<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

       (Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934.

     For the fiscal year ended December 31, 1998                             
                               -----------------------------------------------

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934.

For the transition period from___________ to ___________                       

Commission file number 000-27244
                       -------------------

                               USABANCSHARES, INC.
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)


                Pennsylvania                            23-2806495
---------------------------------------     ------------------------------------
       (State or Other Jurisdiction of      (I.R.S. Employer Identification No.)
        Incorporation or Organization)

    1535 Locust Street, Philadelphia, PA                  19102
----------------------------------------    ------------------------------------
 (Address of Principal Executive Offices)               (Zip Code)

                                 (215) 569-4200
--------------------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)


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


         Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $1.00 par value
--------------------------------------------------------------------------------
                                (Title of Class)


         Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

YES  __X__  NO ____      

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X]

         The Issuer's revenues for its most recent fiscal year were $13.1
million.

         The aggregate market value of the voting and non-voting common equity
held by non-affiliates as of March 24, 1999 was $14,353,611, based on the
average of the closing bid and asked prices of the Registrant's Class A common
stock as reported by the Nasdaq SmallCap Market.




<PAGE>



         As of March 24, 1999 the Issuer had outstanding 2,007,392 shares of
Class A common stock and 10,000 shares of Class B common stock (which are
convertible into 108,230 shares of Class A Common Stock).

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Proxy Statement to be utilized in connection with the
1999 Annual Meeting of Shareholders are incorporated by reference into Part III
hereof.
























<PAGE>



                               USABANCSHARES, INC.

                                   Form 10-KSB

                                      INDEX
<TABLE>
<CAPTION>
                                                                                                              Page
                                                                                                              ----
<S>                                                   <C>                                                      <C>
PART I

Item 1.    Description of Business.........................................................................     2
Item 2.    Description of Property.........................................................................    20 
Item 3.    Legal Proceedings...............................................................................    20
Item 4.    Submission of Matters to a Vote of Security Holders.............................................    20

PART II

Item 5.    Market for Common Equity and Related Stockholder Matters........................................    21
Selected Financial and Other Data..........................................................................    22
Item 6.    Management's Discussion and Analysis............................................................    24
Risk Factors...............................................................................................    32
Item 7.    Financial Statements............................................................................    38
Item 8.    Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosure..........................................................................    38

PART III


Item 9.    Directors, Executive Officers, Promoters and Control Persons; Compliance with
             Section 16(a) of the Exchange Act.............................................................    38
Item 10.   Executive Compensation..........................................................................    38
Item 11.   Security Ownership of Certain Beneficial Owners and Management..................................    38
Item 12.   Certain Relationships and Related Transactions..................................................    38
Item 13.   Exhibits, List and Reports on Form 8-K..........................................................    38
Financial Statements and Report of Independent Certified
  Public Accountants.......................................................................................   F-1
</TABLE>







<PAGE>




                           FORWARD LOOKING STATEMENTS


         Some of the statements contained in this report discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions.

         Important factors that may cause actual results to differ from
projections include, for example,

         o    general economic conditions, including their impact on capital
              expenditures;

         o    business conditions in the financial services industry;

         o    the regulatory environment;

         o    rapidly changing technology and evolving banking industry 
              standards;

         o    competitive factors, including increased competition with
              community, regional and national financial
              institutions;

         o    new services and products offered by competitors; and

         o    price pressures.




                                       -1-

<PAGE>



                                     PART I

Item 1. Description of Business.


General

         USABancShares, Inc. (the "Corporation") is a Pennsylvania corporation
headquartered in Philadelphia, Pennsylvania and was organized in November 1995
in order to facilitate the acquisition of People's Thrift Savings Bank, which
changed its name to "BankPhiladelphia" in July 1998 (the "Bank"). The Bank,
which is the primary business of the Corporation, has operated as a
community-based financial institution for over 110 years. The Bank was
originally organized in 1887 as a mutual building and loan association and
converted to a Pennsylvania-chartered stock savings bank in December 1990. Since
the Corporation's acquisition of the Bank in November 1995, the Corporation has
experienced rapid growth which was fueled primarily by the purchase of loan
pools at a discount from a wide variety of sources. Recently, these sources
consist primarily of private sector sellers and, to a lesser extent,
governmental agencies. The Corporation has historically funded its loan growth
primarily through certificates of deposit and, to a lesser extent, advances from
the Federal Home Loan Bank of Pittsburgh ("FHLB"). The Corporation expects
growth to continue as the Bank leverages its deposit inflows into new loan
originations with continued purchases of pools of loans at a discount,
consisting primarily of performing loans secured by single-family residential,
multi-family residential and commercial properties. From December 31, 1995
through December 31, 1998, the Corporation's total assets, net loans receivable,
deposits and stockholders' equity have increased by $139.3 million, $95.1
million, $93.6 million and $8.9 million or 540%, 1,359%, 450% and 189%,
respectively. At December 31, 1998, the Corporation had total assets of $165.1
million, net loans receivable of $102.1 million, total deposits of $114.4
million and total stockholders' equity of $13.6 million.

Strategy

         The Corporation's business strategy focuses on achieving attractive
returns consistent with the Corporation's risk management objectives. The
Corporation seeks to implement this strategy by: (i) aggressively growing the
Bank's loan portfolio through the acquisition of loan pools at a discount,
together with an increasing emphasis on loan originations; (ii) expanding the
Bank's retail franchise through new branch openings and pursuing strategic
acquisition opportunities; (iii) making a substantial investment in the Bank's
management, data processing systems and internal controls while at the same time
enhancing the Bank's policies, procedures and credit risk management functions
in order to support the Bank's ongoing growth strategy; (iv) reducing funding
costs through the attraction of lower cost transaction accounts; (v) maintaining
a community focus and capitalizing on recent consolidation within the Bank's
primary market area; and (vi) improving operating efficiency by reducing the
level of non-interest expense relative to interest-earning assets.

Market Area and Competition

         The Bank's primary market area encompasses the greater Delaware Valley,
which is served by several major commercial banks such as First Union, PNC Bank
and Mellon Bank as well as a number of mid-sized commercial banks, savings banks
and thrifts such as Commerce Bank, Jefferson Bank, Royal Bank, Progress Bank,
Prime Bank and Crusader Savings Bank, and other small community banks and
thrifts.

         The Bank encounters strong competition both in attracting deposits and
in originating loans. Its most direct competition for deposits comes from
financial institutions in its market area as well as brokerage operations and
mutual funds. The Bank's direct competition for originated loans comes from
small to mid-size financial institutions located in the greater Delaware Valley,
while its most direct competition for purchased loans comes from local and
national companies in the business of acquiring loans. The Bank expects
continued strong competition in the foreseeable future, including increased
competition from a number of growing mid-size regional banks in the Bank's
market area. The Bank competes for savings deposits by offering depositors a
higher level of personal service and a range of competitively priced financial
services. The Bank competes for loan originations and purchases by pricing its
products competitively and by providing superior customer service.

         Based upon statistics provided by the Federal Reserve Bank of
Philadelphia, as of December 31, 1998, there were 116 different banking
institutions operating approximately 1,500 branch offices and having total
deposits of approximately $76.4 billion within the Philadelphia banking market
as identified by the Federal Reserve Bank of


                                       -2-

<PAGE>



Philadelphia. Three of such institutions had approximately 77% of deposits in
the Philadelphia banking market. As of December 31, 1998, the Bank had
approximately .15% of deposits in the Philadelphia banking market and .22% of
deposits in the two counties in which the Bank maintains branches.

Lending Activities

         Loan Portfolio. The principal components of the Bank's loan portfolio
are first mortgage loans secured by residential real estate and commercial real
estate and, to a much lesser extent, home equity loans, passbook and other
consumer loans and commercial business loans. At December 31, 1998, the Bank's
total loans receivable, net amounted to $102.1 million, which represented 61.8%
of the Corporation's $165.1 million in total assets at that date.

         The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio as of the dates
indicated.
<TABLE>
<CAPTION>
                                                                      At December 31,
                                              -----------------------------------------------------------------
(Dollars in Thousands)                                   1998                                   1997
                                              --------------------------           ----------------------------
<S>                                                <C>             <C>                  <C>              <C>
Real estate(1)(2)....................          $102,076             98.8%             $54,262             95.1%
Commercial business (3)..............               986              1.0                1,091              1.9
Consumer(4)..........................               243              0.2                1,694              3.0
                                              ---------       ----------            ---------           ------
Total loans receivable...............           103,305            100.0%              57,047            100.0%
                                                              ==========                                ======
Less
   Loans in process..................                --                                   260
   Deferred loan fees................               116                                   217
   Allowance for loan losses.........             1,051                                   568
                                               --------                              --------
Net loans receivable.................          $102,138                              $ 56,002
                                               ========                              ========
</TABLE>
--------------------------

(1) Consists of loans secured by single-family residential, multi-family
    residential and commercial real estate. 
(2) At December, 31, 1998, a majority of the Bank's real estate loans consisted
    of loans secured by multi-family residential and commercial real estate.
(3) Consists primarily of inventory and working capital loans.
(4) Consists primarily of home equity loans and installment loans.

         Loan Maturity. The following table sets forth the maturity or period of
repricing of the Bank's loan portfolio at December 31, 1998. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due within one year. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed rate loans are
included in the period in which the final contractual repayment is due. The
table does not include the effect of future principal prepayments.
<TABLE>
<CAPTION>

                                         Within 1        1-3          3-5          5-15         Beyond
       (Dollars In Thousands)              Year         Years        Years         Years       15 years        Total
                                           ----         -----        -----         -----       --------        -----
<S>                                      <C>           <C>          <C>           <C>          <C>            <C>
Real estate (1):                           $13,200      $11,837       $23,028      $19,143       $34,868      $102,076
Commercial business(2)...............           --           --            --          986            --           986
Consumer (3).........................           --           --           243           --            --           243
                                         ---------     --------     ---------    ---------     ---------      --------
     Total loans receivable..........    $  13,200     $ 11,837      $ 23,271     $ 20,129      $ 34,868      $103,305
                                         =========     ========     =========    =========     =========      ========
</TABLE>


                                       -3-

<PAGE>



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

(1) Consists of loans secured by single-family residential, multi-family
    residential and commercial real estate.
(2) Consists primarily of inventory and working capital loans.
(3) Consists primarily of home equity loans and installment loans.

         Origination, Purchase and Sale of Loans. The lending activities of the
Bank are subject to the underwriting policies and loan origination and purchase
procedures established by the Board of Directors and management. Loan
originations are derived from a number of sources, such as existing customers,
the Bank's loan officers, borrowers, builders, attorneys, walk-in customers and
correspondent lenders. Upon receiving a loan application, the Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's employment, income and credit standing. In the case
of a real estate loan, an appraiser approved by the Bank appraises the real
estate intended to collateralize the proposed loan. An underwriter checks the
loan application file for accuracy and completeness, and verifies the
information provided. If the appraisal and credit information generally comply
with the Bank's underwriting guidelines, the loan is approved by the Board of
Directors. The Bank has not delegated to any of its loan officers approval
authority and all loan originations are required to be approved by the Board of
Directors. For multi-family residential and commercial real estate loans, the
Bank requires that the borrower provide operating statements, pro forma cash
flow statements and, if applicable, rent rolls. In addition, the Bank reviews
the borrower's credit standing and expertise in owning and managing the type of
property that will collateralize the loan. Fire and casualty insurance, and in
certain cases, flood insurance, are required on the property serving as
collateral at the time the loan is made and throughout the term of the loan.

         The Bank's internal originations consist primarily of multi-family
residential and commercial real estate loans. Although the Bank will and does
originate single-family residential and consumer loans, such originations have
historically been made as an accommodation to the Bank's customers and such
loans are generally not emphasized by the Bank. In addition, although commercial
business loans have also historically not been a major line of business for the
Bank, the Bank's current business focus is to increase its emphasis on small
business commercial loan originations.

         Since December 1995, the Bank has been supplementing its originations
with purchases of loan pools at a discount. Such purchases have been the primary
factor in the Bank's substantial growth since 1995. Prior to 1997, the Bank
acquired loans at a discount, generally from the Federal Deposit Insurance
Corporation ("FDIC") and the Resolution Trust Corporation, primarily in auctions
of pools of loans acquired by such agencies from the large number of financial
institutions which had failed during the late 1980s and early 1990s. Although
governmental agencies, such as the FDIC, continue to be a potential source of
loans at a discount, in recent periods the Bank has obtained discounted loans
primarily from various private sector sellers, such as banks, savings
institutions, mortgage companies and insurance companies which generally were
seeking to eliminate a loan or a category of loans from their portfolio.

         At December 31, 1998, the Bank's net discounted loan portfolio amounted
to $51.7 million or 31.3% of the Corporation's total assets. These loans had a
face value of $57.0 million, reflecting a discount of $5.3 million or 9.3%. The
Bank's discounted loan portfolio is secured by residential and commercial real
estate properties. At December 31, 1998, management believes that approximately
59% and 41% of its discounted loan portfolio was secured by residential and
commercial properties, respectively.

         Substantially all of the loans purchased by the Bank at a discount were
performing in accordance with their terms at the time of purchase. The Bank has
developed and maintains a proprietary model to determine what management
believes to be the appropriate purchase price to be paid for a discounted loan
pool. The discount is determined based on objective and subjective criteria. The
objective criteria includes geographic location, loan-to-value ratio, collateral
type, past payment performance, and the term and structure of the loan. The
subjective criteria relies on senior management's substantial experience with
respect to the acquisition and management of discounted real estate loans.

         Real estate loans generally are acquired in pools, although
multi-family residential and commercial real estate loans may be acquired
individually. These pools generally are acquired in auctions or competitive bid
circumstances in which the Corporation faces substantial competition. Although
many of the Corporation's competitors have access to greater capital and have
other advantages, the Corporation believes that it has a competitive advantage
relative to many of its competitors as a result of its experience in acquiring
and managing loans purchased at a discount and the strategic relationships and
contacts which it has developed in connection with these activities.


                                       -4-

<PAGE>



         Prior to making an offer to purchase a portfolio of loans, the
Corporation conducts an extensive investigation and evaluation of the loans in
the portfolio. Evaluations of potential loans are conducted primarily by the
Corporation's senior management who specialize in the analysis of such loans.
The Corporation's employees may use third parties to assist them in conducting
an evaluation of the value of the collateral property as well as to assist them
in the evaluation and verification of information and the gathering of other
information not previously made available by the potential seller.

         Although the Bank focuses on acquiring loans in the Mid-Atlantic
region, the Bank has acquired loans secured by real estate located in a number
of other states including Texas, Florida and California. The Bank believes that
the relatively broad geographic distribution of its discounted loan portfolio
reduces the risks associated with concentrating such loans in limited geographic
areas and that due to its expertise and the Bank's policies and procedures, the
geographic diversity of its discounted loan portfolio does not place greater
burdens on the Bank's ability to administer and, if applicable, service such
loans.

         One-to-Four Family Residential Mortgage Lending. The Bank has
historically not been an active originator of single-family residential loans
and such loans have generally been originated as an accommodation to the Bank's
customers. These loans are generally made to borrowers who, because of the size
of the loan, prior credit problems, the absence of a credit history or other
factors, are unable to qualify as borrowers for a single-family residential loan
under Federal Home Loan Mortgage Corporation or Federal National Mortgage
Association guidelines ("conforming loans"). As a result, these loans are not
eligible for resale in the secondary mortgage market. Loans to non-conforming
borrowers are perceived by the Bank's management as being advantageous to the
Bank because they generally have higher interest rates and origination and
servicing fees and generally lower loan-to-value ratios.

         Substantially all of the Bank's one-to-four family residential loans
have been acquired through loan purchases. A majority of these loans are located
outside of the greater Delaware Valley. Although the Bank's purchased
single-family residential loans carry a variety of terms, management believes
the majority of such loans have loan-to-value ratios of 80% or below and carry
fixed rates of interest. The Bank generally attempts to acquire the servicing
rights with respect to purchased single-family residential loans, which includes
collecting and remitting loan payments, inspecting the properties and making
certain insurance and tax payments on behalf of the borrowers. However, the Bank
may on occasion purchase such loans where the seller retains the servicing
rights. At December 31, 1998, the Bank held in its portfolio approximately $22.0
million of loans which were being serviced by others.

         The Bank currently offers fixed rate one-to-four family mortgage loans
with terms typically ranging from 15 to 30 years. One-to-four family residential
real estate loans often remain outstanding for significantly shorter periods
than their contractual terms because borrowers may refinance or prepay loans at
their option. The average length of time that the Bank's one-to-four family
residential mortgage loans remain outstanding varies significantly depending
upon trends in market interest rates and other factors. In recent years, the
average maturity of the Bank's mortgage loans has decreased significantly due to
the unprecedented volume of refinancing activity. Accordingly, estimates of the
average length of time that one-to-four family loans may remain outstanding
cannot be made with any degree of accuracy.

         The Bank is permitted under applicable law to lend up to 100% of the
appraised value of the real property securing a residential loan. However, if
the amount of a residential loan originated or refinanced exceeds 80% of the
appraised value, the Bank is required by federal regulations to obtain private
mortgage insurance on the portion of the principal amount that exceeds 80% of
the appraised value of the security property. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Bank will generally only lend
up to 80% of the appraised value of the property securing a single-family
residential loan.

         From time to time, the Bank will originate loans for the construction
of single-family residential properties. Such loans may be made to individuals
or builders. The Bank does not expect to emphasize construction lending in the
near term and at December 31, 1998, the Bank had no construction loans
outstanding.

         Multi-family Residential Real Estate and Commercial Real Estate
Lending. The Bank's lending activities currently emphasize the origination and
acquisition of loans secured by existing multi-family residential and commercial
properties. As of December 31, 1998, over a majority of the Bank's real estate
loan portfolio consisted of loans secured by multi-family residential and
commercial properties. The Bank has generally targeted higher quality, smaller
multi-family residential and commercial real estate loans with principal
balances up to its legal lending limit.



                                       -5-

<PAGE>



         The Bank's multi-family residential loans are secured by multi-family
properties of five units or more, while the Bank's commercial real estate loans
are secured primarily by industrial, warehouse and self-storage properties,
office buildings, office and industrial condominiums, retail space and strip
shopping centers and mixed-used commercial properties. At December 31, 1998,
substantially all of the properties securing the Bank's multi-family residential
and commercial real estate loans were located in the greater Delaware Valley.
The Bank will presently originate multi-family residential and commercial real
estate loans for terms of up to 25 years. Some of these loans contain call or
repayment option features within three to seven years after origination. The
Bank will originate such loans on both a fixed-rate or adjustable-rate basis,
with the latter based on an applicable prime rate. Adjustable-rate loans may
have an established ceiling and floor, and the maximum loan-to-value for these
loan products is generally 80%. As part of the criteria for underwriting
multi-family residential and commercial real estate loans, the Bank generally
requires a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of at least 1.1 to 1.0 on originated
loans and at least 1.0 to 1.0 on acquired loans. It is also the Bank's general
policy to seek additional protection, such as secondary collateral and personal
guarantees from the principals of the borrowers, to mitigate any weaknesses
identified in the underwriting process.

         Loans collateralized by multi-family residential and commercial real
estate generally involve a greater degree of credit risk than one-to-four family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate and multi-family real estate is
typically dependent upon the successful operation of the related property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan can become impaired. At December 31, 1998, $1.1 million of the Bank's
commercial real estate loans were classified as non-performing. As of such date,
a significant portion of the Bank's non-performing commercial real estate loans
was comprised of one purchased loan.

         Commercial Business Loans. The Bank originates commercial business
loans consisting primarily of lines of credit and term loans secured by
equipment and accounts receivable. At December 31, 1998, commercial business
loans totaled $986,000 or 1.0%, of the Bank's total loan portfolio. In addition,
all of the Bank's commercial business loans which are secured by real estate
have been classified as commercial real estate loans. Currently, the Bank is
placing greater emphasis on the origination of commercial business loans and, in
connection with the expansion of its community banking franchise, the Bank is
currently in the process of hiring additional commercial business lenders.
Commercial business loans generally have shorter terms and higher interest rates
than mortgage loans because of the type and nature of the collateral. At
December 31, 1998, none of the Bank's commercial business loans were classified
as non-performing.

         Consumer Loans. The Bank originates consumer loans consisting
principally of loans secured by deposit accounts and marketable securities, and
home improvement, personal and automobile loans. At December 31, 1998, consumer
loans totaled $243,000, or 0.02%, of the Bank's total loan portfolio. The Bank
offers consumer loans as a service to its customers. Consumer loans are offered
primarily on a fixed-rate basis with maturities generally of less than ten
years. Consumer loans entail greater credit risk than do residential mortgage
loans but have smaller balances and tend to have higher interest rates. At
December 31, 1998, none of the Bank's consumer loans were classified as
non-performing.

         Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Bank generally receives fees in connection with loan originations.
Such loan origination fees, net of costs to originate, are deferred and
amortized using the interest method over the contractual life of the loan. Fees
deferred are recognized as income immediately upon prepayment of the related
loan. At December 31, 1998, the Bank had $116,000 of net deferred loan
origination fees. Such fees vary with the volume and type of loans and
commitments made and purchased, the principal repayments on such loans, and
competitive conditions in the real estate market that reflect the demand and
availability of money. In addition to loan origination fees, the Bank also
receives loan fees and service charges that consist primarily of deposit
transaction account service charges and late charges.

         Loans to One Borrower. Current regulations restrict loans to one
borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments). At December 31, 1998, the Bank's
regulatory limit on loans to one borrower was $2.1 million and its five largest
loans or groups of loans to one borrower, including related entities, aggregated
$1.9 million, $1.9 million, $1.8 million, $1.8



                                       -6-

<PAGE>



million and $1.8 million. All five of these loans or loan concentrations were
secured by multi-family residential or commercial real estate and were
performing in accordance with their terms at December 31, 1998.

Asset Quality

         Collection Procedures. The Bank's collection procedures provide that
when a loan is 16 days past due, a computer generated late charge notice is sent
to the borrower requesting payment of the amount due under the loan, plus a late
charge. If such delinquency continues, on the first day of the next month, a
delinquent notice is mailed advising the borrower of the violation of the terms
of the loan. A representative of the Bank attempts to contact borrowers whose
loans are more than 30 days past due. If such attempts are unsuccessful, the
Bank will engage counsel to facilitate the collection process. A delinquent loan
report is presented to the Board of Directors on a regular basis for their
review. Historically, the Bank has instituted legal action on loans 90 days past
due. It is sometimes necessary and desirable to arrange special repayment
schedules with borrowers to prevent foreclosure or filing for bankruptcy. The
schedule is prepared by the Bank pursuant to discussions with the borrower and
reviewed by the Board of Directors.

         Delinquent Loans and Non-performing Assets. Loans are reviewed on a
monthly basis. Loans are typically placed on nonaccrual status when either
principal or interest is 90 days or more past due. Delinquent loans are charged
off when it appears no longer reasonable or probable that the loan will be
collected. Interest accrued and unpaid at the time a loan is placed on
nonaccrual status is charged against interest income.

         Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is deemed other real estate owned ("OREO") until such
time as it is sold. When OREO is acquired, it is recorded at the lower of the
unpaid principal balance of the related loan or its estimated fair value, less
estimated selling expenses. Valuations are periodically performed, or obtained,
by management and any subsequent decline in fair market value is charged to
operations. The Bank had no OREO as of December 31, 1997. At December 31, 1998,
OREO totaled $66,000 and consisted of one parcel of commercial real estate.

         The following table sets forth information with respect to the Bank's
delinquent loans at December 31, 1998. At December 31, 1998, the Bank had no
delinquent consumer loans.

                                                        Balance          Number
                                                        -------          ------
         (Dollars in Thousands)

Residential real estate (1):
   Loans 30 to 89 days delinquent................       $1,272               28
   Loans 90 or more days delinquent..............          818               20
                                                         -----            -----
     Total.......................................        2,090               48
                                                         -----            -----
Commercial real estate:
   Loans 30 to 89 days delinquent................          382                2
   Loans 90 or more days delinquent..............        1,138                5
                                                        ------            -----
     Total.......................................        1,520                7
                                                        ------            -----
Commercial business loans:.......................
   Loans 30 to 89 days delinquent................           --               --
   Loans 90 or more days delinquent..............           58                1
                                                        ------            -----
     Total.......................................           58                1
                                                        ------            -----
Total delinquent loans ..........................       $3,668               56
                                                        ======            =====

----------------------
(1) Consists solely of loans secured by single-family residential real estate.




                                       -7-

<PAGE>



         The following table presents information on the Corporation's
non-performing assets at the dates indicated. The Corporation did not have any
troubled debt restructurings at any of the dates presented.
<TABLE>
<CAPTION>

(Dollars in thousands)                                                               December 31,
                                                                     ---------------------------------------------
                                                                             1998                      1997
                                                                     --------------------       ------------------
<S>                                                                          <C>                       <C>
Non-accruing loans:
   Residential real estate(1)....................................         $  666                    $   258
   Commercial real estate........................................          1,138(2)                      --
   Commercial business...........................................             --                         29
   Consumer......................................................             --                         --
                                                                         -------                    -------
       Total.....................................................          1,804                        287
                                                                         -------                    -------
Accruing loans greater than 90 days delinquent...................            152                         --
                                                                         -------                    -------
       Total non-performing loans(3).............................          1,956                        287
                                                                         -------                    -------
Other real estate owned (4)......................................             66                         --
                                                                         -------                    -------
Total non-performing assets......................................         $2,022                    $   287
                                                                         =======                    =======
Total non-performing loans, net of discount, as a
  percentage of total loans, net of discount.....................           1.89%                      0.50%
                                                                         =======                    =======
Total non-performing assets, net of discount, as a
  percentage of total assets, net of discount....................           1.22%                      0.32%
                                                                         =======                    =======
</TABLE>

---------------
(1) Consists solely of loans secured by single-family residential real estate.
(2) The significant increase in non-performing commercial real estate loans
    during the year ended December 31, 1998 was due, in large part, to a single
    acquired loan. Management believes that this loan does not present a
    significant risk of loss to the Bank on the basis of a current appraisal on
    the real estate securing the loan, the loan-to-value ratio thereon, as well
    as the purchase discount and specific reserve applied to such loan.
(3) All of the Corporation's non-performing loans as of December 31, 1998
    consisted of acquired loans.
(4) Consists of one parcel of commercial real estate.

         The interest income that would have been recorded during the year ended
December 31, 1998 if the Bank's non-accrual loans at the end of such period had
been current in accordance with their terms during such period was $140,000.

         Classification of Assets. Federal regulations provide for the
classification of delinquent or non-homogeneous loans and other assets such as
debt and equity securities as "special mention," "substandard," "doubtful," or
"loss" assets. In analyzing loans for purchase as well as for purposes of the
Bank's loan classification, management has placed increased emphasis on the
payment history of the obligor and, to a lesser extent, the purchase discount
associated with a specific loan. Assets that do not expose the Bank to risk
sufficient to warrant classification in one of the aforementioned categories,
but which possess some weaknesses, are required to be designated "special
mention" by management. Loans designated as special mention are generally loans
that, while current in required payment, have exhibited some potential
weaknesses that, if not corrected, could increase the level of risk in the
future. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor. "Substandard" assets
include those characterized by the "distinct possibility" that the Bank will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets is not warranted and are charged against the loan
loss reserve. Pursuant to internal procedures, loans with a history of 30-89 day
delinquencies will generally be classified either special mention or
substandard. However, all loans 90 days or more delinquent are classified either
substandard, doubtful or loss.



                                       -8-

<PAGE>



         The following table sets forth the aggregate amount of the Bank's
special mention and classified assets at December 31, 1998:

(Dollars in thousands)

         Special mention......................................           $  422
         Substandard..........................................            1,500
         Doubtful ............................................              211
         Loss.................................................               --
                                                                         -------
         Total special mention and classified assets..........            2,133
         Other real estate owned.............................                66
                                                                         -------
         Total special mention and classified assets,
           including other real estate owned..................           $2,199
                                                                         =======

         Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the probable losses that may be incurred. The Bank's method of determining
provisions for loan losses is based partially on the Pennsylvania Banking
Department's (the "Department") and the FDIC's Allowance for Loan and Lease Loss
Guidelines, and partially on an in-house asset classification policy. The policy
provides for the monthly evaluation of concentrations of credit, past loan
experience, current economic conditions, amount and composition of the loan
portfolio, estimated fair value of collateral, delinquencies and other factors.

         The asset classifications are reviewed monthly by senior management
with respect to the loan portfolio and the adequacy of the allowance for loan
losses. Based upon that review, management determines whether any loans require
the establishment of appropriate reserves or allowances for losses. Such
evaluation, which includes a review of all loans for which full collectability
of interest and principal may not be reasonably assured, considers, among other
matters, the estimated fair value of the underlying collateral. Other factors
considered by management include the site and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. Management also prepares a summary classifying all delinquent loans and
non-homogenous loans as special mention, substandard, doubtful or loss.
Management then recommends the general allowance for loan losses in part based
on past experience, and in part based on specified loan balances within each
classification.

         Based on the recommendation of management, the Board of Directors makes
determinations as to any reserves and changes to the provision for loan losses
and allowance for loan losses. Both general and specific loan loss allowances
are charged against earnings; however, general loan loss allowances are added
back to capital in computing total risk-based capital under Department and FDIC
regulations, subject to certain limitations.

         The Bank will continue to monitor the allowance for loan losses and
make future adjustments to the allowance through the provision for loan losses
as conditions indicate. Although the Bank maintains its allowance for loan
losses at a level that it considers to be adequate to provide for the inherent
risk of loss in the loan portfolio, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods. In addition, the Bank's determination as
to the amount of its allowance for loan losses is subject to review by the
Department and the FDIC as part of their examination process, which may result
in the establishment of an additional allowance based upon the judgment of the
applicable regulator.



                                       -9-

<PAGE>



         The following table sets forth activity in the Bank's allowance for
loan losses at or for the specified periods.
<TABLE>
<CAPTION>
                                                                                     At or for the Year
                                                                                      Ended December 31,   
                                                                                 ---------------------------              
<S>                                                                               <C>                   <C>
(Dollars in Thousands)                                                           1998                   1997
                                                                                 ----                   ----

Total loans outstanding................................................       $103,305                 $57,047
Average loans outstanding..............................................         78,797                  26,421
Allowance balance (at beginning of period).............................            568                     182
Provision for loan losses..............................................            510                     415
Charge offs, net of recoveries.........................................             27                      29
                                                                              --------                 -------
Allowance balance (at end of period)...................................       $  1,051                 $   568
                                                                              ========                 =======
Allowance for loan losses as a percent of
     total loans, net of discount, at end of period....................           1.02%                   1.01%
                                                                              ========                 =======
Allowance for loan losses as a percent of total
    non-performing loans, net of discount, at end of period........              53.72%                 197.96%
                                                                              ========                 =======
Allowance for loan losses and purchase discount
    as a percentage of total loans.....................................           5.85%                   8.88%
                                                                              ========                 =======
Net loans charged off as a percent of average loans outstanding........           0.03%                   0.11%
                                                                              ========                 =======
</TABLE>


    The following tables set forth the Bank's percentage of allowance for loan
losses to total allowance for loan losses and the percentage of loans to total
loans in each of the categories listed at the dates indicated:
<TABLE>
<CAPTION>

                                              At December 31, 1998                            At December 31, 1997
                                   -------------------------------------------    ----------------------------------------------
                                                                                                               
                                                                                                                  
                                             Percentage of   Percentage of Loans                               Percentage of Loans  
(Dollars in Thousands)                          Allowance     in Each Category                                   in Each Category  
                                                to Total            to                     Percentage of Allowance       to        
                                   Amount      Allowance        Total Loans         Amount   to Total Allowance    Total Loans
                                   ------      ---------        -----------         ------   ------------------  ---------------
<S>                                 <C>            <C>               <C>            <C>             <C>                 <C>
Balance of allowance for loan                                                                    
losses at end of period applicable                                                               
to:                                                                                              
Real estate.....................     $1,037       98.7%             98.8%             $528           93.0%               95.1%
Commercial business.............         11        1.0               1.0                30            5.3                 1.9
Consumer........................          3        0.3               0.2                10            1.7                 3.0
                                     ------      -----             -----              ----          -----               -----
    Total ......................     $1,051      100.0%            100.0%             $568          100.0%              100.0%
                                     ======      =====             =====              ====          =====               =====
</TABLE>                                                                  

Investment Activities

         The Corporation's securities portfolio is managed by the President and
the Chief Financial Officer (the "Investment Officers") in accordance with a
written Investment Policy of the Board of Directors which addresses strategies,
types and levels of allowable investments.

         At December 31, 1998, the Corporation's securities portfolio amounted
to $44.1 million or 26.7% of the Corporation's total assets. The Corporation's
investment portfolio is comprised of trust preferred securities, mortgage-backed
securities, U.S. Government agency securities, corporate and municipal
obligations and equity securities. At December 31, 1998, the Corporation's trust
preferred securities amounted to $24.9 million, mortgage-backed securities
amounted to $8.3 million, equity securities (consisting of common stock of a
local financial institution, a self-service photocopy business, stock in the
Bank's computer vendor and a financial institution managed fund) equaled $1.9
million, financial institution debt obligations totaled $4.6 million, corporate
and municipal obligations amounted to $3.2 million, and U.S. Government agency
securities amounted to $1.2 million.



                                      -10-

<PAGE>



         Securities are classified by management as either available for sale or
held to maturity based upon the Corporation's intent and ability to hold such
securities. Securities available for sale include debt and equity securities
that are held for an indefinite period of time and are not intended to be held
to maturity. Securities available for sale include securities that management
intends to use as part of its overall asset/liability management strategy and
that may be sold in response to changes in interest rates and resultant
prepayment risk and other factors related thereto. Securities available for sale
are carried at fair value, and unrealized gains and losses (net of related tax
effects) on such securities are excluded from earnings but are included in
stockholders' equity. Upon realization, such gains and losses will be included
in the Corporation's earnings. Investment securities and mortgage-backed
securities, other than those designated as available for sale, are comprised of
debt securities that the Bank has the affirmative intent and ability to hold to
maturity. Securities held to maturity are carried at cost, and are adjusted for
amortization of premiums and accretion of discounts over the estimated terms of
the securities.

         The Bank is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. The Bank has maintained a portfolio of liquid
assets that exceeds regulatory requirements. The Bank's Asset Liability
Management Committee generally meets on a monthly basis to decide, based on
market levels and conditions, current economic data, political and regulatory
information, and internal needs, whether any alterations need to be made to the
Bank's investment portfolio. Based on the parameters of the Bank's Investment
Policy, the Bank endeavors to diversify its holdings through the purchase of
medium-term and long-term, fixed-rate and variable-rate instruments, which
provide both an adequate return and moderate risk. All investment decisions are
made by the Investment Officers of the Corporation in accordance with the
Investment Policy and Asset Liability Management Committee guidelines.

         The Corporation's securities portfolio composition is designed to
provide a liquid portfolio yet maximize yield on a risk adjusted basis. The
process by which management decides to acquire debt instruments, trust preferred
securities and corporate and municipal obligations is similar to that of
underwriting a loan. Management evaluates the potential credit risk associated
with these types of investment instruments by becoming familiar with the
institution, its earnings history, its ability to meet its debt obligation and,
if possible, by meeting its management team. The trust preferred securities are
fixed-rate long-term obligations with a weighted average yield of 9.21% as of
December 31, 1998. The trust preferred securities are obligations of primarily
non-rated financial institutions located throughout the United States, and thus
there is a limited market in which to purchase and sell these securities. As
long-term instruments, this portfolio is also subject to interest rate risk. If
interest rates were to rise, these securities would lose value and require the
Corporation to reflect a charge to its equity.

         The Bank's investments include mortgage-backed securities, which
represent an interest in, or are collateralized by, pools of mortgage loans
originated by private lenders that have been grouped by various governmental,
government-related or private organizations. Mortgage-backed securities
generally enhance the quality of the Bank's assets by virtue of the insurance or
guarantees that back such securities, are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations of the
Bank. Investments in mortgage-backed securities, however, may involve risks not
present with mortgage loans. Specifically, mortgage-backed securities are
subject to the risk that actual prepayments will be greater than estimated
prepayments over the life of the security, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments, thereby reducing the net yield on such securities. Like mortgage
loans, there is also reinvestment risk associated with the cash flows from such
securities in the event such securities are redeemed by the issuer. In addition,
the market value of such securities may be adversely affected by changes in
interest rates. At December 31, 1998, $1.8 million, or 21.7%, of the Bank's
total mortgage-backed securities portfolio of $8.3 million had adjustable
interest rates. Management is seeking to increase its portfolio of
adjustable-rate mortgage-backed securities. The Bank's mortgage-backed
securities are primarily pass-through securities, which provide the Bank with
payments consisting of both principal and interest as mortgage loans in the
underlying mortgage pool are paid off by the borrowers. The average maturity of
pass-through mortgage-backed securities varies with the maturities of the
underlying mortgage instruments and with the occurrence of unscheduled
prepayments of those mortgage instruments.


                                      -11-

<PAGE>




         The following tables present the book values and estimated market
values at December 31, 1998 and December 31, 1997, for each major category of
the Corporation's investment securities:
<TABLE>
<CAPTION>

                                                                    December 31, 1998
                                      -----------------------------------------------------------------------------
(Dollars in Thousands)                    Amortized     Gross Unrealized    Gross Unrealized    Approximate Fair 
                                            Cost              Gains               Losses              Value
                                        -----------     ----------------    ----------------    ------------------
<S>                                          <C>               <C>                 <C>                 <C>
Available-for-Sale:
   Mortgage-backed securities            $  2,628                  --                 (8)            $  2,620
   Corporate obligations                    1,322                  13                (89)               1,246
   Trust preferred securities and
     other securities (1).........         24,944                 243               (664)              24,523
                                         --------        ------------             -------            --------
   Total available-for-sale.......        $28,894        $        256             $ (761)            $ 28,389
                                         ========        ============             =======            ========
Held-to-Maturity:
   U.S. Government agency
    securities.....................      $  1,201        $          1             $   --             $  1,202
   Mortgage-backed securities.....          5,650                 104                 (1)               5,753
   Municipal securities...........          3,166                  69                 --                3,235
   Trust preferred securities and
     other securities (1).........          5,738                  79                (56)               5,761
                                         --------        ------------             -------            --------
     Total held-to-maturity.......       $ 15,755        $        253             $  (57)            $ 15,951 
                                         ========        ============             =======            ========



                                                                    December 31, 1997
                                       ----------------------------------------------------------------------------
                                           Amortized     Gross Unrealized    Gross Unrealized    Approximate Fair
(Dollars in Thousands)                       Cost             Gains               Losses              Value
                                       -------------     ----------------    ----------------    ----------------
Available-for-Sale:
   U.S. Government agency                 $  1,243               $  16                $ --              $1,259
     securities.....................
   Trust preferred securities.......         6,737                 150                 (11)              6,876
                                          --------               -----                ----              ------
     Total available-for-sale.......      $  7,980                $166                $(11)             $8,135
                                          ========               =====                ====              ======
Held-to-Maturity:
   U.S. Government agency
     securities.....................      $  3,557               $  --                $(10)            $ 3,547
   Mortgage-backed securities.......         6,306                  50                  --               6,356
   Municipal securities.............         3,163                 101                  --               3,264
   Trust preferred securities                      
     and other securities (1).......         2,393                  84                  --               2,477
                                          --------               -----                ----             -------
     Total held-to-maturity.........      $ 15,419               $ 235                $(10)            $15,644
                                          ========               =====                ====             =======
</TABLE>

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

(1)  Trust preferred securities and other securities are primarily comprised of
     trust preferred securities of financial institutions located throughout the
     United States. At December 31, 1998, the Bank held $22.6 million of trust
     preferred securities available-for-sale and $2.3 million held-to-maturity.
     Also included in the available-for-sale category was approximately $1.9
     million of equity securities consisting of equity securities of a local
     financial institution and a self-service photocopy business, equity
     securities of the Bank's computer vendor and a financial institution
     managed fund. At December 31, 1997, trust preferred securities held to
     maturity totaled $500,000. The remaining $1.9 million in the held to
     maturity category at such date consisted of debt instruments of financial
     institutions on the East Coast of the United States. The Corporation does
     not hold more than $2.0 million of trust preferred securities of any one
     issuer.



                                      -12-

<PAGE>



         The following table shows the contractual maturity of the Corporation's
investment securities portfolio at December 31, 1998:
<TABLE>
<CAPTION>


(Dollars in Thousands)                                    Available-for-Sale                      Held-to-Maturity     
                                              -------------------------------------   -------------------------------------
                                                                           Weighted                                Weighted
                                               Amortized     Approximate    Average    Amortized     Approximate    Average
                                                 Cost         Fair Value     Yield       Cost         Fair Value     Yield 
                                              ----------     -----------   --------   ----------     -----------   --------
<S>                                             <C>              <C>        <C>         <C>            <C>          <C>
Due after one year through five years......     $ 1,246        $ 1,170       11.92%    $ 2,001         $ 2,015       7.31%
Due after five years through ten years.....         816            770        9.88       2,635           2,581       7.90
Due after ten years........................      22,312         21,996        9.61       5,479           5,613       7.06
Mortgage-backed securities.................       2,628          2,620        7.00       5,640           5,742       6.59
Equity securities..........................       1,892          1,833          --          --              --         --
                                                -------        -------                 -------         -------      
                                                $28,894        $28,389                 $15,755         $15,951
                                                =======        ========                =======         =======
</TABLE>                                                                 

Sources of Funds

         General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from the scheduled payments as well as prepayment of loans, the maturity of
investment securities and the sale of assets available for sale. Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings may be used to
compensate for reductions in the availability of funds from other sources or on
a longer term basis for general business purposes.

         Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's market area through the offering of a broad selection of
deposit instruments, including non interest-bearing demand accounts, NOW
accounts, passbook savings accounts, money market accounts, term certificate
accounts and individual retirement accounts. Deposit account terms vary
according to the minimum balance required, the period of time during which the
funds must remain on deposit, and the interest rate, among other factors.
Deposits have increased 450% from $20.8 million at December 31, 1995 to $114.4
million at December 31,1998. The largest area of increase occurred in
certificates of deposit as the Bank continued to rely primarily on non-retail
certificates of deposits. At December 31, 1998, the Bank had $104.5 million of
certificates of deposit, $34.7 million of which were in excess of $100,000, of
which $10.1 million mature within twelve months.

         The Bank regularly evaluates its internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity, and executes rate changes when deemed appropriate. The
Bank will open a new branch office during the second quarter of 1999 in
Montgomery County, Pennsylvania. Management anticipates that the mix of deposits
will shift towards transaction accounts as the Bank expands its commercial line
of business. The Bank anticipates that the growth in deposits would be
accomplished through aggressive marketing of its retail branch network in
surrounding communities, competitive pricing of retail products and the ability
to provide loan and deposit products to consumers and commercial businesses in
its market area. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources."



                                      -13-

<PAGE>



         The following table sets forth the balance of each deposit type and the
weighted average rate paid on each deposit type of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                         --------------------------------------------------------------------------------
                                                            1998                                    1997
                                                            ----                                    ----
         (Dollars in Thousands)                           Percent of     Weighted                Percent of    Weighted
                                                            Total        Average                    Total       Average
                                                Balance    Deposits       Yield      Balance      Deposits      Yield
                                                -------   ---------      --------    -------     ----------    --------
<S>                                               <C>        <C>           <C>         <C>          <C>          <C>
Noninterest-bearing demand..............       $  1,439        1.26%       --        $   257         0.37%        --
NOW accounts............................            846         .73        2.31%         688         0.98        2.27
Savings and Passbook accounts...........          5,281        4.62        4.40        2,019         2.86        2.49
Money market deposit accounts...........          2,345        2.05        3.66        4,802         6.81        3.74
Certificates of deposit ................        104,476       91.34        5.73       62,708        88.98        6.06
                                               --------      ------                  -------       ------
Total deposits..........................       $114,387      100.00%       5.53%     $70,474        100.0%      5.72%
                                               ========      ======                  =======       ======       
</TABLE>

         At December 31, 1998, the Bank's certificates of deposit had the
following stated maturities:

                                                           Amount
             Maturity Period                           (In Thousands)

             Within 12 months..................          $ 47,067
             Within 13 to 36 months.............           43,168
             Beyond 36 months...................           14,241 
                                                         --------
             Total..............................         $104,476 
                                                         ========


         The following table presents, by various rate categories, the amount of
certificates of deposit outstanding at December 31, 1998.

             Certificate Rates:                     Outstanding Amount
                                                       (In Thousands)
             0 to 3.99%.........................         $  1,584
             4.00% to 5.99%.....................           58,356
             6.00% to 7.99%.....................           44,534
             Over 8.00%.........................                2
                                                         --------
          Total..............................            $104,476
                                                         ========

         The following table summarizes the maturity composition of certificates
of deposit with balances of $100,000 or more at December 31, 1998:


(Dollars in Thousands)                                December 31, 1998
                                            ------------------------------------
                                                   Balance                %
                                            ---------------------   ------------
Three months or less.......................      $  3,227              9.30%
Over three months to six months............         1,130              3.26
Over six months to twelve months...........         5,757             16.59
Over twelve months.........................        24,590             70.85
                                            ---------------------    --------
                                                 $ 34,704            100.00%
                                            =====================    ========

         Borrowings. If the need arises, the Bank may rely upon advances from
the FHLB and the Federal Reserve Board ("FRB") discount window to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. Advances
from the FHLB typically are collateralized by the Bank's stock in the FHLB and a
portion of the Bank's first mortgage loans. At


                                      -14-

<PAGE>



December 31, 1998, the Bank had $30.0 million of FHLB advances available, which
amount had been fully drawn as of such date.

         The FHLB functions as a central reserve bank providing credit for the
Bank and other member savings and financial institutions. As a member, the Bank
is required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities that are obligations of, or guaranteed by,
the United States) provided certain standards related to creditworthiness have
been met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness.

         At December 31, 1998, the Bank had five callable fixed-rate advances
for $30.0 million from the FHLB. The callable advances mature within five to ten
years with call options ranging from 18 months to five years. The interest rates
on the callable advances range from 4.83% to 5.63%, with a weighted average
interest rate of 5.31% at December 31, 1998.

         The following table sets forth certain information regarding the Bank's
borrowed funds, which consist solely of FHLB advances, at or for the years ended
on the dates indicated:

                                                      At or for the
                                                  Year Ended December 31,      
                                              ------------------------------
       (Dollars in Thousands)                   1998                    1997
                                                ----                    ----

FHLB advances:
   Maximum month-end balance..............    $31,000                  $12,700
   Balance at end of period...............     30,000                    9,000
   Average balance........................     22,482                    7,000
Weighted average interest rate on:
   Balance at end of period...............       5.30%                    5.87%
   Average balance for period.............       5.29%                    5.87%


         The Corporation also has three line of credit facilities with local
financial institutions totaling $2.0 million. The aggregate outstanding balance
on the lines of credit at December 31, 1998 was $1.1 million. The interest rates
paid on these advances are floating, prime based rates, ranging from prime to
prime plus one percentage point, with the average interest rate at December 31,
1998 equaling 8.21%.

USACapital

         USACapital, Inc. ("USACapital"), a registered broker-dealer with the
National Association of Securities Dealers, is a Pennsylvania corporation wholly
owned by the Corporation. A subsidiary of the Corporation acquired USACapital in
April 1997 for a purchase price of $75,000, paid in shares of the Corporation's
common stock. USACapital is engaged in the business of trading stocks, bonds,
annuities, and other investment related products to the general public. The
operations of USACapital presently represent less than 10% of the Corporation's
consolidated net income. However, during the year ended December 31, 1998,
USACapital increased its staff from two persons to 18 persons, which management
believes will facilitate the growth of USACapital's business. The majority of
the additional employees at USACapital are compensated on a commission basis,
which will maintain a variable expense base related to performance. USACapital
operates out of the Corporation's corporate office. USACapital generated pre-tax
earnings of $141,000 for the year ended December 31, 1998 and $102,000 from the
Corporation's acquisition of USACapital in April 1997 through December 31, 1997.

Personnel

         As of December 31, 1998, the Corporation, the Bank and USACapital have
a total of 38 full-time and 2 part-time employees.



                                      -15-

<PAGE>



Regulation of the Corporation and the Bank

         The Corporation and the Bank are extensively regulated under both
federal and state law. From time to time, various new types of federal and state
legislation have been proposed that could result in additional or diminished
regulation of and restrictions on, or altered forms of supervision of, banks or
bank holding companies. It cannot be predicted whether any such legislation will
be adopted or how such legislation, if adopted, would affect the business of the
Bank or the Corporation. As a consequence of the extensive regulation of
commercial banking activities and financial institutions in the United States,
the business and activities of the Bank are susceptible to changes in federal
and state legislation which may affect the scope, nature and costs of such
business and activities. The following description of statutory and regulatory
provisions, which is not intended to be a complete description of these
provisions or their effects on the Corporation or the Bank, is qualified in its
entirety by reference to the particular statutory or regulatory provisions.

The Corporation

         General. The Corporation is a registered bank holding company pursuant
to the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is subject
to regulation and supervision by the Federal Reserve Board ("FRB") and the
Pennsylvania Banking Department (the "Department"). The Corporation is required
to file annually a report of its operations with, and is subject to examination
by, the FRB and the Department.

         BHCA Activities and Other Limitations. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the FRB. The BHCA also generally
prohibits a bank holding company from acquiring any bank located outside of the
state in which the existing bank subsidiaries of the bank holding company are
located unless specifically authorized by applicable state law. No approval
under the BHCA is required, however, for a bank holding company already owning
or controlling 50% of the voting shares of a bank to acquire additional shares
of such bank.

         The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the FRB is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the FRB has determined to be so closely related to banking or to managing
or controlling banks as to be a proper incident thereto. In making such
determinations, the FRB is required to weigh the expected benefit to the public,
such as greater convenience, increased competition or gains in efficiency,
against the possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices.

         The FRB has by regulation determined that certain activities are
closely related to banking within the meaning of the BHCA. These activities
include operating a mortgage company, finance company, credit card company,
factoring company, trust company or savings association; performing certain data
processing operations; providing limited securities brokerage services; acting
as an investment or financial advisor; acting as an insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services. The FRB also has
determined that certain other activities, including real estate brokerage and
syndication, land development, property management and underwriting of life
insurance not related to credit transactions, are not closely related to banking
and a proper incident thereto.

         Limitations on Transactions with Affiliates. Transactions between banks
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a bank is any company or entity which controls, is
controlled by or is under common control with the bank. In a holding company
context, the parent holding company of a bank (such as the Corporation) and any
companies which are controlled by such parent holding company are affiliates of
the bank. Generally, Sections 23A and 23B (i) limit the extent to which the Bank
or its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of such bank's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the Bank or subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar transactions. In addition to the restrictions
imposed by Sections 23A and 23B, no bank may (i) loan or otherwise extend credit
to an affiliate, except for any


                                      -16-

<PAGE>



affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the Bank.

         In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a bank, and certain affiliated interests of
either, may not exceed, together with all other outstanding loans to such person
and affiliated interests, the Bank's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons unless the loans are made pursuant to a benefit or
compensation program that (i) is widely available to employees of the
institution and (ii) does not give preference to any director, executive officer
or principal stockholder, or certain affiliated interests of either, over other
employees of the Bank. Section 22(h) also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of credit by a
bank to all insiders cannot exceed the institution's unimpaired capital and
surplus. Furthermore, Section 22(g) places additional restrictions on loans to
executive officers.

         Capital Requirements. The FRB has adopted capital adequacy guidelines
pursuant to which it assesses the adequacy of capital in examining and
supervising a bank holding company and in analyzing applications to it under the
BHCA. The FRB capital adequacy guidelines generally require bank holding
companies to maintain total capital equal to 8% of total risk-weighted assets,
with at least one-half of that amount consisting of Tier 1 or core capital and
up to one-half of that amount consisting of Tier 2 or supplementary capital.
Tier 1 capital for bank holding companies generally consists of the sum of
common stockholders' equity and perpetual preferred stock (subject in the case
of the latter to limitations on the kind and amount of such stocks which may be
included as Tier 1 capital), less goodwill and, with certain exceptions,
intangibles. Tier 2 capital generally consists of hybrid capital instruments;
perpetual preferred stock which is not eligible to be included as Tier 1
capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based capital guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not past-due (90 days
or more) or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.

         In addition to the risk-based capital requirements, the FRB requires
bank holding companies to maintain a minimum leverage capital ratio of Tier 1
capital to average total assets of 3.0%. Total assets for this purpose does not
include goodwill, certain mortgage and non-mortgage servicing assets, purchased
credit card relationships and any other intangible assets and investments that
the FRB determines should be deducted from Tier 1 capital. The FRB has announced
that the 3.0% Tier 1 leverage capital ratio requirement is the minimum for the
top-rated bank holding companies without any supervisory, financial or
operational weaknesses or deficiencies or those which are not experiencing or
anticipating significant growth. Other bank holding companies will be expected
to maintain Tier 1 leverage capital ratios of at least 4.0% or more, depending
on their overall condition.

         As of December 31, 1998, the Corporation was in compliance with the
above-described FRB regulatory capital requirements.

         Financial Support of Affiliated Institutions. Under FRB policy, the
Corporation will be expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances when it might
not do so absent such policy. The legality and precise scope of this policy is
unclear, however, in light of recent judicial precedent.

The Bank

         General. The Bank is incorporated under the Pennsylvania Banking Code
and is subject to extensive regulation and examination by the Department and by
the FDIC. The federal and state laws and regulations which are applicable


                                      -17-

<PAGE>



to banks regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for certain loans.
There are periodic examinations by the Department and the FDIC to test the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or the Congress could have a material adverse impact on
the Corporation, the Bank and their operations.

         FDIC Assessments. The deposits of the Bank are insured by the Bank
Insurance Fund (the "BIF") of the FDIC, up to applicable limits, and are subject
to deposit premium assessments by the BIF. Under the FDIC's risk-based insurance
system, BIF-assessed deposits have been subject to premiums which have varied,
depending upon the institution's capital position and other supervisory factors.

         The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. The FDIC may also suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution
has no tangible capital. If insurance of accounts is terminated, the accounts at
the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the FDIC. Management is aware of no circumstances which would
result in termination of the Bank's deposit insurance.

         Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the FRB regarding
bank holding companies, as described above.

         The FDIC's capital regulations establish a minimum 3.0% Tier 1 leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier 1 leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, highest-rated banks are those that the FDIC determines are
not anticipating or experiencing significant growth and have well diversified
risk, including no undue interest rate risk exposure, excellent asset quality,
high liquidity, good earnings and, in general, which are considered a strong
banking organization and are rated composite 1 under the Uniform Financial
Institutions Rating System. Leverage or core capital is defined as the sum of
common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
qualifying supervisory goodwill and certain purchased mortgage servicing rights.

         The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier 1 capital and
supplementary (Tier 2) capital) to risk-weighted assets of 8.0%, of which at
least 4.0% shall be Tier 1 capital. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item. The components of Tier 1 capital are equivalent to
those discussed above under the 3.0% leverage capital standard. The components
of supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses. Allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. As of December
31, 1998, the Bank met each of its capital requirements.

         In August 1995, the FDIC, along with the other federal banking
agencies, adopted a regulation providing that the agencies will take account of
the exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level of
other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies also have issued a joint policy statement providing guidance on
interest rate risk management,


                                      -18-

<PAGE>



including a discussion of the critical factors affecting the agencies'
evaluation of interest rate risk in connection with capital adequacy.

         The Bank is also subject to more stringent Department capital
guidelines. Although not adopted in regulation form, the Department utilizes
capital standards requiring a minimum of 6% leverage capital and 10% risk-based
capital. The components of leverage and risk-based capital are substantially the
same as those defined by the FDIC. As of December 31, 1998, the Bank exceeded
the Department's capital guidelines.

         Activities and Investments of Insured State-chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.

         Pennsylvania Banking Law. The Pennsylvania Banking Code contains
detailed provisions governing the organization, location of offices, rights and
responsibilities of directors, officers, employees and members, as well as
corporate powers, savings and investment operations and other aspects of the
Bank and its affairs. The Pennsylvania Banking Code delegates extensive
rulemaking power and administrative discretion to the Department so that the
supervision and regulation of state-chartered savings banks may be flexible and
readily responsive to changes in economic conditions and in savings and lending
practices.

         One of the purposes of the Pennsylvania Banking Code is to provide
banks with the opportunity to be competitive with each other and with other
financial institutions existing under other Pennsylvania laws and other state,
federal and foreign laws. A Pennsylvania bank may locate or change the location
of its principal place of business and establish an office anywhere in the
Commonwealth, with the prior approval of the Department.

         The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the present
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.

         Restrictions on Payment of Dividends. Under the FDIA, insured
depository institutions such as the Bank are prohibited from making capital
distributions, including the payment of dividends, if, after making any such
distribution, the institution would become "undercapitalized" (as such term is
used in the statute). Under the FDIA, no dividends may be paid by an insured
bank if the bank is in arrears in the payment of any insurance assessment due to
the FDIC. Dividend payments by the Bank are subject to the Pennsylvania Banking
Code. Under the Pennsylvania Banking Code, no dividends may be paid except from
"accumulated net earnings" (generally, undivided profits). State and federal
regulatory authorities have adopted standards for the maintenance of adequate
levels of capital by banks. Adherence to such standards further limits the
ability of the Bank to pay dividends. In addition, the Bank's regulators have
authority to prohibit the Bank or the Corporation from engaging in an unsafe or
unsound practice in conducting their business. The payment of dividends,
depending upon the financial condition of the Bank or the Corporation, could be
deemed to constitute such an unsafe or unsound practice.

         Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations


                                      -19-

<PAGE>



and institution-affiliated parties. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities.


Item 2.  Description of Properties.

         On December 23, 1997, the Bank purchased a building at 1535 Locust
Street in Center City Philadelphia, formerly owned and operated by PNC Bank,
which serves as its corporate offices and flagship retail operation. This new
location consists of approximately 10,000 square feet of space, and includes not
only a first floor retail operation, but also houses senior management of the
Corporation and USACapital, in addition to selected members of the Bank staff.

         Pursuant to a lease dated May 11, 1989, the Bank leases its building
located at 803 East Germantown Pike in Norristown, Pennsylvania, which contains
a retail branch as well as administrative offices. The lease is for an initial
period of 10 years, with an option to renew or extend the lease for an
additional 10 years. The annual lease payments total $37,400. The Bank intends
to renew the lease upon expiration.

         Pursuant to a lease dated July 27, 1998, the Bank leases a building at
18 East Wynnewood Road, Wynnewood, Pennsylvania. The Corporation will open a
retail branch at this location during the second quarter of 1999. The lease is
for an initial period of 10 years with an option to renew for an additional 10
years. The annual lease payments total $48,000.

         The Bank also leases an additional "mini" branch, known as "eBank" in
the office, restaurant and retail complex known as "The Bellevue" which is
located in Center City Philadelphia. The annual lease payments total $8,200.

         Deposits are received at the Locust Street headquarters, the Norristown
branch and the eBank, and the Bank will receive deposits in the Wynnewood branch
when the branch is opened. At December 31, 1998, the Bank's branches had the
following deposits: Locust Street, $53.0 million; Norristown, $54.8 million; and
eBank, $6.3 million.

         The Bank may acquire or lease other real estate in the future for
purposes of opening new branch locations. In addition, the Bank may acquire or
lease real estate parcels for purposes of establishing mini-branch locations,
which would likely include state of the art automated teller facilities that
would involve minimal staffing requirements.


Item 3.  Legal Proceedings.

         The Corporation is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of the Bank's
business. Such routine legal proceedings, in the aggregate, are believed by
management to be immaterial to the Corporation's and the Bank's financial
condition and results of operation.


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

         No matters were submitted to a vote of shareholders during the fourth
quarter of 1998.


                                      -20-

<PAGE>



                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.

         The common stock of the Corporation is listed for trading on the NASDAQ
SmallCap Market under the symbol "USAB" and began trading during the first
quarter of 1996. As of March 24, 1999, there were approximately 248 holders of
record of the Corporation's common stock. The Corporation has not, since its
inception, paid any cash dividends. On each of July 18, 1997 and August 17,
1998, the Corporation paid a 33% stock dividend on its Class A common stock.

         The Corporation is a bank holding company regulated by the Board of
Governors of the Federal Reserve System (the "FRB"), and almost all of the
operating assets of the Corporation are owned by the Bank and USACapital. The
Corporation relies primarily on dividends from the Bank to meet its corporate
expenses and to satisfy its financial obligations. Dividend payments from the
Bank are subject to (1) regulatory limitations, generally based on current and
retained earnings, imposed by the various regulatory agencies with authority
over the Bank, (2) regulatory restrictions if such dividends would impair the
capital of the Bank or cause the Bank to be undercapitalized, (3) FRB prudent
banking standards relating to the amount of net income available to common
shareholders and the prospective rate of earnings retention, and (4) the Bank's
profitability, financial condition and capital expenditures and other cash flow
requirements.

         The following table shows trading prices for the Corporation's common
stock from January 1, 1997 through March 24, 1999, adjusted to reflect 33% stock
dividends effective August 17, 1998 and July 1, 1997:


1999                          Low Price                     High Price
----                          ---------                     ----------
First Quarter (1)             $ 8                           $ 9

1998                          
----                          
Fourth Quarter                  6 3/4                         9
Third Quarter                   7 1/2                        13 5/6
Second Quarter                 10 1/8                        11 5/8
First Quarter                   6 9/16                       10 1/2

1997                          
----                          
Fourth Quarter                  6                             7 7/8
Third Quarter                   5 9/16                        7 5/6
Second Quarter                  4 59/64                       6 3/64
First Quarter                   5 13/64                       5 29/32


(1) Through and including March 24, 1999.


                                      -21-

<PAGE>



                        SELECTED FINANCIAL AND OTHER DATA

         Set forth below are selected financial and other data of the
Corporation and the Bank. This financial data is derived in part from, and it
should be read in conjunction with the Corporation's consolidated financial
statements and related notes included in this report beginning on page F-1.
<TABLE>
<CAPTION>

(Dollars in Thousands, except per share data)                                 At or for the Year Ended December 31,
                                                                              -------------------------------------
                                                                                     1998                  1997
                                                                                     -----                 ----
<S>                                                                                   <C>                   <C>
Selected Financial Condition Data:
     Total assets.......................................................            $165,106               $89,326
     Loans receivable, net..............................................             102,138                56,002
     Securities (1).....................................................              44,144                24,454
     Deposits...........................................................             114,387                70,474
     Borrowings (2).....................................................              35,305                12,638
     Stockholders' equity...............................................              13,597                 5,366
     Non-performing assets, net of discount (3).........................               2,022(4)                287
     Book value per share (5)...........................................               $6.43                 $4.95

Selected Operations Data:
     Total interest income..............................................             $12,352                $4,879
     Total interest expense.............................................               6,454                 2,530
                                                                                    --------               -------
     Net interest income................................................               5,898                 2,349
     Provision for loan losses..........................................                 510                   415
                                                                                    --------               -------
     Net interest income after                                                                                     
      provision for loan losses.........................................               5,388                 1,934
     Total non-interest income..........................................                 759                   314
     Total non-interest expense ........................................               3,700                 2,457(6)
                                                                                    --------               -------
     Income before income taxes .......................................                2,447                  (209)
     Income tax provision...............................................                 957                    17
                                                                                    --------               -------
     Net income (loss)..................................................             $ 1,490               $  (226)
                                                                                    ========               =======
     Net income (loss) per share (fully-diluted)(5).....................             $  0.70               $ (0.21)
                                                                                    ========               =======

Performance Ratios (7):
    Return (loss) on average assets ....................................                1.16%                (0.09)%
    Return (loss) on average equity.....................................               12.81                 (1.10)
    Net interest margin (8) ............................................                4.87                  4.53
    Interest rate spread (8)............................................                4.54                  3.68
    Efficiency ratio (9)................................................               58.93                 79.35
    Non-interest expense to average total assets........................                2.88                  1.93
    Average interest-earning assets to average interest-bearing liabilities           106.14                117.50

Asset Quality Ratios:
    Non-performing loans, net of discount, to total loans, net of discount(3)           1.89                  0.50
    Non-performing assets, net of discount, to total assets(3)..........                1.22                  0.32
    Allowance for loan losses to total loans, net of discount...........                1.02                  1.01
    Allowance for loan losses and purchase discount as a percentage of 
     total loans........................................................                5.85                  8.88
    Allowance for loan losses to total non-performing loans, net of
     discount (3).......................................................               53.72(10)            197.96

Capital Ratios(11):
    Equity to assets....................................................                 8.2                  6.01
    Tier 1 leverage capital ratio ......................................                 8.5                   5.4
    Tier 1 risk-based capital ratio.....................................                10.3                   7.0
    Total risk-based capital ratio......................................                11.2                   7.9

Other:
    Number of full-service branches.....................................                   3                     2
    Number of full-time employee equivalents............................                  39                    18
</TABLE>
    


                                      -22-

<PAGE>



--------------------------
(1)   Includes securities classified as held-to-maturity and available for sale.

(2)   Consists of FHLB advances and, to a lesser extent, borrowings pursuant to
      line of credit facilities with local financial institutions.

(3)   Non-performing loans consist of non-accrual loans and accruing loans 90
      days or more overdue, net of applicable purchase discounts. Non-performing
      assets consist of non-performing loans and other real estate owned.

(4)   The increase in non-performing assets during the year ended December 31,
      1998 was due, in large part, to a single commercial real estate loan which
      became non-performing during the third quarter of 1998. See Note 10. See
      also "Business of the Bank-Asset Quality-Delinquent Loans and
      Non-performing Assets."

(5)   On each of July 18, 1997 and August 17, 1998, the Corporation paid a 33%
      stock dividend on its common stock. All per share data has been adjusted
      to reflect such stock dividends and has been calculated based on the
      weighted average number of shares outstanding during the period, assuming
      the conversion of the shares of Class B common stock into shares of Class
      A common stock. See "Management of the Corporation-Certain Relationships
      and Related Transactions."

(6)   Includes a one-time charge of $344,000 during the fourth quarter of 1997
      as a result of the recognition of compensation expense due to the
      mandatory conversion of the Corporation's Class B common stock. See
      "Management's Discussion and Analysis of Financial Condition and Results
      of Operations." 

(7)   With the exception of end of period ratios, all ratios are based on
      average monthly balances and are annualized where appropriate.

(8)   Interest rate spread represents the difference between the weighted
      average yield on interest-earning assets and the weighted average cost of
      interest-bearing liabilities, and net interest margin represents net
      interest income as a percentage of average interest-earning assets.

(9)   Efficiency ratio represents non-interest expense as a percentage of the
      aggregate of net interest income and non-interest income (less
      gains/losses on sales of assets and other non-recurring items).

(10)  The significant decline in this ratio during the year ended December 31,
      1998 was impacted by a single acquired commercial real estate loan.
      Management believes that this loan does not present a significant risk of
      loss to the Bank on the basis of a current appraisal on the real estate
      securing the loan, the loan-to-value ratio thereon, the purchase discount
      and the specific reserve applied to such loan. As a general rule, in
      connection with the Bank's purchase of loan pools, a portion of the
      discounted purchase price for each loan is not accreted into income but,
      rather, is identified as a cash discount and is not amortized into income
      until final resolution or collection of principal and interest on the loan
      in question. See "Risk Factors-Risks Related to the Corporation and the
      Bank-Purchase Discount" and "Business of the Bank-Asset Quality-Delinquent
      Loans and Non-performing Assets."

(11)  The ratio of equity to assets is presented on a consolidated basis while
      the ratios of Tier 1 leverage capital, Tier 1 risk-based capital and total
      risk-based capital relate only to the Bank. For information on the
      Corporation's and Bank's regulatory capital requirements, see "Regulation
      of the Corporation and the Bank."





                                      -23-

<PAGE>



Item 6.           Management's Discussion and Analysis. 

         The purpose of this discussion is to focus on significant and ongoing
changes in the financial condition and results of operations of the Corporation
and its subsidiaries during the periods indicated. The discussion and analysis
is intended to supplement and highlight information contained in the
accompanying consolidated financial statements and the selected financial data
presented elsewhere in this report.

         On each of July 18, 1997 and August 17, 1998, the Corporation paid a
33% stock dividend on its common stock. All prior period stock, per share, and
option information included in this report has been adjusted to reflect such
stock dividends.

           Comparison of Financial Condition and Results of Operations
           for the Years Ended December 31, 1998 and December 31, 1997

Financial Condition

         The Corporation's total assets increased from $89.3 million at December
31, 1997 to $165.1 million at December 31, 1998, an increase of $75.8 million,
or 84.8%. The increase was due primarily to increases in the loan and securities
portfolios of $46.1 million and $23.3 million, respectively. This growth was
funded by increases in certificates of deposit (primarily non-retail
certificates of deposit) and borrowed funds of $41.8 million, and $22.7 million,
respectively. The increase in the loan portfolio was primarily due to the
purchase of commercial and single-family residential real estate loans at a
discount. These purchased loans, which had an aggregate unpaid principal balance
of approximately $37.3 million (38% of commercial and 62% of residential loans)
as of the date of acquisition, were acquired for approximately $35.2 million
(reflecting an aggregate discount of $2.1 million, or 5.6%). The increase in the
securities portfolio was primarily due to the acquisition of trust preferred
securities and financial institution bonds. Total deposits increased $43.9
million to $114.4 million at December 31, 1998. The increase in deposits was
comprised of an increase in certificates of deposit of $41.8 million and an
increase in transaction accounts of $2.1 million during the period which
resulted from the Bank's marketing efforts to attract new customers. Borrowed
funds consist of fixed-rate callable advances from the FHLB. Total borrowed
funds increased to $35.3 million at December 31, 1998, from $12.6 million at
December 31, 1997. The increases in deposits and in borrowed funds were utilized
to fund increases in loans and securities as part of the Bank's overall growth
strategy. Management plans to continue to utilize FHLB advances in conjunction
with deposit expansion to provide the necessary funding for the Bank's continued
growth. The Bank's borrowing limit at the FHLB as of December 31, 1998, was
approximately $30.0 million, all of which was drawn upon as of such date. The
Corporation's stockholders' equity increased from $5.4 million at December 31,
1997 to $13.6 million at December 31, 1998. The $8.2 million or 151.8% increase
in stockholders' equity was primarily due to the Corporation's private placement
of $7.5 million of common stock in February 1998.

Results of Operations

         Net Income. The Corporation reported net income of $1.5 million, or
$0.70 per share, diluted, for the year ended December 31, 1998, compared to a
net loss of $226,000, or $0.21 per share, diluted, for the year ended December
31, 1997. The increase in net income was primarily the result of an increase in
net interest income of $3.5 million and an increase in non-interest income of
$445,000. These increases were partially offset by an increase in the provision
for loan losses of $95,000, an increase in non-interest expense of $1.2 million,
and an increase in income tax expense of $940,000.

         Interest Income. Interest income increased 153.2% or $7.5 million to
$12.4 million, for the year ended December 31, 1998, compared to the prior year.
The increase in interest income was the result of an increase in interest income
on loans, investment securities, and interest-bearing deposits of $5.9 million,
$1.4 million, and $157,000, respectively. The increase in interest income on
loans was due to an increase in the average balance of the loan portfolio, as
well as accretion income recognized on loan pools purchased by the Bank at a
discount since 1995. The discount associated with such loan pools is recognized
as a yield adjustment and is included as interest income using the level yield
method (to the extent that the timing and amount of cash flows can reasonably be
determined). Any changes from original estimates used in the purchase price
could result in either an increase or decrease in accretion income. During the
years ended December 31, 1998 and 1997, the Bank recognized $1.3 million and
$691,000 in accretion income, respectively, representing 10.5% and 14.2% of
total interest income, respectively. The significant increase in the average
balance of the Bank's loan portfolio reflects the $37.3 million of loan
purchases and the more


                                      -24-

<PAGE>



than $30.0 million of loan originations (including participations with local
financial institutions) which were closed during the year ended December 31,
1998.

         Interest Expense. Interest expense increased 155.1% or $3.9 million to
$6.5 million, for the year ended December 31, 1998, compared to the year ended
December 31, 1997, due to higher volumes of new certificates of deposit and FHLB
advances. In order to fund the Corporation's substantial growth during the year
ended December 31, 1998, the Corporation relied primarily on non-retail
certificates of deposit and, to a lesser extent, long term callable advances
from the FHLB. The increase in interest expense during the year ended December
31, 1998 was also due to the Bank extending the average maturity of its
certificates of deposit from approximately nine months to approximately 18
months. The average cost of funds, including borrowings, decreased 0.08% to
5.65% for the year ended December 31, 1998 compared to the prior year.

         Net Interest Income. The earnings of the Corporation depend primarily
on its level of net interest income, which is the difference between interest
earned on the Corporation's interest-earning assets (loans and investment
securities) and the interest paid on interest-bearing liabilities (deposits and
borrowings). Net interest income is a function of the Corporation's interest
rate spread, which is the difference between the yield earned on
interest-earning assets and the rate paid on interest-bearing liabilities, as
well as a function of the average balance of interest-earning assets as compared
to the average balance of interest-bearing liabilities. Net interest income for
the year ended December 31, 1998, increased $3.5 million, or 151.1%, to $5.9
million from $2.3 million for the same period in 1997. Average interest-earning
assets increased by $69.3 million, or 133.6%, to $121.2 million, for the year
ended December 31, 1998. Average interest-bearing liabilities increased $70.0
million or 158.6% over the same period. The Corporation's interest rate spread
increased from 3.68% to 4.54% while the Corporation's net interest margin
increased from 4.53% to 4.87%. The increase in the Corporation's interest rate
spread and margin reflects the Corporation's significant growth in loans and
securities which were funded at a positive spread with deposits and borrowings.

         Average Balance Sheet and Yield/Rate Analysis. Net interest income is
affected by changes in both average interest rates and average volumes of
interest-earning assets and interest-bearing liabilities. The following table
presents for the periods indicated the total dollar amount of interest income
from average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates.


                                      -25-

<PAGE>

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                -----------------------------------------------------------------------------------
                                                1998                                      1997
                                -----------------------------------------------------------------------------------
(Dollars in Thousands)            Average                 Average       Average                        Average
                                Balance (1)  Interest   Yield/Rate    Balance (1)      Interest       Yield/Rate
                                --------------------------------------------------   ------------  ----------------
<S>                                <C>          <C>       <C>            <C>              <C>            <C>
Interest-earning assets:
   Loans.....................       $ 78,797    $9,028    11.46%        $26,421         $3,090            11.70%

   Securities................         36,510     3,015     8.26          22,696          1,637             7.21
   Interest-bearing deposits
     and other...............          5,842       309     5.30           2,739            152             5.55
                                   ---------    ------    -----         -------         ------            -----

     Total interest-earning
           assets............        121,149    12,352    10.20          51,856          4,879             9.41
                                   ---------    ------    -----         -------         ------            -----


Interest-bearing liabilities:
   Deposits:
     Passbook................      $   3,650    $   70     1.91%        $ 1,888         $   47             2.49%
     NOW accounts............            842        21     2.48             705             16             2.27
     Money market accounts...          3,573       134     3.76           1,684             63             3.74
     Certificates of deposit.         83,592     5,041     6.03          35,627          2,158             6.06
   Borrowings................         22,482     1,188     5.29           4,227            246             5.82
                                   ---------    ------    -----         -------         ------            -----

     Total interest-bearing
            liabilities......        114,139     6,454     5.66          44,131          2,530             5.73
                                   ---------    ------    -----         -------         ------            -----


Excess of interest-earning
assets over interest-bearing                                          
liabilities..................      $   7,010                            $ 7,725   
                                   =========                            =======  
Net interest income..........                  $ 5,898                                  $2,349
                                               =======                                  ======

Effective interest differential
   (spread)..................                              4.54%                                           3.68%
                                                          =====                                           =====
Net interest margin .........                              4.87%                                           4.53%
                                                          =====                                           =====
</TABLE>

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

(1) Average balances are calculated on a monthly basis.


         Rate/Volume Analysis. The following schedule presents the dollar amount
of changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between changes (a) related to outstanding balances and (b) due to the changes
in interest rates. Information is provided in each category with respect to: (i)
changes attributable to changes in volume (changes in volume multiplied by prior
rate); (ii) changes attributable to changes in rate (changes in rate multiplied
by prior volume); and (iii) the net change in rate/volume (change in rate
multiplied by change in volume). The changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to
volume and the changes due to rate.


                                      -26-

<PAGE>
<TABLE>
<CAPTION>



                                                                 December 31, 1998 vs. December 31, 1997
                                                         --------------------------------------------------------
(Dollars in Thousands)                                           Increase or Decrease
                                                                   Due to Change in
                                                         -------------------------------------
                                                               Average         Average Rate      Total Increase
                                                               Volume                              (Decrease)
                                                         ------------------- ----------------- ------------------
<S>                                                             <C>                <C>                <C>
Variance in interest income on:
 Interest-earning assets:
   Loans....................................                 $  6,000           $   (62)           $  5,938
   Securities...............................                    1,113               265               1,378
   Interest-bearing deposits and other......                      164                (7)                157
                                                             --------           -------            --------
      Total interest-earning assets.........                    7,277               196               7,473
                                                             ========           =======            ========

 Interest-bearing liabilities:
   Deposits:
          Passbook..........................                       30                (7)                 23
          NOW accounts......................                        3                 2                   5
          Money market accounts.............                       71                --                  71
          Certificates of deposit...........                    2,892                (9)              2,883
   Borrowings...............................                      962               (20)                942
                                                             --------           -------            --------
     Total interest-bearing liabilities.....                 $  3,958           $   (34)           $  3,924
                                                             ========           =======            ========
Change in net interest income...............                 $  3,319           $   230            $  3,549
                                                             ========           =======            ========
</TABLE>

         Provision for Loan Losses. Management records a provision for loan
losses in an amount that it believes will result in an allowance for loan losses
sufficient to cover all potential net charge-offs and risks believed to be
inherent in the loan portfolio. Management's evaluation includes such factors as
past loan loss experience as related to current loan portfolio mix, evaluation
of actual and potential losses in the loan portfolio, prevailing regional and
national economic conditions that might have an impact on the portfolio, regular
reviews and examinations of the loan portfolio conducted by bank regulatory
authorities, and other factors that management believes deserve current
recognition. As a result of management's evaluation of these factors, the
provision for loan losses increased $95,000 during the year ended December 31,
1998, compared to the same period last year. The increase in the provision for
loan losses during the year ended December 31, 1998, as compared to the same
period in the prior year was due primarily to the substantial growth in the
Bank's loan portfolio and the shift in such loan portfolio from predominantly
residential loans to a mix of residential and commercial real estate loans. The
allowance for loan losses as a percentage of loans outstanding, net of discount,
was 1.02% at December 31, 1998, compared to 1.01% at December 31, 1997. In
addition, the allowance for loan losses as a percentage of total non-performing
loans, net of discount, was 53.72% at December 31, 1998, compared 197.96% at
December 31, 1997. The significant decline in this ratio during the year ended
December 31, 1998 was due, in large part, to a single acquired commercial real
estate loan which became non-performing during the third quarter of 1998.
Management believes that this loan does not present a significant risk of loss
to the Bank on the basis of a current appraisal on the real estate securing the
loan, the loan-to-value ratio thereon, the applicable purchase discount and
specific reserve applied to such loan. See "Risk Factors-Risks Related to the
Corporation and the Bank-Purchase Discount" and "Business of the Bank-Asset
Quality-Delinquent Loan and Non-performing Assets."

         Management believes that the allowance for loan losses is adequate to
cover actual and potential losses in the loan portfolio under current
conditions. Nevertheless, there can be no assurance that additions to such
allowance will not be necessary in future periods, particularly if the growth in
the Bank's commercial loan originations and purchases continues.

         Non-Interest Income. Non-interest income increased by $445,000 to
$759,000, for the year ended December 31, 1998. The increase was primarily the
result of an increase in gain on sales of investment securities of $251,000, an


                                      -27-

<PAGE>



increase in other non-interest income of $155,000 and brokerage operating income
of $39,000 generated by the Corporation's brokerage subsidiary, USACapital.

         Non-Interest Expense. Non-interest expense increased 50.6%, or $1.2
million to $3.7 million, for the year ended December 31, 1998. Compensation and
benefits expense increased $194,000 due primarily to the hiring of 21 additional
persons to assist in the Bank's retail operations, including personnel for a new
branch, persons to service the Bank's increased number of loans and staff to
assist with the Corporation's financial reporting and other compliance issues.
Occupancy expense increased $321,000 due to the costs associated with the
opening of the Bank's headquarters and branch in Center City, Philadelphia.
Advertising expense increased $115,000 as a result of opening the Bank's Center
City branch and corporate headquarters, a promotional campaign for the branch
opening and an image campaign. Office and supplies expense increased $150,000
due to the Bank changing its name to BankPhiladelphia in July 1998. Data
processing expense increased $84,000 as a result of the increase in the number
of loans and deposit accounts, as well as the number of transactions processed.

         Income Tax Expense. Income tax expense increased $940,000 to $957,000,
for the year ended December 31, 1998, compared to the same period in 1997. The
increase in income tax expense reflected the increase in earnings before income
taxes.

         Asset and Liability Management. A principal objective of the Bank's
asset and liability management is to minimize the Bank's exposure to changes in
interest rates. The Bank's policy is to attempt to manage assets and liabilities
in such a way as to maximize net interest income through changing interest rate
environments. An interest rate sensitive asset or liability is one that, within
a defined time period, either matures or experiences an interest rate change in
line with general market rates. Interest rate sensitivity measures the relative
volatility of a bank's net interest margin resulting from changes in market
interest rates.

         The following table summarizes repricing intervals for interest-earning
assets and interest-bearing liabilities for the period ended December 31, 1998
and the difference or "gap" between them on an actual and cumulative basis for
the periods indicated. The table was prepared with the following assumptions:
(1) 50% of the Bank's transaction accounts are considered core deposits and are
assumed to mature in the "Over 5 Years" category; the remaining 50% are not
considered to be core transaction accounts, are sensitive to rate changes, and,
as such, are placed in the "1-90 Days" category; (2) interest-earning assets are
calculated based on contractual adjustments or stated maturities in the
instruments without any adjustments for prepayment; and (3) certificates of
deposit and borrowings are scheduled based on the applicable stated maturities.

<TABLE>
<CAPTION>

(Dollars in Thousands)                                                                                            12/31/98
                                              1-90 Days      91-364 Days        1-5 Years      Over 5 Years        Balance
                                              ---------      -----------        ---------      ------------       --------
<S>                                              <C>             <C>               <C>             <C>              <C>
Interest-earning assets:
   Loans receivable....................        $  6,955      $     6,245         $ 35,108          $ 54,997       $103,305
   Investments.........................          22,004               --            3,247            22,416         47,667
                                               --------      -----------         --------          --------       --------
      Total Assets.....................        $ 28,959      $     6,245         $ 38,355          $ 77,413       $150,972
                                               ========      ===========         ========          ========       ========

Interest-bearing liabilities:
   NOW accounts........................        $    846      $        --         $     --          $     --       $    846
   Money Market accounts...............           2,345               --               --                --          2,345
   Passbook savings accounts...........           5,281               --               --                --          5,281
   Certificates of deposit.............          12,599           34,469           56,501               907        104,476
   Borrowings..........................              --            6,106           25,000                --         31,106
   Collateralized borrowings...........              --               --            3,202               997          4,199
                                               --------      -----------         --------          --------       --------
      Total interest-bearing liabilities       $ 21,071      $    40,575         $ 84,703          $  1,904       $148,253
                                               ========      ===========         ========          ========       ========

Periodic gap...........................        $  7,888      $   (34,330)        $(46,348)         $ 75,509       $  2,719
                                               ========      ===========         ========          ========       ========
Cumulative gap.........................        $  7,888      $   (26,442)        $(72,790)         $  2,719             --
                                               ========      ===========         ========          ========       ========
Ratio of gap to interest-earning
      assets...........................              5%             -22%             -31%               50%             --

Ratio of cumulative gap to interest-
     earning assets....................              5%             -17%             -48%                2%             --
</TABLE>



                                      -28-

<PAGE>


         A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds interest rate sensitive assets. During a period of falling interest
rates, a positive gap would tend to adversely affect net interest income, while
a negative gap would tend to result in an increase in net interest income.
During a period of rising interest rates, a positive gap would tend to result in
an increase in net interest income while a negative gap would tend to affect net
interest income adversely.

         If repricing of the Bank's assets and liabilities were equally flexible
and moved concurrently, the impact of an increase or decrease in interest rates
on net income would be minimal. At December 31, 1998, the Bank had a negative
cumulative one year gap, which suggests that net interest income may decrease
during periods of rising interest rates.

         The method used to analyze interest rate sensitivity in the table above
has a number of limitations. Certain assets and liabilities may react
differently to changes in interest rates even though they reprice or mature in
the same or similar time periods. The interest rates on certain assets and
liabilities may change at different times than changes in market interest rates,
with some changing in advance of changes in market rates and some lagging behind
changes in market rates. Also, certain assets, such as adjustable-rate loans,
often have provisions which may limit changes in interest rates each time market
interest rates change and on a cumulative basis over the life of the loan.
Additionally, the actual prepayments and withdrawals experienced by the Bank in
the event of a change in interest rates may deviate significantly from those
assumed in calculating the data shown in the table.

         In the event the Bank should experience a mismatch in its desired gap
ranges or an excessive decline in its market value of equity resulting from
changes in interest rates, it has a number of options which it could utilize to
remedy such mismatch. The Bank could restructure its investment portfolio
through sales or purchases of securities with more favorable repricing
attributes. It could also emphasize loan products with appropriate maturities or
repricing attributes, or it could attract deposits or obtain borrowings with
desired maturities.


                         Liquidity and Capital Resources

         Liquidity. As the Bank is the primary operating subsidiary of the
Corporation, liquidity management is generally handled by the Bank's management.
Liquidity refers to a company's ability to generate sufficient cash to meet the
funding needs of current loan demand, deposit withdrawals, principal and
interest payments with respect to outstanding borrowings and to pay operating
expenses. It is management's policy to maintain greater liquidity than required
by the applicable regulatory authorities in order to be in a position to fund
loan originations and purchases, to meet withdrawals from deposit accounts, to
make principal and interest payments with respect to outstanding borrowings and
to make investments that take advantage of interest rate spreads. The Bank
monitors its liquidity in accordance with guidelines established by the Bank and
applicable regulatory requirements. The Bank can minimize the cash required
during times of heavy loan demand by modifying its credit policies or reducing
its marketing effort. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which the Bank has limited control. The Bank
derives its liquidity from both its assets and liabilities. Liquidity is derived
from assets by receipt of interest and principal payments and prepayments, by
the ability to sell assets at market prices and by utilizing unpledged assets as
collateral for borrowings. Liquidity is derived from liabilities by maintaining
a variety of funding sources, including deposits, advances from the FHLB and
other short and long-term borrowings.

        The Bank's liquidity management is both a daily and long-term function
of funds management. Liquid assets are generally invested in short-term
investment securities and other short-term investments. If the Bank requires
funds beyond its ability to generate them internally, various forms of both
short and long-term borrowings provide an additional source of funds. At
December 31, 1998, the Bank had $30.0 million in borrowing capacity under a
collateralized line of credit with the FHLB (all of which had been drawn upon as
of such date) and an additional $2.0 million of borrowing capacity under lines
of credit maintained with several local financial institutions ($1.1 million of
which had been drawn upon as of such date).



                                      -29-

<PAGE>
        At December 31, 1998, the Bank had outstanding commitments, including
unused lines of credit, of $1.1 million and letters of credit of $1.1 million.
Certificates of deposit which are scheduled to mature within one year totaled
$47.1 million at December 31, 1998, and the Corporation, on a consolidated
basis, had no borrowings scheduled to mature within one year. The Bank
anticipates that it will have sufficient funds available to meet its current
loan commitments.

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

        Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of Total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 1998, the
Corporation and the Bank exceeded all capital adequacy requirements to which
they were subject.

        At December 31, 1998 and December 31, 1997, the Bank's actual and
required minimum capital ratios were as follows:
<TABLE>
<CAPTION>
                                                                                                To Be Well Capitalized
                                                                  For Capital Adequacy         Under Prompt Corrective
(Dollars in Thousands)                      Actual                      Purposes                  Action Provisions
                                    -----------------------    ---------------------------   ----------------------------
                                      Amount       Ratio          Amount          Ratio         Amount           Ratio
                                    ----------   ----------    ------------    -----------   -------------    -----------
<S>                                    <C>          <C>             <C>             <C>          <C>              <C>
As of December 31, 1998:
Total Capital
 (to Risk Weighted Assets)......       $13,930     11.2%             $9,987        8.0%            $12,483       10.0%

Tier 1 Capital
 (to Risk Weighted Assets)......        12,879     10.3               4,994        4.0               7,490        6.0

Leverage........................        12,879      8.5               6,068        4.0               7,585        5.0


As of December 31, 1997:
Total Capital
 (to Risk Weighted Assets)......         5,315      7.9               5,400        8.0               6,750       10.0
Tier 1 Capital
 (to Risk Weighted Assets)......         4,747      7.0               2,700        4.0               4,050        6.0
Leverage........................         4,747      5.4               3,548        4.0               4,435        5.0
</TABLE>


     At December 31, 1998 and December 31, 1997, the Corporation's actual and
required minimum capital ratios were as follows:
<TABLE>
<CAPTION>

(Dollars in Thousands)                          Actual                     For Capital Adequacy Purposes
                                     ------------------------------     ------------------------------------
                                        Amount            Ratio             Amount              Ratio
                                     -------------    -------------     --------------    ------------------
<S>                                      <C>               <C>               <C>                <C>
As of December 31, 1998:
Total Capital
 (to Risk Weighted Assets)......       $15,566            12.1%             $10,317             8.0%

Tier 1 Capital
 (to Risk Weighted Assets)......        13,782            10.7                5,159             4.0
Leverage........................        13,782             8.7                6,319             4.0

As of December 31, 1997:
Total Capital
 (to Risk Weighted Assets)......        5,752              8.5                5,431             8.0
Tier 1 Capital
 (to Risk Weighted Assets)......        5,184              7.6                2,715             4.0
Leverage........................        5,184              5.8                3,570             4.0


</TABLE>




                                      -30-

<PAGE>


     Subsequent Event. On March 9, 1999, the Corporation issued $10,000,000 of
9.50% cumulative trust preferred securities through USA Capital Trust I, a
newly-formed, special purpose business trust. The Corporation contributed $6.0
million of the net proceeds to the Bank to increase the Bank's capital position.
The Bank expects to leverage the proceeds contributed to it by increasing its
origination and purchase of loans. An aggregate of $1.9 million of the net
proceeds was placed in a reserve account to be held for two years and thereafter
applied to payment of interest on the trust preferred securities. The remaining
net proceeds of $1.2 million were retained by the Corporation for general
corporate purposes, including the repayment of outstanding debt.

                              Year 2000 Compliance

        Changing from the year 1999 to 2000 has the potential to cause problems
in data processing and other date-sensitive systems. The Year 2000 date change
can affect any system that uses computer software programs or computer chips,
including automated equipment and machinery. The Year 2000 problem is the result
of computer programs using two digits rather than four to define the year. Any
of the Corporation's programs that are time sensitive may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations. Regarding the Corporation, computer systems
are used to perform financial calculations, track deposits and loan payments,
transfer funds and make direct deposits. The primary processing of the
Corporation's loan and deposit transactions is performed by Intrieve
Incorporated, a third-party data processing vendor. Computer software and
computer chips also are used to run security systems, communications networks
and other essential bank equipment. Because of its reliance on these systems
(including those used by its existing third-party data processing vendor), the
Corporation is following a comprehensive process to assure that such systems are
ready for the Year 2000 date change. To become Year 2000 compliant, the
Corporation is following guidelines suggested by federal bank regulatory
agencies and the Securities and Exchange Commission (the "Commission"). A
description of each of the steps and the status of the Corporation's efforts in
completing the steps is as follows.

        During 1997, the Corporation formed a Year 2000 committee that has
investigated the Year 2000 problem and its potential impact on the Corporation's
systems. The Year 2000 Committee reports to the Year 2000 Committee of the Board
of Directors which in turn reports to the full Board of Directors.

        An independent consulting firm has been engaged to assist the
Corporation in developing its approach to becoming Year 2000 compliant. The
initial phase of achieving Year 2000 compliance includes educating the
Corporation's employees and customers about Year 2000 issues. The Corporation
has completed this initial awareness and understanding phase.

        The Bank has identified all potentially affected systems. This step has
included a review of all major information technology and non-information
technology systems to determine how Year 2000 issues affect them. In connection
with the foregoing, the Corporation has completed its assessment of which
systems and equipment are most prone to placing the Corporation at risk if they
are not Year 2000 compliant (i.e., mission critical systems).

        The Year 2000 Committee has developed an inventory of its vendors, an
inventory of actions to be taken, identification of the team members responsible
for completion of each action, a completion timetable and a project tracking
methodology. Significant vendors have been requested to advise the Corporation
in writing of their Year 2000 readiness, including actions to become compliant
if they are not already compliant. A plan has been developed to repair or
replace systems and equipment not currently Year 2000 compliant. Although
responses from certain vendors have not yet been received, this step is
substantially complete and is expected to be completed by September 1999.


                                      -31-

<PAGE>



        The Corporation's third party data processing servicer as well as
vendors who provide significant technology-related services have modified their
systems to become Year 2000 compliant. The Corporation has developed scripts
involving typical transactions to test the proper functioning of the modified
systems. It has also arranged for repair or replacement of equipment programs
affected by Year 2000 issues. Most of the testing and corrections have taken
place and all of the Corporation's mission critical applications have been
deemed compliant through testing or vendor certification, or a plan has been
developed for the software upgrades required. This step is expected to be
completed by June 30, 1999. The monitoring of certain vendors will continue into
1999.

        The Bank is preparing a contingency plan for how the Corporation would
resume business if unanticipated problems arise from non-performance by vendors.
Such plans are expected to be completed in the first quarter of 1999.

        The Year 2000 issues also affect certain of the Corporation's customers,
particularly in the areas of access to funds and additional expenditures to
achieve compliance. As of December 31, 1998, the Corporation had contacted its
commercial credit customers and borrowers regarding the customers' awareness of
the Year 2000 Issue. While no assurance can be given that its customers will be
Year 2000 compliant, management believes, based on representations of such
customers and a review of their operations (including assessments of the
borrowers' level of sophistication and data and record keeping requirements),
that the customers are either addressing the appropriate issues to insure
compliance or that they are not faced with material Year 2000 issues. In
addition, in substantially all cases the credit extended to such borrowers is
collateralized by real estate which inherently minimizes the Corporation's
exposure in the event that such borrowers do experience problems or delays
becoming Year 2000 compliant.

        The Corporation's efforts to become Year 2000 compliant are being
monitored by its federal banking regulators. Failure to be Year 2000 compliant
could subject the Corporation to formal supervisory or enforcement actions. The
Corporation has expensed $20,000 during the year ending December 31, 1998
relating to costs incurred as a result of the Corporation's Year 2000 Plan. The
Corporation anticipates incurring approximately $120,000 in additional costs
related to the implementation of the Corporation's Year 2000 plan. The
Corporation presently believes the Year 2000 issue will not pose significant
operating problems for the Corporation. However, if implementation and testing
plans are not completed in a satisfactory and timely manner by third parties on
which the Corporation is dependent, or other unforeseen problems arise, the Year
2000 issue could potentially have an adverse effect on the operations of the
Corporation.

                          Inflation and Changing Prices

        Management is aware of the impact of inflation on interest rates and the
corresponding impact on a bank's performance. The ability of a financial
institution to cope with inflation can only be determined by ongoing analysis
and monitoring of its asset and liability structure. The Corporation monitors
its asset and liability position with particular emphasis on the mix of
interest-sensitive assets and liabilities in order to reduce the effect of
inflation upon its performance.

        Inflation can have a more direct impact on categories of non-interest
expenses such as salaries and wages, supplies, and employee benefit costs. These
expenses are very closely monitored by management for both the effects of
inflation and non-inflationary increases in such items as staffing levels, usage
of supplies and occupancy costs.


                                  RISK FACTORS

     You should carefully read the following risk factors and the other sections
of this report. You should consider all of these risk factors to be important.
The risk factors below do not necessarily appear in their order of importance.

Loan Acquisition Strategy

     The Bank's lending activities include identifying and purchasing loans
which management believes to be undervalued at discounts. The Bank purchases
primarily performing loans at a discount from the FDIC, private sellers and the
former Resolution Trust Corporation. See "-Purchase Discount." Although the Bank
focuses on acquiring single-family residential, multi-family residential and
commercial real estate loans secured by properties located in the Mid-Atlantic
region, the Bank has acquired loans secured by real estate located in a number
of other states, including Texas, Florida and California. To the extent such
loans are secured by real estate located outside the Bank's primary


                                      -32-

<PAGE>



market area, such loans could present greater risks of collectability than loans
located within the Bank's primary market area.

     The Bank has historically purchased loans either from institutions which
were seeking to eliminate certain loans or categories of loans from their
portfolios or in connection with the failure or consolidation of other financial
institutions. The Bank has developed and maintains a proprietary model to
determine what management believes to be the appropriate price to be paid for
these loans. The Bank's model is based upon a combination of objective and
subjective criteria. The objective criteria includes applicable loan to value
ratios, collateral type, payment history and geographic location. The more
subjective criteria includes management's past experience with purchasing and
administering such loans. The prices paid to acquire loans at a discount are
based on the Bank's estimate of the market value of such loans. As of December
31, 1998, the Bank's net outstanding purchased loan portfolio totaled $51.7
million, or 50.0% of the Bank's total loans outstanding and 31.3% of the Bank's
total assets.

     The Bank's loan acquisition strategy subjects the Bank to risks, including
some risks not experienced by financial institutions engaged in more traditional
lending activities. There can be no assurance that this component of the Bank's
operations will continue to provide the same level of profitability it has
experienced in the past. The Bank's loan acquisition strategy is subject to the
following risks:

     o  the shrinking pool of assets available because the decreasing number of
        failed or failing financial institutions that are being resolved by the
        FDIC may result in the Bank not meeting its targeted level of loan
        purchases;

     o  the competitive nature of the market for loan pools may result in the
        Bank having to acquire such loans at less attractive prices than it has
        in the past;

     o  the cost of resolving non-performing loan pools may be greater than that
        contemplated at the time of acquisition;

     o  the accretion of the discount associated with purchased loans is subject
        to management's assumptions with respect to the estimated value of the
        loans and future cash flows, all of which is uncertain and is subject to
        change, resulting in inter-period variations in income; and

     o  geographic concentrations of purchased loans, including loans in
        geographic areas with which the Corporation has little or no
        familiarity.

        The Bank also originates loans by purchasing participations in loans
from other financial institutions. The Bank considers such loan participations
to be originations because the Bank underwrites each participation as an
origination and the participation is closed under the Bank's loan participation
documentation. As of December 31, 1998, the Bank had $10.0 million of loan
participations in its portfolio, substantially all of which consist of
multi-family residential and commercial real estate loans. Although the Bank has
participated in loans with four other financial institutions, as of December 31,
1998, the Bank had six loan participations with an aggregate principal balance
of $8.9 million with affiliates of a local specialty finance and real estate
company. In each of these six loan participations, the Bank's interest and
rights to principal recovery are senior to the rights of the junior participant
which may be an affiliate of the specialty finance company and may also be the
servicer of the loan. The senior rights created under the participation
agreements were significant considerations in the Bank's qualification of the
loan. Although the finance company has agreed, in several (but not all)
transactions, to cause the participated loans owned by its affiliates which
become non-performing to be substituted for performing underlying loans, the
Bank is subject to risk to the extent the finance company experiences financial
difficulties and is unable to comply with its replacement obligations.
Furthermore, to the extent the finance company experiences financial
difficulties, the Bank's ability to receive principal and interest payments on a
timely basis from the finance company, as servicer of the loans, could be
temporarily interrupted.

Purchase Discount

        At the time the Bank purchases a pool of loans, the difference between
the note amount and the purchase price is accounted for as a discount. The
purchase price is based on the Bank's estimate of the value of the loan,
including an estimate of future cash flows. In accordance with generally
accepted accounting principles, to the extent management believes a purchased
loan will be collected in full, the discount associated with such purchased loan
will be recognized as an increase in the yield of the loan and will be included
as interest income over the estimated life of the loan. To the extent that
management believes full repayment of principal and interest is not reasonable
and probable, the discount will be set up as a cash discount and will not be
recognized as an increase in the yield of the loan until all principal and


                                      -33-

<PAGE>



interest is received or a final resolution is determined. To the extent that
cash flows from the purchased loans may be uncertain, recognition of this income
will also be uncertain. As of December 31, 1998, the total discount associated
with purchased loans amounted to $5.3 million or 9.3% of total purchased loans.
As of such date, $4.0 million or 75.5% of such aggregate discount is being
accreted into income, while the remaining $1.3 million of such discount is
currently not being accreted into income. The $1.3 million currently not being
accreted into income has been identified as a cash discount and will not be
amortized into income as a yield adjustment until final resolution or collection
of principal and interest is achieved. The yield on the Bank's portfolio of
loans which have been purchased at a discount is subject to significant
inter-period variations due to the fact that the timing of actual repayments and
prepayments of the loans may differ from the original assumptions. Such
inter-period variations can also result from the reclassification of loans from
performing to non-performing status.

Commercial Lending Risk

        At December 31, 1998, a majority of the Bank's real estate loan
portfolio consisted of loans secured by multi-family residential real estate and
commercial real estate properties. In addition, as of December 31, 1998, the
Bank had an aggregate of $986,000 of commercial business loans. Furthermore, all
of the Bank's commercial business loans which are secured by real estate have in
the past been classified as real estate loans. The Bank makes commercial real
estate and commercial business loans following analysis of credit risk, the
value of the underlying collateral and other more intangible factors. This
commercial lending activity exposes the Bank to risks, particularly in the case
of loans to small businesses and individuals. These risks include possible
errors in the Bank's credit analysis, the uncertainty of the borrower's ability
to repay the loans, the uncertainty of future economic conditions and the
possibility of loan defaults. Commercial lending generally includes higher
interest rates and shorter terms of repayment than non-commercial lending.
Accordingly, the Bank is subject to greater credit risk with its commercial
lending. As of December 31, 1998, the Bank had no non-performing commercial
business loans and $1.1 million of non-performing loans secured by commercial
real estate.

Reliance on Short-term Deposits

        The Bank has historically employed a wholesale funding strategy
consisting primarily of marketing non-retail certificates of deposit. The Bank
has been able to maintain sufficient funds to support its lending activities by
offering rates of interest on certificates of deposit marginally higher than
rates offered by other banks on comparable deposits. As of December 31, 1998,
$104.5 million or 91.3% of the Bank's deposits consisted of certificates of
deposit. Of this amount, $73.1 million or 70.0% were placed with institutional
investors. In addition, as of December 31, 1998, $47.1 million, or 45.1% of the
Bank's total certificates of deposit were due to mature within one year. In the
current economic environment of low interest rates, the Bank has been focusing
on extending the maturities of its certificates of deposit and borrowings. The
Bank has extended the average maturities on its certificates of deposit to
approximately 18 months from nine months. The Bank's ability to attract and
maintain deposits, as well as the Bank's cost of funds, has been, and will
continue to be, significantly affected by money market rates and general
economic conditions. In addition, the Bank's ability to internally fund any
additional growth through lending will be impacted by its ability to maintain or
generate deposits. In the event the Bank increases interest rates further to
retain deposits, earnings may be negatively affected.

Credit Risk

        A significant source of risk for the Corporation arises from the
possibility that borrowers, guarantors and related parties may fail to repay
their loans or otherwise abide by the terms of their loans. To address risks
related to past loan documentation, management of the Corporation is enhancing
the Bank's loan underwriting, documentation and credit monitoring procedures,
including delinquency reporting, collections, loan classifications and loan loss
allowance analysis. Management believes such procedures are appropriate to
minimize the Bank's credit risk. The enhancements to such policies and
procedures may not, however, prevent unexpected credit losses that could
negatively affect the Corporation's results of operations.



                                      -34-

<PAGE>



Asset Quality

        The Corporation's results of operations are significantly dependent on
the quality of its assets, which is measured by the level of its non-performing
assets. Non-performing assets consist of non-accrual loans, net of discount,
loans which are 90 days or more overdue but still accruing interest and real
estate acquired by foreclosure or deed-in-lieu thereof. At December 31, 1998,
the Corporation's non-performing assets, net of discount, amounted to $2.0
million or 1.2% of total assets, which reflects an increase of $1.7 million in
non-performing assets, net of discount, since December 31, 1997. All of the $2.0
million of non-performing assets, net of discount, consisted of purchased loans.
Although the Bank purchases loan pools at a discount to the face value of such
loans, the Bank faces the risk that in the event one or more of such purchased
loans becomes non-performing, the underlying discount will not be sufficient to
cover the Bank's cost of acquiring, servicing and, if necessary, taking legal
action, with respect to such loans. Although management of the Bank is currently
in the process of enhancing policies and procedures for monitoring asset quality
and devotes a significant amount of time and resources to the identification,
collection and work-out of non-performing assets, the real estate markets and
the overall economy in the markets where the Bank originates and purchases loans
are likely to be significant determinants of the quality of the Bank's assets in
future periods and, thus, its financial condition and results of operations.

Reserve Coverage for Loans

        At December 31, 1998, the Corporation's allowance for loan losses
amounted to 1.02% of total loans, net of discount, and 53.72% of total
non-performing loans, net of discount. In addition, the applicable purchase
discount for an individual acquired loan may act as an additional reserve
against loss for such loan to the extent that the collectability of such loan
becomes questionable. Although the Corporation believes that it has established
an adequate allowance for losses on its loan portfolio, including purchased
loans, material future additions to the allowance for loan losses may be
necessary due to changes in economic conditions, the performance of the
Corporation's loan portfolio and increases in both loan originations and
purchases. In addition, the Department and the FDIC, as an integral part of
their examination process, periodically review the Corporation's allowance for
loan losses. Increases in the allowance for loan losses would adversely affect
the Corporation's results of operations.

Effect of Rapid Growth on Internal Operations

        The Corporation has undergone tremendous growth in recent years, but has
experienced a lag in its infrastructure to accommodate this growth. Total assets
have increased from $25.8 million at December 31, 1995 to $165.1 million at
December 31, 1998. This growth was due in large part to the increase in loans,
primarily through the purchase of loan pools at a discount. In order to
accommodate such growth in the future, the Corporation must upgrade its internal
systems of accounting and monitoring. Among the Corporation's goals for fiscal
1999 are to improve its internal operating systems and the experience level of
its staff at key positions throughout the Corporation. Accordingly, the Bank
intends to upgrade its computer-based systems and applications. Currently, the
Corporation is evaluating the upgrading of its computer systems and intends to
convert its systems in the latter part of 1999 or early in 2000. Management is
aware that investing and upgrading its infrastructure will increase non-interest
expenses, but believes that overall efficiencies obtained from such expenditures
will allow for overall higher profit levels to be achieved. As a consequence,
management anticipates that as the Corporation continues to grow, its
non-interest expense as a percentage of average assets should decrease over
time.

Leverage Risk

        The Bank utilizes a leverage strategy in originating and purchasing
residential and commercial real estate loans. Originations and purchases are
funded primarily through increases in deposits, primarily non-retail
certificates of deposit and borrowings from the FHLB. Management's leverage
strategy is premised on the assumption that it will earn a positive spread on
the yield generated from its originated and purchased loans over the rate paid
on its incremental deposits and that the spread generated from such strategy
will assist the Corporation in enhancing its earnings. To the extent that
maturities and cash flows differ, or if market rates of interest fluctuate in
such a manner that the Corporation is unable to earn a positive spread as a
result of its leverage strategy, the Corporation's net interest margin and net
income will be adversely affected in future periods.



                                      -35-

<PAGE>



Vulnerability to Interest Rate Risk

        Like most financial institutions, the Corporation's results of
operations are primarily dependent on net interest income. Net interest income
results from the "margin" between interest earned on interest-earning assets,
such as investments and loans, and interest paid on interest-bearing
liabilities, such as deposits. As of December 31, 1998, based on certain
assumptions, the Bank's interest-bearing liabilities that were estimated to
mature or reprice within one year exceeded similar interest-earning assets by
$26.4 million, or 17.5% of total interest-earning assets.

        Interest rates are highly sensitive to many factors that are beyond the
Bank's control. Some of these factors include: governmental monetary policies;
inflation; recession; unemployment; the money supply; domestic and international
economic and political conditions; and domestic and international crises.
Changes in interest rates could have adverse effects on the Bank's operations.
Specifically,

        o         Historically, the Bank has relied on short-term and
                  institutional deposits as a source of funds. The Bank's
                  ability to retain these deposits is directly related to the
                  rate of interest paid by the Bank.

        o         When interest-bearing liabilities mature or reprice more
                  quickly than interest-earning assets, in a particular period
                  of time, a significant increase in interest rates could
                  adversely impact the Bank's net interest income.

        o          Changes in interest rates could adversely affect:

                  o   the volume of loans the Bank originates;

                  o   the value of the Bank's purchased loans and other
                      interest-earning assets, particularly the
                      investment securities and trust preferred securities
                      portfolio;

                  o   the Bank's ability to recognize income on loans
                      purchased at a discount; and

                  o   loan prepayments.

"Year 2000" Issues

        Management of the Corporation is aware of the issues associated with the
programming code in existing computer systems as the Year 2000 approaches. The
"Year 2000" problem is pervasive and complex. Virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize this information could generate incorrect data or cause a system to
fail. The Corporation has consulted with its outside vendors as well as its
third-party computer and software providers and is preparing its systems to
operate without significant modification as a result of Year 2000 issues
(including any new hardware and software which are integral to the proposed
conversion of its computer-based systems). The Corporation has not been advised
by any of its primary outside vendors and service providers that they do not
have plans in place to address and correct any Year 2000 problems. Nevertheless,
unanticipated problems could cause the Corporation's systems to malfunction or
cause the Corporation to incur significant costs to remediate such problems. The
Corporation anticipates incurring approximately $120,000 in additional costs
during the year ended December 31, 1999 related to the proposed implementation
of its Year 2000 Plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Year 2000 Compliance."

Competition

        The Bank faces strong competition from larger more established banks and
from non-bank financial institutions which are aggressively expanding into the
Philadelphia market. Most of these competitors have facilities and financial
resources greater than the Bank's and have other competitive advantages over the
Bank. Among the advantages of these larger institutions are their ability to:
make larger loans; finance extensive advertising campaigns; conduct retail
operations at a significant number of branches; and to allocate their investment
assets to business lines of highest yield and demand.



                                      -36-

<PAGE>



        The Bank's profits in recent periods have been largely attributable to
the identification and purchase of loans at a discount and the origination of
commercial loans. The primary factors in competing for loan pool acquisitions
are knowledge of the availability of such loans, the ability to efficiently and
accurately evaluate such loans and the ability to accurately price such loans.
The primary factors in competing for commercial loans are interest rates, loan
origination fees and the quality and range of lending services offered. The Bank
faces strong competition in attracting and retaining deposits and in purchasing
and originating loans. There can be no assurance that the Bank will maintain its
competitive position in the future or continue to operate profitably.

Dependence on Key Employees

        The success of the Corporation will depend heavily on the expertise and
guidance of its President and Chief Executive Officer, Kenneth L. Tepper, and
certain other senior executive officers, including Brian M. Hartline, the
Corporation's Chief Financial Officer. The Corporation has entered into
employment agreements with Mr. Tepper and Mr. Hartline. The loss of the services
of Mr. Tepper or Mr. Hartline would have a negative effect on the Corporation.
The Corporation does not maintain key-man life insurance on Mr. Tepper or Mr.
Hartline.

Economic Conditions

        The performance of financial institutions like the Bank is sensitive to
general economic conditions. Unfavorable economic conditions at the local,
national or international level may adversely affect the Bank's performance. For
example, much of the United States experienced a significant economic decline in
the late 1980's and early 1990's. This decline adversely affected the real
estate market and the banking industry. As a result of this decline, loan
repayment delinquencies increased and the value of properties underlying secured
loans declined. Numerous bank failures resulted in the placement of many
properties in the hands of a federal banking agency with the primary objective
of prompt liquidation. In addition, recent activity in financial markets in the
United States and the rest of the world has demonstrated an increasing
interdependency among the various world markets and economies and has raised
concerns among those in the banking industry. The implications of this
interdependency are very uncertain and present risks to financial institutions
such as the Bank, particularly in light of the current turmoil in some foreign
markets and economies. Economic conditions are unpredictable and the potential
for downturns is always present.

        Although the Bank focuses on acquiring loans in the Mid-Atlantic region,
the Bank has acquired loans secured by real estate located in a number of other
states including Texas, Florida and California. To the extent such loans are
secured by real estate outside the Bank's primary market area, such loans may
present a greater risk of collectability than loans located in the Bank's
primary market area. Thus, adverse economic conditions affecting any of these
market areas could have a negative impact on the financial condition and results
of operations of the Bank.

Federal and State Government Regulation and Deregulation of the Financial
Services Industry

        The Bank is subject to a complex body of federal and state banking laws
and regulations which are intended primarily for the protection of depositors.
In addition, there are several bills relating to the regulation and deregulation
of the financial services industry pending in the U.S. Congress. Any resulting
legislation could significantly affect the operations and oversight of financial
institutions such as the Bank as well as the competitive environment in which
the Bank operates. Further, the laws and regulations which affect the Bank, as
well as the interpretation by the authorities who examine the Bank, may be
changed at any time. It is not possible to predict the content, timing or effect
of regulation by federal, state and local regulatory bodies. However, compliance
with, or any violation of, current and future laws or regulations could require
material expenditures by the Corporation or otherwise adversely affect the
Corporation's business or financial results.

Environmental Liabilities

        In the course of the Bank's business, the Bank may acquire properties
through foreclosure. There is a risk that hazardous substances could be
discovered on such properties. Various federal, state and local laws subject
property owners or operators to liability for the costs of removal or
remediation of certain hazardous substances released on a property. Such laws
often impose liability without regard to whether the owner or operator knew of,
or was responsible for, the release of hazardous substances. There is a risk
that the Bank may be required to bear the cost of removing hazardous substances
from any affected properties. The cost of such removal could exceed the value of
the affected properties or the loans secured by the properties. In addition, the
Bank may not have adequate remedies against the prior owner or other responsible
parties and may find it difficult or impossible to sell the affected properties.


                                      -37-

<PAGE>




Item 7.  Financial Statements.

         The financial statements of the Corporation are attached to this report
and begin on page F-1.


Item 8.  Changes in and Disagreements with Accountants on Accounting and 
         Financial Disclosure.

         None.


                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act.

         The information required by this Item is incorporated by reference from
the definitive proxy materials of the Corporation to be filed with the
Commission in connection with the Corporation's 1999 Annual Meeting of
Shareholders.

Item 10. Executive Compensation.

         The information required by this Item is incorporated by reference from
the definitive proxy materials of the Corporation to be filed with the
Commission in connection with the Corporation's 1999 Annual Meeting of
Shareholders.

Item 11.  Security Ownership of Certain Beneficial Owners and
          Management.

         The information required by this Item is incorporated by reference from
the definitive proxy materials of the Corporation to be filed with the
Commission in connection with the Corporation's 1999 Annual Meeting of
Shareholders.

Item 12.  Certain Relationships and Related Transactions.

         The information required by this Item is incorporated by reference from
the definitive proxy materials of the Corporation to be filed with the
Commission in connection with the Corporation's 1999 Annual Meeting of
Shareholders.

Item 13. Exhibits, List and Reports on Form 8-K.

         (A)      Exhibits

         The following Exhibits are filed as part of this report. (Exhibit
numbers correspond to the exhibits required by Item 601 of Regulation S-B.)

Exhibit No.

3(a) Amended and Restated Articles of Incorporation of the Corporation, as
     amended*
3(b) Bylaws of the Corporation*
4(a) Specimen Stock Certificate of the Corporation*
10.1 Stock Option Plan*
10.2 Employment agreement between the Registrant and Kenneth L. Tepper* 
10.3 Employment agreement between the Registrant and Brian M. Hartline
10.4 Agreement by and between Kenneth L. Tepper and the Registrant dated 
     January 2, 1998**.
10.5 Warrant Agreement between the Registrant and Sandler O'Neill dated February
     13, 1998**
10.6 Registration Rights Agreement between the Registrant and certain
     shareholders dated February 13, 1998**


                                      -38-

<PAGE>



11 Computation of Per Share Earnings (Included in Financial Statements on Pages
   F-12 and F-21)
21 Subsidiaries of the Corporation
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule
------------------------------------

*Incorporated by reference from the Registration Statement on Form SB-2 of the
Corporation, as amended, Registration No. 33-92506.

**Incorporated by reference from the Corporation's Annual Report on Form 10-KSB 
for the fiscal year ended December 31, 1997.

         (B)    Reports on Form 8-K

         The Corporation did not file any reports on Form 8-K during the fourth
quarter of 1998.



                                      -39-

<PAGE>


                                   SIGNATURES

         In accordance with 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, in the City of Philadelphia,
Commonwealth of Pennsylvania on March 30, 1999.

                                  USABancShares, Inc.


                                  By: /s/ Kenneth L. Tepper 
                                     -------------------------------------------
                                     Kenneth L. Tepper, President and
                                     Chief Executive Officer
                                     (Principal Executive Officer)


                                  By: /s/ Brian M. Hartline
                                     -------------------------------------------
                                     Brian M. Hartline, Chief Financial Officer
                                    (Principal Accounting and Financial Officer)

         In accordance with the Securities Exchange Act of 1934, this Report has
been duly signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.


March 30, 1999                 /s/ George M. Laughlin
                               ------------------------------------------------
                               George M. Laughlin
                               Chairman of the Board


March 30, 1999                 /s/ Zeev Shenkman
                               ------------------------------------------------
                               Zeev Shenkman
                               Vice Chairman of the Board


March 30, 1999                 /s/ Kenneth L. Tepper
                               ------------------------------------------------
                               Kenneth L. Tepper
                               President, Chief Executive Officer and Director


March 30, 1999                 /s/ Jeffrey A. D'Ambrosio
                               ------------------------------------------------
                               Jeffrey A. D'Ambrosio
                               Director

March 30, 1999                 /s/ George C. Fogwell, III
                               ------------------------------------------------
                               George C. Fogwell, III
                               Director


March 25, 1999                 /s/ John A. Gambone
                               ------------------------------------------------
                               John A. Gambone
                               Director


March 25, 1999                 /s/ Carol J. Kauffman
                               ------------------------------------------------
                               Carol J. Kauffman
                               Director


March 30, 1999                 /s/ Wayne O. Leevy
                               ------------------------------------------------
                               Wayne O. Leevy
                               Director

March 30, 1999                 /s/ Clarence L. Rader
                               ------------------------------------------------
                               Clarence L. Rader
                               Director




<PAGE>
                       FINANCIAL STATEMENTS AND REPORT OF
                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                      USABANCSHARES, INC. and SUBSIDIARIES

                           December 31, 1998 and 1997

























                                      F-1


<PAGE>












                                 C O N T E N T S
                                                                            Page
                                                                            ----

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                           F-3


FINANCIAL STATEMENTS

         CONSOLIDATED BALANCE SHEETS                                         F-4

         CONSOLIDATED STATEMENTS OF OPERATIONS                               F-5

         CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                AND COMPREHENSIVE INCOME (LOSS)                              F-6

         CONSOLIDATED STATEMENTS OF CASH FLOWS                               F-7

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          F-8


















                                      F-2


<PAGE>





               Report of Independent Certified Public Accountants
               --------------------------------------------------

Board of Directors
USABancShares, Inc. and Subsidiaries

         We have audited the accompanying consolidated balance sheets of
USABancShares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and comprehensive income (loss) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
USABancShares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.


/s/ Grant Thornton LLP


Philadelphia, Pennsylvania
March 22, 1999














                                      F-3













<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                               December 31,           
                                                                                              (in thousands
                                                                                               except share
                                                                                                   data)
                                                                                        -------------------------
ASSETS                                                                                    1998               1997      
                                                                                        --------         ---------
<S>                                                                                     <C>              <C>      
Cash and due from banks                                                                 $  1,335         $     833
Interest bearing deposit with banks                                                        7,706             3,975
Investment securities available for sale                                                  28,389             9,035
Investment securities held to maturity (fair market value of $15,951 and
    $15,644 in 1998 and 1997, respectively)                                               15,755            15,419
FHLB Stock                                                                                 3,523               900
Loans receivable, net                                                                    102,138            56,002
Premises and equipment, net                                                                2,023             1,153
Accrued interest receivable                                                                1,633               847
Other real estate                                                                             66               -
Goodwill, net                                                                                 69                80
Deferred income taxes                                                                        573               163
Other assets                                                                               1,896               919
                                                                                        --------         ---------
              Total assets                                                              $165,106         $  89,326
                                                                                        ========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
    Deposits
      Demand                                                                            $  1,439         $     257
      Now                                                                                    846               688
      Money Market                                                                         2,345             4,802
      Savings and Passbook                                                                 5,281             2,019
      Time                                                                               104,476            62,708
                                                                                        --------         ---------
              Total deposits                                                             114,387            70,474
Borrowings                                                                                35,305            12,638
Accrued interest payable                                                                     399                75
Accrued expenses and other liabilities                                                     1,418               773
                                                                                        --------         ---------
              Total liabilities                                                          151,509            83,960
                                                                                        --------         ---------

STOCKHOLDERS' EQUITY
Preferred stock $1.00 par value, 5,000,000 shares authorized, no shares issued
    and outstanding in 1998 and 1997
Common stock $1.00 par value, 10,000,000 shares authorized, 2,007,392 shares
    issued and outstanding in 1998; 813,807 shares issued and outstanding in
    1997, and 108,230 shares of converted and unissued Class B common stock in
    1998; 81,381 converted and unissued 1997                                               2,116               814
Additional paid-in capital                                                                10,683             4,828
Accumulated (deficit) earnings                                                             1,112              (378)
Accumulated other comprehensive income                                                      (314)              102
                                                                                        --------         ---------
              Total stockholders' equity                                                  13,597             5,366
                                                                                        --------           -------
              Total liabilities and stockholders' equity                                $165,106         $  89,326
                                                                                        ========         =========
</TABLE>

The accompanying notes are an integral part of these statements.

                                       F-4
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                                                          Year ended December 31,
                                                                                         -------------------------   
                                                                                          1998              1997   
                                                                                         -------           -------
                                                                                               (in thousands,
                                                                                           except per share data)
<S>                                                                                       <C>                <C>
INTEREST INCOME
    Loans                                                                                $ 9,028           $ 3,090
    Investment securities                                                                  3,015             1,637
    Interest bearing deposits with banks and other                                           309               152
                                                                                         -------           -------
              Total interest income                                                       12,352             4,879
                                                                                         -------           -------
INTEREST EXPENSE
    Deposits                                                                               5,266             2,285
    Other borrowings                                                                       1,188               245
                                                                                          ------           -------
              Total interest expense                                                       6,454             2,530
                                                                                          ------            ------
              Net interest income                                                          5,898             2,349
PROVISION FOR POSSIBLE LOAN LOSSES                                                           510               415
                                                                                         -------           -------

              Net interest income after provision for
                   possible loan losses                                                    5,388             1,934
                                                                                         -------            ------
OTHER INCOME
    Service charges on deposit accounts                                                       94                26
    Gain on sale of securities                                                               378               127
    Brokerage operations                                                                     141               102
    Other income                                                                             146                59
                                                                                         -------            ------
              Total other income                                                             759               314
                                                                                         -------           -------
OTHER EXPENSES
    Salaries and employee benefits                                                         1,539             1,345
    Net occupancy expense                                                                    523               202
    Professional fees                                                                        275               175
    Office expenses                                                                          270               120
    Data processing fees                                                                     199               115
    Advertising expense                                                                      177                62
    Goodwill amortization                                                                     10                 8
    Other operating expenses                                                                 707               430
                                                                                         -------            ------
              Total other expense                                                          3,700             2,457
                                                                                          ------            ------
              Income (loss) before income tax expense                                      2,447              (209)
INCOME TAX EXPENSE                                                                           957                17
                                                                                         -------           -------
              Net income (loss)                                                          $ 1,490           $  (226)
                                                                                         =======            =======
NET INCOME (LOSS) PER SHARE - BASIC (1)                                                  $  0.75           $ (0.21)
                                                                                         =======           =======
NET INCOME (LOSS) PER SHARE - DILUTED (1)                                                $  0.70           $ (0.21)
                                                                                         =======           =======
</TABLE>
(1) 1997 per share amounts have been restated to reflect a 33% stock dividend
    paid August 17, 1998.

The accompanying notes are an integral part of these statements.

                                       F-5
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

         Consolidated Statement of Changes in Stockholders' Equity and
                          Comprehensive Income (Loss)
<TABLE>
<CAPTION>
                                                                              Unearned     Accumulated                             
                                                   Additional  Accumulated  compensation      other         Total                 
                                           Common    paid-in    (deficit)     Class B     comprehensive  stockholders' Comprehensive
                                           stock     capital     earnings   Common Stock      income       equity      income (loss)
                                           ------  ----------  -----------  ------------  -------------  ------------- -------------
                                                                               (in thousands)          
<S>                                          <C>       <C>          <C>           <C>           <C>         <C>              <C> 
Balance, January 1, 1997                   $  597    $ 4,878      $ (152)       $(425)        $  (2)      $ 4,896                  
    Net loss                                    -          -        (226)           -             -          (226)         $ (226) 
    Other comprehensive income,                                                                                                    
       net of reclassification adjustments                                                                                         
       and taxes                                -          -           -            -           104           104             104  
                                                                                                                           ------  
    Total comprehensive loss                                                                                               $ (122) 
                                                                                                                           ======  
    Stock issued to acquire Knox Financial      8         67           -            -             -            75                  
    33% common stock dividend                 200       (200)          -            -             -             -                  
    Conversion of Class B common stock          9         83           -            -             -            92                  
    Amortization of unearned compensation                                                                                          
       Class B common stock                     -          -           -          425             -           425                  
                                           ------    -------      ------        -----         -----       -------                  
                                                                                                                                   
Balance, December 31, 1997                    814      4,828        (378)           -           102         5,366                  
    Net income                                  -          -       1,490            -             -         1,490          $1,490  
    Other comprehensive loss,                                                                                                      
       net of reclassification adjustments                                                                                         
       and taxes                                -          -           -            -          (416)         (416)           (416) 
                                                                                                                           ------  
    Total comprehensive income                                                                                             $1,074  
                                                                                                                           ======  
    Private placement offering                769      6,341           -            -             -         7,110                  
    Exercise of stock options                   9         38           -            -             -            47                  
    33% stock dividend                        524       (524)          -            -             -             -                  
                                           ------    -------      ------        -----         -----       -------                  
Balance, December 31, 1998                 $2,116    $10,683      $1,112        $   -         $(314)      $13,597                  
                                           ======    =======      ======        =====         =====       =======       
</TABLE>                                                                    

         The accompanying notes are an integral part of this statement.

                                       F-6
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                         Year ended December 31,
                                                                                        ------------------------      
(In Thousands)                                                                            1998            1997 
                                                                                          ----            ----      
<S>                                                                                        <C>             <C>  
OPERATING ACTIVITIES
    Net income (loss)                                                                   $ 1,490         $   (226)
    Adjustments to reconcile net income (loss) to net cash provided by
       (used in) operating activities
    Provision for possible loan losses                                                      510              415
    Depreciation and amortization                                                           219               60
    Decrease in goodwill                                                                     11               49
    Accretion of discounts on purchased loan portfolio                                   (1,306)            (691)
    (Accretion) amortization of securities (discount) premium, net                           (9)              (5)
    Amortization of Class B common stock                                                      -              425
    Class B common stock conversion                                                           -               92
    Gain on sale of securities                                                             (378)            (127)
    Increase in accrued interest receivable                                                (786)            (540)
    Decrease (increase) in deferred tax asset                                              (166)            (216)
    Increase in other assets                                                               (977)            (621)
    Increase in accrued interest payable                                                    324               56
    Increase in accrued expenses and other liabilities                                      645              565
                                                                                       --------          -------
              Net cash used in operating activities                                        (423)            (764)
                                                                                       --------          -------
INVESTING ACTIVITIES
    Investment securities available for sale
       Purchases                                                                        (29,512)         (11,433)
       Sales                                                                              9,286            4,524
       Maturities and principal repayments                                                1,250            4,218
    Investment securities held to maturity
       Purchases                                                                         (8,012)          (9,131)
       Sales                                                                              1,444            2,001
       Maturities and principal repayments                                                5,580            1,959
    Purchases of FHLB Stock                                                              (2,622)            (650)
    (Increase) decrease in interest bearing deposits with banks                          (3,731)              41
    Net increase in loans                                                               (45,340)         (39,196)
    Increase in other real estate, net                                                      (66)             -     
    Cash of entity acquired                                                                   -               45
    Purchase of premises and equipment                                                   (1,089)          (1,067)
                                                                                       --------          -------
              Net cash used in investing activities                                     (72,812)         (48,689)
                                                                                       --------           ------
FINANCING ACTIVITIES
    Net increase in deposits                                                             43,913           42,500
    Net increase in borrowings                                                           22,667            7,588
    Private placement proceeds                                                            7,110               --
    Exercise of stock options                                                                47               --
                                                                                         ------           ------
              Net cash provided by financing activities                                  73,737           50,088
                                                                                         ------           ------
              Net increase in cash and cash equivalents                                     502              635
Cash and cash equivalents, beginning of year                                                833              198
                                                                                        -------         --------
Cash and cash equivalents, end of year                                                  $ 1,335         $    833
                                                                                        =======         ========
Supplemental disclosure of cash flow information
    Cash paid during the year for
       Interest                                                                         $ 6,137          $ 2,231
                                                                                        =======          =======
       Income taxes                                                                     $   975          $   237
                                                                                        =======          =======
</TABLE>

The accompanying notes are an integral part of these statements.

                                       F-7
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


NOTE A - ORGANIZATION

    USABancShares, Inc. (the Corporation), through its subsidiaries,
    BankPhiladelphia (the "Bank"), USACapital, Inc. ("USACapital") and
    USACredit, Inc. ("USACredit"), provides a full range of banking and
    non-depository services to individual and corporate customers located in the
    greater Delaware Valley region.

    The Corporation was organized in November 1995 in order to facilitate the
    acquisition of People's Thrift Savings Bank, which changed its name to
    "BankPhiladelphia" in July 1998.

    The Bank is a Pennsylvania chartered stock savings institution which
    competes with other banking and financial institutions in its primary market
    communities, including financial institutions with resources substantially
    greater than its own. Commercial banks, savings banks, savings and loan
    associations, and credit unions actively compete for savings and time
    deposits and for types of loans. Such institutions, as well as consumer
    finance, insurance, and brokerage firms, may be considered competitors of
    the Bank with respect to one or more of the services it provides.

    The Bank is subject to regulations of certain state and federal agencies
    and, accordingly, is periodically examined by those regulatory authorities.
    As a consequence of the extensive regulation of commercial banking
    activities, the Bank's business is particularly susceptible to being
    affected by state and federal legislation and regulations.

    USACapital is a broker dealer registered with the Securities and Exchange
    Commission (SEC) and the National Association of Securities Dealers (NASD).
    USACapital conducts business through its clearing brokers for its
    proprietary accounts. USACapital also introduces customer accounts on a
    fully disclosed basis to the clearing brokers and earns revenues and incurs
    expenses from activities on those accounts. The clearing and depository
    operations for USACapital's customer accounts and proprietary accounts are
    performed by its clearing brokers pursuant to clearance agreements.

    USACredit is a minority owner of a Delaware limited liability company in the
    business of purchasing judgements, deficiencies, and claims, and pursuing
    collections on such claims.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    1. Basis of Financial Statement Presentation

    The accounting and reporting policies of the Corporation and its
    subsidiaries conform with generally accepted accounting principles and
    predominant practices within the banking industry. All significant
    intercompany balances and transactions have been eliminated.

                                   (Continued)

                                       F-8
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    The preparation of financial statements in conformity with generally
    accepted accounting principles requires management to make estimates and
    assumptions that affect the reported amounts of assets and liabilities and
    disclosure of contingent assets and liabilities at the date of the financial
    statements. These estimates and assumptions also affect reported amounts of
    revenues and expenses during the reporting periods. Actual results could
    differ from those estimates.

    The principal estimates particularly susceptible to significant change in
    the near term relates to the allowance for loan losses. The evaluation of
    the adequacy of the allowance for loan losses includes an analysis of the
    individual loans and overall risk characteristics and size of the different
    loan portfolios, and takes into consideration current economic and market
    conditions, the capability of specific borrowers to pay specific loan
    obligations, and current loan collateral values. However, actual losses on
    specific loans, which also are encompassed in the analysis, may vary from
    estimated losses.

    In 1998, the Corporation adopted Statement of Financial Accounting Standards
    (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
    Information. SFAS No. 131 redefines how operating segments are determined
    and requires disclosures of certain financial and descriptive information
    about the Corporation and its subsidiaries operating segments. Management
    has determined the Corporation operates in one business segment, namely
    community banking.

    2. Investment Securities

    The Corporation accounts for its investment securities in accordance SFAS
    No. 115, Accounting for Certain Investments in Debt and Equity Securities.
    The Corporation classifies its securities as held for investment purposes
    (held to maturity) and available for sale. Investment securities for which
    the Corporation has the ability and intent to hold until maturity are
    classified as held to maturity. These investment securities are carried at
    cost, adjusted for amortization of premiums and accretion of discounts on a
    straight-line basis, which is not materially different from the effective
    interest method.

    Investment securities which are held for indefinite periods of time, which
    management intends to use as part of its asset/liability strategy, or which
    may be sold in response to changes in interest rates, changes in prepayment
    risk, increases in capital requirements or other similar factors, are
    classified as available for sale and are carried at fair value. Differences
    between a security's amortized cost and fair value is charged/credited
    directly to shareholders' equity, net of income taxes. The cost of
    securities sold is determined on a specific identification basis. Gains and
    losses on sales of securities are recognized in the consolidated statements
    of income upon sale. The Corporation had no securities held for trading
    purposes at December 31, 1998 and 1997.

                                   (Continued)

                                       F-9
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
    No. 133, Accounting for Derivative Instruments and Hedging Activity. SFAS
    No. 133 establishes accounting and reporting standards for derivative
    instruments, including certain derivative instruments imbedded in other
    contracts, and for hedging activities. It requires that an entity recognize
    all derivatives as either assets or liabilities in the statement of
    financial position and measure those instruments at fair value. If certain
    conditions are met, a derivative may be specifically designated as a hedge.
    The accounting for changes in the fair value of a derivative (gains and
    losses) depends on the intended use of the derivative and resulting
    designation. SFAS No. 133 is effective for all fiscal quarters of fiscal
    years beginning after June 15, 1999. Earlier application is permitted only
    as of the beginning of any fiscal quarter. The adoption of SFAS No. 133 is
    not anticipated to have a material impact on the Corporation's consolidated
    financial position or results of operations.

    3. Loans and Allowance for Possible Loan Losses

    Loans receivable, which management has the intent and ability to hold for
    the foreseeable future or until maturity or payoff are reported at their
    outstanding principal, adjusted for any charge-offs, the allowance for loan
    losses, and any deferred fees or costs on originated loans. The
    Corporation's management maintains the allowance for possible loan losses at
    a level considered adequate to provide for potential loan losses. The
    allowance is increased by provisions charged to expense and reduced by net
    charge-offs. Loans are charged against the allowance for possible loan
    losses when management believes that the collectibility of the principal is
    unlikely. The level of the allowance is based on management's evaluation of
    potential losses in the loan portfolio after consideration of appraised
    collateral values, financial condition of the borrowers, and prevailing and
    anticipated economic conditions. Credit reviews of the loan portfolio,
    designed to identify potential charges to the allowance, are made on a
    periodic basis during the year by senior management.

    Interest on loans is credited to operations primarily based upon the
    principal amount outstanding. When management believes there is sufficient
    doubt as to the ultimate collectibility of interest on any loan, the accrual
    of applicable interest is discontinued. Interest income is subsequently
    recognized only to the extent cash payments are received. Net loan
    origination fees and loan discounts on purchased loan pools are deferred and
    amortized over the life of the related loan using the level yield method.
    The net loan originations fees recognized as yield adjustments are reflected
    in total interest income in the consolidated statement of operations. The
    unamortized balance of loan origination net fees is reported in the
    consolidated balance sheet as part of unearned income; the unamortized
    portion of discounts on purchased loans reduces the carrying value of loans
    receivable on the consolidated balance sheet.

                                   (Continued)

                                      F-10
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    The Corporation accounts for its impaired loans in accordance with SFAS No.
    114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS
    No. 118, Accounting by Creditors for Impairment of a Loan - Income
    Recognition and Disclosures. This standard requires that a creditor measure
    impairment based on the present value of expected future cash flows
    discounted at the loan's effective interest rate, except that as a practical
    expedient, a creditor may measure impairment based on a loan's observable
    market price, or the fair value of the collateral if the loan is collateral
    dependent. Regardless of the measurement method, a creditor must measure
    impairment based on the fair value of the collateral when the creditor
    determines that foreclosure is probable.

    4. Accounting for Transfers and Servicing of Financial Assets and
       Extinguishments of Liabilities

    The Corporation accounts for its transfers and servicing financial assets in
    accordance with SFAS No. 125, Accounting for Transfers and Servicing of
    Financial Assets and Extinguishments of Liabilities, as amended by SFAS No.
    127, Deferral of the Effective Date of Certain Provisions of SFAS No. 125.
    This standard provides accounting guidance on transfers of financial assets,
    servicing of financial assets, and extinguishments of liabilities.

    5. Premises and Equipment

    Premises and equipment are stated at cost less accumulated depreciation and
    amortization. Building and leasehold improvements are amortized over the
    term of the lease or estimated useful life, whichever is shorter.
    Depreciation and amortization is computed primarily on the straight-line
    method over the estimated useful lives of the assets.

    6. Goodwill

    Goodwill is stated at cost less accumulated amortization, and is being
    amortized on the straight-line method over 15 years. On an ongoing basis,
    management reviews the valuation and amortization of goodwill. As part of
    this review, the Corporation estimates the value of and the estimated
    undiscounted future net income expected to be generated by the related
    subsidiaries to determine that no impairment has occurred.

    The Corporation accounts for impairment under SFAS No. 121, Accounting for
    the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of.
    This standard provides accounting guidance on when to recognize and how to
    measure impairment losses of long-lived assets and certain identifiable
    intangibles and how to value long-lived assets to be disposed of.

                                   (Continued)

                                      F-11
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    7. Other Real Estate

    Properties acquired by foreclosure are other real estate (ORE) and recorded
    at the lower of recorded investment in the related loan or fair value based
    on appraised value at the date actually or constructively received. Loan
    losses arising from the acquisition of such properties are charged against
    the allowance for possible loan losses. Subsequent adjustments to the
    carrying values of ORE properties are charged to operating expense. ORE is
    stated at the lower of cost or fair value less estimated cost to sell.

    8. Income Taxes

    The Corporation recognizes deferred tax assets and liabilities for the
    expected future tax consequences of events that have been recognized in the
    Bank's financial statements or tax returns. Under this method, deferred tax
    assets and liabilities are determined based on their difference between the
    financial statement carrying amounts and the tax basis of assets and
    liabilities. The Corporation files a consolidated federal income tax return
    and the amount of income tax expense or benefit is computed and allocated on
    a separate return basis.

    9. Per Share Amounts

    On January 1, 1997, the Corporation adopted the provisions of SFAS No. 128,
    Earnings Per Share. SFAS No. 128 eliminated primary and fully diluted
    earnings per share and requires presentation of basic and diluted earnings
    per share in conjunction with the disclosure of the methodology used in
    computing such earnings per share. Basic earnings per share excludes
    dilution and is computed by dividing income available to common shareholders
    by the weighted average common shares outstanding during the period. Diluted
    earnings per share takes into account the potential dilution that could
    occur if securities or other contracts to issue common stock were exercised
    and converted into common stock. All weighted average actual shares or per
    share information in the financial statements have been adjusted
    retroactively for the effect of a stock dividend.

    10. Comprehensive Income

    On January 1, 1998, the Bank adopted SFAS No. 130, Reporting Comprehensive
    Income. This standard establishes new standards for reporting comprehensive
    income which includes net income as well as certain other items which result
    in a change to equity during the period. These financial statements have
    been reclassified to reflect the provisions of SFAS No. 130.

                                   (Continued)

                                      F-12
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997




NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

    The income tax effects allocated to comprehensive income (loss) is as
follows:
<TABLE>
<CAPTION>
                                                     December 31, 1998                   December 31, 1997             
                                        ------------------------------------    -----------------------------------
                                                           Tax       Net of                                 Net of
                                         Before tax      expense       tax      Before tax       Tax          tax
                                           amount       (benefit)     amount      amount       expense       amount   
                                         ----------     ---------     ------    ----------     -------      -------   
                                                                          (in thousands)
<S>                                          <C>           <C>          <C>         <C>          <C>           <C>
    Unrealized gains (losses)
          on securities
       Unrealized holding gains
       (losses) arising during period       $(282)        $ 100       $(182)        $296        $(113)        $183
       Less reclassification
          adjustment for gains
          realized in net income              378          (144)        234          127          (48)          79
                                            -----          -----       ----          ---        -----         ----
    Other comprehensive income
       (loss), net                          $(660)        $ 244       $(416)        $169       $  (65)        $104
                                             ====          ====        ====          ===        =====          ===
</TABLE>

    11.  Cash and Cash Equivalents

    Cash and cash equivalents include cash on hand and amounts due from banks.

    12.  Advertising Costs

    The Corporation expenses advertising costs as incurred.

    13.  Restrictions on Cash and Due from Banks

    As of December 31, 1998, the Corporation did not maintain reserves (in the
    form of deposits with the Federal Home Loan Bank ("FHLB")) to satisfy
    federal regulatory requirements. As of December 31, 1998, USACapital has
    segregated $130,000 in special reserve bank accounts for the benefit of
    customers as required by the clearing organizations.

    14.  Reclassifications

    Certain reclassifications have been made to the 1997 financial statements to
    conform with the 1998 presentation.

                                   (Continued)

                                      F-13
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

NOTE C - PRIVATE PLACEMENT

    On February 18, 1998, the Company issued 769,231 shares of its Class A
    common stock in conjunction with a private placement offering (the
    "offering"). Total cash received was $7.1 million, net of offering cost of
    $390,000.

    In connection with the offering, the Company granted warrants convertible
    for a period of five years into 3.25% of the Corporation's common stock on
    the date of conversion. The number of warrants will be adjusted for stock
    splits, stock dividends and the issuance of additional shares so as to
    maintain the holder's ownership of the fully diluted common stock at 3.25%
    for a period of three years from the close of the offering.

NOTE D - ACQUISITION

    In 1997, the Corporation acquired Knox Financial Services Group, Inc. The
    Corporation distributed 14,000 (1) shares of common stock of its parent to
    effect the combination. The purchase method of accounting was used to
    account for this business combination. Subsequent to the acquisition, Knox
    Financial Services Group, Inc. was renamed USACapital, Inc. The results of
    operations of USACapital are included in the accompanying financial
    statements since the date of acquisition.

    (1) Adjusted for 33% stock dividends paid by the Corporation in July 18, 
    1997 and August 17, 1998.

NOTE E - INVESTMENT SECURITIES

    The amortized cost, gross unrealized gains and losses, and fair market value
    of the Corporation's investment securities available for sale and held to
    maturity are as follows:
<TABLE>
<CAPTION>
                                                           1998                               
                                      --------------------------------------------------
                                                      (in thousands)
                                                    Gross          Gross                 
                                      Amortized   unrealized     unrealized       Fair
                                         cost       gains          losses         value 
                                      ---------   ----------     ----------       -----     
    <S>                                  <C>         <C>            <C>            <C>
    Available for sale                                                           
       Mortgage-backed securities     $ 2,628        $ --          $  (8)        $ 2,620
       Corporate obligations            1,322          13            (89)          1,246
       Trust preferred securities                                                
           and other securities        24,944         243           (664)         24,523
                                      -------        ----          -----         -------
                                      $28,894        $256          $(761)        $28,389
                                      =======        ====          =====         =======
    Held to maturity                                                             
       U.S. Government and agency                                                
           securities                 $ 1,201        $  1          $  --         $ 1,202
       Mortgage-backed securities       5,650         104             (1)          5,753
       Municipal securities             3,166          69             --           3,235
       Trust preferred securities                                                
           and other securities         5,738          79            (56)          5,761
                                      -------        ----          -----         -------
                                      $15,755        $253          $ (57)        $15,951
                                        =====        =====         =====         =======
</TABLE>
                                   (Continued)

                                      F-14
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997

NOTE E - INVESTMENT SECURITIES - Continued
<TABLE>
<CAPTION>
                                                                            1997
                                                  -------------------------------------------------------------
                                                                       (in thousands)
                                                                     Gross            Gross
                                                  Amortized        unrealized       unrealized           Fair
                                                     cost            gains            losses             value
                                                  ---------        ----------       ----------           -----
<S>                                                  <C>               <C>              <C>               <C> 
    Available for sale
       U.S. Government and agency
           securities                              $ 1,243             $ 16            $   -            $ 1,259
       Trust preferred securities                    7,637              150              (11)             7,776
                                                   -------             ----            -----            -------

                                                   $ 8,880             $166             $(11)           $ 9,035
                                                   =======             ====             ====            =======

    Held to maturity
       U.S. Government and agency
           securities                              $ 3,557             $  -             $(10)           $ 3,547
       Mortgage-backed securities of                 6,306               50                -              6,356
       Municipal securities                          3,163              101                -              3,264
       Trust preferred securities
           and other securities                      2,393               84                -              2,477
                                                   -------             ----             ----            -------
 
                                                   $15,419             $235             $(10)           $15,644
                                                    ======             ====             ====            =======
</TABLE>
    The amortized cost and fair market value of investment securities, by
    contractual maturity, as of December 31, 1998, are shown below. Expected
    maturities will differ from contractual maturities because borrowers may
    have the right to call or prepay obligations with or without call or
    repayment penalties.
<TABLE>
<CAPTION>


(Dollars in Thousands)                                    Available-for-Sale                      Held-to-Maturity     
                                              -------------------------------------   -------------------------------------
                                                                           Weighted                                Weighted
                                               Amortized     Approximate    Average    Amortized     Approximate    Average
                                                 Cost         Fair Value     Yield       Cost         Fair Value     Yield 
                                              ----------     -----------   --------   ----------     -----------   --------
<S>                                             <C>              <C>        <C>         <C>            <C>          <C>
Due after one year through five years......     $ 1,246        $ 1,170       11.92%    $ 2,001         $ 2,015       7.31%
Due after five years through ten years.....         816            770        9.88       2,635           2,581       7.90
Due after ten years........................      22,312         21,996        9.61       5,479           5,613       7.06
Mortgage-backed securities.................       2,628          2,620        7.00       5,640           5,742       6.59
Equity securities..........................       1,892          1,833          --          --              --         --
                                                -------        -------                 -------         -------      
                                                $28,894        $28,389                 $15,755         $15,951
                                                =======        ========                =======         =======
</TABLE>                                                                 
                                   (Continued)

                                      F-15

<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE E - INVESTMENT SECURITIES - Continued

    Expected maturities will differ from contractual maturities because
    borrowers have the right to call or prepay obligations with or without call
    or prepayment penalties. In 1998, the Corporation sold securities which were
    classified as held-to-maturity due to unforeseen circumstances that could
    not have been anticipated.

    Proceeds on the sale of investment securities classified as held-to-maturity
    were $1.4 million and $2.0 million in 1998 and 1997, respectively. Proceeds
    on the sale of investment securities classified as available-for-sale were
    $9.3 million and $4.5 million in 1998 and 1997, respectively. Gross gains of
    $393,000 and gross losses of $15,000 were realized on 1998 sales.

NOTE F - LOANS RECEIVABLE

    Loans outstanding by classification are as follows:
                                                        1998             1997
                                                        ----             ---- 
                                                          (in thousands)

    Real estate                                       $102,076          $54,262
    Commercial and industrial loans                        986            1,091
    Other                                                  243            1,694
                                                      --------          -------
                                                       103,305           57,047
    Loans in process                                       -               (260)
    Unearned income                                       (116)            (217)
    Allowance for possible loan losses                  (1,051)            (568)
                                                      --------          -------

                                                      $102,138          $56,002
                                                      ========          =======

    At December 31, 1998 and 1997, loans outstanding to certain officers and
    directors of the Bank and their affiliated interests amounted to $2.5
    million and $233,000, respectively. An analysis of activity in loans to
    related parties at December 31, 1998 and 1997, resulted in new loans of $2.7
    million and $122,000, respectively, and reductions of $483,000 and $504,000,
    respectively, representing payments.

    An analysis of the allowance for possible loan losses is as follows:

                                                         1998              1997
                                                         ----              ---- 
                                                            (in thousands)
    Balance, beginning of year                          $  568             $182
    Provision charged to expense                           510              415
    Charge-offs, net of recoveries                         (27)             (29)
                                                        ------             ----

    Balance, end of year                                $1,051             $568
                                                        ======             ====

                                   (Continued)

                                      F-16
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE F - LOANS RECEIVABLE - Continued

    Included in loans receivable are nonaccrual loans of $1.8 million and
    $287,000 at December 31, 1998 and 1997, respectively. Interest income that
    would have been recorded in the financial statements had the nonaccrual
    loans been performing in accordance with their terms would have been
    $140,000 in 1998.

    Also included in loans receivable are loans past due 90 days or more and
    accruing in the amount of $152,000 and $165,000 at December 31, 1998 and
    1997, respectively, which have not been classified as nonaccrual due to
    management's belief that the loans are well-secured and in the process of
    collection.

NOTE G - PREMISES AND EQUIPMENT

    Premises and equipment consist of the following:
<TABLE>
<CAPTION>
                                                                   Estimated
                                                                  useful lives            1998            1997
                                                                  ------------            ----            ----
                                                                                              (in thousands)
<S>                                                                 <C>                  <C>             <C>    
       Building                                                     31.5 years           $  754           $  754
       Premises and improvements                                 5 to 20 years              726              135
       Furniture and equipment                                   5 to  7 years              969              367
                                                                                         ------           ------
                                                                                          2,449            1,256
    Less accumulated depreciation and amortization                                         (426)            (103)
                                                                                         ------           ------

                                                                                         $2,023           $1,153
                                                                                         ======           ======
</TABLE>
    Depreciation and amortization charged to operations was $219,000 and $60,000
    for the years ended December 31, 1998 and 1997, respectively.

NOTE H - DEPOSITS

    The aggregate amount of jumbo certificates of deposit, each with a minimum
    denomination of $100,000, was approximately $34.7 million and $9.3 million
    at December 31, 1998 and 1997, respectively.

    At December 31, 1998, the schedule of maturities of certificates of deposit
    is as follows (in thousands):

    1999                                                            $ 47,067
    2000                                                              28,399
    2001                                                              14,769
    2002                                                               5,663
    2003                                                               7,670
    Thereafter                                                           908
                                                                    --------

                                                                    $104,476
                                                                    ========

                                      F-17
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


NOTE I - BORROWINGS

    At December 31, 1998, the Bank had five callable fixed-rate advances
    outstanding with the FHLB. The callable advances mature within five to ten
    years with call options ranging from 18 months to five years. The interest
    rates on the callable advances range from 4.83% to 5.63% with a weighted
    average interest rate of 5.31% at December 31, 1998.

    The following table sets forth certain information regarding the Bank's FHLB
    advances, at or for the period ended December 31:
<TABLE>
<CAPTION>
                                                                      1998             1997  
                                                                      ----             ----     
                                                                           (in thousands)
<S>                                                                    <C>             <C>   
    Balance outstanding, December 31                                 $30,000          $ 9,000
    Average balance outstanding during year                          $22,482          $ 7,000
    Weighted average interest rate for the period                       5.29%            5.87%
    Maximum outstanding balance at any month end                     $31,000          $12,700
</TABLE>

    The Bank also has $4.2 million in collateralized borrowings that represent
    participations by other banks in certain loans; such amounts are
    non-interest bearing.

    The Corporation has three line of credit facilities with local financial
    institutions totaling $2.0 million. The aggregate outstanding balance on the
    lines of credit at December 31, 1998 was $1.1 million. The interest rates
    paid on these advances are floating, prime based rates, ranging from prime
    to prime plus one percentage point, with the average interest rate at
    December 31, 1998 equaling 8.21%.

NOTE J - STOCKHOLDERS' EQUITY

    In connection with the formation of the Corporation , the President & CEO
    purchased 10,000 shares, par value $.01, of Class B Common Stock for $500.
    These shares mandatorily convert into ten percent of the then issued shares
    of Class A Common Stock on January 1, 2001. Unearned compensation of
    $543,000 was recorded at the close of the offering on November 30, 1995,
    based on the offering price of $10.00 per share. As a result of the
    mandatory conversion provision, the Class B Common Stock was deemed
    converted on November 30, 1995 for financial statement purposes.

    Unearned compensation, which is shown as a separate component of
    Stockholders' equity, was being amortized over five years. In connection
    with the offering (Note 2), the President & CEO agreed to cap the amount of
    Class A common stock into which the Class B common stock could be converted,
    into an amount equal to 10% of the Class A common stock outstanding at
    December 31, 1997, adjusted for any future stock dividends, or stock splits.
    In conjunction with this agreement, the Corporation fully recognized the
    remaining unearned compensation as compensation expense in 1997.

                                   (Continued)

                                      F-18
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE J - STOCKHOLDERS' EQUITY - Continued

    On July 18, 1997, the Corporation paid a 33% stock dividend on its common
stock to stockholders' of record as of July 1, 1997.

    On August 17, 1998, the Corporation paid a 33% stock dividend on its common
stock to stockholders' of record as of August 3, 1998.

NOTE K - EMPLOYEE BENEFIT PLANS

    The Bank had a defined contribution plan, 401(k), covering eligible
    employees, as defined under the plan document. Employees could contribute
    upto 10% of compensation, as defined under the plan document. The Bank could
    make discretionary contributions. The Bank did not make any contributions
    into the plan during the period ended December 31, 1998 or 1997. The plan
    was terminated in 1998, and all funds were distributed to the employees.

NOTE L - INCOME TAXES

    The components of income taxes (benefit) are as follows:

                                                         1998             1997
                                                         ----             ----
    Federal                                                 (in thousands)
       Current                                           $ 935            $ 193
       Deferred                                           (165)            (216)
       Benefit applied to reduce goodwill                    -               22
                                                         -----            -----

                                                           770               (1)
    State
       Current                                             187                9
       Benefit applied to reduce goodwill                    -                9
                                                         -----            -----
                                                           187               18
                                                         -----            -----

    Income taxes                                         $ 957            $  17
                                                         =====            =====

                                   (Continued)

                                      F-19
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE L - INCOME TAXES - Continued

    The reconciliation of the tax computed at the statutory federal rate was as
follows:
<TABLE>
<CAPTION>
                                                                     1998           1997  
                                                                     ----           ----
                                                                        (in thousands)
<S>                                                                  <C>           <C>
    Tax at statutory rate                                            $832           $ (71)
    Increase (decrease) in taxes resulting from
       Tax-exempt income                                              (76)              -
       Nondeductible compensation                                       -             144
       Nondeductible expenses, including goodwill and
           meals and entertainment                                     31              16
       Increase (decrease) in valuation allowance                       -            (103)
       State income taxes, net of federal income
           tax benefit                                                124              12
       Other, net                                                      46              19
                                                                     ----           -----

    Income tax expense                                               $957           $  17
                                                                     ====           =====
</TABLE>
    Deferred income taxes are provided for the temporary difference between the
    financial reporting basis and the tax basis of the Corporation's assets and
    liabilities. Cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
                                                                     1998          1997      
                                                                     ----          ----
                                                                      (in thousands)
<S>                                                                  <C>           <C>
       Deferred tax assets
          Allowance for possible loan losses                         $346          $184
          Deferred loan fees                                            7             9
          Deferred compensation                                        24            23
          Fixed asset                                                   5             -
          Unrealized losses on securities available for sale          191             -  
                                                                     ----          ----
                                                                      573           216

       Deferred tax liabilities
          Fixed assets                                                  -            (1)
          Unrealized gains on securities available-for-sale             -           (52)
                                                                     ----          ----
                                                                        -           (53)
                                                                     ----          ----

       Net deferred tax asset                                        $573          $163
                                                                     ====          ====
</TABLE>
    During 1997, the Corporation realized a tax benefit related to the net
    operating loss carryovers from the acquisition of the Bank that was treated
    as a reduction to goodwill in accordance with SFAS No. 109. The Corporation
    believes it is more likely than not to realize the net deferred tax asset,
    and accordingly, no valuation allowance has been provided at December 31,
    1997.

                                      F-20
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


NOTE M - EARNINGS PER SHARE

    The following table illustrates the reconciliation of the basic and diluted
    EPS computations, (in thousands, except per share data).
<TABLE>
<CAPTION>
                                                                     For the year ended December 31, 1998 
                                                               -----------------------------------------------        
                                                                                     Weighted
                                                                                     average
                                                                  Income             shares          Per share
                                                               (numerator)        (denominator)        amount  
                                                               -----------        -------------      --------- 
<S>                                                                   <C>                <C>             <C>
    Basic earnings per share
       Net income available to common stockholders               $1,490               1,986            $0.75

    Effect of dilutive securities
       Options                                                        -                 133                -  
                                                                 ------              ------            -----

    Diluted earnings per share
       Net income available to common stockholders
           plus assumed conversions                              $1,490               2,119            $0.70
                                                                 ======               =====            =====
</TABLE>
    Options to purchase 62,000 shares of common stock at exercise prices ranging
    from $11.28 to $30.00 per share were outstanding during 1998 and are not
    included in the computation of diluted EPS because the options exercise
    price were greater than the average market price of the common shares.
<TABLE>
<CAPTION>
                                                                   For the year ended December 31, 1997 (1)
                                                               --------------------------------------------     
                                                                                   Weighted
                                                                                    average
                                                                  Income             shares       Per share
                                                               (numerator)        (denominator)     amount  
                                                               -----------        -------------   --------- 
<S>                                                                <C>                 <C>           <C>
    Basic earnings per share
       Net loss available to common stockholders                  $(226)              1,082        $(0.21)

    Effect of dilutive securities
       Options                                                        -                   -             -  
                                                                  -----               -----        ------

    Diluted earnings per share
       Net loss available to common stockholders
           plus assumed conversions                               $(226)              1,082        $(0.21)
                                                                  ======              =====        ======

</TABLE>
    Options to purchase 322,820 shares of common stock at $5.65 per share were
    outstanding during 1997 and are not included in the computation of diluted
    EPS because the options were anti-dilutive.

    (1) Adjusted for 33% stock dividends paid by the Corporation in August 1998.

                                      F-21
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


NOTE N - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
           CREDIT RISK

    The Bank is a party to financial instruments with off-balance-sheet risk in
    the normal course of business to meet the financing needs of its customers.
    These financial instruments include commitments to extend credit and standby
    letters of credit. Such financial instruments are recorded in the financial
    statements when they become payable. Those instruments involve, to varying
    degrees, elements of credit and interest rate risks in excess of the amount
    recognized in the consolidated balance sheets. The contract or notional
    amounts of those instruments reflect the extent of involvement the Bank has
    in particular classes of financial instruments.

    The Bank's exposure to credit loss in the event of nonperformance by the
    other party to the financial instrument for commitments to extend credit and
    standby letters of credit is represented by the contractual or notional
    amount of those instruments. The Bank uses the same credit policies in
    making commitments and conditional obligations as it does for
    on-balance-sheet instruments.

    Unless noted otherwise, the Bank does not require collateral or other
    security to support financial instruments with credit risk. The approximate
    contract amounts are as follows:
<TABLE>
<CAPTION>

                                                                                      1998              1997
                                                                                      ----              ----       
                                                                                          (in thousands)
<S>                                                                                     <C>             <C> 
    Financial instruments whose contract amounts represent credit risk
       Commitments to extend credit                                                   $1,070           $1,322
       Standby letters of credit and financial guarantees written                      1,098                -
</TABLE>

    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. Since many of the commitments are
    expected to expire without being drawn upon, the total commitment amounts do
    not necessarily represent future cash requirements. The Bank evaluates each
    customer's creditworthiness on a case-by-case basis. The amount of
    collateral obtained, if deemed necessary by the Bank upon extension of
    credit, is based on management's credit evaluation.

    Standby letters of credit are conditional commitments issued by the Bank to
    guarantee the performance of a customer to a third party. Those guarantees
    are primarily issued to support public and private borrowing arrangements,
    including commercial paper, bond financing, and similar transactions. The
    credit risk involved in issuing letters of credit is essentially the same as
    that involved in extending loan facilities to customers.

    The Bank's originated loan portfolio primarily consists of loans secured by
    real estate in the greater Delaware Valley region. The Bank's acquired loan
    portfolio consist of individual loans and loan pools throughout the domestic
    United States purchased at sales conducted by governmental agencies. The
    Bank, as with any lending institution, is subject to the risk that
    residential real estate values in the primary lending area will deteriorate,
    thereby potentially impairing collateral values in the primary lending area.
    However, management believes that real estate values are presently stable in
    its primary lending area and that loan loss allowances have been provided in
    amounts commensurate with its current perception of the foregoing risks of
    the portfolio.

                                      F-22

<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


NOTE O - COMMITMENTS AND CONTINGENCIES

    1.  Leases

    The Bank and the Corporation have entered into operating lease arrangement
    for branch facilities. Both the Bank and the Corporation are responsible for
    pro-rate operating expense escalations.

    As of December 31, 1998, future approximate minimum rental payments are as
    follows, (in thousands):

    1999                                                            $ 91
    2000                                                              96
    2001                                                             104
    2002                                                             106
    2003                                                             108
    Thereafter                                                       386
                                                                    ----
                                                                    $891
                                                                    ====

    The above amount represents minimum rentals not adjusted for possible future
    increases due to escalation provisions and assumes that all option periods
    will be exercised by the Bank or the Corporation.

    Rent expense for the years ended December 31, 1998 and 1997, amounted to
    $147,000 and $125,000, respectively.

    2. Employee Agreements

    The Corporation has employment agreements with certain key executives that
    provide severance pay benefits if there is a change in control of the
    Corporation. The agreements will continue in effect on a year-to-year basis
    until terminated or not renewed by the Corporation or key executives. Upon a
    change in control, the Corporation shall continue to pay the key executives'
    salaries per the agreements and certain benefits for the agreed upon time
    periods. The maximum contingent liability under the agreements at December
    31, 1998 was $1.2 million.

    In addition, in connection with the private placement offering (Note C), the
    Corporation and the President & CEO have entered into an agreement whereby
    the Corporation has the option to pay $150,000 per year for each of the
    three years beginning in 1998 in exchange for the President agreeing to
    waive any future exercise of the non-dilutive feature of the Class B common
    stock. If the Corporation does not make the optional payment on January 2nd
    of each year, the President will be entitled to implement the anti-dilutive
    feature for 10% of any shares of Class A common stock issued during the year
    of non-payment. The Corporation exercised its option for 1998 upon the close
    of the offering, and has also exercised its option for 1999.

                                   (Continued)

                                      F-23
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE O - COMMITMENTS AND CONTINGENCIES

    3. Other

    The Corporation may, in the ordinary course of business, become a party to
    litigation involving collection matters, contract claims and other legal
    proceedings relating to the conduct of its business. In management's
    judgment, the financial position of the Corporation will not be materially
    affected by the final outcome of any present legal proceedings.

NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

    SFAS No. 107 requires disclosure of the estimated fair value of an entity's
    assets and liabilities considered to be financial instruments. For the
    Corporation, as for most financial institutions, the majority of its assets
    and liabilities are considered financial instruments. However, many such
    instruments lack an available trading market, as characterized by a willing
    buyer and seller engaging in an exchange transaction. Also, it is the
    Corporation's general practice and intent to hold its financial instruments
    to maturity and not to engage in trading or sales activities, except for
    certain loans. Therefore, the Corporation had to use significant estimations
    and present value calculations to prepare this disclosure.

    Changes in the assumptions or methodologies used to estimate fair values may
    materially affect the estimated amounts. Also, management is concerned that
    there may not be reasonable comparability between institutions due to the
    wide range of permitted assumptions and methodologies in the absence of
    active markets. This lack of uniformity gives rise to a high degree of
    subjectivity in estimating financial instrument fair values.

    Estimated fair values have been determined by the Corporation using the best
    available data and an estimation methodology suitable for each category of
    financial instruments. The estimation methodologies used, the estimated fair
    values, and recorded book balances at December 31, 1998 and 1997, are
    outlined below.

    For cash and cash equivalents, including cash and due from banks and
    interest bearing deposits with banks, the recorded book values of $1.3
    million and $7.7 million respectively, as of December 31, 1998 and $833,000
    and $4.0 million, respectively, at December 31, 1997, approximate fair
    values. The estimated fair values of investment securities, including FHLB
    stock, are based on quoted market prices, if available. Estimated fair
    values are based on quoted market prices of comparable instruments if quoted
    market prices are not available.

    The net loan portfolio at December 31, 1998 and 1997, has been valued using
    a present value discounted cash flow where market prices were not available.
    The discount rate used in these calculations is the estimated current market
    rate adjusted for credit risk. The carrying value of accrued interest
    approximates fair value.

                                   (Continued)

                                      F-24
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

    The estimated fair values of demand deposits (i.e., interest- and
    noninterest-bearing checking accounts, savings, and certain types of money
    market accounts) are, by definition, equal to the amount payable on demand
    at the reporting date (i.e., their carrying amounts). The fair values of
    certificates of deposit are estimated using a discounted cash flow
    calculation that applies interest rates currently being offered to a
    schedule of aggregated expected monthly time deposit maturities. The
    carrying amount of accrued interest payable approximates its fair value.
<TABLE>
<CAPTION>
                                                 1998                            1997 
                                       --------------------------      ------------------------
                                       Carrying        Estimated       Carrying      Estimated
                                       amount          fair value       amount       fair value
                                       --------        ----------      --------      ----------  
                                                           (in thousands)
<S>                                    <C>               <C>            <C>            <C>    
    Investment securities              $ 47,667         $ 47,862        $24,454        $24,678
    Loans receivable                    103,189          110,242         56,570         57,647
    Deposits                            114,387          114,777         70,474         70,645
</TABLE>

    The fair values of borrowings totaling $35.3 million and $12.7 million are
    estimated to approximate their recorded book balances at December 31, 1998
    and 1997, respectively.

    There was no material difference between the notional amount and the
    estimated fair value of off-balance-sheet items, which totalled
    approximately $2.2 million and $1.3 million at December 31, 1998 and 1997,
    respectively, and primarily comprise unfunded loan commitments, which are
    generally priced at market at the time of funding.

NOTE Q - STOCK OPTION PLAN

    The FASB issued SFAS No. 123, Accounting for Stock-Based Compensation, which
    contains a fair value-based method for valuing stock-based compensation that
    entities may use, which measures compensation cost at the grant date based
    on the fair value of the award. Compensation is then recognized over the
    service period, which is usually the vesting period. Alternatively, the
    standard permits entities to continue accounting for employee stock options
    and similar equity instruments under APB Opinion No. 25, Accounting for
    Stock Issued to Employees. Entities that continue to account for stock
    options using APB Opinion No. 25 are required to make pro forma disclosures
    of net income and earnings per share, as if the fair value-based method of
    accounting defined in SFAS No. 123 had been applied. The Corporation has
    determined it will follow APB Opinion No. 25.

                                   (Continued)

                                      F-25
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE Q - STOCK OPTION PLAN - Continued

    The Corporation has a Stock Option Plan (the Plan) for the benefit of key
    officers and employees of the Corporation. The Plan was designed to attract
    and retain qualified personnel in key positions, provide officers and key
    employees with a proprietary interest in the Corporation as an incentive to
    contribute to the success of the Corporation, and reward key employees for
    outstanding performance and the attainment of targeted goals. The Plan was
    also designed to retain qualified directors for the Corporation, and will
    provide for the grant of non-qualified stock options and incentive options
    intended to comply with the requirements of Section 422 of the Internal
    Revenue Code of 1986, as amended.

    The Plan is administered and interpreted by a Committee of the Board of
    Directors, and unless terminated earlier, will be in effect for a period of
    ten years from the Effective Date. A total of 531,000 shares have been
    reserved for issuance under the Plan. The options, which have a term of
    between 4 and 10 years when issued, vest either immediately or over a period
    specified by the Corporation's compensation committee. The exercise price of
    each option is equal to or above the market value on the date of grant.
    Accordingly, no compensation cost has been recognized for the Plan. Had
    compensation cost for the Plan been determined based on the fair value of
    options at the grant dates consistent with the method of SFAS No. 123,
    Accounting for Stock-Based Compensation, the Corporation's results of
    operations and per share amounts would have been reduced to the pro forma
    amounts indicated below, (in thousands, except per share data).

                                                   1998            1997   
                                                   ----            ----   
    Net income (loss)
       As reported                                $1,490          $ (226)
       Pro forma                                   1,180            (226)

    Basic earnings (loss) per share
       As reported                                  0.75           (0.21)
       Pro forma                                    0.59           (0.21)

    Diluted earnings (loss) per share
       As reported                                  0.70           (0.21)
       Pro forma                                    0.56           (0.21)


    These pro forma amounts may not be representative of future disclosures
    because they do not take into effect the pro forma compensation expense
    related to grants before 1995.

    The fair value of each option grant is estimated on the date of grant using
    the Black-Scholes option-pricing model with the following weighted average
    assumptions used for grants in 1998: no dividend yield for all years;
    expected volatility of 20%, risk-free interest rate of 5.55%, and an
    expected lives of ten years for all options. No options were granted in
    1997.

                                   (Continued)

                                      F-26
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE Q - STOCK OPTION PLAN - Continued

    A summary of the status of the Corporation's fixed stock option plans as of
    December 31, 1998, and changes for each of the years in the two-year period
    then ended was as follows:
<TABLE>
<CAPTION>
                                                              1998                          1997 
                                                      ---------------------        -------------------------
                                                                  Weighted                         Weighted
                                                                   average                         average
                                                      Number      exercise         Number          exercise
                                                        of        price per          of            price per
                                                      shares        share          shares            share    
                                                      ------      ---------        ------          ---------

<S>                                                   <C>           <C>            <C>               <C>  
    Outstanding at beginning of year                  323,000       $5.65          333,000           $5.65
    Options granted                                   152,000        9.78                -               -
    Options exercised                                  (9,000)       5.65                -               -
    Options forfeited                                 (28,000)       5.65          (10,000)           5.65       
                                                      -------                      -------

    Outstanding at end of year                        438,000       $7.20          323,000           $5.65
                                                      =======                      =======

    Options exercisable at year-end                   343,000                      323,000
                                                      =======                      =======

    Weighted average fair value of
       options granted during year                                  $3.58                            $  -
</TABLE>

    The following table summarizes information about stock options outstanding
    at December 31, 1998:
<TABLE>
<CAPTION>
                                                     Options outstanding                   Options  exercisable
                                       ----------------------------------------------   --------------------------
                                                          Weighted
                                           Number          average           Weighted       Number        Weighted
                                       outstanding at     remaining          average    exercisable at     average
       Range of exercise                December 31,     contractual         exercise    December 31,     exercise
             prices                         1998         life (years)          price         1998          price 
       -----------------               --------------    ------------        --------   --------------   ----------
<S>          <C>                            <C>              <C>                <C>           <C>           <C> 
       $ 5.65 to $ 8.48                   365,000         5.92 years           $ 6.05       340,000       $ 6.10
       $ 8.66 to $12.99                    60,000         9.42 years            10.80             -            -
       $15.04 to $22.56                    11,000         9.67 years            17.10         3,000        20.00
       $25.00 to $30.00                     2,000         9.67 years            27.50             -            -
</TABLE>

                                      F-27
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


NOTE R - REGULATORY CAPITAL REQUIREMENTS

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

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

    As of December 31, 1998, the most recent notification from the Federal
    Deposit Insurance Corporation categorized the Corporation as adequately
    capitalized under the regulatory framework for prompt corrective action. To
    be categorized as adequately capitalized, the Corporation must maintain
    minimum total risk-based, Tier I risk- based and Tier I leverage ratios as
    set forth in the table. There are no conditions or events since that
    notification that management believes have changed the institution's
    category.

    The Corporation's actual capital amounts and ratios are presented in the
following table.
<TABLE>
<CAPTION>
                                                                                             
                                                                            For capital      
                                                       Actual            adequacy purposes   
                                                  ------------------     ------------------- 
                                                  Amount       Ratio     Amount        Ratio 
                                                  ------       -----     ------        ----- 
                                                            (dollars in thousands)
<S>                                                  <C>        <C>        <C>           <C> 
     As of December 31, 1998
        Total capital (to risk-weighted assets)   $15,566      12.1%    $10,317        8.00%
        Tier I capital (to risk-weighted assets)   13,782      10.7       5,159        4.00 
        Tier I capital (to average assets)         13,782       8.7       6,319        4.00 

     As of December 31, 1997
        Total capital (to risk-weighted assets)     5,752       8.5       5,431        8.00
        Tier I capital (to risk-weighted assets)    5,184       7.6       2,715        4.00 
        Tier I capital (to average assets)          5,184       5.8       3,570        4.00 
</TABLE>

                                   (Continued)

                                      F-28
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997




NOTE R - REGULATORY CAPITAL REQUIREMENTS - Continued

    The Bank's actual capital amounts and ratios are presented in the following
    table.
<TABLE>
<CAPTION>
                                                                                                    To be well
                                                                                                 capitalized under
                                                                              For capital        prompt corrective
                                                          Actual           adequacy purposes     action provisions 
                                                     ----------------      -----------------    --------------------
                                                     Amount     Ratio       Amount     Ratio    Amount         Ratio   
                                                     ------     -----       ------     -----    ------         -----
                                                                         (dollars in thousands)
<S>                                                 <C>          <C>         <C>        <C>     <C>            <C>   
     As of December 31, 1998
        Total capital (to risk-weighted assets)     $13,930      11.2%      $9,987     8.0%     $12,483        10.0%
        Tier I capital (to risk-weighted assets)     12,879      10.3        4,994     4.0        7,490         6.0
        Tier I capital (to average assets)           12,879       8.5        6,068     4.0        7,585         5.0
                                                    
     As of December 31, 1997                        
        Total capital (to risk-weighted assets)       5,315       7.9        5,400     8.0        6,750        10.0
        Tier I capital (to risk-weighted assets)      4,747       7.0        2,700     4.0        4,050         6.0
        Tier I capital (to average assets)            4,747       5.4        3,548     4.0        4,435         5.0
</TABLE>
                                                
    At December 31, 1997, the Bank's Total capital ratio of 7.90% did not meet
    the minimum requirement of 8.0% in order to consider the Bank adequately
    capitalized. However, upon completion of the offering (Note 2) the
    Corporation raised $7.1 million, of which $6.9 million was contributed to
    the Bank. As a result, the Bank's Total capital ratio increased to 17.8%.

    State Banking statutes restrict the amount of dividends paid on capital
    stock. Accordingly, no dividends shall be paid by the Bank on its capital
    stock unless, following the payment of such dividends, the capital stock of
    the Bank will be unimpaired, and (1) the Bank will have surplus of not less
    than 50% of its capital, or, if not (2) the payment of such dividend will
    not reduce the surplus of the Bank.

    Additionally, banking regulations limit the amount of investment, loans,
    extensions of credit and advances that one subsidiary bank can make to the
    Corporation at any time to 10% and in the aggregate 20% of the Bank's
    capital stock and surplus. These regulations also require that any such
    investment, loan, extension of credit or advance be secured by securities
    having a market value in excess of the amounts thereof. At December 31,
    1998, loans from the Bank to the Corporation amounted, in aggregate, to
    $976,000, or 7.50%, of the Bank's capital stock and surplus. There were no
    investments, extensions of credits or advances at December 31, 1998. At
    December 31, 1997, there were no investments, loans, extensions of credit or
    advances from the Bank to the Corporation.

                                      F-29
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY

    Condensed financial information for USABancShares, Inc. (parent company
    only) follows:

                                  BALANCE SHEET
<TABLE>
<CAPTION>

                                                                             December 31,
                                                                         ------------------             
                                                                           1998        1997     
             ASSETS                                                         (in thousands)
<S>                                                                      <C>          <C>   
Cash and Due from banks                                                  $    23      $  254
Securities available-for sale                                              1,931         328
Investment in subsidiaries                                                13,281       5,088
Other assets                                                                 708         211
                                                                         -------      ------

             Total assets                                                $15,943      $5,881
                                                                         =======      ======

             LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
    Other borrowed money                                                 $ 1,957      $  340
    Other liabilities                                                        389         175
                                                                         -------      ------

             Total liabilities                                             2,346         515

Stockholders' equity                                                      13,597       5,366
                                                                         -------      ------

             Total liabilities and stockholders' equity                  $15,943      $5,881
                                                                         =======      ======
</TABLE>
                                   (Continued)

                                      F-30
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued

                             STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
                                                                         ar Ended December 31,
                                                                         ---------------------
                                                                          1998          1997  
                                                                          ----          ----   
                                                                             (in thousands)
<S>                                                                       <C>             <C> 
        INCOME
           Interest income                                               $   49         $   -
           Other income                                                      19            77
                                                                         ------         -----

              Total income                                                   68            77
                                                                         ------         -----

        EXPENSES
           Compensation                                                     150           517
           Interest                                                          89            14
           Other                                                             10            29
                                                                         ------         -----

              Total expenses                                                249           560
                                                                         ------         -----

              Loss before undistributed earnings
                  of subsidiaries                                          (181)         (483)

                  Provision (benefit) for income taxes                        1           (16)
                                                                         -------        -----

              Loss before undistributed earnings
                  of subsidiaries                                          (182)         (467)

        Undistributed earnings of subsidiaries                            1,672           241
                                                                         ------         -----

              NET INCOME (LOSS)                                          $1,490         $(226)
                                                                         ======         =====
</TABLE>
                                   (Continued)

                                      F-31
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997


NOTE S - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - Continued

                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                                      -----------------------
                                                                                         1998         1997
                                                                                         ----         ----
                                                                                           (in thousands)
<S>                                                                                      <C>            <C>
        Cash flows from operating activities
           Net income                                                                  $ 1,490        $(226)
           Adjustments to reconcile net income to net cash
               provided by (used in) operating activities
                  Undistributed earnings (loss) from subsidiaries                       (1,672)         241
                  (Gain) loss on sale of investments                                         5          (28)
                  Net change in assets and liabilities                                    (146)          99
                                                                                       -------        -----

              Net cash provided by (used in) operating activities                         (323)          86
                                                                                       -------        -----

        Cash flows from investing activities
           Capital distribution (to) from subsidiaries                                  (7,078)           -
           Purchase of investment securities available-for-sale                         (1,603)        (135)
                                                                                       -------        -----

              Net cash used in investing activities                                     (8,681)        (135)
                                                                                        ------        -----

        Cash flows from financing activities
           Net increase in borrowings                                                    1,616          290
           Proceeds from issuance of common stock                                        7,157            -  
                                                                                       -------        -----

              Net cash provided by financing activities                                  8,773          290
                                                                                       -------        -----

              NET INCREASE (DECREASE) IN CASH                                             (231)         241

        Cash at beginning of year                                                          254           13
                                                                                       -------        -----

        Cash at end of year                                                            $    23        $ 254
                                                                                       =======        =====

        Supplemental disclosure of cash flow information
          Cash paid during the year for income taxes                                   $     1        $   -   
                                                                                       =======        =====
</TABLE>

                                      F-32
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


NOTE T - SUBSEQUENT EVENT

    In March 1999, the Corporation issued $10 million of 9.50% junior
    subordinated debentures ( the "trust preferred offering") to USA Capital
    Trust 1, a Delaware Business Trust, in which the Corporation owns all of the
    common equity. The trust issued $10 million of Preferred Securities to
    investors, secured by the junior subordinated debentures and the guarantee
    of the Corporation, The junior subordinated debentures mature in 2029. Had
    the trust preferred offering occurred as of December 31, 1998, the
    Corporation's condensed balance sheet would have been as follows:
<TABLE>
<CAPTION>

ASSETS                                                                                Actual           Pro-Forma      
                                                                                   -------------      ------------
                                                                                            (in thousands
                                                                                             except share
                                                                                                 data)
<S>                                                                                      <C>              <C>
Cash and due from banks (1)                                                        $   1,335            $ 10,435 
Interest bearing deposit with banks                                                    7,706               7,706
Investment securities                                                                 47,667              47,667
Loans receivable, net                                                                102,138             102,138
Premises and equipment, net                                                            2,023               2,023
Other assets (2)                                                                       4,237               5,137
                                                                                    --------            --------
              Total assets                                                          $165,106            $175,106
                                                                                    ========            ========
                                                                                                      
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                  
LIABILITIES                                                                                           
Deposits                                                                           $ 114,387            $114,387
Borrowings                                                                            35,305              35,305
Guaranteed preferred beneficial interest in subordinated debt                              -              10,000
Accrued expenses and other liabilities                                                 1,817               1,817
                                                                                    --------            --------
              Total liabilities                                                      151,509             161,509
                                                                                    --------            --------
                                                                                                      
STOCKHOLDERS' EQUITY                                                                                  
Preferred stock $1.00 par value, 5,000,000 shares authorized, no shares issued                        
    and outstanding in 1998 and 1997                                                                  
Common stock $1.00 par value, 10,000,000 shares authorized, 2,007,386 shares                          
    issued and outstanding in 1998; 813,807 shares issued and outstanding in                          
    1997, and 108,236 shares of converted and unissued Class B common stock in                        
    1998; 81,381 converted and unissued 1997                                           2,116               2,116
Additional paid-in capital                                                            10,683              10,683
Accumulated (deficit) earnings                                                         1,112               1,112
Accumulated other comprehensive income                                                  (314)               (314)
                                                                                    --------            --------
              Total stockholders' equity                                              13,597              13,597
                                                                                    --------            --------
              Total liabilities and stockholders' equity                            $165,106            $175,106
                                                                                    ========            ========
</TABLE>                                                                       
(1) Total cash received was $9.1 million, net of trust preferred offering cost
    of $900,000.
(2) $900,000 of trust preferred offering costs will be amortized over the life
    of the related junior subordinated debentures.

                                   (Continued)

                                      F-33
<PAGE>
                      USABANCSHARES, INC. AND SUBSIDIARIES

             Notes to Consolidated Financial Statements - Continued

                           December 31, 1998 and 1997



NOTE T - SUBSEQUENT EVENT - Continued


    Although the junior subordinated debentures will be treated as debt of the
    Corporation, they currently qualify for Tier I capital investments, subject
    to the 25% limitation under risk-based capital guidelines of the Federal
    Reserve. The portion of the Trust Preferred Securities that exceeds this
    limitation qualifies as Tier II capital of the Corporation. Had the trust
    preferred offering occurred as of December 31, 1998, the Corporation's Total
    Capital, Tier 1 Capital, and Tier 1 Leverage capital ratios would have been
    19.82%, 13.36% and 10.91%, respectively.




                                      F-34

<PAGE>

                                  Exhibit Index

10.3 Employment Agreement between the Registrant and Brian M. Hartline, dated
     November 30, 1998.
21   Subsidiaries of the Corporation.
23   Consent of Independent Certified Public Accoutants.
27   Financial Data Schedule.