FORM 10-K - ANNUAL REPORT PURSUANT TO SECTION 13
                 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
[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, 1998

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act   of   1934   [No   Fee   Required]   For   the   transition   period   from
_____________________  to  _____________________________  Commission file Number
0-14506
                     Pioneer American Holding Company Corp.
             (Exact name of registrant as specified in its charter)

Pennsylvania                                                     23-2319931
(State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization)                              Identification No.)

 41 North Main Street, Carbondale, PA                              18407
 (Address of principal executive offices)                        (Zip Code)

               Registrant's telephone number, including area code
                (570) 282-2662 Securities registered pursuant to
                            Section 12(b) of the Act:

 Title of each class                            Name of each exchange on which
                                   Registered

 Common                                         none



           Securities registered pursuant to Section 12(g) of the Act:

                      Common stock, Par Value $1.00 a Share
                                (Title of class)


                                (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  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) 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 amendment to this form 10-K. [ ] (Amended by Exch Act Rel No.
28869, eff. 5/1/91.)
     State the aggregate market value of the voting stock held by non-affiliates
of the registrant.  The aggregate market value shall be computed by reference to
the price at which the stock was sold,  or the average  bid and asked  prices of
such stock,  as of a specified  date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405, 17 CFR 230.405). $46,567,841
     NOTE: If a determination as to whether a particular  person or entity is an
affiliate cannot be made without involving  unreasonable effort and expense, the
aggregate  market  value  of the  common  stock  held by  non-affiliates  may be
calculated  on the basis of  assumptions  reasonable  under  the  circumstances,
provided that the assumptions are set forth in this Form.

              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
     Indicate by check mark whether the  registrant  has filed all documents and
reports  required  to be  filed by  Section  12,  13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. [ ] Yes [ ] No

                       (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock, as of the latest practicable date.
     The number of shares outstanding as of March 1, 1999 2,920,963 shares

                      DOCUMENTS INCORPORATED BY REFERENCE

     List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g.,  Part I, Part II,  etc.) into which the document is
incorporated:  (1) Any  annual  report  to  security  holders;  (2) Any proxy or
information  statement;  and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the  Securities Act of 1933.  The listed  documents  should be clearly
described for identification  purposes (e.g.,  annual report to security holders
for fiscal year ended December 24, 1980).

<PAGE>

                              10-K CROSS REFERENCE
                                      Page
PART I

      1.  Business ........................................................ 3-7
      2.  Properties .........................................................7
      3   Legal Proceedings...................................................7
      4.  Submission of Matters to a Vote of Security Holders.................7

PART II

      5.  Market for the Registrant's Common Equity and Related
              Shareholder Matters............................................2-3
      6.  Selected Financial Data..............................................8
      7.  Management's Discussion and Analysis of Financial
              Condition and Results of Operations...........................9-37
      8.  Financial Statements and Supplementary Data......................38-66
      9.  Changes in and disagreements with Accountants
              on Accounting and Financial Disclosure.......................    *

PART III

      10. Directors and Executive Officers of the Registrant .................70
      11. Executive Compensation..............................................70
      12. Security Ownership of Certain Beneficial Owners and
              Management......................................................70
      13. Certain Relationships and Related Transactions......................70

PART IV

      14.  Exhibits, Financial Statement Schedules, and Reports  on Form 8-K
                  Financial Statements Filed:
                     Pioneer American Holding Company Corp.
                     Consolidated Balance Sheets, December 31, 1998 
                          and 1997....................................... .38-39
                     Consolidated Statements of Operations, Years ended
                          December 31, 1998, 1997 and 1996....................40
                     Consolidated Statements of Changes in Stockholders'
                         Equity, Years ended December 31, 1998, 1997
                         and 1996 ............................................41
                     Consolidated Statements of Cash Flows, Years ended
                         December 31, 1998, 1997 and 1996..................42-43
                  Financial Schedules Filed:
                     All schedules  applicable to the Registrant are included in
                         the notes to the Financial Statements.
                     There were no  reports  filed on Form 8-K during the fourth
                         quarter of 1998.
                  Auditors' Opinion...........................................67

                  Exhibit:
                        Consent of Independent Auditors.......................**
----------
*    Not applicable

**   Copies of any exhibits not  contained  herein may be obtained by writing to
     John W. Reuther,  President,  Pioneer  American  Company Corp., 41 No. Main
     Street, Carbondale, Pa. 18407.
                                       1

<PAGE>




           THE PIONEER AMERICAN HOLDING COMPANY CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>

Highlights of the Year

                                                  
                                                       1998           1997        % Change
---------------------------------------------------------------------------------------------
<S>                                               <C>                <C>          <C> 

FOR THE YEAR
Total operating income                             $  31,263,000      28,968,000           7.92%
Total operating expense                               25,706,000      23,460,000           9.57%
Income before income taxes                             5,557,000       5,508,000           0.89%
Income tax expense                                     1,535,000       1,500,000           2.33%
Net income                                             4,022,000       4,008,000           0.35%
Total cash dividends declared                          2,235,000       2,055,000           8.76%

AT YEAR END
Assets                                               405,157,000     370,126,000           9.46%
Deposits                                             307,360,000     293,643,000           4.67%
Loans, (net)                                         222,826,000     209,583,000           6.32%
Securities available for sale                        101,079,000      96,696,000           4.53%
Securities held to maturity                           46,178,000      37,379,000          23.54%
Stockholders' equity                                  35,466,000      33,398,000           6.19%

PER SHARE DATA
Net income (diluted)                                        1.36            1.36
Cash dividends declared                                     0.77            0.72
Book value *                                               12.01           11.36
Number of shareholders                                     1,457           1,430
</TABLE>

--------------------------------------------------------------------------------
* Based on weighted average diluted shares outstanding during the year.



Company Stock Prices and Dividend Information

           This  range of sales  prices is based upon a very  limited  number of
transactions  for which prices are available to the Company from various sources
and  accordingly  may not  reflect  the actual  high and low prices at which the
Company's stock traded. All stock prices have been adjusted for applicable stock
splits.

         Quarterly highs and lows are presented below:
<TABLE>
<CAPTION>


                                             1998                   1997                   1996
                                       ----------------       ---------------        ---------------
Quarter                                  High     Low           High    Low            High    Low
-------------------------------------------------------------------------------------------------
<S>                                      <C>     <C>          <C>      <C>           <C>      <C>

First                                    23.50   21.38         25.00   22.25          21.25   20.00
Second                                   25.25   22.50         26.00   23.75          21.12   20.12
Third                                    24.50   22.00         24.75   23.25          22.00   19.50
Fourth                                   23.50   22.00         23.00   21.25          24.00   21.75
</TABLE>



                                       2
<PAGE>



 Company Stock Prices and Dividend Information, (Continued)

     On March 1, 1999 the Holding Company had approximately  1,457 shareholders.
The market price of the stock on this date was $20.50 per share.  Cash dividends
per share for 1998, 1997 and 1996 appear in the table below:


Quarter                                  1998           1997          1996
-----------------------------------------------------------------------------
First                                 $  0.19           0.17           0.15
Second                                   0.19           0.17           0.17
Third                                    0.19           0.19           0.17
Fourth                                   0.20           0.19           0.17
-----------------------------------------------------------------------------
                                      $  0.77           0.72           0.66


Business of Pioneer American Holding Company Corp.

Holding Company

     Pioneer  American  Holding  Company Corp. (the "Company") is a Pennsylvania
Corporation,  incorporated  in 1984 and is registered as a bank holding  company
under the Bank Holding  Company Act of 1956,  as amended (the  "Holding  Company
Act"). The Company became an active bank holding company on May 15, 1985 when it
assumed ownership of Pioneer American Bank, National Association,  (the "Bank").
The Bank is a wholly-owned subsidiary of the Company and is its sole subsidiary.

     The Company's  principal  activities  consist of owning and supervising the
Bank, which engages in a full-service wholesale and retail banking business. The
Bank employs 184 full-time  equivalents.  Through the Bank, the Company  derives
substantially   all  of  its  income   from  the   furnishing   of  banking  and
banking-related services.

The Bank

     The Bank was incorporated under federal law as a national bank in 1864. The
Bank is a member of the Federal  Reserve  System and its deposits are insured by
the Federal  Deposit  Insurance  Corporation  ("FDIC") to the extent provided by
law.

     The Bank engages in a full-service  wholesale and retail banking  business,
which is managed as a single  operating  segment.  Service  is  provided  to the
Bank's  customers  through its main office and nineteen branch  offices.  Ten of
these branch  facilities  are located  within  supermarkets.  Many of the Bank's
locations are improved with drive-in  banking  facilities  and automated  teller
machines (ATM's)  accessed through the "MAC" and "PLUS" systems.  In addition to
the ATM's located at the branches, there are 24 ATM's at remote locations. These
                                       3
<PAGE>

The Bank (Continued)
locations include convenience stores,  supermarkets,  and corporate centers. The
Bank, with its expanding branch network,  serves Lackawanna and Luzerne Counties
and parts of Wayne,  Wyoming,  Susquehanna  and Monroe  counties in northeastern
Pennsylvania.

     The Bank's services include  accepting time,  demand and savings  deposits,
including  interest bearing checking  accounts,  money market checking accounts,
regular savings accounts,  fixed rate certificates of deposit and club accounts.
Its services also include making  secured and unsecured  commercial and consumer
loans,  financing  commercial  transactions  either directly or through regional
industrial development corporations,  making construction and mortgage loans and
renting  of  safe  deposit   facilities.   Additional  services  include  making
residential  mortgage  loans,  home equity lines of credit,  overdraft  lines of
credit,  small business  loans,  student loans,  etc. The Bank's  business loans
include seasonal credit collateral loans and term loans.

     The Bank has a relatively  stable  deposit  base and no material  amount of
deposits is obtained from a single  depositor or group of depositors  (including
Federal,  state  and  local  governments).  The  Bank  has not  experienced  any
significant seasonal fluctuations in the amount of its deposits.

     The Bank's  market area is  concentrated  in the primary trade areas of the
branch locations.  These 20 locations are throughout  Northeastern  Pennsylvania
with offices in Lackawanna  County (10),  Luzerne  County (5), Wayne County (2),
Monroe  County  (2),  and  Wyoming  County  (1).  The   unemployment   rate  for
Pennsylvania  in the  fourth  quarter  of 1998 was  approximately  4.5%.  In the
counties in which the Company operates the rates were:  Lackawanna 4.8%, Luzerne
5.9%, Wayne 5.1%, Monroe 5.9%, and Wyoming 6.0% . Northeastern  Pennsylvania has
maintained  average  vacancy rates with no  expectation  of over capacity in the
foreseeable  future. The loan portfolio of the Bank is primarily  collateralized
by commercial and residential real estate located in Northeastern Pennsylvania.

         All phases of the Bank's  business  are  highly  competitive.  The Bank
competes with respect to its lending activities, as well as in attracting demand
deposits,  with local commercial banks,  other commercial banks with branches in
the Bank's market area, savings banks, savings and loan associations,  insurance
companies,  finance companies,  leasing companies,  mutual funds, credit unions,
and others. The Bank is generally competitive with financial institutions in its
service area with respect to interest  rates paid on time and savings  deposits,
service charges on deposit accounts and interest rates charged on loans.

Supervision and Regulation

     Bank  holding  companies  and banks are  extensively  regulated  under both
federal and state law. To the extent that the  following  information  describes
statutory  and  regulatory  provisions,  it is  qualified  in  its  entirety  by
reference to the particular statutory and regulatory  provisions.  Any change in
applicable  laws or regulations  may have a material  effect on the business and
prospects of the Company and the Bank.
                                       4
<PAGE>

Supervision and Regulation, (Continued)

          The Company

         The Company is  registered  as a bank  holding  company  under the Bank
Holding  Company Act of 1956,  as amended  (the  "Holding  Company  Act") and is
therefore  subject to the  supervision  and  examination by the Federal  Reserve
Board under the Holding  Company Act.  The Company is subject to certain  annual
reporting requirements regarding its business operations.

         The Federal  Deposit  Insurance  Corporation  Improvement  Act (FDICIA)
directs that each federal  banking  agency  prescribe  standards for  depository
institutions and depository  institution  holding companies relating to internal
controls,  information  systems,  internal  audit systems,  loan  documentation,
credit  underwriting,  interest rate exposure,  asset growth, a maximum ratio of
classified  assets to capital,  minimum earnings  sufficient to absorb losses, a
minimum  ratio of market  value to book  value for  publicly  traded  shares (if
feasible) and such other standards as the agency deems appropriate.  FDICIA also
contains a variety of other  provisions  that  affected  the  operations  of the
Company, including reporting requirements,  regulatory standards for real estate
lending,  "truth in  savings"  provisions,  the  requirement  that a  depository
institution  give 90 days prior notice to customers and  regulatory  authorities
before  closing  any  branch,  limitations  on credit  exposure  between  banks,
restrictions  on loans to a bank's  insiders,  guidelines  governing  regulatory
examinations and a prohibition on the acceptance or renewal of brokered deposits
by  depository  institutions  that are not well  capitalized  or are  adequately
capitalized and have not received a waiver from the FDIC.  Compliance with these
regulations did not impose material costs on the Company.

         The Company is under the  jurisdiction  of the  Securities and Exchange
Commission and various state securities  commissions for matters relating to the
offering and sale of its  securities  and is subject to the  periodic  reporting
requirements of the Securities and Exchange Commission.

     Interstate  Banking - The  Riegle-Neal  Interstate  Banking  and  Branching
Efficiency Act of 1994 (the "Interstate Banking Act"),  enacted on September 29,
1994,  permits bank holding companies to acquire banks in any state beginning in
1995. Beginning in 1997, acquired banks in different states may be merged into a
single bank,  and thereafter  merged banks may establish and acquire  additional
branches  anywhere the  acquiree  could have  branched.  States could opt out of
interstate branching until June 1, 1997, but if so, their domestic  institutions
would also be prohibited from branching interstate. States could also enact laws
permitting interstate merger transactions and interstate de novo branching prior
to June 1, 1997. Limited branch purchases are still subject to state laws.

          Bank  management  anticipates  that the  Interstate  Banking  Act will
significantly  increase competitive pressures in the Bank's market by permitting
entry of additional competitors.
                                       5
<PAGE>


Supervision  and  Regulation,  (Continued)

The Bank

     The Bank, as a national bank, is subject to the National Bank Act. The Bank
is also  subject  to the  supervision  of,  and is  regularly  examined  by, the
Comptroller  of the  Currency of the United  States (the  "Comptroller")  and is
required to furnish  quarterly  reports to the Comptroller.  The approval of the
Comptroller is required for the  establishment  of additional  branch offices by
any national bank,  subject to applicable state law restrictions.  Under present
applicable  Pennsylvania law,  effective March 1990, a federally  chartered bank
(such as the Bank) may, with the prior  approval of the  Comptroller,  establish
branches generally within any county in the Commonwealth.

         The Bank is a member of the FDIC and a member of Federal Reserve System
and, therefore,  is subject to additional regulation by these agencies.  Some of
the aspects of the lending and deposit  business of the Bank which are regulated
by these agencies include personal lending,  mortgage lending, interest rates as
they relate to lending and reserve  requirements.  These  agencies are primarily
concerned  with the safety  and  soundness  of  individual  banks,  but are also
involved with the general  oversight of the activities of a bank directed toward
the determination that the bank is operating  competitively and  constructively,
in accordance with applicable regulations and statutes.

         The operations of the Bank are also subject to numerous Federal,  State
and  local  laws and  regulations  which  set forth  specific  restrictions  and
procedure   requirements  with  respect  to  the  extension  of  credit,  credit
practices,   the  disclosure  of  credit  terms  and  discrimination  in  credit
transactions.

     The Bank is subject  to certain  restrictions  on loans and  extensions  of
credit to the Company,  investment in the stock or securities of the Company and
acceptance of the stock or securities of the Company as collateral for loans. As
a consequence of the extensive  regulation of commercial  banking  activities in
the United  States,  the Bank's  business is  particularly  susceptible to being
affected by federal and state  legislation  and  regulations  which may have the
effect  of  increasing  the  costs of doing  business  as well as  limiting  the
business activities of the Bank.

National Monetary Policy

     In addition to being affected by general economic conditions,  the earnings
and growth of the Bank and therefore the earnings and growth of the Company, are
affected by the policies of regulatory  authorities,  including the Comptroller,
the Federal  Reserve  Board and the FDIC.  An important  function of the Federal
Reserve Board is to regulate the money supply,  conditions  and interest  rates.
Among  the  instruments  used to  implement  these  objectives  are open  market
operations  in U.S.  Government  securities,  changes  in  reserve  requirements
against member bank deposits and changing the discount rate on bank  borrowings.
These  instruments are used in varying  combinations to influence overall growth
and distribution of credit, bank loans,  investments and deposits. Their use may
also affect interest rates charged on loans or paid for deposits.


                                       6

<PAGE>

Supervision and Regulation, (Continued)

     National Monetary Policy, Continued

     The policies and regulations of the Federal Reserve Board have had and will
probably  continue  to have a  significant  effect on the growth  and  operating
results of the Bank.  The  effects of such  policies  upon the future  business,
earnings and growth of the Company and the Bank cannot accurately be predicted.

Properties

         The principal  executive offices of the Bank and Company are located at
41 N. Main Street, in the City of Carbondale,  Lackawanna County,  Pennsylvania.
This  building is owned by the bank and subject to a mortgage held by the former
owner.  In 1996 the Company also  purchased a building  located at 27 North Main
Street, Carbondale,  Pennsylvania.  This property was acquired to provide needed
office space for loan operations and administrative services. The Bank also owns
properties located at 3 John F. Kennedy Drive, Archbald,  Pennsylvania (Archbald
Branch Office);  Route 6, Carbondale,  Pennsylvania  (Schoolside Branch Office),
105 W. Main Street,  Dalton,  Pennsylvania (Dalton Branch Office);  Main Avenue,
Dickson City, Pennsylvania (Dickson City Branch and remote Drive-In); Route 435,
Elmhurst, Pennsylvania (Elmhurst Branch Office); Route 590, Hamlin, Pennsylvania
(Hamlin  Branch  Office);  and 500  Lackawanna  Avenue,  Mayfield,  Pennsylvania
(Mayfield Branch Office),  Route 940, Mount Pocono,  Pennsylvania  (Mount Pocono
Branch  Office).  The  Bank  purchased  a tract  of land on 455  Market  Street,
Kingston,  Pennsylvania  for the purpose of constructing a full-service  office.
This office was completed in November of 1998 and replaced the existing Kingston
leased office. The Bank owns properties  adjacent to the main office utilized as
parking lots.

     The Bank also leases  facilities for ten branch offices:  four in the Price
Chopper Super Markets in Scranton (2), Dunmore and Wilkes-Barre; four in the Mr.
Z's supermarkets in Mountaintop,  Dallas, Stroudsburg,  and Tunkhannock; and two
in Weis Markets in Clarks Summit and Hazleton.

Legal Proceedings

     The  nature  of the  Company's  business  generates  a  certain  amount  of
litigation  involving  matters  arising  in the  ordinary  course  of  business.
However, in the opinion of management, there are no proceedings pending to which
the Company or the Bank are parties or to which their property is subject, which
would  be  material  in  relation  to  the  Company's   results  of  operations,
stockholders'   equity  or  financial  condition.   In  addition,   no  material
proceedings  are pending or are known to be threatened or  contemplated  against
the Company or the Bank by governmental authorities or parties.

Submission of Matters to a Vote of Security Holders

         No matters were submitted to a vote of security  holders of the Company
during the fourth  quarter of 1998  through  the date of filing this report with
the Securities and Exchange Commission.
                                       7


<PAGE>

Selected Financial Data
(In thousands, except per share data and number of shareholders)
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------
                                                                         Years ended December 31
                                                   ---------------------------------------------------------------------
                                                            1998          1997          1996          1995         1994
------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>           <C>            <C>          <C> 

Results of Operations
for the Year
Interest income                                       $   28,302        26,507        24,358        23,662       20,626
Interest expense                                          14,319        12,845        10,874        11,227        8,157
------------------------------------------------------------------------------------------------------------------------

Net interest income                                       13,983        13,662        13,484        12,435       12,469

Provision for loan losses                                    420           535           500           420          310
------------------------------------------------------------------------------------------------------------------------

Net interest income after provision for
      loan losses                                         13,563        13,127        12,984        12,015       12,159

Other operating income                                     2,961         2,461         2,012         1,913        1,319
Other operating expense                                   10,967        10,080         9,749         9,075        8,697
Income tax expense                                         1,535         1,500         1,543         1,370        1,333
------------------------------------------------------------------------------------------------------------------------

Net income                                                 4,022         4,008         3,704         3,483        3,448
------------------------------------------------------------------------------------------------------------------------

Cash dividends declared                               $    2,235         2,055         1,900         1,671        1,610
------------------------------------------------------------------------------------------------------------------------

Per Share (1)
Net income (diluted)                                  $     1.36          1.36          1.26          1.20         1.19

Book value (2)                                             12.01         11.36         10.32          9.80         8.64

Cash dividends paid                                         0.77          0.72          0.66          0.60         0.58
------------------------------------------------------------------------------------------------------------------------

Financial Condition
At End of Year
Assets                                               $   405,157       370,126       330,213       320,647      302,408
Deposits                                                 307,360       293,643       295,946       288,252      270,718
Loans, net                                               222,826       209,583       201,298       194,555      177,173
Securities available for sale                            101,079        96,696        76,019        68,328       50,467
Securities held to maturity                               46,178        37,379        20,860        26,033       52,915
Stockholders' equity                                      35,466        33,398        30,263        28,492       24,978
------------------------------------------------------------------------------------------------------------------------

Number of Stockholders                                     1,457         1,430         1,421         1,347        1,334
------------------------------------------------------------------------------------------------------------------------
<FN>
(1)  Per share data for 1995 and 1994  restated to reflect the  Company's  two for
     one stock split effected in the form of a stock dividend effective July 15,
     1996.

(2)  Based on weighted average diluted shares outstanding during the period.
</FN>
</TABLE>

                                       8
<PAGE>

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

         The  following   financial  review  and  analysis  is  presented  on  a
consolidated basis and is intended to assist in understanding and evaluating the
major changes in the financial condition and earnings performance of the Company
(and the Bank) with a primary focus on the analysis of operating results for the
years ended December 31, 1998,  1997, and 1996. The information  below should be
read in conjunction  with the Company's  consolidated  financial  statements and
accompanying  notes  thereto,  "Selected  Financial  Data"  and  other  detailed
information appearing elsewhere in this report.

Results of Operations
Highlights of Operating Results
1998 vs. 1997

     Net income reached  $4,022,000 in 1998, $14,000 or .3% higher than in 1997.
These earnings  represent the highest annual earnings in the Company's  history.
Earnings per diluted share were $1.36 in 1998 and 1997 respectively.

         The Company experienced an increase in interest income driven primarily
by an increase in the volume of interest earning assets.  The overall change was
an increase in interest  income of $1,795,000  or 6.8% from 1997 to 1998.  Total
interest expense also increased  $1,474,000,  primarily as a result of increases
of other  borrowed  money,  resulting in an increase in net  interest  income of
$321,000 or 2.3%.  Net interest  spread went from 3.62% in 1997 to 3.30% in 1998
due to competitive  pressures on interest rates on loans which caused the spread
of the loan  portfolio  to drop  from  8.95%  in 1997 to  8.76%  in 1998.  Other
operating  income was up $500,000  during  1998 from the prior  period due to an
increase in gain on sale of securities  available  for sale and ATM fees.  Other
operating  expense also increased  during 1998 versus 1997 due to an increase in
ORE expense, an upgrading of our computer system and the opening of a new branch
in November of 1998.

                                       9


<PAGE>
Highlights of Operating Results (Continued)

The table below presents both the amount and percent of increase  (decrease) for
items relative to net income.  

Table 1 Increase  (Decrease) in Components of Net Income

<TABLE>
<CAPTION>

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

                                             1998 vs. 1997          1997 vs. 1996
                                          --------------------   ---------------------
                                                Amount      %          Amount       %
--------------------------------------------------------------------------------------
<S>                                     <C>               <C>       <C>          <C>

Interest income                         $    1,795,000      6.8     2,149,000       8.8
Interest expense                             1,474,000     11.5     1,971,000      18.1
--------------------------------------------------------------------------------------

Net interest income                            321,000      2.3       178,000       1.3

Provision for loan losses                     (115,000)   (21.5)       35,000       7.0
--------------------------------------------------------------------------------------

Net interest income after provision
     for loan losses                           436,000      3.3       143,000       1.1

Other operating income                         500,000     20.3       449,000      22.3
Other operating expense                        887,000      8.8       331,000       3.4
--------------------------------------------------------------------------------------

Income before income taxes                      49,000      0.9       261,000       5.0

Income tax expense                              35,000      2.3       (43,000)     (2.8)
--------------------------------------------------------------------------------------

Net income                              $       14,000      0.3       304,000       8.2
--------------------------------------------------------------------------------------
</TABLE>


1997 vs. 1996

     Net income  reached  $4,008,000  in 1997,  $304,000 or 8.2 % higher than in
1996.  Diluted earnings per share was $1.36 in 1997,  compared to $1.26 in 1996,
an increase of 7.9 %.

     The  increase in net income for 1997 over 1996 was due to the  increases in
net  interest  income and other  income,  as well as a decline  in tax  expense,
offset by  increases in other  operating  expenses  and the  provision  for loan
losses.  The increase in interest income  resulted  primarily from the change in
the volume of assets in the securities portfolio. This increase was offset by an
increase in interest expense on other borrowed money, which was used to fund the
larger  securities  portfolio.  Other  income  was also up during  1997 from the
previous period due to increased service charges,  gains on sales of securities,
and ATM fees.  This increase was partially  offset by an increase in total other
operating expense primarily  resulting from the expanded branch and ATM network.
The provision for loan losses was higher in 1997 due to a higher level of charge
offs and to continuing portfolio growth.

                                       10
<PAGE>
Net Interest Income (Taxable-Equivalent Basis)

     The Company's net interest income, the difference between interest and fees
on loans, securities,  and other earning assets and interest expense on deposits
is a major determinant of the Company's profitability. In the following analyses
(Tables 2 and 3) net interest income is analyzed on a tax-equivalent basis, i.e.
an  adjustment  is made to reflect  the benefit  which the  Company  realizes by
investing  in  certain  tax free  municipal  securities  and by making  loans to
certain  tax-exempt  organizations.  In this way the ultimate economic impact of
earnings from various assets can be more readily compared.

     Net  interest  income is  affected  by  changes  in volume  and  changes in
interest rates. Volume refers to the amount of interest-earning  assets, such as
loans and investments, and the amount of interest-bearing  liabilities,  such as
savings and time deposits.  Demand  deposits and equity capital provide a source
of funds for lending or  investment  and enhance the interest  margins  since no
payment of interest  expense is required  (although  equity capital  requires no
payment of interest expense, shareholders invest in entities such as the Company
in  anticipation  of returns  commensurate  with the risk  assumed  with such an
investment).  Similarly,  certain  assets,  such as bank premises and equipment,
other real estate, and non-performing  loans do not enhance the interest margin,
since they earn no interest income.

     Pricing policies on loans and investment  policies have become increasingly
important in terms of maintaining and improving the interest margin. The Company
places  continuing   emphasis  on  asset/liability   management  at  the  senior
management and director levels in order to maintain control and profitability in
a changing  economic  environment.  Table 2 presents a summary of the changes in
net interest income  separated  between changes in volumes and changes in rates.
The portion of the change  resulting  from  changes in rates was  determined  by
multiplying  the change in rates during the year by the volume at the  beginning
of the year. The balance of change in net interest  income was attributed to the
change in volume experienced during the year.

         The  impact of changes in the  volume of  interest  earning  assets and
interest  bearing  liabilities  and the change in rates for both of these  areas
resulted in an  increase in net  interest  income on a tax  equivalent  basis of
$331,000 from 1997 to 1998. Tax equivalent net interest  income was decreased by
$596,000  for  interest  rate  changes  from 1997 to 1998  versus an decrease of
$262,000 from 1996 to 1997. The increase in tax  equivalent net interest  income
from volume changes from 1997 to 1998 was $927,000  versus $607,000 from 1996 to
1997.

     Net interest  income  increased  in 1997 from 1996.  The volume of interest
earning  assets  drove the  increase in interest  income from 1996 to 1997.  The
increase in volume resulted in an increase in interest income of $2,044,000. The
security portfolio  provided  $2,088,000 of the increase with 71% of this coming
from the volume increase in taxable  securities.  During 1997, the Bank borrowed
money from Federal Home Loan Bank of  Pittsburgh  which was invested in mortgage
backed  securities in both  available  for sale and held to maturity  investment
securities.  The increase in interest  income from the increase in the volume of
securities was slightly  offset by a decrease of $96,000 in interest income from
the volume of loans.  Federal  funds sold had an increase of interest  income of
$52,000 over the prior period.
                                       11
<PAGE>

Net Interest Income  (Taxable-Equivalent  Basis),
(Continued)

          The  improvement  in net  interest  income  in 1998  from 1997 was the
result of several  factors.  The volume of  interest  earning  assets  drove the
increase in interest  income from 1997 to 1998. The increase in volume  resulted
in an increase in interest income of $2,669,000.  The increase in volume was the
result of a $13.9 million increase in the average balance of taxable  securities
as part of the Bank's  leverage  strategy.  The  increase in volume was also the
result of a $7.7 million  increase in the average balance of installment  loans.
The security  portfolio  provided  $1,086,000  of the increase  with 86% of this
coming from the volume increase in taxable securities.  During the first quarter
of 1998, the Bank borrowed an additional $25,000,000 from Federal Home Loan Bank
of Pittsburgh which was invested in mortgage backed securities in both available
for sale and held to maturity  investment  securities.  The loan  portfolio also
provided  $1,406,000  of the  increase  with 50% of this  coming from the volume
increase in installment  loans and 38% in commercial  loans.  Federal funds sold
had an increase of interest income of $177,000 over the prior period.

     Net interest  income was affected by a decrease in the rates of $420,000 in
securities,  $17,000 federal funds sold and $427,000 in loans. These changes are
attributable  to the  downward  trend in  interest  rates  both  nationally  and
regionally and increasing levels of lending competition.

     The growth of interest  bearing  deposits from the nine branch openings and
other  promotions over the past several years was offset by a  restructuring  of
the Bank's  interest rates on deposits.  This  restructuring  was based upon our
expanded presence throughout  Northeastern  Pennsylvania.  Our regional coverage
allows for a pricing  structure  comparable to the Bank's regional  competitors,
not one based upon any local competitive  pressures for any particular branch or
branches.  The  decrease of $521,000 in interest  expense from a decrease in the
volume of interest  bearing  deposit  and an  increase  in  interest  expense of
$25,000 through interest rate increases on interest bearing deposits resulted in
a decrease in interest expense of $496,000 from 1997 to 1998. The single largest
contributor  to the  decrease in interest  expense on deposits was a decrease in
the volume of Time  deposits.  The decrease  due to volume of $661,000  resulted
from a  $12,106,000  decrease in the  average  balances  of Time  deposits  from
$157,576,000 for 1997 to $145,470,000 for 1998.

     The volume  increase  in  interest  income was the result of a  $34,587,000
increase in the total average of interest  earning assets from  $332,618,000  in
1997 to  $367,205,000  in 1998.  The average  rate of return on these assets was
down  slightly  compared to the prior year with 1998 at 7.86% and 1997 at 8.13%.
The volume  increase in interest  income was primarily  driven by an increase in
both our security and loan portfolio.  Total securities were up $15,792,000 from
1997 to 1998 and total loans up $15,524,000.  The related interest income was up
$666,000 to $9,229,000 in 1998 for securities and up $979,000 to $19,152,000 for
loans in 1998.

     The  Company had an increase in average  interest  bearing  liabilities  of
$29,180,000  from 1997.  This was due to an increase in other  borrowed money to
$58,964,000 for 1998, a $35,366,000  increase over 1997.  Management borrowed an
additional  $25,000,000  in  January  of 1998  from  Federal  Home  Loan Bank of
Pittsburgh.
                                       12
<PAGE>

Net Interest Income (Taxable-Equivalent Basis), (Continued)

The money borrowed was invested in mortgage backed  securities.  Bank management
believes that it was  appropriate to take advantage of borrowing at a rate lower
than the rate received in investing in Federal agency mortgage backed obligation
in both available for sale and held to maturity investment securities. There was
also a slight increase in the interest  bearing checking and money market areas.
Management   actively   managed  the  pricing   structure  of  interest  bearing
liabilities to reduce the impact of local competitive  pressures by managing the
Bank's  portfolio on a regional basis.  The interest rate in low or non-interest
bearing  liabilities and in savings and time deposits stayed fairly constant for
both 1998 and 1997.  There was a 5 basis point  increase in the cost of interest
bearing  liabilities  in 1998 to 4.56%.  The  increase in funds was  utilized in
funding the growth in the purchase of investment grade securities.

     Table 3 provides  details of the average balances  outstanding  during each
respective  year,  the amount of interest and the average  rates earned or paid.
Net interest income is again presented on a taxable-equivalent basis.

         Tables 2 and 3 present securities  available for sale in the securities
categories.

     Table 4 presents the Company's interest earning assets and interest bearing
liabilities  as of December 31, 1998 and indicates the relative  periods  within
which these assets and  liabilities  will  reprice.  Although  Table 4 shows the
Company to be liability sensitive within the next year, management believes that
factors  such as  product  pricing,  interest  rate  spread  relationships,  and
customer  behavior  patterns  permit the Company to reduce interest rate risk to
acceptable levels.

                                       13

<PAGE>
Table 2
Rate/Volume Analysis of Changes in Net Interest Income
Years ended December 31
(Dollars in Thousands)

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------
                                                                     1998/1997                  1997/1996
                                                                Increase (Decrease)        Increase (Decrease)
                                                                 due to changes in          due to changes in
                                                              ------------------------  --------------------------
                                                              Volume (1) Rate   Total   Volume (1)   Rate   Total
------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>     <C>       <C>        <C>   <C>

Interest Income

Securities:
     Taxable                                                      936    (384)    552      1,477      441   1,918
     Non-taxable (2)                                              150     (36)    114        611       18     629
------------------------------------------------------------------------------------------------------------------
Total securities                                                1,086    (420)    666      2,088      459   2,547
------------------------------------------------------------------------------------------------------------------

Federal funds sold                                                177     (17)    160         52       (6)     46
------------------------------------------------------------------------------------------------------------------

Loans, net of unearned discount:
     Commercial (2)                                               540     (35)    505        377      (39)    338
     Mortgage                                                     166    (134)     32       (691)     (45)   (736)
     Installment                                                  700    (258)    442        218      (98)    120
------------------------------------------------------------------------------------------------------------------
Total loans                                                     1,406    (427)    979        (96)    (182)   (278)
------------------------------------------------------------------------------------------------------------------

Total interest income                                           2,669    (864)  1,805      2,044      271   2,315
------------------------------------------------------------------------------------------------------------------

Interest Expense
Interest bearing deposits:
     NOW, Super NOW and Money Market                               64     (12)     52        145      457     602
     Savings                                                       76      26     102        (31)     (35)    (66)
     Time                                                        (662)     11    (651)       (35)      36       1
------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits                                  (522)     25    (497)        79      458     537

Other borrowed money and note payable                           2,245    (287)  1,958      1,348       76   1,424
Fed Funds Purchased                                                19      (6)     13         10       (1)      9
------------------------------------------------------------------------------------------------------------------

Total interest expense                                          1,742    (268)  1,474      1,437      533   1,970
------------------------------------------------------------------------------------------------------------------

Change in net interest income                               $     927    (596)    331        607     (262)    345
------------------------------------------------------------------------------------------------------------------
<FN>

1)   The rate/volume variance is allocated entirely to change in volume.

2)   Amounts are presented on a tax-equivalent  basis utilizing an effective tax
     rate of  approximately  31% in 1998,  and 32% in 1997 and  1996.  The total
     taxable equivalent  adjustments included above are $559,000,  $549,000, and
     $382,000 for 1998, 1997 and 1996, respectively.
</FN>
</TABLE>

                                       14
<PAGE>


Table 3
         Average Balance, Net Interest Income Rates
         Years ended December 31
         (Dollars in Thousands)

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
                                                   1998                          1997                           1996
                                         ----------------------------  -----------------------------  -----------------------------
                                         Average                       Average                        Average
                                              (2)           Average         (2)           Average          (2)           Average
Assets                                    Balance Interest     Rate     Balance  Interest     Rate     Balance  Interest     Rate
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>            <C>         <C>    <C>        <C>         <C>     <C>        <C>          <C>

Interest earning assets:


Securities:
          Taxable                   $    119,096    7,615        6.39  105,165     7,063        6.72   81,707     5,145        6.30
          Non-taxable (1)                 20,389    1,614        7.92   18,528     1,500        8.10   10,890       871        8.00
------------------------------------------------------------------------------------------------------------------------------------
Total securities                         139,485    9,229        6.62  123,693     8,563        6.92   92,597     6,016        6.50
-----------------------------------------------------------------------------------------------------------------------------------

Federal funds sold                         9,172      480        5.23    5,901       320        5.42    4,955       274        5.53
-----------------------------------------------------------------------------------------------------------------------------------

Loans, net of unearned discount:
          Commercial (1) (5)              85,898    7,537        8.77   79,777     7,032        8.81   75,520     6,694        8.86
          Mortgage (5)                    74,022    6,291        8.50   72,112     6,259        8.68   80,020     6,995        8.74
          Installment (5)                 61,564    5,324        8.65   53,842     4,882        9.07   51,490     4,762        9.25
          Allowance for possible 
           loan losses                    (2,936)       -        -      (2,707)       -         -      (2,794)       -         -
------------------------------------------------------------------------------------------------------------------------------------
Net loans                                218,548   19,152        8.76  203,024    18,173        8.95  204,236    18,451        9.03
-----------------------------------------------------------------------------------------------------------------------------------

Total interest earnings assets           367,205   28,861        7.86  332,618    27,056        8.13  301,788    24,741        8.20

Non-interest earning assets               27,107        -        -      25,990        -         -      24,706        -         -
-----------------------------------------------------------------------------------------------------------------------------------

Total assets/interest income         $   394,312   28,861        7.32  358,608    27,056        7.54  326,494    24,741        7.58
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       15
<PAGE>

Table 3, (Continued)
Average Balance, Net Interest Income Rates
Years ended December 31
(Dollar in Thousands)
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------------
                                                1998                           1997                            1996
                                    ----------------------------  ------------------------------  -------------------------------
                                      Average                         Average                         Average
                                           (2)           Average           (2)           Average           (2)            Average
Liabilities                           Balance  Interest     Rate      Balance  Interest     Rate      Balance Interest       Rate
---------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>            <C>          <C>    <C>         <C>         <C>     <C>        <C>           <C> 

Interest bearing liabilities:

Deposits:
     NOW, Super NOW, and
        Money Market              $    51,487    1,670        3.24    49,527     1,618        3.27    43,331    1,016          2.34
     Savings                           57,447    1,219        2.12    53,774     1,117        2.08    55,219    1,183          2.14
     Time                             145,470    7,951        5.47   157,576     8,602        5.46   158,213    8,601          5.44
-----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits       254,404   10,840        4.26   260,877    11,337        4.35   256,763   10,800          4.21
-----------------------------------------------------------------------------------------------------------------------------------

Other borrowed money
     and note payable                  58,964    3,456        5.86    23,598     1,498        6.35     1,228       74          6.03
Fed Funds Purchased                       447       23        4.92       160        10        6.25        15        1          6.67
                                                                                                    
-----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities    313,815   14,319        4.56   284,635    12,845        4.51   258,006   10,875          4.22
-----------------------------------------------------------------------------------------------------------------------------------

Non-interest bearing deposits and
     other liabilities                 46,620        -        -       42,594        -         -       39,471        -        -
-----------------------------------------------------------------------------------------------------------------------------------

Total liabilities                     360,435   14,319        3.97   327,229    12,845        3.93   297,477   10,875          3.66
-----------------------------------------------------------------------------------------------------------------------------------

Stockholders' equity                   33,877        -        -       31,379        -         -       29,017        -        -
---------------------------------------------------------------------------------------------------------------------------------

Total liabilities and stockholders'
     equity/interest expense      $   394,312   14,319        3.63   358,608    12,845        3.58   326,494   10,875          3.33
---------------------------------------------------------------------------------------------------------------------------------

Net interest income               $             14,542                          14,211                         13,866
---------------------------------------------------------------------------------------------------------------------------------

Net interest spread (3)                                       3.30%                           3.62%                            3.98%
---------------------------------------------------------------------------------------------------------------------------------

Net interest yield (4)                                        3.96%                           4.27%                            4.59%
---------------------------------------------------------------------------------------------------------------------------------
<FN>

(1)  Interest  and average  rates are  presented on a  taxable-equivalent  basis
     utilizing an effective tax rate of  approximately  31% in 1998,  and 32% in
     1997, and 1996. The total taxable-equivalent adjustments included above are
     $559,000, $549,000 and $382,000 for 1998, 1997, and 1996, respectively.

(2)  Average   balances  are  computed   utilizing   daily   average   balances.
     Non-accruing loans have been included in average loan balances.

(3)  Net interest spread is the arithmetic difference between the rate earned on
     total interest  earning assets and the rate paid on total interest  bearing
     liabilities.

(4)  Net interest  yield is computed by dividing  net  interest  income by total
     interest earning assets.

(5)  Total  interest   income   includes   amortization  of  deferred  net  loan
     origination fees of $378,000,  $260,000,  $359,000 in 1998, 1997, and 1996,
     respectively.
</FN>
</TABLE>

                                       16


<PAGE>
Market Risk
Table 4
Interest Rate Sensitivity
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
                                                                            December 31, 1998
                                     -----------------------------------------------------------------------------------------------
                                           1 to 90          91 to 180      181 to 365       1 to 5         Beyond
                                            Days              Days            Days           Years         5 Years          Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                <C>             <C>            <C>              <C>           <C>

Interest Earning Assets

Securities available for sale           $  32,017,000       6,953,000       8,593,000      28,235,000      25,281,000    101,079,000

Securities held to maturity                   420,000       1,678,000         502,000      16,618,000      26,960,000     46,178,000

Loans (net of unearned
   discount and deferred fees)             44,927,000       5,269,000      16,046,000      38,529,000     120,964,000    225,735,000

Federal Funds Sold                          7,600,000            --              --              --              --        7,600,000
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         
Total                                   $  84,964,000      13,900,000      25,141,000      83,382,000     173,205,000    380,592,000
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         -

Interest Bearing Liabilities

Interest bearing DDA (MMA,
       NOW, Super NOW)                  $  60,943,000            --              --              --              --       60,943,000

Savings (1)                                11,343,000            --              --              --        45,371,000     56,714,000

Time                                       23,304,000      20,368,000      35,164,000      26,303,000            --      105,139,000

Time > $100M                                9,967,000      12,005,000      13,056,000       6,605,000            --       41,633,000

Other borrowed money and
     note payable                                --              --        20,000,000      38,082,000         275,000     58,357,000
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         -----------
Total                                   $ 105,557,000      32,373,000      68,220,000      70,990,000      45,646,000    322,786,000
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                         -----------

Interest rate sensitivity gap           $ (20,593,000)    (18,473,000)    (43,079,000)     12,392,000     127,559,000     57,806,000

Cumulative interest rate
      sensitivity gap                   $ (20,593,000)    (39,066,000)    (82,145,000)    (69,753,000)     57,806,000           --

Cumulative interest rate
      sensitivity ratio (2)                    (5.08%)         (9.64%)        (20.27%)        (17.22%)         14.27%          --
-----------------------------------------------------------------------------------------------------------------------------------
 
<FN>
                                                                                                                        
(1)  The  amount  shown as  repricing  within 1 to 90 days is that  portion
     which, based upon average balances, is considered sensitive to changes
     in interest rates. The Company's  historical  experience has been that
     total savings account  balances  exhibit minimal movement with changes
     in interest rates.  Accordingly,  a large  percentage of the Company's
     savings account  balances are not as rate sensitive and are classified
     in the "Beyond Five Years" category.

(2) Represents the cumulative  interest rate  sensitivity gap as a percentage of
    total assets.
</FN>
</TABLE>

                                       17
<PAGE>

Market Risk, (Continued)

     In addition to gap management, the Company also uses simulation analysis to
help  monitor  and manage  interest  rate risk.  In this  analysis  the  Company
examines the result of a 200 basis point change in market interest rates and the
effect on net interest  income.  It is assumed that the change is  instantaneous
and that  all  rates  move in a  parallel  manner.  Assumptions  are  also  made
concerning  prepayment speeds on mortgage loans and mortgage  securities as well
as growth rates of deposit and loan  portfolios.  The results of this rate shock
are a useful tool to assist the Company in assessing interest rate risk inherent
in their balance sheet. Below are the results of this ratio shock analysis as of
December 31, 1998 and 1997.
<TABLE>
<CAPTION>


                                    December 31, 1998                               December 31, 1997
                    ------------------------------------------------------------------------------------------------
                        Net Interest       Percentage Change in           Net Interest       Percentage Change in
  Change in Rates       Income Change       Net Interest Income           Income Change       Net Interest Income
<S>                     <C>                <C>                            <C>                <C>    

       +200                  841                   5.53%                      (400)                 (2.72%)
      Static                  -                      -                          -                      -
       -200                (1,176)                (7.73%)                     (405)                 (2.75%)

</TABLE>


     A 200 basis point rise in  interest  rates  results in a 5.53%  increase in
interest  income.  A 200 basis point  decrease in  interest  rates  results in a
decrease in  interest  income due to  optionality  in the  Company's  securities
portfolio.  In a falling  rate  environment  it is assumed  that  certain of the
Company's  securities  would be called and the  resulting  cash  flows  would be
reinvested at the lower prevailing rates.


Table 5
Other Operating Income
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------
                                                                                 Years ended December 31
                                                                          --------------------------------------
                                                                             1998         1997         1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>          <C> 
Service charges on deposit accounts                                     $   1,334,000    1,330,000    1,168,000
Net gains on sales of
    securities available for sale                                             509,000      154,000      -
Gains on calls of securities held to maturity                                   2,000        3,000      -
ATM Fees                                                                      523,000      402,000      131,000
Other income                                                                  593,000      572,000      713,000
----------------------------------------------------------------------------------------------------------------

Total other operating income                                            $   2,961,000    2,461,000    2,012,000
----------------------------------------------------------------------------------------------------------------
</TABLE>

     Gains were recognized for the sale of securities available for sale in 1998
of $509,000 and  $154,000 in 1997.  The Company did not  recognize  any gains or
losses on the sale of securities  available for sale in 1996.  The proceeds from
the sale of securities  available  for sale were  $20,217,000,  $17,799,000  and
$6,327,000 in 1998, 1997, and 1996 respectively.
                                       18
<PAGE>

Other Operating Income, (Continued)

     Management is constantly  monitoring the securities and loan  portfolios in
response to changes in the various risks that are applicable to these assets and
changes in the  Company's  asset/liability  strategy.  These changes in risk and
strategy  call for  management  to sell both  securities  and loans from time to
time. In 1998,  1997 and 1996 the Company sold newly  originated  mortgage loans
(primarily fixed rate) to the Federal Home Loan Mortgage Corporation and student
loans to PHEAA.

     ATM fees increased by $121,000 over the prior period.  The increase was due
to an additional 35 ATM machines  placed in service during the fourth quarter of
1996 and throughout 1997, on which a surcharge per foreign  transaction has been
collected.  As of  December  31,  1998 the Bank has a total of 40 ATM  machines.
Other income and service  charges on deposit  accounts  remained fairly constant
for both 1998 and 1997.

         Total operating  income  increased by $449,000 in 1997 compared to 1996
primarily  as the  result of  service  charges  on  deposits,  gains on sales of
securities and ATM fees, partially offset by decreases in other income.

Table 6
Other Operating Expenses
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------
                                                                                 Years ended December 31
                                                                         ----------------------------------------
                                                                             1998          1997         1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>         <C>   

Salaries and employee benefits                                         $     5,071,000    5,040,000    5,061,000
Net occupancy expense of bank premises                                       1,027,000    1,026,000      857,000
Furniture and equipment expenses                                               773,000      685,000      622,000
Data processing expense                                                        255,000      242,000      241,000
ORE expense                                                                    360,000      121,000      193,000
Other expenses                                                               3,481,000    2,966,000    2,775,000
-----------------------------------------------------------------------------------------------------------------

Total other operating expenses                                         $    10,967,000   10,080,000    9,749,000
-----------------------------------------------------------------------------------------------------------------
</TABLE>

     Salaries  and  employee  benefits,  which  represent  the most  significant
portion of non-interest expenses,  increased by .6% and decreased by .4% in 1998
and 1997, respectively.  Salary expense remained constant while employee benefit
expense increased 3.2% in 1998. Employees salaries did increase 4% in 1998. This
increase was offset by an increased  level of SFAS 91 deferred  costs based on a
higher volume of real estate loans on which no points were collected.

     The  contribution  to the Company's  ESOP in 1998 was $2,000 and $54,000 in
1997. No contribution was made in 1996.

         Net occupancy  expense  remained  constant for 1998 over 1997,  and the
increase of $169,000 or 19.7% in 1997 over 1996  reflected the  increased  costs
from the nine new branch  facilities opened from 1994 through 1996. The increase
was also attributable to inflation adjustments in lease agreements maintained by
the Bank.
                                       19
<PAGE>

Other Operating Income, (Continued)

     The increase in furniture  and  equipment  expense of $88,000 or 12.8% over
1997 was primarily due to an increase in  maintenance  contracts on our expanded
ATM  network.  During  the  second  quarter  of 1998 we also  replaced  computer
hardware and software to update for Year 2000 compliance, resulting in increased
depreciation.

     ORE expense  increased by $239,000 or 50.1% in 1998 due to increased charge
offs of ORE  properties  based on  evaluation  of the fair values of  individual
properties.

     Other  expenses  increased  by 17.4% in 1998 and 6.9% in 1997.  The largest
increases were in automated teller and related card holder services,  legal fees
and  marketing  expense.  The  growth of the Bank  resulted  in an  increase  in
automated teller machines and related  cardholder  service for 1998 over 1997 of
$66,000.  The  expense  for  legal  fees  increased  $95,000  due to  additional
requirements necessary to service the Bank. Marketing expense was up $185,000 in
1998 due to marketing a larger  geographical  area and for the  relocation of an
existing  branch.  In 1998 the Bank  contracted  with an advertising  company to
develop a new marketing  campaign.  The  advertising  company handles all public
media including television commercials.

     The  provision  for income taxes for 1998,  1997 and 1996 were  $1,535,000,
$1,500,000 and  $1,543,000,  respectively.  The effective rate for these periods
were 27.6%,  27.2% and 29.4%. The lower effective rate for 1998 and 1997 was due
to management's strategy in investing in tax free securities.

         Total  other  operating  expense  increased  by  $331,000  for  1997 as
compared to 1996 primarily as a result of increases in other  expenses  relating
to  automated  teller and related  card  holder  services,  courier  expense and
telephone communication.

Financial Position

         Loan Portfolio

     Total loans,  net of unearned  discount and deferred  loan fees,  increased
$13,393,000  or 6.3% in 1998 and  increased by  $8,294,000  or 4.1 % in 1997. In
1998 the Bank sold  $3,416,000 in mortgage  loans and $1,941,000 in PHEAA loans.
In 1997 the loans sold were $972,000 and $2,384,000,  respectively. The increase
in loans  after  consideration  of the  previously  mentioned  loan  sales  were
$18,750,000 in 1998 and $11,650,000 in 1997. There was growth in two segments of
the Company's  portfolio in 1998:  residential real estate and commercial loans.
The largest amount of originations were from residential real estate loans.

     In 1998 and 1997 the Bank  sold  fewer  loans to keep its loan and  deposit
ratio in the same  position as in the past years.  Unlike 1996,  loan growth had
increased at a rate greater than deposit growth. This resulted in an increase in
the  Bank's  loan to  deposit  ratio  in  1996.  The Bank  sold  $12,160,000  of
residential  mortgage loans in 1996 consisting of $8,265,000 of fixed rate loans
and $3,895,000 of adjustable rate mortgages. The objectives
                                       20
<PAGE>

Loan Portfolio, (Continued)

were to reduce the loan to deposit ratio,  address  interest rate and prepayment
risks in the  fixed  rate  section  of the  portfolio,  as well as  improve  the
liquidity and quality characteristics of one year adjustable rate mortgages.


The following table  summarizes  loans held for portfolio by type at December 31
for each of the last five years:

Table 7
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
                                                               December 31
                                 -------------------------------------------------------------------------
                                      1998          1997           1996          1995           1994
----------------------------------------------------------------------------------------------------------
<S>                            <C>                <C>            <C>            <C>            <C>

Commercial business            $     17,264,000    15,534,000     17,256,000    16,684,000     16,200,000
Commercial real estate               71,389,000    69,505,000     61,254,000    58,062,000     52,603,000
Real estate construction              1,120,000     1,002,000        947,000       625,000      1,482,000
Real estate residential             133,521,000   120,604,000    115,791,000   112,493,000    102,708,000
Consumer                             17,681,000    17,865,000     20,424,000    19,013,000     14,184,000
----------------------------------------------------------------------------------------------------------

Total loans, gross                  240,975,000   224,510,000    215,672,000   206,877,000    187,177,000

Unearned discount and
     deferred loan fees             (15,240,000)  (12,168,000)   (11,624,000)   (9,580,000)    (7,305,000)
----------------------------------------------------------------------------------------------------------

Total loans, net of
     unearned discount
     and deferred loan fees    $    225,735,000   212,342,000    204,048,000   197,297,000    179,872,000
----------------------------------------------------------------------------------------------------------
</TABLE>

     The following table summarizes commercial, financial, agricultural and real
estate  construction loans at December 31, 1998 by maturity  distribution (based
on contractual maturities) and by interest rate sensitivity:

Table 8
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                            One Year     One Through      Over          Total
                                                             or Less     Five Years    Five Years    Gross Loans
-------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                <C>          <C>            <C>

Maturity Distribution:

Commercial Business                                     $    10,481,000     4,650,000     2,133,000     17,264,000
Commercial real estate                                       17,772,000     6,371,000    47,246,000     71,389,000
Real estate construction                                      1,120,000         -            -           1,120,000
-------------------------------------------------------------------------------------------------------------------

Total                                                   $    29,373,000    11,021,000    49,379,000     89,773,000
-------------------------------------------------------------------------------------------------------------------

Interest Rate Sensitivity:

Loans with predetermined rates                               10,497,000     9,522,000    46,248,000     66,267,000
Loans with variable rates                                    18,876,000     1,499,000     3,131,000     23,506,000
-------------------------------------------------------------------------------------------------------------------

Total                                                   $    29,373,000    11,021,000    49,379,000     89,773,000
-------------------------------------------------------------------------------------------------------------------
</TABLE>

     Variable  interest rate loans and shorter  maturities  provide for interest
rate changes from time to time based upon changes in the Company's  base lending
rate or some other barometer of market interest rates. By matching
                                       21
<PAGE>

Loan Portfolio, (Continued)

     the interest rate  sensitivity  of variable rate loans against the interest
rate  sensitivity of  liabilities,  management  attempts to reduce the Company's
vulnerability  to future  interest  rate  fluctuations.  As in  previous  years,
management  continues to seek  commercial  and  residential  mortgage loans with
variable  interest  rates.  In  1998,  the  Company  originated  $19,074,000  in
residential  mortgage and home equity loans of which  $3,648,000  were  variable
rate loans. The Company  originated  $9,843,000 and $19,261,000 of such loans in
1997 and 1996,  respectively of which  $4,283,000 and  $10,768,000  respectively
were  variable rate loans.  In addition,  the Bank has the ability to sell fixed
and adjustable rate  residential  mortgages and student loans it originates into
secondary  markets to reduce its  exposure to future  interest  rate  increases.
Proceeds  from  the  sale  of  mortgages  and  student  loans  were  $5,419,000,
$3,414,000, and $14,439,000 for 1998, 1997, and 1996, respectively.


Risk Elements of Loan Portfolio

         The  following  table shows  various  non-performing  categories  as of
December 31 for each of the last five years:

Table 9
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------
                                                       1998        1997        1996       1995        1994
---------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>        <C>         <C>         <C>

Non-accrual loans                                 $   1,684,000   2,596,000  4,404,000   2,161,000   2,315,000
90 days and more past due                               838,000   2,026,000     -           -           -
Restructured loans                                    1,247,000     890,000    643,000     837,000   1,077,000
---------------------------------------------------------------------------------------------------------------

                                                  $   3,769,000   5,512,000  5,047,000   2,998,000   3,392,000
---------------------------------------------------------------------------------------------------------------
</TABLE>


         The Company  generally  places a loan on a non-accrual  status when, in
the opinion of  management,  the borrower  does not have the ability to meet the
original  terms of the loan.  The Company  reserves the accrued  interest on all
commercial  loans over ninety days past due and these loans are  included in the
non-accrual totals. Mortgages past due 90 days or more are placed in non-accrual
status unless the Bank  considers the loan to be well secured and in the process
of collection.  Consumer loans that are not secured by real estate are generally
charged off after 120 days past due. The Bank experienced a $1,743,000  decrease
in  non-performing  loans in 1998 over 1997 and a $465,000 increase in 1997 over
1996.  During 1996 and through the first half of 1997,  the Bank performed an in
depth analysis of the organization structure of the lending department. In 1997,
the Bank hired a Special Assets Officer and increased the collection  department
staff.  This action resulted in a leveling off of overall  delinquencies  in the
last quarter of 1997 and a significant  drop in 1998.  This action also resulted
in improvement in the  non-performing  loan levels of the Bank through  expanded
effort and more expeditious resolution of problem loans on a loan-by-loan basis.

     The increase in non-performing  loans in 1996 from 1995 consisted primarily
of thirteen (13) borrowers representing $1,921,000 of the increase. The Bank had
specific loan loss reserves of $106,000 allocated and  non-performing  loans and
the remaining problem loan balances are substantially collateralized.
                                       22
<PAGE>

Risk Elements of Loan Portfolio, (Continued)

     The amount of interest income on  non-accruing  loans which was recorded in
income  was  $13,000  in  1998,  $12,000  in  1997,  and  -0-  in  1996.  If the
non-accruing  loans had been current in accordance with their original terms and
had been  outstanding  throughout  the period,  interest  income would have been
increased  by  $98,000,   $149,000  and  $160,000  in  1998,   1997,  and  1996,
respectively.

         The amount of interest  on  restructured  loans  which was  recorded in
income  was  $98,000  in 1998,  $59,000 in 1997,  and  $54,000  in 1996.  If the
restructured  loans had been current in accordance with their original terms and
had been  outstanding  throughout  the period,  interest  income would have been
increased  by  $24,000,   $33,000,   and  $48,000  in  1998,   1997,  and  1996,
respectively.

         As of December  31,1998,  the Company had  impaired  loans with a total
recorded  investment of $1,530,000,  $1,922,000,  and $1,603,000 on December 31,
1998,  1997, and 1996,  respectively.  The average  recorded  investment for the
twelve month periods ended  December 31, 1998,  1997,  and 1996 was  $1,837,000,
$1,914,000, and $1,145,000, respectively. Interest income recognized during each
of these periods was nominal. As of December 31,1998,  1997, and 1996 the amount
of recorded  investment in impaired loans for which there is a related allowance
for  credit  losses  and  amount of the  allowance  is  $425,000  and  $106,000,
respectively,  $815,000 and $185,000,  respectively,  and $819,000 and $350,000,
respectively.  The amount of the recorded investment in impaired loans for which
there was no related allowance for credit losses at December 31, 1998, 1997, and
1996 was $1,105,000,  $1,107,000,  and $784,000,  respectively.  For purposes of
applying the measurement  criteria for impaired loans the Company excludes large
groups of smaller-balance homogeneous loans, primarily consisting of residential
real  estate  loans and  consumer  loans,  as well as  commercial  business  and
commercial  real estate loans with balances less than  $100,000.  For applicable
loans, the Company evaluates the need for impairment  recognition when a loan is
transferred to nonaccrual status, or earlier if based on management's assessment
of the relevant  facts and  circumstances,  it is probable that the Bank will be
unable to collect all proceeds due  according  to the  contractual  terms of the
loan agreement.  The Company's  policy for the recognition of interest income on
impaired  loans  is the  same  as for  nonaccrual  loans  discussed  previously.
Impaired loans are charged off when the Company  determines that  foreclosure is
probable  and the  fair  value  of the  collateral  is less  than  the  recorded
investment of the impaired loan.

         Substantially all of the Bank's loans are secured by residential and/or
commercial  real estate in the area of northeastern  Pennsylvania.  Accordingly,
the Bank's  primary  concentration  of credit risk is related to the real estate
market in the northeastern  Pennsylvania area and the ultimate collectibility of
this portion of the Bank's loan  portfolio is susceptible to changes in economic
conditions in that area.  As of December 31, 1998 and 1997,  there were no other
concentrations  of loans exceeding 10% of total loans. Loan  concentrations  are
considered to exist when there are amounts  loaned to related  borrowers or to a
multiple  number of borrowers  engaged in similar  activities  which would cause
them to be similarly impacted by economic conditions.
                                       23
<PAGE>


Provision and Allowance for Loan Losses

         The  allowance  for loan losses  constitutes  the amount  available  to
absorb known and inherent  losses within the loan portfolio.  When  establishing
the appropriate  levels for the quarterly and annual provision and the allowance
for loan losses,  management  considers a variety of factors, in addition to the
inherent risk of loss contained in the lending process.  Periodic  consideration
is given to the current impact of economic  conditions,  the  diversification of
the loan portfolio,  the volume and nature of non-performing and impaired loans,
historical loss experience,  the financial  condition of significant  individual
borrowers, the adequacy of any collateral,  and other factors.  Consideration is
also given to examinations performed by regulatory authorities and the Company's
independent auditors.

         The provision  for loan losses was $420,000 in 1998,  $535,000 in 1997,
and $500,000 in 1996.  The current year  provision has enabled the allowance for
loan losses to increase by 5.4% to  $2,909,000  as of December 31,  1998,  while
there was a 6.3% increase in total loans, net of unearned  discount and unearned
loan fees. The increase in the loan portfolio in 1998 is primarily  attributable
to residential  real estate loans  (including  home equity loans).  Based on the
nature  of  the  collateral  supporting  these  real  estate  loans  it  is  not
anticipated  that  potential  future  problems  with these credits would have as
significant  an impact on the allowance  for loan losses as loans  originated in
previous years.  This, in combination with a reduction in non-performing  loans,
permitted a decrease to the provision in 1998 as compared to 1997. The increased
amount of loan loss  provision  for 1996 over 1995 was  primarily to address the
additional specifically allocated reserves for the increase in non-accrual loans
and for the increased level of charge-offs.

                                       24

<PAGE>
Provision and Allowance for Loan Losses, (Continued)

The  following  table  presents an analysis of the allowance for loan losses for
each of the last five years:

Table 10
Analysis of the Allowance for Loan Losses
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------
                                                             Years ended December 31
                                     ------------------------------------------------------------------------
                                         1998          1997           1996          1995           1994
-------------------------------------------------------------------------------------------------------------
<S>                                <C>                 <C>            <C>           <C>            <C>    

Balance at beginning of period.    $     2,759,000     2,750,000      2,742,000     2,699,000      2,604,000
                                                    
Loans charged off:
       Commercial business                 (76,000)     (225,000)      (203,000)      (99,000)        (8,000)
       Commercial real estate              (68,000)      (34,000)       (55,000)     (132,000)       (58,000)
       Real estate residential             (88,000)     (149,000)      (196,000)      (85,000)      (179,000)
       Consumer                            (76,000)     (191,000)       (64,000)     (124,000)       (69,000)
-------------------------------------------------------------------------------------------------------------
Total loans charged off                   (308,000)     (599,000)      (518,000)     (440,000)      (314,000)
-------------------------------------------------------------------------------------------------------------

Recoveries on charged off loans:
       Commercial business                   9,000        14,000         12,000        33,000         39,000
       Commercial real estate                8,000          -             -            16,000         31,000
       Real estate residential               4,000         2,000          -              -             -
       Consumer                             17,000        57,000         14,000        14,000         29,000
-------------------------------------------------------------------------------------------------------------
Total recoveries                            38,000        73,000         26,000        63,000         99,000
-------------------------------------------------------------------------------------------------------------

Net loans charged off                     (270,000)     (526,000)      (492,000)     (377,000)      (215,000)

Provision for loan losses                  420,000       535,000        500,000       420,000        310,000
-------------------------------------------------------------------------------------------------------------

Balance at end of period           $     2,909,000     2,759,000      2,750,000     2,742,000      2,699,000
-------------------------------------------------------------------------------------------------------------

Net charge-offs during the period as
a percentage of average loans
outstanding during the period                0.12%         0.26%          0.24%         0.20%          0.13%

Allowance for loan losses
as a percentage of loans net of
unearned discount and loan fees
at end of period                             1.29%         1.30%          1.35%         1.39%          1.50%
-------------------------------------------------------------------------------------------------------------
</TABLE>



                                       25
<PAGE>
Provision and Allowance for Loan Losses, (Continued)

     The following table presents an allocation of the allowance for loan losses
by major  category and  percentage  of loans in each category to total loans for
each of the last five  years.  It should be noted that  allocations  are no more
than estimates and are subject to revision as conditions change.

Table 11
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------
                                                                                                              
                1998                1997                1996                1995                1994
             -----------------   -----------------   -----------------   -----------------   -------------------
                        % of                % of                % of                % of                % of
                        loans to            loans to            loans to            loans to            loans to
                        total               total               total               total               total
               Amount    loans     Amount    loans     Amount    loans     Amount    loans     Amount    loans
----------------------------------------------------------------------------------------------------------------
<S>            <C>         <C>    <C>  <C>  <C>    <C>    <C>    <C>    <C>    <C>

Commercial
 business     $ 770,000     7.2% $  439,000     6.9%  $ 666,000     8.0%  $ 161,000     8.1%  $ 386,000     8.7%        
Commercial
 real estate    403,000    29.6     201,000    31.0     292,000    28.4      97,000    28.0     145,000    28.1
Real estate
construction       -        0.5      -          0.4      -          0.4      -          0.3      -          0.8
Real estate
 residential    135,000    55.4     120,000    53.7     153,000    53.7     135,000    54.4     376,000    54.9
Consumer        361,000     7.3     225,000     8.0     182,000     9.5     106,000     9.2     166,000     7.5
Unallocated   1,240,000     -     1,774,000     -     1,457,000      -    2,243,000     -     1,626,000     -
----------------------------------------------------------------------------------------------------------------

Total        $2,909,000   100 %  $2,759,000   100 %  $2,750,000   100 %  $2,742,000   100 %  $2,699,000   100 %  
----------------------------------------------------------------------------------------------------------------
</TABLE>


         Allocations  for commercial  business and commercial  real estate loans
are determined by reviewing certain significant,  non-performing,  delinquent or
otherwise  unusual  loans  and  charge-offs  and by  analyzing  historical  loss
experience and delinquent  trends.  Losses on residential  real estate loans and
consumer loans are reasonably  predictable  based on historical loss experience,
delinquency trends and current economic  conditions.  The unallocated portion of
the allowance for loan losses is established by management at a level considered
prudent to absorb certain  inherent  risks in the loan  portfolio  based on such
information as is currently  available.  Shifts in specific allocations for 1995
resulted from continuing  refinement of loan officer risk ratings and reductions
in certain  delinquency  percentages.  This process was further enhanced in 1996
and, in conjunction  with increased  delinquencies  in certain loan  categories,
resulted in further shifts in specific allocations.


Securities Portfolio

         The primary objectives in managing the Company's  securities  portfolio
are to maintain  the needed  flexibility  to meet  liquidity  needs and changing
interest  rates without  impairing  earnings,  and to provide a stable source of
interest revenue.  The following table presents the yield by securities type and
contractual  maturity  for  the  Bank's  securities  portfolio,   consisting  of
securities available for sale and securities held to maturity.

                                       26
<PAGE>

Table 12
Securities Portfolio and Yield by Maturity
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
                                                                                December 31, 1998
                                     ----------------------------------------------------------------------------------------------
                                                              After One          After Five
                                      One Year            Through             Through            After Ten
                                      or Less           Five Years           Ten Years             Years                    Total
------------------------------------------------------------------------------------------------------------------------------------
Securities Available for Sale
------------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>                   <C>                  <C>                <C>                       <C> 

U.S. Treasuries & Other
     U.S. Government agencies:
        Fair value                $  17,144,000          23,281,000           7,112,000          34,127,000               81,664,000

        Yield                              5.78                5.62                6.29                6.53                     6.09
------------------------------------------------------------------------------------------------------------------------------------
State & Municipal agencies:
        Fair value                $           -           2,932,000           9,857,000            500,000                13,289,000

        Yield(1)                              -                8.26                7.96                7.35                     8.01
------------------------------------------------------------------------------------------------------------------------------------
Other securities:
        Fair value                            -                   -                   -           6,126,000                6,126,000

        Yield                                 -                   -                   -                6.32                     6.32
------------------------------------------------------------------------------------------------------------------------------------

Total Fair Value                  $   17,144,000          26,213,000          16,969,000         40,753,000              101,079,000
------------------------------------------------------------------------------------------------------------------------------------

Weighted average yield(2)                   5.78                6.00                7.26               6.51                     6.36
------------------------------------------------------------------------------------------------------------------------------------

Securities Held to Maturity
------------------------------------------------------------------------------------------------------------------------------------

U.S. Treasuries & other
     U.S. government agencies:
        Carrying Value            $           -                   -                   -          35,838,000               35,838,000

        Yield                                 -                   -                   -                6.87                     6.87
------------------------------------------------------------------------------------------------------------------------------------
States & Municipal securities
        Carrying Value                2,600,000           4,185,000           3,085,000             470,000               10,340,000

        Yield(1)                           8.25                8.42                8.37                8.33                     8.36
------------------------------------------------------------------------------------------------------------------------------------

Total carrying value              $   2,600,000           4,185,000           3,085,000          36,308,000               46,178,000
------------------------------------------------------------------------------------------------------------------------------------

Weighted average yield                     8.25                8.42                8.37                6.89                     7.2
------------------------------------------------------------------------------------------------------------------------------------
<FN>

(1)  Yields are presented on a taxable  equivalent  basis utilizing an effective
     tax rate of approximately 31% for all maturities.

(2)  Yields on  securities  available  for sale are  computed  using  historical
     amortized cost.
</FN>
</TABLE>


                                       27
<PAGE>
Securities Portfolio, (Continued)

         The following  table sets forth the  composition  and carrying value of
the Company's  securities  portfolio,  analyzed by securities available for sale
and securities held to maturity, as of the dates indicated:

Table 13
Securities Portfolio


Securities available for sale
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------
                                                                     December 31
                                                          1998           1997          1996
-------------------------------------------------------------------------------------------------
<S>                                                 <C>                <C>            <C> 

US Treasury securities                              $       -            1,999,000     2,504,000

Federal agency mortgage-backed obligations:

     Federal National Mortgage Association                9,397,000      2,744,000     1,705,000
     Federal Home Loan Mortgage Corporation               5,429,000      4,809,000     4,951,000
     Government National Mortgage Association            19,301,000     24,429,000     1,166,000

Other obligations of Federal agencies                    47,537,000     50,252,000    58,852,000

State and Municipal                                      13,289,000      8,828,000     4,755,000

Other                                                     6,126,000      3,635,000     2,086,000
-------------------------------------------------------------------------------------------------

Total                                               $   101,079,000     96,696,000    76,019,000
-------------------------------------------------------------------------------------------------


Securities held to maturity
-------------------------------------------------------------------------------------------------

Federal agencies mortgage backed                   $     35,838,000     19,083,000       -

Obligations of Federal agencies                             -            6,000,000     9,669,000

State and Municipal                                      10,340,000     12,296,000    11,191,000
-------------------------------------------------------------------------------------------------

Total                                              $     46,178,000     37,379,000    20,860,000
-------------------------------------------------------------------------------------------------
</TABLE>


         Approximately $70 million, or 48% of the total investment portfolio, is
invested  in  U.S.   Agency   Mortgage-Backed   pools  and  U.S.  Agency  issued
Collateralized  Mortgage Obligations (CMOs). This is split equally between fixed
rate and adjustable  rate issues.  Due to the nature of the mortgage  collateral
behind these issues,  the average lives of these  holdings will tend to lengthen
when interest  rates rise and shorten when interest rates fall. To help mitigate
this risk,  management primarily focuses on instruments that have some degree of
extension and call protection,  particularly in the fixed rate holdings.  All of
the fixed rate  holdings  are, for example,  planned  amortization  class CMO's,
which  provide a higher  degree of  certainty  with  respect  to  cashflows.  In
addition,  management  regularly reviews the performance of all  Mortgage-Backed
holdings as well as the portfolio as a whole.  This  includes the  projection of
principal cashflows under a current rate environment as well as given a parallel
move in the  yield  curve up or down  200  basis  points.  The  increase  in the
securities portfolio in 1998 and 1997, in both the securities available for sale
and investment securities,  is a result of the investment of funds borrowed from
the Federal  Home Loan Bank of  Pittsburgh.  The money  borrowed was invested in
mortgage  backed  securities to take advantage of borrowing at a rate lower than
the rate received in investing in federal  mortgage backed  obligations for sale
and investment securities.

                                       28
<PAGE>

Securities Portfolio, (Continued)

     There has been a consistent  trend of increasing  the balance of securities
available for sale. In 1998 the bank  increased  securities  held to maturity as
part of asset/liability  strategy to enhance net interest income.  This trend is
based on  managements  intention to provide  flexibility  within the  securities
portfolio to adapt to the changing risk  environment.  Also,  the Bank increased
its investment in state and municipal  securities.  The tax equivalent  interest
rates  available  in 1998 and 1997  have made  these  securities  an  attractive
investment.


Deposits

     One of the primary  components of sound growth and profitability is deposit
accumulation  and  retention.  Total  deposits at December 31, 1998 increased by
4.7% over total  deposits at December  31, 1997,  which had a .8% decrease  over
total deposits at December 31, 1996. Table 14 below summarizes deposits by type.
Table 15  presents  maturity  information  for all time  deposits  and  Table 16
presents maturity information for time deposits of $100,000 or greater.

Table 14
Deposits by Major Classification
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------
                                                                             December 31
                                                -------------------------------------------------------------
                                                            1998                1997               1996
-------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                  <C>                 <C>

Demand non-interest bearing                             $   42,931,000        43,740,000          37,643,000
Demand interest bearing                                     38,462,000        30,679,000          23,410,000
Savings                                                     56,714,000        52,783,000          53,175,000
Money Market                                                22,481,000        22,487,000          25,020,000
Time                                                       146,772,000       143,954,000         156,698,000
-------------------------------------------------------------------------------------------------------------

Total                                                   $  307,360,000       293,643,000         295,946,000
-------------------------------------------------------------------------------------------------------------
</TABLE>



Table 15
Remaining Maturities of Time Deposits
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------
                                                                             December 31
                                                ------------------------------------------------------------
                                                           1998                1997                1996
------------------------------------------------------------------------------------------------------------
<S>                                                <C>                      <C>                 <C>  

Three months or less                               $    33,271,000           31,557,000          33,732,000
Over three through six months                           32,373,000           32,327,000          36,191,000
Over six through twelve months                          48,220,000           48,735,000          50,476,000
Over twelve months                                      32,908,000           31,335,000          36,299,000
------------------------------------------------------------------------------------------------------------

Total                                         $        146,772,000          143,954,000         156,698,000
------------------------------------------------------------------------------------------------------------
</TABLE>


                                       29
<PAGE>
Table 16
Remaining Maturities of Time Deposits of
$100,000 or Greater
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------
                                                                             December 31
                                                -----------------------------------------------------------------
                                                              1998                  1997                 1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>                   <C>  

Three months or less                                    $   9,967,000           11,359,000             9,586,000
Over three through six months                              12,005,000           10,128,000            14,662,000
Over six through twelve months                             13,056,000           12,395,000            11,069,000
Over twelve months                                          6,605,000            5,852,000             7,257,000
-----------------------------------------------------------------------------------------------------------------

Total                                                   $  41,633,000           39,734,000            42,574,000
-----------------------------------------------------------------------------------------------------------------
</TABLE>


     Federal  Fund  rates,  which  are  a  driving  factor  in  the  pricing  of
liabilities,  have  continued to remained  stable in 1998.  These interest rates
have led to a trend from long-term  instruments to  intermediate  and short-term
instruments  reflecting the consumers'  unwillingness  to commit their funds for
extended periods of time.

     Because  of  the  Bank's  continued  transition  to  a  regional  financial
institution  in  Northeastern,  Pennsyl-vania,  management  altered  the  Bank's
pricing strategy on interest bearing  liabilities.  Management  actively manages
the pricing  structure of interest  bearing  liabilities to reduce the impact of
local  competitive  pressures by managing the portfolio on a regional basis. The
result of this  strategy was a decrease in the time deposits of  $12,744,000  in
1997 and a continuing decrease of $2,818,000 in 1998. This had a positive impact
on the Bank's  interest margin by lowering the cost of time deposits in 1997 and
allowing the Bank to maintain that lower level of cost in 1998.  Offsetting  the
decrease  in time  deposits  was an  increase  in low and  non-interest  bearing
deposits (demand  interest  bearing and savings) which increased  $11,714,000 in
1998. The result was a decrease in the Bank's overall cost of deposits in 1998.

Taxation

     Income tax expense was  $1,535,000,  $1,500,000,  and  $1,543,000 for 1998,
1997, and 1996, respectively. The Company's effective tax rate for these periods
was 27.6%, 27.2 %, and 29.4%, respectively. The fluctuation in the Company's tax
expense and  effective  tax rate is primarily  due to  management's  strategy in
investing in tax free securities.

Liquidity

     Liquidity  involves the  Company's  ability to raise funds to support asset
growth,  meet deposit  withdrawal and other borrowing  needs,  maintain  reserve
requirements  and otherwise  operate the Company on an ongoing basis.  To adjust
for the effects of a changing  interest rate environment and deposit  structure,
the  Company's  management  monitors  its  liquidity  requirements  through  its
asset/liability  management program.  This program,  along with other management
analysis,  enables the bank to meet its cash flow  requirements and adapt to the
changing  needs of  individual  customers  and the  requirements  of  regulatory
agencies.

                                       30
<PAGE>

Liquidity, (Continued)

     Among the sources of asset  liquidity are cash and due from banks,  Federal
Funds sold,  securities  available for sale,  mortgage loans available for sale,
and funds received from the repayment of loans and the maturing of  investments.
The  total  carrying  value of cash  and due from  banks,  Federal  Funds  sold,
securities available for sale and investment  securities with maturities of less
than one year was  $125,256,000  at  December  31,  1998.  In  addition to these
sources of liquidity and loan repayments,  the Company has the ability to secure
borrowings collateralized by the securities portfolio.  Through the use of these
and other  sources,  management  believes the Company has adequate  liquidity in
both the  short-term  and the  long-term to carry out the  Company's  growth and
profitability  strategies.  The  Company's  ability  to  pay  dividends  depends
primarily on the ability of the Bank to pay dividends to the Company. Note 12 of
the consolidated financial statements provides information as to the limitations
on dividend  and other  funds  transfers  from the  Company's  subsidiary.  Such
limitations  are not expected to adversely  impact the ability of the Company to
meet its future dividend and other cash obligations.


Effects of Economic Cycles

     Economic  conditions  are reviewed by management in a continuing  effort to
adjust to the changing environment.  The effects of these changes on the banking
industry as a whole and in the Company's  market area are reviewed by management
in order to compete at a level  consistent with the goals of  profitability  and
sound management policy.

         An economic  recession can decrease longer term interest  rates,  which
will generally increase the value of existing fixed rate investment  securities,
mortgage  loans and other  similar  fixed  rate  assets.  However,  recessionary
periods also may tend to decrease  the  borrowing  needs of consumers  and cause
increased  uncertainty  relative  to the  borrowers  ability  to pay  previously
advanced loans.  Also,  reinvestment  of matured  investments and loan principal
payments can be a problem as attractive rates are not as available.  This may be
further  exacerbated  by  accelerated  prepayments  in a falling  interest  rate
environment.  The converse of the aforementioned impact of an economic recession
may be true in a period of economic  expansion.  Management closely monitors the
collectibility of existing loans outstanding and intends to be conservative when
authorizing new loans, especially during periods of economic uncertainty.

Impact of Other Recently Issued Accounting Standards

     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This  statement   establishes   standards  for  the  reporting  and  display  of
comprehensive  income  and  its  components  in a full  set  of  general-purpose
financial statements.  SFAS No. 130 requires that all items that are required to
be recognized as components of  comprehensive  income be reported in a financial
statement  that is  displayed  with  the  same  prominence  as  other  financial
statements.  The statement does not require a specific format for that financial
statement but requires that an enterprise  display an amount  representing total
comprehensive income for the period
                                       31
<PAGE>

Impact of Other Recently Issued Accounting Standards, (Continued)

in that  financial  statement.  SFAS  No.  130 is  effective  for  fiscal  years
beginning  after  December 15, 1997. The Company has included this new reporting
information in its 1998 consolidated financial statements as required.

     In June 1997, the FASB issued SFAS No. 131,  Disclosures  About Segments of
an Enterprise and Related  Information.  SFAS No. 131 establishes  standards for
the way that public  business  enterprises  report  information  about operating
segments in annual  financial  statements  and requires  that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
reports  issued to  shareholders.  It also  establishes  standards  for  related
disclosures about products and services,  geographic areas, and major customers.
SFAS No. 131 is effective for financial  statements for periods  beginning after
December 15, 1997. The Company's 1998 annual  financial  statements  include the
required disclosures for a business that is managed as one operating segment.

     In February  1998,  the FASB issued  SFAS No. 132,  Employer's  Disclosures
about  Pensions  and  other  Postretirement  Benefits.  This  Statement  revises
employers'  disclosures about pension and other postretirement benefit plans. It
does not change the  measurement or recognition of those plans.  It standardizes
the disclosure  requirements for pensions and other  postretirement  benefits to
the  extent  practicable,  requires  additional  information  on  changes in the
benefit  obligations  and  fair  values  of plan  assets  that  will  facilitate
financial  analysis,  and eliminates  certain  disclosures that are no longer as
useful as they were when FASB  Statements  No.  87,  Employers'  Accounting  for
Pensions,  No. 88,  Employers'  Accounting for Settlements  and  Curtailments of
Defined  Benefits  Pension  Plans and for  Termination  Benefits,  and No.  106,
Employers'  Accounting for  Postretirement  Benefits  Other Than Pensions,  were
issued.  This Statement is effective for fiscal years  beginning  after December
15, 1997. This Statement  requires changes in disclosures and did not effect the
financial condition, operations, or equity of the Corporation.

         In June 1998,  the FASB issued SFAS No. 133,  Accounting for Derivative
Instruments and Hedging Activities.  This statement  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other  contracts,   (collectively   referred  to  as
derivatives)  and for hedging  activities.  It requires that an entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative  depends on the intended use of the derivative
and the resulting  designation.  If certain conditions are met, a derivative may
be specifically  designated as (a) a hedge of certain exposure to changes in the
fair  value  of  a  recognized  asset  or  liability  or  an  unrecognized  firm
commitment,  (b) a hedge of the exposure to variable  cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposures. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier adoption is permitted. The Company has not yet determined the impact, if
any,  of  this   Statement,   including   its   provisions   for  the  potential
reclassifications of investment securities, on earnings,  financial condition or
equity.
                                       32
<PAGE>

Impact of Other Recently Issued Accounting Standards, (Continued)

         In  October  1998,  the  FASB  issued  SFAS  No.  134,  Accounting  for
Mortgage-Backed  Securities  Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage  Banking  Enterprise.  This Statement  requires that
after the  securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking  activities  classify any retained  mortgage-backed  securities
based on the ability and intent to sell or hold those investments, except that a
mortgage   banking   enterprise   must   classify   as  trading   any   retained
mortgage-backed  securities  that  it  commits  to sell  before  or  during  the
securitization  process. This statement is efective for the first fiscal quarter
beginning  after  December  15,  1998  with  earlier  adoption  permitted.  This
statement provides a one-time opportunity for an enterprise to reclassify, based
on  the  ability  and  intent  on  the  date  of  adoption  of  this  statement,
mortgage-backed   securities  and  other  beneficial   interest  retained  after
securitization of mortgage loans held for sale from the trading category, except
for those with  commitments  in place.  The Company has not yet  determined  the
impact, if any, of this Statement on earnings, financial condition or equity.

Other Matters

Year 2000 Compliance

     Year 2000 issues  result from the  inability of many  computer  programs or
computerized  equipment  to  accurately  calculate,  store  or use a date  after
December  31,  1999.  The  erroneous  date can be  interpreted  in a  number  of
different  ways,  the most common being Year 2000  represented as the year 1900.
Correctly  identifying  and  processing  Year 2000 as a leap year may also be an
issue. These  misinterpretations  of various dates in the Year 2000 could result
in a system failure or  miscalculations  causing  disruptions of normal business
operations  including,  among other  things,  a temporary  inability  to process
transactions,   track  important  customer  account   information,   or  provide
convenient access to this information.

Company State of Readiness

         The  Company  has   completed  an   assessment  of  its  financial  and
operational  software systems in accordance with the various  regulatory  agency
guidance  documents.  The Company is  maintaining  an  inventory of hardware and
software  systems,  which  ranges from  mission  critical  software  systems and
personal  computers  to  security  and  video  equipment,   and  general  office
equipment.  The Company has  prioritized  its hardware  and software  systems to
focus on the most  critical  systems  first.  In  connection  with the Company's
assessment,  a number of the less  significant  third party vendors  advised the
Company that their software is Year 2000  compliant,  and the Company intends to
fully test that software by June 30, 1999.

     The  Company  has  completed  an  assessment  of  its  core  financial  and
operational  software  systems and has taken the  necessary  steps to bring them
into compliance. Our Year 2000 project plan is in place and is progressing
                                       33
<PAGE>

Other Matters, (Continued)

on schedule with the testing of our core  applications  for critical dates.  The
Company has tested past the Year 2000 prior to December 31, 1998 and plans to be
fully compliant by June 30, 1999.

Contingency Plan

         The Board of Directors and  Management of the Company  recognize  that,
despite  efforts to renovate or replace  mission-critical  systems,  the risk of
disruption  remains due to the  failure of a resource  which  supports  critical
business  activities.  To provide for business  continuity  in the event of such
disruptions,  the Board has directed management to coordinate the development of
contingency  plans  for each  line of  business  designated  as a core  business
process. Management will reevaluate identification of mission-critical resources
and develop and document Y2K scenarios  which could result in the loss of one or
more  resources.  Because  of the number of  critical  resources  and  different
combinations  of  failure  scenarios,  it is  impossible  to  prepare  for every
conceivable  event.  Management  will assign a probability  and  prioritize  and
allocate contingency  planning resources based on the level of probability.  The
bulk of evaluation of contingency  needs will be completed by June,  1999,  when
the Company will shift to a monitoring mode, which will include an early warning
system to identify suppliers who may be experiencing date related failures.

Cost of Year 2000

         Over the past several years,  the Company's  Technology Plan has called
for an aggressive  schedule for  installing new systems or upgrading old systems
in order to build a  technology  infrastructure  which will allow the Company to
offer  competitive  products  while  providing  for  internal  efficiencies  and
customer  service  improvement.  The Technology Plan has resulted in positioning
the Company to continue its  technology  improvements  while  avoiding  specific
costly Year 2000 issues. Based on preliminary  information,  costs of addressing
potential  problems are estimated to be $550,000.  The Bank had  expenditures of
$260,000 in 1998 for Y2K related matters,  of which $10,000 was expensed in 1998
and  $250,000  will be  capitalized  and  amortized  over the next  five  years.
Additionally, during 1999 the bank anticipates further expenditures of $125,000,
all of which will be capitalized over the next five years, with $20,000 expensed
in 1999.  This cost is primarily  associated  with  purchasing new equipment and
software which will be capitalized and amortized over a 5 year period.

Risks of Year 2000

     Systems outside of the direct control of the Company, such as ATM networks,
credit card processors,  and the Fed Wire System, pose a more problematic issue.
A theoretical  problem scenario would involve a temporary inability of customers
to access  their  funds  through  automated  teller  machines,  point of service
terminals  at retailer  locations,  or other  shared  networks.  For this reason
alone, banks and their governing agencies are closely  scrutinizing the progress
of our major industry service providers.
                                       34
<PAGE>

Other Matters, (Continued)

     Successful  and  timely  completion  of the Year 2000  project  is based on
management's  best  estimates,  which were derived from numerous  assumptions of
future events,  which are inherently  uncertain,  including the  availability of
certain resources, third party modification plans and other factors.

Forward Looking Statements

     Within these financial statements we have included certain "forward looking
statements"  concerning  the  future  operations  of  the  Corporation.   It  is
management's  desire to take  advantage of the "safe  harbor"  provisions of the
Private  Securities  Litigation  Reform Act of 1995.  This  statement is for the
express  purpose of availing the  Corporation  of the  protections  of such safe
harbor  with  respect  to all  "forward  looking  statements"  contained  in our
financial statements.  We have used "forward looking statements" to describe the
future plans and  strategies  including our  expectations  of the  Corporation's
future financial results.  Management's ability to predict results or the effect
of future plans and strategy is inherently uncertain.  Factors that could affect
results include interest rate trends, competition,  the general economic climate
in Pennsylvania, and the country as a whole, loan delinquency rates, and changes
in  federal  and  state  regulation.  These  factors  should  be  considered  in
evaluating the "forward  looking  statements",  and undue reliance should not be
placed on such statements.


Capital Adequacy

     A strong capital  position is important to the continued  profitability  of
the Company and  promotes  depositor  and  investor  confidence.  The  Company's
capital  consists of  stockholders'  equity,  which  provides a basis for future
growth and  expansion  and also  provides a buffer  against  unexpected  losses.
Undivided  profits  increased  9.7% between 1997 and 1998 and 11.9% between 1996
and 1997. The Company has paid cash dividends  without  interruption  since 1942
and it is  management's  intention  to continue  paying a  reasonable  return on
stockholders'   investment  while  retaining  adequate  earnings  to  allow  for
continued growth.

     The Company's  ability to pay dividends to its'  shareholders  rests on the
ability of the Bank to pay  dividends to the Company.  Dividends  payable to the
Company by the Bank are subject to certain regulatory  limitations.  The payment
of  dividends in any year without  regulatory  permission  is limited to the net
profits (as defined for regulatory purposes) for that year plus the retained net
profits for the preceding two calendar  years.  Accordingly,  as of December 31,
1998, dividends in excess of those already declared from the Bank to the Company
are limited to  $5,801,000.  The  dividends  declared to the Company by the Bank
were $2,235,000 in 1998.

     The Federal  Reserve  Board  measures  capital  adequacy  for bank  holding
companies by using a risk-based  capital framework and by monitoring  compliance
with minimum  leverage ratio  guidelines.  The minimum ratio of total risk-based
capital to risk-adjusted  assets is 8% at December 31, 1998, of which 4% must be
Tier I  capital.  The  Company's  total  risk-based  capital  ratio was 16.6% at
December  31,  1998  and  17.1% at  December  31,  1997.  The  Company's  Tier I
risk-based  capital  ratio was 15.4 % at December 31, 1998 and 15.8% at December
31, 1997.
                                       35


<PAGE>

Capital Adequacy, (Continued)

          In  addition,  the  Federal  Reserve  Board  has  established  minimum
leverage ratio guidelines for bank holding  companies.  These guidelines provide
for a minimum leverage ratio of 3% for bank holding  companies that meet certain
criteria,  including the maintenance of the highest regulatory rating. All other
bank holding  companies are required to maintain a leverage  ratio of 3% plus an
additional  cushion of at least 100 to 200 basis  points.  The  Federal  Reserve
Board has not  advised  the  Company  of any  specific  minimum  leverage  ratio
applicable to it. The Company's leverage ratio was 8.4% at December 31, 1998 and
8.6 % at December 31, 1997.

         At December  31,  1998,  the Bank's total  risk-based  capital,  Tier I
risk-based  capital and Tier I leverage ratios as defined by the Federal Deposit
Insurance Corporation Improvement Act were 16.2%, 14.9%, and 8.3%, respectively.

          Certain other ratios that are commonly used in analyzing  bank holding
company and bank financial statements are presented in the following table:

Table 17
Return on Equity and Assets
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------
                                                                             Years ended December 31
                                                                   ------------------------------------
                                                                           1998       1997         1996
-------------------------------------------------------------------------------------------------------
<S>                                                                       <C>         <C>          <C>  

Return on assets (net income divided by average total assets)               1.02%       1.12%        1.13%

Return on equity (net income divided by average equity)                    11.87%      12.77%       12.76%

Dividend payout ratio (cash dividends declared divided
by net income)                                                             55.57%      51.27%       51.30%

Equity to asset ratio (average equity divided by average
total assets)                                                               8.6 %       8.8 %        8.9 %
-------------------------------------------------------------------------------------------------------
</TABLE>



                                       36
<PAGE>

Quarterly Financial Data (unaudited)
In Thousands, Except Per Share Amount
<TABLE>
<CAPTION>

                                                 First         Second         Third        Fourth
                                                 Quarter       Quarter        Quarter       Quarter
-----------------------------------------------------------------------------------------------------
<S>                                       <C>                  <C>             <C>           <C> 

1998
Net Interest Income                       $         3,551          3,541         3,475         3,416
Provision for Loan Losses                             150            150           150           (30)
Other Operating Income                                853            584           653           871
Other Operating Expense                             2,674          2,714         2,742         2,837
Net Income                                          1,140            921           907         1,054
-----------------------------------------------------------------------------------------------------

Earnings Per Share
     Basic (1)                            $          0.40           0.32          0.31          0.36
     Diluted                                         0.39           0.31          0.31          0.36
-----------------------------------------------------------------------------------------------------

1997
Net Interest Income                       $         3,375          3,304         3,468         3,515
Provision for Loan Losses                             135            140           140           120
Other Operating Income                                537            627           738           559
Other Operating Expense                             2,586          2,471         2,577         2,446
Net Income                                            851            965         1,070         1,122
-----------------------------------------------------------------------------------------------------

Earnings Per Share
     Basic (1)                            $          0.30           0.34          0.37          0.39
     Diluted                                         0.29           0.33          0.36          0.38
-----------------------------------------------------------------------------------------------------
<FN>

(1)  Per share data  restated to reflect the  Company's  two for one stock split
     effected in the form of a stock dividend effective July 15, 1996.
</FN>
</TABLE>

                                       37
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>


Assets                                                                       1998            1997
--------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                     <C> 

Cash and due from banks                                              $       13,977,000      14,918,000
Federal funds sold                                                            7,600,000        -
Securities available for sale (cost
     of $100,057,000 in 1998 and
      $95,591,000 in 1997)
          U.S. Treasury securities                                            -               1,999,000
          Federal agency mortgage based obligations                          34,127,000      31,982,000
          Other obligations of Federal agencies                              47,537,000      50,252,000
          Obligations of states and political subdivisions                   13,289,000       8,828,000
          Other securities                                                    6,126,000       3,635,000
     
--------------------------------------------------------------------------------------------------------
Total securities available for sale                                         101,079,000      96,696,000
--------------------------------------------------------------------------------------------------------


Securities held to maturity (approximate fair value
     of $46,729,000 in 1998 and
      $37,857,000 in 1997):
        Federal agency mortgage based obligations                            35,838,000      19,083,000
        Other obligations of Federal agencies                                 -               6,000,000
        Obligations of states and political subdivisions                     10,340,000      12,296,000
--------------------------------------------------------------------------------------------------------
                                                                       
Total securities held to maturity                                            46,178,000      37,379,000
--------------------------------------------------------------------------------------------------------

Loans, net of unearned discount and deferred loan fees                      225,735,000     212,342,000
Allowance for loan losses                                                    (2,909,000)     (2,759,000)
--------------------------------------------------------------------------------------------------------
Net loans                                                                   222,826,000     209,583,000
--------------------------------------------------------------------------------------------------------

Accrued interest receivable                                                   2,547,000       3,168,000
Premises and equipment, net                                                   7,067,000       5,334,000
Other real estate owned                                                       1,449,000       1,045,000
Other assets                                                                  1,843,000       1,373,000
Cost in excess of fair value of net assets acquired
     (net of accumulated amortization of $952,000 in 1998
     and $913,000 in 1997)                                                      591,000         630,000
--------------------------------------------------------------------------------------------------------

Total assets                                                         $      405,157,000     370,126,000
--------------------------------------------------------------------------------------------------------
</TABLE>




                                       38
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets, (Continued)
December 31, 1998 and 1997

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------
 
Liabilities and Stockholders' Equity                                                1998               1997
------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                         <C>

Deposits:
     Demand - noninterest bearing                                         $        42,931,000          43,740,000
     NOW and Super NOW                                                             38,462,000          30,679,000
     Savings                                                                       56,714,000          52,783,000
     Money Market                                                                  22,481,000          22,487,000
     Time                                                                         146,772,000         143,954,000
------------------------------------------------------------------------------------------------------------------
Total deposits                                                                    307,360,000         293,643,000
------------------------------------------------------------------------------------------------------------------

Accrued interest payable                                                            2,095,000           2,103,000
Dividends payable                                                                     581,000             544,000
Federal funds purchased                                                             -                   2,350,000
Other borrowed money                                                               58,357,000          37,073,000
Other liabilities                                                                   1,298,000           1,015,000
------------------------------------------------------------------------------------------------------------------

Total liabilities                                                                 369,691,000         336,728,000
------------------------------------------------------------------------------------------------------------------

Stockholders' equity:
     Common  stock,  $1 par  value  per  share,  25,000,000  shares  authorized;
        2,904,309 shares in 1998; 2,862,874
        in 1997 issued and outstanding                                              2,904,000           2,863,000
     Additional paid-in capital                                                    11,767,000          11,472,000
     Retained earnings                                                             20,121,000          18,334,000
     Accumulated other comprehensive income                                           674,000             729,000
------------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                                         35,466,000          33,398,000
------------------------------------------------------------------------------------------------------------------


Total liabilities and stockholders' equity                                $       405,157,000         370,126,000
------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.



                                       39
<PAGE>
PIONEER  AMERICAN HOLDING COMPANY CORP  Condolidated  Statements Of Operations
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------
                                                                         1998              1997             1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                      <C>               <C> 

Interest income:
     Interest and fees on loans                                 $         19,093,000       18,101,000       18,345,000
     Interest on Federal funds sold                                          480,000          320,000          274,000
     Interest on investments:
                Taxable                                                    7,615,000        7,063,000        5,144,000
                Non-taxable                                                1,114,000        1,023,000          595,000
-----------------------------------------------------------------------------------------------------------------------

Total interest income                                                     28,302,000       26,507,000       24,358,000
-----------------------------------------------------------------------------------------------------------------------
Interest expense:
     Interest on deposits                                                 10,840,000       11,337,000       10,799,000
     Interest on Federal funds purchased                                      23,000           10,000            1,000
     Interest on other borrowed money                                      3,456,000        1,498,000           74,000
-----------------------------------------------------------------------------------------------------------------------

Total interest expense                                                    14,319,000       12,845,000       10,874,000
-----------------------------------------------------------------------------------------------------------------------
Net interest income                                                       13,983,000       13,662,000       13,484,000

Provision for loan loss                                                      420,000          535,000          500,000
-----------------------------------------------------------------------------------------------------------------------

Net interest income after provision for loan losses                       13,563,000       13,127,000       12,984,000
-----------------------------------------------------------------------------------------------------------------------
Other operating income:
     Service charges on deposit accounts                                   1,334,000        1,330,000        1,168,000
     Gains on sales of securities available for sale                         509,000          154,000            -
     Gains on calls of securities held to maturity                             2,000            3,000            -
     ATM fees                                                                523,000          402,000          131,000
     Other income                                                            593,000          572,000          713,000
-----------------------------------------------------------------------------------------------------------------------

Total other operating income                                               2,961,000        2,461,000        2,012,000
-----------------------------------------------------------------------------------------------------------------------
Other operating expenses:
     Salaries and employee benefits                                        5,071,000        5,040,000        5,061,000
     Net occupancy expense of bank premises                                1,027,000        1,026,000          857,000
     Furniture and equipment expenses                                        773,000          685,000          622,000
     Data Processing expense                                                 255,000          242,000          241,000
     ORE Expense                                                             360,000          121,000          193,000
     Other expenses                                                        3,481,000        2,966,000        2,775,000
-----------------------------------------------------------------------------------------------------------------------

Total other operating expenses                                            10,967,000       10,080,000        9,749,000
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes                                                 5,557,000        5,508,000        5,247,000
Income tax expense                                                         1,535,000        1,500,000        1,543,000
-----------------------------------------------------------------------------------------------------------------------

Net income                                                      $          4,022,000        4,008,000        3,704,000
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax
     Unrealized gain/loss on securities
        Unrealized holding gain/(loss) arising during the period             282,000        1,013,000          (87,000)
        Less reclassification adjustment for gains
            included in net income                                          (337,000)        (104,000)             -
        Comprehensive income                                               3,967,000        4,917,000        3,617,000
-----------------------------------------------------------------------------------------------------------------------

Earnings Per Share Data: (Based on net income)
        Basic                                                   $               1.39             1.41             1.32
        Diluted                                                                 1.36             1.36             1.26
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                       40
<PAGE>

PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated  Statements of Changes in Stockholders' Equity Years ended 
December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>


                                                                                    Accumlated
                                                                                      Other
                                                          Additional                 Compre-                    Total
                                               Common      Paid-in      Retained     hensive     Treasury   Stockholders'
                                                Stock      Capital      Earnings      Income       Stock       Equity
--------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>          <C>             <C>        <C>         <C>

Balance at December 31, 1995               $   2,786,000   11,181,000   14,618,000      (93,000)     -         28,492,000

Net Income                                        -           -          3,704,000        -          -          3,704,000

Cash dividends declared - $0.66 per share         -           -         (1,900,000)       -          -         (1,900,000)

Changes in net unrealized loss on
     securities available for sale, net of tax    -           -            -            (87,000)     -            (87,000)

Exercise of stock options                         43,000       52,000      (41,000)       -          -             54,000
--------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1996               $   2,829,000   11,233,000   16,381,000     (180,000)     -         30,263,000

Net Income                                        -           -          4,008,000        -          -          4,008,000

Cash dividends declared - $0.72 per share         -           -         (2,055,000)       -          -         (2,055,000)

Changes in net unrealized gain on
     securities available for sale, net of tax    -           -            -            909,000      -            909,000

Exercise of stock options                         34,000      239,000      -              -          -            273,000
--------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1997               $   2,863,000   11,472,000   18,334,000      729,000      -         33,398,000

Net Income                                        -           -          4,022,000        -          -          4,022,000

Cash dividends declared - $0.77 per share         -           -         (2,235,000)       -          -         (2,235,000)

Changes in net unrealized gain on
     securities available for sale, net of tax    -           -            -            (55,000)     -            (55,000)

Purchase of Treasury stock                        (2,000)     -            -              -         (33,000)      (35,000)

Exercise of stock options                         43,000      295,000      -              -          33,000       371,000
--------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1998               $   2,904,000   11,767,000   20,121,000      674,000      -         35,466,000
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.


                                       41
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

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

                                                                           1998             1997            1996
---------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                       <C>             <C>

Cash flows from operating activities:
     Net income                                                  $        4,022,000        4,008,000       3,704,000

     Adjustments  to  reconcile  net income to 
        net cash  provided  by  operating
        activities:
            Net gain on sales of securities available
                for sale                                                   (509,000)        (154,000)       -
            Net gain on calls on investments securities                      (2,000)          (3,000)       -
            Accretion of discount on securities
                and money market investments                                (48,000)         (63,000)        (94,000)
            Amortization of premium on investment
                securities                                                  394,000           91,000          97,000
            Provision for loan losses                                       420,000          535,000         500,000
            Decrease in deferred loan fees                                 (260,000)          (6,000)       (116,000)
            (Increase) decrease in deferred tax benefit                      54,000           (2,000)        (30,000)
            Decrease (increase) in accrued interest receivable              621,000         (576,000)         41,000
            Depreciation and amortization of premises
                and equipment                                               859,000          844,000         770,000
            Gain on sales of premises and equipment                         (23,000)          (5,000)         (6,000)
            Loss on sale of other real estate                               220,000           13,000         177,000
            Proceeds from the sale of mortgage
                 and PHEAA loans held for sale                            5,419,000        3,414,000      14,439,000
            Net increase in mortgage & PHEAA
                loans held for sale                                      (5,712,000)      (3,160,000)     (2,584,000)
            Gain on sale of mortgages and PHEAA loans                       (62,000)         (58,000)       (249,000)
            (Decrease) increase in other assets                            (497,000)          57,000        (322,000)
            Amortization of goodwill                                         39,000           38,000          39,000
            Increase (decrease) in accrued interest payable                  (8,000)         (98,000)         99,000
            (Decrease) increase in other liabilities                        283,000          (32,000)        (61,000)
---------------------------------------------------------------------------------------------------------------------
     Total adjustments to reconcile net income to net cash
        provided by operating activities                                  1,188,000          835,000      12,700,000
---------------------------------------------------------------------------------------------------------------------

Net cash provided by operating activities                                 5,210,000        4,843,000      16,404,000
---------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
     Proceeds from maturities and calls of securities
        held to maturity                                                 16,866,000        6,638,000       6,745,000
     Proceeds from maturities and calls of securities
        available for sale                                               31,788,000       38,459,000      35,908,000
     Proceeds from sales of securities available for sale                20,217,000       17,799,000       6,327,000
     Purchases of securities held to maturity                           (25,804,000)     (44,593,000)     (4,445,000)
     Purchase of securities available for sale                          (56,167,000)     (53,992,000)    (47,188,000)
     Net increase in loans made to customers, excluding
        provision for loan losses and change in
        deferred loan fees                                              (14,130,000)      (9,764,000)    (18,923,000)
     Acquisition of premises and equipment                               (2,635,000)      (1,132,000)     (1,071,000)
     Proceeds from sales of premises and equipment                           66,000           35,000          14,000
     Proceeds from sale of other real estate                                459,000          471,000         169,000
---------------------------------------------------------------------------------------------------------------------


Net cash used in investing activities                                   (29,340,000)     (46,079,000)    (22,464,000)
---------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       42
<PAGE>


PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flows, (Continued)
Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

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

                                                                       1998              1997              1996
-----------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                       <C>                <C> 

Cash flows from financing activities:
     Net (decrease)increase in demand, NOW and Super
        NOW, savings, money market and time deposits.         $         13,717,000       (2,303,000)         7,694,000
     Dividends paid                                                     (2,198,000)      (1,992,000)        (1,837,000)
     Other borrowed money                                               21,284,000       36,798,000         -
     Increase (decrease) Federal funds purchased                        (2,350,000)       2,350,000         -
     Exercise of stock options                                             336,000          273,000             54,000
-----------------------------------------------------------------------------------------------------------------------

Net cash provided by financing activities                               30,789,000       35,126,000          5,911,000
-----------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                     6,659,000       (6,110,000)          (149,000)

Cash and cash equivalents at beginning of year                          14,918,000       21,028,000         21,177,000
-----------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of year                   $            21,577,000       14,918,000         21,028,000
-----------------------------------------------------------------------------------------------------------------------

Supplemental Disclosure:
     Cash payments for interest                                         14,327,000       12,943,000         10,775,000
     Cash payments for income taxes                                      1,753,000        1,491,000          1,543,000
     Transfer of assets from loans
        to other real estate                                             1,083,000          753,000            190,000
     Change in net unrealized loss(gain) on securities
        available for sale                                                  83,000       (1,378,000)           132,000
     Tax effect on change in unrealized loss(gain)
        on securities available for sale                                    28,000         (469,000)            45,000
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.



                                       43
<PAGE>

Notes to Consolidated Financial Statements

 (1)     Summary of Significant Accounting Policies

         Principles of Consolidation and Presentation

         The accompanying  consolidated  financial statements have been prepared
         in conformity with generally accepted accounting principles and include
         the  accounts  of the  Pioneer  American  Holding  Company  Corp.  (the
         "Company")  and its  wholly-owned  subsidiary,  Pioneer  American Bank,
         National  Association  (the "Bank").  The Bank provides a wide range of
         banking  services to  individual  and corporate  customers  through its
         branch  banks  in  Lackawanna,  Luzerne,  Monroe,  Wayne,  and  Wyoming
         Counties in Pennsylvania. The Bank operates within two major markets in
         Northeastern  Pennsylvania  consisting  of: the Scranton  -Wilkes-Barre
         -Hazleton  metropolitan  statistical area (MSA) and the Poconos.  These
         two markets are quite diverse.  The MSA consists of a stable industrial
         complex and a growing service  industry.  The MSA also has a relatively
         stable  population  base. The Poconos is a more transient market with a
         growing  industrial and service complex,  but is still primarily driven
         by the vacation  resort and tourist trade.  The entire  business of the
         Company is managed as one operating segment.

         The  Bank  operates  its  branch  network  in three  distinct  manners:
         supermarket  banking  (10  offices),   traditional  branch  banking  (8
         offices),  and personal banking (2 offices).  A large percentage of the
         Bank's loans and deposits were originated and are being serviced by the
         traditional  branches.  All of the  branches are full service and offer
         commercial  and  retail  products.   These  products  include  checking
         accounts   (non-interest  and  interest  bearing),   savings  accounts,
         certificate of deposits,  commercial and installment loans, real estate
         mortgages  and home  equity  loans.  The  Bank  also  offers  ancillary
         services which complement these products.

         The Bank is subject to competition  from other  financial  institutions
         and other  financial  services  companies.  The Bank is  subject to the
         regulations  of  certain  federal   agencies  and  undergoes   periodic
         examinations by those regulatory authorities.

         All material intercompany balances and transactions between the Company
         and its  subsidiary  have been  eliminated.  In preparing the financial
         statements,  management is required to make  estimates and  assumptions
         that affect the reported  amounts of assets and  liabilities  as of the
         date of the balance  sheet and  revenues  and  expenses for the period.
         Actual  results  could  differ   significantly  from  those  estimates.
         Material  estimates  that are  particularly  susceptible to significant
         change in the near-term  relate to the  determination  of the allowance
         for loan losses,  the  valuation of real estate  acquired in connection
         with foreclosures or in satisfaction of loans.

         In connection with the  determination of the allowances for loan losses
         and real estate owned,  management obtains  independent  appraisals for
         significant properties to the extent considered practical.
                                       44
<PAGE>

Notes to Consolidated Financial Statements, (Continued)

(1)      Continued

         Cash and Cash Equivalents

         For purposes of reporting cash flows, cash and cash equivalents include
         cash  on  hand,  amounts  due  from  banks,  and  Federal  funds  sold.
         Generally,  Federal  funds are sold for  one-day  periods.  The Bank is
         required to maintain certain average reserve balances as established by
         the Federal Reserve Bank. The amount of those reserve  balances for the
         reserve  computation  period which  included  December  31,  1998,  was
         $4,078,000, which amount was satisfied through the restriction of vault
         cash.

         The Bank is also required to maintain certain balances at correspondent
         banks based upon activity with the correspondent. At December 31, 1998,
         the amount of such required balances was $22,000.


         Mortgage Loans Held for Sale

         The Company  periodically  identifies certain loans as held for sale at
         the time of  origination.  These loans consist  primarily of fixed rate
         residential  mortgages  and  are  recorded  at the  lower  of  cost  or
         estimated market value.


         Securities

         Securities   are   classified   in  three   categories   consisting  of
         held-to-maturity,  trading and available for sale.  Trading  securities
         are those  which are bought  and held  principally  for the  purpose of
         selling them in the near term.  Held to maturity  securities  are those
         securities for which the Company has the ability and intent to hold the
         security until maturity.  All other  securities not included in trading
         or held to maturity  are  classified  as  available  for sale.  Held to
         maturity  securities  are reported at  amortized  cost,  while  trading
         securities  and  available  for sale  securities  are  reported at fair
         value.  For  trading  securities  the  unrealized  gains and losses are
         included  in  current  earnings.  Available  for  sale  securities  are
         accounted  for by reporting  unrealized  gains and losses as a separate
         component of shareholders' equity, net of tax.


         Interest Revenue and Expense

         Interest  revenue  and expense  are  accrued on various  methods  which
         approximate  a level yield or cost when  related to  principal  amounts
         outstanding.  Unearned  discount on loans is  amortized  to income by a
         method which also  approximates a level yield on the principal  amounts
         outstanding.

                                       45

<PAGE>
Notes to Consolidated Financial Statements, (Continued)

(1)      Continued

         Non-accrual Loans

          The  accrual of  interest  on loans is  discontinued  when  payment of
          principal or interest is considered doubtful of collection. Commercial
          loans  over  ninety  days  past due are  included  in the  non-accrual
          totals.  Mortgages  past due 90 days or more are placed in non-accrual
          status  unless the Bank  considers  the loan to be well secured and in
          the process of collection. When interest accrual is discontinued,  the
          interest  receivable  which  was  previously  credited  to  income  is
          reversed.  If a loan  demonstrates the ability to pay over a period of
          time and is current as to  principal  and  interest,  then the loan is
          returned to accrual status.

         Loan Fees

         Loan origination fees and direct loan origination  costs are recognized
         over the life of the related loan as an adjustment of the loan's yield.


          Allowance for Loan Losses

         The provision for loan losses charged to operating expense reflects the
         amount deemed  appropriate  by management to maintain the allowance for
         loan losses at a level to absorb known and inherent  losses in light of
         the  present  risk   characteristics  of  the  Bank's  loan  portfolio.
         Management's  judgment is based on the  evaluation of individual  loans
         and their overall risk  characteristics,  past experiences with respect
         to the  relationship  of its loan  losses  to the loan  portfolio,  the
         assessment of current economic conditions and other relevant factors.

         Management  believes  that the  allowance  for loan losses is adequate.
         While  management uses available  information to make its  evaluations,
         future  adjustments  to the  allowance  may be  necessary  if  economic
         conditions differ substantially from the assumptions used in making the
         evaluations.  In addition,  various regulatory agencies, as an integral
         part of their  examination  process,  periodically  review  the  Bank's
         allowance  for loan  losses.  Such  agencies  may  require  the Bank to
         recognize  additions to the allowances  based on their  judgments about
         information available to them at the time of their examination.

         Loan losses are charged  directly  against the allowance and recoveries
         on previously charged-off loans are added to the allowance.

         Impaired  loans are  measured  based on the  present  value of expected
         future cash flows discounted at the loan's effective interest rate, the
         loan's market price or the fair value of the  collateral if the loan is
         collateral dependent. For purposes of applying the measurement criteria
         for   impaired   loans,   the   Company   excludes   large   groups  of
         smaller-balance  homogeneous loans, primarily consisting of residential
         real estate

                                       46
<PAGE>

Notes to Consolidated Financial Statements, (Continued)

(1)      Continued

         loans  and  consumer  loans,  as well as  commercial,  financial  , and
         agricultural  loans with balances less than  $100,000.  For  applicable
         loans, the Company evaluates the need for impairment recognition when a
         loan  becomes   nonaccrual,   or  earlier  if,  based  on  management's
         assessment of the relevant facts and circumstances, it is probable that
         the Bank will be unable to collect all  proceeds  due  according to the
         contractual  terms of the loan agreement.  The Company's policy for the
         recognition  of interest  income on  impaired  loans is the same as for
         nonaccrual loans discussed  previously.  Impaired loans are charged off
         when the Company  determines that  foreclosure is probable and the fair
         value of the  collateral  is less than the recorded  investment  of the
         impaired loan.


         Premises and Equipment

         Premises and equipment are stated at cost less accumulated depreciation
         and  amortization.  Depreciation is computed on a  straight-line  basis
         over the estimated  lives of the related  assets as follows:  buildings
         20-33 years; building and land improvements 5-10 years;  equipment 3-12
         years; and leasehold  improvements over 10-15 years. No depreciation is
         taken on capital projects-in-progress until such projects are completed
         and  placed  in  service.   Maintenance  and  repairs  are  charged  to
         operations as incurred.

         Other Real Estate Owned

         Other real estate owned consists of real estate acquired  through or in
         lieu of  foreclosure  and is stated  at the lower of cost or  estimated
         fair value, less estimated  disposal costs.  Allowances for declines in
         value subsequent to acquisition were not necessary at both December 31,
         1998 and 1997. While management uses the best information  available to
         make its evaluations, future adjustments to the valuation of other real
         estate may be necessary  if economic  conditions  differ  significantly
         from the assumptions used in making the evaluations.


         Cost in Excess of Fair Value of Net Assets Acquired

         Cost in excess  of fair  value of net  assets  acquired  arose  from an
         acquisition  in 1976 and is being  amortized on a  straight-line  basis
         over a period of 40 years.


         Income Taxes

         Deferred tax assets and liabilities are recognized for the future tax
         consequences attributable to differences
                                       47
<PAGE>

Notes to Consolidated Financial Statements, (Continued)

(1)      Continued

         between the financial statement carrying amounts of existing assets and
         liabilities  and their  respective  tax bases.  Deferred tax assets and
         liabilities  are measured  using enacted tax rates expected to apply to
         taxable income in the periods in which those temporary  differences are
         expected to be  recovered  or settled.  The Company and the Bank file a
         consolidated tax return.

(2)      Securities Available for Sale

         Securities  available  for  sale at  December  31,  1998  and  1997 are
         summarized as follows:
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------
                                                             1998
                                                        -------------------------------------------------------
                                                             Cost              Unrealized         Carrying Value
---------------------------------------------------------------------------------------------------------------
                                                                           Gain         Loss         (Fair)
---------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                  <C>            <C>        <C>   
Federal agency mortgage-backed obligations:
     Federal National Mortgage Association            $      9,365,000       42,000       (10,000)   9,397,000
     Federal Home Loan Mortgage Corporation                  5,464,000         -          (35,000)   5,429,000
     Government National Mortgage Association               19,078,000      239,000       (16,000)  19,301,000
Other obligations of Federal agencies                       47,207,000      391,000       (61,000)  47,537,000
State and municipals                                        12,817,000      502,000       (30,000)  13,289,000
Other securities                                             6,126,000         -             -       6,126,000
---------------------------------------------------------------------------------------------------------------
Total securities available for sale                   $    100,057,000    1,174,000      (152,000) 101,079,000
---------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------
                                                             1997
                                                        -------------------------------------------------------
                                                             Cost              Unrealized         Carrying Value
---------------------------------------------------------------------------------------------------------------
                                                                           Gain         Loss         (Fair)
---------------------------------------------------------------------------------------------------------------

US Treasury securities                                $      1,998,000        1,000          -       1,999,000
Federal agency mortgage-backed  obligations:
     Federal National Mortgage Association                   2,707,000       37,000          -       2,744,000
     Federal Home Loan Mortgage Corporation                  4,831,000         -          (22,000)   4,809,000
     Government National Mortgage Association               24,112,000      317,000          -      24,429,000
Other obligations of Federal agencies                       49,835,000      468,000       (51,000)  50,252,000
State and municipals                                         8,473,000      355,000          -       8,828,000
Other securities                                             3,635,000         -             -       3,635,000
---------------------------------------------------------------------------------------------------------------
Total securities available for sale                   $     95,591,000    1,178,000       (73,000)  96,696,000
---------------------------------------------------------------------------------------------------------------
</TABLE>


                                       48
<PAGE>


Notes to Consolidated Financial Statements, (Continued)

(2)      Continued

         The amortized  cost and fair value of securities  available for sale at
         December 31, 1998 are due as follows:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------
                                                             December 31, 1998
                                             ---------------------------------------------------

                                                Amortized                            Fair
                                                   Cost                             Value
------------------------------------------------------------------------------------------------

Securities Available for Sale
------------------------------------------------------------------------------------------------
<S>                                        <C>                                      <C>  

Due in one year or less                    $       17,117,000                        17,144,000
Due after one year through five years              25,934,000                        26,213,000
Due after five years through ten years             16,471,000                        16,969,000
Due after ten years                                40,535,000                        40,753,000
------------------------------------------------------------------------------------------------


Total securities available for sale        $      100,057,000                       101,079,000
------------------------------------------------------------------------------------------------
</TABLE>


         Proceeds from sales of  securities  available for sale during 1998 were
         $20,217,000.  Gross  gains of  $509,000  and gross  losses of $-0- were
         realized on these sales.  Proceeds from sales of  securities  available
         for sale during  1997 were  $17,799,000.  Gross  gains of $170,000  and
         gross losses of $16,000 were  realized on these  sales.  Proceeds  from
         sales of  securities  available  for sale during 1996 were  $6,327,000.
         There were no gains or losses realized on these sales.


(3)      Securities Held to Maturity

         Securities  held  to  maturity  at  December  31,  1998  and  1997  are
         summarized as follows:
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------
                                                           1998
                                                      -------------------------------------------------------
                                                      Carrying Value         Unrealized          Fair Value
                                                          (Cost)         Gain          Loss
-------------------------------------------------------------------------------------------------------------
<S>                                               <C>                     <C>           <C>       <C> 

Federal agencies mortgage backed                   $      35,838,000       184,000      (43,000)  35,979,000
Obligations of state and politcal subdivisions            10,340,000       413,000       (3,000)  10,750,000
-------------------------------------------------------------------------------------------------------------

Securities held for investment                      $     46,178,000       597,000      (46,000)  46,729,000
-------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------
                                                           1997
                                                      -------------------------------------------------------
                                                      Carrying Value         Unrealized          Fair Value
                                                          (Cost)         Gain          Loss
-------------------------------------------------------------------------------------------------------------

Federal agencies mortgage backed                          19,083,000       211,000      -         19,294,000
Obligations of Federal agencies                            6,000,000         1,000      (24,000)   5,977,000
Obligations of states and political subdivisions          12,296,000       304,000      (14,000)  12,586,000
-------------------------------------------------------------------------------------------------------------

Securities held for investment                      $     37,379,000       516,000      (38,000)  37,857,000
-------------------------------------------------------------------------------------------------------------
</TABLE>

                                       49
<PAGE>



Notes to Consolidated Financial Statements, (Continued)

(3)      Continued



         The  amortized  cost and  market  value  of  investment  securities  at
         December 31, 1998 are due as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                                          December 31, 1998
                                                         ----------------------------------------------------

                                                             Amortized                            Fair
                                                               Cost                              Value
-------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                                      <C>  

Investment Securities
-------------------------------------------------------------------------------------------------------------

Due in one year or less                                $         2,600,000                         2,628,000
Due after one year through five years                            4,185,000                         4,363,000
Due after five years through ten years                           3,085,000                         3,273,000
Due after ten years                                             36,308,000                        36,465,000
-------------------------------------------------------------------------------------------------------------

Total investment securities                            $        46,178,000                        46,729,000

-------------------------------------------------------------------------------------------------------------
</TABLE>

         At December 31, 1998 and 1997,  securities with an aggregate book value
         of $40,407,000  and  $29,654,000  respectively,  were pledged to secure
         public deposits.

         There were no sales of securities  held to maturity  during the periods
         presented herein.


(4)      Loans

         Loans at December 31, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------
                                                                  1998                    1997
-------------------------------------------------------------------------------------------------------
<S>                                                      <C>                              <C>  

Commercial business                                      $          17,264,000              15,534,000
Commercial real estate                                              71,389,000              69,505,000
Real estate construction                                             1,120,000               1,002,000
Real estate residential (mortgage and installment)                 133,521,000             120,604,000
Consumer                                                            17,681,000              17,865,000
-------------------------------------------------------------------------------------------------------

Total loans, gross                                                 240,975,000             224,510,000

Unearned discount                                                  (14,531,000)            (11,199,000)
Deferred loan fees                                                    (709,000)               (969,000)
-------------------------------------------------------------------------------------------------------

Total loans, net of unearned discount
        and deferred loan fees                           $         225,735,000             212,342,000
-------------------------------------------------------------------------------------------------------
</TABLE>

                                       50
<PAGE>


Notes to Consolidated Financial Statements, (Continued)

(4)      Loans

         Substantially  all of the Bank's loans are secured by both  residential
         and commercial  real estate in the area of  Northeastern  Pennsylvania.
         Loans  secured by  commercial  or  residential  real estate  outside of
         Northeastern  Pennsylvania  constitute less than 2% of the Bank's loans
         outstanding  at  December  31, 1998 and 1997.  Accordingly,  the Bank's
         primary  concentration  of credit  risk is related  to the real  estate
         market  in  the  Northeastern   Pennsylvania   area  and  the  ultimate
         collectibility  of  this  portion  of  the  Bank's  loan  portfolio  is
         susceptible to changes in economic conditions in that area.  Management
         of  the  Bank  does  not  believe  there  are  any  other   significant
         concentrations of credit risk in the loan portfolio.

         Interest   was  not  being   recorded   on  total   loans   aggregating
         approximately  $1,684,000 as of December 31, 1998 and  $2,596,000 as of
         December  31,  1997.  If all  non-accrual  loans  had been  current  in
         accordance   with  their  original  terms  and  had  been   outstanding
         throughout the period, interest income would have increased by $98,000,
         $149,000, and $160,000 for the years ended December 31, 1998, 1997, and
         1996 respectively.  The amount of interest income on non-accruing loans
         which were recorded in income was $13,000 in 1998,  and $12,000 in 1997
         and -0- for 1996, respectively.  The total amount of restructured loans
         were $1,247,000,  $890,000, and $643,000 as of December 31, 1998, 1997,
         and 1996,  respectively.  The amount of interest on restructured  loans
         which was recorded in income was $98,000,  $59,000,  and $54,000 during
         1998, 1997, and 1996, respectively.  If the restructured loans had been
         current  in  accordance   with  their   original  terms  and  had  been
         outstanding throughout the period, interest income would have increased
         by $24,000, $33,000, and $48,000 for the years ended December 31, 1998,
         1997, and 1996.

         As of December  31, 1998,  the Company had impaired  loans with a total
         recorded  investment of $1,530,000 and $1,922,000 on December 31, 1997.
         The average  recorded  investment  for the twelve  month  period  ended
         December 31,  1998,  1997,  and 1996 was  $1,837,000,  $1,914,000,  and
         $1,145,000,  respectively.  Interest income  recognized  during each of
         these  periods was  nominal.  As of December  31,  1998,  the amount of
         recorded  investment  in  impaired  loans for which  there is a related
         allowance for credit losses and amount of the allowance is $425,000 and
         $106,000,  respectively  and  $815,000 and $185,000 for the prior year.
         The amount of the recorded investment in impaired loans for which there
         was no related  allowance  for credit  losses at  December  31, 1998 is
         $1,105,000 and  $1,107,000 for December 31, 1997. The aggregate  amount
         of impaired loans are measured under the fair value measurement method.

         The  aggregate  amount of loans by the  Company  to its  directors  and
         executive  officers,  including  loans to related persons and entities,
         was   $2,580,000   and  $2,715,000  at  December  31,  1998  and  1997,
         respectively.  These loans were made in the ordinary course of business
         at  substantially  the same  terms and  conditions  as those with other
         borrowers.

                                       51
<PAGE>
Notes to Consolidated Financial Statements, (Continued)

(4)      Continued

         An analysis of the activity of these loans follows:

-------------------------------------------------------------------------------
                                                                 1998
-------------------------------------------------------------------------------

Balance January 1                                             $     2,715,000
         New loans                                                    925,000
         Repayments                                                 1,060,000
-------------------------------------------------------------------------------

Balance December 31                                           $     2,580,000
-------------------------------------------------------------------------------

         In 1998, 1997 and 1996 the Company sold newly originated mortgage loans
         (primarily  fixed rate) to the Federal Home Loan Mortgage  Corporation.
         In 1996, the Company also sold both fixed rate and adjustable  mortgage
         loans to a financial intermediary.  The proceeds from the sale of these
         loans were  $3,452,000,  $992,000,  and $12,380,000  respectively.  The
         Company  recognized a gain of $36,000 in 1998 and a gain of $20,000 and
         $220,000 in 1997 and 1996, respectively,  from these transactions.  The
         proceeds  from the sale of PHEAA loans by the Company were  $1,967,000,
         $2,422,000 and $2,059,000 in 1998,  1997, and 1996,  resulting in gains
         of $26,000, $38,000, and $29,000, respectively.  Loans serviced for the
         benefit  of  others  approximated  $18,231,000  and  $19,299,000  as of
         December 31, 1998 and 1997, respectively.



(5)      Allowance for Loan Losses

         Activity in the allowance for loan losses for the years ended  December
         31, 1998, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------
                                                                  1998           1997          1996
---------------------------------------------------------------------------------------------------------
<S>                                                         <C>                  <C>           <C> 

Balance at beginning of period                              $     2,759,000      2,750,000     2,742,000

Additions and (deductions):
         Loans charged-off                                         (308,000)      (599,000)     (518,000)
         Recoveries                                                  38,000         73,000        26,000
---------------------------------------------------------------------------------------------------------

Net loans charged-off                                              (270,000)      (526,000)     (492,000)
---------------------------------------------------------------------------------------------------------

Provision for loan losses                                           420,000        535,000       500,000
---------------------------------------------------------------------------------------------------------

Balance at end of period                                    $     2,909,000      2,759,000     2,750,000
---------------------------------------------------------------------------------------------------------
</TABLE>

                                       52
<PAGE>
Notes to Consolidated Financial Statements, (Continued)



(6)      Premises and Equipment

         Premises and  equipment  are comprised of the following at December 31,
         1998 and 1997:
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------
                                                                            1998                1997
----------------------------------------------------------------------------------------------------------
<S>                                                              <C>                            <C> 

Premises owned                                                   $          5,801,000           4,675,000
Furniture and equipment                                                     8,700,000           7,331,000
Leasehold improvements                                                      1,334,000           1,336,000
----------------------------------------------------------------------------------------------------------
                                                                           15,835,000          13,342,000

Accumulated depreciation and amortization                                  (8,768,000)         (8,008,000)
----------------------------------------------------------------------------------------------------------

                                                                 $          7,067,000           5,334,000
----------------------------------------------------------------------------------------------------------
</TABLE>


         Occupancy  expenses are reduced by rental income from premises owned of
         $30,000 in 1998, $31,000 in 1997 and $73,000 in 1996.

(7)      Deposits

         Included in time deposits are  certificates of deposit and money market
         certificates.   Although  such  certificates  are  often  renewed,  the
         following  is a  summary  by  maturity  date of these  certificates  at
         December 31, 1998 and 1997:

--------------------------------------------------------------------------------
Maturity                                               1998             1997
--------------------------------------------------------------------------------

Less than one year                             $   113,864,000       112,619,000
Greater than one year                               32,908,000        31,335,000
--------------------------------------------------------------------------------

                                               $   146,772,000       143,954,000
--------------------------------------------------------------------------------


         The aggregate amount of certificates of deposit, each $100,000 or more,
         was  $41,633,000  and  $39,734,000  at  December  31,  1998  and  1997,
         respectively. Interest expense associated with certificates of deposit,
         each $100,000 or more, was approximately  $2,510,000,  $2,782,000,  and
         $1,951,000,  respectively,  for the years ended December 31, 1998, 1997
         and 1996.

(8)      Other Borrowed Money

         The Bank  maintains  a  collateralized  maximum  borrowing  capacity of
         $129,602,000  with the  Federal  Home Loan Bank of  Pittsburgh  (FHLB).
         Inclusive in this figure is an available line of credit of $13,000,000.
         The line is collateralized by eligible securities. At December 31, 1998
         and 1997 there were no borrowing outstanding against the Bank's line of
         credit.  Two FHLB advances of  $10,000,000  each were issued on January
         21, 1997 and will mature on January 22, 2002 with a fixed rate of 6.44%
         and 6.45%,  respectively.  The Bank's third FHLB advance of $20,000,000
         was  made  on  September  11,  1997.  This  was a  five  year/two  year
         convertible  program  with  a  fixed  rate  of  5.98%  for  two  years,
         adjustable quarterly thereafter
                                       53
<PAGE>

Notes to Consolidated Financial Statements, (Continued)


(8)      Continued

         at the option of the FHLB.  On January 22, 1998 the Bank also  borrowed
         $25,000,000 at a ten year/five  year putable  program with a fixed rate
         of 5.38%.

         The balance of other borrowed  money and Federal funds  purchased as of
         December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>

                                                                      Maximum
                                                                      Amount                         Weighted
                                                                    Outstanding        Average       Average
                                                   Weighted          at Month          Amount        Interest
                                    Balance        Average              End          Outstanding       Rate
                                     End of        Interest         During the       During the     During the
                                     Period          Rate             Period           Period         Period
                                  -------------  -------------     --------------   -------------- -------------
<S>                             <C>                <C>            <C>              <C>                 <C>   

             1998
FHLB Advances                   $   58,082,000              6.15% $   61,497,000   $   58,689,000             5.86%
Note Payable                           275,000              6.50         275,000          275,000             6.50
Federal funds purchased                -                    -          3,000,000          447,000             4.92


             1997
FHLB Advances                   $   36,798,000              6.36% $   37,984,000  $    23,323,000             6.35%
Note Payable                           275,000              6.50         275,000          275,000             6.50
Federal funds purchased              2,350,000              8.00       2,350,000          160,000             6.25


             1996
FHLB Advances                   $      -                    -   % $       -        $       -                  -   %
Note Payable                           275,000              6.50         275,000          275,000             6.50
Federal funds purchased                -                    -             -                -                  -

</TABLE>


         Advances  from the  Federal  Home Loan Bank (FHLB) of  Pittsburgh  with
         fixed rates ranging from 5.38% to 6.45% at December 31, 1998 are due as
         follows :

                                                          Weighted
                                                          Average
                                    Amount                  Rate
                                 --------------        ---------------
1999                                 3,962,000              6.45%
2000                                 4,226,000              6.45
2001                                 4,506,000              6.45
2002                                20,388,000              5.99
2008                                25,000,000              5.38
                                 --------------
                              $     58,082,000
                                 ==============


                                       54
<PAGE>
Notes to Consolidated Financial Statements, (Continued)


(9)      Commitments, Contingent Liabilities, Off Balance Sheet Risk

         In  the  ordinary  course  of  business,  the  Company,  Bank  and  its
         subsidiaries  are subject to legal  actions  which  involve  claims for
         monetary  relief.   Based  upon  information   presently  available  to
         management and its counsel,  it is management's  opinion that any legal
         and financial  responsibility  arising from such claims will not have a
         material  adverse  effect  on the  Company's  financial  condition  and
         results of operations.

         The Company  leases four branch  offices under  year-to-year  operating
         leases.  The Company is  currently  obligated  for six  non-cancelable,
         long-term  commitments  under operating  leases for six branch offices.
         Total  rental  expense,  which  consists  primarily of the rent for the
         branch  offices and  computer  equipment  was  $310,000,  $304,000  and
         $233,000  for the  years  ended  December  31,  1998,  1997  and  1996,
         respectively.

         The following is a schedule by years for future minimum rental payments
         required for operating leases as of December 31, 1998:


Years ending December 31:

             1999                             282,000
             2000                             228,000
             2001                             138,000
             2002                              77,000
             2003                              75,000
             2004 thereafter                  139,000
                                      ----------------

Total minimum
payments required                   $         939,000


         In the normal course of business,  various  commitments  and contingent
         liabilities  are  outstanding,  such as guarantees  and  commitments to
         extend credit,  which are not reflected in the  consolidated  financial
         statements.  Management does not anticipate any significant losses as a
         result  of  these   commitments.   Commitments  to  extend  credit  are
         agreements  to lend to a customer as long as there is no  violation  of
         any condition  established in the contract.  Commitments generally have
         fixed  expiration  dates or other  termination  clauses and may require
         payment of a fee. The Bank evaluates each  customer's  creditworthiness
         on a case by case basis.  The amount of  collateral,  if any,  obtained
         upon extension of credit is based on management's  credit evaluation of
         the borrower.  Collateral held usually consists of real estate, but may
         include securities, property or other assets.

         The Company had outstanding  standby letters of credit in the amount of
         approximately  $2,131,000  and $1,929,000 and unfunded loan and line of
         credit  commitments  in the  amount of  approximately  $14,846,000  and
         $14,374,000  at  December  31,  1998  and  1997,  respectively.   These
         instruments involve, to

                                       55
<PAGE>

Notes to Consolidated Financial Statements, (Continued)

(9)      Continued
         varying degrees, elements of credit and interest rate risk in excess of
         the amount recognized in the balance sheet. The exposure to credit loss
         in the event of  non-performance  by the counter party to the financial
         instrument  for  commitments  to extend  credit and standby  letters of
         credit is  represented  by the  contractual  amount.  The  credit  risk
         involved in issuing  letters of credit is essentially  the same as that
         involved in extending  loan  facilities  to  customers.  The Bank holds
         various collateral to support these commitments. The Bank uses the same
         credit policies in making commitments and conditional obligations as it
         does for on-balance-sheet instruments.


  (10)   Stockholders' Equity and Per Share Data

         In the second quarter of 1996 the Company's Board of Directors declared
         a two for one stock split effected in the form of a stock dividend. The
         split was effective on July 15, 1996. The  shareholders in June of 1996
         approved a  decrease  in the par value of  authorized  shares of common
         stock from  25,000,000  ($10 par value) to  25,000,000  ($1 par value).
         These financial statements have been adjusted to reflect both the stock
         split and the change in par value.

         Basic  earnings per share is  calculated  by dividing net income by the
         weighted  average shares  outstanding  during the period.  The dilutive
         effect of stock options is excluded from basic earnings per share,  but
         included in the computation of diluted earnings per share.

         The  following  table sets forth the  computation  of basic and diluted
         earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>

                                                              1998             1997             1996
<S>                                                     <C>                <C>               <C>  

Numerator:
      Net income                                        $        4,022            4,008           3,704
                                                           ============     ============     ===========

Denominator:
      Denominator for basic earnings per share -
      weighted average shares                                    2,894            2,850           2,812

Effect of dilutive securities:
      Employee stock options                                        59               89             120
                                                           ------------     ------------     -----------

Denominator for diluted earnings per share -
      adjusted weighted average shares and
      assumed conversion                                         2,953            2,939           2,932
                                                           ============     ============     ===========

Basic earnings per share                                $            1.39             1.41            1.32
                                                           ============     ============     ===========

Diluted earnings per share                              $            1.36             1.36            1.26
                                                           ============     ============     ===========
</TABLE>


                                       56
<PAGE>
Notes to Consolidated Financial Statements, (Continued)

  (10)   Continued

         The weighted  average number of basic shares  outstanding in 1998, 1997
         and  1996   were,   2,893,570,   2,849,723,   and   2,812,269   shares,
         respectively. The weighted average number of diluted shares outstanding
         in 1998, 1997, and 1996 were 2,953,325, 2,939,090 and 2,932,161 shares,
         respectively.   The  Company   currently  has  one  million  shares  of
         authorized, but unissued preferred stock.


(11)       Employee Stock Option Plan

         In 1990,  the Company's  Board of Directors  adopted an employee  stock
         option plan (the Plan) which reserved  300,000 shares of authorized but
         unissued stock, as adjusted for the stock splits, effective February 7,
         1994 and a stock split July 15, 1996.  The Plan  provides for the grant
         of incentive stock options and nonqualified stock options. The exercise
         price of the  options  when issued was at least 100% of the fair market
         value of the  Company's  common  stock as of the date the options  were
         granted.  The  exercise  of the stock  options  is subject to a vesting
         schedule and certain  termination  provisions.  Stock options have been
         issued for all of the  authorized  shares of stock  reserved  under the
         plan.

         Changes in total options  outstanding during 1998, 1997, and 1996, were
         as follows:
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------
                                                                                Weighted
                                      Number of      Exercise Price             Average
                                         Options      Per Option (1)          Exercise Price
-------------------------------------------------------------------------------------------
<S>                                         <C>        <C>                    <C>

Balance at December 31, 1995                 248,278   $8.00  -  $13.00           9.70
   ISOs Exercised                            (65,553)             $8.00           8.00
-------------------------------------------------------------------------------------------
Balance at December 31, 1996                 182,725   $8.00  -  $13.00          10.31
   ISOs Exercised                            (37,597)  $8.00  -  $13.00           9.68
-------------------------------------------------------------------------------------------
Balance at December 31, 1997                 145,128   $8.00  -  $13.00          10.48
   ISOs Exercised                            (42,935)  $8.00  -  $ 9.00           8.64
-------------------------------------------------------------------------------------------

Balance at December 31, 1998                 102,193   $8.00  -  $13.00          11.26
-------------------------------------------------------------------------------------------
</TABLE>


         The amounts  have been  restated to reflect the  Company's  two for one
         split  effected  in the form of a stock  dividend,  effective  July 15,
         1996.

         The  following  table  summarizes   information   about  stock  options
         outstanding at December 31, 1998:


--------------------------------------------------------------------------------
                                           Exercisable
                         -------------------------------------------------------
Exercise                                                        Average
Price Range                     Shares   Average Life (1) Exercise Price
-------------------------------------------------------------------------------

$     8.00                       9,525       2.50         $     8.00
      9.00                      32,668       4.33               9.00
$    13.00                      60,000       5.17         $    13.00
--------------------------------------------------------------------------------
Total                          102,193       4.00              11.26
--------------------------------------------------------------------------------

(1) Average contractual life remaining in years.


                                       57
<PAGE>
Notes to Consolidated Financial Statements, (Continued)

(11)     Continued

         The  Company,  as  permitted,  has  elected not to adopt the fair value
         accounting  provisions  of SFAS No. 123,  "Accounting  for  Stock-Based
         Compensation",   and  has  instead  continued  to  apply  the  existing
         intrinsic value method in accounting for stock based  compensation  and
         provide the required  proforma  disclosure of SFAS No. 123. The Company
         did not  grant  any  options  in  1998,  1997 or  1996.  Therefore  had
         compensation  cost for the  Company's  stock  options  been  determined
         consistent with SFAS No. 123, the Company's net income and earnings per
         share would have been unaffected.


(12)     Regulatory Matters

         Dividends  payable to the  Company  by the Bank are  subject to certain
         regulatory  limitations.  The payment of  dividends in any year without
         regulatory  permission  is limited to the net  profits  (as defined for
         regulatory  purposes)  for that year plus the  retained net profits for
         the preceding two calendar years. Accordingly, as of December 31, 1998,
         dividends  in excess  of those  already  declared  from the Bank to the
         Company  are  limited to  $5,801,000.  The  dividends  declared  to the
         Company by the Bank were $2,235,000 in 1998.

         Under Federal banking law, the Bank is restricted  regarding extensions
         of  credit  to the  Company.  The limit on  extensions  of  credit  was
         $1,908,000 as of December 31, 1998.

         The  Bank  is  subject  to  various  regulatory  capital   requirements
         administered by the federal banking  agencies.  Failure to meet minimum
         capital  requirements  can  initiate  certain  mandatory-  and possibly
         additional  discretionary-  actions by regulators  that, if undertaken,
         could have a direct material effect on the Bank's financial statements.
         Under capital  adequacy  guidelines  and the  regulatory  framework for
         prompt  corrective   action,   the  Bank  must  meet  specific  capital
         guidelines  that involve  quantitative  measures of the Bank's  assets,
         liabilities,  and certain off- balance-sheet  items as calculated under
         regulatory  accounting  practices.   The  Bank's  capital  amounts  and
         classification  are  also  subject  to  qualitative  judgments  by  the
         regulators about components, risk weightings, and other factors.

         Quantitative  measures  established  by  regulation  to ensure  capital
         adequacy  require the Bank to maintain  minimum amounts and ratios (set
         forth in the table  below) of total and Tier I capital  (as  defined in
         the  regulations) to risk-weighted  assets (as defined),  and of Tier I
         capital  (as  defined)  to  average  assets  (as  defined).  Management
         believes,  as of  December  31,  1998,  that the Bank meets all capital
         adequacy requirements to which it is subject.

         As of December 31, 1998, the most recent notification from the Office
         of the Comptroller of the Currency categorized the Bank as well
         capitalized under the regulatory framework for prompt corrective
         action.  To
                                       58
<PAGE>
Notes to Consolidated Financial Statements, (Continued)

(12)     Continued

         be categorized as well capitalized the Bank must maintain minimum total
         risk-based,  Tier I risk-based, and Tier I leverage ratios as set forth
         in the table. There are no conditions or events since that notification
         that management believes have changed the institution's category.

         The Bank's actual capital  amounts and ratios are also presented in the
         table.

<TABLE>
<CAPTION>

                                                                                      To Be Well Capitalized
                                       Actual              For Capital Adequacy      Under Prompt Corrective
                                                                 Purposes                     Action
                                                                                            Provisions

                              ------------------------------------------------------------------------------
                                 Amount        Ratio        Amount         Ratio        Amount         Ratio
<S>                              <C>            <C>     <C>                <C>      <C>               <C>

As of December 31, 1998

Total Capital
   (to Risk Weighted Assets)    $36,359,000     16.22%  > $ 17,935,840     > 8.00%  > $ 22,419,800    > 10.00%
                                                        -                  -        -                 -

Tier I Capital
   (to Risk Weighted Assets)    $33,555,000     14.97%   > $ 8,967,920     > 4.00%  > $ 13,451,880     > 6.00%
                                                         -                 -        -                  -

Tier I Capital
     (to Average Assets)        $33,555,000      8.25%  > $ 16,260,840     > 4.00%  > $20,326,050      > 5.00%
                                                        -                  -        -                  -


As of December 31, 1997

Total Capital
   (to Risk Weighted Assets)    $34,150,000     16.70%  > $ 16,360,800     > 8.00%  > $20,451,000      > 10.00%
                                                        -                  -        -                   -


Tier I Capital
   (to Risk Weighted Assets)    $31,591,000     15.45%    > $ 8,180,400    > 4.00%  > $ 12,270,600     > 6.00%
                                                          -                -        -                  -

Tier I Capital
     (to Average Assets)        $31,591,000      8.45%  > $ 14,946,880     > 4.00%  > $  18,683,600    > 5.00%
                                                        -                  -        -                  -
</TABLE>


  (13)   Income Taxes

         The components of federal income tax expense (benefit) are as follows:

--------------------------------------------------------------------------------
                                               1998         1997         1996
--------------------------------------------------------------------------------

Current                               $    1,481,000    1,502,000     1,573,000
Deferred                                      54,000       (2,000)      (30,000)
--------------------------------------------------------------------------------

                                       $    1,535,000    1,500,000     1,543,000
--------------------------------------------------------------------------------


                                       59
<PAGE>
Notes to Consolidated Financial Statements, (Continued)

(13)     Continued

         A  reconciliation  of  the  income  tax  expense  in  the  accompanying
         statements of income with the amount computed by applying the statutory
         federal income tax rate to income before income taxes is as follows:

--------------------------------------------------------------------------------
                                                   1998        1997       1996
--------------------------------------------------------------------------------

Tax expense at 34% rate                    $   1,889,000  1,873,000   1,784,000
Interest from tax exempt loans
     and investments                            (368,000)  (361,000)   (251,000)
Other, net                                        14,000    (12,000)     10,000
--------------------------------------------------------------------------------

Income tax expense                          $   1,535,000  1,500,000   1,543,000
--------------------------------------------------------------------------------


         The tax effect of temporary  differences  that give rise to significant
         portions of the deferred tax assets and  deferred  tax  liabilities  at
         December 31, 1998 and 1997 are presented below:

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------
                                                                       1998              1997
-----------------------------------------------------------------------------------------------------
<S>                                                           <C>                         <C> 

Deferred tax assets:
     Executive retirement plan                                $            251,000           243,000
     Allowance for loan losses                                             713,000           662,000
     Deferred loan fees                                                    185,000           266,000
     Deferred directors fees                                               116,000           116,000
     Non-accrual interest                                                   45,000            64,000
     Others, net                                                            39,000            39,000
-----------------------------------------------------------------------------------------------------
Total gross deferred tax assets                                          1,349,000         1,390,000

Deferred tax liabilities:
     Accumulated amortization of discount
     on investment securities                                             (118,000)         (194,000)
     Depreciation                                                         (325,000)         (236,000)
     Unrealized gain on securities available for sale                     (347,000)         (376,000)
-----------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities                                      (790,000)         (806,000)
-----------------------------------------------------------------------------------------------------

Net deferred tax asset                                        $            559,000           584,000
-----------------------------------------------------------------------------------------------------
</TABLE>


         Based upon the Company's  current  taxable  history and the anticipated
         level of future taxable income,  management of the Company believes the
         existing deductible  temporary  differences will, more likely than not,
         reverse in future  periods in which the Company  generates  net taxable
         income. Accordingly, the Company does not believe a valuation allowance
         is necessary at December 31, 1998 and 1997.  There can be no assurance,
         however,  that the Company  will  generate any earnings or any specific
         level of continued earnings in the future.


                                       60
<PAGE>
Notes to Consolidated Financial Statements, (Continued)

(13)    Continued

         At December  31, 1998 and 1997,  net  deferred tax benefits of $559,000
         and $584,000  respectively,  are included in other  assets,  and income
         taxes  currently  recoverable  of $257,000  and -0-,  respectively  are
         included in other assets. At December 31, 1997, $15,000 of income taxes
         currently payable was included in other liabilities.


(14)     Benefit Plans

         The  Bank  has  an  employee   stock   ownership  plan  which  includes
         substantially  all employees  who have at least one year of service.  A
         qualified  determination  letter has been  received  from the  Internal
         Revenue Service. Contributions at the discretion of the Company's Board
         of Directors of $2,000, $54,000 and $-0- were accrued in 1998, 1997 and
         1996, respectively.

         The ESOP held 143,579 and 148,770  shares of the Bank's common stock at
         December 31, 1998 and 1997, respectively.

         The  Bank  has a  savings  and  investment  plan.  Employees  who  have
         completed  one year of service  with 1,000 hours of  employment  during
         that year are eligible to  participate.  Employees may contribute up to
         12% of their  total  pay in each  payroll  period  up to  approximately
         $9,000  during any  calendar  year.  The Bank  matches  the  employees'
         contribution to the Plan at a rate of 100% for the first 3% contributed
         by the employee and at a rate of 50% for the second 3%  contributed  by
         the employee.  A qualified  determination letter has been received from
         the  Internal  Revenue  Service.  Expense for this Plan was $121,000 in
         1998, $115,000 in 1997, and $105,000 in 1996.

         During  1996,  1997 and through  and until  October  1998,  the Company
         maintained employment contracts with its President and Senior Executive
         Vice President.  The employment contracts provided for a minimum annual
         salary and certain  incentives in the event of a merger of the Company.
         During this period, the Company also paid premiums on split dollar life
         insurance  policies  on the  lives  of  these  executives  and  expects
         reimbursement of policy premiums upon the death or termination of these
         executives.  The Company has also agreed to provide enhanced retirement
         benefits  for  these   executives.   Costs  for  these   benefits  were
         approximately  $24,000,  $44,000  and  $84,000 in 1998,  1997 and 1996,
         respectively.

         The Company has a deferred  compensation plan for directors' fees under
         which nine  directors  deferred  receipt of $6,000 each per year during
         the four years ended March 31,  1990.  The Company is  obligated to pay
         the directors an annuity  beginning at the later of their attaining age
         65 or March 31, 1990.  The obligation is funded  substantially  by life
         insurance on the directors.
                                       61
<PAGE>
Notes to Consolidated Financial Statement, (Continued)

(14)     Continued

         A total of $32,000 was disbursed to these  directors in each year 1998,
         1997 and 1996. In 1998,  1997 and 1996,  $36,000,  was remitted for the
         payment of insurance  premiums.  Assets held by the  insurance  company
         which have reduced the company's  accrual were $502,000 and $452,000 at
         December 31, 1998 and 1997,  respectively.  Expense under this plan was
         $12,000, $24,000, and $6,000 in 1998, 1997 and 1996, respectively.

(15)     Disclosures about Fair Value of Financial Instruments

         Statement of Financial Accounting Standards No. 107 "Disclosures about
         Fair Value of Financial Instruments" (SFAS No. 107), as amended by
         SFAS No. 119, requires the bank to disclose estimated fair
         value for its financial instruments.

         Limitations

         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.  Significant assets and
         liabilities  that  are not  considered  financial  instruments  include
         deferred tax assets, property, plant and equipment, and goodwill.

         Fair value  estimates  are made at a specific  point in time,  based on
         relevant  market   information  and  information  about  the  financial
         instrument. These estimates do not reflect any premium or discount that
         could  result  from  offering  for sale at one time the  Bank's  entire
         holdings of a particular financial instrument. Because no market exists
         for a significant  portion of the Bank's  financial  instruments,  fair
         value estimates are based on 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 therefore cannot be determined with precision.
         Changes in assumptions could significantly affect the estimate.

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

         Cash and Due from Banks and Federal Funds Sold

         For cash and due from banks and Federal funds sold, the carrying amount
         is a reasonable estimate of fair value.
                                       62
<PAGE>

Notes to Consolidated Financial Statement, (Continued)

(15)       Continued

         Securities Available for Sale and Securities Held to Maturity

         The fair values of securities available for sale and securities held to
         maturity  are  estimated  based on bid prices  published  in  financial
         newspapers or bid quotations received from securities dealers.


         Loans

         Fair values are estimated for portfolios of loans of similar  financial
         characteristics.  Loans  are  segregated  by type  such as  commercial,
         residential  real estate,  and consumer.  Each loan category is further
         segmented into fixed and adjustable rate interest terms. The fair value
         of performing  loans is calculated by discounting  the expected  future
         cash  flows   through   expected   maturity,   considering   prepayment
         experience,  using  estimated  market  discount  rates that reflect the
         inherent credit risk in the loan.

         Fair value of  nonperforming  loans is based upon estimated future cash
         flows  discounted  using a rate  commensurate  with the risk associated
         with the estimated cash flows.  Assumptions regarding credit risk, cash
         flows, and discount rates are  judgmentally  determined using available
         market information and specific borrower information.


         Deposit liabilities

         The  fair  value  of  deposits  with  no  stated   maturity,   such  as
         non-interest  earning  demand  deposits,  savings,  NOW and  Super  NOW
         accounts,  and money market accounts, is equal to the amount payable on
         demand.  The fair  value of  certificates  of  deposit  and other  time
         deposits is based on the discounted  value of  contractual  cash flows.
         The discount rate is estimated  using the rates  currently  offered for
         deposits of similar remaining maturities.

         Federal Funds Purchased

         For  federal  funds  purchased,  the  carrying  amount is a  reasonable
         estimate of fair value.

         Other Borrowed Money

         The estimated  fair value of other borrowed money is the carrying value
         due to the interest and term of other borrowed money being commensurate
         with the current market rate.

                                       63
<PAGE>

Notes to Consolidated Financial Statements, (Continued)

(15)     Continued


         Commitments to extend credit, and standby letters of credit

         The fair value of commitments  to extend credit is estimated  using the
         fees currently  charged to enter into similar  agreements,  taking into
         account the remaining  terms of the  agreements  and the present credit
         worthiness of the counterparties.

         The following represents the carrying value and estimated fair value:
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------
                                           1998                             1997
                                         Carrying         Fair            Carrying        Fair
                                           Value          Value            Value          Value
----------------------------------------------------------------------------------------------------
<S>                                 <C>                 <C>              <C>            <C>  

Financial assets:

     Cash and due from banks         $    13,977,000      13,977,000       14,918,000    14,918,000
     Federal funds sold                    7,600,000       7,600,000         -              -
     Securities available for sale       101,079,000     101,079,000       96,696,000    96,696,000
     Securities held to maturity          46,178,000      46,729,000       37,379,000    37,857,000
     Loans                               222,826,000     229,198,000      209,583,000   213,705,000

Financial liabilities:

     Deposits                        $   307,360,000     307,732,000      293,643,000   293,686,000
     Federal funds purchased                 -              -               2,350,000     2,350,000
     Other borrowed money                 58,357,000      58,357,000       37,073,000    37,073,000
----------------------------------------------------------------------------------------------------
</TABLE>

         The contract  amount and estimated fair value for commitments to extend
         credit and standby letters of credit are as follows:
<TABLE>
<CAPTION>


-----------------------------------------------------------------------------------------------------
                                         At December 31, 1998              At December 31, 1997
                                    -------------------------------   -------------------------------
                                       Contract        Estimated        Contract        Estimated
                                        Amount        Fair Value         Amount         Fair Value
-----------------------------------------------------------------------------------------------------
<S>                               <C>                   <C>             <C>               <C>  

Commitments to extend credit      $     14,846,000         223,000       14,374,000          216,000

Standby letters of credit                2,131,000          43,000        1,929,000           39,000

-----------------------------------------------------------------------------------------------------
</TABLE>

                                       64
<PAGE>
Notes to Consolidated Financial Statements, (Continued)

(16)     Pioneer American Holding Company Corp. (Parent Company Only)

         Condensed 1998, 1997 and 1996 financial information is as follows:


Condensed Balance Sheets
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------
Assets                                                      1998            1997
-------------------------------------------------------------------------------------
<S>                                                   <C>                 <C> 

Cash                                                  $      594,000         396,000
Investment in subsidiary                                  34,820,000      32,950,000
Receivable from subsidiary                                   633,000         596,000
-------------------------------------------------------------------------------------

Total assets                                          $   36,047,000      33,942,000
-------------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Dividends payable                                            581,000         544,000
Stockholders' equity                                      35,466,000      33,398,000
-------------------------------------------------------------------------------------

Total liabilities and stockholders' equity            $   36,047,000      33,942,000
-------------------------------------------------------------------------------------
</TABLE>



Condensed Statements of Income
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------
                                                        1998        1997        1996
-------------------------------------------------------------------------------------
<S>                                            <C>             <C>         <C> 

Expenses:
     Administrative and other                  $     138,000      50,000      69,000
-------------------------------------------------------------------------------------

Loss before earnings of subsidiary                  (138,000)    (50,000)    (69,000)

Earnings of subsidiary:
     Received as dividends                         2,235,000   2,055,000   1,900,000
     Undistributed                                 1,925,000   2,003,000   1,873,000
-------------------------------------------------------------------------------------

Net income                                     $   4,022,000   4,008,000   3,704,000
-------------------------------------------------------------------------------------
</TABLE>


                                       65
<PAGE>

Notes to Consolidated Financial Statements, (Continued)


(16)     Pioneer American Holding Company Corp. (Parent Company Only),
         (Continued)

Condensed Statements of Cash Flows
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------
                                                  1998         1997         1996
-------------------------------------------------------------------------------------
<S>                                         <C>              <C>           <C> 

Cash flows from operating activities:
Net income                                  $    4,022,000    4,008,000    3,704,000
Adjustments to reconcile net income to net
     cash from operating activities:
        Undistributed earnings of subsidiary    (1,925,000)  (2,003,000)  (1,873,000)
        Other                                      (37,000)     (62,000)     (63,000)
-------------------------------------------------------------------------------------

Net cash from operating activities               2,060,000    1,943,000    1,768,000
-------------------------------------------------------------------------------------

Cash flows used in financing activities:
     Dividend paid                              (2,198,000)  (1,992,000)  (1,837,000)
     Exercise of stock options                     336,000      273,000       54,000
-------------------------------------------------------------------------------------

Net cash used in financing activities           (1,862,000)  (1,719,000)  (1,783,000)
-------------------------------------------------------------------------------------

Net increase (decrease) in cash                    198,000      224,000      (15,000)

Cash at beginning of year                          396,000      172,000      187,000
-------------------------------------------------------------------------------------

Cash at end of year                         $      594,000      396,000      172,000
-------------------------------------------------------------------------------------
</TABLE>

                                       66
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Pioneer American Holding Company Corp.:

     We have audited the  accompanying  consolidated  balance  sheets of Pioneer
American Holding Company Corp. and subsidiary (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of operations, changes in
stockholders'  equity  and cash  flows for each of the  years in the  three-year
period ended December 31, 1998. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly.  In all material  respects,  the financial  position of Pioneer
American  Holding  Company Corp.  and subsidiary as of December 31, 1998 and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally  accepted
accounting principles.


KPMG LLP

Janaury 25, 1999
Philadelphia, Pennsylvania



                                       67
<PAGE>

SIGNATURES
<TABLE>
<CAPTION>
<S>                                                                             <C>

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             /S/ GENE E. GOLDENZIEL, ESQ.
be signed on its behalf by the undersigned, thereunto duly authorized.          GENE E. GOLDENZIEL, ESQ.
                                                                                Director
PIONEER AMERICAN HOLDING COMPANY CORP.

Date:  March 26, 1999                                                           /S/WILLIAM K. NASSER
                                                                                WILLIAM K. NASSER
                                                                                Director


By/S/John W. Reuther                                                            /S/RICHARD CHOJNOWSKI
     John W. Reuther                                                            RICHARD CHOJNOWSKI
     President, Chief Executive Officer,                                        Director
             & Chief Financial Officer


By/S/Richard J. Lapera                                                          /S/JOHN W. REUTHER
     Richard J. Lapera                                                          JOHN W. REUTHER
     Comptroller of Pioneer American                                            Director
     Bank, National Association

                                                                                /S/ELDORE SEBASTIANELLI
                                                                                ELDORE SEBASTIANELLI
                                                                                Director


                                                                                /S/MARGARET O'CONNOR, R.N.
                                                                                MARGARET O'CONNOR, R.N.
                                                                                Director


                                                                                /S/JOHN W. WALSKI
                                                                                JOHN W. WALSKI
                                                                                Director

</TABLE>


                                       68

<PAGE>

Management Statement of Responsibility

         The consolidated financial statements and related financial information
presented in this Annual Report were  prepared by the  management of the Company
which  is  responsible  for the  fairness,  objectivity,  and  integrity  of the
information presented herein.  Management believes that the financial statements
have been prepared in conformity with generally accepted accounting  principles.
This  information  is based on recorded  financial  transactions  which  include
amounts that are based on management's best estimate and judgment.

         Management's responsibility for the financial information in the report
rests on the  Company's  internal  accounting  control  structure.  The internal
accounting  control structure  consists of written policies and procedures which
include segregation of responsibilities  and safeguarding  against  unauthorized
use or  disposition  of assets.  During 1998,  the internal  audit staff,  which
reports to the Audit Committee of the Board of Directors, had the responsibility
of  following  audit  procedures  and  maintaining  close  observation  of  such
controls.  The  internal  accounting  control  structure  is designed to provide
reasonable assurance that financial records are reliable for financial reporting
purposes and that assets are properly safeguarded.

         The Audit  Committee of the Board of Directors meets on a regular basis
in order to review and oversee the  Company's  internal  control  structure  and
financial  reporting.  The  Audit  Committee  reviews  the  Company's  audit and
financial  reporting  matters with  management,  the  internal  auditors and the
independent auditors, KPMG, LLP.

         The consolidated  financial  statements in this Annual Report have been
audited  by the  independent  auditors.  Management  believes  their  audit  was
conducted in accordance with generally  accepted auditing standards and included
consideration  of the Company's  internal  accounting  control  structure to the
extent they deemed necessary to determine the nature, timing and extent of their
audit  testing  for the  purpose  of  expressing  an  opinion  on the  Company's
consolidated financial statements.

                                       69
<PAGE>
Item 10

Directors and Executive Officers

         The  information  that appears in the  Corporation's  Definitive  Proxy
Statement relating to the 1999 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.

Item 11

Executive Compensation

         The  information  that appears in the  Corporation's  Definitive  Proxy
Statement relating to the 1999 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.

Item 12

Security Ownership of Certain Beneficial Owners and Management

         The  information  that appears in the  Corporation's  Definitive  Proxy
Statement relating to the 1999 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.

Item 13

Certain Relationships and Related Transactions

         The  information  that appears in the  Corporation's  Definitive  Proxy
Statement relating to the 1999 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference
                                       70
<PAGE>

                        Consent of Independent Auditors

The Board of Directors
Pioneer American Holding Company Corp.:

We consent to  incorporation  by reference in the  Registration  Statement  (No.
33-70784) on Form S-8 of Pioneer  American  Holding  Company Corp. of our report
dated January 25, 1999,  relating to the consolidated  balance sheets of Pioneer
American  Holding  Company Corp. and  subsidiaries  as of December 31, 1998, and
1997,  and  the  related  consolidated  statements  of  operations,  changes  in
stockholders'  equity,  and cash  flows for each of the years in the  three-year
period ended  December 31, 1998,  which report  appears in the December 31, 1998
annual report on Form 10-K of Pioneer American Holding Company Corp.

KPMG LLP

Philadelphia, PA
March 26, 1999
                                       71
<PAGE>

                        Consent of Independent Auditors



The Board of Directors
Pioneer American Holding Company Corp.:

We consent to  incorporation  by reference in the  registration  Statement ( No.
33-70784) on Form S-8 of Pioneer  American  Holding  Company Corp. of our report
dated January 29, 1998,  relating to the  consolidated  balance sheet of Pioneer
American  Holding  Company Corp. and  subsidiaries  as of December 31, 1997, and
1996,   and  the  related   consolidated   statements  of  income,   changes  in
stockholders'  equity,  and cash  flows for each of the years in the  three-year
period ended  December 31, 1997,  which report  appears in the December 31, 1997
annual report on Form 10-K of Pioneer American Holding Company Corp.


KPMG Peat Marwick LLP


Philadelphia, Pennsylvania
March 23, 1998

                                       72

<PAGE>


                        Consent of Independent Auditors



The Board of Directors
Pioneer American Holding Company Corp.:

We consent to  incorporation  by reference in the  Registration  Statement  (No.
33-70784) on Form S-8 of Pioneer  American  Holding  Company Corp. of our report
dated January 23, 1997,  relating to the  consolidated  balance sheet of Pioneer
American  Holding  Company Corp. and  subsidiaries  as of December 31, 1996, and
1995,   and  the  related   consolidated   statements  of  income,   changes  in
stockholders'  equity,  and cash  flows for each of the years in the  three-year
period ended  December 31, 1996,  which report  appears in the December 31, 1996
annual report on Form 10-K of Pioneer American Holding Company Corp.


KPMG Peat Marwick LLP


Philadelphia, Pennsylvania
March 31, 1997



                                       73

<PAGE>

                        Consent of Independent Auditors


The Board of Directors
Pioneer American Holding Company Corp.


We consent to  incorporation  by reference in the  registration  statement  (No.
33-70784) on Form S-8 of Pioneer  American  Holding  Company Corp. of our report
dated January 26, 1996,  relating to the  consolidated  balance sheet of Pioneer
American  Holding  Company Corp. and  subsidiaries  as of December 31, 1995, and
1994,   and  the  related   consolidated   statements  of  income,   changes  in
stockholders'  equity,  and cash  flows for each of the years in the  three-year
period ended  December 31, 1995,  which report  appears in the December 31, 1995
annual report on Form 10-K of Pioneer American Holding Company Corp.


KPMG Peat Marwick LLP


Philadelphia, Pennsylvania
March 27, 1996


                                       74