<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of
                       THE SECURITIES EXCHANGE ACT OF 1934

  For the fiscal year ended December 31, 1996   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 No. Main St., Carbondale, PA                                 18407
----------------------------------------                       --------
(Address of principal executive offices)                       Zip Code

Registrant's telephone number, including area code  (717) 282-2662
                                                    --------------

Securities registered pursuant to Section 12(b) of the Act:  None
                                                            

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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.
                            Yes    X          No
                                --------         --------

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1997:

Common stock,  $ 55,929,120 (1)

The number of shares outstanding of the issuer's classes of common stock as of
March 1, 1997:

Common stock, $1.00 par value - 2,828,912 shares

DOCUMENTS INCORPORATED BY REFERENCE

Part II: Annual  Report to  Shareholders  for the Year Ended  December 31, 1996,

Part III:  1997 Proxy  Statement, Part IV: Annual Report to Shareholders for
the Year Ended December 31, 1996.

(1) The aggregate dollar amount of the voting stock set forth equals the number
of shares of the registrant's Common Stock outstanding, reduced by the amount of
Common Stock held by executive officers, directors and shareholders owning in
excess of 10% of the registrant's Common Stock, multiplied by the closing high
bid price for the registrant's Common Stock on March 1, 1997. The information
provided shall in no way be construed as an admission that any officer, director
or 10% shareholder may be deemed an affiliate of the registrant or that such
person is the beneficial owner of the shares reported as being held by him, and
any such inference is hereby disclaimed. The information provided herein is
included solely for record keeping purposes of the Securities and Exchange
Commission.





<PAGE>
<TABLE>
<CAPTION>



                                               10-K CROSS REFERENCE
                                                                                                          Page
PART I

<S>   <C>                                                                                                 <C> 
      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.....................................................9-35
      8. Financial Statements and Supplementary Data.....................................................36-64
      9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure...............**

PART III

      10.Directors and Executive Officers of the Registrant ................................................68
      11.Executive Compensation.............................................................................68
      12.Security Ownership of Certain Beneficial Owners and
                  Management................................................................................68
      13.Certain Relationships and Related Transactions.....................................................68

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, 1996 and 1995.............................36-37
                     Consolidated Statements of Income, Years ended
                          December 31, 1996, 1995 and 1994..................................................38
                     Consolidated Statements of Changes in Stockholders'
                         Equity, Years ended December 31, 1996, 1995 and 1994...............................39
                     Consolidated Statements of Cash Flows, Years ended
                         December 31, 1996, 1995 and 1994................................................40-41
                  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 1996.
                  Auditors' Opinion........................................................................65
------------------
 **      Not applicable
</TABLE>


                                       1

<PAGE>



THE PIONEER AMERICAN HOLDING COMPANY CORP. AND SUBSIDIARY

Highlights of the Year

<TABLE>
<CAPTION>


=============================================================================================
                                                      1996            1995       % Change
---------------------------------------------------------------------------------------------
<S>                                            <C>               <C>               <C>  
FOR THE YEAR
Total operating income                         $ 26,370,000      25,575,000         3.11%
Total operating expense                          21,123,000      20,722,000         1.94%
Income before income taxes                        5,247,000       4,853,000         8.12%
Income tax expense                                1,543,000       1,370,000        12.63%
Net income                                        3,704,000       3,483,000         6.35%
Total cash dividends declared                     1,900,000       1,671,000        13.70%

AT YEAR END
Assets                                          330,213,000     320,647,000         2.98%
Deposits                                        295,946,000     288,252,000         2.67%
Loans, (net)                                    201,298,000     194,555,000         3.47%
Securities available for sale                    76,019,000      68,328,000        11.26%
Investment securities                            20,860,000      26,033,000        19.87%
Stockholders equity                              30,263,000      28,492,000         6.22%

PER SHARE DATA
Net income                                             1.27            1.20
Cash dividends declared                                0.66            0.60
Book value                                            10.36            9.80
Number of shareholders                                1,421           1,347
=============================================================================================
</TABLE>

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.

         Quarterly highs and lows presented here have been restated for 1995 &
1994 to reflect the Company's two for one stock split effected in the form of a
stock dividend effective July 15, 1996:


==============================================================================
                         1996                  1995                 1994
                    ---------------       ----------------     ---------------
Quarter               High    Low           High     Low        High     Low
------------------------------------------------------------------------------

First                 21.25  20.00          17.75   17.25      13.50   12.00
Second                21.12  20.12          18.50   17.00      14.13   13.50
Third                 22.00  19.50          20.25   18.38      16.00   14.13
Fourth                24.00  21.75          22.00   19.00      19.00   16.00
==============================================================================

                                       2

<PAGE>


 Company Stock Prices and Dividend Information, (Continued)

         On March 1, 1997 the Holding Company had approximately 1,421
shareholders. The market price of the stock on this date was $ 24.00 per share.
Cash dividends per share for 1996, 1995 and 1994 appear in the table below:


=======================================================================
Quarter (1)                          1996             1995        1994
-----------------------------------------------------------------------

First                           $     0.15            0.15        0.14
Second                                0.17            0.15        0.14
Third                                 0.17            0.15        0.15
Fourth                                0.17            0.15        0.15
-----------------------------------------------------------------------

                                $     0.66            0.60        0.58
=======================================================================

(1) Per share data for years 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.




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 180 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.
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

                                       3
<PAGE>

         The Bank (Continued)

at the branches, there are eighteen ATM's at remote locations. These 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 1996 was approximately 5.1%. In the
counties in which the Company operates the rates were: Lackawanna 7.9% with
8,700 claims, Luzerne 6.5% with 10,500 claims; Wayne 6.3%, with 1,300 claims,
Monroe with 7.4% with 3,700 claims, and; Wyoming 7.3% with 1,100 claims.
Northeastern Pennsylvania has maintained average vacancy rates with no fear 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. These
regulations have not resulted in any material cost to the Company or any
significant changes to the Company's operations. FDICIA also contains a variety
of other provisions that affected the operations of the Company, including new
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 may opt out of
interstate branching until June 1, 1997, but if so, their domestic institutions
will also be prohibited from branching interstate. States may 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 Market Street, Kingston,
Pennsylvania for the purpose of constructing a full-service office. This office
is expected to be completed in 1998 and will replace the existing Kingston
leased office. The Bank owns properties adjacent to the main office utilized as
parking lots.

         The Bank also leases facilities for eleven 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,
two in Weis Markets in Clarks Summit and Hazleton, and a free-standing office in
Kingston.

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 1996 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
                                               -------------------------------------------------------------
                                                      1996        1995       1994        1993          1992
------------------------------------------------------------------------------------------------------------
<S>                                          <C>                <C>        <C>         <C>           <C>   
Results of Operations
For the Year
Interest income                              $      24,358      23,662     20,626      19,855        20,863
Interest expense                                    10,874      11,227      8,157       7,514         9,048
------------------------------------------------------------------------------------------------------------
                                                                        
Net interest income                                 13,484      12,435     12,469      12,341        11,815

Provision for possible loan losses                     500         420        310         837           850
------------------------------------------------------------------------------------------------------------

Net interest income after provision for
     possible  loan losses                          12,984      12,015     12,159      11,504        10,965

Other operating income                               2,012       1,913      1,319       1,750         1,323
Other operating expense                              9,749       9,075      8,697       8,570         8,465
Income tax expense                                   1,543       1,370      1,333       1,323         1,022
------------------------------------------------------------------------------------------------------------

Income before cumulative effect of change
     in accounting principle                 $       3,704       3,483      3,448       3,361         2,801
                                                                        
Cumulative effect of change in accounting
     principle                                       -           -          -             (75)       -
------------------------------------------------------------------------------------------------------------

Net income                                           3,704       3,483      3,448       3,286         2,801
============================================================================================================

Cash dividends declared                      $       1,900       1,671      1,610       1,374         1,166
============================================================================================================

Per Share (1)
Net income                                   $        1.27        1.20       1.20        1.18          1.02

Book value                                           10.36        9.80       8.71        8.91          8.22

Cash dividends paid                                   0.66        0.60       0.58        0.50          0.43
============================================================================================================

Financial Condition
At End of Year
Assets                                       $     330,213     320,647    302,408     264,663       256,511
Deposits                                           295,946     288,252    270,718     237,556       231,326
Loans, net                                         201,298     194,555    177,173     156,979       162,640
Securities available for sale (2)                   76,019      68,328     50,467      55,208        37,109
Securities held for investment (3)                  20,860      26,033     52,915      25,054        36,744
Stockholders' equity                                30,263      28,492     24,978      24,785        22,627
============================================================================================================
Number of Stockholders                               1,421       1,347      1,334       1,304         1,316
============================================================================================================
</TABLE>

(1)  Per share data for 1995,  1994,  1993,  and 1992  restated  to reflect  the
     Company's two for one stock split  effected in the form of a stock dividend
     effective July 15, 1996.

(2)  Carried  at fair  value  in 1996,  1995  and 1994 and the  lower of cost or
     market prior to 1994.

(3)  Carried at historical cost, net of unamortized premiums and discounts.

                                       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, 1996, 1995, and 1994. 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. All share and per share data for
1995 has been restated to reflect the Company's two for one stock split effected
in the form of a stock dividend effective July 15, 1996.

Results of Operations
Highlights of Operating Results
1996 vs. 1995

         Net income reached $ 3,704,000 in 1996, $221,000 or 6.3 % higher than
in 1995. These earnings represent the highest annual earnings in the Company's
history. Earnings per share were $ 1.27 in 1996, compared to $ 1.20 in 1995, an
increase of 5.8 %.

         The Company experienced an increase in net interest income driven
primarily by an increase in the volume of interest earning assets. The overall
change was an increase in net interest income of $ 1,049,000 or 8.4 % from 1995
to 1996. The provision for loan losses was up $ 80,000 year-to-year due to
growth within the loan portfolio. Other operating income was up $ 99,000 during
1996 from the prior period due to an increase in total service charges,
maintenance fees, and the sale of mortgages. Other operating expenses increased
during 1996 versus 1995 due to additional salaries and benefits expense for the
newly implemented credit administration department, and other recurring and
non-recurring expenses associated with the new branches and continued growth of
the Bank.


                                        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>


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

                                            1996 vs. 1995          1995 vs. 1994
                                         --------------------   ---------------------
                                               Amount      %          Amount      %
-------------------------------------------------------------------------------------

<S>                                    <C>               <C>       <C>           <C> 
Interest income                        $      696,000      2.9     3,036,000     14.7
Interest expense                             (353,000)    (3.1)    3,070,000     37.6
-------------------------------------------------------------------------------------

Net interest income                         1,049,000      8.4       (34,000)    (0.3)

Provision for loan losses                      80,000     19.0       110,000     35.5
-------------------------------------------------------------------------------------

Net interest income after provision
     for loan losses                          969,000      8.1      (144,000)    (1.2)

Other operating income                         99,000      5.2       594,000     45.0
Other operating expense                       674,000      7.4       378,000      4.3
-------------------------------------------------------------------------------------
                                                                 
Income before income taxes                    394,000      8.1        72,000      1.5

Income tax expense                            173,000     12.6        37,000      2.8
-------------------------------------------------------------------------------------

Net income                             $      221,000      6.3        35,000      1.0
=====================================================================================
</TABLE>


1995 vs. 1994

         Net income reached $ 3,483,000 in 1995, $ 35,000 or 1.0 % higher than
in 1994. Earnings per share was $1.20 in 1995, compared to $ 1.21 in 1994, a
decrease of .82 %.

         Although the Company experienced an increase in net interest income
from changes in volume, this increase was offset by the change in interest
rates, primarily on the Company's interest bearing liabilities. The Bank's
special deposit rate offers to support the opening of new branches resulted in
an increase in interest expense. The overall change was a reduction in net
interest income of $34,000 or 0.3% from 1994 to 1995. The provision for loan
losses was up $110,000 year-to-year due to growth within the loan portfolio.
Other operating income was up $594,000 during 1995 from the prior period due to
an increase in net securities gains and increases in total service charges on
deposit accounts. The increase in net securities gains was attained through the
ongoing asset/liability management of the portfolio. Other operating expenses
increased during 1995 and 1994 due to additional salaries and benefits expense
for staffing the new branches and other recurring and non-recurring expense
associated with the new branches and growth of the Bank.

                                       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 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
$999,000 from 1995 to 1996. Tax equivalent net interest income was increased by
$40,000 for interest rate changes from 1995 to 1996 versus a reduction of
$826,000 from 1994 to 1995. The tax equivalent net interest income from the
volume change from 1995 and 1996 was comparable to the volume change for 1994 to
1995. The increase in tax equivalent net interest income from volume changes
from 1995 to 1996 was $ 959,000 versus $784,000 from 1994 to 1995.

          The improvement in net interest income in 1996 from 1995 was the
result of several factors. The volume of interest earning assets drove the
increase in interest income from 1995 to 1996. The increase in volume resulted
in an increase in interest income of $1,051,000. The loan portfolio provided
$1,646,000 of the increase with 55% of this coming from the volume increase in
installment loans. The Bank offered an attractive home equity


                                       11
<PAGE>

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

promotion in early 1996 which represented a majority of the increase. The
increase in interest income from the increase in the volume of loans was offset
by a decrease of $595,000 in interest income from the volume of securities and
Federal funds sold.
         Securities, Federal funds sold and loans all had decreases from 1995 in
interest income from rate changes. These decreases are attributable to the
fluctuating interest rate environment in which the Bank continued to operate
during 1996 as well as the ongoing and increasing competitive pressures in the
lending area.

         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 increase of $131,000 in interest expense from an increase in the
volume of interest bearing liabilities was offset by a reduction in interest
expense of $446,000 through interest rate reductions on interest bearing
liabilities. The result of both these changes is a reduction in interest expense
of $352,000 from 1995 to 1996.

          The volume increase in interest income was the result of a $ 8,679,000
increase in the total average of interest earning assets from $ 293,109,000 in
1995 to $ 301,788,000 in 1996. The average rate of return on these assets was
comparable to the prior year with 1996 at 8.20% and 1995 at 8.22%. The volume
increase in interest income was primarily driven by an increase in lending
activity. Loans, net of unearned discount were up $18,122,000 from 1995 to 1996.
The related interest income was up $ 1,252,000 to $ 18,451,000 in 1996. The
return of 9.03% on net loans was a 21 basis point decrease from the return in
1995.

         The Company had an increase in average interest bearing liabilities of
$ 4,933,000 from 1995. This was due to an increase of interest bearing deposits
to $ 256,763,000 for 1996, a $ 5,582,000 increase over 1995. This increase was
primarily in the interest bearing checking, money market and savings 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 result was an increase in low or
non-interest bearing liabilities and an overall decrease in the total cost of
funds. There was a twenty-two basis point decrease in the cost of interest
bearing liabilities in 1996 to 4.21%. The increase in funds was utilized in
funding the growth in the loan portfolio and 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.


                                       12
<PAGE>

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

         Table 4 presents the Company's interest earning assets and interest
bearing liabilities as of December 31, 1996 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>

==================================================================================================================
                                                                    1996/1995                   1995/1994
                                                               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                                                    (451)      53    (398)       432     181      613
     Non-taxable (2)                                             (60)     (58)   (118)       (40)    (15)     (55)
------------------------------------------------------------------------------------------------------------------
Total securities                                                (511)      (5)   (516)       392     166      558
------------------------------------------------------------------------------------------------------------------
                                                                                                          
Federal funds sold                                               (84)      (5)    (89)       118      76      194
------------------------------------------------------------------------------------------------------------------

Loans, net of unearned discount:
     Commercial (2)                                              354     (150)    204        545     427      972
     Mortgage                                                    390      (38)    352        580    (210)     370
     Installment                                                 902     (206)    696        785     150      935
------------------------------------------------------------------------------------------------------------------
Total loans                                                    1,646     (394)  1,252      1,910     367    2,277
------------------------------------------------------------------------------------------------------------------

Total interest income                                          1,051     (404)    647      2,420     609    3,029
------------------------------------------------------------------------------------------------------------------

Interest Expense
Interest bearing deposits:
     NOW, Super NOW and Money Market                             121      (44)     77       (106)     24      (82)
     Savings                                                       9     (219)   (210)       (38)      6      (32)
     Time                                                          1     (183)   (182)     1,696   1,399    3,095
------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Deposits                                  131     (446)   (315)     1,552   1,429    2,981

Short-term borrowings and note payable                           (39)       3     (36)        95        -      95
Fed Funds Purchased                                                0       (1)     (1)       (11)      6       (5)
------------------------------------------------------------------------------------------------------------------

Total interest expense                                            92     (444)   (352)     1,636   1,435    3,071
------------------------------------------------------------------------------------------------------------------
                                                                                                          
Change in net interest income                              $     959       40     999        784    (826)     (42)
==================================================================================================================
</TABLE>

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  34% in  1996,  1995  and  1994.  The  total  taxable  equivalent
     adjustments included above are $382,000,  $433,000,  and $439,000 for 1996,
     1995 and 1994, respectively.



                                       14


<PAGE>

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

<TABLE>
<CAPTION>


----------------------------------------------------------------------------------------------------------------------------
                                               1996                           1995                           1994
                                  ----------------------------- -----------------------------   ----------------------------
                                    Average                        Average                        Average
                                         (2)           Average          (2)           Average          (2)           Average
Assets                              Balance  Interest     Rate     Balance  Interest     Rate      Balance  Interest    Rate
----------------------------------------------------------------------------------------------------------------------------

Interest earning assets:


<S>                                  <C>         <C>         <C>    <C>       <C>          <C>     <C>        <C>       <C> 
Securities:
          Taxable                    81,707     5,145        6.30   88,877    5,543        6.24    81,949     4,930     6.02
          Non-taxable (1)            10,890       871        8.00   11,638      989        8.50    12,106     1,044     8.62
----------------------------------------------------------------------------------------------------------------------------
Total securities                     92,597     6,016        6.50  100,515    6,532        6.50    94,055     5,974     6.35
----------------------------------------------------------------------------------------------------------------------------
                                                                                                                     
Federal funds sold                    4,955       274        5.53    6,480      363        5.60     4,368       169     3.87
----------------------------------------------------------------------------------------------------------------------------

Loans, net of unearned discount:
          Commercial (1) (5)         75,520     6,694        8.86   71,521    6,490        9.07    65,519     5,518     8.42
          Mortgage (5)               80,020     6,995        8.74   75,553    6,643        8.79    68,956     6,273     9.10
          Installment (5)            51,490     4,762        9.25   41,742    4,066        9.74    33,682     3,131     9.30
          Allowance for possible
           loan losses               (2,794)       -         -      (2,702)       -        -       (2,775)       -         -
----------------------------------------------------------------------------------------------------------------------------
Net loans                           204,236    18,451        9.03  186,114   17,199        9.24   165,382    14,922     9.02
----------------------------------------------------------------------------------------------------------------------------

Total interest earnings assets      301,788    24,741        8.20  293,109   24,094        8.22   263,805    21,065     7.99

Non-interest earning assets          24,706        -         -      22,278        -          -     19,403        -        -
----------------------------------------------------------------------------------------------------------------------------

Total assets/interest income      $ 326,494    24,741        7.58  315,387   24,094        7.64   283,208    21,065     7.44
============================================================================================================================
</TABLE>





                                       15


<PAGE>

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

====================================================================================================================================
                                                1996                             1995                              1994
                                ----------------------------------------------------------------------------------------------------
                                  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:
     Interest bearing 
      checking and
     Money Market                $ 43,331       1,016       2.34     38,173        939        2.46      42,490      1,021      2.40
     Savings                       55,219       1,183       2.14     54,818      1,393        2.54      56,313      1,425      2.53
     Time                         158,213       8,601       5.44    158,190      8,783        5.55     127,643      5,688      4.46
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing, 
  deposits                        256,763      10,800       4.21    251,181     11,115        4.43     226,446      8,134      3.59
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Short-term borrowings                                                                                 
     and note payable               1,228          74       6.03      1,872        110        5.88         255         15      5.88
Fed Funds Purchased                    15           1       6.67         20          2       10.00         131          7      5.34
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
  liability                       258,006      10,875       4.22    253,073     11,227        4.44     226,832      8,156      3.60
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Non-interest bearing
     deposits and                                                                     
     other liabilities             39,471         --         --      35,290         --          --      31,188         --        --
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Total liabilities                 297,477      10,875       3.66    298,363     11,227        3.89     258,020      8,156      3.16
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Stockholders equity                29,017        --           --     27,024         --          --      25,188         --        --
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Total liabilities
     and stockholders'                                                                   
     equity/interest expense     $326,494      10,875       3.33    315,387     11,227        3.56     283,208      8,156      2.88
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Net interest income                            13,866                           12,867                             12,909
====================================================================================================================================
Net interest spread (3)                                     3.99%                             3.80%                            4.39%
====================================================================================================================================
Net interest yield (4)                                      4.59%                             4.39%                            4.89%
====================================================================================================================================
</TABLE>

(1)  Interest and average rates are presented on a taxable-equivalent basis
     utilizing an effective tax rate of 34% in 1996, 1995 and 1994. The total
     taxable-equivalent adjustments included above are $382,000, $433,000 and
     $439,000 for 1996, 1995, and 1994, respecitively.

(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 arithmetric difference between the rate earned
     on total interest bearing 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 fees of $359,0000, $324,000, $470,000 in
     1996, 1995, and 1994, respectively.


                                       16





<PAGE>





Table 4
Interest Rate Sensitivity
<TABLE>
<CAPTION>

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

                            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                 $  23,082,000    3,502,000    4,964,000   29,143,000    15,328,000     76,019,000
                           
Investment securities    $   1,369,000    2,247,000    2,910,000   10,140,000     4,194,000     20,860,000
                       
Loans (net of unearned                                                                       
discount and deferred
fees)                    $  49,295,000    7,948,000   24,597,000   60,006,000    62,202,000    204,048,000 

Federal funds sold           6,455,000       -            -            -            -            6,455,000
 ----------------------------------------------------------------------------------------------------------
Total                    $  80,201,000   13,697,000   32,471,000   99,289,000    81,724,000    307,382,000
===========================================================================================================

Interest Bearing
Liabilities

Interest bearing DDA,
(MMA, NOW, Super NOW)    $  48,430,000       -           -             -            -           48,430,000
                                                                               
Savings (1)                 10,635,000       -           -            -          42,540,000     53,175,000
                                                                                             
Time                        24,146,000   21,529,000   39,407,000   29,042,000       -          114,124,000
                                                                                             
Time greater than $100M      9,586,000   14,662,000   11,069,000    7,257,000       -           42,574,000
                                                                               
Note Payable                    -            -            -            -            275,000        275,000
-----------------------------------------------------------------------------------------------------------
Total                    $  92,797,000   36,191,000   50,476,000   36,299,000    42,815,000    258,578,000
===========================================================================================================

Interest rate                                                                                
sensitivity gap          $(12,596,000) (22,494,000) (18,005,000)   62,990,000    38,909,000     48,804,000

Cumulative interest rate 
      sensitivity gap    $(12,596,000) (35,090,000) (53,095,000)    9,895,000    48,804,000            -

Cumulative interest rate
      sensitivity ratio(2)      -3.81%      -10.63%      -16.08%            3%        14.78%           -

===========================================================================================================
</TABLE>

(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.


                                       17
<PAGE>

Table 5
Other Operating Income

<TABLE>
<CAPTION>


================================================================================================================
                                                                                 Years ended December 31
                                                                          --------------------------------------
                                                                             1996         1995         1994
----------------------------------------------------------------------------------------------------------------

<S>                                                                     <C>                <C>          <C>    
Service charges on deposit accounts                                     $   1,168,000      849,000      749,000
Net gains on sales of
    securities available for sale                                              -           457,000       29,000
Net gains on calls of held to maturity securities                              -             8,000      -
Other income                                                                  844,000      599,000      541,000
----------------------------------------------------------------------------------------------------------------

Total other operating income                                            $   2,012,000    1,913,000    1,319,000
================================================================================================================

</TABLE>

         Service charge income on deposit accounts increased in 1996 due to an
increase in the fees collected for returned items and an increased number of
accounts subject to service charge routines of the Bank. During 1996 pricing of
service charges and maintenance fees were increased based upon a cost analysis
completed by the Bank. This resulted in an increase in service charge income on
deposit accounts in 1996.


         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 1996, 1995 and 1994 the Company sold newly originated mortgage loans
(primarily fixed rate) to the Federal Home Loan Mortgage Corporation. The
Company recognized $220,000 on the sale of mortgage loans in 1996, $18,000 in
1995 and a loss of $34,000 in 1994, respectively. Also recognized were gains of
$29,000, $31,000 and $21,000 in 1996, 1995, and 1994 respectively, on the sale
of PHEAA loans. The proceeds from the sale of mortgage and PHEAA loans were
$14,439,000 in 1996, $3,043,000 in 1995 and $6,411,000 in 1994, respectively.
The sale of these loans, contractual or otherwise, was deemed necessary and
beneficial based upon ongoing asset/liability management. These sales allowed
management to alter the composition of these portfolios to address interest
rate, pre-payment and credit risk inherent in the loan portfolio.

         The Company did not recognize any gains or losses on the sale of
securities available for sale in 1996. There were gains recognized for the sale
of securities available for sale in 1995 of $457,000 and $29,000 in 1994. The
proceeds from the sale of securities available for sale were $6,327,000,
$29,497,000 and $8,131,000 in 1996, 1995, and 1994 respectively.

          On November 15,1995, the Financial Accounting Standards Board (FASB)
released a special report entitled "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt & Equity Securities." This guide
contained a provision which allowed a one time reclassification of securities
previously classified as Held by Maturity to the Available for Sale category.
Securities in the Available for Sale category can be sold in the normal course
of managing the balance sheet, while there are restrictions on the sale of
securities from the Held to Maturity portfolio. Bank Management believes that it
was appropriate to take advantage of this



                                       18
<PAGE>

Other Operating Income, (Continued)

reclassification opportunity since a bank's ability to manage overall risk is
enhanced by having a larger Available for Sale portfolio. Accordingly, the Bank
reclassified securities with a book value of $11,825,000 in December 1995.

Table 6
Other Operating Expenses

<TABLE>
<CAPTION>

===============================================================================================================
                                                                                Years ended December 31
                                                                         --------------------------------------
                                                                            1996         1995         1994
---------------------------------------------------------------------------------------------------------------

<S>                                                                    <C>              <C>          <C>      
Salaries and employee benefits                                         $   5,061,000    4,385,000    4,181,000
Net occupancy expense of bank premises                                       857,000      761,000      679,000
Furniture and equipment expenses                                             622,000      565,000      543,000
Data processing expense                                                      241,000      332,000      339,000
FDIC Insurance                                                                 1,000      319,000      537,000
Other expenses                                                             2,967,000    2,713,000    2,418,000
---------------------------------------------------------------------------------------------------------------

Total other operating expenses                                         $   9,749,000    9,075,000    8,697,000
===============================================================================================================

</TABLE>


         Salaries and employee benefits, which represent the most significant
portion of non-interest expenses, increased by 15.4% and 4.9% in 1996 and 1995,
respectively. The 1996 increase was attributed to normal salary increases, the
addition of a commercial lender, an administrative assistant to the commercial
lenders, a credit administrator and two credit analysts in the loan operations
department. The increase was also attributable to an increase in full-time
equivalents from the new branches opened in 1996, which include Tunkhannock and
Hazleton. Also, 1996 represented the first full year of salary and benefit
expense for our Mount Pocono, Stroudsburg, O'Neill and Clarks Summit Offices,
which opened in November, December, June and October of 1995, respectively.
Salary expense increased 16.6% and employee benefit expense increased 11.5% in
1996. Salary expense increased 10.4% and employee benefit expense decreased 9.7%
in 1995 over 1994. The increase in salaries and employee benefits expense of
1995 over 1994 was attributable to a full year of salary and benefit expense for
the Dallas, Kingston, and Mountaintop offices which all opened in December of
1994.

         There was no contribution to the Company's ESOP in 1996. The
contributions in 1995 decreased $264,000 from 1994 for a total of $5,000. No
contribution was made in 1996 and was substantially less in 1995 because the
plan had unallocated shares purchased in previous periods negating the need for
more funds to purchase additional shares in 1995 and 1996.

         The increase in net occupancy and furniture and equipment expense of
$96,000 or 12.6% over 1995 and the increase of $104,000 or 8.5% in 1995 over
1994 reflected the increased costs from the nine new branch facilities opened
from 1994 through 1996. The increase was also attributable to inflation
adjustments in most of the lease agreements maintained by the Bank.



                                       19
<PAGE>

Other Operating Income, (Continued)

         Data processing expense decreased $91,000 or 27.4% in 1996. The Bank
replaced its computer hardware and software in 1996. The upgrades significantly
reduced the supplies and maintenance expense for data processing. This was
partially offset by an increase in depreciation expense for additions placed in
service over the past several years. The decrease in data processing expense in
1994 was due to a reduction in leasing expense for the teller equipment which
was replaced in late 1993 with the purchase of new teller equipment.

         The decreased level of insurance premiums for FDIC Insurance was
substantial in 1996 resulting in expense of $1,000 versus $319,000 for 1995.
This decrease was due to the bank insurance fund recapitalization refund
calculation due on assessments paid for the second and third quarter of 1995 and
for the year of 1996.

          Other expenses increased by 9.4 % in 1996 and by 12.2% in 1995. The
increase was attributable to various areas due to the growth of the Bank and
outsourcing. The largest increases were in stationary, printing and supplies,
marketing and courier expense. The growth of the Bank and a significant increase
in the cost of paper resulted in an increase in stationary, printing and
supplies for 1996 over 1995 of $68,000. The Bank's marketing expense increase
$59,000 due to marketing a larger geographical area for the new branch
locations. The expense for couriers increased $54,000 due to the Bank's
outsourcing of this function to a delivery company necessary to service the
banks expanded branch network. Other areas with increases over 1995 were credit
reports, up $40,000, automated teller machines and related cardholder services
up $39,000 and expenses for the holding company were up $20,000. Offsetting the
increase in other expenses were miscellaneous expenses, down $75,000 in 1996 and
funding expenses of the Directors Deferred Compensation Plan, down $59,000 in
1996 over 1995. The Company also had an increase in other real estate expenses
of $20,000 over 1995 associated with higher administration costs incurred in the
foreclosure and continuing maintenance of properties.

Financial Position

         Loan Portfolio

         Total loans, net of unearned discount and deferred loan fees, increased
$6,751,000 or 3.4% in 1996 and increased by $17,425,000 or 9.7% in 1995. In
1996 the Bank sold $10,867,000 in mortgage loans and $3,572,000 in PHEAA loans.
The increase in loans after consideration of the previously mentioned loan sales
were $21,190,000 in 1996 and $20,468,000 in 1995. In 1995 the loans sold were
$1,255,000 and $1,788,000, respectively. There was growth in all three segments
of the Company's portfolio: residential real estate, commercial loans and
consumer loans. The largest amount of originations were from real estate
residential loans, some of which were sold. In January through March of 1996,
the Bank held a home equity promotion resulting in $12,000,000 in new loan
originations.




                                       20
<PAGE>


Loan Portfolio, (Continued)

         Loan growth over the past few years has increased at a rate greater
than deposit growth. This has resulted in an increase in the Bank's loan to
deposit ratio. Management decided to better position the mortgage loan portfolio
in 1996 by completing an infrequent restructure transaction. The objectives were
to reduce the loan to deposit ratio, address interest rate and prepayment risks
in the fixed rate sector of the portfolio, as well as improve the liquidity and
quality characteristics of the one-year adjustable rate mortgages. The Bank sold
$10,867,000 of residential mortgage loans in 1996 consisting of $7,000,000 of
fixed rate loans and $3,867,000 of adjustable rate mortgages. As a required term
of the sale, the servicing rights for the fixed rate mortgages were sold on a
servicing released basis.

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
                                 ------------------------------------------------------------------------
                                      1996          1995           1994          1993          1992
---------------------------------------------------------------------------------------------------------

<S>                            <C>                 <C>            <C>           <C>           <C>       
Commercial, financial &        $     78,510,000    74,746,000     68,803,000    63,450,000    60,297,000
     agricultural
Real estate construction                947,000       625,000      1,482,000     1,594,000     1,005,000
Real estate residential             115,791,000   112,493,000    102,708,000    88,857,000    92,358,000
Consumer                             20,424,000    19,013,000     14,184,000    11,609,000    19,429,000
---------------------------------------------------------------------------------------------------------

Total loans, gross                  215,672,000   206,877,000    187,177,000   165,510,000   173,089,000

Unearned discount and
     deferred loan fees             (11,624,000)   (9,580,000)    (7,305,000)   (5,927,000)   (8,089,000)
---------------------------------------------------------------------------------------------------------

Total loans, net of
     unearned discount
     and deferred loan fees    $    204,048,000   197,297,000    179,872,000   159,583,000   165,000,000
=========================================================================================================
</TABLE>




                                       21
<PAGE>

Loan Portfolio, (Continued)

The following table summarizes commercial, financial, agricultural and real
estate construction loans at December 31, 1996 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, financial & agricultural                    $    23,965,000    15,506,000    39,039,000     78,510,000
Real estate construction                                        947,000       -             -              947,000
-------------------------------------------------------------------------------------------------------------------

Total                                                   $    24,912,000    15,506,000    39,039,000     79,457,000
===================================================================================================================

Interest Rate Sensitivity:

Loans with predetermined rates                                7,796,000    13,800,000    31,109,000     52,705,000
Loans with variable rates                                    17,116,000     1,706,000     7,930,000     26,752,000
-------------------------------------------------------------------------------------------------------------------

Total                                                   $    24,912,000    15,506,000    39,039,000     79,457,000
==================================================================================================================

</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 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 1996, the Company originated $19,261,000 in
residential mortgage and home equity loans of which $10,768,000 were variable
rate loans. The Company originated $11,200,000 in 1995 of which $7,100,000 were
variable rate loans. In addition, the Bank has the ability to sell fixed and
adjustable rate residential mortgages and student loans it does originate into
secondary markets to reduce its exposure to future interest rate increases.
Sales of mortgage and student loans were $14,439,000 for 1996 and $3,043,000 for
1995.




                                       22
<PAGE>

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>

===============================================================================================================
                                                       1996        1995        1994       1993        1992
---------------------------------------------------------------------------------------------------------------

<S>                                               <C>             <C>        <C>         <C>         <C>      
Non-accrual loans                                 $   4,404,000   2,161,000  2,315,000   3,613,000   4,414,000

Restructured loans                                      643,000     837,000  1,077,000     496,000     380,000
---------------------------------------------------------------------------------------------------------------

                                                  $   5,047,000   2,998,000  3,392,000   4,109,000   4,794,000
===============================================================================================================
</TABLE>

Prior to 1994, other loans past due ninety or more days as to interest or
principal were disclosed separately from non-accrual loans. These loans have
now been added to non-accrual loans for disclosure purposes as loans ninety or
more days past due by definition are non-accruing due to interest being fully
reserved for accordance with the Bank's lending policies.


         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 also reserves the accrued interest on
all loans over ninety days past due unless the Bank considers the loan to be
well secured and in the process of collection. During 1996 the Bank performed an
in depth analysis of the organizational structure of the lending department. The
results of this analysis were the initiation of several improvements in this
area. These improvements include an additional commercial loan officer, the
institution of a separate and distinct credit administration department,
improvements in the loan review process and the establishment of an internal
loan committee.

         An outcome of all these and other actions was an improvement in the
recognition of problem credits and the subsequent actions to remedy these
situations. The Bank experienced a $2,049,000 increase in non-performing loans
in 1996 over 1995. Non-accrual loans increased $2,243,000 to $4,404,000. The
$2,243,000 increase primarily consists of thirteen (13) borrowers representing
$1,921,000 of the increase. There are specific loan loss reserves of $235,000
allocated to the thirteen loans representing the $1,921,000. The remainder of
the balance is fully collateralized.

         There was no interest income recognized on non-accruing loans in 1996,
1995 and 1994. 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 $160,000, $111,000 and $109,000 in 1996,
1995, and 1994, respectively.

         The amount of interest on restructured loans which was recorded in
income was $54,000 in 1996, $73,000 in 1995, and $37,000 in 1994. 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 $48 ,000, 12,000, and $8,000 in 1996, 1995, and 1994, respectively.




                                       23
<PAGE>

Risk Elements of Loan Portfolio, (Continued)

         Statement of Financial Accounting Standard (SFAS) No. 114, "Accounting
By Creditors for Impairment of Loans," requires certain impaired loans to be
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. SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures" (SFAS
No. 118), amends SFAS No. 114 and requires certain related disclosures.

         Both SFAS No. 114 and 118 were effective for the Company beginning
January 1, 1995 and have been reflected prospectively from that date. The
implementation of these statements did not have a material effect on the
Company's results of operations, financial condition, or stockholders' equity.
As of December 31, 1996, the Company had impaired loans with a total recorded
investment of $1,603,000 and $1,722,000 on December 31,1995. The average
recorded investment for the twelve month period ended December 31, 1996 was
$1,145,000 and $1,528,000 on December 31, 1995. As of December 31, 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 $819,000 and $350,000
respectively and $288,000 and $95,000 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, 1996 was $784,000 and $1,434,000 on December
31,1995. For purposes of applying the measurement criteria for impaired loans
under SFAS No. 114, as amended, the Company excludes large groups of
smaller-balance homogeneous loans, primarily consisting of residential real
estate 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 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, 1996 and 1995, 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.




                                       24
<PAGE>


Provision and Allowance for Possible Loan Losses

         The allowance for possible 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 possible 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 $500,000 in 1996, $420,000 in 1995,
and $310,000 in 1994. The current year provision has enabled the allowance for
loan losses to increase by .3% to $2,750,000 as of December 31, 1996, while
there was a 3.4% increase in total loans, net of unearned discount and unearned
loan fees. The increase in the loan portfolio is attributable to residential
real estate loans including home equity loans and commercial loans. Based on the
nature of the collateral supporting residential real estate loans, it is not
anticipated that any potential future problems with these credits would have a
significant impact on the allowance for loan losses. The increased amount of
loan loss provision for 1995 over 1994 was primarily to address the additional
specifically allocated reserves for the increase in non-accrual loans and for
the increased level of charge-offs. In an effort to address any risks presented
by the continued growth of the loan portfolio and the increased level of net
loans charged off, Management increased the loan loss provision $110,000 in 1995
over 1994.


                                       25
<PAGE>


Provision and Allowance for Possible Loan Losses, (Continued)

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

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

===============================================================================================================
                                                                 Years ended December 31
---------------------------------------------------------------------------------------------------------------
                                             1996          1995           1994            1993         1992
---------------------------------------------------------------------------------------------------------------

<S>                                   <C>                 <C>              <C>           <C>          <C>      
Balance at beginning of period         $    2,742,000     2,699,000       2,604,000     2,360,000    1,882,000

Loans charged off :
   Commercial, financial &
       agricultural                          (258,000)     (231,000)        (66,000)     (441,000)    (128,000)
Real estate residential                      (196,000)      (85,000)       (179,000)     (123,000)     (90,000)
Consumer                                      (64,000)     (124,000)        (69,000)     (108,000)    (243,000)

---------------------------------------------------------------------------------------------------------------
Total loans charged off                      (518,000)     (440,000)       (314,000)     (672,000)    (461,000)
---------------------------------------------------------------------------------------------------------------

Recoveries on charged off loans:
     Commercial, financial &
        agricultural                           12,000        49,000          70,000        33,000       52,000
     Real estate residential                        -             -               -        19,000       16,000
     Consumer                                  14,000        14,000          29,000        27,000       21,000

---------------------------------------------------------------------------------------------------------------
Total recoveries                               26,000        63,000          99,000        79,000       89,000
---------------------------------------------------------------------------------------------------------------

Net loans charged off                        (492,000)     (377,000)       (215,000)     (593,000)    (372,000)

Provision for loan losses                     500,000       420,000         310,000       837,000      850,000
---------------------------------------------------------------------------------------------------------------

Balance at end of period                    2,750,000     2,742,000       2,699,000     2,604,000    2,360,000
===============================================================================================================

Net charge-offs during the period
as a percentage of average loans
outstanding during the period                    0.24%         0.20%           0.13%         0.36%        0.24%

Allowance for possible loan losses
as a percentage of loans net of
unearned discount and loan fees at
end of period                                    1.35%         1.39%           1.50%         1.63%        1.43%
===============================================================================================================
</TABLE>





                                       26
<PAGE>


Provision and Allowance for Possible Loan Losses, (Continued)

         The following table presents an allocation of the allowance for
possible 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 Possible Loan Losses

<TABLE>
<CAPTION>

==========================================================================================================================
                     1996                 1995                 1994                  1993               1992
                  --------------------------------------------------------------------------------------------------------
                                 % 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,                                                                      
financial                                                                        
& agricultural     $  958,000     36.4     258,000     36.1    531,000    36.8      431,000      38.3     390,000    34.8
Real estate                                                                      
construction                -      0.4           -      0.3                0.8                    1.0                 0.6
Real estate                                                                      
 residential          153,000     53.7     135,000     54.4    376,000    54.9      448,000      53.7     406,000    53.4
Consumer              182,000      9.5     106,000      9.2    166,000     7.5      685,000       7.0     621,000    11.2
Unallocated         1,457,000       -    2,234,000       -    1,626,00       -    1,040,000         -     943,000       -
--------------------------------------------------------------------------------------------------------------------------
                                                                                 
                   $2,750,000      100   2,742,000      100  2,699,000     100    2,604,000       100   2,360,000     100
==========================================================================================================================
                                                                                
</TABLE>                                                   

         Allocations for commercial, financial and agricultural 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 possible 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. In 1996, 1995, and 1994, these
same factors were used in setting specific allocations for commercial, financial
and agricultural loans, and residential mortgages. Shifts in specific
allocations for 1995 resulted from continuing refinement of loan officer risk
ratings and reductions in delinquency percentages. This process was further
enhanced in 1996. In 1993 and 1992, Management concluded that an increase in the
specifically allocated portion of the allowance at December 31, 1993 and 1992
for residential mortgages and consumer loans was warranted due to increasing
delinquencies in these portfolios. These delinquency trends tempered in 1994 and
1995 resulting in the reduction of allocated reserves to consumer and real
estate residential loans and an increase in unallocated reserves.

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

                                       27
<PAGE>

Securities Portfolio, (Continued)

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 investment securities.

Table 12
Securities Portfolio and Yield by Maturity
<TABLE>
<CAPTION>
====================================================================================================================
                                                                    December 31, 1996
                                      ------------------------------------------------------------------------------
                                                       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              $       26,703,000    30,426,000      5,958,000     6,091,000          69,178,000

          Yield                                 6.17          6.76           7.15          6.74                6.56
--------------------------------------------------------------------------------------------------------------------
State & Municipal agencies:
          Fair Value              $                -       423,000      3,933,000       399,000           4,755,000
                                              
          Yield (1)                                -          8.33           8.38          8.36                8.49
--------------------------------------------------------------------------------------------------------------------
Other securities:
          Fair value                               -              -             -     2,086,000           2,086,000
                                         
          Yield                                    -              -             -          6.30                6.30
--------------------------------------------------------------------------------------------------------------------

Total Fair Value                    $     26,703,000    30,849,000      9,891,000     8,576,000          76,019,000
====================================================================================================================

Weighted average yield (2)                      6.17          6.78           7.64          6.71                6.67
====================================================================================================================

Investment Securities
====================================================================================================================

U. S. Treasuries & other
      U.S. government agencies:
          Carrying Value            $      5,670,000     3,000,000      1,000,000             -           9,670,000

           Yield                                5.86          6.47           7.62                              6.22
--------------------------------------------------------------------------------------------------------------------
States & Municipal
      securities:
          Carrying value                     856,000     7,140,000      3,144,000        50,000          11,190,000

          Yield (1)                             9.67          8.48           8.49         12.12                8.59
--------------------------------------------------------------------------------------------------------------------
Other securities:
          Carrying value                           -              -             -              -                -
                                        
          Yield                                    -              -             -              -                -
--------------------------------------------------------------------------------------------------------------------

Total carrying value                $      6,526,000    10,140,000      4,144,000        50,000          20,860,000
====================================================================================================================

Weighted average yield                          7.63          7.88           8.28         12.12                7.49
====================================================================================================================
</TABLE>
(1)  Yields are presented on a taxable equivalent basis utilizing an effective
     tax rate of 34% for all maturities.
(2) Yields on securities available for sale are computed using historical
     amortized cost.



                                       28
<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 investment securities, as of the dates indicated:

Table 13
Securities Portfolio

Securities available for sale
<TABLE>
<CAPTION>
================================================================================================
                                                                December 31
                                                   1996             1995             1994
------------------------------------------------------------------------------------------------

<S>                                          <C>                   <C>               <C>       
U.S. Treasureies & Other
    U.S. Government Agencies                 $     69,178,000      66,268,000        48,743,000

    State and Municipal                             4,755,000         101,000         -

    Other                                           2,086,000       1,959,000         1,724,000
------------------------------------------------------------------------------------------------

Total                                        $     76,019,000      68,328,000        50,467,000
================================================================================================


Investment Securities
================================================================================================

U.S. Treasuries & Other
    U.S. Government Agencies                 $      9,669,000      17,697,000        40,182,000

    State & Municipal                              11,191,000       8,126,000        12,424,000

    Other                                            -                210,000           309,000
------------------------------------------------------------------------------------------------

Total                                        $     20,860,000      26,033,000        52,915,000
================================================================================================
</TABLE>

         Approximately $8 million, or 8% 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.

         There has been a consistent trend of increasing the balance of
securities available for sale and reducing the securities held to maturity. 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 rate available in 1996 have made these securities an attractive
investment.



                                       29
<PAGE>

Deposits

         One of the primary components of sound growth and profitability is
deposit accumulation and retention. Total deposits at December 31, 1996
increased by 2.7% over total deposits at December 31, 1995, which had a 6.5%
increase over total deposits at December 31, 1994. 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
                                                -------------------------------------------------------------
                                                         1996                1995               1994
-------------------------------------------------------------------------------------------------------------
<S>                                           <C>                             <C>                 <C>       
Demand non-interest bearing                   $             37,643,000        32,915,000          29,157,000
Demand interest bearing                                     23,410,000        15,392,000          16,526,000
Savings                                                     53,175,000        54,062,000          55,333,000
Money Market                                                25,020,000        22,510,000          24,824,000
Time                                                       156,698,000       163,373,000         144,878,000
-------------------------------------------------------------------------------------------------------------

Total                                         $            295,946,000       288,252,000         270,718,000
-------------------------------------------------------------------------------------------------------------
</TABLE>

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

============================================================================================================
                                                                        December 31
                                                ------------------------------------------------------------
                                                       1996                1995                1994
------------------------------------------------------------------------------------------------------------

<S>                                           <C>                            <C>                 <C>       
Three months or less                          $         33,732,000           29,828,000          22,149,000
Over three through six months                           36,191,000           39,355,000          31,056,000
Over six through twelve months                          50,476,000           59,366,000          49,571,000
Over twelve months                                      36,299,000           34,824,000          42,102,000
------------------------------------------------------------------------------------------------------------

Total                                         $        156,698,000          163,373,000         144,878,000
============================================================================================================
</TABLE>

Table 16 
Remaining Maturities of Time Deposits
of $100,000 or Greater
<TABLE>
<CAPTION>
=================================================================================================================
                                                                          December 31
                                                -----------------------------------------------------------------
                                                        1996                 1995                  1994
-----------------------------------------------------------------------------------------------------------------

<S>                                           <C>                                <C>                   <C>      
Three months or less                          $            9,586,000             8,407,000             6,110,000
Over three through six months                             14,662,000             8,210,000             7,245,000
Over six through twelve months                            11,069,000            11,427,000             9,070,000
Over twelve months                                         7,257,000             6,233,000             6,617,000
-----------------------------------------------------------------------------------------------------------------

Total                                         $           42,574,000            34,277,000            29,042,000
=================================================================================================================
</TABLE>

         Because of the Bank's continued transition to a regional financial
institution in Northeastern , Pennsylvania, management altered the Bank's
pricing strategy on interest bearing liabilities. Management actively managed
the pricing structure of interest bearing liabilities to reduce the impact of



                                       30
<PAGE>

Deposits, Continued

local competitive pressures by managing the portfolio on a regional basis. The
result of this strategy was a decrease in the time deposits of $6,675,000. This
had a positive impact on the Bank's interest margin by lowering the cost of
funds. Offsetting the decrease in time deposits was an increase in low and
non-interest bearing deposits (demand non-interest bearing, demand interest
bearing, and money market) which increased $15,256,000. The result was an
increase in total deposits of $7,694,000 with an accompanying decrease in the
Bank's cost of funds. The new branches opened in the past several years and
success by the marketing and business development department in several large
bid processes is the reason for the increase.

           Federal Fund rates, which are a driving factor in the pricing of
liabilities, increased in 1994 and the beginning of 1995 then stabilized until
there were two rate reductions in the last two quarters of 1995. The instability
in interest rates 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. Although interest rates stabilized in 1996,
this shift to short and immediate term instruments continued. As the interest
rates offered on time deposits continued to rise, consumers made a renewed
commitment to time deposits throughout 1994, and with special rates offered in
1995 for new branch promotions, this trend continued throughout 1995.

Taxation

         Income tax expense was $1,543,000, $1,370,000, and $1,333,000 for 1996,
1995, and 1994, respectively. The Company's effective tax rate for these periods
was 29.4%, 28.2%, and 27.9%, respectively. The increase in the Company's tax
expense is primarily due to the increasing level of income before income taxes
offset by proportionately smaller benefits from a relatively constant level of
tax-exempt obligations as a result of the Tax Reform Act of 1986.


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.



                                       31
<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 $103,573,000 at December 31, 1996. 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 13 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 March 1995, the FASB issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever



                                       32
<PAGE>

Impact of Other Recently Issued Accounting Standards, (Continued)

events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, and that any related impairment be based on the fair
value of the asset. This statement also requires that long-lived assets to be
disposed of be carried at the lower of cost or fair value less estimated
disposal costs. This statement was effective January 1,1996, the adoption of
this statement did not materially affect the Company's results of operations,
financial condition, or stockholders' equity.

          In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights. This statement will prospectively require the Company, which
services mortgage loans for others in return for a fee, to recognize these
servicing assets, regardless of how they were acquired. Additionally, the
Company will be required to assess the fair value of these assets at each
reporting date to determine impairment. SFAS No. 122 adopted by the Company in
1996. The adoption of this statement did not materially affect the Company's
results of operations, financial condition, or stockholders' equity due to the
volume of loans sold with servicing retained.

         In October 1995, the FASB issued SFAS No. 123 Accounting for
Stock-based Compensation. This statement encourages the adoption of fair value
accounting for stock-based compensation issued to employees. Further, in the
event that fair value accounting is not adopted, the statement requires proforma
disclosure of net income and earnings per share as if fair value accounting had
been adopted. SFAS No. 123 was required to be adopted by the Company in 1996.
Management has not adopted fair value accounting for stock-based compensation
issued to employees and, therefore, the adoption of this statement did not
materially affect the Company's results of operations, financial condition, or
stockholders' equity.

         In June 1996, the FASB issued No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This Statement
provides accounting and reporting standards for transfer and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial - components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 125 is required to be adopted by the company in
1997, except for certain sections of SFAS No. 125 which are deferred in
accordance with SFAS No. 127. Management does not expect the adoption of SFAS
No. 125 to materially effect the Company's results of operation, financial
condition, or stockholders' equity.


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



                                       33
<PAGE>

Capital Adequacy, (Continued)

losses. Undivided profits increased 12.1% between 1995 and 1996 and 14.2%
between 1994 and 1995. 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 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, 1996, of which 4% must be
Tier I capital. The Company's total risk-based capital ratio was 16.5% at
December 31, 1996 and 16.8% at December 31, 1995. The Company's Tier I
risk-based capital ratio was 15.3% at December 31, 1996 and 15.6% at December
31, 1995.


          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 9.0% at December 31, 1996 and
8.8 % at December 31, 1995.

         At December 31, 1996, 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 (FDICIA) were 16.3%, 15.0%, and 8.9%,
respectively.

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




                                       34
<PAGE>


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

--------------------------------------------------------------------------------------------------------
                                                                          Years ended December 31
                                                                    ------------------------------------
                                                                       1996       1995         1994
--------------------------------------------------------------------------------------------------------

<S>                                                                    <C>         <C>          <C>  
Return on assets (net income divided by average total assets)          1.13%       1.10%        1.22%

Return on equity (net income divided by average equity)               12.76%      12.89%       13.69%

Dividend payout ratio (cash dividends declared divided
by net income)                                                        51.30%      47.98%       46.7 %

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

Quarterly Financial Data (unaudited)
In Thousands, Except Per Share Amount
<TABLE>
<CAPTION>
==============================================================================================================
                                                                First      Second        Third      Fourth
                                                               Quarter     Quarter      Quarter     Quarter
--------------------------------------------------------------------------------------------------------------

1996                                                                                               
<S>                                                        <C>                  <C>         <C>         <C>  
Net Interest Income                                        $       3,181        3,479       3,468       3,356
Provision for Possible Loan Losses                                   120          115          80         185
Other Operating Income                                               379          423         455         755
Other Operating Expense                                            2,300        2,476       2,492       2,481
Net Income                                                           813          901         948       1,042
==============================================================================================================

Net Income Per
     Common Share Equivalent (1)                           $        0.28         0.31        0.32        0.36
==============================================================================================================

1995                                                                                               
Net Interest Income                                        $       3,118        3,085       3,062       3,170
Provision for Possible Loan Losses                                   120           90         105         105
Other Operating Income                                               395          525         349         644
Other Operating Expense                                            2,316        2,428       2,097       2,234
Net Income                                                           807          782         874       1,020
==============================================================================================================

Net Income Per
     Common Share Equivalent (1)                           $        0.28         0.27        0.30        0.35
==============================================================================================================
</TABLE>

(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.


                                       35
<PAGE>

PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets
December 31, 1996 and 1995


<TABLE>
<CAPTION>

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

Assets                                                                       1996            1995
--------------------------------------------------------------------------------------------------------

<S>                                                                  <C>                     <C>       
Cash and due from banks                                              $       14,573,000      12,677,000
Federal funds sold                                                            6,455,000       8,500,000
Securities available for sale (approximate cost of
     $76,292,000 in 1996 and $68,469,000 in 1995)                                      
          U.S. Treasury securities                                            2,504,000       2,463,000
          Federal agency mortgage based obligations                           7,822,000      15,142,000
          Other obligations of Federal agencies                              58,852,000      48,663,000
          Obligations of state & political subdivision                        4,755,000         101,000
          Other securities                                                    2,086,000       1,959,000
--------------------------------------------------------------------------------------------------------
Total securities available for sale                                          76,019,000      68,328,000
--------------------------------------------------------------------------------------------------------


Investment securities (approximate market value of
      $ 20,960,000 in 1996 and  $25,993,000 in 1995)
        Other obligations of Federal agencies                                 9,669,000      17,697,000
        Obligations of states and political subdivisions                     11,191,000       8,126,000
        Corporate notes                                                       -                 200,000
        Other securities                                                      -                  10,000
--------------------------------------------------------------------------------------------------------
Total investment securities                                                  20,860,000      26,033,000
--------------------------------------------------------------------------------------------------------

Loans, net of unearned discount and deferred loan fees                      204,048,000     197,297,000
Allowance for possible loan losses                                           (2,750,000)     (2,742,000)
--------------------------------------------------------------------------------------------------------
Net loans                                                                   201,298,000     194,555,000
--------------------------------------------------------------------------------------------------------

Accrued interest receivable                                                   2,592,000       2,633,000
Premises and equipment, net                                                   5,076,000       4,783,000
Other real estate owned                                                         776,000         932,000
Other assets                                                                  1,896,000       1,499,000
Cost in excess of fair value of net assets acquired
     (net of accumulated amortization of $875,000 in 1996
     and $836,000 in 1995)                                                      668,000         707,000
--------------------------------------------------------------------------------------------------------

Total assets                                                         $      330,213,000     320,647,000
========================================================================================================
</TABLE>

                                       36
<PAGE>


PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Balance Sheets, (Continued)
December 31, 1996 and 1995

<TABLE>
<CAPTION>
=================================================================================================================

Liabilities and Stockholders' Equity                                             1996               1995
-----------------------------------------------------------------------------------------------------------------

<S>                                                                      <C>                          <C>       
Deposits:
     Demand - noninterest bearing                                        $        37,643,000          32,915,000
     NOW and Super NOW                                                            23,410,000          15,392,000
     Savings                                                                      53,175,000          54,062,000
     Money Market                                                                 25,020,000          22,510,000
     Time                                                                        156,698,000         163,373,000
-----------------------------------------------------------------------------------------------------------------

Total deposits                                                                   295,946,000         288,252,000
-----------------------------------------------------------------------------------------------------------------

Accrued interest payable                                                           2,201,000           2,102,000
Dividends payable                                                                    481,000             418,000
Note payable                                                                         275,000             275,000
Other liabilities                                                                  1,047,000           1,108,000
-----------------------------------------------------------------------------------------------------------------

Total liabilities                                                                299,950,000         292,155,000
-----------------------------------------------------------------------------------------------------------------

Stockholders' equity:
     Common stock, $1 par value per share,
        25,000,000 shares authorized;
        2,828,912 shares in 1996; 2,786,350
        in 1995 issued and outstanding                                             2,829,000           2,786,000
     Additional paid-in capital                                                   11,233,000          11,181,000
     Undivided profits                                                            16,381,000          14,618,000
     Net unrealized loss on securities available for sale                           (180,000)            (93,000)
-----------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                                        30,263,000          28,492,000
-----------------------------------------------------------------------------------------------------------------


Total liabilities and stockholders' equity                               $       330,213,000         320,647,000
================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.



                                       37
<PAGE>



PIONEER AMERICAN HOLDING COMPANY CORP
Consolidated Statements Of Income
Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>

=======================================================================================================================
                                                                         1996             1995              1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                       <C>              <C>       
Interest income:
     Interest and fees on loans                                  $       18,345,000        17,087,000       14,823,000
     Interest on Federal funds sold                                         274,000           363,000          169,000
     Interest on investments:
                  Taxable                                                 5,144,000         5,543,000        4,930,000
                  Non-taxable                                               595,000           669,000          704,000
-----------------------------------------------------------------------------------------------------------------------

Total interest income                                                    24,358,000        23,662,000       20,626,000
-----------------------------------------------------------------------------------------------------------------------
Interest expense:
     Interest on Federal funds purchased                                      1,000             2,000            7,000
     Interest on short term borrowing                                        56,000            93,000           15,000
     Interest on deposits                                                10,799,000        11,115,000        8,135,000
     Interest on notes payable                                               18,000            17,000           -
-----------------------------------------------------------------------------------------------------------------------

Total interest expense                                                   10,874,000        11,227,000        8,157,000
-----------------------------------------------------------------------------------------------------------------------
Net interest income                                                      13,484,000        12,435,000       12,469,000

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

Net interest income after provision for loan losses                      12,984,000        12,015,000       12,159,000
-----------------------------------------------------------------------------------------------------------------------
Other operating income:
     Service charges on deposit accounts                                  1,168,000           849,000          749,000
     Gains on  calls of securities held to maturity                               -             8,000                -
     Gains on sales of securities available for sale                              -           483,000          185,000
     Losses on sales of securities available for sale                             -           (26,000)        (156,000)
     Other income                                                           844,000           599,000          541,000
-----------------------------------------------------------------------------------------------------------------------

Total other operating income                                              2,012,000         1,913,000        1,319,000
-----------------------------------------------------------------------------------------------------------------------
Other operating expenses:
     Salaries and employee benefits                                       5,061,000         4,385,000        4,181,000
     Net occupancy expense of bank premises                                 857,000           761,000          679,000
     Furniture and equipment expenses                                       622,000           565,000          543,000
     Data processing expense                                                241,000           332,000          339,000
     FDIC Insurance                                                           1,000           319,000          537,000
     Other expenses                                                       2,967,000         2,713,000        2,418,000
-----------------------------------------------------------------------------------------------------------------------

Total other operating expenses                                            9,749,000         9,075,000        8,697,000
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of change in
     accounting principle                                                 5,247,000         4,853,000        4,781,000
Income tax expense                                                        1,543,000         1,370,000        1,333,000
-----------------------------------------------------------------------------------------------------------------------

Net income                                                       $        3,704,000         3,483,000        3,448,000
=======================================================================================================================
Per Share Data:

        Primary net income per common share equivalent           $             1.27              1.20             1.20
        Fully diluted net income per common share equivalent                   1.26              1.20             1.20
=======================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       38
<PAGE>


PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Changes in Stockholders' Equity 
Years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
=========================================================================================================================
                                                                                                   Net
                                                                                                Unrealized
                                                                                                 Loss on
                                                                   Additional                   Securities     Total
                                                      Common         Paid-in      Undivided     Available   Stockholders'
                                                      Stock          Capital       Profits       for Sale      Equity
-------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>               <C>              <C>                         <C>       
Balance at December 31, 1993                   $     2,756,000   11,061,000       10,968,000        -         24,785,000
                                                                                               
                                                                                               
Net income                                           -                -            3,448,000        -          3,448,000
                                                                                               
Cash dividends declared - $0.58 per share            -                -           (1,610,000)        -        (1,610,000)
                                                                                               
Change in net unrealized loss on securities                                                    
    available for sale net of taxes                  -                -             -           (1,795,000)   (1,795,000)
                                                                                               
Exercise of stock options                               18,000        132,000       -               -            150,000
-------------------------------------------------------------------------------------------------------------------------
                                                                                               
Balance at December 31, 1994                   $     2,774,000     11,193,000     12,806,000    (1,795,000)   24,978,000
                                                                                               
Net income                                           -                -            3,483,000        -          3,483,000
                                                                                               
Cash dividends - $0.60 per share                     -                -           (1,671,000)        -        (1,671,000)
                                                                                               
Change in net unrealized loss on securities                                                    
    available for sale, net of taxes                 -                -              -           1,702,000     1,702,000
                                                                                               
Exercise of stock options                               12,000       (12,000)       -               -            -
-------------------------------------------------------------------------------------------------------------------------
                                                                                               
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 - $0.66 per share                     -                -           (1,900,000)        -        (1,900,000)
                                                                                               
Change in net unrealized loss on securities                                                    
    available for sale, net of taxes                 -                -              -             (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
=========================================================================================================================
</TABLE> 
See accompanying notes to consolidated financial statements.




                                       39
<PAGE>
PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

======================================================================================================================
                                                                         1996             1995             1994
----------------------------------------------------------------------------------------------------------------------

<S>                                                              <C>                       <C>              <C>      
Cash flows from operating activities:

     Net income                                                  $        3,704,000        3,483,000        3,448,000
     Adjustments to reconcile net income to net
        cash provided by operating activities:
            Net gain on sales of securities available
                for sale                                                          -         (457,000)         (29,000)
            Net gain on calls on investments securities                           -           (8,000)               -
            Accretion of discount on securities
                and money market investments                                (94,000)         (87,000)        (107,000)
            Amortization of premium on investment
                securities                                                   97,000          159,000          168,000
            Provision for possible loan losses                              500,000          420,000          310,000
            Increase (decrease) in deferred loan fees                      (116,000)          70,000          (31,000)
            Increase in deferred tax benefit                                (30,000)        (143,000)         (58,000)
            Decrease (increase) in accrued interest receivable               41,000          390,000         (957,000)
            Depreciation and amortization of premises
                and equipment                                               770,000          787,000          703,000
            Gain on sales of premises and equipment                          (6,000)          (2,000)          (1,000)
            Loss on sale of other real estate                               177,000          100,000          140,000
            Gain on lease termination                                             -                -          (78,000)
            Proceeds from the sale of mortgage
                 and PHEAA loans                                         14,439,000        3,043,000        6,411,000
            Net increase in mortgage & PHEAA
                loans held for sale, excluding  provision
                for loans losses and change in deferred loan fees        (2,833,000)      (3,392,000)      (7,851,000)
            (Decrease) increase in other assets                            (322,000)          78,000          (76,000)
            Amortization of goodwill                                         39,000           38,000           39,000
            Increase in accrued interest payable                             99,000          386,000          665,000
            Increase (decrease) in other liabilities                        (61,000)         (48,000)         263,000
----------------------------------------------------------------------------------------------------------------------
Total adjustments to reconcile net income to net cash
     provided by operating activities                                    12,700,000        1,334,000         (489,000)
----------------------------------------------------------------------------------------------------------------------

Net cash provided by operating activities                                16,404,000        4,817,000        2,959,000
----------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:

     Proceeds from maturities and calls of investment securities          6,745,000       28,918,000        4,506,000
     Proceeds from maturities and calls of                                                            
        securities available for sale                                    35,908,000        7,799,000        4,000,000
     Proceeds from sales of securities available for sale                 6,327,000       29,497,000        8,131,000
     Purchases of investment securities                                  (4,445,000)      (9,399,000)     (29,095,000)
     Purchase of securities available for sale                          (47,188,000)     (44,823,000)     (13,413,000)
     Net increase in loans made to customers, excluding
        provision for loan losses and change in
        deferred loan fees                                              (18,923,000)     (17,960,000)     (15,183,000)
     Acquisition of premises and equipment                               (1,071,000)      (2,142,000)      (1,046,000)
     Proceeds from sales of premises and equipment                           14,000           36,000           17,000
     Proceeds from sale of other real estate                                169,000          230,000          638,000
======================================================================================================================
</TABLE>

                                       40
<PAGE>

PIONEER AMERICAN HOLDING COMPANY CORP.
Consolidated Statements of Cash Flows, (Continued)
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
===================================================================================================================

                                                                   1996              1995              1994
-------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>                        <C>                <C>       
Cash flows from financing activities:
     Net increase in demand, NOW and Super NOW,
        savings, money market and time deposits.          $          7,694,000       17,534,000         33,161,000
     Dividends paid                                                 (1,837,000)      (1,669,000)        (1,571,000)
     Notes payable                                                           -                -            275,000
     Short-term borrowings                                                   -       (3,150,000)         3,150,000
     Exercise of stock options                                          54,000                -            150,000
-------------------------------------------------------------------------------------------------------------------

Net cash provided by financing activities                            5,911,000       12,715,000         35,165,000
-------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                  (149,000)       9,688,000         (3,321,000)

Cash and cash equivalents at beginning of year                      21,177,000       11,489,000         14,810,000
-------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of year                  $         21,028,000       21,177,000         11,489,000
-------------------------------------------------------------------------------------------------------------------

Supplemental Disclosure:
     Cash payments for interest                           $         10,775,000       10,841,000          7,492,000
     Cash payments for income taxes                                  1,543,000        1,355,000          1,204,000
     Transfer of assets from loans
        to other real estate                                           190,000          438,000            322,000
     Change in net unrealized loss on securities
        available for sale                                             132,000        2,578,000          2,719,000
     Tax effect on change in unrealized loss
        on securities available for sale                                45,000          876,000            924,000
     Reclassification of investment
        securities to available for sale                                     -       11,825,000                  -
===================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.




                                       41
<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 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 possible loan losses and the valuation of real estate acquired in
         connection with foreclosures or in satisfaction of loans.

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


                                       42
<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, 1996, was
         $1,831,000, 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, 1996,
         the amount of such required balances was $53,000.

         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

         Effective January 1, 1994, the Company adopted Statement of Financial
         Accounting Standards No. 115, Accounting for Certain Investments in
         Debt and Equity Securities (SFAS No. 115), which addresses the
         accounting and reporting for investments in debt and equity securities
         that have readily determinable fair values and for all investments in
         debt securities. Applicable investments 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.

         The Company believes it has the intent and ability to hold to maturity
         its portfolio of investment securities as part of its portfolio of
         long-term interest earning assets. Gains and losses on sales of
         securities available for sale are computed on a specific identification
         cost basis. Premiums and discounts on all securities are amortized over
         the estimated lives of the securities on a level yield method. On
         November 15,1995, the Financial Accounting Standards Board (FASB)
         released a special report entitled "A Guide to Implementation of
         Statement 115 on Accounting for Certain Investments in Debt and



                                       43
<PAGE>


Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------

(1)      Continued

         Equity Securities". This guide contained a provision which allowed a
         one time reclassification of securities previously classified as Held
         to Maturity to the Available for Sale category. Securities in the
         Available for Sale category can be sold in the normal course of
         managing the balance sheet, while there are restrictions on the sale of
         securities from the Held to Maturity portfolio. Bank Management
         believes that it was appropriate to take advantage of this
         reclassification opportunity since a bank's ablility to manage overall
         risk is enhanced by having a larger Available For Sale portfolio.
         Accordingly, the Bank reclassified securities with a book value of
         $11,825,000 on November 15, 1995.

         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.

         Non-accrual Loans

         The accrual of interest on loans is discontinued when payment of
         principal or interest is considered doubtful of collection. Loans on
         which payments are ninety days or more past due are considered non-
         accrual unless the loan is both 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 Possible Loan Losses

         The provision for possible loan losses charged to operating expense
         reflects the amount deemed appropriate by management to maintain the
         allowance for possible 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.




                                       44
<PAGE>

Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------

(1)      Continued

         Management believes that the allowance for possible 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 possible 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.

         On January 1, 1995, the Company prospectively implemented Statement of
         Financial Accounting Standard (SFAS) No. 114, "Accounting By Creditors
         for Impairment of Loans," and SFAS No. 118, Accounting by Creditors for
         Impairment of a Loan - Income Recognition and Disclosures (SFAS No.
         118), which amends SFAS No. 114 and requires certain related
         disclosures. SFAS No. 114, as amended, requires certain impaired loans
         to be 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. The implementation of these statements did not have a
         material effect on the Company's results of operations, financial
         condition, or stockholders' equity.

         For purposes of applying the measurement criteria for impaired loans
         under SFAS No. 114, as amended, the Company excludes large groups of
         smaller-balance homogeneous loans, primarily consisting of residential
         real estate 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.





                                       45
<PAGE>

Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------

(1)      Continued

         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
         foreclosure and is stated at the lower of estimated fair value, less
         estimated disposal costs. Allowances for declines in value subsequent
         to acquisition were not necessary at both December 31, 1996 and 1995.
         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 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.


                                       46
<PAGE>


Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------

(2)      Securities Available for Sale

         Securities available for sale at December 31, 1996 and 1995 are
summarized as follows:


<TABLE>
<CAPTION>
===============================================================================================================
                                                                                1996
                                                        -------------------------------------------------------
                                                             Cost             Unrealized         Carrying Value
---------------------------------------------------------------------------------------------------------------
                                                                           Gain         Loss        (Fair)
---------------------------------------------------------------------------------------------------------------

<S>                                                   <C>                     <C>                   <C>      
U.S. Treasury securities                              $      2,501,000        3,000                 2,504,000
Federal agency mortgage-backed obligations:
     Federal National Mortgage Association                   1,696,000        9,000                 1,705,000
     Federal Home Loan Mortgage Corporation                  5,020,000                   (69,000)   4,951,000
     Government National Mortgage Association                1,164,000        2,000                 1,166,000
Other obligations of Federal agencies                       59,194,000                  (342,000)  58,852,000
State and municipals                                         4,631,000      124,000                 4,755,000
Other securities                                             2,086,000      -            -          2,086,000
--------------------------------------------------------------------------------------------------------------
Total securities available for sale                   $     76,292,000      138,000     (411,000)  76,019,000
==============================================================================================================

==============================================================================================================
                                                                                1995
                                                        ------------------------------------------------------
                                                             Cost             Unrealized         Carrying Value
--------------------------------------------------------------------------------------------------------------
                                                                           Gain         Loss        (Fair)

U.S. Treasury securities                              $      2,465,000      -             (2,000)   2,463,000
Federal agency mortgage-backed obligations:
     Federal National Mortgage Association                   1,810,000      -            (26,000)   1,784,000
     Federal Home Loan Mortgage Corporation                  6,524,000      -           (106,000)   6,418,000
     Government National Mortgage Association                6,912,000       28,000      -          6,940,000
Other obligations of Federal agencies                       48,699,000       94,000     (130,000)  48,663,000
State and municipals                                           100,000        1,000      -            101,000
Other securities                                             1,959,000      -            -          1,959,000
--------------------------------------------------------------------------------------------------------------
Total securities available for sale                   $     68,469,000      123,000     (264,000)  68,328,000
==============================================================================================================
</TABLE>

         The amortized cost and fair value of securities available for sale at
December 31, 1996

================================================================================
                                                     December 31, 1996
                                                  -----------------------
                                                Amortized               Fair
                                                  Cost                  Value
--------------------------------------------------------------------------------
Securities Available for Sale
--------------------------------------------------------------------------------

Due in one year or less                      $ 26,775,000       $   26,703,000
Due after one year through five years          31,059,000           30,849,000
Due after five years through ten years          9,819,000            9,891,000
Due after ten years                             8,639,000            8,576,000
--------------------------------------------------------------------------------

Total securities available for sale          $ 76,292,000           76,019,000
================================================================================



                                       47
<PAGE>

Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------

(3)      Investment Securities

         Investment securities at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
===========================================================================================================
                                                                             1996
                                                    -------------------------------------------------------
                                                    Carrying Value         Unrealized          Fair Value
                                                        (Cost)         Gain          Loss      
-----------------------------------------------------------------------------------------------------------
<S>                                                     <C>                <C>       <C>        <C>       
Obligations of Federal agencies                  $       9,669,000                   (100,000)   9,569,000
Obligations of state and politcal subdivisions          11,191,000       200,000                11,391,000
-----------------------------------------------------------------------------------------------------------

Securities held for investment                    $     20,860,000       200,000     (100,000)  20,960,000
===========================================================================================================


===========================================================================================================
                                                                             1995
                                                    -------------------------------------------------------
                                                    Carrying Value         Unrealized          Fair Value
                                                        (Cost)         Gain          Loss      
-----------------------------------------------------------------------------------------------------------


Obligations of Federal agencies                         17,697,000         2,000     (159,000)  17,540,000
Obligations of states and political subdivisions         8,126,000       162,000      (48,000)   8,240,000
Corporate notes                                            200,000         3,000      -            203,000
Other securities                                            10,000       -            -             10,000
-----------------------------------------------------------------------------------------------------------

Securities held for investment                    $     26,033,000       167,000     (207,000)  25,993,000
===========================================================================================================
</TABLE>




         The amortized cost and market value of investment securities at
December 31, 1996:

<TABLE>
<CAPTION>
========================================================================================================
                                                                        December 31, 1996
                                                           ---------------------------------------------

                                                              Amortized                      Fair
                                                                 Cost                       Value
--------------------------------------------------------------------------------------------------------
Investment Securities
--------------------------------------------------------------------------------------------------------
<S>                                                      <C>                                  <C>      
Due in one year or less                                  $        6,526,000                   6,464,000
Due after one year through five years                            10,140,000                  10,205,000
Due after five years through ten years                            4,144,000                   4,241,000
Due after ten years                                                  50,000                      50,000
--------------------------------------------------------------------------------------------------------

Total investment securities                              $       20,860,000                  20,960,000
========================================================================================================
</TABLE>


         At December 31, 1996 and 1995, securities with an aggregate book value
of $22,480,000 and $13,485,000 respectively, were pledged to secure public
deposits.

         There were no sales of investment securities during the periods
presented herein.




                                       48
<PAGE>


Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------

(4)      Loans

         Loans at December 31, 1996 and 1995 are summarized below:

<TABLE>
<CAPTION>
=============================================================================================
                                                              1996                1995
---------------------------------------------------------------------------------------------

<S>                                                   <C>                         <C>       
Commercial, financial and agricultural                $       78,510,000          74,746,000
Real estate construction                                         947,000             625,000
Real estate residential (mortgage and installment)           115,791,000         112,493,000
Consumer                                                      20,424,000          19,013,000
---------------------------------------------------------------------------------------------

Total loans, gross                                           215,672,000         206,877,000

Unearned discount                                            (10,649,000)         (8,489,000)
Deferred loan fees                                              (975,000)         (1,091,000)
---------------------------------------------------------------------------------------------

Total loans, net of unearned discount
        and deferred loan fees                       $       204,048,000         197,297,000
=============================================================================================
</TABLE>

         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, 1996 and 1995. 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 $4,404,000 as of December 31, 1996 and $2,161,000 as of
         December 31, 1995. 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
         $160,000, $111,000, and $109,000 for the years ended December 31, 1996,
         1995, and 1994, respectively. The amount of interest income on
         non-accruing loans which were recorded in income was $0 in 1996, 1995
         and 1994. The total amount of restructured loans were $643,000,
         $837,000, and $1,077,000 as of December 31, 1996, 1995, and 1994,
         repsectively. The amount of interest on restructured loans which was
         recorded in income was $54,000, $73,000, and $37,000 during 1996, 1995,
         and 1994, respectively. If the resturctured loans had been current in
         accordance with their orginal terms and had been outstanding throughout
         the period, interest income would have increased by $ 48,000, $12,000,
         and $8,000 for the years ended December 31, 1996, 1995, and 1994.


                                       49
<PAGE>



Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------
(4)      Continued

         As of December 31, 1996, the Company had impaired loans with a total
         recorded investment of $1,603,000 and $1,722,000 on December 31, 1995.
         The average recorded investment for the twelve month period ended
         December 31, 1996 of $1,145,000 and $1,528,000 on December 31, 1995. As
         of December 31, 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 $819,000 and $350,000, respectively and
         $288,000 and $95,000 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, 1996 is $784,000 and $1,434,000 for
         December 31, 1995.

         The aggregate amount of loans by the Company to its directors and
         executive officers, including loans to related persons and entities,
         was $2,300,000 and $1,584,000 at December 31, 1996 and 1995,
         respectively. These loans were made in the ordinary course of business
         at substantially the same terms and conditions as those with other
         borrowers.

         An analysis of the activity of these loans follows:


====================================================================
                                                        1996
--------------------------------------------------------------------

Balance January 1                                $      1,584,000
         New loans                                      1,228,000
         Repayments                                       512,000
--------------------------------------------------------------------

Balance December 31                              $      2,300,000
====================================================================

         In 1996, 1995 and 1994 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 sales of these
         loans were $12,380,000, $1,255,000, and $5,470,000 respectively. The
         Company recognized a gain of $220,000 in 1996 and a gain of $18,000 and
         a loss of $34,000 in 1995 and 1994, respectively, from these
         transactions. The proceeds from the sale of PHEAA loans by the Company
         were $2,059,000, $1,788,000 and $941,000 in 1996,1995, and 1994,
         resulting in gains of $29,000, $31,000, and $21,000, respectively.
         Loans serviced for the benefit of others approximated $20,632,000 and
         $17,923,000 as of December 31, 1996 and 1995, respectively.




                                       50
<PAGE>


Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------


(5)      Allowance for Possible Loan Losses

         Activity in the allowance for loan losses for the years ended December
         31, 1996, 1995 and 1994 is summarized as follows:

<TABLE>
<CAPTION>

===========================================================================================================
                                                                    1996          1995           1994
-----------------------------------------------------------------------------------------------------------
<S>                                                          <C>                  <C>            <C>      
Balance at beginning of period                               $      2,742,000     2,699,000      2,604,000

Additions and (deductions):
         Loans charged-off                                           (518,000)     (440,000)      (314,000)
         Recoveries                                                    26,000        63,000         99,000
-----------------------------------------------------------------------------------------------------------

Net loans charged-off                                                (492,000)     (377,000)      (215,000)
-----------------------------------------------------------------------------------------------------------

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

Balance at end of period                                     $      2,750,000     2,742,000      2,699,000
===========================================================================================================
</TABLE>


(6)      Premises and Equipment

         Premises and equipment are comprised of the following at December 31,
1996 and 1995:

<TABLE>
<CAPTION>
==================================================================================================
                                                                    1996                 1995
--------------------------------------------------------------------------------------------------
<S>                                                          <C>                        <C>      
Premises owned                                               $     4,378,000            4,365,000
Furniture and equipment                                            6,859,000            6,162,000
Leasehold improvements                                             1,056,000              733,000
--------------------------------------------------------------------------------------------------
                                                                  12,293,000           11,260,000

Accumulated depreciation and amortization                         (7,217,000)          (6,477,000)
--------------------------------------------------------------------------------------------------

                                                             $     5,076,000            4,783,000
==================================================================================================
</TABLE>

         Occupancy expenses are reduced by rental income from premises owned of
         $73,000 in 1996, $27,000 in 1995 and $27,000 in 1994.




                                       51
<PAGE>

Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------

 (7)     Leased Property Under Capital Leases

         During 1994, the Bank purchased the Main Office of the Company from a
         third party that owned the facility and leased it to the Company. The
         Bank had entered into a sale and leaseback transaction with the third
         party for the Main Office in 1964. The purchase price was $275,000
         which represents the note payable of the Company as of December
         31,1995. The note is held by the same third party and bears interest at
         a rate of 6.5% with 192 interest payments of $1,490 and a balloon
         payment of $275,000 due on May 1, 2010. The gain recognized from the
         termination of the sales and leaseback transaction was $78,000 and is
         included in other income in 1994.

(8)      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, 1996 and 1995:


=============================================================================
Maturity                                         1996             1995
-----------------------------------------------------------------------------

Less than one year                        $    120,399,000       128,549,000
Greater than one year                           36,299,000        34,824,000
-----------------------------------------------------------------------------

                                          $    156,698,000       163,373,000
=============================================================================

         The aggregate amount of certificates of deposit, each $100,000 or more,
         was $42,574,000 and $34,277,000 at December 31, 1996 and 1995,
         respectively. Interest expense associated with certificates of deposit,
         each $100,000 or more, was approximately $1,951,000, $1,863,000, and
         $1,146,000, respectively, for the years ended December 31, 1996, 1995
         and 1994.


(9)      Short Term Borrowings

         The Bank maintains a collateralized line of credit with the Federal
         Home Loan Bank of Pittsburgh. The commitment expires November 1997 and
         has maximum borrowing amount of $33,151,000. The rate of this facility
         resets daily. The line is collateralized by eligible securities and
         loans. At December 31, 1996, there were no short term borrowings
         outstanding and $0 was outstanding at December 31,1995. The maximum
         amount of outstanding month-end short-term borrowings during 1996 was
         $11,792,000 and $3,600,000 in 1995. The approximate average outstanding
         balance for 1996 was $953,000 and $1,597,000 for 1995. The average
         interest rate on the balances during 1996 and 1995 were 6.03% and
         5.88%, respectively.




                                       52
<PAGE>

Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------

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

         The Company leases three branch offices under year-to-year operating
         leases. The Company is currently obligated for six noncancelable,
         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 $233,000, $191,000 and
         $147,000 for the years ended December 31, 1996, 1995 and 1994,
         respectively.

         The following is a schedule by years for future minimum rental payments
         required for operating leases as of December 31, 1996:

                     1997                          $  217,000
                     1998                             205,000
                     1999                             197,000
                     2000                             150,000
                     2001                             134,000
                     2002 thereafter                  287,000
                                                   ----------
          
          Total minimum
          payments required                        $1,190,000



         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. The Company had outstanding standby
         letters of credit in the amount of approximately $1,419,000 and
         $1,302,000 and unfunded loan and line of credit commitments in the
         amount of approximately $12,815,000 and $15,757,000 at December 31,
         1996 and 1995, respectively. These instruments involve, to 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.



                                       53
<PAGE>


Notes to Consolidated Financial Statements, (Continued)
------------------------------------------------------------------------------
(10)     Continued

         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.


  (11)   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.

         Earnings per share for 1996, 1995 and 1994 were determined by dividing
         net income by the weighted average number of shares of common stock and
         dilutive common stock equivalents outstanding. The common stock
         equivalents consist of common stock options.

         The average number of primary shares outstanding (including dilutive
         common stock equivalents) in 1996, 1995 and 1994 were 2,921,698,
         2,906,382, and 2,866,396 shares, respectively. The average number of
         fully diluted shares outstanding (including common stock equivalents)
         in 1996, 1995, and 1994 were 2,932,161, 2,906,382, and 2,866,396
         shares, respectively. The Company currently has one million shares of
         authorized, but unissued preferred stock.


(12)     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.




                                       54
<PAGE>


Notes to Consolidated Financial Statements, (Continued)
-----------------------------------------------------------------------------

(12)     Continued

         Changes in total options outstanding during 1996, 1995, and 1994, were
as follows:

<TABLE>
<CAPTION>
=========================================================================================
                                                                                Weighted
                                        Number of     Exercise Price             Average
                                          Options         per Option      Exercise Price
-----------------------------------------------------------------------------------------
<S>                                       <C>          <C>       <C>              <C> 
Balance at December 31, 1993              228,000      $8.00  -  $11.50         $ 8.54
   ISOs Exercised                         (18,742)                 8.00           8.00
   ISOs Granted                            60,000                 13.00          13.00
-----------------------------------------------------------------------------------------
Balance at December 31, 1994              269,258      8.00  -   13.00            9.57
   ISOs Exercised                         (20,980)                8.00            8.00
-----------------------------------------------------------------------------------------
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
=========================================================================================
</TABLE>

The amounts have been restated to reflect the Companys 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, 1996:

<TABLE>
<CAPTION>
=========================================================================================
                                                         Exercisable
                                     ----------------------------------------------------
Exercise                                                                         Average
Price Range                                Shares     Average Life 1      Exercise Price
-----------------------------------------------------------------------------------------
<C>                                        <C>             <C>               <C>           
$             8.00                         26,550          4.50              $     8.00
              8.00                         18,175          5.58                    8.00
      9.00 - 11.50                         78,000          6.54                    9.58
$            13.00                         60,000          7.17                   13.00
-----------------------------------------------------------------------------------------
Total                                     182,725          6.07                   10.31
=========================================================================================
</TABLE>                                                                 
1  Average contractual life remaining in years.

         

         Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
         "Accounting for Stock-Based Compensation," became effective January
         1,1996. SFAS No. 123 provides an alternative method of accounting for
         stock-based compensation arrangements. This method is based on fair
         value of the stock-based compensation determined by an option pricing
         model utilizing various assumptions regarding the underlying attributes
         of the options and stock, rather than the existing method of accounting
         for stock-based compensation which is provided in Accounting Principles
         Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to
         Employees." The Financial Accounting Standards Board encourages
         entities to adopt the fair value based method, but does not require the
         adoption of this method.

         The Company, as permitted, has elected not to adopt the fair value
         accounting provisions of SFAS No. 123, and has instead continued to
         apply APB No. 25 and related interpretations in accounting for plans
         and provide the required proforma disclosures of SFAS No. 123. The
         Company did not grant any options in 1996 or 1995. Therefore had
         compensation cost for the plan been determined consistent with SFAS No.
         123, the Company's net income and earnings per share would have been
         unaffected.



                                       55
<PAGE>


Notes to Consolidated Financial Statements, (Continued)
-----------------------------------------------------------------------------
(13)     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, 1996,
         dividends in excess of those already declared from the Bank to the
         Company are limited to $5,587,000.

         The dividends declared to the Company by the Bank were $1,900,000 in
         1996.

         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, 1996.

         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, 1996, that the Bank meets all capital
         adequacy requirements to which it is subject.

         As of December 31, 1996, 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 be categorized as adequately 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.




                                       56
<PAGE>

Notes to Consolidated Financial Statements, (Continued)
-----------------------------------------------------------------------------
(13)     Continued

         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
As of December 31, 1996

<S>                            <C>              <C>        <C>               <C>       <C>              <C>   
Total Capital
   (to Risk Weighted Assets)   $ 32,012,000     16.28%   *  $ 15,730,713    *  8.00%   *  $ 19,663,391   *  10.00%

Tier I Capital
   (to Risk Weighted Assets)   $ 29,550,000     15.03%   *  $  7,864,271    *  4.00%   *  $ 11,796,407   *   6.00%

Tier I Capital
     (to Average Assets)       $ 29,550,000      8.89%   *  $ 13,295,838    *  4.00%   *  $ 16,619,798   *   5.00%

As of December 31,1995

Total Capital
   (to Risk Weighted Assets)   $ 29,881,000     16.71%   *  $ 14,305,685    *  8.00%   *  $ 17,882,107   *  10.00%

Tier I Capital
   (to Risk Weighted Assets)   $ 27,639,000     15.45%   *  $   7,155,728   *  4.00%   *  $ 10,733,592   *   6.00%

Tier I Capital
     (to Average Assets)       $ 27,639,000      8.69%   *  $ 12,722,209    *  4.00%   *  $ 15,902,762   *   5.00%

==================================================================================================================
</TABLE>
-------
* Equal to or greater than.




  (14)   Income Taxes

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


===============================================================================
                                            1996         1995         1994
-------------------------------------------------------------------------------

Current                               $    1,573,000    1,513,000    1,391,000
Deferred                                     (30,000)    (143,000)     (58,000)
-------------------------------------------------------------------------------

                                      $    1,543,000    1,370,000    1,333,000
===============================================================================
                                         



                                       57
<PAGE>

Notes to Consolidated Financial Statements, (Continued)
-----------------------------------------------------------------------------
(14)     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:
<TABLE>
<CAPTION>

           ====================================================================================================
                                                                  1996               1995            1994
           ----------------------------------------------------------------------------------------------------
<S>                                                             <C>               <C>              <C>      
           Tax expense at 34% rate                               $ 1,784,000       1,650,000        1,626,000
           Interest from tax exempt loans
            and investments                                         (251,000)       (289,000)        (313,000)
           Others, net                                                10,000           9,000           20,000
           ----------------------------------------------------------------------------------------------------

           Income tax expense                                    $ 1,543,000       1,370,000        1,333,000
           ====================================================================================================
</TABLE>


         The tax effect of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 1996 and 1995 in accordance with SFAS No. 109 are
         presented below:


<TABLE>
<CAPTION>

================================================================================================
                                                                     1996                1995
------------------------------------------------------------------------------------------------

<S>                                                             <C>                     <C>    
Deferred tax assets:
     Executive retirement plan                                  $      228,000          200,000
     Allowance for loan losses                                         659,000          656,000
     Deferred loan fees                                                257,000          320,000
     Deferred directors fees                                           115,000          121,000
     Unrealized loss on securities available for sale                   93,000           48,000
     Non-accrual interest                                               56,000           42,000
     Others, net                                                        49,000           32,000
------------------------------------------------------------------------------------------------
Total gross deferred tax assets                                      1,457,000        1,419,000

Deferred tax liabilities:
     Accumulated amortization of discount
     on investment securities                                         (213,000)        (252,000)
     Depreciation                                                     (192,000)        (190,000)
     Other, net                                                              -                -
------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities                                  (405,000)        (442,000)
------------------------------------------------------------------------------------------------

Net deferred tax asset                                          $    1,052,000          977,000
================================================================================================
</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, 1996. There can be no



                                       58
<PAGE>

Notes to Consolidated Financial Statements, (Continued)
-----------------------------------------------------------------------------

(14)     Continued

         assurance, however, that the Company will generate any earnings or any
         specific level of continued earnings.

         At December 31, 1996 and 1995, net deferred tax benefits of $1,052,000
         and $977,000 respectively, and income taxes currently (payable) /
         recoverable of ($6,000) and $24,000 respectively, are included in other
         assets.


(15)     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 $-0-, $5,000 and $269,000 were accrued in 1996, 1995
         and 1994, respectively.

         The ESOP held 156,168 and 156,060 shares of the Bank's common stock at
         December 31, 1996 and 1995, 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 $105,000 in
         1996, $107,000 in 1995, and $96,000 in 1994.

         The Company maintains employment contracts with its President, Sr.
         Executive Vice President and Executive Vice President. The Company also
         maintains insurance contracts for its President and Sr. Executive Vice
         President. Pursuant to the insurance agreement, the Company pays the
         annual premiums and will receive reimbursement of policy premiums upon
         the death or termination of these executives. The employment contracts
         provide for a minimum annual salary and certain incentives in the event
         of a merger of the Company. The Company has also agreed to provide
         enhanced retirement and death benefits for the President and Sr.
         Executive Vice President. Costs for those benefits were approximately
         $84,000, $95,000 and $42,000 in 1996, 1995 and 1994, respectively.




                                       59
<PAGE>


Notes to Consolidated Financial Statement, (Continued)
------------------------------------------------------------------------------
(15)     Continued

         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.

         A total of $32,000 was disbursed to these directors in each year 1996,
         1995 and 1994. In 1996, 1995 and 1994, $36,000, $36,000 and $0
         respectively, were remitted for the payment of insurance premiums.
         Assets held by the insurance company which have reduced the company's
         accrual were $404,000 and $185,000 at December 31, 1996 and 1995,
         respectively. Expense under this plan was $6,000, $64,000, and $59,000
         in 1996, 1995 and 1994, respectively.

(16)     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.




                                       60
<PAGE>


Notes to Consolidated Financial Statement, (Continued)
------------------------------------------------------------------------------
(16)     Continued

         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.

         Securities Available for Sale and Investment Securities

         The fair values of securities available for sale and investment
         securities 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
         credit and inherent 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.


         Short-term Borrowings

         For short-term borrowings, the carrying amount is a reasonable estimate
         of fair value.



                                       61
<PAGE>

Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------
(16)       Continued


         Note Payable

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


         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>

=================================================================================================
                                         1996                           1995
                                       Carrying        Fair           Carrying         Fair
                                         Value         Value            Value         Value
-------------------------------------------------------------------------------------------------

Financial assets:

<S>                                 <C>              <C>              <C>            <C>       
     Cash and due from banks        $  14,573,000    14,573,000       12,677,000     12,677,000
     Federal funds sold                 6,455,000     6,455,000        8,500,000      8,500,000
     Securities available for sale     76,019,000    76,019,000       68,328,000     68,328,000
     Investment securities             20,860,000    20,960,000       26,033,000     25,993,000
     Loans                            201,298,000   204,323,000      194,555,000    195,606,000

Financial liabilities:

     Deposits                       $ 295,946,000   295,719,000      288,252,000    289,169,000
     Note payable                         275,000       275,000          275,000        275,000
=================================================================================================

</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, 1996             At December 31, 1995
                                    -------------------------------  -------------------------------
                                      Contract         Estimated        Contract        Estimated
                                       Amount         Fair Value         Amount        Fair Value
----------------------------------------------------------------------------------------------------

<S>                               <C>                      <C>           <C>                <C>    
Commitments to extend credit      $    12,815,000          192,000       15,757,000         236,000

Standby letters of credit               1,419,000           28,000        1,302,000          26,000

====================================================================================================
</TABLE>





                                       62
<PAGE>


Notes to Consolidated Financial Statements, (Continued)
--------------------------------------------------------------------------------

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

         Condensed 1996, 1995 and 1994 financial information is as follows:


         Condensed Balance Sheets


===============================================================================
Assets                                                1996           1995
-------------------------------------------------------------------------------

Cash                                            $      172,000         187,000
Investment in subsidiary                            30,039,000      28,253,000
Receivable from subsidiary                             533,000         470,000
-------------------------------------------------------------------------------

Total assets                                    $   30,744,000      28,910,000
================================================================================

                                                                  
================================================================================
Liabilities and Stockholders Equity                              
-------------------------------------------------------------------------------

Dividends payable                                      481,000         418,000
Stockholders' equity                                30,263,000      28,492,000
--------------------------------------------------------------------------------

Total liabilities and stockholders' equity      $   30,744,000      28,910,000
================================================================================

         Condensed Statements of Income


================================================================================
                                                1996        1995        1994
--------------------------------------------------------------------------------
Expenses:
     Administrative and other              $      69,000      49,000     55,000
--------------------------------------------------------------------------------

Loss before earnings of subsidiary               (69,000)    (49,000)   (55,000)
                                                                      
Earnings of subsidiary:                                               
     Received as dividends                     1,900,000   1,671,000  1,650,000
     Undistributed                             1,873,000   1,861,000  1,853,000
--------------------------------------------------------------------------------
                                                                      
Net income                                 $   3,704,000   3,483,000  3,448,000
================================================================================






                                       63
<PAGE>



Notes to Consolidated Financial Statements, (Continued)
-------------------------------------------------------------------------------

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

         Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
=====================================================================================
                                                 1996         1995         1994
-------------------------------------------------------------------------------------

<S>                                        <C>               <C>           <C>      
Cash flows from operating activities:
Net income                                 $    3,704,000    3,483,000     3,448,000
Adjustments to reconcile net income to net                              
     cash from operating activities:                                    
        Undistributed earnings of subsidiary   (1,873,000)  (1,861,000)   (1,853,000)
        Other                                     (63,000)      (3,000)      (37,000)
-------------------------------------------------------------------------------------
                                                                        
Net cash from operating activities              1,768,000    1,619,000     1,558,000
-------------------------------------------------------------------------------------
                                                                        
Cash flows used in financing activities:                                
     Dividend paid                             (1,837,000)  (1,669,000)   (1,571,000)
     Exercise of stock options                     54,000      -             150,000
-------------------------------------------------------------------------------------
                                                                        
Net cash used in financing activities          (1,783,000)  (1,669,000)   (1,421,000)
-------------------------------------------------------------------------------------
                                                                        
Net increase (decrease) in cash                   (15,000)     (50,000)      137,000
                                                                        
Cash at beginning of year                         187,000      237,000       100,000
-------------------------------------------------------------------------------------
                                                                        
Cash at end of year                        $      172,000      187,000       237,000
=====================================================================================
                                              
</TABLE>




                                       64
<PAGE>

KPMG      Peat Marwick LLP

          1600 Market Street
          Philadelphia, PA 19103-7212

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, 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. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Philadelphia, Pennsylvania

January 23, 1997


                                       65
<PAGE>
                                   SIGNATURES

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

Date:  March 27, 1997                                                           

By /S/ Donald A. Hoyle, Jr.
   ------------------------------------
   Donald A. Hoyle, Jr.                                                   
   President & Chief Executive Officer                                    

                                                                                
By /S/ John W. Reuther
   ------------------------------------
   John W. Reuther                                                   
   Sr. Executive Vice President & Chief
   Financial Officer
                                                                                
                                                                                
By /S/ Richard J. Lapera
   ------------------------------------
   Richard J. Lapera
   Comptroller of Pioneer American
   Bank, National Association                                             
                                                                                
      /S/ GENE E. GOLDENZIEL, ESQ.   
---------------------------------------
GENE E. GOLDENZIEL, ESQ.             
Director                                                                       
                                                                              
      /S/ JOHN S. GUZEY
---------------------------------------
JOHN S. GUZEY                        
Director                                                                      
                                                                              
      /S/ DONALD A. HOYLE, JR.
---------------------------------------
DONALD A. HOYLE, JR.                 
Director                                                                      
                                                                              
      /S/ WILLIAM K. NASSER
---------------------------------------
WILLIAM K. NASSER                    
Director                             
                                     
      /S/ RICHARD CHOJNOWSKI
---------------------------------------
RICHARD CHOJNOWSKI                   
Director                             
                                     
       /S/ JOHN W. REUTHER
---------------------------------------
JOHN W. REUTHER                      
Director                             
                                     
       /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                             

                                       66
<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 1996, 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 Peat Marwick 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.                                              
                                                                                
                                                                                

                                       67
<PAGE>
                                                                                
Directors and Executive Officers                                                
                                                                                
         The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1996 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.

Executive Compensation

         The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1996 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.

Security Ownership of Certain Beneficial Owners and Management

         The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1996 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference.

Certain Relationships and Related Transactions

         The information that appears in the Corporation's Definitive Proxy
Statement relating to the 1996 Annual Meeting of Shareholders of the Corporation
is incorporated herein by reference












                                       68