provisions similar to
the CRA that are applicable to New York-chartered banks.

Bank holding companies are required to give the FRB 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 FRB 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, FRB order, or any condition imposed by, or written agreement with,
the FRB. 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.

Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB'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 overall financial condition. The FRB
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 FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized".

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
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.

23

RISK FACTORS

In addition to the various risks and uncertainties discussed throughout this
Form 10-K, the Company is also subject to the following risk factors.

Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment

The results of operations and financial condition of the Company are
significantly affected by changes in interest rates. The Company's results of
operations are dependent on 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
the Company's interest-bearing liabilities reprice or mature more quickly than
its 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 Part II Item 7A "Quantitative and Qualitative Disclosure About
Market Risk."

Changes in interest rates also affect the value of the Company's
interest-earning assets, and in particular the Company's investment securities.
Generally, the value of investment securities fluctuates inversely with changes
in interest rates. At December 31, 2000, the securities portfolio totaled $501.8
million. Unrealized gains and losses on securities available for sale are
reported as a separate component of stockholders' equity, net of applicable
taxes, and amounted to $336,000 at December 31, 2000. Decreases in the fair
value of securities available for sale therefore could have an adverse affect on
stockholders' equity. See the "Investment Activities" section of Part I Item 1
"Business."

The Company is 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, the Company is subject to
reinvestment risk to the extent that reinvestment of such prepayments can not be
made at rates that are comparable to the rates on maturing loans or securities.

Minority Public Ownership and Certain Anti-Takeover Provisions

Voting Control of the Mutual Company. Under New York law, FNFG's Plan of
Reorganization from a Mutual Savings Bank to a Mutual Holding Company and Stock
Issuance Plan (the "Plan of Reorganization"), and governing corporate
instruments, at least 51% of FNFG's voting shares must be owned by the MHC. The
MHC will be controlled by its board of trustees, who will consist of persons who
are members of the board of directors of FNFG. The MHC will elect all members of
the board of directors of FNFG, and as a general matter, will control the
outcome of all matters presented to the stockholders of FNFG for resolution by
vote, except for matters that require a vote greater than a majority. The MHC,
acting through its board of trustees, will be able to control the business and
operations of FNFG and its subsidiaries and will be able to prevent any
challenge to the ownership or control of FNFG by stockholders other than the
MHC. Accordingly, a change in control of FNFG cannot occur unless the MHC first
converts to the capital stock form of organization. Although New York law,
applicable regulations and the Plan of Reorganization permit the MHC to convert
from the mutual to the capital stock form of organization, a conversion of the
MHC is not anticipated at the present time. There can be no assurance when, if
ever, a conversion of the MHC will occur.

Provisions in the Governing Instruments. In addition, certain provisions of
FNFG's certificate of incorporation and bylaws, particularly a provision
limiting voting rights, as well as certain federal and state regulations, assist
FNFG 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 stockholders, and limits on the ability of
stockholders to vote common stock in excess of 5% of the issued and outstanding
shares (inclusive of shares issued to the MHC).

Dividend Waivers by the MHC

In connection with its approval of the reorganization, the FRB imposed a
condition requiring the MHC to obtain prior FRB approval before it may waive any
dividends paid by FNFG on its common stock. As of the date hereof, management
does not believe the FRB has given its approval to any waiver of dividends by
any mutual holding company that has requested its approval. To date the MHC has
not requested approval for or waived any dividends. If the MHC converts to
capital stock form in the future, assets held by the MHC, including cash held by
the MHC, would reduce the percentage of the converted company's shares of common
stock issued to stockholders.

24

ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------

Both FNFG and First Niagara maintain their executive offices at the
Administrative Center, located at 6950 South Transit Road, Lockport, New York.
The Administrative Center, built in 1997, has 76,000 square feet of space and is
owned by First Niagara. In addition to its branch network, First Niagara leases
nine offices and owns one building that it utilizes for its non-banking
subsidiaries, back office operations, training and storage. The total square
footage for these facilities is approximately 104,000 square feet and are
located in Erie and Niagara Counties.

In addition to its branch network, Cayuga owns four office buildings in Cayuga
and Oneida Counties. The total square footage of these facilities is
approximately 66,000 square feet and is utilized for administrative offices,
back office operations and training.

In addition to its branch network, Cortland owns three buildings in Cortland
County that are utilized for administrative offices, back office operations and
storage. The total square footage of these facilities is approximately 30,000
square feet.

The Company, as of December 31, 2000, conducts its business through 36
full-service banking offices, 4 loan production offices and 55 ATM locations. Of
the 36 branches, 12 are located in Erie County, 5 each in Niagara, Cayuga and
Oneida Counties, 3 in Cortland County, 2 each in Monroe and Orleans Counties and
1 each in Oswego and Genesee Counties. Additionally, 25 of the branches are
owned and 11 are leased. The loan production offices are located in Rochester,
Ithaca, Liverpool and Old Forge and are leased by the Banks.

At December 31, 2000, the Company's premises and equipment had an aggregate net
book value of approximately $40.1 million. See note 5 of the "Notes to
Consolidated Financial Statements" filed herewith in Part II, Item 8, "Financial
Statements and Supplementary Data" for further detail on the Company's premises
and equipment and operating leases. All of these properties are in generally
good condition and are appropriate for their intended use.

ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------

The Company is not involved in any legal proceedings other than immaterial
proceedings occurring in the ordinary course of business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------

No matters were submitted during the fourth quarter of the year ended December
31, 2000 to a vote of security holders.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------

The common stock of FNFG is traded under the symbol of FNFG on the NASDAQ
National Market. At March 19, 2001, FNFG had 25,547,100 shares of common stock
outstanding and had approximately 7,100 shareholders of record. During 2000, the
high and low closing sales price of the common stock was $11.06 and $8.25,
respectively. FNFG paid dividends of $0.28 per common share during the year
ended December 31, 2000. During the third quarter of 1999, FNFG revised its
dividend payment schedule to better coincide with the FNFG's Board of Director's
review of quarterly results. As a result, FNFG declared the 1999 fourth quarter
dividend of $0.06 per common share on January 26, 2000, which was payable on
February 23, 2000 to shareholders of record on February 9, 2000.

25

ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------

As of December 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollars and share amounts in thousands)

Selected Financial Condition Data:

Total assets ............................................ $2,624,686 $1,711,712 $1,508,734 $1,179,026 $1,093,358
Securities available for sale:
Mortgage-backed ..................................... 302,334 384,329 392,975 272,955 284,860
Other ............................................... 199,500 179,144 187,776 176,326 124,875
Securities held to maturity ............................. -- -- -- 17,000 38,000
Loans, net .............................................. 1,823,174 985,628 744,739 635,396 598,486
Deposits ................................................ 1,906,351 1,113,302 1,060,897 995,621 928,845
Borrowings .............................................. 429,567 335,645 142,597 33,717 32,008
Stockholders' equity (1) ................................ $ 244,540 $ 232,616 $ 263,825 $ 130,471 $ 115,664
Treasury shares repurchased ............................. 1,098 3,111 -- -- --
Common shares outstanding:
Basic ............................................. 24,667 25,658 28,716 -- --
Diluted ........................................... 24,686 25,658 28,716 -- --
Ratio of stockholders' equity to total assets ........... 9.32% 13.59% 17.49% 11.07% 10.58%

Year ended December 31,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)

Selected Operations Data:

Interest income ................................. $137,040 $107,814 $ 92,102 $ 82,363 $ 75,062
Interest expense ................................ 76,862 57,060 47,966 44,978 40,655
-------- -------- -------- -------- --------
Net interest income ......................... 60,178 50,754 44,136 37,385 34,407
Provision for credit losses ..................... 2,258 2,466 2,084 1,493 2,187
-------- -------- -------- -------- --------
Net interest income after provision ............. 57,920 48,288 42,052 35,892 32,220
Noninterest income .............................. 34,090 27,688 9,182 6,796 5,752
Noninterest expenses ............................ 61,518 47,643 35,946(2) 25,178 20,926
-------- -------- -------- -------- --------
Income before income taxes ...................... 30,492 28,333 15,288 17,510 17,046
Income taxes .................................... 10,973 9,893 4,906 6,259 6,278
-------- -------- -------- -------- --------

Net income ...................................... $ 19,519 $ 18,440 $ 10,382(2) $ 11,251 $ 10,768
======== ======== ======== ======== ========

As of and for the year ended December 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ----- ------ ------

Stock and Related Per Share Data:

Net income per share:
Basic ................................................... $ 0.79 $ 0.69 $ --(2) $ -- $ --
Diluted ................................................. 0.79 0.69 --(2) -- --
Cash dividends .............................................. $ 0.28 $ 0.14(3) $ 0.06 $ -- $ --
Dividend payout ratio ....................................... 35.44% 20.30%(3) 16.60% -- --
Book value .................................................. $ 9.91 $ 9.07 $ 9.19 $ -- $ --
Market price (NASDAQ:FNFG):
High .................................................... 11.06 11.13 17.06 -- --
Low ..................................................... 8.25 9.00 8.38 -- --
Close ................................................... $10.81 $10.25 $10.50 $ -- $ --

26

As of and for the year ended December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars in thousands)

Selected Financial Ratios and Other Data (4):

Performance Ratios:
Return on average assets .................................. 0.98% 1.13% 0.77%(2) 0.98% 1.03%
Return on average equity .................................. 8.38 7.52 4.65(2) 9.16 9.84
Net interest rate spread .................................. 2.82 2.72 2.75 2.86 2.87
Net interest margin as a percent of interest-
earning assets ......................................... 3.26 3.33 3.48 3.39 3.41
As a percentage of average assets:
Noninterest income (5) ................................. 1.73 1.67 0.68 0.51 0.50
Noninterest expense .................................... 3.09 2.93 2.68(2) 2.20 2.01
------ ------ ------ ------ ------
Net overhead ........................................... 1.36 1.26 2.00(2) 1.69 1.51
Average interest-earning assets
to average interest-bearing liabilities ............... 110.45 116.10 119.38 113.12 113.30
Efficiency ratio .......................................... 65.02% 61.11% 67.59%(2) 58.19% 52.87%

Asset Quality Data:
Total non-accruing loans .................................. $ 6,483 $ 1,929 $ 3,296 $ 3,047 $ 4,718
Other non-performing assets ............................... 757 1,073 589 223 474
Allowance for credit losses ............................... 17,746 9,862 8,010 6,921 6,539
Net loan charge-offs ...................................... $ 735 $ 614 $ 995 $ 1,111 $ 355
Total non-accruing loans to total loans ................... 0.35% 0.19% 0.43% 0.47% 0.78%
Total non-performing assets as percentage of
total assets .......................................... 0.28 0.18 0.26 0.28 0.48
Allowance for credit losses to non-
accruing loans ......................................... 273.73 511.27 243.02 227.14 138.60
Allowance for credit losses to total loans ................ 0.96 0.99 1.06 1.08 1.09
Net charge-offs to average loans .......................... 0.06% 0.07% 0.15% 0.18% 0.06%

Other Data:
Number of full-service offices ............................ 36 18 18 15 13
Full time equivalent employees ............................ 930 625 402 357 325

27

2000 1999
---------------------------------------- ----------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(In thousands except per share amounts)

Selected Quarterly Data:

Interest income ............................ $41,835 $35,410 $30,836 $28,959 $28,401 $27,893 $26,579 $24,941
Interest expense ........................... 24,441 19,936 16,727 15,759 15,458 14,873 13,852 12,877
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ................... 17,394 15,474 14,109 13,200 12,943 13,020 12,727 12,064
Provision for credit losses ................ 743 544 554 417 544 554 547 821
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision ......................... 16,651 14,930 13,555 12,783 12,399 12,466 12,180 11,243
Noninterest income ......................... 9,578 8,703 8,333 7,476 6,890 7,028 6,850 6,920
Noninterest expense ........................ 17,210 14,757 13,764 12,735 12,149 11,756 11,323 10,921
Goodwill amortization ...................... 1,126 864 609 452 374 372 374 374
------- ------- ------- ------- ------- ------- ------- -------
Net income before income
taxes ............................. 7,893 8,012 7,515 7,072 6,766 7,366 7,333 6,868
Income taxes ............................... 3,009 2,895 2,653 2,416 2,317 2,580 2,633 2,363
------- ------- ------- ------- ------- ------- ------- -------

Net income ............................ $ 4,884 $ 5,117 $ 4,862 $ 4,656 $ 4,449 $ 4,786 $ 4,700 $ 4,505
======= ======= ======= ======= ======= ======= ======= =======

Earnings per share:
Basic ................................. $ 0.20 $ 0.21 $ 0.20 $ 0.18 $ 0.17 $ 0.18 $ 0.17 $ 0.16
Diluted ............................... 0.20 0.21 0.20 0.18 0.17 0.18 0.17 0.16

Market price (NASDAQ:FNFG):
High .................................. $ 11.06 $ 9.75 $ 10.16 $ 10.38 $ 11.00 $ 10.94 $ 10.94 $ 11.13
Low ................................... 8.75 8.50 9.00 8.25 10.13 9.69 9.00 9.25
Close ................................. 10.81 9.25 9.38 9.75 10.25 10.44 10.63 10.00

Cash Dividends ............................. $ 0.08 $ 0.07 $ 0.07 $ 0.06 $ 0.06(3) $ --(3) $ 0.04 $ 0.04

- ----------
(1) Amounts prior to 1998 represent retained earnings and unrealized
gains/losses on securities available for sale only.
(2) During the second quarter of 1998, FNFG contributed $4.0 million, net of
applicable income taxes to the First Niagara Foundation. Noninterest
expense includes $6.8 million for the one-time contribution of cash and
common stock. The following presentation excludes the effect of the
contribution, and the earnings per share calculation includes proforma
earnings of $0.10 per share for the period January 1, 1998 through April
17, 1998. (Dollars in thousands except per share amounts):

As of December 31, 1998
-----------------------

Net income ............................................... $ 14,366
Net income per share:
Basic ............................................... $ 0.50
Diluted ............................................. $ 0.50
Return on average assets ................................. 1.07%
Return on average equity ................................. 6.43%
As a percentage of average assets:
Noninterest expense ................................. 2.18%
Net overhead ........................................ 1.50%
Efficiency ratio ......................................... 54.90%

(3) The dividend declaration date for the third and fourth quarters of 1999
was scheduled during the fourth quarter of 1999 and first quarter of 2000,
respectively, which coincided with FNFG's Board of Director's review of
quarterly and/or yearly results. For 1999, three quarterly dividends were
declared.
(4) Averages presented are daily averages.
(5) Excluding net gain/loss on sale of securities available for sale.

28

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------

GENERAL

The following discussion should be read in conjunction with the consolidated
financial statements and related notes. The Company's results of operations are
dependent primarily on net interest income. Results of operations are also
affected by the provision for credit losses, investment activities, loan and
lease originations, sales and servicing activities, service charges and fees
collected on deposit accounts, insurance services and fees and investment and
fiduciary services income. Noninterest expense primarily consists of salaries
and employee benefits, occupancy and equipment expense, technology and
communications expenses, marketing expenses, and goodwill amortization. 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.

ANALYSIS OF FINANCIAL CONDITION

Overview

The following tables set forth certain information relating to the Company's
consolidated statements of condition and income and illustrates the effects of
the Cayuga, Cortland, Albion, ENL and NIA acquisitions (collectively, "the
acquisitions") that occurred in 2000. The assets/liabilities acquired are as of
the respective acquisitions effective date, while the income from acquired
companies represents income contributed since the effective date of the
respective acquisition (In thousands).

December 31, Assets/Liabilities December 31,
1999 Acquired 2000 Activity 2000
----------- ----------- ----------- -----------

Assets
Cash and cash equivalents .......................... $ 41,949 $ 94,408 $ (73,542) $ 62,815
Securities available for sale ...................... 563,473 128,440 (190,079) 501,834
Loans (1)
One- to four-family residential ................. 618,696 456,178 19,335 1,094,209
Home equity ..................................... 22,499 70,443 11,312 104,254
Commercial and multi-family
real estate ................................ 215,717 71,463 68,873 356,053
Consumer ........................................ 115,256 46,789 32,726 194,771
Commercial business loans ....................... 23,322 48,050 20,261 91,633
----------- ----------- ----------- -----------

Total loans .............................. 995,490 692,923 152,507 1,840,920
Allowance for credit losses ........................ (9,862) (6,361) (1,523) (17,746)
----------- ----------- ----------- -----------

Total loans, net ......................... 985,628 686,562 150,984 1,823,174

Premises and equipment, net ........................ 25,886 13,805 403 40,094
Goodwill ........................................... 13,450 74,556 (3,051) 84,955
Other assets ....................................... 81,326 43,653 (13,165) 111,814
----------- ----------- ----------- -----------

Total assets .............................. $ 1,711,712 $ 1,041,424 $ (128,450) $ 2,624,686
=========== =========== =========== ===========

Liabilities
Deposits:
Savings ......................................... $ 295,511 $ 166,176 $ (44,044) $ 417,643
Certificates of deposits ........................ 427,180 387,005 30,364 844,549
Money market accounts ........................... 254,050 57,275 54,511 365,836
Demand deposits ................................. 136,561 122,212 19,550 278,323
----------- ----------- ----------- -----------

Total deposits ............................ 1,113,302 732,668 60,381 1,906,351

Borrowings ......................................... 335,645 103,211 (9,289) 429,567
Other liabilities .................................. 30,149 18,351 (4,272) 44,228
----------- ----------- ----------- -----------

Total liabilities ........................ $ 1,479,096 $ 854,230 $ 46,820 $ 2,380,146
=========== =========== =========== ===========

- ----------
(1) Loans are shown net of deferred costs and unearned discounts.

29

Consolidated Consolidated
Income Income
First Niagara for for
and FNFG Income from Year Ended Year Ended
Excluding Acquired December 31, December 31,
Acquisitions Companies (1) 2000 1999
------------ ------------- ------------- -------------

Interest income
Loans ................................................... $ 88,567 $ 13,258 $101,825 $ 67,398
Investment securities ................................... 30,816 2,033 32,849 37,976
Other ................................................... 2,066 300 2,366 2,440
-------- -------- -------- --------

Total interest income ............................... 121,449 15,591 137,040 107,814

Interest expense
Deposits ................................................ 49,290 6,982 56,272 42,393
Borrowings .............................................. 19,396 1,194 20,590 14,667
-------- -------- -------- --------

Total interest expense ............................. 68,686 8,176 76,862 57,060

Net interest income .............................. 52,763 7,415 60,178 50,754
Provision for credit losses ................................ 2,037 221 2,258 2,466
-------- -------- -------- --------

Net interest income after
provision for credit losses ................... 50,726 7,194 57,920 48,288
-------- -------- -------- --------

Noninterest income
Banking service charges and fees ........................ 6,585 672 7,257 4,816
Lending and leasing income .............................. 1,660 1,445 3,105 1,684
Insurance services and fees ............................. 16,673 12 16,685 15,723
Bank-owned life insurance ............................... 2,024 46 2,070 1,581
Annuity and mutual fund
commissions ....................................... 1,326 22 1,348 1,382
Investment and security gains ........................... 1,673 156 1,829 1,901
Investment and fiduciary services
income ............................................ -- 965 965 --
Other ................................................... 756 75 831 601
-------- -------- -------- --------

Total noninterest income ........................... 30,697 3,393 34,090 27,688

Noninterest expense
Salaries and employee benefits .......................... 30,368 3,856 34,224 27,708
Occupancy and equipment ................................. 5,154 581 5,735 4,506
Technology and communications ........................... 4,999 734 5,733 4,481
Goodwill amortization ................................... 1,870 1,181 3,051 1,494
Other ................................................... 11,514 1,261 12,775 9,454
-------- -------- -------- --------

Total noninterest expense .......................... 53,905 7,613 61,518 47,643

Income before income taxes ....................... 27,518 2,974 30,492 28,333

Income tax expense ......................................... 9,551 1,422 10,973 9,893
-------- -------- -------- --------

Net income ....................................... $ 17,967 $ 1,552 $ 19,519 $ 18,440
======== ======== ======== ========

- ----------
(1) Includes income from Cayuga since November 3, 2000, Cortland since July 7,
2000, NIA since May 31, 2000 and ENL since January 1, 2000. FNFG merged
Albion's two branch locations into First Niagara's branch network upon
acquisition. Therefore, separate income and expense amounts are not
available for Albion and are included in the "First Niagara and FNFG
Excluding Acquisitions" totals. The effects of not including Albion in the
above disclosures is not deemed material.

Total assets increased $913.0 million, or 53%, from $1.7 billion at December 31,
1999 to $2.6 billion at December 31, 2000. Asset growth was realized primarily
due to the acquisitions during the year, which contributed over $1.0 billion of
assets comprised mostly of loans, which totaled $693.0 million. Additionally,
the Company's continued emphasis on loan originations caused loans to increase
$152.5 million excluding loans acquired. This loan growth was partially offset
by a net decrease in securities available for sale of $61.6 million, which
served as the main funding source for the acquisitions. Total liabilities
increased $901.1 million, or 61%, from $1.5 billion at December 31, 1999 to $2.4
billion at December 31, 2000. Approximately $870.2 million of this increase

30

was attributable to the acquisitions and includes $16.0 million of additional
borrowings utilized to fund the Cayuga acquisition in the fourth quarter. Total
assets increased 13% from $1.5 billion at December 31, 1998 to $1.7 billion at
December 31, 1999, primarily due to loan growth of $242.4 million.

Lending Activities

Total loans increased $845.4 million, or 85%, to $1.8 billion at December 31,
2000 from $995.5 million at December 31, 1999. This increase is mainly
attributable to the acquisitions, which added approximately $693.0 million of
loans to the portfolio, and increased the Company's loan origination capacity.
This increase occurred across all loan categories, but was primarily in one- to
four-family residential real estate loans, which increased $475.5 million,
despite the sale of $15.1 million of residential real estate loans in the fourth
quarter, to help fund the Cayuga acquisition. Similarly, home equity and
commercial business loans increased $81.8 million and $68.3 million,
respectively, or 363% and 293%. This significant growth occurred not only as a
result of the acquisitions, but also due to the Company's emphasis on
originating higher yielding loans to diversify the loan portfolio and improve
net interest margins. This emphasis also resulted in the Company's commercial
and multi-family real estate and consumer loan portfolios increasing $140.3
million and $79.5 million, respectively. The increase in consumer loans was
mainly due to automobile loans, which increased $46.8 million as a result of the
expansion of the Company's indirect lending programs and the acquisitions.

The Company's focus on lending activities was also evident in 1999 as loans
increased 32% from $752.7 million at December 31, 1998 to $995.5 million at
December 31, 1999, primarily in the one- to four-family residential and
commercial real estate portfolios, which increased $153.5 million and $22.1
million, respectively. This increase was reflective of the Company's continued
emphasis on the expansion of its real estate lending activities, indirect
lending products, primarily recreational vehicle and automobile loans, as well
as the establishment of a Small Business Lending Unit to focus on commercial
business loans.

Non-accruing loans increased to $6.5 million at December 31, 2000 from $1.9
million and $3.3 million at December 31, 1999 and 1998, respectively.
Approximately, $3.7 million of this $4.6 million increase is attributable to the
Cayuga and Cortland acquisitions, and not a deterioration in the credit quality
of the Company's loan portfolio. The Company's ratio of non-accruing loans to
total loans increased to 0.35% at December 31, 2000, from 0.19% at December 31,
1999, but was still below the 0.43% at December 31, 1998. The Company's
allowance for credit losses decreased slightly as a percentage of total loans to
0.96% at December 31, 2000, compared to 0.99% and 1.06% at December 31, 1999 and
1998, respectively. While management uses available information to recognize
losses on loans, future credit 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 credit
losses and may require the Company to recognize additional provisions based on
their judgement of information available to them at the time of their
examination. Management believes that the allowance for credit losses is
adequate to absorb credit losses from existing loans.

Investing Activities

The Company's securities available for sale portfolio decreased $61.6 million,
or 11%, from $563.5 million at December 31, 1999 to $501.8 million at December
31, 2000. During 2000 the Company acquired investment securities totaling $128.4
million from its bank acquisitions, which primarily consisted of
mortgage-backed, U.S. government agency and municipal securities of $52.9
million, $32.2 million, and $21.1 million, respectively. However, this increase
was more than offset by the sale and maturity of mortgage-backed, asset-backed
and U.S. Treasury securities, used to fund the acquisitions and expanding loan
portfolio, and resulted in a decrease in investment securities of $190.1
million. This decrease is consistent with management's strategy of investing the
proceeds from the 1998 initial public offering in higher earning assets, such as
loans, and companies that provide noninterest income. As a result, securities
available for sale only comprised 19% of total assets at December 31, 2000
compared to 33% at December 31, 1999, while loans comprised 70% and 58% of total
assets, respectively.

Securities available for sale decreased slightly from $580.8 million at December
31, 1998 to $563.5 million at December 31, 1999. This decrease was primarily a
result of the WHA acquisition and loan growth, partially offset by the Company's
leveraging strategy of utilizing FHLB advances to purchase higher yielding CMOs
with comparable maturities. During 2000, the Company discontinued the leveraging
strategy due to the increase in market borrowing rates during the first half of
2000.

31

Other Activities

In addition to the loans and investments obtained through acquisitions during
the year, the Company also acquired $7.9 million of FHLB stock, $5.4 million of
bank-owned life insurance and $5.0 million of accrued interest receivable. These
were the primary contributors to the increase in other assets of $30.5 million
from $81.3 million at December 31, 1999 to $111.8 million at December 31, 2000.
Additionally, the Company acquired $13.8 million of premises and equipment and
recorded $74.6 million of goodwill as a result of the acquisitions. During 1999,
the Company purchased $10.0 million of bank-owned life insurance and $10.0
million of FHLB stock.

Funding Activities

The Company's borrowed funds increased $93.9 million, or 28%, from $335.6
million at December 31, 1999 to $429.6 million at December 31, 2000. This
increase was almost exclusively attributable to the acquisition of the three
banks during 2000, which added $103.2 million of FHLB advances and reverse
repurchase agreements to the balance sheet. Additionally, in order to help fund
the Cayuga acquisition, FNFG borrowed $16.0 million from the MHC and a
commercial bank under short-term variable rate loan agreements. These increases
were offset by the repayment of borrowings during the year, which were not
replaced as the cash on hand, increase in deposits and sale and maturity of
investment securities were more than adequate to meet the operational funding
needs of the Company. Total borrowings increased $193.0 million during 1999, as
a result of a continuation of the Company's borrowing/reinvestment program begun
in 1998.

Total deposits at December 31, 2000 were $1.9 billion, an increase of $793.0
million, or 71%, when compared to the $1.1 billion of deposits at December 31,
1999. This increase is primarily the result of eighteen branch locations
obtained by the Company through the three bank acquisitions and opening of two
de-novo branch locations by First Niagara during 2000. The bank acquisitions
contributed $732.7 million of funding through deposits, which were primarily
comprised of certificates of deposits, savings accounts and demand deposits of
$387.0 million, $166.2 million and $122.2 million, respectively. Additionally,
the Company's money market accounts and certificates of deposits increased $54.5
million and $30.4 million, excluding acquired balances, respectively. This was a
result of the Company competitively pricing its money market accounts in order
to compete with larger banks and mutual fund companies, and the higher interest
rate environment during the first half of 2000 which caused money to flow from
short-term lower rate savings accounts to longer-term higher rate certificates
of deposits. Total deposits grew $52.4 million during 1999, primarily in the
money market demand accounts.

Equity Activities

The increase in stockholders' equity of $11.9 million, or 5%, to $244.5 million
at December 31, 2000 from $232.6 million at December 31, 1999 was primarily
attributable to net income of $19.5 million. Additionally, the Company's
accumulated other comprehensive income increased $9.2 million as a result of the
increase in the unrealized gain/loss on securities available for sale, due to
the declining interest rate environment during the second half of 2000, which
caused the Company's fixed rate debt, mortgage-backed and asset-backed
securities to appreciate in value. These increases were partially offset by
FNFG's repurchase of common stock and payment of dividends, which caused
stockholders' equity to decrease $10.9 million and $7.0 million, respectively. A
total of 1,098,300 shares were repurchased during 2000 at an average price of
$9.90 per share as part of the capital management buy-back program started in
1999. As a result of the acquisition activity during 2000, repurchases of common
stock have slowed considerably, as capital has been utilized to expand the
Company's strategic and competitive positions in the retail banking market.
Stockholders' equity decreased $31.2 million from $263.8 million at December 31,
1998 to $232.6 million at December 31, 1999, as a result of the capital
management buy-back program.

32

Average Balance Sheet. The following table sets forth certain information
relating to the Company's consolidated statements of financial condition and
reflects the average yields earned on interest-earning assets, as well as the
average rates paid on interest-bearing liabilities for the years indicated. Such
yields and rates were derived by dividing interest income or expense by the
average balances of interest-earning assets or interest-bearing liabilities,
respectively, for the years shown. No tax equivalent adjustments were made. All
average balances are average daily balances. Non-accruing loans have been
excluded from the yield calculations in this table.

Year ended December 31,
----------------------------------------------------------------------------
2000 1999
----------------------------------- -----------------------------------
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 and securities
purchased under resale agreements .... $ 12,312 $ 771 6.26% $ 21,804 $ 1,104 5.06%
Investment securities (1) ............ 159,268 8,859 5.56 191,222 10,972 5.74
Mortgage-backed securities (1) ....... 362,086 23,990 6.63 422,952 27,004 6.38
Loans (2) ............................ 1,288,931 101,825 7.90 867,630 67,398 7.77
Other interest-earning assets (3) .... 24,185 1,595 6.59 22,750 1,336 5.87
----------- ----------- ---- ----------- ----------- ----

Total interest-earning assets .. 1,846,782 $ 137,040 7.42% 1,526,358 $ 107,814 7.06%
----------- ----------- ---- ----------- ----------- ----

Allowance for credit losses ............ (12,766) (9,160)
Other noninterest-earning assets (4)(5) 158,016 109,851
----------- -----------

Total assets ................... $ 1,992,032 $ 1,627,049
=========== ===========

Interest-bearing liabilities:
Savings accounts ..................... $ 338,475 $ 9,380 2.77% $ 302,583 $ 9,098 3.01%
Interest-bearing checking ............ 411,778 16,038 3.89 306,628 10,908 3.56
Certificates of deposit .............. 558,860 30,593 5.47 433,168 22,193 5.12
Mortgagors' payments held in escrow .. 14,959 261 1.74 10,834 194 1.79
Borrowed funds ....................... 347,959 20,590 5.92 261,515 14,667 5.61
----------- ----------- ---- ----------- ----------- ----

Total interest-bearing liabilities 1,672,031 $ 76,862 4.60% 1,314,728 $ 57,060 4.34%
----------- ----------- ---- ----------- ----------- ----

Noninterest-bearing demand deposits .... 46,799 31,921
Other noninterest-bearing liabilities .. 40,253 35,301
----------- -----------

Total liabilities ................ 1,759,083 1,381,950

Stockholders' equity (4) ............... 232,949 245,099
----------- -----------
Total liabilities and
stockholders' equity ........... $ 1,992,032 $ 1,627,049
=========== ===========

Net interest income .................... $ 60,178 $ 50,754
=========== ===========

Net interest rate spread ............... 2.82% 2.72%
==== ====
Net earning assets ..................... $ 174,751 $ 211,630
=========== ===========

Net interest income as a percentage of
average interest-earning assets ...... 3.26% 3.33%
=========== ===========

Ratio of average interest-earning assets
to average interest-bearing liabilities 110.45% 116.10%
=========== ===========

Year ended December 31,
-----------------------------------
1998
-----------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
----------- ----------- ----
(Dollars in thousands)

Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements .... $ 59,646 $ 3,344 5.61%
Investment securities (1) ............ 196,571 11,586 5.89
Mortgage-backed securities (1) ....... 319,143 21,107 6.61
Loans (2) ............................ 681,164 55,326 8.12
Other interest-earning assets (3) .... 12,760 739 5.79
----------- ----------- ----

Total interest-earning assets .. 1,269,284 $ 92,102 7.26%
----------- ----------- ----

Allowance for credit losses ............ (7,444)
Other noninterest-earning assets (4)(5) 78,713
-----------

Total assets ................... $ 1,340,553
===========

Interest-bearing liabilities:
Savings accounts ..................... $ 302,313 $ 9,575 3.17%
Interest-bearing checking ............ 205,326 6,847 3.33
Certificates of deposit .............. 476,641 27,447 5.76
Mortgagors' payments held in escrow .. 9,483 165 1.74
Borrowed funds ....................... 69,485 3,932 5.66
----------- ----------- ----

Total interest-bearing liabilities 1,063,248 $ 47,966 4.51%
----------- ----------- ----

Noninterest-bearing demand deposits .... 28,242
Other noninterest-bearing liabilities .. 25,778
-----------

Total liabilities ................ 1,117,268

Stockholders' equity (4) ............... 223,285
-----------
Total liabilities and
stockholders' equity ........... $ 1,340,553
===========

Net interest income .................... $ 44,136
===========

Net interest rate spread ............... 2.75%
====
$ 206,036
Net earning assets ..................... ===========

Net interest income as a percentage of 3.48%
average interest-earning assets ...... ===========

Ratio of average interest-earning assets 119.38%
to average interest-bearing liabilities ===========

- ----------
(1) Amounts shown are amortized cost.
(2) Net of deferred loan fees and expenses, loan discounts, loan purchase
accounting adjustments, loans in process and non-accruing loans.
(3) Includes FHLB stock and interest-bearing demand accounts.
(4) Includes unrealized gains/losses on securities available for sale.
(5) Includes bank-owned life insurance, earnings on which are reflected in
other noninterest income.

33

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 Company'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.

Year Ended December 31,
--------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
-------------------------------------- --------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
----------------------- Increase ----------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease
-------- -------- -------- -------- -------- --------
(In thousands)

Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements .... $ (554) $ 221 $ (333) $ (1,946) $ (294) $ (2,240)
Investment securities .................. (1,786) (327) (2,113) (311) (303) (614)
Mortgage-backed securities .............. (4,002) 988 (3,014) 6,651 (754) 5,897
Loans .................................. 33,264 1,163 34,427 14,576 (2,504) 12,072
Other interest-earning assets .......... 87 172 259 587 10 597
-------- -------- -------- -------- -------- --------

Total interest-earning assets .... 27,009 2,217 29,226 19,557 (3,845) 15,712
======== ======== ======== ======== ======== ========

Interest-bearing liabilities:
Savings accounts ....................... 1,027 (745) 282 9 (487) (478)
Interest-bearing checking .............. 4,019 1,111 5,130 3,578 484 4,062
Certificates of deposit ................ 6,796 1,604 8,400 (2,378) (2,876) (5,254)
Mortgagors' payments held in escrow .... 72 (5) 67 24 5 29
Borrowed funds ......................... 5,077 846 5,923 10,770 (35) 10,735
-------- -------- -------- -------- -------- --------

Total interest-bearing liabilities $ 16,991 $ 2,811 $ 19,802 $ 12,003 $ (2,909) $ 9,094
======== ======== ======== ======== ======== ========

Net interest income ............ $ 9,424 $ 6,618
======== ========

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31,
1999

Net Income

Net income increased $1.1 million to $19.5 million, or $0.79 per share for the
year ended December 31, 2000 compared, to $18.4 million, or $0.69 per share for
the same period in 1999. Net income represented a return on average assets in
2000 of 0.98% compared to 1.13% in 1999. The return on average equity in 2000
was 8.38% compared to 7.52% in 1999. The increase in the return on average
equity in 2000 was enhanced by the impact of treasury stock repurchases.

Net Interest Income

Net interest income rose $9.4 million, or 19%, to $60.2 million for the year
ended December 31, 2000 from $50.8 million for the year ended December 31, 1999.
Additionally, the net interest margin was 3.26% for 2000 compared to 3.33% for
1999. The narrowing of the margin resulted primarily from a $36.9 million, or
17%, decline in average net earning assets to $174.8 million in 2000 compared to
$211.6 million in 1999, as funds previously available for investment in
interest-earning assets were utilized to fund the Company's acquisition
activity. This decrease was partially offset by a 10 basis point increase in the
net interest rate spread, which can be attributed to the general increase in
market interest rates, as well as the redeployment of funds from lower yielding
investment securities into the higher yielding loan portfolio.

Interest income rose $29.2 million, or 27%, from $107.8 million in 1999 to
$137.0 million in 2000. This was mainly a result of the growth in average
interest-earning assets, which increased $320.4 million, or 21%, to $1.8 billion
in 2000, as well as an increase in the interest rate earned on those assets of
36 basis points for the same period. Interest income on loans increased $34.4
million or 51% to $101.8 million for 2000 from $67.4 million for 1999. This
increase resulted from a 49% increase in average loans outstanding during 2000
compared to 1999, as well as a 13 basis point increase in the average yield on
loans over the same period. This increase was partially offset by a decrease in
interest earned on investment and mortgage-backed securities of $5.1 million to
$32.8 million for the year ended December 31, 2000 compared to $38.0 million for
the same period in 1999, partially offset by a 12

34

basis point increase in the average yield earned on these investments. The
increase in average yields earned on loans and investments can be attributed to
the higher interest rate environment in 2000 compared to 1999 and the change in
the Company's asset and loan portfolio composition to higher yielding commercial
and consumer loans.

Interest expense increased $19.8 million, or 35%, to $76.9 million for 2000 from
$57.1 million for 1999. This increase is primarily attributable to interest
expense on deposits, which increased $13.9 million for the same period. This was
a result of a 22 basis point increase in the average rate paid on deposits, in
addition to a $270.9 million increase in the average balances. Interest expense
on borrowed funds increased to $20.6 million for the year ended December 31,
2000, compared to $14.7 million for the same period in 1999. This increase was a
result of an increase in the average balance of borrowed funds of $86.4 million,
in addition to an increase in the average rate paid on borrowed funds of 31
basis points when comparing the year ending December 31, 2000 to the year ending
December 31, 1999. The increase in the average rate paid on deposits and
investments can be attributed to the higher interest rate environment in 2000
compared to 1999 and the change in liability and deposit mix to certificates of
deposits and the Company's competitively priced money market accounts which
generally bear higher rates of interest.

Provision for Credit Losses

Even with the significant increase in loans during 2000 and the shift in
portfolio mix to higher risk categories such as commercial real estate,
commercial loans and indirect consumer loans, the Company did not experience a
significant increase in net charge-offs. Net charge-offs for 2000 increased to
$735,000 compared to $614,000 in 1999 and $995,000 in 1998. However, as a
percentage of average loans outstanding, net charge-offs decreased to 0.06% for
2000, from 0.07% in 1999 and 0.15% in 1998. Given this, and the fact that the
quality of the loan portfolio remains high, the Company reduced the provision
for credit losses to $2.3 million for the year ending December 31, 2000, from
$2.5 million and $2.1 million in 1999 and 1998, respectively. The provision is
based on management's quarterly assessment of the adequacy of the allowance for
credit losses with consideration given to such interrelated factors as the
composition and inherent risk within the loan portfolio, the level of
non-accruing loans and charge-offs, both current and historic economic
conditions, as well as current trends related to regulatory supervision. The
Company establishes provisions for credit losses, which are charged to
operations, in order to maintain the allowance for credit losses at a level
sufficient to absorb credit losses inherent in the existing loan portfolio.

Noninterest Income

Noninterest income increased $6.4 million, or 23%, to $34.1 million in 2000 from
$27.7 million in 1999, as a result of the Company's efforts to become less
reliant on net interest income. Revenue associated with acquisitions, excluding
Albion, resulted in $3.4 million of additional noninterest income for the year,
of which $2.0 million related to the investment advisory and commercial leasing
subsidiaries acquired in 2000. Other factors that contributed to the increase
included third-party benefit administration fees, bank-owned life insurance
income, debit card, credit card and deposit account fees and income from
investments in limited partnerships. Noninterest income continues to be a stable
source of earnings for the Company, and represented 36% of total revenue during
2000.

Noninterest Expenses

Noninterest expenses totaled $61.5 million for the year ended December 31, 2000
reflecting a $13.9 million, or 29%, increase over the year ended December 31,
1999 total of $47.6 million. Approximately $7.6 million, or 55%, of the increase
in noninterest expense was attributable to the acquired companies, excluding
Albion, and was primarily in salaries and employee benefits. As a result,
salaries and employee benefits were $34.2 million in 2000, an increase of $6.5
million, or 24%, from $27.7 million in 1999. During 2000, the Company's
noninterest expense also continued to be impacted by the increased amortization
of goodwill associated with its acquisitions, which increased $1.6 million when
compared to the same period in 1999. Other increases related to the Company's
ongoing upgrade of technology and communications systems, expenses incurred for
operating two new branch locations opened in early 2000, and increased costs due
to integration efforts of the acquired companies. Management anticipates the
integration of the acquisitions will be completed during 2001.

Income Taxes

The effective tax rate increased to 36.0% in 2000 from 34.9% in 1999, primarily
due to the nondeductible goodwill related to the acquisitions.

35

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31,
1998

Net Income

Net income increased 28% to $18.4 million, or $0.69 per share for the year ended
December 31, 1999 compared to $14.4 million for the same period in 1998. The
1998 earnings are exclusive of a one-time, after-tax contribution of $4.0
million to fund the establishment of the First Niagara Bank Foundation during
1998.

Net income represented a return on average assets in 1999 of 1.13% compared to
1.07% in 1998, excluding the one-time contribution. The return on average equity
in 1999 was 7.52% compared to 6.43% in 1998, excluding the one-time
contribution. The increase in the return on average equity in 1999 was enhanced
by the impact of treasury stock repurchases.

Net Interest Income

Net interest income increased 15% to $50.8 million in 1999 from $44.1 million in
1998. This was mainly the result of the growth in average interest-earning
assets, which increased $257.1 million, or 20% to $1.5 billion in 1999 from $1.3
billion in 1998. Interest income on loans increased 22% to $67.4 million for the
1999 period from $55.3 million for the same period in 1998. The increase
resulted from a 27% increase in average loans outstanding during 1999 compared
to the same period in 1998, the benefits of which more than offset a 35 basis
point decrease in the average yield on loans over the same periods. Interest
income on investment and mortgage-backed securities in the available for sale
portfolio increased $5.3 million to $38.0 million for the year ended December
31, 1999 compared to $32.7 million for the same period in 1998, resulting from a
$98.5 million increase in the average balance of these securities, partially
offset by a 16 basis point decrease in the average yield earned on these
investments.

Interest expense on deposits decreased $1.6 million to $42.4 million for the
year ended December 31, 1999 from $44.0 million for the same period in 1998. A
41 basis point decrease in the average rate paid on deposits offset a $59.5
million increase in the average balances. Interest expense on borrowed funds
increased to $14.7 million for the year ended December 31, 1999, compared to
$3.9 million for the same period in 1998, as a result of significant additional
borrowings used to fund the loan growth.

The net interest margin was 3.33% for the year ended December 31, 1999 compared
to 3.48% for the same period in 1998. The narrowing of the margin resulted
primarily from a 3 basis point decrease in the average interest rate spread to
2.72% in 1999 from 2.75% in 1998. The decrease in the average interest rate
spread reflects the general decline in market yields early in 1999 on average
interest-earning assets and the additional funding costs of borrowed funds, as
well as interest-bearing checking accounts, primarily money market demand
accounts, which carry a market-based cost of funds that is slightly higher than
the other interest-bearing liabilities of the Company. The decline in the
average interest rate spread was partially offset by a 3% increase in average
net interest-earning assets when comparing the two periods.

Provision for Credit Losses

The provision for credit losses increased to $2.5 million in 1999 compared to
$2.1 million in 1998. Net charge-offs for 1999 totaled $614,000 compared to $1.0
million in 1998, with net charge-offs as a percentage of average loans
outstanding decreasing to 0.07% in 1999 from 0.15% in 1998.

Noninterest Income

Noninterest income increased 201% to $27.7 million in 1999 from $9.2 million in
1998. Several factors, primarily the acquisition of the insurance subsidiaries,
which contributed $14.5 million of noninterest income during 1999, and the
implementation of various treasury initiatives, furthered the Company's efforts
to be less reliant on net interest income. Additionally, premium income
generated by a newly implemented equity covered call option program, tax-exempt
earnings on bank-owned life insurance, as well as increased commissions received
from the sale of third-party annuity and mutual fund products had a positive
impact on the year to date noninterest income. The Company's focus on generating
core checking accounts, fees associated with a revised relationship checking
account product, and continued growth in debit card usage also contributed to
the increase in fee income.

Noninterest Expenses

Noninterest expenses totaled $47.6 million for the year ended December 31, 1999
reflecting an $11.7 million increase over the year ended December 31, 1998 total
of $35.9 million. Included in the 1998 total was a one-time expense of $6.8
million related to funding the Foundation. Approximately $13.6 million of the
noninterest expense for the year ended December 31, 1999 was attributable to the
operation and acquisition of the insurance subsidiaries, primarily in salaries
and benefits, occupancy and equipment costs, as well as goodwill amortization of
$1.5 million. Salaries and employee benefits were $27.7 million in 1999, an

36

increase of $11.8 million or 74% from $15.9 million in 1998. In addition to the
insurance subsidiary costs, salaries and employee benefits increased due to
newly implemented sales and incentive programs, new stock option award plans and
increased staffing related to the expansion of the residential and commercial
loan origination sales forces. Other increases relate to the Company's ongoing
upgrade of technology and communications systems, particularly the
implementation of a home banking product in 1999, expenses incurred for the
opening of two new branch locations scheduled for opening in early 2000, and
professional and legal costs related to the analysis of potential acquisitions.

Income Taxes

The effective tax rate increased to 34.9% in 1999 from 32.1% in 1998, primarily
due to the nondeductible goodwill related to the insurance subsidiary
acquisition.

LIQUIDITY AND CAPITAL RESOURCES

In addition to the Company's primary funding sources of income from operations,
deposits and borrowings, additional funding is provided from the principal and
interest payments on loans, proceeds from the maturities and sale of investment
securities, as well as proceeds from the sale of fixed rate mortgage loans in
the secondary market. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit outflows, mortgage
prepayments, mortgage loan sales, and borrowings are greatly influenced by
general interest rates, economic conditions and competition.

The primary investing activities of the Company are the origination of
residential one- to-four family mortgages, commercial and multi-family real
estate loans, consumer loans, as well as the purchase of mortgage-backed, debt
and equity securities. During 2000, loan originations totaled $419.5 million
compared to $372.1 million and $310.3 million for 1999 and 1998, respectively,
while purchases of investment securities totaled $37.1 million, $301.1 million
and $300.4 million for the same periods. The reduction in investment security
purchases was due to the Company funding five acquisitions during 2000 that
required $90.9 million of net cash outflow compared to only $11.3 million in
1999 and none in 1998. The increased amount of security purchases in 1999 and
1998 were a result of the Company's leveraging program in 1999 and investment of
funds received from the 1998 initial public offering.

The sales, maturity and principal payments on investment securities, as well as
deposit growth and existing liquid assets were used to fund the above investing
activities. During 2000 cash flow provided by the sale and maturity of
securities available for sale amounted to $241.2 million compared to $282.0
million and $203.2 million in 1999 and 1998. Deposit growth, primarily the
Company's competitively priced money market and certificates of deposit
accounts, provided $60.4 million, $52.4 million and $65.3 million of funding for
the years ending December 31, 2000, 1999 and 1998, respectively. Additionally,
with the addition of Cayuga, the Company now has the ability to accept municipal
deposits, which totaled $63.0 million at December 31, 2000. In addition to the
sales of investment securities and deposit growth, FNFG borrowed $16.0 million
of funds from the MHC and a commercial bank in the fourth quarter to help fund
the Cayuga acquisition. However, borrowings, excluding amounts acquired,
decreased only slightly from 1999 as the increase in deposits and sale and
maturity of investment securities were more than adequate to meet the funding
needs of the Company.

At December 31, 2000, outstanding loan commitments totaled $155.7 million. These
commitments do not necessarily represent future cash requirements since certain
of these instruments may expire without being funded and others may not be fully
drawn upon. It is anticipated that there will be sufficient funds available to
meet the current loan commitments and other obligations through the sources
described above.

Cash, interest-bearing demand accounts at correspondent banks and federal funds
sold are the Company's most liquid assets. The level of these assets are
monitored daily and are dependent on operating, financing, lending and investing
activities during any given period. Excess short-term liquidity is usually
invested in overnight federal funds sold. In the event that funds beyond those
generated internally are required, additional sources of funds are available
through the use of reverse repurchase agreements and FHLB advances. As of
December 31, 2000, the total of cash, interest-bearing demand accounts and
federal funds sold was $62.8 million, or 2.4% of total assets.

37

FOURTH QUARTER RESULTS

Net income for the quarter ended December 31, 2000 was $4.9 million, up from
$4.4 million for the same period in 1999. Earnings per share increased 18% to
$0.20 per share for the fourth quarter of 2000 compared to $0.17 per share for
the corresponding quarter in 1999.

For the quarter ended December 31, 2000, total loans increased $462.3 million to
$1.8 billion as compared to $1.4 billion for the quarter ended September 30,
2000. During the quarter, the Company obtained approximately $453.8 million of
loans as a result of the Cayuga acquisition. The remainder of the increase is
attributable to the continued focus on loan origination efforts, partially
offset by $15.1 million in loan sales during the fourth quarter in order to fund
the Cayuga purchase. Correspondingly, interest income on loans increased to
$33.6 million for the fourth quarter of 2000 from $18.7 million for the same
period in 1999. The Company's net interest rate spread, the difference in the
interest earned on interest-earning assets and interest paid on interest-bearing
liabilities, also improved due to the increase in the loan portfolio, as well as
a change in asset mix from lower yielding investments to higher yielding loans.
For the three-month period ended December 31, 2000, the spread improved 12 basis
points to 2.87% as compared to 2.75% for the fourth quarter of 1999.

In the fourth quarter of 2000, the Company had $9.6 million in noninterest
income, an increase of 39% over the $6.9 million for the same period in 1999.
Revenue associated with bank acquisitions resulted in $932,000 of additional
noninterest income for the quarter. Further, income related to the Company's
investment advisory services, commercial leasing activities and third-party
benefit administration fees contributed $912,000 of income. Other factors
included debit and credit card fees, service charges on deposit accounts and
income from investments in limited partnerships

Noninterest expenses for the quarter ended December 31, 2000 increased to $18.3
million from $12.5 million for the corresponding period in 1999. Expenses
increased approximately $3.8 million as a result of additional operating costs,
primarily salaries and employee benefits, as well as occupancy and technology
costs related to the Cortland and Cayuga operations. Similarly, the investment
advisory and commercial leasing subsidiaries contributed $634,000 to the
increase. The Company's noninterest expenses also continue to be impacted by the
increased amortization of goodwill associated with its recent acquisitions which
totaled $1.1 million for the fourth quarter of 2000 compared to $374,000 for the
same period in 1999.

IMPACT OF NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. In June 2000,
SFAS No. 133 was amended by SFAS No. 138 Accounting for Certain Derivative
Instruments and Certain Hedging Activities - An Amendment of FASB Statement No.
133. SFAS No. 133 and SFAS No. 138 establish accounting and reporting standards
for derivative instruments, including certain derivatives embedded in other
contracts, and for hedging activities. These statements require that an entity
recognizes all derivatives as either assets or liabilities in the statement of
condition and measures those instruments at fair value. Changes in the fair
value of the derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 133
and SFAS No. 138 are effective for all fiscal years beginning after June 15,
2000. As of January 1, 2001, the Company adopted SFAS No. 133 and SFAS No. 138,
which did not significantly impact the Company's financial condition or results
of operations. However, the Company anticipates that adoption of SFAS No. 133
and SFAS No. 138 could increase the volatility of reported earnings and/or
stockholders' equity in future periods.

In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140,
which replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, revises the standards related to the
accounting for securitizations and other transfers of financial assets and
collateral. This statement requires certain disclosures, but carries over most
of the provisions of SFAS No. 125 without consideration. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities of the Company occurring after March 31, 2001. However, the
provisions of SFAS No. 140 concerning the recognition and reclassification of
collateral and disclosures relating to securitization transactions and
collateral were effective for the Company for the year ended December 31, 2000.
This statement is to be applied prospectively with certain exceptions. Adoption
of the remaining provisions of SFAS No. 140 is not expected to have a material
impact on the Company's financial statements as the Company generally does not
enter into the types of transactions covered by this pronouncement.

38

In March 2000, FASB Interpretation ("FIN") No. 44, Accounting for Certain
Transactions Involving Stock Compensation was issued. This interpretation
clarifies the application of certain issues of APB Opinion No. 25, "Accounting
for Stock Issued to Employees." FIN No. 44, which was effective July 1, 2000,
did not have a material impact on the Company's financial statements.

In February 2001, the FASB issued an Exposure Draft of a proposed Statement,
Business Combinations and Intangible Assets - Accounting for Goodwill. If
issued, the Statement would require all business combinations to be accounted
for using the purchase method of accounting. Acquired intangible assets (other
than goodwill) would be amortized over their useful economic life, while
goodwill and any acquired intangible asset with an indefinite useful economic
life would not be amortized, but would be reviewed for impairment. The goodwill
and intangible asset provisions would be effective for the first fiscal quarter
beginning after the Statement's issuance. However, there are no assurances that
the FASB will issue a new accounting pronouncement or that if issued, it will
contain the guidance discussed above. At December 31, 2000, the Company had
$85.0 million of goodwill, and recorded $3.1 million of goodwill amortization
expense during 2000.

39

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------

The principal objective of the Company's interest rate risk management is to
evaluate the interest rate risk inherent in certain assets and liabilities,
determine the appropriate level of risk given the Company's 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 operations to changes in interest rates. The
asset/liability committee is comprised of senior management and selected banking
officers 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 the net interest margin, the fair value of the portfolio and the
effect that changes in interest rates will have on the portfolio and exposure
limits.

The Company utilizes 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, education
loans, and recreational vehicle loans; (2) selling substantially all newly
originated 15-30 year monthly and 20-30 year bi-weekly fixed-rate, residential
mortgage loans into the secondary market without recourse and on a servicing
retained basis; and (3) investing in shorter term securities which generally
bear lower yields as compared to longer term investments, but which better
position the Company for increases in market interest rates. Shortening the
maturities of the Company's interest-earning assets by increasing shorter term
investments better matches the maturities of the Company's deposit accounts, in
particular its certificates of deposits that mature in one year or less, which,
at December 31, 2000 totaled $668.1 million, or 30% of total interest-bearing
liabilities. The Company, on a limited basis, also enters into interest rate
swap agreements with a third party to match more closely the repricing of its
money market demand product. The Company intends to continue to analyze the
future utilization of swap agreements as part of its overall asset/liability
management process.

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 Company'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 December 31, 2000, the Company'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 24.19%. 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 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 Company'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 Company'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 December 31, 2000, which are
anticipated by the Company, 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 December 31, 2000, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within the selected time intervals.
One- to four-family residential loans were projected to repay at rates between
5% and 10% annually, while mortgage-backed securities were projected to prepay
at rates between 15% and 35% annually. Non-core savings and negotiable order of
withdrawal ("NOW") accounts were assumed to decay, or run-off, at 11% annually.
While the Company 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.

40

Amounts Maturing or Repricing as of December 31, 2000
------------------------------------------------------------------------
Less Than 3-6 6 Months
3 Months Months to 1 Year 1-3 Years 3-5 Years
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)

Interest-earning assets:
Federal funds sold ......................... $ 10,900 $ -- $ -- $ -- $ --
Mortgage-backed securities (1) ............. 12,629 13,477 28,731 127,097 93,060
Investment securities (1) .................. 46,484 14,803 30,532 60,221 19,992
Loans (2) .................................. 267,063 104,482 201,744 424,536 304,383
Other (1)(3) ............................... 4,224 -- -- -- --
---------- ---------- ---------- ---------- ----------

Total interest-earning assets .... 341,300 132,762 261,007 611,854 417,435
---------- ---------- ---------- ---------- ----------

Interest-bearing liabilities:
Savings accounts ........................... 24,432 23,777 47,554 67,918 57,147
Interest-bearing checking accounts ......... 375,681 31,025 62,050 28,445 10,602
Certificates of deposit .................... 214,757 149,797 303,540 155,871 17,737
Mortgagors' payments held in escrow ........ 3,892 3,892 7,784 -- --
Other borrowed funds ....................... 65,165 19,399 37,239 86,553 82,182
---------- ---------- ---------- ---------- ----------

Total interest-bearing liabilities 683,927 227,890 458,167 338,787 167,668
---------- ---------- ---------- ---------- ----------

Interest rate sensitivity gap .................. ($ 342,627) ($ 95,128) ($ 197,160) $ 273,067 $ 249,767
========== ========== ========== ========== ==========

Cumulative interest rate sensitivity gap ....... ($ 342,627) ($ 437,755) ($ 634,915) ($ 361,848) ($ 112,081)
========== ========== ========== ========== ==========

Ratio of interest-earning assets to
interest-bearing liabilities ............... 49.90% 58.26% 56.97% 180.60% 248.97%
Ratio of cumulative gap to total assets ........ (13.05%) (16.68%) (24.19%) (13.79%) (4.27%)

Amounts Maturing or Repricing as of December 31, 2000
-----------------------------------------------------
Over 10
5-10 Years Years Total
---------- ---------- ----------
(Dollars in thousands)

Interest-earning assets:
Federal funds sold ......................... $ -- $ -- $ 10,900
Mortgage-backed securities (1) ............. 30,000 391 305,385
Investment securities (1) .................. 16,655 7,202 195,889
Loans (2) .................................. 389,066 142,574 1,833,848
Other (1)(3) ............................... -- 24,668 28,892
---------- ---------- ----------

Total interest-earning assets .... 435,721 174,835 2,374,914
---------- ---------- ----------

Interest-bearing liabilities:
Savings accounts ........................... 109,511 87,304 417,643
Interest-bearing checking accounts ......... 24,828 6,524 539,155
Certificates of deposit .................... 2,803 44 844,549
Mortgagors' payments held in escrow ........ -- 3,201 18,769
Other borrowed funds ....................... 119,880 19,149 429,567
---------- ---------- ----------

Total interest-bearing liabilities 257,022 116,222 2,249,683
---------- ---------- ----------

Interest rate sensitivity gap .................. $ 178,699 $ 58,613 $ 125,231
========== ========== ==========

Cumulative interest rate sensitivity gap ....... $ 66,618 $ 125,231
========== ==========

Ratio of interest-earning assets to
interest-bearing liabilities ............... 169.53% 150.43% 105.57%
Ratio of cumulative gap to total assets ........ 2.54% 4.77%

- ----------
(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.
(3) Includes demand balances held at correspondent banks and FHLB stock.

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.

As a result of these shortcomings, the Company focuses more attention on
simulation modeling, such as the Net Income and Portfolio Value Analysis
discussed below, rather than Gap Analysis. Even though the Gap Analysis reflects
a ratio of cumulative gap to total assets within the Company's targeted range of
acceptable limits, the net income and net portfolio value simulation modeling is
considered by management to be more informative in forecasting future income and
economic value trends.

41

Net Income and Portfolio Value Analysis. The accompanying table as of December
31, 2000 and 1999 sets forth the estimated impact on the Company's net income
resulting from changes in the interest rates during the next twelve months.
These estimates require making certain assumptions including loan and
mortgage-related investment prepayment speeds, reinvestment rates, and deposit
maturities and decay rates similar to the Gap Analysis. These assumptions are
inherently uncertain and, as a result, the Company cannot precisely predict the
impact of changes in interest rates on net income. Actual results may differ
significantly due to timing, magnitude and frequency of interest rate changes
and changes in market condition.

Calculated increase (decrease) at
--------------------------------------------------------
December 31, 2000 December 31, 1999
------------------------- -------------------------
Changes in Net Net Portfolio Net Net Portfolio
Interest rates Income Value Income Value
- ----------------- -------- ---------- --------- ----------
(In thousands)

+200 basis points $ (2,738) $ (50,176) $ (2,105) $ (25,301)
+100 basis points (1,353) (23,595) (1,038) (13,193)
- -100 basis points 1,289 23,691 986 8,518
- -200 basis points $ 2,493 $ 39,408 $ 1,878 $ 14,057

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 net income and NPV requires the making of certain assumptions that may or may
not reflect the manner in which actual yields and costs respond to changes in
market interest rates. In this regard, the net income and NPV Table presented
assumes that the composition of the Company'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 net income and NPV Table provides an indication of the Company'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 Company's net interest income and will differ
from actual results.

42

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------

Independent Auditors' Report

The Board of Directors
First Niagara Financial Group, Inc.:

We have audited the accompanying consolidated statements of condition of First
Niagara Financial Group, Inc. and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 First Niagara
Financial Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.

/s/ KPMG LLP

January 26, 2001
Buffalo, New York

43

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Condition

December 31, 2000 and 1999
(In thousands except share and per share amounts)

Assets 2000 1999
----------- ---------

Cash and cash equivalents:
Cash and due from banks $ 51,915 24,449
Federal funds sold 10,900 17,500
----------- ---------
Total cash and cash equivalents 62,815 41,949

Securities available for sale 501,834 563,473
Loans, net 1,823,174 985,628
Premises and equipment, net 40,094 25,886
Goodwill, net 84,955 13,450
Other assets 111,814 81,326
----------- ---------
Total assets $ 2,624,686 1,711,712
=========== =========

Liabilities and Stockholders' Equity

Liabilities:
Deposits $ 1,906,351 1,113,302
Short-term borrowings 121,803 90,005
Long-term borrowings 307,764 245,640
Other liabilities 44,228 30,149
----------- ---------
Total liabilities 2,380,146 1,479,096
----------- ---------

Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
none issued -- --
Common stock, $0.01 par value, 45,000,000 shares
authorized, 29,756,250 shares issued 298 298
Additional paid-in capital 135,776 135,964
Retained earnings 163,836 151,341
Accumulated other comprehensive income (loss) 336 (8,893)
Common stock held by ESOP (12,378) (13,076)
Treasury stock, at cost, 4,154,180 and 3,110,850 shares
in 2000 and 1999, respectively (43,328) (33,018)
----------- ---------

Total stockholders' equity 244,540 232,616
----------- ---------

Total liabilities and stockholders' equity $ 2,624,686 1,711,712
=========== =========

See accompanying notes to consolidated financial statements.

44

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2000, 1999 and 1998
(In thousands except per share amounts)

2000 1999 1998
-------- -------- --------

Interest income:
Real estate loans $ 85,213 57,669 47,860
Other loans 16,612 9,729 7,466
Investment securities 32,849 37,976 32,693
Federal funds sold and securities purchased
under resale agreements 771 1,104 3,344
Other 1,595 1,336 739
-------- -------- --------
Total interest income 137,040 107,814 92,102

Interest expense:
Deposits 56,272 42,393 44,034
Borrowings 20,590 14,667 3,932
-------- -------- --------
Total interest expense 76,862 57,060 47,966
-------- -------- --------
Net interest income 60,178 50,754 44,136
Provision for credit losses 2,258 2,466 2,084
-------- -------- --------
Net interest income after provision
for credit losses 57,920 48,288 42,052
-------- -------- --------
Noninterest income:
Banking service charges and fees 7,257 4,816 3,791
Lending and leasing income 3,105 1,684 1,736
Insurance services and fees 16,685 15,723 1,120
Bank-owned life insurance income 2,070 1,581 769
Annuity and mutual fund commissions 1,348 1,382 741
Investment and security gains 1,829 1,901 161
Investment and fiduciary services income 965 -- --
Other 831 601 864
-------- -------- --------
Total noninterest income 34,090 27,688 9,182
-------- -------- --------
Noninterest expense:
Salaries and employee benefits 34,224 27,708 15,900
Occupancy and equipment 5,735 4,506 3,388
Technology and communications 5,733 4,481 3,577
Marketing and advertising 2,603 1,893 1,543
Goodwill amortization 3,051 1,494 --
Other 10,172 7,561 11,538
-------- -------- --------
Total noninterest expense 61,518 47,643 35,946
-------- -------- --------
Income before income taxes 30,492 28,333 15,288
Income tax expense 10,973 9,893 4,906
-------- -------- --------
Net income $ 19,519 18,440 10,382
======== ======== ========
Earnings per common share (see note 12):
Basic $ 0.79 0.69 --
Diluted 0.79 0.69 --

Cash dividends per common share $ 0.28 0.14 --

Weighted average common shares outstanding:
Basic 24,847 26,744 --
Diluted 24,858 26,744 --

See accompanying notes to consolidated financial statements.

45

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years ended December 31, 2000, 1999 and 1998
(In thousands)

2000 1999 1998
------- ------- -------

Net income $19,519 18,440 10,382
------- ------- -------

Other comprehensive income (loss), net of income taxes:
Net unrealized gains (losses) on securities available
for sale arising during the year 9,433 (13,198) 2,138
Less: Reclassification adjustment for gains
included in net income 204 282 81
------- ------- -------

Total other comprehensive income (loss) 9,229 (13,480) 2,057
------- ------- -------

Total comprehensive income $28,748 4,960 12,439
======= ======= =======

See accompanying notes to consolidated financial statements.

46

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Years ended December 31, 2000, 1999 and 1998
(In thousands except share and per share amounts)

Accumulated Common
Additional other stock
Common paid-in Retained comprehensive held by Treasury
stock capital earnings income (loss) ESOP stock Total
-------- -------- -------- -------- -------- -------- --------

Balances at December 31, 1997 $ -- -- 127,941 2,530 -- -- 130,471

Net income -- -- 10,382 -- -- -- 10,382
Unrealized gain on securities available for
sale, net of taxes and reclassification
adjustment -- -- -- 2,057 -- -- 2,057
Issuance of common stock (29,351,204 shares) 298 132,092 -- -- -- -- 132,390
Charitable contribution of common stock to
First Niagara Bank Foundation
(405,046 shares) -- 4,051 -- -- -- -- 4,051
Common stock acquired by ESOP
(1,080,124 shares) -- -- -- -- (14,298) -- (14,298)
ESOP shares released
(39,406 shares) -- (29) -- -- 522 -- 493
Common stock dividends of $.03 per share -- -- (1,721) -- -- -- (1,721)
-------- -------- -------- -------- -------- -------- --------

Balances at December 31, 1998 $ 298 136,114 136,602 4,587 (13,776) -- 263,825

Net income -- -- 18,440 -- -- -- 18,440
Unrealized loss on securities available for
sale, net of taxes and reclassification
adjustment -- -- -- (13,480) -- -- (13,480)
Purchase of treasury stock
(3,110,850 shares) -- -- -- -- -- (33,018) (33,018)
ESOP shares released
(52,908 shares) -- (150) -- -- 700 -- 550
Common stock dividends of $.14 per share -- -- (3,701) -- -- -- (3,701)
-------- -------- -------- -------- -------- -------- --------

Balances at December 31, 1999 $ 298 135,964 151,341 (8,893) (13,076) (33,018) 232,616

Net income -- -- 19,519 -- -- -- 19,519
Unrealized gain on securities available for
sale, net of taxes and reclassification
adjustment -- -- -- 9,229 -- -- 9,229
Purchase of treasury stock
(1,098,300 shares) -- -- -- -- -- (10,871) (10,871)
ESOP shares released
(52,727 shares) -- (204) -- -- 698 -- 494
Vested restricted stock plan awards
(54,970 shares) -- 16 -- -- -- 561 577
Common stock dividends of $.28 per share -- -- (7,024) -- -- -- (7,024)
-------- -------- -------- -------- -------- -------- --------

Balances at December 31, 2000 $ 298 135,776 163,836 336 (12,378) (43,328) 244,540
======== ======== ======== ======== ======== ======== ========

See accompanying notes to consolidated financial statements.

47

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2000, 1999 and 1998
(In thousands)

2000 1999 1998
--------- --------- ---------

Cash flows from operating activities:
Net income $ 19,519 18,440 10,382
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization (accretion) of fees and discounts, net (271) 894 519
Depreciation of premises and equipment 3,665 3,139 2,482
Provision for credit losses 2,258 2,466 2,084
Amortization of goodwill 3,051 1,494 --
Net (increase) decrease in loans held for sale (1,751) (3,154) 4,132
Net (gain) loss on sale of securities available for sale 339 (478) (138)
ESOP compensation expense 494 550 493
Charitable contribution to First Niagara Bank Foundation -- -- 4,051
Deferred income taxes 420 (191) (2,380)
(Increase) decrease in other assets 8,589 (1,565) (1,350)
Increase (decrease) in other liabilities (4,120) (4,838) 7,385
--------- --------- ---------

Net cash provided by operating activities 32,193 16,757 27,660
--------- --------- ---------

Cash flows from investing activities:
Proceeds from sales of securities available for sale 135,556 67,212 5,266
Proceeds from maturities of securities:
Available for sale 32,595 35,040 26,212
Held to maturity -- -- 17,000
Principal payments received on securities available for sale 73,044 179,705 154,692
Purchases of securities available for sale (37,116) (301,078) (300,443)
Net increase in loans (152,589) (239,946) (114,570)
Purchase of bank-owned life insurance -- (10,000) (25,000)
Acquisitions, net of cash acquired (90,865) (11,260) --
Other, net (5,018) (14,816) (7,554)
--------- --------- ---------

Net cash used by investing activities (44,393) (295,143) (244,397)
--------- --------- ---------

Cash flows from financing activities:
Net increase in deposits 60,381 52,405 65,276
Proceeds from (repayments) of short-term borrowings (41,850) 84,427 (13,234)
Proceeds from long-term borrowings 42,900 109,060 122,509
Repayments of long-term borrowings (10,470) (439) (395)
Net proceeds from issuance of common stock -- -- 132,390
Purchase of common stock by ESOP -- -- (14,298)
Purchase of treasury stock (10,871) (31,820) --
Dividends paid on common stock (7,024) (4,561) (861)
--------- --------- ---------

Net cash provided by financing activities 33,066 209,072 291,387
--------- --------- ---------

Net increase (decrease) in cash and cash equivalents 20,866 (69,314) 74,650

Cash and cash equivalents at beginning of year 41,949 111,263 36,613
--------- --------- ---------

Cash and cash equivalents at end of year $ 62,815 41,949 111,263
========= ========= =========

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 9,661 16,013 3,554
Interest expense 75,886 55,317 49,589
========= ========= =========

Treasury stock purchases not settled $ -- 1,198 --
========= ========= =========

Acquisition of banks and financial services companies:
Fair value of:
Assets acquired (noncash) $ 872,460 2,889 --
Liabilities assumed 854,230 3,655 --
Purchase price payable 1,120 2,919 --
========= ========= =========

See accompanying notes to consolidated financial statements.

48

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

1) Summary of Significant Accounting Policies

First Niagara Financial Group, Inc. ("FNFG"), the holding company of First
Niagara Bank ("First Niagara"), Cortland Savings Bank ("Cortland") and
Cayuga Bank ("Cayuga"), is a Delaware incorporated bank holding company
organized in December 1997. FNFG and its consolidated subsidiaries are
hereinafter referred to collectively as "the Company." The Company
provides financial services to individuals and businesses in Western and
Central New York. The Company's business is primarily accepting deposits
from customers through its branch offices 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 loans, and investment
securities. Additionally, the Company offers insurance products and
services, as well as fiduciary and investment services.

The accounting and reporting policies of the Company conform to general
practices within the banking industry and to generally accepted accounting
principles. Certain reclassification adjustments were made to the 1999 and
1998 financial statements to conform them to the 2000 presentation. The
following is a description of the more significant accounting policies.

(a) Principles of Consolidation

The consolidated financial statements include the accounts of FNFG
and all of its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

(b) Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from
banks, federal funds generally sold for one day and securities
purchased under resale agreements generally sold within 90 days.

(c) Investment Securities

All debt and marketable equity securities are classified as
available for sale. The securities are carried at fair value, with
unrealized gains and losses, net of the related deferred income tax
effect, reported as a component of accumulated other comprehensive
income. Realized gains and losses are included in the consolidated
statement of income and are determined using the specific
identification method. A decline in the fair value of any available
for sale security below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new cost
basis. Premiums and discounts on investment securities are
amortized/accreted to interest income utilizing a method that
approximates the level-yield method.

49

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

(d) 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. Loans are
generally returned to accrual status when principal and interest
payments are current, full collectibility of principal and interest
is reasonably assured and a consistent record of performance,
generally six months, has been demonstrated.

Mortgage loans originated and intended for sale in the secondary
market are carried at the lower of aggregate cost or market value.
Net unrealized losses are recognized through a valuation allowance
by charges to earnings.

(e) 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
holding period.

(f) Allowance for Credit Losses

The allowance for credit losses is established through charges to
earnings. Management's determination of the amount 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 credit losses and may
require the Company to recognize additions to the allowance based on
their judgment of information available to them at the time of their
examination.

A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all
amounts of principal and interest under the original terms of the
agreement. Such loans are 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. The Company excludes smaller-balance
homogeneous loans that are collectively evaluated for impairment,
including one- to four-family residential mortgage loans, student
loans and consumer loans, other than those modified in a troubled
debt restructuring.

50

(g) 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.

(h) Goodwill

The excess of the cost of acquired entities over the fair value of
identifiable assets acquired less liabilities assumed is recorded as
goodwill. All of the Company's goodwill is being amortized on a
straight-line basis over a period of ten to twenty years. The
Company periodically assesses whether events or changes in
circumstances indicate that the carrying amount of goodwill may be
impaired. Impairment is measured using estimates of future
discounted cash flows or earnings potential of the acquired
entities.

(i) Employee Benefits

During 2000, the Company maintained a non-contributory, qualified,
defined benefit pension plan that covered substantially all
employees of First Niagara, excluding subsidiaries acquired in 1999
and 2000, who meet certain age and service requirements. 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 Company's policy is to fund the minimum amount
required by government regulations. Effective January 1, 2001
substantially all full time employees of the Company became eligible
to participate in the defined benefit pension plan.

The Company maintains various defined contribution plans and accrues
contributions due under these plans as earned by employees.

The Company also provides certain post-retirement benefits,
principally health care and group life insurance, to employees and
their beneficiaries and dependents. Expected cost of providing these
post-retirement benefits are accrued during an employee's active
years of service.

(j) Stock-Based Compensation

The Company maintains a fixed award stock option plan and a
restricted stock plan for certain officers, directors, key employees
and other persons providing services to the Company. The Company
applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in
accounting for its fixed award stock options. As such, compensation
expense is recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price.

Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed
under SFAS No. 123, the Company has elected to continue to apply the
intrinsic value-based method of accounting described above, and has
only adopted the disclosure requirements of SFAS No. 123.

51

Compensation expense equal to the market value of FNFG's stock on
the grant date is accrued ratably over the service period for shares
granted under the restricted stock plan.

(k) 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 periods 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 income tax expense.

(l) Earnings Per Share

Basic earnings per share ("EPS") is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the
earnings of the Company. EPS is only presented in these financial
statements for 2000 and 1999 since FNFG completed its initial public
offering of stock on April 17, 1998. See note 16 for further details
on FNFG's initial public offering.

(m) Investment and Fiduciary Services

Assets held in fiduciary or agency capacity for customers are not
included in the accompanying consolidated balance sheets, since such
assets are not assets of the Company. Fee income is recognized on
the accrual method based on the fair value of assets administered.

(n) New Accounting Standards

In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. In June 2000, SFAS No. 133 was amended by SFAS
No. 138 Accounting for Certain Derivative Instruments and Certain
Hedging Activities - An Amendment of FASB Statement No. 133. SFAS
No. 133 and SFAS No. 138 establish accounting and reporting
standards for derivative instruments, including certain derivatives
embedded in other contracts, and for hedging activities. These
statements require that an entity recognizes all derivatives as
either assets or liabilities in the statement of condition and
measures those instruments at fair value. Changes in the fair value
of the derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of
hedge transaction. SFAS No. 133 and SFAS No. 138 are effective for
all fiscal years beginning after June 15, 2000. As of January 1,
2001, the Company adopted SFAS No. 133 and SFAS No. 138, which did
not significantly impact the Company's financial condition or
results of operations. However, the Company anticipates that
adoption of SFAS No. 133 and SFAS No. 138 could increase the
volatility of reported earnings and/or stockholders' equity in
future periods.

In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 140, which replaces SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, revises the standards related to the accounting for
securitizations and other transfers of financial assets and
collateral. This statement requires certain disclosures, but carries
over most of the provisions of SFAS

52

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

No. 125 without consideration. SFAS No. 140 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities of the Company occurring after March 31, 2001. However,
the provisions of SFAS No. 140 concerning the recognition and
reclassification of collateral and disclosures relating to
securitization transactions and collateral were effective for the
Company for the year ended December 31, 2000. See note 8 for
disclosure of investment securities pledged under reverse repurchase
agreements. This statement is to be applied prospectively with
certain exceptions. Adoption of the remaining provisions of SFAS No.
140 is not expected to have a material impact on the Company's
financial statements as the Company generally does not enter into
the types of transactions covered by this pronouncement.

In March 2000, FASB Interpretation ("FIN") No. 44, Accounting for
Certain Transactions Involving Stock Compensation was issued. This
interpretation clarifies the application of certain issues of APB
Opinion No. 25, "Accounting for Stock Issued to Employees." FIN No.
44, which was effective July 1, 2000, did not have a material impact
on the Company's financial statements.

(o) Use of Estimates

Management of the Company 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.

(2) Acquisitions

On November 3, 2000, FNFG acquired all of the stock of Iroquois Bancorp,
Inc. ("Iroquois") and its wholly owned subsidiaries Cayuga Bank, of
Auburn, New York and The Homestead Savings FA, of Utica, New York. FNFG
paid $33.25 per share in cash for each of the outstanding shares and
options of Iroquois' common stock for an aggregate purchase price of
approximately $80.2 million. The transaction was accounted for under the
purchase method of accounting and accordingly, the excess of the purchase
price over the fair value of identifiable assets acquired, less
liabilities assumed, has been recorded as goodwill. Approximately, $43.8
million of such goodwill is being amortized on a straight-line basis over
twenty years. Upon closing of the transaction, FNFG merged the branches of
Homestead Savings into Cayuga's branch network, which is being operated as
a wholly owned subsidiary of FNFG.

On July 7, 2000, FNFG acquired all of the common stock of CNY Financial
Corporation ("CNY") and its subsidiary bank, Cortland. FNFG paid $18.75
per share in cash for each of the outstanding shares and options of CNY
common stock for an aggregate purchase price of $86.3 million. This
acquisition has been accounted for as a purchase transaction and
accordingly, approximately $17.0 million of goodwill has been recorded and
is being amortized on a straight-line basis over twenty years. Cortland is
being operated as a wholly owned subsidiary of FNFG.

On May 31, 2000, First Niagara completed the acquisition of all of the
common stock of Niagara Investment Advisors, Inc. ("NIA"), an investment
advisory services firm. The acquisition has been accounted for as a
purchase transaction and accordingly, approximately $2.8 million of
goodwill has been recorded and is being amortized on a straight-line basis
over ten years. The acquired company operates as a wholly owned subsidiary
of First Niagara.

53

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

On March 24, 2000, FNFG acquired all of the common stock of Albion Banc
Corp, Inc. ("Albion"). FNFG paid $15.75 per share in cash resulting in an
aggregate purchase price of approximately $11.9 million and merged
Albion's subsidiary bank, Albion Federal Savings and Loan Association, and
its two branch locations into First Niagara's branch network. The
transaction has been accounted for as a purchase transaction and
accordingly, approximately $7.6 million of goodwill has been recorded and
is being amortized on a straight-line basis over a period of fifteen
years.

On January 1, 2000, First Niagara acquired all of the common stock of
Empire National Leasing, Inc. and its affiliate ("ENL"), nationwide
providers of equipment lease financing. The acquisition has been accounted
for as a purchase transaction and accordingly, approximately $3.5 million
of goodwill has been recorded and is being amortized on a straight-line
basis over a period of fifteen years. The acquired companies operate as
wholly-owned subsidiaries of First Niagara.

Presented below is certain unaudited pro forma information as if the
Albion, CNY, and Iroquois acquisitions, which occurred in 2000, had all
been consummated on January 1, 1999. This pro forma information gives
effect to certain adjustments, including accounting adjustments related to
fair value adjustments, amortization of goodwill and related income tax
effects. The pro forma information does not necessarily reflect the
results of operations that would have occurred had the Company acquired
these entities on January 1, 1999. The effect of ENL and NIA, were not
deemed material, and therefore, have not been included in this pro forma
information.

Pro Forma (Unaudited)
Year ended December 31,
-----------------------
2000 1999
------- -------
(In thousands except
per share amounts)

Net interest income $76,202 77,364
------- -------

Noninterest income $38,104 33,648
------- -------

Net income $19,490 18,590
======= =======

Basic/diluted earnings
per share $ .78 .70
======= =======

54

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

(3) Securities Available for Sale

The amortized cost, unrealized gains and losses and approximate fair value
of securities available for sale at December 31, 2000 are summarized as
follows (in thousands):

Amortized Unrealized Unrealized Fair
cost gains losses value
-------- -------- -------- --------

Debt securities:
U.S. Treasury $ 37,970 251 (5) 38,216
U.S. government agencies 56,379 585 (36) 56,928
Corporate 8,209 20 (36) 8,193
States and political subdivisions 23,548 427 (27) 23,948
-------- -------- -------- --------

126,106 1,283 (104) 127,285
-------- -------- -------- --------

Mortgage-backed securities:
Collateralized mortgage obligations 215,181 177 (5,013) 210,345
Freddie Mac 48,891 741 (106) 49,526
Government National Mortgage
Association 22,645 385 (14) 23,016
Federal National Mortgage Association 18,668 781 (2) 19,447
-------- -------- -------- --------

305,385 2,084 (5,135) 302,334
-------- -------- -------- --------

Asset-backed securities:
Non-U.S. government agencies 35,684 288 (83) 35,889
U.S. government agencies 6,099 19 -- 6,118
-------- -------- -------- --------

41,783 307 (83) 42,007
-------- -------- -------- --------

Equity securities - common stock 23,547 6,447 (4,230) 25,764
Other 4,453 -- (9) 4,444
-------- -------- -------- --------
$501,274 10,121 (9,561) 501,834
======== ======== ======== ========

Scheduled contractual maturities of debt securities, at December 31, 2000
are as follows (in thousands):

Amortized Fair
cost value
-------- --------

Within one year $ 48,183 48,265
After one year through five years 59,073 59,836
After five years through ten years 11,682 11,944
After ten years 7,168 7,240
-------- --------
126,106 127,285

Mortgage-backed securities 305,385 302,334
Asset-backed securities 41,783 42,007
-------- --------
$473,274 471,626
======== ========

55

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

The contractual maturities of mortgage and asset-backed securities
available for sale generally exceed ten years. However, the effective
lives are expected to be shorter due to anticipated prepayments.

The amortized cost, unrealized gains and losses and approximate fair value
of securities available for sale at December 31, 1999 are summarized as
follows (in thousands):

Amortized Unrealized Unrealized Fair
cost gains losses value
-------- -------- -------- --------

Debt securities:
U.S. Treasury $ 47,446 61 (101) 47,406
U.S. government agencies 14,976 -- (237) 14,739
Corporate 6,985 17 (6) 6,996
States and political subdivisions 2,449 70 (183) 2,336
-------- -------- -------- --------

71,856 148 (527) 71,477
-------- -------- -------- --------

Mortgage-backed securities:
Collateralized mortgage obligations 306,339 -- (15,706) 290,633
Freddie Mac 66,930 52 (1,683) 65,299
Government National Mortgage
Association 15,246 204 (127) 15,323
Federal National Mortgage Association 13,379 -- (305) 13,074
-------- -------- -------- --------

401,894 256 (17,821) 384,329
-------- -------- -------- --------

Asset-backed securities:
Non-U.S. government agencies 80,271 -- (1,608) 78,663
U.S. government agencies 5,497 -- (27) 5,470
-------- -------- -------- --------

85,768 -- (1,635) 84,133
-------- -------- -------- --------

Equity securities - common stock 19,028 6,486 (1,980) 23,534
-------- -------- -------- --------

$578,546 6,890 (21,963) 563,473
======== ======== ======== ========

Gross realized gains and losses on sales of securities available for sale
are summarized as follows (in thousands):

2000 1999 1998
------- ------- -------

Gross realized gains $ 1,295 2,157 138
Gross realized losses (1,634) (1,679) --
------- ------- -------

Net realized gains (losses) $ (339) 478 138
======= ======= =======

At December 31, 2000, $209.0 million of securities were pledged to secure
borrowings from the Federal Home Loan Bank, repurchase agreements,
municipal deposits and interest rate swap agreements.

56

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

(4) Loans

Loans receivable at December 31, 2000 and 1999 consist of the following
(in thousands):

2000 1999
----------- -----------
Real estate:
Residential conventional $ 1,089,607 609,742
Home equity 104,254 22,499
Commercial and multi-family 329,427 195,410
Construction:
Commercial 29,195 22,131
Residential 5,864 6,282
----------- -----------

Total real estate loans 1,558,347 856,064

Consumer installment 188,129 110,233
Commercial business 93,730 24,301
----------- -----------
Total loans 1,840,206 990,598

Net deferred costs and unearned discounts 714 4,892
Allowance for credit losses (17,746) (9,862)
----------- -----------

Loans, net $ 1,823,174 985,628
=========== ===========

Included in commercial business loans are approximately $10.7 million and
$5.7 million of direct financing leases at December 31, 2000 and 1999,
respectively. Under direct financing leases, the Company leases equipment
to small businesses with terms ranging from two to five years. Income on
direct financing leases is recognized by a method that produces a constant
periodic rate of return on the outstanding investment in the lease. During
2000, approximately $13.4 million of equipment leases were originated by
the Company, of which approximately $8.0 million were sold to third party
brokers. The remainder of the leases originated were retained by the
Company.

Non-accrual loans amounted to $6,483,000, $1,929,000 and $3,296,000 at
December 31, 2000, 1999, and 1998, respectively, representing 0.35%, 0.19%
and 0.43% of total loans. Interest income that would have been recorded if
the loans had been performing in accordance with their original terms
amounted to $273,000, $161,000 and $286,000 in 2000, 1999 and 1998,
respectively. Residential real estate owned at December 31, 2000 and 1999
was $757,000 and $1.1 million, respectively.

Residential mortgage loans held for sale were $4.9 million at December 31,
2000 and $3.2 million at December 31, 1999 and are included in the table
above. Mortgages serviced for others by the Company amounted to $190.1
million and $124.6 million at December 31, 2000 and 1999, respectively.
Mortgage loans sold amounted to $56.3 million, $28.6 million and $52.2
million for the years ending December 31, 2000, 1999, and 1998,
respectively.

57

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

At December 31, 2000, the Company had outstanding commitments to originate
loans of approximately $155.7 million with $27.0 million at fixed rates
and $128.7 million at variable rates. Commitments to sell residential
mortgages amounted to $10.3 million and $1.9 million at December 31, 2000
and 1999, respectively.

Changes in the allowance for credit losses in 2000, 1999 and 1998 were as
follows (in thousands):

2000 1999 1998
-------- -------- --------

Balance, beginning of year $ 9,862 8,010 6,921
Provision for credit losses 2,258 2,466 2,084
Allowance obtained through
acquisitions 6,361 -- --
Charge-offs (1,072) (735) (1,252)
Recoveries 337 121 257
-------- -------- --------

Balance, end of year $ 17,746 9,862 8,010
======== ======== ========

Virtually all of the Company's mortgage and consumer loans are to
customers located in Upstate New York. Accordingly, the ultimate
collectibility of the Company's loan portfolio is susceptible to changes
in market conditions in this market area.

(5) Premises and Equipment

A summary of premises and equipment at December 31, 2000 and 1999 follows
(in thousands):

2000 1999
------- -------

Land $ 3,531 1,049
Buildings and improvements 29,421 19,861
Furniture and equipment 27,698 21,867
Property under capital leases 1,365 1,365
------- -------

62,015 44,142
Less accumulated depreciation and
amortization 21,921 18,256
------- -------

Premises and equipment, net $40,094 25,886
======= =======

Future minimum rental commitments for premises and equipment under
noncancellable operating leases at December 31, 2000 were $1.5 million in
2001; $1.3 million in 2002 and 2003; $1.2 million in 2004; $1.1 million in
2005 and $8.2 million in years thereafter through 2021. Real estate taxes,
insurance and maintenance expenses related to these leases are obligations
of the Company. Rent expense was $1.3 million, $1.1 million, and $597,000
in 2000, 1999, and 1998, respectively, and is included in occupancy and
equipment expense.

58

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

(6) Other Assets

A summary of other assets at December 31, 2000 and 1999 follows (in
thousands):

2000 1999
-------- --------

Bank owned life insurance $ 44,848 37,349
Federal Home Loan Bank stock 24,668 16,595
Net deferred tax assets 11,665 10,589
Accrued interest receivable 13,445 7,677
Other receivables and prepaid assets 6,947 2,054
Other 10,241 7,062
-------- --------

$111,814 81,326
======== ========

(7) Deposits

Deposits consist of the following at December 31, 2000 and 1999 (in
thousands):

2000 1999
---------------------------- -----------------------------
Weighted Weighted
Average Average
Balance Rate Balance Rate
---------- -------- ---------- ---------

Savings accounts $ 417,643 2.63% $ 295,511 3.00%

Certificates maturing:
Within one year 668,094 5.87 329,058 5.02
After one year, through two years 136,219 6.06 81,727 5.14
After two years, through
three years 19,652 5.63 9,509 5.27
After three years, through
four years 10,304 5.86 1,826 5.20
After four years, through
five years 7,433 6.35 1,753 6.04
After five years 2,847 5.33 3,307 5.25
---------- ----------

844,549 5.90 427,180 5.06
---------- ----------
Checking accounts:
Non-interest bearing 86,235 -- 35,149 --
Interest-bearing:
NOW accounts 173,319 0.98 89,658 1.50
Money market accounts 365,836 5.07 254,050 4.63
---------- ----------

625,390 378,857
---------- ----------
Mortgagors' payments held in
escrow 18,769 2.00 11,754 2.00
---------- ----------

$1,906,351 4.27% $1,113,302 3.94%
========== ==========

59

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

Interest rates on certificates of deposit generally range from 4.11% to
7.75% at December 31, 2000. Interest expense on deposits in 2000, 1999 and
1998 is summarized as follows (in thousands):

2000 1999 1998
------- ------- -------

Certificates of deposit $30,593 22,193 27,447
Money market accounts 14,848 9,726 5,863
Savings accounts 9,380 9,097 9,575
NOW accounts 1,190 1,183 984
Mortgagors' payments
held in escrow 261 194 165
------- ------- -------
$56,272 42,393 44,034
======= ======= =======

Certificates of deposit issued in amounts over $100,000 amounted to $162.4
million, $63.0 million and $80.5 million at December 31, 2000, 1999 and
1998, respectively. Interest expense thereon approximated $4.8 million,
$3.3 million and $4.9 million in 2000, 1999 and 1998, respectively.

The carrying value of investment securities pledged as collateral for
municipal deposits at December 31, 2000 was $65.6 million. There were no
municipal deposits at December 31, 1999.

As of December 31, 2000, the Company had outstanding interest rate swap
agreements with third parties with notional amounts totaling $50.0
million. Under these agreements, the Company pays an annual fixed rate
ranging from 5.97% to 7.10% and receives a floating three-month U.S.
dollar LIBOR rate. The Company entered into these transactions to manage
the interest rate risk related to the repricing of its money market
accounts. During 2000 and 1999, $94,000 and ($21,000) of interest income
(expense) relating to these swaps was reflected in money market account
interest, respectively. These swaps had an unrealized loss of $309,000 at
December 31, 2000.

(8) Other Borrowed Funds

Information relating to outstanding borrowings at December 31, 2000 and
1999 is summarized as follows (in thousands):

2000 1999
-------- --------
Short-term borrowings:
Current portion of long-term FHLB advances $ 95,060 51,005
Reverse repurchase agreements 10,743 39,000
Loan payable to First Niagara
Financial Group, MHC 6,000 --
Commercial bank loan 10,000 --
-------- --------

$121,803 90,005
======== ========
Long-term borrowings:
Long-term FHLB advances, excluding current
portion $199,816 173,692
Reverse repurchase agreements 107,948 71,948
-------- --------

$307,764 245,640
======== ========

60

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

FHLB advances bear fixed interest rates ranging from 4.91% to 7.71% at
December 31, 2000. Reverse repurchase agreements bear fixed interest rates
ranging from 3.94% to 6.75% at December 31, 2000.

In order to fund the Cayuga acquisition, FNFG borrowed $6.0 million from
First Niagara Financial Group, MHC ("the MHC"), the majority shareholder
of FNFG, and $10.0 million from a commercial bank. The MHC loan is payable
on November 3, 2001 and bears an interest rate equal to the prime rate.
The commercial bank loan ("the loan") is payable in quarterly installments
commencing on February 2, 2001 and ending on November 2, 2001. The loan
bears an interest rate equal to the LIBOR rate plus 150 basis points that
resets every 30, 60 or 90 days based upon FNFG's election. As part of the
loan agreement, FNFG pledged 1,000 shares of Cortland's common stock and
10,000,000 shares of Cayuga's common stock. At December 31, 2000, FNFG is
in compliance with all covenants of the loan agreement.

Interest expense on borrowings in 2000, 1999 and 1998 is summarized as
follows (in thousands):

2000 1999 1998
------- ------- -------

FHLB and FRB advances $13,099 9,514 1,274
Reverse repurchase agreements 7,253 5,153 2,658
Loan payable to First Niagara
Financial Group, MHC 90 -- --
Commercial bank loan 148 -- --
------- ------- -------

$20,590 14,667 3,932
======= ======= =======

The Company has a line of credit with the Federal Home Loan Bank (FHLB)
and Federal Reserve Bank (FRB), that provide a secondary funding source
for lending, liquidity, and asset/liability management. At December 31,
2000, the FHLB line of credit totaled $653.0 million, under which $295.0
million was utilized. The FRB line of credit totaled $11.1 million, under
which there were no borrowings outstanding as of December 31, 2000. The
Company is required to pledge loans or investment securities as collateral
for these borrowing facilities. Approximately $324.0 million of
residential mortgage and multifamily loans were pledged to secure the
amount outstanding under the FHLB line of credit at December 31, 2000.

The Company pledged to the FHLB and to broker-dealers, available for sale
securities with a carrying value of $141.0 million as collateral under
reverse repurchase agreements at December 31, 2000. These are treated as
financing transactions and the obligations to repurchase are reflected as
a liability in the consolidated financial statements. The dollar amount of
securities underlying the agreements are included in securities available
for sale in the consolidated statements of condition. However, the
securities are delivered to the dealer with whom each transaction is
executed. The dealers may sell, loan or otherwise dispose of such
securities to other parties in the normal course of their business, but
agree to resell to the Company the same securities at the maturities of
the agreements. The Company also retains the right of substitution of
collateral throughout the terms of the agreements.

61

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

The aggregate maturities of long-term borrowings at December 31, 2000 are
as follows (in thousands):

2002 $ 49,861
2003 36,692
2004 26,305
2005 55,877
Thereafter 139,029
----------

$ 307,764
==========

(9) Capital

FNFG and each of its banking subsidiaries are subject to various
regulatory capital requirements administered by 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 Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, FNFG and each of its banking
subsidiaries must meet specific guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require FNFG and each of its banking subsidiaries to maintain minimum
amounts and ratios of total and Tier 1 capital to risk-weighted assets and
Tier 1 capital to average assets (leverage ratio), of 8.0%, 4.0% and 3.0%,
respectively. As of December 31, 2000, FNFG and each of its banking
subsidiaries meet all minimum capital adequacy requirements to which it is
subject.

The most recent notification from the Federal Deposit Insurance
Corporation categorized FNFG and each of its banking subsidiaries as well
capitalized under the regulatory framework for prompt corrective action.
In order to be considered well capitalized FNFG and each of its banking
subsidiaries must maintain total and Tier 1 capital to risk-weighted
assets and leverage ratios of 10.0%, 6.0% and 5.0%, respectively.
Management is unaware of any conditions or events since the latest
notifications from federal regulators that have changed the capital
adequacy category of FNFG, Cayuga or First Niagara. Cortland was
classified as "adequately capitalized" at December 31, 2000, as its total
risk-based capital ratio of 9.91%, was below the 10.0% required to be
considered "well capitalized."

62

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

The actual capital amounts and ratios for FNFG and its significant banking
subsidiaries are presented in the following table (in thousands):

First Niagara
Financial First
Group, Inc. Niagara Cayuga Cortland
----------- ------- ------ --------
As of December 31, 2000
Total capital
Amount $178,183 117,965 40,419 15,708
Ratio 11.13% 10.93% 11.36% 9.91%
Minimum Required 128,065 86,374 28,463 12,678

Tier 1 capital
Amount 159,439 105,173 36,663 13,722
Ratio 9.96% 9.74% 10.31% 8.66%
Minimum Required 64,032 43,187 14,231 6,339

Leverage
Amount 159,439 105,173 36,663 13,722
Ratio 6.78% 6.15% 6.20% 5.84%
Minimum Required 70,542 51,340 17,746 7,047

As of December 31, 1999
Total capital
Amount $239,992 197,263 -- --
Ratio 23.56% 19.61% -- --
Minimum Required 81,483 80,493 -- --

Tier 1 capital
Amount 228,102 185,297 -- --
Ratio 22.40% 18.42% -- --
Minimum Required 40,741 40,247 -- --

Leverage
Amount 228,102 185,297 -- --
Ratio 13.51% 11.19% -- --
Minimum Required 50,634 49,677 -- --

During 2000 and 1999, FNFG received authorization from its Board of
Directors and bank regulatory agencies to repurchase up to 4,848,160
shares of its common stock outstanding. During 2000 and 1999, FNFG
purchased 1,098,300 and 3,110,850 shares at an average cost of $9.90 and
$10.61 per share, respectively.

63

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

(10) Stock Based Compensation

The Company has a stock option plan pursuant to which options may be
granted to officers, directors and key employees. The plan authorizes
grants of options to purchase up to 1,390,660 shares of authorized but
unissued common stock. Stock options are granted with an exercise price
equal to the stock's market value at the date of grant. All options have a
10-year term and become fully vested and exercisable over 5 years from the
grant date.

At December 31, 2000, there were 1,238,500 shares granted and 152,160
additional shares available for grant under the plan. The per share
weighted-average fair value of stock options granted during 2000 and 1999
were $7.20 and $4.28 on the date of grant, respectively, using the Black
Scholes option-pricing model. The following weighted-average assumptions
were utilized: 2000 and 1999 expected dividend yield of 3.13% and 1.86%,
risk-free interest rate of 6.44% and 5.58%, expected life of 7.5 years for
both years, and expected volatility of 14.42% and 35.3%, respectively. The
Company also deducted 10% in each year to reflect an estimate of the
probability of forfeiture prior to vesting.

The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on fair value at the grant date for the stock
options under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below. These amounts may not be
representative of the effects on reported net income for future years due
to changes in market conditions and the amount of options outstanding (in
thousands except per share amounts):

2000 1999
---------- ----------

Net income As reported $ 19,519 18,440
Pro forma 18,906 18,209

Basic and
diluted EPS As reported $ 0.79 0.69
Pro forma 0.76 0.68

Stock option activity is as follows:

Number of Weighted average
shares exercise price
---------- ----------------
Balance at January 1, 1999 -- $ --

Granted 789,750 10.75
Exercised -- --
Forfeited 6,500 10.75
Expired -- --
---------- ----------
Balance at December 31, 1999 783,250 10.75

Granted 471,500 9.07
Exercised -- --
Forfeited 16,250 10.08
Expired -- --
---------- ----------
Balance at December 31, 2000 1,238,500 $ 10.12
========== ==========

64

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

At December 31, 2000, options outstanding had exercise prices ranging from
$9.03 to $10.75. Of the options outstanding, 223,180 shares were
exercisable at a weighted average exercise price of $10.56. There were no
options exercisable at December 31, 1999. The weighted average remaining
contractual life for options outstanding at December 31, 2000 and 1999
were 8.8 and 9.4 years, respectively.

During 1999, the Company allocated 556,264 shares for issuance under the
Restricted Stock Plan. The plan grants shares of FNFG's stock to executive
management and members of the Board of Directors. The restricted stock
generally becomes fully vested over 5 years from the grant date.
Compensation expense equal to the market value of FNFG's stock on the
grant date is accrued ratably over the service period for shares granted.

Shares granted under the Restricted Stock Plan in 2000 and 1999 totaled
139,250 and 179,500, respectively, and had a weighted average market value
on the date of grant of $9.06 and $10.75, respectively. Compensation
expense related to this plan amounted to $663,000 and $248,000 in 2000 and
1999, respectively. Shares outstanding as of December 31, 2000 are due to
vest as follows: 59,400 shares in 2001 through 2004 and 26,180 shares in
2005.

(11) Income Taxes

Total income taxes in 2000, 1999 and 1998 were allocated as follows (in
thousands):

2000 1999 1998
------- ------- -------

Income from operations $10,973 $ 9,893 4,906
Stockholders' equity, for
change in unrealized
gain (loss) on securities
available for sale 6,404 (9,367) 1,429
======= ======= =======

The components of income taxes attributable to income from operations in
2000, 1999 and 1998 are as follows (in thousands):

2000 1999 1998
-------- -------- --------
Current:
Federal $ 10,207 9,430 6,936
State 346 654 350
-------- -------- --------

10,553 10,084 7,286
-------- -------- --------
Deferred:
Federal 166 (330) (2,120)
State 254 139 (260)
-------- -------- --------

420 (191) (2,380)
-------- -------- --------

$ 10,973 9,893 4,906
======== ======== ========

65

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

Income tax expense attributable to income from operations in 2000, 1999
and 1998 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):

2000 1999 1998
------- -------- --------

Expected tax expense $10,672 9,917 5,351
Increase (decrease) attributable to:
State income taxes, net of
Federal benefit and deferred
state tax 479 564 (34)
Bank-owned life
insurance income (724) (553) (269)
Goodwill amortization 1,016 523 --
Dividends received deduction (79) (65) (59)
Decrease in valuation allowance for
deferred tax assets (542) (552) --
Other 151 59 (83)
------- -------- --------
$10,973 9,893 4,906
======= ======== ========

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 are presented below (in thousands):

2000 1999
-------- --------

Deferred tax assets:
Unrealized loss on securities available for sale $ -- 6,180
Financial reporting allowance for credit losses 7,081 4,043
Net purchase discount on acquired companies 2,290 --
Charitable contributions 14 739
Deferred compensation 2,164 1,047
Post-retirement benefit obligation 1,454 817
Losses on investments in affiliates 521 502
Branch purchase intangible 863 --
Other 729 416
-------- --------
Total gross deferred tax assets 15,116 13,744
Valuation allowance (292) (834)
-------- --------
Net deferred tax assets 14,824 12,910
-------- --------
Deferred tax liabilities:
Tax allowance for credit losses, in excess
of base year amount (1,155) (1,341)
Unrealized gain on securities available for sale (224) --
Excess of tax depreciation over financial reporting
depreciation (499) (331)
Prepaid pension costs (123) (164)
Gains on securities held for sale (813) (349)
Other (345) (136)
-------- --------
Total gross deferred tax liabilities (3,159) (2,321)
-------- --------
Net deferred tax asset $ 11,665 10,589
======== ========

66

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

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 Company will realize the benefits of these
deductible differences, net of the existing valuation allowance, at
December 31, 2000.

(12) Earnings Per Share

The computation of basic and diluted earnings per share for the years
ended December 31, 2000 and 1999 are as follows (in thousands except per
share amounts):

2000 1999
-------- --------

Net income available to common shareholders $ 19,519 18,440

Weighted average shares outstanding, basic and diluted:
Total shares issued 29,756 29,756
Unallocated ESOP shares (988) (1,040)
ESOP shares committed to be released 20 20
Treasury shares (3,965) (1,992)
Vested restricted stock awards 24 --
-------- --------

Total basic weighted average shares outstanding 24,847 26,744
-------- --------

Incremental shares from assumed conversion
of stock options 9 --
Incremental shares from assumed conversion
of restricted stock awards 2 --
-------- --------

Total diluted weighted average shares outstanding 24,858 26,744
-------- --------

Basic earnings per share $ 0.79 0.69
======== ========

Diluted earnings per share $ 0.79 0.69
======== ========

67

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

(13) Benefit Plans

Pension Plan

The reconciliation of the change in the projected benefit obligation, the
fair value of plan assets and the funded status of the Company's pension
plan as of December 31, 2000 and 1999 are as follows (in thousands):

2000 1999
-------- --------
Change in projected benefit obligation:
Projected benefit obligation at beginning
of year $ 7,967 8,307
Service cost 408 413
Interest cost 621 554
Actuarial gain (357) (1,023)
Benefits paid (300) (284)
-------- --------

Projected benefit obligation at end of year 8,339 7,967
-------- --------

Change in fair value of plan assets:
Fair value of plan assets at beginning
of year 10,284 8,959
Actual return on plan assets 1,769 1,609
Benefits paid (300) (284)
-------- --------

Fair value of plan assets at end of year 11,753 10,284
-------- --------

Funded status:
Plan assets in excess of projected
benefit obligation at end of year 3,414 2,317
Unrecognized net gain (3,249) (2,062)
Prior service cost not yet recognized in
net periodic pension costs -- 2
-------- --------

Prepaid pension costs, included in other assets $ 165 257
======== ========

Net pension cost in 2000, 1999, and 1998 is comprised of the following (in
thousands):

2000 1999 1998
----- ----- -----

Service cost, benefits earned during the year $ 408 413 400
Interest cost on projected benefit
obligation 621 554 488
Expected return on plan assets (862) (706) (725)
Net amortization and deferral (75) 4 (129)
----- ----- -----

Net periodic pension cost $ 92 265 34
===== ===== =====

68

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

The principal actuarial assumptions used in 2000, 1999 and 1998 were as
follows:

2000 1999 1998
---- ---- ----
Discount rate 8.00% 7.75% 6.50%
Expected long-term rate of return on assets 9.00% 8.00% 8.00%
Assumed rate of future
compensation increase 5.00% 5.50% 4.50%
==== ==== ====

The plan assets are in mutual funds consisting primarily of listed stocks
and bonds, government securities and cash equivalents.

Other Post-retirement Benefits

The Company maintains various post-retirement health care and life
insurance plans, which cover substantially all full-time employees and
their beneficiaries (and dependents) that meet certain age and service
requirements. A reconciliation of the change in the benefit obligation and
the accrued benefit cost of the Company's accumulated post-retirement
benefit obligation under its various plans as of December 31, 2000 and
1999 are as follows (in thousands):

2000 1999
------- -------
Change in accumulated post-retirement
benefit obligation:
Accumulated post-retirement benefit
obligation at beginning of year $ 1,885 1,968
Service cost 95 126
Interest cost 140 126
Plan participants contributions -- 5
Actuarial gain (291) (274)
Benefits paid (86) (66)
Benefit obligation acquired 1,513 --
------- -------
Accumulated post-retirement benefit obligation at
end of year $ 3,256 1,885
======= =======
Accrued post-retirement benefit cost:
Accrued post-retirement benefit cost
at end of year $ 3,256 1,885
Unrecognized net actuarial loss 388 109
------- -------
Accrued post-retirement benefit cost
at end of year, included in other liabilities $ 3,644 1,994
======= =======

The components of net periodic post-retirement benefit cost for the years
ended December 31, 2000, 1999 and 1998 are as follows (in thousands):

2000 1999 1998
----- ----- -----
Service cost $ 95 126 90
Interest cost 140 126 114
Net amortization and deferral (12) -- --
----- ----- -----

Total cost $ 223 252 204
===== ===== =====

69

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

The post-retirement benefit obligation was determined using a discount
rate of 8.00% for 2000 and 7.75% for 1999. The assumed health care cost
trend rate used in measuring the accumulated post-retirement benefit
obligation was 6.5% for 2001, and gradually decreased to 5.0% in the year
2004 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, 2000 would have increased by 4.5% and the aggregate of service and
interest cost would increase by 14.6%. If the health care cost trend rate
were decreased one percent, the accumulated post-retirement benefit
obligation as of December 31, 2000 would have decreased by 3.9% and the
aggregate of service and interest cost would have decreased by 10.9%.

Effective January 19, 2001, the Company has modified all of its
post-retirement health care and life insurance plans so that participation
in the plans will be closed to those employees who do not meet the
retirement eligibility requirements on December 31, 2001.

401(k) Plan

Substantially all employees are eligible to participate in Company
sponsored 401(k) plans. As a result of the Company's acquisitions, various
plans were in effect during 2000. The Company's contribution to these
plans amounted to $524,000, $421,000 and $254,000 in 2000, 1999 and 1998,
respectively. During 2001 the Company plans to merge the assets of its
various 401(k) plans into one plan. Substantially all employees are
eligible to participate in this plan as of January 1, 2001. Under the new
plan participants may make contributions, in the form of salary
reductions, up to 15% of their eligible compensation subject to the
Internal Revenue Code limit. The Company contributes an amount to the plan
equal to 75% of the employee contributions up to a maximum of 6% of the
employee's eligible compensation.

Employee Stock Ownership Plan

The Company's ESOP plan is accounted for in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
All First Niagara employees with one year of service, who work at least
1,000 hours per year and who have attained the age of 21, are eligible to
participate. The ESOP holds 1,080,124 shares of FNFG common stock with
549,954 shares purchased in the 1998 initial public offering and 530,530
shares purchased in the open market. The purchased shares were funded by a
loan from FNFG payable in equal quarterly installments over 30 years
bearing an interest rate that is adjustable with the prime rate. Loan
payments are funded by cash contributions from First Niagara and dividends
on FNFG stock held by the ESOP. The loan can be prepaid without penalty.
Shares purchased by the ESOP are maintained in a suspense account and held
for allocation among the participants. As quarterly loan payments are
made, shares are committed to be released and subsequently allocated to
employee accounts at each calendar year end. Compensation expense is
recognized in an amount equal to the average market price of the committed
to be released shares during the respective quarterly period. Compensation
expense of $494,000, $550,000 and $493,000 was recognized for the years
ended December 31, 2000, 1999 and 1998, respectively, in connection with
the 52,727, 52,908 and 39,406 shares allocated to participants during each
year. Effective January 1, 2001 substantially all full time employees of
the Company became eligible to participate in the ESOP plan.

70

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

Other Plans

The Company also sponsors various non-qualified compensation plans for
officers and employees. Awards are payable if certain earnings and
performance objectives are met. Awards under these plans were $1,251,000,
$1,540,000 and $1,181,000 in 2000, 1999 and 1998, respectively. The
Company also maintains supplemental benefit plans for certain executive
officers.

(14) Fair Value of Financial Instruments

The carrying value and estimated fair value of the Company's financial
instruments are as follows (in thousands):

Carrying Estimated fair
value value
---------- --------------
December 31, 2000:
Financial assets:
Cash and cash equivalents $ 62,815 62,815
Securities available for sale 501,834 501,834
Loans 1,823,174 1,821,540
Other assets 82,961 83,058

Financial liabilities:
Deposits $1,906,351 1,905,445
Borrowings 429,567 431,201
Other liabilities 3,727 3,727

Unrecognized financial instruments:
Interest rate swaps $ -- (309)

December 31, 1999:
Financial assets:
Cash and cash equivalents $ 41,949 41,949
Securities available for sale 563,473 563,473
Loans 985,628 960,479
Other assets 61,621 61,475

Financial liabilities:
Deposits $1,113,302 1,113,140
Borrowings 335,645 326,155
Other liabilities 2,751 2,751

Unrecognized financial instruments:
Interest rate swaps $ -- 278

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.

71

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

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
have original maturities of 90 days or less.

Securities

The carrying value and fair value are estimated based on quoted market
prices. See note 3 for the amortized cost of securities available for
sale.

Loans

Residential revolving home equity and personal and commercial open ended
lines of credit reprice as the prime rate changes. Therefore, the carrying
value of such loans approximates their fair value.

The fair value of fixed-rate performing loans is calculated by discounting
scheduled cash flows through estimated maturity using current origination
rates. The estimate of maturity is based on the contractual cash flows
adjusted for prepayment estimates based on current economic and lending
conditions. Fair value for significant nonaccruing 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. 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.

Borrowings

The fair value of borrowings is calculated by discounting scheduled cash
flows through the estimated maturity using current market rates.

Other Assets and Liabilities

The fair value of accrued interest receivable on loans and investments and
accrued interest payable on deposits and borrowings approximates the
carrying value because all interest is receivable or payable in 90 to 120
days. The fair value of bank-owned life insurance is calculated by
discounting scheduled cash flows through the estimated maturity using
current market rates. FHLB stock carrying value approximates fair value.

Interest Rate Swaps

The fair value of interest rate swaps is calculated by discounting
expected future cash flows through maturity using current market rates.

72

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

Off-Balance Sheet Commitments. The fair value of commitments to extend
credit, standby letters of credit and financial guarantees are not
included in the above table. These instruments generate fees that
approximate those currently charged to originate similar commitments.

(15) Segment Information

Based on the "Management Approach" model, the Company has determined that
it has two primary business segments, its banking activities and its
insurance activities. For the year ended December 31, 1999, the Company's
insurance activities consisted of those conducted through WHA and NOVA
Healthcare Administrators, Inc. ("NOVA"), as well as through the Company's
relationship with Saving Bank Life Insurance ("SBLI"). Effective January
1, 2000, as a result of the reorganization of SBLI into a mutual insurance
company, the Company's insurance activities through SBLI have been limited
to the servicing of life insurance policies and the collection of income
generated by insurance sales. Information about the Company's segments is
presented in the following table (in thousands):

Banking Insurance
Activities Activities Total
---------- ---------- -------
Year ended December 31, 2000
Net interest income $60,168 10 60,178
Provision for credit losses 2,258 -- 2,258
------- ------- -------
Net interest income after
provision for credit losses 57,910 10 57,920
Noninterest income 17,402 16,688 34,090
Noninterest expense 46,589 14,929 61,518
------- ------- -------
Income before income taxes 28,723 1,769 30,492
Income tax expense 9,686 1,287 10,973
------- ------- -------

Net income $19,037 482 19,519
======= ======= =======

Year ended December 31, 1999
Net interest income $50,727 27 50,754
Provision for credit losses 2,466 -- 2,466
------- ------- -------
Net interest income after
provision for credit losses 48,261 27 48,288
Noninterest income 11,965 15,723 27,688
Noninterest expense 33,995 13,648 47,643
------- ------- -------
Income before income taxes 26,231 2,102 28,333
Income tax expense 8,528 1,365 9,893
------- ------- -------

Net income $17,703 737 18,440
======= ======= =======

For the year ending December 31, 1998, the Company determined that its
business was comprised of banking activities only.

73

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

(16) Reorganization and Stock Offering

FNFG was organized in December 1997 by First Niagara in connection with
the conversion from a New York chartered mutual savings bank to a New York
chartered stock savings bank and the reorganization to a two-tiered mutual
holding company. FNFG was formed for the purpose of acquiring all of the
capital stock of First Niagara upon completion of the reorganization. As
part of the reorganization, FNFG sold approximately 43.5% of the shares of
its common stock to eligible depositors of First Niagara (the "Offering")
and issued approximately 53.3% of FNFG's shares of common stock to First
Niagara Financial Group, MHC (the "MHC"), a state-chartered mutual holding
company incorporated in New York. Concurrent with the close of the
offering, 1.9% of the shares were issued to the Company's employee stock
ownership plan and 1.3% of the shares were issued to the First Niagara
Bank Foundation (the "Foundation").

Completion of the Offering on April 17, 1998, resulted in the issuance of
29,756,250 shares of common stock at $10.00 per share. Costs related to
the Offering, primarily marketing fees paid to investment banking firms,
professional fees, registration fees, and printing and mailing costs, were
$2.5 million. Net offering proceeds were $132.4 million. FNFG used 50% of
that amount, or $66.2 million, to purchase all of the common stock of the
First Niagara. The remaining proceeds were used to fund a $14.3 million
loan to the ESOP and to acquire $51.9 million in short-term investments.

The Foundation is dedicated exclusively to supporting charitable causes
and community development activities throughout the communities that the
Company serves. In addition to the $4.1 million (405,046 shares) of common
stock contributed by FNFG, First Niagara contributed $2.7 million in cash
to the Foundation. As a result, a one-time charge of $6.8 million is
reflected in other noninterest expense of the 1998 consolidated statement
of income for this contribution, which is tax deductible, subject to an
annual limitation based upon the Company's taxable income.

First Niagara established a liquidation account, as of the date of
conversion, in the amount of $126.7 million, equal to its net worth as of
the date of the latest consolidated statement of financial condition
appearing in the final prospectus. The liquidation account is maintained
for the benefit of eligible pre-conversion account holders who continue to
maintain their accounts at First Niagara after the date of conversion. The
liquidation account, which is reduced annually to the extent that eligible
account holders have reduced their qualifying deposits as of each
anniversary date, totaled $43.3 million at December 31, 2000 and $54.4
million at December 31, 1999. Similarly, Cortland maintains a liquidation
account in connection with its reorganization into a New York State
chartered stock savings bank on October 6, 1998. Cortland's liquidation
account totaled $10.9 million at December 31, 2000.

In the event of a complete liquidation of either bank, each eligible
account holder of the applicable bank will be entitled, under New York
State Law, to receive a distribution from the liquidation account in an
amount equal to their current adjusted account balances for all such
depositors then holding qualifying deposits in the applicable bank.
Accordingly, retained earnings of the Company are deemed to be restricted
up to the balance of the liquidation account at December 31, 2000 and
1999.

74

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

(17) Condensed Parent Company Only Financial Statements

The following condensed statements of condition as of December 31, 2000
and 1999 and the condensed statements of income and statements of cash
flows for the years ended December 31, 2000, 1999 and for the period from
April 17, 1998 through December 31, 1998 should be read in conjunction
with the consolidated financial statements and related notes (in
thousands):

December 31,
---------------------
Condensed Statements of Condition 2000 1999
-------- --------
Assets:
Cash and cash equivalents $ 1,193 3,733
Securities available for sale 7,000 37,151
Loan receivable from ESOP 12,988 13,464
Investment in subsidiaries 241,129 190,580
Other assets 4,099 1,736
-------- --------
$266,409 246,664
======== ========
Liabilities:
Accounts payable and other liabilities $ 660 2,640
Short-term borrowings 15,209 --
Short-term loan payable to related parties 6,000 11,408
Stockholders' equity 244,540 232,616
-------- --------
$266,409 246,664
======== ========

Condensed Statements of Income 2000 1999 1998
-------- -------- --------

Interest income $ 3,538 3,911 2,985
Dividend received from subsidiaries 95,000 10,000 --
-------- -------- --------
Interest income 98,538 13,911 2,985
Interest expense 415 238 --
-------- -------- --------
Net interest income 98,123 13,673 2,985
Net loss on securities available for sale (422) (33) --
Noninterest expenses 1,244 781 4,373
-------- -------- --------
Income (loss) before income taxes
and undisbursed (overdisbursed)
income of subsidiaries 96,457 12,859 (1,388)

Income tax expense (benefit) 587 1,148 (625)
-------- -------- --------

Income (loss) before undisbursed
(overdisbursed) income of
subsidiaries 95,870 11,711 (763)

Net income of subsidiaries 18,649 16,729 11,145
Less dividend received from
subsidiaries (95,000) (10,000) --
-------- -------- --------
Undisbursed (overdisbursed) income
of subsidiaries (76,351) 6,729 11,145
-------- -------- --------
Net income $ 19,519 18,440 10,382
======== ======== ========

75

FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2000, 1999 and 1998

Condensed Statements of Cash Flows 2000 1999 1998
--------- --------- ---------

Cash flows from operating activities:
Net income $ 19,519 18,440 10,382
Adjustments to reconcile net income to
net cash provided by operating activities:
Charitable contribution of First Niagara
Financial Group, Inc. common stock to
First Niagara Bank Foundation -- -- 4,051
Accretion of fees and discounts, net (18) (6) (5)
(Undisbursed) overdisbursed income
of subsidiaries 76,351 (6,729) (11,145)
Net loss on securities available for sale 422 33 --
Deferred income taxes 767 284 (1,140)
(Increase) decrease in other assets 2,869 889 (1,234)
Increase (decrease) in liabilities (3,468) 190 640
--------- --------- ---------

Net cash provided by operating
activities 96,442 13,101 1,549
--------- --------- ---------

Cash flow from investing activities:
Proceeds from sales of securities available
for sale 25,085 3,968 --
Purchases of securities available for sale (841) (5,965) (47,648)
Principal payments on securities available
for sale 5,105 10,453 1,328
Acquisitions, net of cash acquired (120,713) -- --
Purchase of First Niagara common stock -- -- (66,245)
Funding of ESOP loan receivable -- -- (14,298)
Repayments of ESOP loan receivable 476 477 357
--------- --------- ---------

Net cash provided by (used for)
investing activities (90,888) 8,933 (126,506)
--------- --------- ---------

Cash flows from financing activities:
Proceeds from issuance of common stock -- -- 132,490
Purchase of treasury stock (10,871) (31,820) --
Proceeds (repayment) of loans from related parties (5,408) 11,408 --
Proceeds from short-term borrowings 15,209 -- --
Dividends paid on common stock (7,024) (4,561) (861)
--------- --------- ---------

Net cash provided by (used for)
financing activities (8,094) (24,973) 131,629
--------- --------- ---------

Net increase (decrease) in cash
and cash equivalents (2,540) (2,939) 6,672

Cash and cash equivalents at beginning
of period 3,733 6,672 --
--------- --------- ---------

Cash and cash equivalents at end of period $ 1,193 3,733 6,672
========= ========= =========

76

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------

Information regarding directors and executive officers of FNFG in the
Proxy Statement for the 2001 Annual Meeting of Stockholders is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------

Information regarding executive compensation in the Proxy Statement for
the 2001 Annual Meeting of Stockholders is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------

Information regarding security ownership of certain beneficial owners
of FNFG management in the Proxy Statement for the 2001 Annual Meeting
of Stockholders is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------

Information regarding certain relationships and related transactions in
the Proxy Statement for the 2001 Annual Meeting of Stockholders is
incorporated herein by reference.

77

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------

(a) Financial statements filed as part of this Annual Report on Form
10-K. See Part II, Item 8. "Financial Statements and Supplementary
Data."

(b) Reports on Form 8-K

First Niagara Financial Group, Inc. filed on January 17, 2001 a
Current Report on Form 8-K pertaining to the completion of the
acquisition of Iroquois Bancorp, Inc. Such Current Report, as an
Item 7 exhibit, included pro forma information as of September 30,
2000 and December 31, 1999.

(c) Exhibits

The exhibits listed below are filed herewith or are incorporated by
reference to other filings.

Exhibit Index to Form 10-K

Exhibit 3.1 Articles of Incorporation (1)

Exhibit 3.2 Bylaws (1)

Exhibit 10.1 Form of Employment Agreement with the Named
Executive Officers (1)

Exhibit 10.2 First Niagara Bank Deferred Compensation Plan (1)

Exhibit 10.3 First Niagara Financial Group, Inc. 1999 Stock
Option Plan (2)

Exhibit 10.4 First Niagara Financial Group, Inc. 1999
Recognition and Retention Plan(2)

Exhibit 11 Calculations of Basic Earnings Per Share and
Diluted Earnings Per Share (See Note 12 to Notes
to Consolidated Financial Statements)

Exhibit 21 Subsidiaries of First Niagara Financial Group,
Inc. (See Part I, Item 1 of Form 10-K)

Exhibit 23 Consent of KPMG LLP

(1) Incorporated by reference from the Company's Registration
Statement filed on December 22, 1997.
(2) Incorporated by reference from the Company's Proxy Statement
for the 1999 Annual Meeting of Stockholders filed on March 23,
1999.

78

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

FIRST NIAGARA FINANCIAL GROUP, INC.

Date: March 20, 2001 By: /s/ William E. Swan
-------------------------------
William E. Swan
Chairman, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

Signatures Title Date
---------- ----- ----

/s/ William E. Swan Chairman, President and March 20, 2001
- -------------------------- Chief Executive Officer
William E. Swan

/s/ Paul J. Kolkmeyer Executive Vice President March 20, 2001
- -------------------------- and Chief Banking Officer
Paul J. Kolkmeyer

/s/ Daniel A. Dintino, Jr. Senior Vice President and March 20, 2001
- -------------------------- Chief Financial Officer
Daniel A. Dintino, Jr.

/s/ Gordon P. Assad Director March 20, 2001
- --------------------------
Gordon P. Assad

/s/ John J. Bisgrove, Jr. Director March 20, 2001
- --------------------------
John J. Bisgrove, Jr.

/s/ Christa R. Caldwell Director March 20, 2001
- --------------------------
Christa R. Caldwell

/s/ James W. Currie Director March 20, 2001
- --------------------------
James W. Currie

/s Gary B. Fitch Director March 20, 2001
- --------------------------
Gary B. Fitch

79

/s/ Daniel W. Judge Director March 20, 2001
- --------------------------
Daniel W. Judge

/s/ Harvey D. Kaufman Director March 20, 2001
- --------------------------
Harvey D. Kaufman

/s/ B. Thomas Mancuso Director March 20, 2001
- --------------------------
B. Thomas Mancuso

/s/ James Miklinski Director March 20, 2001
- --------------------------
James Miklinski

/s/ Robert G. Weber Director March 20, 2001
- --------------------------
Robert G. Weber

80