SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

[x]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1998

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

For the transition period from             to

Commission file Number:  2-85306

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

PENNSYLVANIA                                          23-2244948
(State of other jurisdiction of                       (I.R.S.   Employer
incorporation or organization)                        Identification Number)   
                                                                             

Post Office Box 67, Route 191, Lake Ariel, Pennsylvania                  18436
(Address of principal executive offices)                             (Zip Code)

Registrant's telephone number, including area code:  (570) 698-5695

Securities registered pursuant to Section 12(b) of the Act:  Not Applicable

Securities registered pursuant to Section 12(g) of the Act:  
Common Stock, par value $.21 per share

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the past 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______

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant  based on average  closing bid and asked prices:  $42,015,693 at
March 16, 1999.

     As of March 16, 1999, the registrant had  outstanding  4,838,386  shares of
its common stock, par value $.21 per share.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to shareholders of the registrant for the year 
ended December 31, 1998 and of the Proxy Statement for the 1999 Annual Meeting 
of Shareholders, are incorporated by reference in Part II of this Annual Report.

                                  Page 1 of 120
                            Exhibit Index on Page 26


<PAGE>


                            LAKE ARIEL BANCORP, INC.
                                    FORM 10-K

                                      Index
Part I                                                                    Page

Item 1.           Business.......................................            3

Item 2.           Properties.....................................           16

Item 3.           Legal Proceedings..............................           18

Item 4.           Submission of Matters to a Vote of 
                  Security Holders.........................     Not Applicable

Part II

Item 5.           Market for the Registrant's Common Equity and Related
                   Shareholder Matters...........................           18

Item 6.           Selected Financial Data........................           20

Item 7.           Management's Discussion and Analysis of Financial
                    Condition and Results of Operations..........           20

Item 7A.          Quantitative and Qualitative Disclosures 
                   About Market Risk.............................           20

Item 8.           Financial Statements and Supplementary Data....           20

Item 9.           Changes in and Disagreements with Accountants on
                    Accounting and Financial Disclosure..........           20

Part III

Item 10.          Directors and Executive Officers of the Registrant.       20

Item 11.          Executive Compensation.........................           21

Item 12.          Security Ownership of Certain Beneficial 
                    Owners and Management........................           21

Item 13.          Certain Relationships and Related Transactions.           21

Part IV

Item 14.          Exhibits, Financial Statement Schedules and 
                    Reports on Form 8-K..........................           22

Signatures        ...............................................           24

Exhibit Index     ...............................................           26

                                       2

<PAGE>


                            LAKE ARIEL BANCORP, INC.
                                    FORM 10-K

                                     Part I

Item 1.       Business

              General

              Lake Ariel Bancorp,  Inc.  ("Bancorp"),  a  Pennsylvania  business
corporation,  is a bank holding  company,  registered with and supervised by the
Board of Governors of the Federal Reserve System (the "Federal  Reserve Board").
Bancorp was organized on May 23, 1983, and commenced  operations on November 26,
1983. Bancorp has one wholly-owned  subsidiary,  LA Bank,  National  Association
(the  "Bank").  Bancorp's  business  has  consisted  primarily  of managing  and
supervising the Bank, and its principal source of income has been dividends paid
by the Bank.  At  December  31,  1998,  Bancorp had total  consolidated  assets,
deposits  and  stockholders'  equity of  approximately  $474.7  million,  $312.7
million and $37.9 million, respectively.

              The Bank was  organized  in 1910.  The Bank is a national  banking
association  that is a member of the Federal  Reserve System and the deposits of
which are insured by the Federal  Deposit  Insurance  Corporation  (the  "FDIC")
under the Bank  Insurance  Fund  ("BIF").  The Bank has  twenty-one  (21) branch
locations  (four branches within Wayne County,  ten branches  within  Lackawanna
County, three branches within Pike County, two branches within Monroe County and
two branches within Luzerne County),  and a Financial Center (within  Lackawanna
County,  Pennsylvania).  The Bank is a full service  commercial bank providing a
wide range of services to  individuals  and small to medium sized  businesses in
its Northeastern Pennsylvania market area, including accepting time, demand, and
savings  deposits and making secured and unsecured  commercial,  real estate and
consumer loans. The Bank has two subsidiaries,  LA Lease,  Inc., that engages in
the leasing of personal property,  and Ariel Financial  Services,  Inc., a newly
formed   business   unit   offering   stocks,   bonds,   annuities   and   other
insurance-related products.

              Supervision and Regulation - Bancorp

              Bancorp is  subject  to the  jurisdiction  of the  Securities  and
Exchange Commission ("SEC") relating to the offering and sale of its securities.
Bancorp is  currently  subject to the SEC's  rules and  regulations  relating to
periodic reporting,  insider trading reports and proxy solicitation materials in
accordance with the Securities Exchange Act of 1934 (the "Exchange Act").

              Bancorp is also  subject  to the  provisions  of the Bank  Holding
Company Act of 1956, as amended ("Bank Holding Company Act"), and to supervision
by the Federal Reserve Board.  The Bank Holding Company Act will require Bancorp
to secure the prior  approval of the  Federal  Reserve  Board  before it owns or
controls,  directly  or  indirectly,  more  than  5% of  the  voting  shares  of
substantially all of the assets of any institution,  including another bank. The
Bank Holding Company Act prohibits acquisition by Bancorp of more than 5% of the
voting  shares of, or interest  in, or  substantially  all of the assets of, any
bank located  outside  Pennsylvania  unless such an acquisition is  specifically
authorized by laws of the state in which such bank is located.

              A bank holding company is prohibited from engaging in or acquiring
direct or indirect  control of more than 5% of the voting  shares of any company
engaged in non-banking  activities unless the Federal Reserve Board, by order or
regulation,  has found such  activities  to be so closely  related to banking or
managing or controlling banks as to be a proper incident thereto. In making this
determination,  the Federal Reserve Board  considers  whether the performance of
these  activities by a bank holding  company would offer  benefits to the public
that outweigh possible adverse effects.

              The Bank  Holding  Company  Act  also  prohibits  acquisitions  of
control of a bank holding company, such as Bancorp,  without prior notice to the
Federal  Reserve  Board.  Control  is  defined  for this  purpose  as the power,
directly or  indirectly,  to direct the management or policies of a bank holding
company or to vote twenty-five  percent (25%) (or ten percent (10%), if no other
person or persons  acting on concert,  holds a greater  percentage of the Common
Stock) or more of Bancorp's Common Stock.
                                       3
<PAGE>

              Bancorp is  required  to file an annual  report  with the  Federal
Reserve Board and any additional  information that the Federal Reserve Board may
require  pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examinations of Bancorp and any or all of its subsidiaries. Subject to
certain  exceptions,  a bank holding company and its  subsidiaries are generally
prohibited  from engaging in certain tie-in  arrangements in connection with any
extension  of credit or  provision  of credit or  provision  of any  property or
services. The so-called "Anti-tie-in" provisions state generally that a bank may
not extend credit,  lease, sell property or furnish any service to a customer on
the  condition  that the customer  provide  additional  credit or service to the
bank, to its bank holding company or to any other subsidiary of its bank holding
company or on the condition that the customer not obtain other credit or service
from a competitor of the bank, its bank holding company or any subsidiary of its
bank holding company.

              Subsidiary  banks of a bank holding company are subject to certain
restrictions  imposed by the Federal  Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other  securities of the bank holding  company and on taking of such stock or
securities as collateral for loans to any borrower.

              Permitted Non-Banking Activities

              The Federal Reserve Board permits bank holding  companies or their
subsidiaries to engage in nonbanking activities so closely related to banking or
managing or  controlling  banks as to be a proper  incident  thereto.  While the
types of  permissible  activities  are subject to change by the Federal  Reserve
Board, the principal nonbanking  activities that presently may be conducted by a
bank holding  company or its  subsidiary  without prior  approval of the Federal
Reserve Board are:

              (1)  Extending  credit and  servicing  loans.  Making,  acquiring,
brokering,   or  servicing  loans  or  other  extensions  of  credit  (including
factoring,  issuing  letters of credit and  accepting  drafts) for the company's
account or for the account of others.

              (2) Activities  related to extending credit. Any activity usual in
connection  with  making,  acquiring,  brokering  or  servicing  loans  or other
extensions of credit,  as determined by the Federal  Reserve Board.  The Federal
Reserve  Board  has  determined  that  the  following  activities  are  usual in
connection  with  making,  acquiring,  brokering  or  servicing  loans  or other
extensions of credit:

                      (i)  Real  estate  and   personal   property   appraising.
              Performing  appraisals of real estate and tangible and  intangible
              personal property, including securities.

                      (ii) Arranging  commercial  real estate equity  financing.
              Acting  as  intermediary   for  the  financing  of  commercial  or
              industrial  income-producing  real  estate  by  arranging  for the
              transfer  of the title,  control,  and risk of such a real  estate
              project to one or more investors,  if the bank holding company and
              its  affiliates  do not have an  interest  in, or  participate  in
              managing  or  developing,  a real  estate  project  for  which  it
              arranges  equity  financing,  and do not  promote or  sponsor  the
              development of the property.

                      (iii) Check-guaranty  services.  Authorizing a subscribing
              merchant to accept  personal  checks  tendered  by the  merchant's
              customers in payment for goods and services,  and purchasing  from
              the  merchant  validly  authorized  checks  that are  subsequently
              dishonored.

                      (iv)  Collection  agency  services.   Collecting   overdue
              accounts receivable, either retail or commercial.

                      (v)  Credit  bureau  services.   Maintaining   information
              related  to the credit  history of  consumers  and  providing  the
              information  to a credit  grantor who is  considering a borrower's
              application for credit or who has extended credit to the borrower.

                                       4
<PAGE>
 

                      (vi)   Asset   management,   servicing,   and   collection
              activities.  Engaging  under  contract with a third party in asset
              management,  servicing, and collection of assets of a type that an
              insured  depository  institution  may  originate  and own,  if the
              company does not engage in real property management or real estate
              brokerage services as part of these services.

                      (vii) Acquiring debt in default. Acquiring debt that is in
              default at the time of acquisition under certain conditions.

                      (viii) Real estate  settlement  servicing.  Providing real
              estate settlement services.

              (3) Leasing  personal or real property.  Leasing  personal or real
property or acting as agent,  broker,  or adviser in leasing such property under
certain conditions.

              (4) Operating nonbank depository institutions:

                      (i) Industrial banking. Owning,  controlling, or operating
              an industrial bank,  Morris Plan bank, or industrial loan company,
              so long as the institution is not a bank.

                      (ii) Operating savings association. Owning, controlling or
              operating  a  savings  association,  if  the  savings  association
              engages  only in  deposit-taking  activities,  lending,  and other
              activities that are permissible for bank holding companies.

              (5) Trust company  functions.  Performing  functions or activities
that may be performed by a trust company  (including  activities of a fiduciary,
agency, or custodial nature),  in the manner authorized by federal or state law,
so long as the company is not a bank for  purposes of the Bank  Holding  Company
Act.

              (6)  Financial  and  investment  advisory  activities.  Acting  as
investment or financial advisor to any person,  including (without,  in any way,
limiting the foregoing):

                      (i) Serving as  investment  adviser (as defined in section
              2(a)(20)  of  the  Investment  Company  Act  of  1940,  15  U.S.C.
              80a-2(a)(20)), to an investment company registered under that act,
              including  sponsoring,   organizing,  and  managing  a  closed-end
              investment company;

                      (ii) Furnishing  general economic  information and advice,
              general economic statistical  forecasting  services,  and industry
              studies;

                      (iii)   Providing   advice  in  connection  with  mergers,
              acquisitions, divestitures, investments, joint ventures, leveraged
              buyouts,   recapitalizations,   capital  structurings,   financing
              transactions and similar  transactions,  and conducting  financial
              feasibility studies;

                      (iv) Providing information,  statistical forecasting,  and
              advice with respect to any transaction in foreign exchange, swaps,
              and similar transactions,  commodities,  and any forward contract,
              option, future, option on a future, and similar instruments;

                      (v)  Providing   educational  courses,  and  instructional
              materials to consumers on individual financial management matters;
              and

                      (vi) Providing  tax-planning and tax-preparation  services
to any person.

              (7) Agency transactional services for customer investments:

                      (i) Securities  brokerage.  Providing securities brokerage
              services   (including   securities   clearing  and/or   securities
              execution   services  on  an   exchange),   whether  alone  or  in
              combination  with  investment  advisory  services,  and incidental
              activities  (including  related  securities  credit activities and
              custodial  services),  if the  securities  brokerage  services are
              restricted  to buying and selling  securities  solely as agent for
              the  account  of   customers   and  do  not   include   securities
              underwriting or dealing.
                                       5
<PAGE>

                      (ii) Riskless principal  transactions.  Buying and selling
              in the  secondary  market all types of  securities on the order of
              customers as a "riskless principal" to the extent of engaging in a
              transaction in which the company,  after receiving an order to buy
              (or sell) a security  from a  customer,  purchases  (or sells) the
              security for its own account to offset a  contemporaneous  sale to
              (or purchase from) the customer. This does not include:

                               (A)  Selling  bank-ineligible  securities  at the
                      order of a customer that is the issuer of the  securities,
                      or selling  bank-ineligible  securities in any transaction
                      where the company has a contractual agreement to place the
                      securities as agent of the issuer; or

                               (B)  Acting  as  a  riskless   principal  in  any
                      transaction involving a bank-ineligible security for which
                      the company or any of its  affiliates  acts as underwriter
                      (during  the  period  of the  underwriting  or for 30 days
                      thereafter) or dealer.

                      (iii) Private placement services.  Acting as agent for the
              private   placement  of   securities   in   accordance   with  the
              requirements  of the  Securities  Act of 1933 ("1933 Act") and the
              rules of the  Securities and Exchange  Commission,  if the company
              engaged in the activity  does not purchase or  repurchase  for its
              own account the  securities  being  placed,  or hold in  inventory
              unsold portions of issues of these securities.

                      (iv)  Futures  commission  merchant.  Acting  as a futures
              commission  merchant  ("FCM")  for  unaffiliated  persons  in  the
              execution,  clearance,  or execution  and clearance of any futures
              contract and option on a futures contract traded on an exchange in
              the United States or abroad under certain conditions.

                      (v) Other transactional  services.  Providing to customers
              as agent transactional  services with respect to swaps and similar
              transactions.

         (8) Investment transactions as principal:

                      (i) Underwriting and dealing in government obligations and
              money market instruments.  Underwriting and dealing in obligations
              of the  United  States,  general  obligations  of states and their
              political  subdivisions,  and other  obligations that state member
              banks  of  the  Federal   Reserve  System  may  be  authorized  to
              underwrite  and  deal in  under 12  U.S.C.  24 and 335,  including
              banker's  acceptances and certificates of deposit,  under the same
              limitations  as would be applicable if the activity were performed
              by the  bank  holding  company's  subsidiary  member  banks or its
              subsidiary nonmember banks as if they were member banks.

                      (ii)  Investing  and  trading   activities.   Engaging  as
principal in:

                               (A)      Foreign exchange;

                               (B) Forward contracts,  options, futures, options
                      on futures,  swaps, and similar contracts,  whether traded
                      on exchanges or not, based on any rate,  price,  financial
                      asset  (including  gold,  silver,   platinum,   palladium,
                      copper,  or  any  other  metal  approved  by  the  Board),
                      nonfinancial  asset,  or group  of  assets,  other  than a
                      bank-ineligible security under certain conditions.

                               (C) Forward contracts,  options, futures, options
                      on futures,  swaps, and similar contracts,  whether traded
                      on exchanges or not, based on an index of a rate, a price,
                      or the value of any financial asset,  nonfinancial  asset,
                      or  group  of  assets,   if  the  contract  requires  such
                      settlement.

                                       6
<PAGE>


                      (iii) Buying and selling bullion,  and related activities.
              Buying,  selling and storing bars, rounds,  bullion,  and coins of
              gold,  silver,  platinum,  palladium,  copper, and any other metal
              approved by the  Federal  Reserve  Board,  for the  company's  own
              account  and the  account  of  others,  and  providing  incidental
              services  such as arranging for storage,  safe custody,  assaying,
              and shipment.

              (9) Management consulting and counseling activities:

                      (i) Management consulting. Providing management consulting
              advice under certain conditions.

                      (ii)  Employee  benefits  consulting  services.  Providing
              consulting   services  to  employee   benefit,   compensation  and
              insurance  plans,  including  designing  plans,  assisting  in the
              implementation  of plans,  providing  administrative  services  to
              plans, and developing employee communication programs for plans.

                      (iii)  Career   counseling   services.   Providing  career
              counseling services to:

                               (A)  A  financial  organization  and  individuals
                      currently  employed  by, or  recently  displaced  from,  a
                      financial organization;

                               (B)      Individuals who are seeking employment 
                      at a financial organization; and

                               (C) Individuals who are currently  employed in or
                      who seek positions in the finance,  accounting,  and audit
                      departments of any company.

              (10) Support services:

                      (i)     Courier services.  Providing courier services for:

                               (A) Checks,  commercial  papers,  documents,  and
                      written  instruments  (excluding  currency or  bearer-type
                      negotiable instruments) that are exchanged among banks and
                      financial institutions; and

                               (B) Audit and  accounting  media of a banking  or
                      financial  nature and other business records and documents
                      used in processing such media.

                      (ii) Printing and selling MICR-encoded items. Printing and
              selling checks and related  documents,  including  corporate image
              checks,  cash tickets,  voucher  checks,  deposit  slips,  savings
              withdrawal  packages,  and other forms that  require  Magnetic Ink
              Character Recognition ("MICR") encoding.

              (11) Insurance agency and underwriting:

                      (i)  Credit  insurance.  Acting as  principal,  agent,  or
              broker  for  insurance   (including   home   mortgage   redemption
              insurance) that is:

                               (A) Directly  related to an extension of credit 
                      by the bank holding  company or any of its subsidiaries; 
                      and

                               (B)  Limited to  ensuring  the  repayment  of the
                      outstanding  balance due on the extension of credit in the
                      event   of   the   death,   disability,   or   involuntary
                      unemployment of the debtor.

                      (ii) Finance company subsidiary. Acting as agent or broker
              for  insurance  directly  related to an  extension  of credit by a
              finance  company  that is a subsidiary  of a bank holding  company
              under certain conditions.
                                       7
<PAGE>

                      (iii) Insurance in small towns.  Engaging in any insurance
              agency  activity  in a place where the bank  holding  company or a
              subsidiary  of the bank holding  company has a lending  office and
              that:

                               (A)      Has a population not exceeding  5,000 
                      (as shown in the preceding  decennial census); or

                               (B) Has inadequate  insurance agency  facilities,
                      as determined by the Federal  Reserve Board,  after notice
                      and opportunity for hearing.

                      (iv) Insurance-agency activities conducted on May 1, 1982.
              Under   certain    restrictions,    engaging   in   any   specific
              insurance-agency   activity  if  the  bank  holding  company,   or
              subsidiary  conducting  the  specific  activity,   conducted  such
              activity on May 1, 1982,  or received  the Federal  Reserve  Board
              approval to conduct such activity on or before May 1, 1982.

                      (v) Supervision of retail insurance agents. Supervising on
              behalf  of  insurance   underwriters   the  activities  of  retail
              insurance agents who sell:

                               (A) Fidelity  insurance and property and casualty
                      insurance  on the real and personal  property  used in the
                      operations   of   the   bank   holding   company   or  its
                      subsidiaries; and

                               (B) Group  insurance  that protects the employees
                      of the bank holding company or its subsidiaries.

                      (vi)  Small  bank  holding  companies.   Engaging  in  any
              insurance-agency  activity if the bank  holding  company has total
              consolidated assets of $50 million or less.

                      (vii)  Insurance-agency  activities conducted before 1971.
              Engaging  in  any  insurance-agency   activity  performed  at  any
              location in the United  States  directly or  indirectly  by a bank
              holding  company that was engaged in  insurance-agency  activities
              prior to January 1, 1971,  as a  consequence  of  approval  by the
              Federal Reserve Board prior to January 1, 1971.

              (12) Community development activities:

                      (i) Financing and investment activities. Making equity and
              debt investments in corporations or projects designed primarily to
              promote community welfare, such as the economic rehabilitation and
              development of low-income areas by providing housing, services, or
              jobs for residents.

                      (ii) Advisory  activities.  Providing advisory and related
              services for  programs  designed  primarily  to promote  community
              welfare.

              (13) Money orders,  savings  bonds,  and  traveler's  checks.  The
issuance  and sale at retail of money orders and similar  consumer-type  payment
instruments;  the  sale of U.S.  savings  bonds;  and the  issuance  and sale of
traveler's checks.

              (14)  Data   processing.   Providing  data   processing  and  data
processing and data transmission services, facilities (including data processing
and  data  transmission   hardware,   software,   documentation,   or  operating
personnel), data bases, advice, and access to such services, facilities, or data
bases by any technological means under certain conditions.

                                       8
<PAGE>

              Pennsylvania Banking Law

              Under the  Pennsylvania  Banking  Code of 1965,  as  amended  (the
"Code"),  Bancorp is permitted to control an unlimited number of banks. However,
Bancorp  would be required,  under the Bank  Holding  Company Act, to obtain the
prior  approval  of the Federal  Reserve  Board  before it could  acquire all or
substantially  all of the assets of any bank, or acquire ownership or control of
any voting shares of any bank other than the Bank,  if, after such  acquisition,
it would own or control more than five percent (5%) of the voting shares of such
bank.

              Interstate Banking and Branching

              The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the  "Interstate  Banking Law"),  amended  various federal banking laws to
provide  for  nationwide   interstate  banking,   interstate  bank  mergers  and
interstate   branching.   The  interstate   banking  provisions  allow  for  the
acquisition by a bank holding company of a bank located in another state.

              Interstate   bank  mergers  and  branch  purchase  and  assumption
transactions were allowed effective June 1, 1997; however,  states may "opt-out"
of the merger and purchase  and  assumption  provisions  by enacting a law which
specifically  prohibits  such  interstate  transactions.  States  could,  in the
alternative,  enact  legislation  to allow  interstate  merger and  purchase and
assumption  transactions  prior  to  June  1,  1997.  States  could  also  enact
legislation to allow for de novo interstate  branching of out-of-state banks. In
July  1995,   Pennsylvania   adopted  "opt-in"  legislation  which  allows  such
transactions.

              Legislation and Regulatory Changes

              From time to time,  legislation is enacted which has the effect of
increasing  the  cost of  doing  business,  limiting  or  expanding  permissible
activities  or  affecting  the  competitive  balance  between  banks  and  other
financial  institutions.  Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on Bancorp and its subsidiary  bank.  Certain
changes  of  potential  significance  to  Bancorp  which  have been  enacted  or
promulgated,  as the case may be, by  Congress or various  regulatory  agencies,
respectively, are discussed below.

              Financial Institutions Reform, Recovery and Enforcement Act 
              of 1989 ("FIRREA")

              On August 9, 1989, major reform and financing  legislation,  i.e.,
FIRREA,  was enacted  into law in order to  restructure  the  regulation  of the
thrift industry,  to address the financial  condition of the Federal Savings and
Loan Insurance Corporation and to enhance the supervisory and enforcement powers
of  the  Federal  bank  and  thrift  regulatory  agencies.  The  Office  of  the
Comptroller of the Currency  ("OCC"),  as the primary  Federal  regulator of the
Bank, is primarily  responsible  for  supervision  of the Bank. The OCC and FDIC
have far greater flexibility to impose supervisory  agreements on an institution
that fails to comply with its regulatory requirements, particularly with respect
to the capital requirements. Possible enforcement actions include the imposition
of a capital  plan,  termination  of deposit  insurance and removal or temporary
suspension of an officer, director or other institution-affiliated party.

              Under FIRREA,  civil  penalties are classified  into three levels,
with  amounts  increasing  with the  severity of the  violation.  The first tier
provides for civil penalties of up to $5,000 per day for any violation of law or
regulation.  A civil  penalty of up to $25,000  per day may be  assessed if more
than a minimal loss or a pattern of  misconduct  is involved.  Finally,  a civil
penalty  of up to  $1.0  million  per  day  may be  assessed  for  knowingly  or
recklessly  causing a substantial  loss to an  institution or taking action that
results in a substantial pecuniary gain or other benefit. Criminal penalties are
increased  to $1.0  million per  violation,  up to $5.0  million for  continuing
violations or for the actual amount of gain or loss.  These  monetary  penalties
may be combined with prison sentences for up to five years.

                                       9
<PAGE>
              Federal Deposit Insurance Corporation Improvement 
              Act of 1991 ("FDICIA")


               General.  The FDICIA reformed a variety of bank regulatory  laws.
Certain of these provisions are discussed below.

              Examinations and Audits.  Annual full-scope,  on-site examinations
are required for all  FDIC-insured  institutions  with assets of $500 million or
more.  For bank  holding  companies  with $500  million or more in  assets,  the
independent  accountants  of such  companies  shall  attest to the  accuracy  of
management's report. Such accountants shall also monitor management's compliance
with governing laws and regulations.  Such companies are also required to select
an independent audit committee composed of outside directors who are independent
of management,  to review with  management and the  independent  accountants the
reports that must be submitted to the appropriate bank regulatory  agencies.  If
the independent  accountants resign or are dismissed,  written notification must
be given to the FDIC and to the  appropriate  federal and state bank  regulatory
agency.

              Prompt Corrective Action. In order to reduce losses to the deposit
insurance  funds,  the  FDICIA  established  a format  to more  closely  monitor
FDIC-insured  institutions  and  to  enable  prompt  corrective  action  by  the
appropriate  federal  supervisory  agency if an institution begins to experience
any difficulty. The FDICIA established five "Capital" categories.  They are: (1)
well-capitalized;   (2)  adequately  capitalized;   (3)  undercapitalized;   (4)
significantly undercapitalized; and (5) critically undercapitalized. The overall
goal of these new capital  measures is to impose more  scrutiny and  operational
restrictions on depository  institutions as they descend the capital  categories
from well capitalized to critically undercapitalized.

              The FDIC,  the OCC,  the Federal  Reserve  Board and the Office of
Thrift  Supervision  have issued  jointly  final  regulations  relating to these
capital  categories and prompt  corrective  action.  These capital  measures for
prompt corrective action are defined as follows:

              A "well-capitalized"  institution would be one that has at least a
10% total  risk-based  capital ratio, a 6% or greater Tier I risk-based  capital
ratio, a 5% or greater Tier I leverage  capital ratio, and is not subject to any
written  order or final  directive  by the FDIC to meet and  maintain a specific
capital level.

              An "adequately  capitalized"  institution  would be one that meets
the required  minimum  capital  levels,  but does not meet the  definition  of a
"well-capitalized"  institution.  The existing  capital rules generally  require
banks to  maintain a Tier I leverage  capital  ratio of at least 4% and an 8% or
greater total  risk-based  capital ratio.  Since the  risk-based  standards also
require at least half of the total risk-based  capital  requirement to be in the
form of Tier I capital,  this also will mean that an  institution  would need to
maintain at least a 4% Tier I risk-based  capital  ratio.  Thus, an  institution
would need to meet each of the required  minimum  capital  levels in order to be
deemed "adequately capitalized."

              An  "undercapitalized"  institution would fail to meet one or more
of  the  required  minimum  capital  levels  for  an  "adequately   capitalized"
institution.  An "undercapitalized"  institution must file a capital restoration
plan and is automatically subject to restrictions on dividends,  management fees
and asset  growth.  In  addition,  the  institution  is  prohibited  from making
acquisitions,  opening new branches or engaging in new lines of business without
the  prior  approval  of its  primary  federal  regulator.  A  number  of  other
discretionary  restrictions  also may be imposed on a  case-by-case  basis,  and
harsher    restrictions   that   otherwise   would   apply   to   "significantly
undercapitalized"   institutions   may  be  imposed  on  an   "undercapitalized"
institution  that fails to file or implement an acceptable  capital  restoration
plan.

              A "significantly  undercapitalized" institution would have a total
risk-based  capital ratio of less than 6%, a Tier I risk-based  capital ratio of
less than 3%, or a Tier I  leverage  capital  ratio of less than 3%, as the case
may be.  Institutions in this category would be subject to all the  restrictions
that  apply  to   "undercapitalized"   institutions.   Certain  other  mandatory
prohibitions  also would  apply,  such as  restrictions  against  the payment of
bonuses or raises to senior executive officers without the prior approval of the
institution's  primary federal regulator.  A number of other restrictions may be
imposed.

                                       10
<PAGE>

              A "critically  undercapitalized"  institution  would be one with a
tangible  equity (Tier I capital)  ratio of 2% or less.  In addition to the same
restrictions   and   prohibitions   that   apply   to   "undercapitalized"   and
"significantly undercapitalized" institutions, the FDIC's rule implementing this
provision of FDICIA also addresses  certain other  provisions for which the FDIC
has been accorded responsibility as the insurer of depository institutions.

              At  a  minimum,   any   institution   that   becomes   "critically
undercapitalized"  is prohibited  from taking the following  actions without the
prior written approval of its primary federal  supervisory  agency:  engaging in
any material transactions other than in the usual course of business;  extending
credit for highly  leveraged  transactions  ("HLTs");  amending  its  charter or
bylaws;  making any material changes in accounting methods;  engaging in certain
transactions  with  affiliates;  paying excessive  compensation or bonuses;  and
paying   interest  on  liabilities   exceeding  the  prevailing   rates  in  the
institution's  market  area.  In  addition,   a  "critically   undercapitalized"
institution is prohibited from paying interest or principal on its  subordinated
debt and is subject to being placed in  conservatorship  or  receivership if its
tangible  equity  capital level is not increased  within  certain  mandated time
frames.

              At any time, an institution's  primary federal  supervisory agency
may reclassify it into a lower capital category. All institutions are prohibited
from declaring any dividends, making any other capital distribution, or paying a
management  fee if it would  result in downward  movement  into any of the three
undercapitalized   categories.   The  FDICIA   provides  an  exception  to  this
requirement for stock redemptions that do not lower an institution's capital and
would improve its financial  condition,  if the appropriate  federal supervisory
agency has consulted with the FDIC and approved the redemption.

              The regulation requires  institutions to notify the FDIC following
any  material  event that would cause such  institution  to be placed in a lower
category.  Additionally,  the FDIC monitors  capital levels through call reports
and examination reports.

              Real Estate Lending Standards. Pursuant to the FDICIA, the OCC and
other federal  banking  agencies  adopted real estate lending  guidelines  which
would set loan-to-value ("LTV") ratios for different types of real estate loans.
A LTV  ratio is  generally  defined  as the total  loan  amount  divided  by the
appraised  value of the  property  at the time  the loan is  originated.  If the
institution does not hold a first lien position,  the total loan amount would be
combined  with the amount of all senior  liens when  calculating  the ratio.  In
addition to establishing the LTV ratios,  the guidelines require all real estate
loans to be based upon proper loan  documentation  and a recent appraisal of the
property.

              Bank  Enterprise  Act of 1991.  Within  the  overall  FDICIA  is a
separate  subtitle called the "Bank Enterprise Act of 1991." The purpose of this
Act  is to  encourage  banking  institutions  to  establish  "basic  transaction
services for consumers" or so-called  "lifeline  accounts." The FDIC  assessment
rate is reduced for all lifeline depository  accounts.  This Act establishes ten
(10)  factors  which are the  minimum  requirements  to  qualify  as a  lifeline
depository account.  Some of these factors relate to minimum opening and balance
amounts,  minimum number of monthly  withdrawals,  the absence of discriminatory
practices against  low-income  individuals and minimum service charges and fees.
Moreover,  the Housing and Community  Development  Act of 1972 requires that the
FDIC's  risk-based  assessment  system include  provisions  regarding  life-line
accounts.   Assessment  rates  applicable  to  life-line   accounts  are  to  be
established by FDIC rule.

              Truth in  Savings  Act.  The  FDICIA  also  contains  the Truth in
Savings  Act  ("TSA").   The  Federal  Reserve  Board  has  adopted  regulations
("Regulation  DD") under the TSA. The purpose of TSA is to require the clear and
uniform  disclosure  of the rates of  interest  which  are  payable  on  deposit
accounts by depository  institutions  and the fees that are  assessable  against
deposit accounts, so that consumers can make a meaningful comparison between the
competing  claims of banks with  regard to deposit  accounts  and  products.  In
addition to  disclosures  to be provided  when a customer  establishes a deposit
account,  TSA requires the  depository  institution  to include,  in a clear and
conspicuous manner, the following  information with each periodic statement of a
deposit  account:  (1) the annual  percentage  yield  earned;  (2) the amount of
interest  earned;  (3) the amount of any fees and charges  imposed;  and (4) the
number of days in the  reporting  period.  TSA allows for civil  lawsuits  to be
initiated by customers if the depository  institution  violates any provision or
regulation under TSA.

                                       11
<PAGE>


              FDIC Insurance Assessments

              The FDIC has implemented a risk-related  premium  schedule for all
insured depository institutions that results in the assessment of premiums based
on capital and supervisory measures.

              Under the risk-related premium schedule, the FDIC, on a semiannual
basis,   assigns  each   institution  to  one  of  three  capital  groups  (well
capitalized,  adequately  capitalized or under  capitalized) and further assigns
such institution to one of three subgroups within a capital group  corresponding
to the  FDIC's  judgment  of the  institution's  strength  based on  supervisory
evaluations,  including  examination  reports,  statistical  analysis  and other
information  relevant  to  gauging  the  risk  posed  by the  institution.  Only
institutions  with a total  capital to  risk-adjusted  assets  ratio of 10.0% or
greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a
Tier 1 leverage ratio of 5.0% or greater,  are assigned to the  well-capitalized
group.

              Over the last two  years,  FDIC  insurance  assessments  have seen
several  changes  for both BIF and SAIF  institutions.  The most  recent  change
occurred  on  September  30,  1996,  when the  President  signed into law a bill
designed to remedy the  disparity  between BIF and SAIF  deposit  premiums.  The
first  part of the bill  called  for the SAIF to be  capitalized  by a  one-time
assessment  on all  SAIF  insured  deposits  held as of  March  31,  1995.  This
assessment, which was 65.7 cents per $100 in deposits, raised approximately $4.7
billion to bring the SAIF up to is required  1.25  reserve  ratio.  This special
assessment,  paid on November  30, 1996,  had no effect on the Bank.  The second
part of the bill remedied the future  anticipated  shortfall with respect to the
payment of FICO interest.  For 1997 through 1999, the banking industry will help
pay the FICO interest  payments at an assessment rate that is one-fifth the rate
paid by thrifts.  The FICO assessment on BIF insured  deposits is 1.29 cents per
$100 in  deposits;  for  SAIF  insured  deposits  it is 6.44  cents  per $100 in
deposits.  Beginning  January 1, 2000,  the FICO interest  payments will be paid
pro-rata by banks and thrifts based on deposits.  At December 31, 1998, the FICO
interest assessment paid by the Bank was approximately $34,000. The Bank has not
been required to pay any FDIC insurance  assessments since the fourth quarter of
1996  because  BIF has met  its  statutorily  required  ratios  and the  Bank is
categorized as "well capitalized."

              Regulatory Capital Requirements

              The following table presents Bancorp's consolidated capital ratios
at December 31, 1998.

                                                                  (In Thousands)
Tier I Capital...................................................     $  35,587
Tier II Capital..................................................         2,360
Total Capital....................................................     $  37,947

Adjusted Total Average Assets....................................      $461,050
Total Adjusted Risk-Weighted Assets(1)...........................      $253,820

Tier I Risk-Based Capital Ratio(2).................................       14.02%
Required Tier I Risk-Based Capital Ratio...........................        4.00%
Excess Tier I Risk-Based Capital Ratio.............................       10.02%

Total Risk-Based Capital Ratio(3)..................... ............       14.95%
Required Total Risk-Based Capital Ratio............................        8.00%
Excess Total Risk-Based Capital Ratio..............................        6.95%

Tier I Leverage Ratio(4)...........................................        7.72%
Required Tier I Leverage Ratio.....................................        4.00%
Excess Tier I Leverage Ratio.......................................        3.72%
------------------------------
(1)  Includes   off-balance  sheet  items  at   credit-equivalent   values  less
     intangible assets.
(2)  Tier I Risk-Based  Capital  Ratio is defined as the ratio of Tier I Capital
     to Total Adjusted Risk-Weighted Assets.
(3)  Total  Risk-Based  Capital Ratio is defined as the ratio of Tier I and Tier
     II Capital to Total Adjusted Risk-Weighted Assets.
(4)  Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Adjusted
     Total Average Assets.
                                       12
<PAGE>

              Bancorp's  ability to maintain the  required  levels of capital is
substantially  dependent  upon the success of  Bancorp's  capital  and  business
plans;  the impact of future economic  events on Bancorp's loan  customers;  and
Bancorp's ability to manage its interest rate risk and investment  portfolio and
control its growth and other operating expenses.

              Effect of Government Monetary Policies

              The  earnings  of Bancorp  are and will be  affected  by  domestic
economic  conditions  and the monetary and fiscal  policies of the United States
government and its agencies.

              The monetary  policies of the Federal  Reserve Board have had, and
will likely  continue to have, an important  impact on the operating  results of
commercial  banks  through its power to implement  national  monetary  policy in
order, among other things, to curb inflation or combat a recession.  The Federal
Reserve Board has a major effect upon the levels of bank loans,  investments and
deposits  through  its  open  market  operations  in  United  States  government
securities and through its regulations of, among other things, the discount rate
on borrowings of member banks and the reserve  requirements  against member bank
deposits.  It is not possible to predict the nature and impact of future changes
in monetary and fiscal policies.

              History and Business - Bank

              The Bank's  legal  headquarters  are  located  on Route 191,  Lake
Ariel, Pennsylvania.

              As of  December  31,  1998,  the Bank had  total  assets of $474.3
million,  total  shareholders'  equity of $37.6  million and total  deposits and
other liabilities of $436.7 million.

              The Bank engages in a full-service  commercial  banking  business,
including  accepting time and demand deposits,  and making secured and unsecured
commercial and consumer  loans.  The Bank's  business is not seasonal in nature.
Its deposits are insured by the FDIC to the extent provided by law.

              At December 31, 1998, the Bank had 147 full-time  employees and 40
part-time  employees.  The  Bank is not a  party  to any  collective  bargaining
agreement.

              Market Area

              The Bank competes  actively with other area  commercial  banks and
savings and loan  associations,  many of which are larger than the Bank, as well
as with major  regional  banking and  financial  institutions  headquartered  in
Wilkes-Barre  and Scranton,  Pennsylvania.  The Bank's major  competitors in its
market area are, in  alphabetical  order:  Community Bank & Trust Co.;  Fidelity
Deposit & Discount Bank; First Liberty Bank and Trust;  First National Community
Bank; First Union Corporation, Charlotte, North Carolina; Penn Security Bank and
Trust Company;  Pioneer American Bank, N.A.; PNC Bank, N.A.; and Wayne Bank. The
Bank is generally  competitive with all competing financial  institutions in its
service area with respect to interest  rates paid on time and savings  deposits,
service charges on deposit accounts and interest rates charged on loans.

              Supervision and Regulation - Bank

              The  operations  of the Bank are  subject  to  federal  and  state
statutes  applicable  to banks  chartered  under the banking  laws of the United
States, to members of the Federal Reserve System and to banks whose deposits are
insured by the FDIC. Bank operations are also subject to regulations of the OCC,
the Federal Reserve Board and the FDIC.

              The primary  supervisory  authority  of the Bank is the OCC,  that
regularly  examines  the Bank.  The OCC has the  authority  under the  Financial
Institutions  Supervisory  Act to prevent a national  bank from  engaging  in an
unsafe or unsound practice in conducting its business.

                                       13
<PAGE>


              Federal and state banking laws and regulations govern, among other
things,  the scope of a bank's  business,  the  investments a bank may make, the
reserves  against  deposits  a  bank  must  maintain,  loans  a bank  makes  and
collateral  it takes,  the  activities  of a bank with  respect to  mergers  and
consolidations and the establishment of branches.  All banks in Pennsylvania are
permitted  to maintain  branch  offices in any county of the state.  Branches of
national  banks may be  established  only after  approval by the OCC. The OCC is
required  to grant  approval  only if it finds that there is a need for  banking
services or facilities such as are contemplated by the proposed branch.  The OCC
may disapprove the application if the bank does not have the capital and surplus
deemed necessary by the OCC, or if the application  relates to the establishment
of a branch  in a county  contiguous  to the  county  in which  the  applicant's
principal place of business is located, and another banking institution that has
its principal place of business in the county in which the proposed branch would
be located, has in good faith,  notified the OCC of its intention to establish a
branch in the same  municipal  location in which the  proposed  branch  would be
located.

              Multi-bank holding companies are permitted in Pennsylvania  within
certain  limitations.  See  sections  entitled  "Pennsylvania  Banking  Law" and
"Interstate Banking and Branching."

              A subsidiary  bank of a bank holding company is subject to certain
restrictions  imposed by the Federal  Reserve Act on any extensions of credit to
the bank holding  company or its  subsidiaries,  on  investments in the stock or
other  securities of the bank holding company or its  subsidiaries and on taking
such stock or securities as collateral  for loans.  The Federal  Reserve Act and
Federal Reserve Board  regulations also place certain  limitations and reporting
requirements on extensions of credit by a bank to principal  shareholders of its
parent holding company, among others, and to related interests of such principal
shareholders. In addition, such legislation and regulations may affect the terms
upon which any person becoming a principal  shareholder of a holding company may
obtain  credit  from  banks  with  which  the   subsidiary   bank   maintains  a
correspondent relationship.

              Federal  law also  prohibits  acquisitions  of  control  of a bank
holding company without prior notice to certain federal bank regulators. Control
is defined for this purpose as the power,  directly or indirectly,  to influence
the  management  or  policies  of the bank or bank  holding  company  or to vote
twenty-five  percent (25%) or more of any class of voting securities of the bank
holding company.

              From time to time,  various types of federal and state legislation
have  been  proposed  that  could  result  in  additional  regulations  of,  and
restrictions  on, the business of the Bank.  It cannot be predicted  whether any
such  legislation  will be  adopted  or how such  legislation  would  affect the
business of the Bank. As a consequence of the extensive regulation of commercial
banking  activities in the United States,  the Bank's  business is  particularly
susceptible to being affected by federal  legislation and  regulations  that may
increase the costs of doing business.

              Under the Federal  Deposit  Insurance  Act, the OCC  possesses the
power to prohibit institutions  regulated by it (such as the Bank) from engaging
in any  activity  that would be an unsafe and unsound  banking  practice  and in
violation of the law.  Moreover,  the Financial  Institutions  and Interest Rate
Control Act of 1987 ("FIRA")  generally  expands the  circumstances  under which
officers  or  directors  of a bank may be removed by the  institution's  federal
supervisory  agency;  restricts  lending  by a bank to its  executive  officers,
directors,  principal  shareholders  or  related  interests  thereof;  restricts
management  personnel of a bank from  serving as  directors in other  management
positions with certain  depository  institutions whose assets exceed a specified
amount or which have an office within a specified geographic area; and restricts
management  personnel  from  borrowing  from  another  institution  that  has  a
correspondent relationship with their bank. Additionally,  FIRA requires that no
person may acquire control of a bank unless the appropriate  federal supervisory
agency has been given 60-days prior written  notice and within that time has not
disapproved the acquisition or extended the period for disapproval.

              Under the Bank Secrecy Act ("BSA"), the Bank is required to report
to the Internal  Revenue Service  currency  transactions of more than $10,000 or
multiple  transactions  of which the Bank is aware in any one day that aggregate
in excess of $10,000.  Civil and criminal  penalties are provided  under the BSA
for  failure  to file a  required  report,  for  failure  to supply  information
required by the BSA or for filing a false or fraudulent report.
                                       14
<PAGE>

              The Garn-St  Germain  Depository  Institutions  Act of 1982 ("1982
Act"),  removes  certain  restrictions on the lending powers and liberalizes the
depository  abilities of the Bank.  The 1982 Act also amends FIRA (see above) by
eliminating  certain  statutory  limits on  lending  of a bank to its  executive
officers, directors,  principal shareholders or related interests thereof and by
relaxing certain reporting requirements. However, the 1982 Act strengthened FIRA
provisions respecting management interlocks and correspondent bank relationships
by management personnel.

              Community Reinvestment Act

              The  Community  Reinvestment  Act of 1977, as amended (the "CRA"),
and the  regulations  promulgated  to implement the CRA are designed to create a
system for bank  regulatory  agencies  to  evaluate a  depository  institution's
record  in  meeting  the  credit  needs of its  community.  Until  May  1995,  a
depository institution was evaluated for CRA compliance based upon 12 assessment
factors.

              The CRA regulations were completely  revised as of May 4, 1995, to
establish  new  performance-based  standards  for use in  examining a depository
institution's  compliance  with the CRA (the  "revised  CRA  regulations").  The
revised CRA regulations  establish new tests for evaluating both small and large
depository  institutions' investment in the community. A "small bank" is defined
as a bank which has total assets of less than $250 million and is independent or
is an  affiliate  of a holding  company  with less than $1  billion  in  assets.
Pursuant  to  the  revised  CRA  regulations,  a  depository  institution  which
qualifies as a "small bank" will be examined under a streamlined procedure which
emphasizes  lending  activities.  The streamlined  examination  procedures for a
small bank became effective on January 1, 1996.

              A large retail  institution  is one which does not meet the "small
bank" definition,  above. A large retail  institution can be evaluated under one
of two tests:  (1) a  three-part  test  evaluating  the  institution's  lending,
service and investment  performance;  or (2) a "strategic  plan" designed by the
institution with community  involvement and approved by the appropriate  federal
bank regulator.  A large  institution  must choose one of these options prior to
July 1997,  but may opt to be examined  under one of these two options  prior to
that time. Effective January 1, 1996, a large retail institution that opts to be
examined  pursuant to a strategic plan may submit its strategic plan to the bank
regulators for approval.

              In addition,  the revised CRA regulations  include  separate rules
regarding the manner in which "wholesale banks" and "limited purpose banks" will
be evaluated for compliance.

              The new CRA  regulations  were  phased in over a two-year  period,
beginning July 1, 1995, with a final  effective date of July 1, 1997.  Until the
applicable  test was phased in,  institutions  were examined under the prior CRA
regulations.

              On December  27, 1995,  the federal  banking  regulators  issued a
joint final rule containing technical amendments to the revised CRA regulations.
Specifically,  the recent  technical  amendments  clarify the various  effective
dates in the revised CRA regulations, correct certain cross references and state
that once an institution  becomes subject to the requirements of the revised CRA
regulations,  it must comply  with all  aspects of the revised CRA  regulations,
regardless  of the  effective  date of certain  provisions.  Similarly,  once an
institution is subject to the revised CRA regulations, the prior CRA regulations
do not apply to that institution.

              For the  purposes  of the  revised  CRA  regulations,  the Bank is
deemed to be a large depository institution, based upon financial information as
of December  31, 1998.  The Bank had a CRA  Compliance  examination  in 1998 and
received a  "satisfactory"  rating.  The Bank was evaluated  for CRA  compliance
using the three-part, performance-based test.

              Concentration

              Bancorp and the Bank are not dependent for deposits nor exposed by
loan  concentrations  to a single  customer or to a small group of customers the
loss of any one or more of which would have a materially  adverse  effect on the
financial condition of Bancorp or the Bank.
                                       15
<PAGE>

              Business - LA Lease, Inc.

     The principal office of LA Lease, Inc. is located at Route 191, Lake Ariel,
Pennsylvania 18436 (the Lake Ariel branch of the Bank).

     As of December 31, 1998,  LA Lease,  Inc. had total assets of $5.7 million,
total  shareholders'  equity  of $93  thousand  and  other  liabilities  of $5.6
million.

     LA Lease, Inc.  provides  financing to consumers and businesses in the form
of vehicle and equipment leases.  The business of LA Lease, Inc. is not seasonal
in nature.

              Business - Ariel Financial Services, Inc.

     The principal office of Ariel Financial Services,  Inc. is located at Route
191, Lake Ariel, Pennsylvania 18436 (the Lake Ariel branch of the Bank).

     This  subsidiary of LA Bank was  incorporated  on July 11, 1997, to deliver
non-depository  investment and annuity  products to the customers of LA Bank. As
of December 31, 1998, Ariel Financial  Services,  Inc. had no material assets or
liabilities.


Item 2.       Properties

              Bancorp owns or leases no properties, except through the Bank. The
following is selective information about the Bank's properties:

<TABLE>
<CAPTION>
----------- --------------------------------- ------------- ----------------- ---------------------------------------
                                                Type of       Approximate
 Property               Location               Ownership     Square Footage                    Use
----------- --------------------------------- ------------- ----------------- ---------------------------------------
<S>          <C>                               <C>           <C>              <C>  
    1       Route 191                             Own            3,000        Banking Services and Main Office
            Lake Ariel, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    2       Route 191                             Own            1,800        Greene-Dreher Branch
            Newfoundland, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    3       Routes 191 and 590                    Own            2,900        Hamlin Corners Branch
            Hamlin, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    4       Routes 247 and 348                    Own            2,400        Mt. Cobb Branch
            Lake Ariel, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    5       Route 5                               Own            2,800        Eynon Branch
            Scranton-Carbondale Highway
            Eynon, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    6       Keyser Avenue                         Own            3,000        Keyser Valley Branch
            Scranton, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    7       The Mall at Steamtown                Lease           1,867        Steamtown Branch
            Lackawanna Avenue
            Scranton, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    8       East Grove Street and                 Own            3,000        Clarks Green Branch
            South Abington Road
            Clarks Green, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    9       Route 6                              Lease           5,535        Carbondale Branch
            Ames Shopping Plaza
            Carbondale, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    10      Routes 6 and 209                      Own           11,000        Milford Township Branch
            Milford, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    11      Route 739                            Lease           1,250        Lords Valley Branch
            Lords Valley Shopping Plaza
            Lords Valley, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    12      214 W. Harford Street                 Own           10,350        Milford Branch
            Milford, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    13      Route 390-Barrett Township            Own            3,700        Mountainhome Branch
            Mountainhome, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
                                       16
<PAGE>

    14      409 Lackawanna Avenue                Lease             670        Scranton Branch
            Scranton, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    15      Commerce Boulevard                   Lease             500        Dickson City Branch
            Suite 1
            Dickson City, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    16      Old Willow Avenue                    Lease             500        Honesdale Branch
            Suite 100
            Honesdale, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    17      South Main Street                     Own            4,850        Taylor Branch
            Taylor, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    18      Route 611                            Lease           2,200        Tannersville Branch
            Tannersville, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    19      Public Square                        Lease           1,500        Public Square Branch
            Wilkes-Barre, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    20      Meadow Avenue                         Own            2,200        East Mountain Branch
            Scranton, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    21      Wyoming Avenue                       Lease           2,250        Kingston Branch
            Kingston, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    22      409 Lackawanna Avenue                Lease          20,800        Financial Center
            Suite 201
            Scranton, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------
    23      Keyser Avenue                         Own            7,500        Commercial Rental Property
            Scranton, PA
----------- --------------------------------- ------------- ----------------- ---------------------------------------


                                       17

<PAGE>


              For  information  with respect to  obligations  for lease rentals,
refer to Note 5 of the Notes to Consolidated  Financial  Statements in Bancorp's
Annual Report filed at Exhibit 13 hereto and is  incorporated in its entirety by
reference.  The branches that are under lease have  customary  commercial  lease
options to extend the terms of the applicable lease.

              It is management's  opinion that the facilities currently utilized
are suitable and adequate for current and immediate future purposes.

Item 3.       Legal Proceedings

              General

              The  nature of  Bancorp's  and the  Bank's  business  generates  a
certain amount of litigation involving matters arising in the ordinary course of
business.  However,  in the opinion of management of Bancorp and the Bank, there
are no proceedings pending to which Bancorp and the Bank are a party or to which
their  property is subject,  which,  if determined  adversely to Bancorp and the
Bank,  would be  material  in relation  to  Bancorp's  and the Bank's  undivided
profits or financial condition, nor are there any proceedings pending other than
ordinary routine litigation incident to the business of Bancorp and the Bank. In
addition,  no material  proceedings are pending or are known to be threatened or
contemplated against Bancorp and the Bank by government authorities or others.

              Environmental Issues

              There are  several  federal  and state  statutes  that  govern the
obligations  of financial  institutions  with respect to  environmental  issues.
Besides being responsible  under such statutes for its own conduct,  a bank also
may be held liable under certain circumstances for actions of borrowers or other
third  parties on properties  that  collateralize  loans held by the bank.  Such
potential  liability may far exceed the original  amount of the loan made by the
bank. Currently,  the Bank is not a party to any pending legal proceedings under
any  environmental  statue nor is the Bank aware of any  circumstances  that may
give rise to liability of them under any such statute.

                                     Part II

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

              The Company's  common stock has been listed on the Nasdaq National
Market  since  November  21,  1997,  and was  previously  listed  on the  Nasdaq
Small-Cap  Market since December 9, 1993.  "The Nasdaq Stock Market" or "Nasdaq"
is a highly-regulated electronic securities market comprised of competing Market
Makers whose trading is supported by a  communications  network  linking them to
quotation  dissemination,  trade reporting,  and order execution  systems.  This
market  also  provides   specialized   automation   services  for   screen-based
negotiations of transactions, on-line comparison of transactions, and a range of
informational  services  tailored  to  the  needs  of the  securities  industry,
investors and issuers.  The Nasdaq Stock Market  consists of two distinct market
tiers:  the Nasdaq  National  Market(R) and the Nasdaq SmallCap  MarketsSM.  The
Nasdaq Stock Market is operated by the Nasdaq Stock Market, Inc., a wholly-owned
subsidiary of the National  Association of Securities  Dealers,  Inc. The Nasdaq
National Market symbol for the Company's common stock is "LABN." At December 31,
1998,   the  total  number  of  holders  of  record  of  the  common  stock  was
approximately 1400.

              The table below presents the high and low bid prices  reported for
the Common  Stock and the cash  dividends  declared on such Common Stock for the
periods  indicated.  The range of high and low  prices is based on trade  prices
reported on the Nasdaq National Market for 1998 year and fourth quarter of 1997.
The range of high and low prices for the first  three  quarters of 1997 and 1996
year is based on trade prices reported on the Nasdaq  Small-Cap  Market.  Market
quotations reflect inter-dealer prices,  without retail mark-up,  mark-down,  or
commission, and may not necessarily reflect actual transactions. On December 31,
1998, the closing price of share of Common Stock on the Nasdaq  National  Market
was $12.375. All prices and dividends have been restated to reflect the 5% stock
dividends paid in October 1998, 1997 and 1996, and the  two-for-one  stock split
effective on November 10, 1997.

                                       18

<PAGE>


Year              Quarter           High               Low    Dividends Declared

1998                 4th            $13.25           $11.75                $0.13
                     3rd             16.00            11.43                 0.10
                     2nd             16.19            14.88                 0.09
                     1st             16.55            14.76                 0.09

1997                 4th            $20.95           $13.24                $0.13
                     3rd             13.38             9.05                 0.09
                     2nd              9.29             9.05                 0.08
                     1st             10.76             9.29                 0.08

1996                 4th            $11.57            $7.19                $0.11
                     3rd              7.81             6.86                 0.08
                     2nd              7.24             6.14                 0.08
                     1st              7.33             6.38                 0.08


              As of March 16, 1999, Bancorp had approximately 1,472 shareholders
of record.

              Since  1983,  Bancorp has paid cash  dividends.  It is the present
intention  of Bancorp's  Board of  Directors  to continue  the dividend  payment
policy,  although the payment of future dividends must  necessarily  depend upon
earnings, financial condition, appropriate restrictions under applicable law and
other  factors  relevant  at the  time  the  Board of  Directors  considers  any
declaration  of  dividends.  Cash  available  for the payment of dividends  must
initially  come  from  dividends  paid by the Bank to  Bancorp.  Therefore,  the
restrictions on the Bank's dividend payments are directly applicable to Bancorp.

              Dividend Restrictions on the Bank

              The OCC has issued  rules  governing  the payment of  dividends by
national banks. Consequently, the Bank (which is subject to these rules) may not
pay dividends from capital  (unimpaired  common and preferred stock outstanding)
but only from retained  earnings after deducting losses and bad debts therefrom.
"Bad debts" are defined as matured obligations in which interest is past due and
unpaid for ninety (90) days, but do not include  well-secured  obligations  that
are in the process of collection.

              Previously,  the Bank was  permitted  to add the  balances  in its
allowance for possible credit and lease losses in determining retained earnings,
but the OCC's new  regulations  prohibit that practice.  However,  to the extent
that (1) the Bank has capital  surplus in an amount in excess of common  capital
and (2) if the Bank can prove  that such  surplus  resulted  from  prior  period
earnings,  the Bank,  upon approval of the OCC, may transfer  earned  surplus to
retained earnings and thereby increase its dividend paying capacity.

              If, however, the Bank has insufficient  retained earnings to pay a
dividend,  the  OCC's  regulations  allow the Bank to reduce  its  capital  to a
specified  level and to pay dividends upon receipt of the approval of the OCC as
well as that of the  holders  of two  thirds  of the  outstanding  shares of the
Common Stock.

              The Bank is  allowed  to pay  dividends  no more  frequently  than
quarterly.  Moreover,  the Bank must obtain the OCC's  approval  before paying a
dividend if the total of all dividends declared by the Bank in any calendar year
would  exceed the total of (1) the Bank's net profits for that year plus (2) its
retained  net  profits  for the  immediately  preceding  two years  less (3) any
required transfers to surplus or a fund for the retirement of preferred stock.

                                       19
<PAGE>

              The Bank may not pay any dividends on its capital stock during the
period  in which it may be in  default  in the  payment  of its  assessment  for
deposit  insurance  premium due to the FDIC,  nor may it pay dividends on Common
Stock until any cumulative dividends on the Bank's preferred stock (if any) have
been paid in full.  The Bank has never been in default  in the  payments  of its
assessments to the FDIC; and,  moreover,  the Bank has no outstanding  preferred
stock. In addition, under the Federal Deposit Insurance Act, dividends cannot be
declared  and paid if the OCC  obtains a cease and  desist  order  because  such
payment would constitute an unsafe and unsound banking practice.  As of December
31,  1998,  there was $3.9  million in  unrestricted  retained  earnings and net
income  available at the Bank that could be paid as a dividend to Bancorp  under
the current OCC regulations.

              Dividend Restrictions on Bancorp

              Under  the  Pennsylvania  Business  Corporation  Law of  1988,  as
amended  (the `BCL'),  Bancorp may not pay a dividend  if,  after giving  effect
thereto,  either (a) Bancorp would be unable to pay its debts as they become due
in the usual course of business or (b) Bancorp's total assets would be less than
its total liabilities.  The determination of total assets and liabilities may be
based upon: (i) financial statements prepared on the basis of generally accepted
accounting principles;  (ii) financial statements that are prepared on the basis
of other  accounting  practices and  principles  that are  reasonable  under the
circumstances;  or (iii) a fair  valuation  or other  method that is  reasonable
under the circumstances.

Item 6.       Selected Financial Data

              The  information  called for by this item is filed at Exhibit  99A
hereto and is incorporated in its entirety by reference under this Item 6.

Item 7.       Management's Discussion and Analysis of Financial Condition 
              and Results of Operation

              The caption  "Management's  Discussion and Analysis"  contained in
excerpts from  Bancorp's  Annual Report  (beginning at page 21 thereto) filed at
Exhibit 13 hereto is  incorporated  in its entirety by reference under this Item
7.

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk

              The  caption  "Interest  Rate Risk  Management"  contained  in the
"Management's  Discussion  and  Analysis"  section of  Bancorp's  Annual  Report
(beginning at page 28 thereto) filed at Exhibit 13 hereto is incorporated in its
entirety by reference under this Item 7A.

Item 8.       Financial Statements and Supplementary Data

              Bancorp's  Consolidated  Financial  Statements  and notes  thereto
contained  in  excerpts  from  Bancorp's  Annual  Report  (beginning  at page 36
thereto)  filed at Exhibit  13 hereto  are  incorporated  in their  entirety  by
reference under this Item 8.

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

              Bancorp  changed its  independent  certifying  accountants for the
year ending  December 31, 1999. The  information  concerning  such change can be
found on Bancorp's Form 8-K,  filed with the Securities and Exchange  Commission
on January 15, 1999 (No.  2-85306),  and hereby  incorporated  by reference into
this Item 9.

                                    Part III

Item 10.      Directors and Executive Officers of the Registrant

              The captions "Board of Directors" and "Stock Ownership"  contained
in Bancorp's Proxy Statement (at pages 2 and 5 thereof,  respectively)  filed at
Exhibit 99B hereto is  incorporated  in their  entirety by reference  under this
Item 10.

                                       20
<PAGE>

              Principal Officers of the Corporation

              The  following  table sets forth  selected  information  about the
principal officers of the Corporation,  each of whom is selected by the Board of
Directors  and each of whom  holds  office  at the  discretion  of the  Board of
Directors:


</TABLE>
<TABLE>
X
<CAPTION>
                                                     Held            Corporation      Number of           Age as of
Name                Office/Position with Corporation Since        Employee Since    Shares Owned     March 16, 1999
<S>                 <C>                              <C>               <C>         <C>                    <C>    

Bruce D. Howe       President                        1983               (2)           389,428              67

John G. Martines    Chief Executive Officer          1983               (3)          221,199               52

Donald E. Chapman   Secretary                        1983               (2)           132,790              62

Louis M. Martarano  Vice President and               1989               (3)            87,479              48
                    Assistant Secretary

Joseph J. Earyes    Vice President and Treasurer     1995               (3)            44,426              42
<FN>

-------------------------
(1)  See notes under Item 12 "Security  Ownership of Certain  Beneficial  Owners
     and Management" for shareholdings of these officers.
(2)  Messrs. Howe and Chapman are not employees of the Corporation.
(3)  Messrs. Martines, Martarano, and Earyes are full-time salaried employees of
     the Bank.
</FN>
</TABLE>


              Principal Officers of the Bank

              The  following  table sets forth  selected  information  about the
principal  officers  of the  Bank,  each of  whom is  elected  by the  Board  of
Directors  of the Bank and each of whom holds  office at the  discretion  of the
Board of Directors of the Bank:

<TABLE>
<CAPTION>
                                                     Held                 Bank        Number of        Age as of
Name                  Office/Position with Bank      Since        Employee Since    Shares Owned     March 16,1999
<S>                   <C>                            <C>              <C>             <C>                 <C>   

Bruce D. Howe         Chairman of the Board          1986               (1)           389,428              67

John G. Martines      President and CEO              1986              1979           221,199              52

Louis M. Martarano    Executive Vice President and   1990              1981            87,479              48
                      Chief Operating Officer

Joseph J. Earyes      Executive Vice President and   1995              1995            44,426              42
                      Chief Financial Officer

Donald E. Chapman     Secretary                      1983                (1)          132,790              62
----------------------------
<FN>

(1)  Mr. Howe and Mr. Chapman are not employees of the Bank.
(2)  See notes under Item 12 "Security  Ownership of Certain  Beneficial  Owners
     and Management" for shareholdings of these officers.
</FN>
</TABLE>


Item 11.      Executive Compensation

              The caption "Execution  Compensation" contained in Bancorp's Proxy
Statement (at page 6 thereof) filed at Exhibit 99B hereto is incorporated by its
entirety by reference under this Item 11.

Item 12.      Security Ownership of Certain Beneficial Owners and Management

              The  caption  "Stock  Ownership"   contained  in  Bancorp's  Proxy
Statement (at page 5 thereof) filed at Exhibit 99B hereto is incorporated by its
entirety by reference under this Item 12.

Item 13.      Certain Relationships and Related Transactions

              The caption  "Other  Information"  contained  in  Bancorp's  Proxy
Statement (at page 13 thereof)  filed at Exhibit 99B hereto is  incorporated  by
its entirety by reference under this Item 13.
                                       21
<PAGE>

Item 14.      Exhibits and Reports on Form 8-K

              (a) Exhibits required by Item 601 of Regulation S-K:


Exhibit Number Referred to
Item 601 of Regulation S-K            Description of Exhibit

2    None.
3A   Amended  Articles of  Incorporation of Bancorp filed at Exhibit 3A on March
     25,  1988 and March 24,  1993,  to Forms  10-K for the  fiscal  year  ended
     December 31, 1987 (No.  2-85306),  and 10-KSB for the period ended December
     31, 1992 (No. 2-85306), respectively, and hereby incorporated by reference.
     Photocopy of the  Articles of Amendment of Bancorp,  dated August 18, 1993,
     to effect,  among other things, a 3-for-1 stock split,  filed at Exhibit 3A
     on September 3, 1993, to Form S-1 (No. 33-68470) and hereby incorporated by
     reference.
3B   Amended  By-laws of Bancorp filed on March 25, 1988, at Exhibit 3B, to Form
     10-K for the fiscal year ended December 31, 1987 (No. 2-85306),  and hereby
     incorporated by reference.
4    None.
9    None.
10A  Photocopy of the Executive  Employment  Agreement  dated September 1, 1993,
     among Bancorp,  the Bank and John G. Martines,  the Chief Executive Officer
     of Bancorp and President of the Bank,  filed at Exhibit 10A on September 3,
     1993, to Form S-1 (No. 33-68470), and hereby incorporated by reference.
10B  Photocopy of the Executive  Employment  Agreement  dated September 1, 1993,
     among Bancorp,  the Bank and Louis M. Martarano,  Vice President of Bancorp
     and Senior Vice President of the Bank, filed at Exhibit 10B on September 3,
     1993, to Form S-1 (No. 33-68470), and hereby incorporated by reference.
10C  Copy of the LA Bank, N.A. Salary  Continuation  Agreement,  dated March 11,
     1997, between the Bank and John G. Martines, Chief Executive Officer of the
     Bancorp and President of the Bank,  relating to the supplemental  executive
     retirement plan of the Bank, filed at Exhibit 10C on March 18, 1998 to Form
     10-K for the fiscal year ended December 31, 1997 (No. 2-85306),  and hereby
     incorporated by reference.
10D  Copy of the LA Bank, N.A. Salary  Continuation  Agreement,  dated March 11,
     1997,  between  the Bank and  Louis M.  Martarano,  Vice  President  of the
     Bancorp and Executive  Vice  President and Chief  Operating  Officer of the
     Bank, relating to the supplemental  executive  retirement plan of the Bank,
     filed at Exhibit  10D on March 18,  1998 to Form 10-K for the  fiscal  year
     ended  December  31,  1997  (No.  2-85306),   and  hereby  incorporated  by
     reference.
                                       22


<PAGE>


Exhibit Number Referred to
Item 601 of Regulation S-K                  Description of Exhibit

10E  Copy of the LA Bank, N.A. Salary  Continuation  Agreement,  dated March 11,
     1997,  between  the Bank and Joseph J.  Earyes,  CPA,  Vice  President  and
     Treasurer of the Bancorp and Executive Vice  President and Chief  Financial
     Officer of the Bank, relating to the supplemental executive retirement plan
     of the Bank,  filed at Exhibit  10E on March 18,  1998 to Form 10-K for the
     fiscal year ended December 31, 1997 (No. 2-85306),  and hereby incorporated
     by reference.
11   None.
12   None.
13   Annual Report to Shareholders for Fiscal Year Ended December 31, 1998.
16   Current Report on Form 8-K, filed on January 15, 1999 (No. 2-85306),  which
     contains the information with respect to the change in Bancorp's certifying
     accountant, and hereby incorporated by reference.
18   None.
21   List of Subsidiaries of Bancorp.
22   None.
23   None.
24   None.
27   Financial Data Schedule.
28   None.
99A  Selected 5-Year Financial Data and Selected Year-End Balances.
99B  Proxy  Statement  for the 1999 Annual  Meeting of  Shareholders  To Be Held
     April 27, 1999


     (b) Reports on Form 8-K for quarter ended December 31, 1998.

     A Form 8-K was filed on  January  15,  1999,  reporting  the  change in the
Registrant's  certifying  accountant and the  appointment of new director to the
Board of Directors of the Corporation.

                                       23
<PAGE>

                                   SIGNATURES


              In  accordance  with Section 13 or 15(d) of the Exchange  Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

LAKE ARIEL BANCORP, INC.
         (Bancorp)


By:      ______________________________
         John G. Martines
         Chief Executive Officer

Date:    March 17, 1999


              In  accordance  with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.



By:      ______________________________
         Bruce D. Howe
         President and Director

Date:    March 17, 1999



By:      ______________________________
         John G. Martines
         Chief Executive Officer and Director
          (Chief Executive Officer)

Date:    March 17, 1999



By:      ______________________________
         Peter O. Clauss
         Director

Date:    March 17, 1999



By:      ______________________________
         Donald E. Chapman
         Secretary and Director

Date:    March 17, 1999

                                       24
<PAGE>



By:      ______________________________
         Kenneth M. Pollock
         Director

Date:    March 17, 1999



By:      ______________________________
         Harry F. Schoenagel
         Director

Date:    March 17, 1999



By:      ______________________________
         William C. Gumble
         Director

Date:    March 17, 1999



By:      ______________________________
         Paul D. Horger
         Director

Date:    March 17, 1999



By:      ______________________________
         Louis M. Martarano
         Vice President and Assistant
          Secretary

Date:    March 17, 1999



By:      ______________________________
         Joseph J. Earyes, CPA
         Vice President and Treasurer
         (Principal Financial and
          Accounting Officer)

Date:    March 17, 1999

                                       25

<PAGE>


                                   SIGNATURES


              In  accordance  with Section 13 or 15(d) of the Exchange  Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

LAKE ARIEL BANCORP, INC.
         (Bancorp)


By:      /s/ John G. Martines
         John G. Martines
         Chief Executive Officer

Date:    March 17, 1999


              In  accordance  with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.



By:      /s/ Bruce D. Howe
         Bruce D. Howe
         President and Director

Date:    March 17, 1999



By:      /s/ John G. Martines
         John G. Martines
         Chief Executive Officer and Director
          (Chief Executive Officer)

Date:    March 17, 1999



By:      /s/ Peter O. Clauss
         Peter O. Clauss
         Director

Date:    March 17, 1999



By:      /s/ Donald E. Chapman
         Donald E. Chapman
         Secretary and Director

Date:    March 17, 1999

                                       26
<PAGE>


By:      /s/ Kenneth M. Pollock
         Kenneth M. Pollock
         Director

Date:    March 17, 1999



By:      /s/ Harry F. Schoenagel
         Harry F. Schoenagel
         Director

Date:    March 17, 1999



By:      /s/ William C. Gumble
         William C. Gumble
         Director

Date:    March 17, 1999



By:      /s/ Paul D. Horger
         Paul D. Horger
         Director

Date:    March 17, 1999



By:      /s/ Louis M. Martarano
         Louis M. Martarano
         Vice President and Assistant
          Secretary

Date:    March 17, 1999



By:      /s/ Joseph J. Earyes
         Joseph J. Earyes, CPA
         Vice President and Treasurer
         (Principal Financial and
          Accounting Officer)

Date:    March 17, 1999


                                       27

<PAGE>


                                INDEX TO EXHIBITS


Item Number                Description                                     Page

       13    Annual Report to Shareholder for the Fiscal Year
             Ended December 31, 1998......................................    29
       21    List of Subsidiaries of Bancorp..............................    96
       99A   Selected 5-Year Financial Data and Selected
             Year-End Balances............................................    97
       99B   Proxy Statement for the 1999 Annual Meeting of
             Shareholders To Be Held April 27, 1999.......................    99
       27    Financial Data Schedule......................................   119


                                       28

<PAGE>


                                   EXHIBIT 13


                          ANNUAL REPORT TO SHAREHOLDERS
                     FOR FISCAL YEAR ENDED DECEMBER 31, 1998

                                       29


<PAGE>





















                            LAKE ARIEL BANCORP, INC.
                               1998 ANNUAL REPORT


















                                       30

<PAGE>




                   LAKE ARIEL BANCORP, INC. 1998 ANNUAL REPORT



TABLE OF CONTENTS

-Financial Highlights
-Message to Our Stockholders
-Board of Directors
-Landmarks
-Responsibilities for Preparation of Financial Statements
-Financial Review: Management's Discussion and Analysis
-Consolidated Financial Statements
    -Balance Sheet
    -Statement of Income
    -Statement of Changes in Stockholders' Equity
    -Statement of Cash Flows
    -Notes to Consolidated Financial Statements
    -Independent Auditor's Report
-Investor Information
-Company Directors and Officers
-Office Locations
-Business Development Boards






Except for  historical  information  that is  contained  in this annual  report,
certain matters presented in this report may contain forward-looking  statements
that involve risks and uncertainties in the banking  industry,  including timely
availability and acceptance of new products,  the impact of competitive products
and pricing,  the management of growth and the other risks detailed from time to
time in the  Company's  SEC reports,  including  the report on Form 10-K for the
year  ended  December  31,  1998,  and  the  section  in  this  report  entitled
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."






                                       31
<PAGE>


FINANCIAL HIGHLIGHTS - 1998

EARNINGS AND DIVIDENDS
                             (dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                               1998                   1997                    1996            1995        1994

                                            Percent/Basis Point       Percent/Basis Point    Percent/Basis Point
                                      Amount    Change       Amount        Change      Amount     Change     Amount       Amount
<S>                                  <C>       <C>          <C>         <C>            <C>      <C>         <C>           <C> 

Net Income..........................  $3,771      9.9%       $3,431        13.2%       $3,031      31.4%     $2,307       $2,128
Earnings Per Share - Basic*.........   $0.79    -14.1%        $0.88        12.2%        $0.78      30.2%      $0.60        $0.56
Earnings Per Share - Diluted*.......   $0.77    -12.5%        $0.84         7.3%        $0.78      30.2%      $0.60        $0.56
Dividends Per Share*................   $0.41      7.9%        $0.38        18.8%        $0.32      18.5%      $0.27        $0.25
Return on Average Total Assets......   0.88%  12 bpts.        1.00%      -9 bpts.       1.09%   +17 bpts.     0.92%        1.04%
Return on Average Stockholders' Equity10.27% 497 bpts.       15.24%     +27 bpts.      14.97%  +180 bpts.    13.17%       13.07%
Dividend Payout Ratio...............  50.43%       -         39.90%          -         39.14%        -       42.13%       42.15%

</TABLE>

<TABLE>
<CAPTION>
FINANCIAL POSITION

                                             1998                   1997                       1996           1995         1994

                                          Percent/Basis Point         Percent/Basis Point   Percent/Basis Point
                                      Amount     Change     Amount        Change       Amount     Change    Amount       Amount
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Total Assets........................$474,689     29.0%     $368,073        23.6%     $297,906     18.3%    $251,859     $236,125
Total Deposits......................$312,742     11.5%     $280,450        10.8%     $253,196     21.3%    $208,759     $192,187
Net Loans...........................$224,754      7.9%     $208,236        18.3%     $175,990     15.6%    $152,306     $135,018
Long-Term Debt......................$115,459    142.3%      $47,656       138.0%      $20,023     32.1%     $15,156      $15,219
Stockholders' Equity**.............. $37,940      5.9%      $35,815        69.2%      $21,172      8.5%     $19,509      $15,799
Book Value Per Share*...............   $7.87      4.9%        $7.50        37.6%        $5.45      2.3%       $5.33        $4.37
Stockholders' Equity to Total Assets   7.99% -174 bpts.       9.73%    +262 bpts.       7.11%  -64 bpts.      7.75%        6.69%

<FN>

*Reflects  adjustment for 5% stock dividends issued on October 1, 1998, 1997 and
1996, and a two-for-one stock split effective November 10, 1997.
**Beginning  with  1994,  reflects  adjustment  to  capital  as a result  of the
implementation of SFAS No. 115.
</FN>
</TABLE>
                                       32



<PAGE>


MESSAGE TO OUR STOCKHOLDERS


Company Overview

1998-A Year of Building for the Future
         Lake  Ariel   Bancorp,   Inc.   entered  1998  with  the  objective  of
aggressively expanding its branch network. In the midst of continued mergers and
consolidations  within  our  industry,  Lake  Ariel  Bancorp,  Inc.  seized  the
opportunity  to enter new  marketplaces  and build new  relationships  (not just
branches) by offering quality customer service and localized decision making.

     The past year could be described  as the  Company's  most hectic,  yet most
exciting  year.  During  1998,  the  following  events had a major impact on our
branch network:

         March 18  - Dickson City Branch in Wal-Mart Supercenter opened.
         April 1   -  Lackawaxen Branch opened.
         May 18    -  Wilkes-Barre Mortgage Loan Center opened.
         June 17   -  Honesdale Branch in the Wal-Mart Supercenter opened.
         August 24 -  Taylor Branch opened.
         August 31 -  Tannersville Branch opened.
         September 8 - Groundbreaking for the Wilkes-Barre Boulevard Branch -
                         expected to open Spring, 1999.
         September 9 - Purchased the Mellon Bank Mountainhome Branch.
         September 14- Wilkes-Barre Public Square Branch opened.
         November 23 - East Mountain Branch in Scranton opened.
         December 7  - Kingston Branch opened.
         December 11 - Sold Lackawaxen Branch to Honesdale National Bank.
         December 11 -Sold Lake Wallenpaupack Branch to Honesdale National Bank.

         Our financial  franchise has now been established to span five counties
with 22 banking  locations.  The ultimate challenge starts in 1999 and continues
into the 21st Century - "Achieving  outstanding  financial performance and value
for our stockholders." Costs associated with the expansion of our branch network
had a negative  impact on this year's  earnings.  A full year's  effect of these
operations  will hamper earnings during 1999, but we are optimistic that most of
our new branches will become profitable within two years and, therefore,  have a
positive effect on earnings in the near future.

Stockholders' Value
         Significant events  during  1998 had  major  impacts  on the  Company's
                  capital  position:   
-  5%  stock  dividend  
-  Cash  dividend increased by 8% 
-  Cash  dividend  increased  17th  consecutive year 
- 10.27% Return on Average Equity

         At year-end 1998,  our Company was in a very strong  capital  position.
Stockholders'  equity was at $38 million.  The Tier I, or core capital ratio was
14.07%  and  the  total  risk-based  capital  ratio  was at  14.96%,  this is in
comparison to regulatory  minimums of 4% and 8%,  respectively.  The new capital
raised in December, 1997 has been used to continue the Bank's expansion goals.

     During 1998, for the 17th consecutive  year, the Company  increased its per
share cash  dividend  from $0.38 in 1997 to $0.41 in 1998,  an 8% increase  and,
also,  for the  third  consecutive  year,  paid a 5% stock  dividend.  Per share
information for all prior years has been restated to reflect the effects of this
stock dividend.

         Our return on average  stockholders'  equity for 1998 was 10.27%,  down
from 15.24% in 1997 due to the  weighted  average  effect in 1998 of the sale of
$12 million of common stock in December, 1997. Return on stockholders' equity is
arguably the most important measure of a bank's performance.
                                       33
<PAGE>

         Book value  increased  from $7.50 in 1997 to $7.87 in 1998, an increase
of 5%. The Company's (LABN) market price closed at $12.375 per share on December
31, 1998 as compared to $17.75 at December  31, 1997.  While the closing  market
price at December 31, 1998 was somewhat  disappointing,  the price represents 16
times earnings and 157% of book value.

Net Income
         
1998  proved  to be  another  strong  earnings  performance  for the Company:  
- Record  Earnings 
- $3,771,000 - up 10% 
- Return On Average  Assets - 0.88% 
- 12% Growth in Net Interest  Income 
- Earnings  per  share - basic - $0.79 
-  Earnings  per  share - diluted - $0.77

         The Company's net income for 1998 was $3,771,000,  9.9% higher than the
$3,431,000  reported for 1997. Net income was  positively  influenced by a 12.2%
growth in net  interest  income and a 45.1%  growth in other  operating  income.
Overhead costs were $11.5 million for 1998, an increase of $2.2 million or 24.3%
from $9.2 million reported in 1997.  Overhead costs were greatly impacted by the
growth in the number of branch offices in 1998.

         Operating  earnings  for the year  were at $0.79  per share - basic and
$0.77 per share - diluted  compared to $0.88 per share - basic and $0.84 diluted
in 1997. Return on average assets was 0.88% for 1998.

Growth
         1998 proved to be another year of exceptional increases:
                  - Assets                  -        29.0%
                  - Deposits                -        11.5%
                  - Loans                   -         7.9%
                  - Investment Securities   -        67.6%

         Total assets  increased to $474.7 million at year-end 1998, an increase
of $106.6  million or 29.0% from  $368.1  million at  December  31,  1997.  This
increase was primarily  attributable to a $16.5 million growth in securities and
$77.6 million growth in net loans and leases.

         Investment  securities  increased  to $192.4  million at  year-end,  an
increase of $77.6  million or 67.6% from $114.8  million at December  31,  1997.
This increase was attributable to an investment strategy implemented during 1998
whereby the Company  borrowed  $75  million  from the Federal  Home Loan Bank of
Pittsburgh  ("FHLB") and invested in a combination of various fixed and variable
rate investments.

         Total net loans  increased to $224.7  million at December 31, 1998,  an
increase of $16.5 million or 7.9% from $208.2  million at December 31, 1997. For
the year 1998,  residential  mortgage  loans  increased  to $106.7  million,  an
increase of $3.7 million or 3.4% from $103.0 million at December 31, 1997.  This
increase was  attributable  to the increased  mortgage loan activity  during the
period,  particularly during the second half of 1998, net of mortgage loans sold
during  1998 of  approximately  $34.9  million.  As of  year  end,  LA Bank  was
servicing over $141 million in residential mortgage loans.

         During 1998, total deposits increased to $312.7 million, an increase of
$32.3 million or 11.5% from $280.5 million at December 31, 1997.

Strengthening the Organization - Branches, Personnel and Technology

         In order to accommodate our growth during 1998 the following  personnel
changes were made.  Branch operations were enhanced with the promotions of Treva
J. Day to Vice President,  Regional  Branch  Administrator  of Monroe,  Pike and
Wayne  Counties  and  Lynn  P.  Thiel  to  Vice   President,   Regional   Branch
Administrator of Lackawanna and Luzerne Counties.  Other promotions include Lisa
Dowse, Branch Manager,  Lake Ariel; Joann Simyan,  Assistant Branch Manager, Mt.
Cobb; Saundra Roeckel,  Branch Sales Manager and Ellen Juseck,  Assistant Branch
Sales  Manager of our first  in-store  location in the Wal-Mart  Supercenter  in
Dickson City and Deborah  Aragona,  Branch Sales Manager and Annemarie  Roberts,
                                       34
<PAGE>

Assistant Branch Sales Manager of our second in-store  location in the Honesdale
Wal-Mart  Supercenter;  Marjorie  Kunkle,  Branch Manager,  Tannersville;  Lauri
Nidoh, Branch Manager,  Steamtown and Scranton;  Debra Skurkis,  Branch Manager,
Public Square; Sybil Kline, Branch Manager, East Mountain;  Patricia Williamson,
Branch  Manager,  Kingston;  Lisa  Akulonis,  Branch  Manager,  Eynon  and  Mary
Auffhammer,  Branch Manager,  Keyser Valley and Maryann McManus, Branch Manager,
Wilkes-Barre Boulevard.

         Our  sales  team was  refined  with  the  addition  of John  Gouse as a
Business   Development   Officer  for  Monroe  and  Pike  Counties;   Mary  Beth
Pasqualicchio, Branch Sales Officer; Cathy Langan, Mortgage Originator for Wayne
County; Paul Ochman,  Mortgage Originator for Luzerne County;  William Zernhelt,
Mortgage Originator for Pike County, and Theresa Yocum,  Mortgage Originator for
Monroe County.

         The lending staff was reinforced  with the addition of Maureen  Straub,
Senior Vice President,  Commercial Loan Officer of Luzerne County; Paul Freeman,
Vice President, Commercial Loan Officer; Peter Misura, Assistant Vice President,
Consumer  Loan Officer;  Susan  Mroczka,  Consumer  Loan Officer;  Scott Hiller,
Assistant Vice President,  Credit Analyst;  and, Lawrence  Highhouse,  Assistant
Vice President, Collection Department Manager.

         Finally,  Daniel  Santaniello was promoted to Senior Operations Officer
and Francis Chinchar to Data Processing Supervisor.

     In January,  1999,  Kenneth M. Pollock,  President of HUD, Inc. t/a Emerald
Anthracite  II, from Luzerne  County,  was appointed to the  Company's  Board of
Directors. He currently serves on the Boards of Pennsylvania Enterprises,  Inc.,
PG Energy,  and Penn State  Wilkes-Barre  Campus.  We welcome Mr. Pollock's vast
experience and business leadership to our Company.

         As a result of our new and  increased  presence  in  additional  market
areas,  we have expanded our Business  Development  Boards to include Monroe and
Luzerne County Boards.  We have also  appointed  new,  energetic  members to the
existing  Development  Boards.  We fully  expect  these  Boards  to  provide  an
additional  source of referrals and new  customers  within the market areas they
serve.

Marketing, Products and Services
         During  1998,  the Company  retained  the  services  of a  professional
advertising  agency  to  develop  a new  marketing  campaign  to  assist  in the
marketing  of the  new  branches  which  opened  during  the  year.  The  Senior
Management team felt a strong campaign would also help launch our expansion into
Luzerne  County  where  the  Company  had  little  name  recognition.  Print and
television ads, direct mail pieces and billboard treatments were developed which
proved to be an overwhelming success in all areas, not just Luzerne County.

         Home  equity  loans  and  mortgage  loans  were  aggressively  marketed
throughout the year, which resulted in a record number of new loans  originated.
LA Bank became one of the first community banks in the area to develop a Reverse
Mortgage  Program,  targeting senior citizens.  This specialized  program allows
seniors to borrow against the equity in their home, which then generates monthly
income that allows the money  necessary  for seniors to live a more  comfortable
lifestyle  and  remain in their  homes.  In  addition,  the Bank was  identified
through the Office of the  Comptroller  of the Currency as the number one lender
in Northeastern Pennsylvania for conventional home purchase mortgage loans.

         During the first  quarter of 1998,  the Bank's  newly  formed  company,
Ariel Financial Services,  Inc., was introduced to employees through a series of
training  sessions.   Customers  received  communications  throughout  the  year
regarding the services offered by Ariel Financial Services,  Inc. and the Bank's
highly-trained  investment  specialists  marketed  the  Company's  products  and
services to customers  throughout  the Bank's current  twenty-one  office branch
network.

         Also, during the first quarter,  two new retirement products were added
to the Bank's  product line.  The Education IRA and Roth IRA were  introduced in
response  to  significant  changes  in  legislation  signed  into law  under the
Taxpayer Relief Act of 1997.
                                       35
<PAGE>

         In response to the mandates of  Electronic  Funds  Transfer Act of 1999
(EFT99), new legislation  affecting the direct deposit of government  retirement
funds,  the Bank's senior citizen  program was heavily  marketed  throughout the
year to attract new customers.  A senior citizen seminar was held in April which
addressed the new direct deposit mandate,  investment services,  estate planning
and reverse  mortgages.  The Bank's new senior travel club was also  introduced.
The inaugural season of the travel club was an overwhelming  success.  The group
traveled  to the Grand  Candlelight  Dinner  Theater  in Milton,  Atlantic  City
casinos and closed the year with a trip to The Big Apple to see a Broadway play.

         The first of our SmartLine  electronic banking products was introduced.
The SmartLine  telephone  voice  response unit allows  customers to access their
accounts,  get  information on certificates  of deposit,  loans,  transfer funds
between  accounts and obtain  current  deposit and loan rate  information  via a
touch-tone telephone.  The new system allows customers 24-hour access to account
information  without the assistance of a bank employee.  Bill- payment  services
will be added to the SmartLine in early spring of 1999.

         The Bank kept abreast of current  product  marketing via the World Wide
Web by  incorporating  our print  advertising  with the  `What's  New Page'.  In
addition to the outward  change of our  address to  www.labank.com,  LA Bank has
greatly  improved  our  Internet  speed and  accessibility  by  housing  our own
website.  Browsers  may now  contact  senior  management  and  department  heads
directly from the web page. LA Bank  employees are afforded the  opportunity  to
procure  product and sales  manuals,  in addition to employee  handbooks via the
recently established intranet. This greatly reduces the amount of paper used and
allows for immediate updates and enhanced  communication and efficiencies within
the Bank.

         For the third  consecutive  year,  we  achieved  two top  ratings  from
national  financial  review  organizations.  The  Bank  received  IDC  Financial
Publishing,  Inc.'s Superior ranking and Bauer Financial Reports,  Inc.'s 5-Star
rating, which recognizes the Bank as one of the safest financial institutions in
the United  States.  In addition,  the Bank earned the  distinction  of an award
given by the Pennsylvania  Community  Bankers for the best community  project in
our asset size during Community Banking week.

         With  the  addition  of our  two new  in-store  branches,  an  entirely
different  sales  program  was  developed  for these  branches.  The new program
includes  extensive sales training for the staff,  focusing on in-aisle selling,
development of sales promotions, and employee incentives. Each month, the branch
staff develops two  promotions,  which run  concurrently  during the month.  The
staff are  required  during the day to go out in the aisle and talk to  shoppers
about the  convenience of 7-day a week banking,  our products and services.  The
sales staff at both  in-store  branches  have  developed  unique and  attractive
promotions that have contributed to the success of each of the branches.

Community Reinvestment and Development
         During  1998,  LA Bank  continued  to meet the credit  needs of low and
moderate  income  families  within  their  market  area by  offering  innovative
mortgage  products  and  participating  with other local  banks and  agencies in
providing  financing to families who would not normally  qualify for traditional
mortgage  loans.  In  addition,  many of the Bank's loan  officers  are actively
involved with  community  organizations  that focus on housing and credit needs.
The Bank's  commitment to the  communities it serves was confirmed when the Bank
was notified by the Office of the  Comptroller  of the Currency in 1998 that the
Bank  is  the  number  one  Home  Mortgage  Disclosure  Act  (HMDA)  lender  for
conventional home purchase mortgages within  Northeastern  Pennsylvania.  We are
all very proud of this achievement.

     The Bank's "Welcome  Neighbor" program for first time homebuyers in the low
and moderate  income level was revised and  improved  during the year.  Over $61
million of these loans were originated during 1998.

         The Bank is also  involved  with the  Office of  Economic  &  Community
Development  in the City of  Scranton,  which  assists low and  moderate  income
individuals  who are  interested in becoming first time  homeowners.  The Bank's
management  team works with a consortium of other local lenders in  underwriting
and funding these loans.
                                       36
<PAGE>

         LA Bank also participates with the Pike County Planning and Development
Authority to  rehabilitate  residential  real estate.  The county provides grant
money and the Bank provides financing to low and moderate income individuals who
are remodeling  deteriorated  primary homes.  Twenty-six  loans were  originated
during 1998 for a total of $286,000.

Year In Review
         For the year ended  December 31,  1998,  LA Bank  achieved  substantial
growth and posted record high profits.  We are very proud of this year's efforts
and performance and believe our aggressive strategy gives us reason for optimism
for future years.

         Looking to the future,  management believes that an excellent financial
institution has been established.  The Company has exercised a broad involvement
in the various  communities  it serves and continues to meet the credit needs of
all community  segments.  We believe that the Company's  current  commercial and
retail loan growth momentum,  balance sheet strength, and increased market share
provide the nucleus for continued and improved earnings trends.

         We  thank  our  Board  of  Directors,   Business   Development  Boards,
management and employees for making 1998 a very  successful  year.  Their effort
and support,  coupled with invaluable experience,  are appreciated by all of us.
Once again,  as a  stockholder,  we sincerely hope that you continue to support,
promote and  patronize LA Bank so that we may continue in our efforts to grow as
a strong locally-owned community bank.




John G. Martines
Chief Executive Officer of the Corporation and 
President and Chief Executive Officer
of the Subsidiaries




Bruce D. Howe
President of the Corporation
and Chairman of the Subsidiaries
                                       37
<PAGE>


Board of Directors

William C. Gumble,  Esquire - Age 61. Attorney Gumble has served on the Board of
Directors  since 1985.  He resides in Paupack,  Pike County.  He retired from an
active law practice in 1993. He has held office as County Solicitor and District
Attorney of Pike County.

Bruce D. Howe- Age 67. Mr. Howe is Chairman of the Board of LA Bank,  N.A.,  and
is a  resident  of Lake  Ariel.  He is  President  of John T. Howe,  Inc.  which
operates local fuel and heating oil companies,  a motel,  interstate  truck stop
and convenient  stores. He is also President of Howe's Twin Rocks, Inc., a local
restaurant.

Harry  F.  Schoenagel-  Age 63.  Mr.  Schoenagel  was  elected  to the  Board of
Directors in 1985.  He is a resident of Greentown and is a partner in Schoenagel
& Schoenagel  Associates,  a local  engineering and surveying company located in
Pike County.

John G.  Martines- Age 52. Mr.  Martines is Bank  President and CEO and has been
employed by the Bank and on the Board of Directors  since 1979. He is a resident
of Newton Lake, Greenfield Township, Lackawanna County.

Peter O. Clauss- Age 69. Mr.  Clauss has served on the Board since 1986.  He was
the former  President  of C & D  Builders,  Inc.,  a  contracting  firm,  and is
presently retired and a resident of Lake Ariel.

Donald E. Chapman- Age 62. Mr. Chapman has been on the Board of Directors  since
1972. He is a resident of Lake Ariel and owner of a Nationwide  Insurance agency
for the past 35 years. He also serves as a Wayne County Commissioner.

Paul D. Horger,  Esquire - Age 61. Attorney Horger is a practicing  attorney for
34 years.  He is Senior  Partner  at the law firm of  Oliver,  Price & Rhodes in
Scranton, Pennsylvania.

Kenneth M. Pollock, Jr. - Age 41. Mr. Pollock is the newest member on the Board.
He is the  President  of HUD Inc.  t/a  Emerald  Anthracite  II and  resides  in
Huntsville in Luzerne County.


                                       38

<PAGE>


BOARD


While the  average LA Bank  customer  would not be nearly as  familiar  with the
faces of the Board members as they are with those of our staff which serves them
daily, it is the directives of our Board and their policy  decisions that impact
the  products  and  services  our  customers  benefit  from and from  which  our
stockholders  ultimately  derive financial  reward.  It is this  entrepreneurial
spirit that has given us the  momentum to expand,  improving  the  products  and
services we offer our customers,  and  culminating  with our proud  tradition of
financial reward to our stockholders.  Our aggressive  expansion into now a five
county territory,  including the Luzerne County location pictured here, provides
new  opportunities  to the diverse  populations of the  communities we serve. We
welcome the new  customer  base which  further  increases  our market  share and
overall performance.

                                       39

<PAGE>


LUZERNE COUNTY


Luzerne  County  has  become  a focal  point  for our  continuing  strength  and
expansion.  In May,  1998 we opened our first  dedicated  Mortgage  Loan Center,
followed  in  September  by a  full-service  branch at the same  Luzerne  County
landmark site,  Public Square.  December  ushered in the opening of our Kingston
Branch,  situated  adjacent  to the  cherry-blossomed  banks of the  Susquehanna
River. We expect our third Luzerne County branch on the  Wilkes-Barre  Boulevard
to open in the spring of 1999.  Our main Luzerne  County  location,  this branch
will also be home for our Luzerne  County  commercial  lending and other lending
functions.

There is no doubt that Public Square (pictured here) has long been the spiritual
center of Luzerne County. The Square houses other prominent landmarks, including
the Greater  Wilkes-Barre  Chamber of Business  and Industry  Center,  the Kirby
Center for the Performing  Arts, and, within walking  distance,  the Greco-Roman
style Luzerne County Courthouse.  Nearby, numerous educational  institutions and
businesses  help shape the  surrounding  culture of our new locations and accent
the Public Square that symbolizes the aspirations of creating fine public spaces
for all to enjoy.

                                       40

<PAGE>


LACKAWANNA COUNTY


LA  Bank's  presence  in  Lackawanna  County  has been  recently  marked  by our
Financial Center, located in the heart of downtown Scranton. Simultaneously, the
greater  Scranton  area itself is becoming more  identified  with the concept of
Steamtown.  Steamtown National Historic Site, pictured here, is truly a landmark
of national  recognition.  Drawing thousands of domestic and international  rail
fans and historians, Steamtown is a memorial to one of the most prosperous times
in the history of the County.  Today, one can enjoy the exhilaration of stepping
back in time to enjoy an excursion  spotlighting the beauty of the Valley. As it
is true that life, times and means of transportation  change, 1998 brought about
the opening of our newest Lackawanna  branch locations at Dickson City,  located
in the new Wal-Mart Supercenter; downtown Taylor; and, Meadow Avenue, located in
the busy East Mountain area of Scranton.


                                       41
<PAGE>


WAYNE COUNTY


Despite  LA  Bank's  multiple  expansions  throughout  a  five-county  region of
Northeastern  Pennsylvania,  Wayne  County  -- the site of the  founding  of our
precursor,  the First  National Bank of Lake Ariel -- remains the spiritual home
to many who know the history of our founding on November 10, 1910. Today,  Wayne
County houses three  additional  branches,  including our newest office  located
inside the Honesdale Wal-Mart Supercenter. Our Hamlin and Newfoundland locations
complete the list of our other Wayne County  locations.  This traditional  rural
character  is  immediately  evident  from  a  drive  through  the  Wayne  County
countryside,  where  farming  remains a way of life.  The values of the  farming
lifestyles are the landmark so reflective of this county. This lifestyle is well
represented by the Walter Krompasky Farm, principally a dairy operation, and one
of the oldest working farms located in the region.


                                       42
<PAGE>


PIKE COUNTY


Pike  County  is home to  three  LA Bank  branches,  including  one in  downtown
Milford. The Columns,  home to the Museum of the Pike County Historical Society,
a landmark of rich  architectural  distinction,  can be seen when  visiting  our
branch. This county shares the tremendous natural beauty of the Pocono Mountains
bordering  Monroe County,  and together are noted as two of the fastest  growing
counties in Pennsylvania. The Columns, pictured here, is proof that, despite the
Pocono's  recreational  opportunities and astounding natural aesthetics,  it has
man-made  wonders of equal  beauty.  Built  originally  as a summer estate for a
textile  magnate  before being  deeded to the  Historical  Society in 1930,  The
Columns  is  best  known  as  the  home  of  the  Lincoln   Flag,   historically
authenticated  as the flag which was placed  under the head of the  assassinated
President as he lay dying.

                                       43

<PAGE>


MONROE COUNTY


A popular destination for tourists seeking to enjoy the fun the outdoors offers,
Monroe County was carved out of the original  Northampton County,  itself one of
the great land  grants  presented  by the King of England to William  Penn.  The
county features spectacular recreational terrain and immense natural beauty. The
natural  beauty of the Pocono  Mountains in the county itself is a true landmark
and this beauty is captured in the  spectacular  photo of the Delaware  River at
Shawnee. Home to one of LA Bank's newest branches,  Tannersville is also home to
the Crossings,  a popular shopping epicenter located just across the border from
New Jersey.


                                       44

<PAGE>


Responsibilities for Preparation of Financial Statements

         The  management  of  Lake  Ariel  Bancorp,   Inc.  ("the  Company")  is
responsible  for  the  preparation,  integrity  and  fair  presentation  of  the
financial  statements,  as well as other  information  contained  in the  annual
report.  Estimates  are an integral  part of preparing  financial  statements as
management must make informed  judgements  about the expected  effects of events
and transactions prior to their definitive resolution.

         In meeting its  responsibility  for the  reliability  of the  financial
statements,  the Company depends on its system of internal accounting  controls.
This  system is  designed  to  provide  reasonable  assurance  that  assets  are
safeguarded  and  transactions  are executed in accordance  with the appropriate
corporate  authorization  and  recorded  properly to permit the  preparation  of
financial   statements  in  accordance   with  generally   accepted   accounting
principles. Although accounting control procedures are designed to achieve these
objectives, it must be recognized that errors or irregularities may nevertheless
occur.  The  effectiveness  of the system of  accounting  controls  is  reviewed
continually  throughout  the year by an established  program of internal  audit.
These  controls are  constantly  modified and improved in response to changes in
business  conditions  and  operations.  The design,  monitoring  and revision of
internal accounting controls involve,  among other considerations,  management's
judgement  with respect to the relative  cost and expected  benefits of specific
control  measures.  The Company  believes that its accounting  controls  provide
reasonable assurance that errors or irregularities that could be material to the
financial  statements are prevented or would be detected  within a timely period
by employees in the normal course of performing their assigned functions.

         Management  discharges its responsibility for the financial  statements
through the Audit  Committee of the Board of  Directors,  comprised  entirely of
Directors who are not Company employees.  This  responsibility  includes general
oversight of the Company's  accounting  system,  internal  accounting  controls,
financial   accounting  and  reporting  matters  and  regulatory  reports.   The
independent  auditors and the Company's  internal audit  department  have direct
access to the Audit  Committee,  and meet with it, with and  without  management
being present, to discuss auditing and financial reporting matters.

         The  accompanying  financial  statements  have been audited by Parente,
Randolph,  Orlando,  Carey & Associates,  Certified Public Accountants,  for the
purpose of rendering an independent  professional  opinion,  and their report is
included herein.



Joseph J. Earyes, CPA
Vice President and Treasurer

                                       45
<PAGE>
Management's Discussion and Analysis

     The  consolidated  financial  review  of Lake  Ariel  Bancorp,  Inc.  ("the
Company")  provides a comparison of the performance of the Company for the years
ended December 31, 1998,  1997, and 1996.  The financial  information  presented
should be reviewed in conjunction with the consolidated financial statements and
accompanying notes appearing elsewhere in this annual report.

Background

     The Company is a one bank holding company whose principal  subsidiary is LA
Bank, N.A. The Company  operates 21  full-service  branch banking offices in its
principal market area in Lackawanna,  Luzerne,  Monroe, Pike and Wayne Counties.
At December 31, 1998, the Company had 174 full-time  equivalent  employees.  The
increase,  41 additional over 1997, was due to the additional  staffing needs in
the new branches.

Analysis of Results of Operation

Overview
         Net income for 1998 increased to $3.8 million,  an increase of $340,000
or 9.9% over 1997. Net income for 1997 was $3.4 million, an increase of $400,000
or 13.2% over 1996.  On a per share basis,  net income was $0.79 basic and $0.77
diluted  in 1998,  $0.88  basic and $0.84  diluted  in 1997 and $0.78  basic and
diluted in 1996.  Weighted average diluted shares outstanding for 1998, 1997 and
1996 were 4,906,000, 3,886,000, and 3,686,000, respectively.  Earnings per share
and weighted  average  shares  outstanding  reflect  adjustment for the 5% stock
dividends  paid on October 1, 1998,  1997 and 1996,  and the  two-for-one  stock
split effective November 10, 1997.

         The growth in net income  during  1998 was  attributable  to the volume
improvement in net interest  income after  provision for possible credit losses,
which increased to $11.4 million, an increase of $1.0 million or 9.7% over 1997,
and  which  was  coupled  with an  increase  in other  operating  income to $4.9
million, an increase of $1.5 million or 45.1% over 1997. This increase more than
offset the increase in other operating expenses to $11.5 million, an increase of
$2.2  million or 24.3% over 1997.  The  Company  continued  to focus its efforts
toward  retail  banking  services  within its existing and new market areas with
specific attention given to increasing overall market share.

         The  growth  in  net  income  in  1997  was  also  attributable  to the
improvement in net interest  income after  provision for possible credit losses,
which increased to $10.3 million,  an increase of $903,000 or 9.6% over 1996 and
which  was also  coupled  with an  increase  in other  operating  income to $3.4
million,  an increase of $695,000 or 25.7% over 1996.  This  increase  more than
offset the increase in other operating expenses to $9.2 million,  an increase of
$1.2 million or 15.2% over 1996.

Analysis of Net Interest Income
         In 1998, net interest income  (tax-equivalent basis) increased to $13.4
million,  an increase of $1.4 million or 11.9% over 1997 levels.  Average  loans
and leases  increased to $218.6  million,  an increase of $24.6 million or 12.7%
over 1997. Average commercial loans grew to $73.4 million,  an increase of $12.2
million or 20.0% over 1997 levels. Interest income on commercial loans increased
to $6.6  million,  an increase  of $665,000 or 11.1% over 1997.  This was due to
increased volumes through most of 1998. The national prime rate as reported in a
national  publication  published  daily, an index to which the majority of these
loans  were  tied,   was  7.75%  and  8.50%  at  December  31,  1998  and  1997,
respectively.  Average real estate loans increased 14.5%, which contributed to a
12.0% increase in interest income on real estate loans.  Average consumer loans,
which included  credit card  receivables  and leases,  decreased $1.2 million or
2.9% over 1997, and resulted in no change in related interest income, due to the
increased volume and rates from lease financing.

     Net  interest  income  (tax-equivalent  basis) for 1997  increased to $11.9
million,  an increase of $1.3 million or 12.0% over 1996.  This increase was due
to the  continued  strong growth of earning  assets,  which grew 23.3% over 1996
levels.
                                       46
<PAGE>

         On average,  investment securities in 1998 increased to $166.2 million,
an increase of $52.0 million or 45.5% over 1997 levels. Investment securities in
1997  increased to $114.2  million,  an increase of $28.9  million or 33.9% over
1996 levels.  Income earned on investment securities increased to $11.4 million,
an increase of $3.1 million or 37.8% over 1997.  Income earned in 1997 increased
to $8.3 million, an increase of $2.2 million or 36.2% over 1996. As is discussed
under  "Financial  Condition",  the  asset/liability  management  and investment
strategies  that were  employed  during 1998  resulted in increased  holdings of
investment  securities and created an increase in investment  income. The mix of
securities in the investment  portfolio  changed  slightly during 1998.  Taxable
securities,  which  represented  73.9%  of the  investment  portfolio  in  1997,
increased to 80.2% or $133.3  million in 1998. At December 31, 1998,  tax-exempt
securities  represented  19.8% of the  portfolio  compared  to 26.1% in 1997 and
23.9% in  1996.  In  1998,  tax-exempt  securities  provided  similar  after-tax
investment  returns as taxable  issues in similar  maturity and quality  ranges.
Accordingly,  average balances on state and municipal securities at December 31,
1998 increased to $32.9 million, an increase of $3.1 million or 10.5% over 1997.
Average  balances  on state  and  municipal  securities  at  December  31,  1997
increased  to $29.8  million,  an increase  of $9.4  million or 46.1% from $20.4
million at December 31, 1996.

         Average  interest-bearing  deposits at December  31, 1998  increased to
$243.4  million,  an  increase  of $10.8  million  or 4.6%  over  1997.  Average
interest-bearing  deposits at December 31, 1997 increased to $232.6 million,  an
increase of $28.7  million or 14.1% from $203.9  million at December  31,  1996.
Savings and  interest-bearing  demand deposits at December 31, 1998 increased to
$77.8  million,  an  increase  of $7.1  million or 10.1% over 1997.  Savings and
interest-bearing  demand  deposits  at  December  31,  1997  increased  to $70.6
million,  an increase of $6.4 million or 9.9% from $64.2 million at December 31,
1996. As a percentage of total average  interest-bearing  deposits,  savings and
interest-bearing  demand deposits  represented  32.0% in 1998, 30.4% in 1997 and
31.5% in 1996. Average time deposits  (including deposits greater than $100,000)
at December 31, 1998 increased to $165.6 million, an increase of $3.6 million or
2.2% over 1997.  Average time deposits at December 31, 1997  increased to $162.0
million,  an increase of $22.3  million or 15.9% over 1996.  As a percentage  of
total average  interest-bearing  deposits,  time deposits  represented  68.0% in
1998, 69.6% in 1997, and 68.5% in 1996. Due to the shift in the mix of deposits,
the rates at which they were repricing and the volume increase, interest expense
on deposits at December  31, 1998  increased  to $10.9  million,  an increase of
$462,000 or 4.4% over 1997.  Interest  expense on deposits at December  31, 1997
increased  to $10.4  million,  an  increase  of $1.4  million or 16.1% from $9.0
million at December 31, 1996.  These results were reflected in the cost of funds
which  decreased  2.2% from 1997 through 1998,  and increased  1.8% from 1996 to
1997, while volume increased 4.6% and 14.1%, respectively. Interest expense as a
percent of earning  assets  decreased  by 2 basis  points  from 4.32% in 1997 to
4.30% in 1998 due to the rate decrease paid on interest-bearing liabilities.

         Short-term  borrowings,  which  included  federal  funds  purchased and
securities sold under  agreements to repurchase,  averaged $2.2 million in 1998,
$2.1  million  in 1997  and $3.7  million  in 1996.  These  borrowings  remained
relatively constant through 1998.

         The overall  effect of the modest  decrease in interest rates paid, the
shift in mix of and  growth  in  deposit  accounts  and  long-term  debt and the
decreasing  yields earned on earning  assets  produced a negative  impact on net
interest  margin.  The net interest margin decreased by 38 basis points to 3.43%
in 1998 from 3.81% in 1997.  The net  interest  margin  was 4.20% in 1996.  This
result is very indicative of a decreasing rate environment,  which took place in
1998. Due to the large volume of variable rate  securities and loans tied to the
national prime rate,  the yield on earning assets  decreased to 7.74% from 8.13%
in 1997, or a 39 basis point decrease.  Similarly,  the rate of interest expense
as a percent of earning assets decreased from 4.32% to 4.30% or 2 basis points.

         The  following  tables  provide an analysis of changes in net  interest
income with  regard to volume,  rate and yields of  interest-bearing  assets and
liabilities  based on average  balances for each period.  Components of interest
income and expenses are presented on a tax-equivalent  basis using the statutory
federal income tax rate of 34.0% each year.


                                       47
<PAGE>

<TABLE>
<CAPTION>
                                                                              For The Year Ended December 31,
                                                            1998                           1997                    1996
                                              Average     Interest              Average   Interest        Average  Interest
                                              Balance     Income/       Yield/  Balance   Income/  Yield/ Balance  Income/  Yield/
                                             (1)          Expense        Rate    (1)      Expense  Rate   (1)      Expense   Rate
                                                                                (Dollars in thousands)
<S>                                          <C>            <C>          <C>    <C>      <C>      <C>    <C>         <C>      <C>   

Earning assets:
Federal funds sold .......................     $4,028        $217        5.39%  $4,640     $264   5.69%  $3,124       164     5.25%
Deposits in Federal Home Loan Bank .......         85           9        4.86      160        9   5.63      145         6     4.14
Investment securities:
   U.S. government agencies ..............    127,571       8,430        6.61   81,567    5,738   7.03   63,443     4,323     6.81
   State and municipal(2) ................     32,922       2,567        7.80   29,798    2,391   8.02   20,393     1,673     8.20
   Other securities ......................      5,708         419        7.34    2,850      154   5.40    1,460        86     5.89
     Total investment securities .........    166,201      11,416        6.87  114,215    8,283   7.25   85,296     6,082     7.13
Loans and leases:
   Commercial, financial and industrial(2)     73,393       6,617        9.02   61,163    5,952   9.73   48,626     4,585     9.43
   Real estate-construction and mortgage .    106,508       8,240        7.74   92,998    7,356   7.91   80,395     6,557     8.16
    Installment loans to individuals(3) ..     34,003       3,122        9.18   36,793    3,299   8.97   34,213     3,251     9.50
   Lease financing(3) ....................      4,725         480       10.16    3,110      302   9.71    2,114       199     9.41
     Total loans and leases ..............    218,629      18,459        8.44  194,064   16,909   8.71  165,348    14,592     8.83

Total earning assets .....................    389,043      30,101        7.74  313,079   25,465   8.13  253,913    20,844     8.21

Cash and due from banks ..................     11,038                           10,469                    9,834
Premises and equipment ...................     14,794                           10,901                    7,769
Other, less allowance for credit losses
   and loan fees .........................     14,334                            9,617                    5,438
Total assets .............................   $429,209                         $344,066                 $276,954

Liabilities and stockholders= equity:
Interest-bearing deposits:
   Demand ................................    $35,503        $806        2.27% $30,245     $627   2.07% $ 25,764    $537      2.08%
   Savings ...............................     42,257       1,697        4.02   40,377    1,611   3.99    38,472   1,549      4.03
   Time ..................................    126,525       6,288        4.97  123,054    6,157   5.00   105,883   5,350      5.05
   Time over $100,000 ....................     39,090       2,066        5.29   38,918    2,000   5.14    33,811   1,521      4.50
     Total interest-bearing deposits .....    243,375      10,857        4.46  232,594   10,395   4.47   203,930   8,957      4.39
Short-term borrowings ....................        652          38        5.83    1,843       99   5.37     3,312     174      5.25
Securities sold under agreements
   to repurchase .........................      1,526          70        4.59      259       13   5.02       338      17      5.03
Long-term debt ...........................     96,817       5,775        5.96   47,663    3,018   6.33    16,275   1,035      6.36
Total interest-bearing liabilities .......    342,370      16,740        4.89  282,359   13,525   4.79   223,855  10,183      4.55
Demand - noninterest - bearing ...........     45,289                           35,518                    29,545
Other liabilities ........................      4,826                            3,674                     3,312
Total liabilities ........................    392,485                          321,551                   256,712
Stockholders= equity .....................     36,724                           22,515                    20,242
Total liabilities and stockholders= equity   $429,209                         $344,066                  $276,954

Net interest income ......................                $13,361                       $11,940                  $10,661
Net interest spread ......................                               2.85%                    3.34%                       3.66%
Net interest margin(4) ...................                               3.43%                    3.81%                       4.20%
</TABLE>

------------------------------
[FN]

(1)  Average balances have been computed using daily balances.  Nonaccrual loans
     are included in loan balances.
(2)  Interest and yield are  presented on a  tax-equivalent  basis using a 34.0%
     statutory tax rate for 1998, 1997 and 1996.
(3)  Installment loans and leases are presented net of unearned interest.
(4)  Represents  the  difference  between  interest  earned and  interest  paid,
     divided by average total earning assets.
</FN>
[/TABLE]
                                       48




<PAGE>
<TABLE>
<CAPTION>


                                                   1998 Compared to 1997(1)          1997 Compared to 1996(1)
                                                     Caused by        Total               Caused by      Total
                                                  Volume     Rate     Variance       Volume     Rate     Variance
<S>                                              <C>          <C>     <C>           <C>        <C>        <C>
                                                                              (In thousands)
Interest income:
   Federal funds sold............................       $     (34         )$(13)    $(47)   $    85   $     15       $100
   Deposits in Federal Home Loan Bank .................         1            (1)        0         1          2          3    
   Investment securities                                    3,501          (368)   3,133      2,101        100      2,201
   Loans and leases ...................................     1,160           390     1,550     2,553       (236)     2,317
Total interest income .................................     4,628             8     4,636     4,740       (119)     4,621

Interest expense:
   Demand and savings deposits ........................       190            75       265       169        (17)       152
   Time deposits ......................................       182            15       197     1,105        181      1,286
   Borrowed funds .....................................     2,932          (179)    2,753     1,904          -      1,904
Total interest expense ................................     3,304           (89)    3,215     3,178        164      3,342

Net interest income.............................           $1,324           $97    $1,421    $1,562      $(283)    $1,279
<FN>

                                                                             
(1)      The portion of the total  change  attributable  to both volume and rate
         changes  during the period  has been  allocated  to the volume and rate
         components  based upon the absolute dollar amount of the change in each
         component prior to the allocation.
</FN>
</TABLE>

Provision for Possible Credit Losses
         The  provision for possible  credit losses for the year ended  December
31, 1998 increased to $1.1 million,  an increase of $350,000 or 44.9% over 1997.
The provision  for possible  credit  losses for 1997  increased to $780,000,  an
increase of $130,000 or 20.0% from $650,000 for 1996. In 1998, the provision for
possible credit losses was 128.4% of net charge-offs, compared to 155.7% in 1997
and 136.3% in 1996.  The provision  represented  management's  assessment of the
risks  inherent  in the loan and lease  portfolio  while  providing  the amounts
necessary to cover potential charge-offs.

         Net charge-offs in 1998 increased to $880,000,  an increase of $379,000
or 75.6% over 1997. Net  charge-offs in 1997 increased to $501,000,  an increase
of $24,000  or 5.0% from  $477,000  in 1996.  The net  charge-offs  in 1998 were
primarily attributed to the commercial,  consumer  installment,  and credit card
portfolios.  The  net  charge-offs  in 1997  were  primarily  attributed  to the
consumer  installment  loans  and  credit  card  portfolio.  The  ratio  of  net
charge-offs to average loans  outstanding was at 0.40% for 1998,  0.26% for 1997
and 0.30% for 1996.

         Net  charge-offs  on  commercial  and  industrial  loans  for 1998 were
$506,000  or  57.5%  of net  charge-offs  compared  to  $64,000  or 12.8% of net
charge-offs for 1997 and $118,000 or 24.7% of net charge-offs for 1996. Consumer
and credit card and real estate related debt accounted for 42.5% in 1998,  87.2%
in 1997 and 75.3% in 1996, of net charge-offs, respectively.

Other Operating Income
         Other operating  income in 1998 increased to $4.9 million,  an increase
of $1.5 million or 45.0% over 1997.  Other operating income in 1997 increased to
$3.4 million,  an increase of $695,000 or 25.7% from $2.7 million in 1996.  Fees
generated from the origination  and sale of residential  mortgage loans provided
$39,000 or 1.0% in 1998,  $183,000 or 5.4% in 1997 and $266,000 or 9.8% in 1996,
of other operating income. Mortgage servicing fee income, net of amortization of
mortgage servicing rights,  decreased in 1998 to $294,000, a decrease of $16,000
or 5.1% over 1997.  Such income in 1997  decreased  to  $310,000,  a decrease of
$17,000 or 5.2% from $327,000 in 1996.  These fees were  directly  influenced by
the volume of loans that were sold in the secondary  market and the value of the
retained  servicing rights.  Gains or losses on sales of mortgage loans occurred
when the coupon  rates on  mortgage  loans  exceeded or fell short of the yields
required by the purchasers.  The net gain of $951,000 recorded in 1998, compared
with the net gain of  $404,000  in 1997 and net gain of  $114,000  in 1996,  was
indicative  of the  changes in  interest  rates  during the periods in which the
sales occurred.

                                       49
<PAGE>

         Fee income from service charges on demand  deposits,  item  processing,
return  items and other  service  fees  increased  to $1.6  million in 1998,  an
increase of $329,000 or 26.4% over 1997.  Such income in 1997 remained  constant
with  1996 at $1.2  million.  These  fees,  which  represented  31.9%  of  other
operating  income,  were influenced by both pricing changes and increases in the
number of consumer and business  demand deposit  accounts which  increased $22.8
million or 31.9% in 1998 over 1997.

         Net gains on available-for-sale  securities  represented  approximately
8.8% in  1998,  6.3% in 1997  and  1.6%  in  1996  of  other  operating  income,
respectively. The sales of these securities resulted from the Company's decision
to  liquidate  certain  securities  to capture  market gains with the ability to
reinvest in bonds with similar risk and yield.

         Included in other income are earnings on directors'  and officers' life
insurance policies, credit card annual fees and merchant discounts, safe deposit
box  rentals,  rental  income on excess  office  space in four of the  Company's
branch offices,  automated teller machine surcharge income, commissions on check
orders and other  general  service  fees.  These fees in 1998  increased to $1.7
million,  an  increase  of  $673,000  or 67.0%  over  1997.  These  fees in 1997
increased  to $1.0  million,  an increase of $265,000 or 35.9% from  $739,000 in
1996.  Automated  teller machine  surcharge  income  represented  $46,000 of the
increase.   Earnings  on  directors'  and  officers'  life  insurance   policies
represented  $121,000 of the increase.  Rental income represented $55,000 of the
increase.  A gain of $240,000 on the sale of  deposits  and fixed  assets of two
branch  offices  during  the  year  represents  the  majority  of the  remaining
increase.

Other Operating Expenses
         Other  operating  expenses  in 1998  increased  to  $11.5  million,  an
increase of $2.2 million or 24.3% over 1997.  Other  operating  expenses in 1997
increased  to $9.2  million,  an  increase  of $1.2  million  or 15.0% from $8.0
million in 1996.  Salaries and benefits,  which were the most significant of the
noninterest  expenses,  increased  in each of the years  reported.  Salaries and
benefits for 1998  increased to $5.0  million,  an increase of $807,000 or 19.2%
over 1997.  Salaries and benefits in 1997 increased to $4.2 million, an increase
of $522,000 or 14.2% from $3.7 million in 1996.  These increases were due to the
additional  staffing  needs in both new and existing  branch and  administrative
offices,  merit  increases  and the added  costs  associated  with  health  care
insurance and other benefits which were provided by the Company.

         Equipment and occupancy expenses in 1998 increased to $2.7 million,  an
increase of $462,000 or 20.4% over 1997. Such expenses in 1997 increased to $2.3
million, an increase of $389,000 or 20.7% over 1996. Again, these increases were
primarily  attributable  to the  growth  in the  number of  branch  offices,  in
addition to overall increases in overhead expenses, maintenance costs, equipment
upgrades (including  computer hardware and software),  and the Year 2000 testing
and related equipment costs throughout the branch network.

         FDIC  insurance  assessments  decreased  from $222,000 in 1995 to $0 in
1998.  The decrease in the FDIC insurance  assessment  reflected the decision by
the FDIC in late  1995 to  charge  well-capitalized  banks a $1,000  semi-annual
membership fee without any deposit-based  insurance  premium.  In 1998 and 1997,
the FDIC  charged no  membership  fee.  Foreclosed  asset  expenses in 1998 were
$27,000,  a decrease of $12,000 or 30.8% over 1997. The decrease was a result of
the sales of properties in 1998 without any material additions. Foreclosed asset
expenses in 1997 were $39,000, a decrease of $12,000 or 23.5% over 1996.

         Amortization  of  intangible  assets  increased to $205,000 in 1998, an
increase  of  $51,000 or 33.1% over 1997,  and was  related to the  premium  the
Company paid for the core deposits and the deposit  customer lists from acquired
branch offices. Amortization of intangible assets increased to $154,000 in 1997,
an  increase  of $46,000 or 42.6% over  1996,  also  related to the  acquisition
premium  paid  for  core  deposits  and  customer  lists.  Advertising  expenses
increased to $430,000 in 1998,  an increase of $138,000 or 47.3% over 1997.  The
increase  is the  result  of  expenses  associated  with a new  advertising  and
promotion  campaign  developed for 1998 as well as increased  marketing costs in
our new market segments.  Advertising expenses increased to $292,000 in 1997, an
increase of $43,000 or 17.3% over 1996.

                                       50
<PAGE>

         Other  expenses  in 1998  increased  to $3.3  million,  an  increase of
$847,000 or 35.2% over 1997.  Other  expenses in 1997 increased to $2.4 million,
an increase of $273,000 or 12.8% over 1996. Included in these expenses were such
costs as legal fees,  professional and audit, state shares' tax, directors' fees
and other general branch and administrative operating expenses.

Provision For Income Taxes
     The provision for income taxes for the years ended December 31, 1998, 1997,
and 1996 was $1.1 million.  The effective tax rate for 1998,  1997, and 1996 was
22.0%, 24.4% and 27.0%, respectively.

Financial Condition

December 31, 1998 Compared to December 31, 1997

         The Company's total assets  increased to $474.7 million at December 31,
1998, an increase of $106.6 million or 29.0% from $368.1 million at December 31,
1997.  The  increase in assets was  primarily  attributable  to a $16.5  million
growth in net loans and a $77.6 million increase in investment securities.

         The amortized cost of investment securities, including held-to-maturity
(HTM) and available-for-sale  (AFS), increased to $192.8 million at December 31,
1998, an increase of $78.0 million or 67.9% from $114.8  million at December 31,
1997.  The  continued  attention  given  to  management's   asset/liability  and
investment  strategies  resulted  in an increase in net  interest  income  while
controlling  interest rate risk. Due to the significant increase in deposits and
by again utilizing structured  borrowings with the FHLB, the Company was able to
purchase  both  taxable and  tax-exempt  investments  that  provided a favorable
spread between the interest rate on deposits and borrowings  versus the yield on
invested  funds.  During 1998,  the Company  purchased $75 million of securities
with funds  borrowed from the FHLB.  The strategy  that was employed  provided a
favorable  spread between the rates on invested and borrowed  funds. At December
31, 1998,  gross  unrealized  gains in the HTM  investments  were $858,000 while
gross unrealized losses amounted to $331,000.

         The following  table  presents the maturity  distribution  and weighted
average yield of the  securities  portfolio of the Company at December 31, 1998.
Weighted  average  yields on  tax-exempt  obligations  have been  computed  on a
taxable equivalent basis.
<TABLE>
<CAPTION>

                                                                            Available-for-Sale December 31, 1998
                                                        After 1 Year But After 5 Years But    After 10 Years
                                      Within 1 Year     Within 5 Years   Within 10 Years     or no maturity        Total
                                      Amount   Yield    Amount      Yield   Amount    Yield   Amount   Yield  Amount   Yield
<PAGE>
<S>                                   <C>         <C>    <C>        <C>    <C>        <C>    <C>       <C>   <C>         <C>     

Amortized cost:                                                         (Dollars in thousands)
U.S. government agencies and
   corporations ...................   $21,613      5.59%$11,161      6.70%$5,336      6.38%$26,222      6.88%$64,332      6.37%
Obligations of state and
   political subdivisions .........       100      7.80     755      6.97    494      6.50   8,171      6.78   9,520      6.79
Equity securities .................        --                 -      -         -      -          -      5.88   7,125      5.88
Total securities available-for-sale   $21,713      5.60%$11,916      6.72%$5,830      6.39%$41,518      6.69%$80,977      6.38%

</TABLE>

<TABLE>
<CAPTION>


                                                                 Held-to-Maturity December 31, 1998
                                                         After 1 Year But After 5 Years But After 10 Years
                                       Within 1 Year     Within 5 Years   Within 10 Years   or no maturity      Total
                                     Amount      Yield Amount     Yield   Amount    Yield   Amount   Yield  Amount   Yield
<S>                                 <C>          <C>   <C>         <C>    <C>        <C>    <C>        <C>       <C>       

Amortized cost:                                                         (Dollars in thousands)
U.S. government agencies and
   corporations .................   $24,592      6.62%$33,739      6.48%  $6,161      6.30% $24,524     6.34%    $89,016       6.47%
Obligations of state and
   political subdivisions .......         -      -      1,424      6.55   11,692      6.97    9,694     7.67      22,810       7.24
Total securities held-to-maturity   $24,592      6.62%$35,163      6.48%$ 17,853      6.74%$ 34,218     6.72%   $111,826       6.63%

</TABLE>

                                       51
<PAGE>

         A   summary   of   securities    available-for-sale    and   securities
held-to-maturity  at December 31, 1998,  1997,  1996,  1995 and 1994 follows (in
thousands):
<TABLE>
<CAPTION>

                                                              Securities Available-for-Sale at December 31,
                                                      1998         1997          1996         1995         1994
<S>                                                  <C>          <C>          <C>          <C>          <C>    

U.S. government agencies and corporations.........   $64,332      $46,334      $50,253      $43,041      $27,348
Obligations of states and political subdivisions..     9,520        7,287        9,066        5,810        6,919
Equity securities(1)..............................     7,125        2,913        1,443        1,304        2,619

Total amortized cost of securities................   $80,977      $56,534      $60,762      $50,155      $36,886

Total fair value of securities....................   $80,591      $56,545      $60,399      $50,580      $34,142
<FN>

(1)  Comprised  mostly  of  FHLB  stock,   Federal  Reserve  Bank  stock  and  a
    Pennsylvania community bank stock.
</FN>
</TABLE>

<TABLE>
<CAPTION>

                                                               Securities Held-to-Maturity at December 31,
                                                      1998         1997          1996         1995         1994
<S>                                                 <C>           <C>          <C>         <C>           <C>    

U.S. government agencies and corporations.........  $ 89,016      $33,892      $10,841      $11,065      $31,611
Obligations of states and political subdivisions..    22,810       24,353       15,760       11,524      10,924

Total amortized cost of securities................  $111,826      $58,245      $26,601      $22,589      $42,535

Total fair value of securities....................  $112,353      $59,008      $26,564      $22,866      $40,674

</TABLE>

         A summary of the  outstanding  loans and leases by major  categories at
December 31 is as follows:
<TABLE>
<CAPTION>

                                                      1998         1997          1996         1995         1994
                                                                              (in thousands)
<S>                                                <C>           <C>          <C>          <C>           <C>     

Real estate-construction.......................... $   3,522     $  3,338     $  3,214     $  4,726      $  2,406
Real estate-mortgage..............................   103,151       99,637       84,352       68,006        56,858
Commercial and industrial.........................    79,293       69,479       51,485       45,210        43,269
Consumer installment..............................    40,907       40,912       45,170       42,891        40,839
Lease financing...................................     5,392        3,711        2,588        1,742         1,119
Unearned income...................................    (4,606)      (6,067)      (8,091)      (7,641)       (6,947)
Unearned loan fees, net...........................      (545)        (665)        (898)        (971)       (1,030)

     Total loans and leases.......................   227,114      210,345      177,820      153,963       136,514

Allowance for possible credit losses..............    (2,360)      (2,109)      (1,830)      (1,657)       (1,496)

     Net loans and leases.........................  $224,754     $208,236     $175,990     $152,306      $135,018

</TABLE>

         Total net loans  increased to $224.7  million at December 31, 1998,  an
increase of $16.5 million or 7.9% from $208.2  million at December 31, 1997. The
increase  in net  loans  was  directly  related  to the  significant  growth  in
commercial loans and residential  mortgages.  Residential mortgage loans (net of
mortgage  loans sold during 1998 of $34.9  million),  which included real estate
construction  loans,  increased  to $106.7  million at  December  31,  1998,  an
increase of $3.7 million or 3.5% from $103.0 million at December 31, 1997.
                                       52
<PAGE>

         Consumer loans, net of unearned  discounts,  increased to $41.0 million
at December 31, 1998,  an increase of $2.4 million or 6.2% from $38.6 million at
December 31, 1997.  Commercial  loans increased to $79.3 million at December 31,
1998,  an increase of $9.8  million or 14.1% from $69.5  million at December 31,
1997.  Commercial loans consisted of loans made to small  businesses  within the
Company's market area and were generally secured by real estate and other assets
of the borrowers.

         Life  insurance  cash  surrender  value  increased  to $8.8  million at
December  31,  1998,  an  increase  of  $900,000  or 11.4% from $7.9  million at
December 31, 1997. The policies represent  investments in various life insurance
contracts  to fund  directors'  deferred  compensation  plans,  a  non-qualified
supplemental  retirement  plan (SERP) and an officer  group term life  insurance
replacement  plan on the executive  officers and certain  other  officers of the
Company.

         Total  deposits  increased to $312.7  million at December 31, 1998,  an
increase of $32.3  million or 11.5% from $280.5  million at December  31,  1997.
Noninterest-bearing  demand deposits  increased to $52.4 million at December 31,
1998,  an increase of $12.7  million or 32.1% from $39.7 million at December 31,
1997. In the aggregate,  savings and interest-bearing  demand deposits increased
to $80.3  million at December  31, 1998,  an increase of $12.1  million or 17.8%
from $68.2  million at December 31, 1997.  As a  percentage  of total  deposits,
savings and interest-bearing demand deposits represented 25.7% in 1998, compared
to 24.3% in 1997.  Savings  deposits  increased to $38.5 million at December 31,
1998,  an increase of $2.1  million or 5.7% from $36.4  million at December  31,
1997. Time deposits,  which include  certificates of deposit in denominations of
$100,000 or more,  increased to $180.0 million at December 31, 1998, an increase
of $7.4  million  or 4.3%  from  $172.6  million  at  December  31,  1997.  As a
percentage of total  deposits,  these  deposits  decreased to 57.6% in 1998 from
61.5% in 1997.  Approximately  $20.7 million or 6.6% of total  deposits are from
public  funds of school  districts  and local  governments  located  within  the
Company's market area.

         Included in  interest-bearing  deposits are  certificates of deposit in
amounts of $100,000 or more.  These  certificates of deposit and their remaining
maturities at December 31 are as follows:
<TABLE>
<CAPTION>

                                             1998            1997           1996            1995           1994
                                                                      (in thousands)
<S>                                         <C>           <C>              <C>            <C>            <C>   

Three months or less.....................   $14,039        $15,217         $11,375        $11,708         $9,664
Over three through six months............    11,217         12,956          17,847          5,701          6,503
Over six through twelve months...........    11,084          6,814           6,376          8,213          6,424
Over twelve months.......................     6,603          9,032           4,642          1,321          2,072
         Total...........................   $42,943        $44,019         $40,240        $26,943        $24,663

</TABLE>
                                       53
<PAGE>

Nonperforming Assets
         Nonperforming assets included nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consisted of loans where the principal and/or
interest  was 90 days or more  past  due and  loans  that  had  been  placed  on
nonaccrual status. When loans were placed on nonaccrual status,  income from the
current  period was  reversed  from current  earnings  and  interest  from prior
periods was charged to the allowance for possible credit losses.  Consumer loans
were charged-off when principal or interest was 120 days or more delinquent,  or
were placed on nonaccrual status if a sufficient  amount of collateral  existed.
The following  table shows  information  concerning  loan  delinquency and other
nonperforming assets of the Company for 1998, 1997, 1996, 1995, and 1994:
<TABLE>
<CAPTION>

                                             1998            1997           1996            1995           1994
                                                                      (in thousands)
<S>                                         <C>             <C>            <C>            <C>             <C>

Loans past due 90 days or more...........   $   759         $1,453          $1,593         $1,716         $1,125
Impaired loans in nonaccrual status......     2,088            411             542          1,216              -
Other nonaccrual loans...................       308            123              73            487         1,786
         Total nonperforming loans.......     3,155          1,987           2,208          3,419          2,911
Foreclosed assets held for sale..........       357            523             841             52            191
         Total nonperforming assets......    $3,512         $2,510          $3,049         $3,471         $3,102

Nonperforming loans as a
     percentage of loans.................     1.39%           .94%          1.24%           2.19%          2.13%
Nonperforming assets as a
     percentage of assets................      .74%           .68%          1.02%           1.36%          1.31%

</TABLE>

         The following summary shows the impact on interest income on nonaccrual
and restructured loans for the periods indicated:
<TABLE>
<CAPTION>

                         For the Year Ended December 31,
                                             1998            1997           1996            1995           1994
                                                                     (in thousands)
<S>                                          <C>             <C>            <C>             <C>            <C>

Interest income that would
   have been recorded had
   the loan been in accordance
   with their original terms.............     $167            $51             $92           $187           $171
Interest income included in
   net income............................       10             21               7             12              -
</TABLE>

         Nonperforming  loans  increased  58.8% from year-end  1997.  Nonaccrual
loans  increased  $1.9 million or in excess of three times from  year-end  1997.
Commercial loans accounted for 87.2% of all nonaccruals, followed by real estate
loans at 12.8%.  Within the $2.4 million of total nonaccrual loans,  100.0% were
secured by mortgages,  primarily first liens,  against residential or commercial
properties. Loans past due 90 days or more decreased $694,000 from 1997 year-end
levels.  These loans  included  $420,000 in real  estate  mortgages,  $68,000 in
consumer credit, $236,000 in commercial loans and $35,000 in leasing.
These loans were reviewed by management  at its quarterly  loan review  meetings
regarding collection efforts.

         Legal  proceedings on the nonaccrual  loans are ongoing,  routine,  and
reviewed by management on a continuing basis. No material losses are expected as
a result of these proceedings.

         Foreclosed assets held for sale were $357,000 at year-end 1998 compared
to $523,000 at year-end 1997. The decrease was a result of sales during the year
without any  substantial  additions.  The Company  does not expect any  material
losses  on the  sales of these  properties  based on  current  appraised  values
exceeding book values.  See "Factors That May Affect Future Results" for factors
that could affect sales prices of foreclosed assets. 
                                       54
<PAGE>

Potential Problem Loans
         At December 31,  1998,  the Company had  approximately  $1.3 million of
potential problem loans not included in the nonperforming  loan  classification.
Known  information  about possible  credit  problems  related to these borrowers
caused  management to have serious doubts as to the ability of such borrowers to
comply with present loan repayment terms and may result in future classification
of such loans as  nonperforming.  These potential  problem loans were taken into
consideration  by management when  determining the adequacy of the allowance for
possible credit losses at December 31, 1998. See "Factors That May Affect Future
Results" for further discussion.

Allowance for Possible Credit Losses
         The Company determined the provision for possible credit losses through
a quarterly  review of the loan  portfolio.  Factors  such as changing  economic
trends;  the  volume of  nonperforming  loans;  concentrations  of credit  risk;
adverse  situations that may affect the borrower's  ability to repay; prior loss
experience within the various categories of the portfolio;  and current economic
conditions  were  considered  when reviewing the risks in the portfolio.  Larger
exposures were analyzed  individually.  Over the past several years, the Company
implemented more stringent  underwriting standards in commercial lending as this
category of loans continues to grow. While management believed the allowance for
possible  credit losses was adequate,  future  additions to the allowance may be
necessary based on changes in economic conditions. The adequacy of the allowance
for possible  credit  losses was reviewed  quarterly by a loan review  committee
comprised  of members of the Board of  Directors  and senior  management  of the
Company.  The full Board of Directors  reviewed the relevant ratios with respect
to the allowance after the loan review  committee made its  recommendations.  At
December 31, 1998,  the allowance for possible  credit losses was 1.05% of loans
compared to 1.00% at  December  31, 1997 and 1.03% at  December  31,  1996.  For
further  discussion  on factors that could  influence the allowance for possible
credit losses, see "Factors That May Affect Future Results."

Changes in the allowance for possible credit losses for the years ended December
31, 1998, 1997, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>

                                                      1998         1997          1996         1995         1994
                                                                      (dollars in thousands)
<S>                                                  <C>           <C>           <C>          <C>          <C>


Loans past due 90 days or more....................   $   759       $1,453       $1,593       $1,716       $1,125
Balance at beginning of period....................    $2,109       $1,830       $1,657       $1,496       $1,544
Charge-offs:
         Real estate-construction.................         -            -            -            -            -
         Real estate-mortgage.....................       122          103          143          200           14
         Commercial and industrial................       512          106          158          294          321
         Consumer installment.....................       282          363          274          206          157
         Lease financing..........................        29           11            -            -            7

                  Total...........................       945          583          575          700          499

Recoveries:
         Real estate-construction.................         -            -            -            -            -
         Real estate-mortgage.....................         -            -            -            -            2
         Commercial and industrial................         6           42           40            8           12
         Consumer installment.....................        59           40           58           43           58
         Lease financing..........................         -            -            -            -            4

                  Total...........................        65           82           98           51           76

Net charge-offs...................................       880          501          477          649          423
Provision for possible credit losses..............     1,130          780          650          810          375

Balance at end of period..........................    $2,360       $2,109       $1,830       $1,657       $1,496
Ratio of net charge-offs during period to
  average loans outstanding during period.........     0.40%        0.26%        0.30%        0.44%        0.35%

</TABLE>

         The  Company's  management is unable to determine in what loan category
future  charge-offs and recoveries may occur. The following  schedule sets forth
the  allocation  of the  allowance  for possible  credit  losses  among  various
categories.  At December  31, 1998,  approximately  74.1% of the  allowance  for
possible  credit  losses is  allocated  to general  risk to protect  the Company
against  probable  yet  undetermined   losses.  The  allocation  is  based  upon
historical  experience.  The entire  allowance  for  possible  credit  losses is
available to absorb future loan losses in any loan category.
<TABLE>
<CAPTION>

                                                                 At December 31,
                              1998               1997              1996               1995               1994
                                  Percent            Percent             Percent           Percent            Percent
                                 of Loans            of Loans            of Loans           of Loans          of Loans
                                  in Each            in Each             in Each            in Each           in Each
                                 Category            Category            Category           Category          Category
                         Amount to Loans(1)  Amount  to Loans(1)  Amount to Loans(1)Amount  to Loans(1)Amount to Loans(1)
                                                                 (Dollars in thousands)
<S>                      <C>       <C>      <C>        <C>     <C>      <C>     <C>       <C>      <C>         <C>        

Allocation of allowance for possible credit losses:
Real estate............. $  281     46%    $  278      48%   $  248      49%    $  279      47%    $  370      43%
Commercial and industrial   780     36        868      32       574      29        700      29        631      32
Consumer installment....    361     16        465      19       428      21        437      23        386      24
Lease financing.........     92      2         68       1        62       1         52       1         52       1
Unallocated.............    846      -        430       -       518       -        189       -         57       -
      Total............. $2,360    100%    $2,109     100%   $1,830     100%    $1,657     100%    $1,496     100%
<FN>

(1)  Loans, net of unearned income.
</FN>
</TABLE>

Interest Rate Risk Management
         The following  discussion contains certain  forward-looking  statements
(as  defined in the Private  Securities  Litigation  Reform Act of 1995).  These
forward-looking  statements may involve significant risks and uncertainties that
are described under the caption "Factors That May Affect Future Results."

         Interest  rate risk  management  involves  managing the extent to which
interest-sensitive  assets  and  interest-sensitive   liabilities  are  matched.
Interest rate sensitivity is the relationship  between market interest rates and
earnings  volatility  due  to  the  repricing   characteristics  of  assets  and
liabilities.  The  Company's  net interest  income is affected by changes in the
level  of  market  interest  rates.  In order to  maintain  consistent  earnings
performance,  the Company seeks to manage, to the extent possible, the repricing
characteristics of its assets and liabilities.

         Asset/Liability  Management.  One major  objective  of the Company when
managing the rate  sensitivity of its assets and liabilities is to stabilize net
interest income. The management of and authority to assume interest rate risk is
the responsibility of the Company's Asset/Liability Committee ("ALCO"), which is
comprised  of senior  management  and Board  members.  ALCO meets  quarterly  to
monitor  the  ratio  of  interest   sensitive   assets  to  interest   sensitive
liabilities.  The process to review  interest rate risk  management is a regular
part  of  management  of the  Company.  Consistent  policies  and  practices  of
measuring and reporting interest rate risk exposure,  particularly regarding the
treatment of noncontractual assets and liabilities,  are in effect. In addition,
there is an annual  process to review the  interest  rate risk  policy  with the
Board of Directors  which includes  limits on the impact to earnings from shifts
in interest rates.

         Interest Rate Risk Measurement. Interest rate risk is monitored through
the use of three complementary measures:  static gap analysis,  earnings at risk
simulation  and economic  value at risk  simulation.  While each of the interest
rate  risk  measurements  has  limitations,  taken  together  they  represent  a
reasonably  comprehensive  view of the  magnitude  of interest  rate risk in the
Company and the  distribution  of risk along the yield curve,  the level of risk
through  time,  and the amount of exposure to changes in certain  interest  rate
relationships.
                                       56
<PAGE>

         Static Gap.  The ratio  between  assets and  liabilities  repricing  in
specific  time  intervals is referred to as an interest  rate  sensitivity  gap.
Interest rate  sensitivity gaps can be managed to take advantage of the slope of
the yield  curve as well as  forecasted  changes in the level of  interest  rate
changes.

         To  manage  this   interest   rate   sensitivity   gap   position,   an
asset/liability  model  called  "static  gap  analysis"  is used to monitor  the
difference  in the  volume  of  the  Company's  interest  sensitive  assets  and
liabilities  that mature or reprice within given periods.  A positive gap (asset
sensitive)  indicates that more assets reprice during a given period compared to
liabilities, while a negative gap (liability sensitive) has the opposite effect.
The Company  employs  computerized  net interest income  simulation  modeling to
assist in  quantifying  interest rate risk exposure.  This process  measures and
quantifies  the impact on net interest  income  through  varying  interest  rate
changes and balance sheet  compositions.  The use of this model assists the ALCO
to gauge the effects of the interest rate changes on interest  sensitive  assets
and  liabilities  in order to determine what impact these rate changes will have
upon the net interest spread.

         At December 31, 1998, LA Bank  maintained a one year  cumulative gap of
positive $11.6 million or 2.45% of total assets. The effect of this gap position
provided a positive  mismatch of assets and liabilities which can expose LA Bank
to interest rate risk during a period of decreasing interest rates.  Conversely,
in a rising interest rate environment,  net income could be positively  affected
because more assets than liabilities will reprice during a given period.

                                       57

<PAGE>

<TABLE>
<CAPTION>

                                                             Interest Sensitivity Gap at December 31, 1998
                                               3 months       3 through      1 through        Over
                                                or less     12 months        3 years       3 years        Total
                                                                               (Dollars in thousands)
<S>                                          <C>            <C>           <C>            <C>            <C>   

Cash and cash equivalents................... $   6,620      $     241      $        -     $  12,143      $  19,004
Investment securities(1)(2).................    32,226         21,598          39,051        99,641        192,516
Loans(2)....................................    61,265         60,968          57,959        46,394        226,586
Fixed and other assets......................         -            -              -           36,204         36,204
Total assets................................  $100,111       $ 82,807         $97,010      $194,382       $474,310

Non interest-bearing transaction deposits(3) $       -       $      -         $26,225     $  26,225      $  52,450
Interest-bearing transaction deposits(3)....     1,263          13,671         17,325        49,263         81,522
Time .......................................    45,808          62,641         15,041        12,369        135,859
Time over $100,000..........................    14,041          22,401            634         5,867         42,943
Short-term borrowings.......................     3,496             641          1,529           647          6,313
Long-term debt..............................     5,585           1,753          9,552        95,540        112,430
Other liabilities...........................         -             -               -          4,986          4,986
     Total Liabilities......................  $ 70,193        $101,107        $70,306      $194,897       $436,503

Interest sensitivity gap....................  $ 29,918        $(18,300)       $26,704     $    (516)
Cumulative gap..............................  $ 29,918        $ 11,618        $38,322      $ 37,806
Cumulative gap to total assets..............     6.31%           2.45%          8.08%         7.97%
<FN>

------------------------------
(1)      Gross of unrealized gains/losses on available-for-sale securities.
(2)      Investments  and loans are  included  in the  earlier  of the period in
         which  interest  rates were next  scheduled  to adjust or the period in
         which they are due. In addition,  loans were included in the periods in
         which they are scheduled to be repaid based on scheduled  amortization.
         For amortizing loans and mortgage-backed securities,  annual prepayment
         rates  are  assumed  reflecting   historical   experience  as  well  as
         management's knowledge and experience of its loan products.
(3)      LA Bank's  demand  and  savings  accounts  were  generally  subject  to
         immediate withdrawal. However, management considers a certain amount of
         such accounts to be core accounts having significantly longer effective
         maturities  based on the  retention  experiences  of such  deposits  in
         changing interest rate environments. The effective maturities presented
         are  the  recommended  maturity  distribution  limits  for  nonmaturing
         deposits based on historical deposit studies.
</FN>
</TABLE>


         Certain  shortcomings are inherent in the method of analysis  presented
in the above table.  Although  certain assets and  liabilities  may have similar
maturities  or  periods of  repricing,  they may react in  different  degrees to
changes in market interest rates.  The interest rates on certain types of assets
and  liabilities  may fluctuate in advance of changes in market  interest rates,
while  interest  rates on other types of assets and  liabilities  may lag behind
changes  in market  interest  rates.  Certain  assets,  such as  adjustable-rate
mortgages,  have  features  which  restrict  changes  in  interest  rates  on  a
short-term  basis  and over the life of the  asset.  In the event of a change in
interest rates, prepayment and early withdrawal levels may deviate significantly
from those assumed in  calculating  the table.  The ability of many borrowers to
service their adjustable-rate debt may decrease in the event of an interest rate
increase.

         Earnings at Risk and Economic  Value at Risk  Simulations.  The Company
recognizes that more  sophisticated  tools exist for measuring the interest rate
risk in the balance sheet beyond static gap analysis.  Although it will continue
to measure its static gap position, the Company utilizes additional modeling for
identifying  and measuring the interest rate risk in the overall  balance sheet.
The ALCO is responsible  for focusing on "earnings at risk" and "economic  value
at risk", and how both relate to the risk-based  capital position when analyzing
the interest rate risk.

         Earnings at Risk.  Earnings at risk  simulation  measures the change in
net interest  income and net income  should  interest  rates rise and fall.  The
simulation  recognizes that not all assets and  liabilities  reprice one for one
with market rates (e.g.,  savings rate). The ALCO looks at "earnings at risk" to
determine  income  changes  from a base  case  scenario  under an  increase  and
decrease of 200 basis points in interest rates simulation model.

         Economic  Value at  Risk.  Earnings  at risk  simulation  measures  the
short-term  risk in the balance sheet.  Economic value (or portfolio  equity) at
risk measures the long-term  risk by finding the net present value of the future
cashflows from the Company's existing assets and liabilities.  The ALCO examines
this ratio  quarterly  utilizing an increase and decrease of 200 basis points in
interest rates  simulation  model.  The ALCO recognizes that, in some instances,
this ratio may contradict the "earnings at risk" ratio.
                                       58
<PAGE>

         The  following  table  illustrates  the  simulated  impact of 200 basis
points upward or downward movement in interest rates on net interest income, net
income,  and the change in economic  value  (portfolio  equity).  This  analysis
assumed that  interest-earning  asset and  interest-bearing  liability levels at
December  31,  1998  remained  constant.  The impact of the rate  movements  was
developed by simulating the effect of rates changing over a twelve-month  period
from the December 31, 1998 levels.

                                                     Rates +200       Rates -200
Earnings at risk:
   Percent change in:
      Net Interest Income..........................       8.42%         (11.65)%
      Net Income...................................      22.28          (29.48)

Economic value at risk:
   Percent change in:
      Economic value of equity.....................      (2.48)         (20.40)
      Economic value of equity
        as a percent of book assets................      (0.29)          (2.39)


         Economic  value has the most meaning when viewed  within the context of
risk-based  capital.  Therefore,  the  economic  value  may  change  beyond  the
Company's  policy guideline for a short period of time as long as the risk-based
capital ratio (after  adjusting for the excess equity  exposure) is greater than
10%.

Capital

         The adequacy of the  Company's  capital is reviewed on an ongoing basis
with regard to size,  composition  and quality of the  Company's  resources.  An
adequate  capital  base is  important  for  continued  growth and  expansion  in
addition to providing an added protection against unexpected losses.

         An important  indicator in the banking  industry is the leverage ratio,
defined as the ratio of common  stockholders'  equity less intangible assets, to
average quarterly assets less intangible  assets. The leverage ratio at December
31, 1998 was 7.72% compared to 10.26% at December 31, 1997. This decrease in the
leverage  ratio in 1998 was caused by the increase in average assets in 1998 due
to the  borrowings  from  the FHLB  which  were  invested  in  investment  grade
securities. The higher leverage ratio in 1997 was the result of the public stock
offering  in  December,  1997.  For 1998 and 1997,  the  ratios  were well above
minimum regulatory guidelines.

         As required by the federal banking regulatory  authorities,  guidelines
have been adopted to measure capital  adequacy.  Under the  guidelines,  certain
minimum  ratios are required for core capital and total  capital as a percentage
of  risk-weighted  assets  and  other  off-balance  sheet  instruments.  For the
Company,  Tier I capital consists of common stockholders' equity less intangible
assets,  and Tier II capital includes the allowable portion of the allowance for
possible loan losses,  currently  limited to 1.25% of risk-weighted  assets.  By
regulatory guidelines, neither Tier I nor Tier II capital reflect the adjustment
of SFAS No. 115, which requires  adjustment in financial  statements prepared in
accordance  with  generally  accepted  accounting  principles  by including as a
separate  component of equity,  the amount of net  unrealized  holding  gains or
losses on debt and equity securities that are deemed to be available-for-sale.


                                       59
<PAGE>

                              At December 31, 1998
                             (Dollars in thousands)

            Primary capital......................................       $ 37,880
            Intangible assets....................................          2,293
            Tier I capital.......................................         35,587
             Tier II capital......................................         2,268
            Total risk-based capital.............................       $ 37,855

            Total risk-weighted assets...........................       $252,967
            Tier I ratio.........................................         14.07%
            Risk-based capital ratio.............................         14.96%
            Tier I leverage ratio................................          7.72%

         Regulatory  guidelines  require that core capital and total  risk-based
capital must be at least 4.0% and 8.0%, respectively.

Liquidity and Funds Management
         Liquidity management is to ensure that adequate funds will be available
to meet  anticipated  and  unanticipated  deposit  withdrawals,  debt  servicing
payments,  investment  commitments,  commercial  and  consumer  loan  demand and
ongoing  operating  expenses.  Funding sources include  principal  repayments on
loans and  investments,  sales of assets,  growth in core  deposits,  short- and
long-term  borrowings  and  repurchase  agreements.  Regular loan payments are a
dependable source of funds,  while the sale of loans and investment  securities,
deposit flows,  and loan  prepayments  are  significantly  influenced by general
economic conditions and level of interest rates.

         At December 31, 1998, the Company  maintained $19.0 million in cash and
cash equivalents (including Federal funds sold) in the form of cash and due from
banks (after reserve requirements). In addition, the Company had $2.7 million of
mortgage  loans  held for  resale  and $80.6  million  in AFS  securities.  This
combined total of $102.3 million  represented  21.6% of total assets at December
31, 1998. The Company believes that its liquidity is adequate.

         The Company  considers  its primary  source of liquidity to be its core
deposit base. This funding source has grown steadily over the years and consists
of deposits  from  customers  throughout  the branch  network.  The Company will
continue to promote the acquisition of deposits  through its branch offices.  At
December 31, 1998,  approximately  65.9% of the Company's  assets were funded by
core deposits  acquired within its market area. An additional 8.0% of the assets
were funded by the Company's equity.  These two components provide a substantial
and stable source of funds.

         Net cash used in operating  activities  was $422,000 for the year ended
December 31, 1998, as compared to net cash  provided by operating  activities of
$4.9 million for the comparable  period in 1997.  This $5.3 million  decrease is
primarily related to a net $6.7 million increase in the change in mortgage loans
held for  resale  and  other  assets.  Net  cash  used in  investing  activities
increased $30.0 million for the year ended December 31, 1998, from $69.5 million
to $99.5 million,  which was primarily  attributable  to purchases of investment
securities.  Net cash provided by financing  activities  increased $36.0 million
from 1997. A net increase in FHLB  borrowings of $40.2 million were used to fund
investment purchases.  A net increase in the annual growth of deposits from 1997
to 1998 of $5.0 million was the other major  component  impacting funds provided
by financing  activities.  Cash  provided by financing  activities  for 1998 was
impacted by a net decrease of $11.8  million from net proceeds  from issuance of
common stock.

                                       60
<PAGE>

Future Outlook
         In 1995,  interest  rates began moving  steadily  upward as the Federal
Reserve Board tightened its monetary policy. In early 1995,  interest rates rose
and continued  rising  through the middle of the year,  with the national  prime
lending rate peaking at 9.0%.  The national  prime  lending rate fell to 8.5% at
December 31, 1995, falling again to 8.25% in February 1996, where it remained at
December 31, 1996. In March 1997,  the national  prime lending rate increased to
8.5%.  Beginning with  September 1998 through  November 1998, the national prime
lending rate fell in three  separate  adjustments to its current level of 7.75%.
Management  and the Board of  Directors  do not have the ability to determine if
another rate adjustment  will occur;  however,  the Company  believes it is very
well  prepared to meet the  challenges  and effects of a changing  interest rate
environment.  Management's  belief  is that a  significant  impact  on  earnings
depends on its ability to react to changes in interest rates.  Through its ALCO,
the Company continually monitors interest rate sensitivity of its earning assets
and  interest-bearing  liabilities  to minimize  any  adverse  effects on future
earnings.  The Company's commitment to remaining a community-based  organization
is strong and the  intention  is to  recognize  steady  growth in its  consumer,
mortgage and commercial loan portfolios while obtaining and maintaining a strong
core deposit base.

         The banking and financial services industries are constantly  changing.
The  Company  is not  aware of any  pending  pronouncements  that  would  have a
material impact on the results of operations.

         A normal examination of LA Bank by the Office of the Comptroller of the
Currency  ("OCC") in 1998 resulted in no  significant  findings and no impact is
anticipated on current or future operations.

         LA Bank's  current and future FDIC BIF assessment is expected to be $0;
however, the FICO assessment for 1999 is expected to be approximately $45,000.

         In 1996, LA Bank acquired the real estate and deposit customer lists of
the Milford (Pike County) and Mountainhome (Monroe County) branches of PNC Bank.
These branches  opened in December 1996. In September 1998, LA Bank acquired the
fixed assets and deposits of the  Mountainhome  (Monroe County) branch of Mellon
Bank. The acquired office was consolidated into LA Bank's existing  Mountainhome
branch.  The amortization of the customer lists and deposit premium was $205,000
for 1998 and is expected to be $300,000 for 1999.

         Management is hopeful that the newest  additional  banking offices will
continue to expand the  Company's  deposit base by  attracting  new  depositors,
while providing quality service to both new and existing customers.  The initial
costs  associated  with the branch  openings,  such as  salaries  and  benefits,
advertising,  overhead expenses and marketing,  will have a short-term  negative
impact on the Company's earnings until the growth in deposits reaches a level to
offset these expenses.  The potential for future earnings growth is positive and
should provide a favorable return for our stockholders.

Year 2000 Compliance; Management Information Systems
         The Board of Directors has established a Year 2000 compliance committee
to address the risks of the critical  internal bank systems that are affected by
date  sensitive  applications,  as well as  external  systems  provided by third
parties. A comprehensive plan was developed detailing the sequence of events and
actions to be taken as the Year 2000 approaches.

         The Year 2000 (Y2K)  Committee  was formed in May 1997.  The  Executive
Vice  President  and Chief  Operating  Officer  was named  liaison to  executive
management.  Co-chairpersons  of the committee are Senior Operations Manager and
Deposit  Operations  Manager.  Other  committee  members include MIS Supervisor,
Controller,  Senior  Lending  Officer,  Loan  Review  Officer,  Loan  Operations
Officer,  and Branch  Administration  Officers.  The committee  currently  meets
weekly to discuss the progress of the project.

         An outline was  developed by the Y2K  Committee to manage the phases of
our year 2000  readiness  program.  The outline  addresses the necessary  phases
(identification, renovation, testing, and implementation) necessary to conduct a
detailed review of the Company's readiness.
                                       61
<PAGE>

         A list was  compiled  of all  vendors.  The list  included  information
technology vendors and non-information  technology vendors. The Company does not
utilize any in-house developed  programs.  A letter was sent to vendors early in
the third quarter of 1997 seeking  assurance and testing scripts to ensure their
products are Year 2000 ready.  Each vendor was evaluated and  prioritized  as to
the Company's  reliance on the  application.  The Company's MIS  Department  has
conducted testing on all personal computers and file servers. Those that did not
successfully  roll into the Year  2000 were  replaced.  Unisys  Corporation  was
contracted  to assist and act as a consultant  to the Company with the Year 2000
testing. The Company simulated its entire technology platform into the Year 2000
to conduct transactional testing.

         Lending  officers  have  compiled  a Year 2000  questionnaire  for each
client with a total lending  relationship  of $250,000 or more.  Loan review has
incorporated  into their  evaluations  of the borrower's  credit  worthiness the
question  of the impact that the Year 2000 will have on an  individual  business
and the risk associated with non-compliance  resulting in business disruption. A
Year 2000 legal  addendum has been added to the loan  documentation  for all new
and renewed commercial loans.
         Large depositors have also been personally  contacted and made aware of
the Year 2000 issue and how it may effect them. The Company has also developed a
Year 2000  awareness  brochure  that was inserted  with the  customers'  Company
statements.

         The Year  2000  Committee  has  established  a  timeline  for Year 2000
Readiness. This timeline is updated as actions are completed.

                                       62

<PAGE>


                                    TIME LINE
       AWARENESS AND ASSESSMENT RENOVATION, TESTING, IMPLEMENTATION PHASES

<TABLE>
<CAPTION>


 *2nd Quarter 1997               *3rd Quarter 1997              *4th Quarter 1997        *1st Quarter 1998
<S>                              <C>                            <C>                        <C>

-Y2K Committee was formed.    -Complaint letters were        -Vendors were ranked     -Commercial customers with a borrowing
-Vendor list was compiled.     sent to all vendors.           according to mission       relationship of $250,000 or greater were
-Terminals were tested.       -Y2K Outline was developed.     critical application.      contacted as to their Y2K status.
                                                                                      -Committee Chairpersons attended Y2K training.
                                                                                      -PC's and proof machines were tested for Y2K
                                                                                           compliance.
                                                                                      -Assessment of all vendors & hardware was
                                                                                            completed.




 *2nd Quarter 1998                *3rd Quarter 1998             *4th Quarter 1998                     1st/2nd Quarter 1999

-Tested core applications.     -All depositors were sent a    -Sought alternate hardware and software  -Implement any new hardware 
-Began renovation of PC's       letter stating the bank's      vendors for those applications that        and/orsoftware vendors.
  and routers.                  Y2K status.                    were not Y2K compliant.                -Continue testing core applic-
-Prepared contingency plan.    -Continued testing core        -Continued testing core applications        ations for critical dates.
                                applications for critical dates. for critical dates.                  -Complete renovations.
                               -Commercial customers with a     -Partnered with Unisys Corp. to       -Test non mission critical 
with                            borrowing relationship between    conduct Y2K testing. The Bank's       equipment date sensitive
                                $150,000 to $250,000, and         technology platform was aged into  operating controls or calendar 
                                any others heavily reliant on     the Year 2000 and transactional     functions.
                                technology were assessed          testing was conducted.
                                for Y2K status.
</TABLE>


*Denotes completion
                                       63
<PAGE>


                                YEAR 2000 BUDGET

         In accordance  with the Office of the  Comptroller of the Currency Year
2000  advisory  letters,  the Y2K Committee has prepared a budget of current and
anticipated expenditures. The following is a breakdown as of January 1, 1999:
<TABLE>
<CAPTION>

         Vendor                                    Description                                   Amount
<S>                                        <C>                                                  <C> 

Unisys Corporation                         Y2K analysis, ITI, Wide Area Network,
                                           and Clear Path testing                                $ 69,959

Retec Corporation                          ATM memory, processor and software upgrade              23,350

Barefoot Technology                        Y2K test server setup and server                         2,130

Compliance Technology Systems              Wire Transfer Control System                             1,500

Information Technology, Inc.               Year 2000 ITI Training Seminar                           1,473

Sheshunoff Information Services            Year 2000 Planning & Consulting Manual                     392

MK Business Machines, Inc.                 ATM NCR 7760 year wheel upgrade                            265

Amerigo Inc.                               Purchase new PC's to replace non Y2K
                                           compliant PC's                                          12,250

Infinity Technology Group                  Assist with upgrading PC's                               3,840

Mortgage Banker Assoc.                    Freddie Mac Delinquency and Investor Reporting            1,750

**Unisys Corporation/                      Change non Y2K check processing software      
    Information Technology Inc.            and check sorter equipment                             246,163

                                                            TOTAL                                $363,072

</TABLE>


**The  purchase  of the  check  sorter  equipment  was a Y2K  issue  as  well as
improving the  efficiency of the Bank's overall  operations.  The existing check
processing  software and equipment  could have been upgraded to be Y2K compliant
for approximately $80,000.

                                       64

<PAGE>


         The core business processes that the Year 2000 Committee has identified
are  Information   Technology   Incorporated,   Bankers  Systems   Incorporated,
Attachmate  Incorporated,  Unisys  Corporation,  NCR, Novell  Incorporated,  and
Leasetek  Incorporated.  The Company is very  optimistic  that by conducting the
necessary tests there will not be any interruption of services.

         The process that is most  heavily  relied upon in the  Company's  daily
operations is Information  Technology  Incorporated.  Without this process,  the
Company would not function  adequately.  The Year 2000  Committee has identified
this as a high-risk process and has developed a very intensive testing schedule.
The Company has already conducted detailed testing of this process and currently
has generated a schedule that will continue into the Year 1999.

         The Company has developed a written contingency plan to handle the most
reasonably likely worst case scenarios. The plan addresses alternate vendors for
these mission critical  applications,  a timeline for implementation and action,
circumstances  and trigger  dates,  and core  business  processes  that pose the
greatest  amount of risk to the Company.  The Y2K Committee  will be responsible
for  updating  the  contingency  plan,  reporting  progress  and  implementating
changes.  The  contingency  plan will be modified to reflect any changes at that
time.  However,  no  assurance  can be made that the  systems of others that the
Company  relies upon will be converted on a timely basis,  or that their failure
to be compliant would not have an adverse effect on the Company.  Therefore, the
Company cannot currently quantify the potential financial impact of a worst case
scenario created by Y2K failures.

         In October 1997, the Company  purchased and installed an upgrade to its
current  bank  operating  systems  to improve  efficiencies  of  operations  and
position itself for future growth.  The cost of the new system was approximately
$775,000.  Preconversion testing demonstrated that the new hardware and software
are Year 2000 compliant.

Factors That May Affect Future Results

General

         Banking is affected,  directly and indirectly,  by local,  domestic and
international economic and political conditions,  and by government monetary and
fiscal policies. Conditions such as inflation, recession, unemployment, volatile
interest rates, tight money supply, real estate values,  international conflicts
and other  factors  beyond the control of the Company may  adversely  affect the
future results of operations of the Company.  Management does not expect any one
particular  factor to affect results of operations.  A downward trend in several
areas, however, including real estate, construction and consumer spending, could
have an  adverse  impact  on the  Company's  ability  to  maintain  or  increase
profitability. Therefore, there is no assurance that the Company will be able to
continue its current rate of profitability and growth. See "Business - Allowance
For Possible Credit Losses."

Interest Rates

         The Company's  earnings  depend,  to a large extent,  upon net interest
income,  which is primarily  influenced by the relationship  between its cost of
funds  (deposits and borrowings)  and the yield on its  interest-earning  assets
(loans and investments). This relationship, known as the net interest spread, is
subject to fluctuate  and is affected by  regulatory,  economic and  competitive
factors  which  influence   interest  rates,   the  volume,   rate  and  mix  of
interest-earning  assets  and  interest-bearing  liabilities,  and the  level of
nonperforming  assets.  As part of its interest rate risk  management  strategy,
management  seeks to control its  exposure to interest  rate changes by managing
the  maturity  and  repricing  characteristics  of  interest-earning  assets and
interest-bearing liabilities. Through its asset/liability committee, the Company
continually  monitors  interest  rate  sensitivity  of its  earning  assets  and
interest-bearing liabilities to minimize any adverse effects on future earnings.

                                      665
<PAGE>

         As of December  31, 1998,  total  interest-earning  assets  maturing or
repricing  within  one year were more than  total  interest-bearing  liabilities
maturing  or  repricing  in the same  period by $11.6  million,  representing  a
cumulative  one-year  interest  rate  sensitivity  gap as a percentage  of total
assets  of  positive  2.45%.  This  condition  suggests  that  the  yield on the
Company's  interest-earning  assets should adjust to changes in market  interest
rates  at a  faster  rate  than  the  cost  of  the  Company's  interest-bearing
liabilities.  Consequently,  the  Company's net interest  income could  increase
during periods of rising interest rates. See "Interest Rate Risk Management."

Adequacy of Allowance for Possible Credit Losses

         In  originating  loans,  there is a likelihood  that some credit losses
will occur. This risk of loss varies with, among other things,  general economic
conditions, the type of loan being made, the creditworthiness and debt servicing
capacity  of the  borrower  over  the  term of the  loan  and,  in the case of a
collateralized  loan, the value and marketability of the collateral securing the
loan.  Management  maintains an allowance  for possible  credit losses based on,
among other things, historical loan loss experience, known inherent risks in the
loan portfolio,  adverse  situations  that may affect the borrower's  ability to
repay,  the estimated  value of any  underlying  collateral and an evaluation of
current economic conditions. Management believes that the allowance for possible
credit losses is adequate.  There can be no assurance that  nonperforming  loans
will not increase in the future.

Effects of Inflation

         The majority of assets and  liabilities of a financial  institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial  companies that have significant  investments in fixed
assets or inventories.  Management  believes that the most significant impact of
inflation on financial  results is the Company's  ability to react to changes in
interest  rates.  As discussed  previously,  management  attempts to maintain an
essentially balanced position between rate sensitive assets and liabilities over
a one year time  horizon  in order to protect  net  interest  income  from being
affected by wide interest rate fluctuations.

New Financial Accounting Standards

Reporting Comprehensive Income

         In  June  1997,   the  FASB  issued   Statement  No.  130,   "Reporting
Comprehensive  Income." This Statement  establishes  standards for the reporting
and  display  of  comprehensive  income  and  its  components  in a full  set of
general-purpose financial statements.  Statement No. 130 requires that all items
that are required to be  recognized as  components  of  comprehensive  income be
reported in a financial  statement that is displayed with the same prominence as
other  financial  statements.  This Statement does not require a specific format
for that financial statement,  but requires that an enterprise display an amount
representing  total  comprehensive  income  for the  period  in  that  financial
statement.  Statement  No. 130 is  effective  for fiscal years  beginning  after
December  15, 1997.  The impact of this  Statement on the Company was to require
additional disclosures in the Company's financial statements.

Operating Segment Disclosure

         In June 1997,  the FASB issued  Statement No. 131,  "Disclosures  About
Segments  of  an  Enterprise  and  Related   Information."   Statement  No.  131
establishes  standards  for the way  that  public  business  enterprises  report
information about operating segments in annual financial statements and requires
that those enterprises  report selected  information about operating segments in
interim financial reports issued to shareholders.  It also establishes standards
for related disclosures about products and services,  geographic areas and major
customers.  Statement No. 131 is effective for periods  beginning after December
15,  1997.  The impact,  if any,  of this  Statement  on the Company  will be to
require additional disclosures in the Company's financial statements.  There was
no impact on the Company's financial statements in 1998.
                                       66
<PAGE>


Accounting for Derivative Instruments and Hedging Activities

         FASB No. 133, issued in June 1998, establishes accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded 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. In
connection  with the  implementation  of FASB No. 133,  the Company may transfer
debt  securities  classified  as  held-to-maturities  to the  available-for-sale
category. Such a transfer will not call into question the Company's intention to
hold other debt to maturity in the future. The impact on the Company's financial
position and results of operations  will be dependent upon the future volume (if
any) of  acquisitions  of derivative  instruments  and hedging  activities.  The
Company plans to adopt FASB No. 133 in 1999.  Management  has not determined the
impact, if any, of this statement on the Company.

Accounting for Mortgage-Backed Securities after the Securitization of 
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise

     Statement of  Financial  Accounting  Standards  No. 134 amends FASB No. 65,
Accounting for Certain Mortgage Banking Activities.  The amendment provides that
after  the  securitization  of a  mortgage  loan  held for  sale,  any  retained
mortgage-backed securities shall be classified in accordance with the provisions
of FASB No. 115. However, a mortgage banking enterprise must classify as trading
any retained mortgage-backed securities that it commits to sell before or during
the securitization  process.  The adoption of Statement No. 134 had no impact on
the Company.

                                       67


<PAGE>

<TABLE>
<CAPTION>
Consolidated Balance Sheet
                                                                                    December 31,
                                                                                1998             1997
 
                                                                                   (in thousands)
<S>                                                                           <C>             <C> 
ASSETS
Cash and cash equivalents                                                    $ 19,004          $ 17,109
Available-for-sale securities                                                  80,591            56,545
Held-to-maturity securities (fair value of $112,353
  and $59,008 in 1998 and 1997, respectively)                                 111,826            58,245

Loans and leases                                                              229,555           216,465
Mortgage loans held for resale                                                  2,710               621
     Less unearned income and loan fees                                        (5,151)           (6,741)
     Less allowance for possible credit losses                                 (2,360)          (2,109)
       Net loans and leases                                                   224,754           208,236

Premises and equipment, net                                                    17,364            13,744
Accrued interest receivable                                                     3,210             3,005
Foreclosed assets held for sale                                                   358               523
Life insurance cash surrender value                                             8,788             7,891
Other assets                                                                    8,794            2,775

       TOTAL ASSETS                                                          $474,689          $368,073

LIABILITIES
Deposits:
     Noninterest-bearing                                                     $ 52,410          $ 39,689
     Interest-bearing:
       Demand                                                                  41,811            31,767
       Savings                                                                 38,525            36,437
       Time                                                                   137,053           128,538
       Time $100,000 and over                                                  42,943            44,019
     Total Deposits                                                           312,742           280,450

Accrued interest payable                                                        3,260             2,975
Securities sold under agreements to repurchase                                  3,283               200
Long-term debt                                                                115,459            47,656
Other liabilities                                                               2,005               977

     Total Liabilities                                                        436,749           332,258

STOCKHOLDERS' EQUITY
Preferred stock: Authorized 1,000,000 shares of
   $1.25 par value each; no outstanding shares                                      -                 -
Common stock: Authorized, 10,000,000 shares of $.21
   par value each; issued and outstanding 4,820,192
   shares in 1998 and 4,548,383 shares in 1997                                  1,012               956
Capital surplus                                                                29,563            25,717
Retained earnings                                                               7,620             9,135
Accumulated other comprehensive income                                           (255)                7

     Total Stockholders' Equity                                                37,940            35,815

       TOTAL LIABILITIES AND
           STOCKHOLDERS' EQUITY                                              $474,689          $368,073
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       68

<PAGE>

Consolidated Statement of Income
<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                1998              1997             1996
                                                                  (in thousands, except per share data)
<S>                                                           <C>              <C>              <C>  

INTEREST INCOME
Loans and leases                                              $18,452          $16,907           $14,592
Investment securities:
     Taxable                                                    8,429            5,738             4,323
     Exempt from federal income taxes                           1,694            1,578             1,104
     Dividends                                                    419              154                86
     Total investment securities income                        10,542            7,470             5,513

Deposits in bank                                                    9                9                 6
Federal funds sold                                                217              264               164

TOTAL INTEREST INCOME                                          29,220           24,650            20,275

INTEREST EXPENSE
Deposits                                                       10,857           10,395             8,957
Long-term debt                                                  5,744            3,018             1,143
Short-term borrowings                                              69               99                66
Securities sold under agreements to repurchase                     70               13                17

TOTAL INTEREST EXPENSE                                         16,740           13,525            10,183

NET INTEREST INCOME                                            12,480           11,125            10,092
PROVISION FOR POSSIBLE CREDIT LOSSES                            1,130              780               650

NET INTEREST INCOME AFTER PROVISION
   FOR POSSIBLE CREDIT LOSSES                                  11,350           10,345             9,442

OTHER OPERATING INCOME
Loan origination fees                                              39              183               266
Customer service charges and fees                               1,576            1,247             1,217
Mortgage servicing fees, net                                      294              310               327
Investment security gains, net                                    432              214                43
Gain (loss) on sale of loans, net                                 951              404               114
Gain (loss) on sale of assets, net                               (74)                -                 -
Life insurance earnings                                           409              288               127
Other income                                                    1,307              755               612

TOTAL OTHER OPERATING INCOME                                    4,934            3,401             2,706

OTHER OPERATING EXPENSES
Salaries and benefits                                           5,013            4,206             3,684
Occupancy expense                                               1,509            1,334             1,053
Equipment expense                                               1,219              932               824
Advertising                                                       430              292               249
Foreclosed asset expenses                                          27               39                51
Other expenses                                                  3,254            2,407             2,136

TOTAL OTHER OPERATING EXPENSES                                 11,452            9,210             7,997
INCOME BEFORE PROVISION FOR INCOME TAXES                        4,832            4,536             4,151
PROVISION FOR INCOME TAXES                                      1,061            1,105             1,120

NET INCOME                                                    $ 3,771          $ 3,431           $ 3,031

EARNINGS PER SHARE - BASIC*                                     $0.79            $0.88             $0.78

EARNINGS PER SHARE - DILUTED*                                   $0.77            $0.84             $0.78

DIVIDENDS PER SHARE*                                            $0.41            $0.38             $0.32
</TABLE>


*Reflects  adjustment for 5% stock dividends issued on October 1, 1998, 1997 and
1996, and a two-for-one stock split effective November 10, 1997 (See Note 13).

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
                                       69

<PAGE>


Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>

                                                                                       Accumulated
                                                                                            Other
                                                   Common       Capital    Retained    Comprehensive
                                                     Stock     Surplus    Earnings         Income         Total
                                                                    (in thousands)
<S>                                                <C>         <C>        <C>            <C>           <C>   



BALANCES, DECEMBER 31, 1995                        $696        $9,414      $9,118         $281          $19,509
Comprehensive income:
Net income                                                                  3,031                         3,031
Change in net unrealized holding gains (losses)
   on available-for-sale securities, net of
   reclassification adjustment and tax effects                                            (520)           (520)
     Total comprehensive income                                                                           2,511
Issuance of 16,856 shares of common stock
   through Dividend Reinvestment Plan*                7           265                                       272
Issuance of 5,735 shares of common stock
   through Employee Stock Purchase Plan*              2            70                                        72
Cash dividends declared ($.32 per share)*                                  (1,186)                       (1,186)
Stock dividend declared (5% on October 1, 1996)      35         1,350      (1,385)                            -
Cash paid for fractional shares on stock dividend  ____        ______          (6)       ______              (6)

BALANCES, DECEMBER 31, 1996                         740        11,099       9,572         (239)          21,172

Comprehensive income:
Net income                                                                  3,431                         3,431
Change in net unrealized holding gains (losses)
   on available-for-sale securities, net of
   reclassification adjustment and tax effects                                             246              246
     Total comprehensive income                                                                           3,677
Issuance of 35,306 shares of common stock
   through Dividend Reinvestment Plan*                8           393                                       401
Issuance of 11,579 shares of common stock
   through Employee Stock Purchase Plan*              2            67                                        69
Cash dividends declared ($.38 per share)*                                  (1,369)                       (1,369)
Stock dividend declared (5% on October 1, 1997)      37         2,448      (2,485)                            -
Cash paid for fractional shares on stock dividend                             (14)                          (14)
Sale of 845,250 shares of common stock
   through secondary stock offering                 169        11,710                                    11,879

BALANCES, DECEMBER 31, 1997                         956        25,717       9,135            7           35,815

Comprehensive income:
Net income                                                      3,771                    3,771
Change in net unrealized holding gains (losses)
   on available-for-sale securities, net of
   reclassification adjustment and tax effects                               (262)                         (262)
     Total comprehensive income                                                                           3,509
Issuance of 38,890 shares of common stock
   through Dividend Reinvestment Plan*                7           502                                       509
Issuance of 5,500 shares of common stock
   through Employee Stock Purchase Plan*              1            25                                        26
Costs on sale of common stock through
   secondary stock offering                                                   (11)                          (11)
Cash dividends declared ($.41 per share)                                   (1,903)                       (1,903)
Stock dividend declared (5% on October 1, 1998)      48         3,319      (3,367)                            -
Cash paid for fractional shares on stock dividend _____        ______          (5)        _____              (5)

BALANCES, DECEMBER 31, 1998                      $1,012       $29,563      $7,620        $(255)         $37,940


</TABLE>

*Reflects  adjustment for 5% stock dividends issued on October 1, 1998, 1997 and
1996, and a two-for-one stock split effective November 10, 1997.
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
                                       70

<PAGE>


Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>

                                                                                 Year Ended December 31,
                                                                1998              1997            1996
                                                                                         (in thousands)
<S>                                                          <C>                <C>             <C>

CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                   $  3,771           $3,431           $3,031
Adjustments to reconcile net income to net
   cash provided by (used in) operating activities:
     Provision for possible credit losses                       1,077              780              650
     Depreciation, amortization and accretion                   1,620              935              720
     Deferred income taxes                                        158              (62)              45
     Writedown of foreclosed assets held for sale                  25              213                -
     Investment security gains, net                              (432)            (214)             (43)
     (Gain) on sale of loans                                     (951)            (404)            (114)
     (Gain) loss on sale of foreclosed assets                      72                6               (1)
     (Gain) loss on sale of leased assets                           -                -                2
     (Gain) loss on sale of equipment                               2               38               (1)
(Increase) decrease in mortgage loans held for resale          (2,089)            (306)           3,090
(Increase) in accrued interest receivable                        (205)            (656)            (378)
Increase in accrued interest payable                              285              559              670
(Increase) decrease in other assets                            (4,783)             371             (869)
Increase (decrease) in other liabilities                        1,028              178             (490)

NET CASH (USED IN) PROVIDED BY
   OPERATING ACTIVITIES                                          (422)           4,869            6,312

CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
     Proceeds from maturities and paydowns                     30,140            2,974              339
     Purchases                                                (84,049)         (34,618)          (4,351)
Available-for-sale securities:
     Proceeds from maturities and paydowns                      4,989           10,106            6,505
     Proceeds from sales                                       34,159           29,522           34,130
     Purchases                                                (62,565)         (35,193)         (51,190)
Purchase of life insurance policies                              (897)          (5,352)               -
Increase in loans and leases                                  (52,203)         (61,670)         (39,923)
Purchases of premises and equipment                            (5,080)          (4,959)          (2,962)
Proceeds from sale of loans                                    37,382           28,939           11,734
Proceeds from sale of leased assets                                -                -                19
Proceeds from sale of equipment                                   213              253               13
Proceeds from sale of foreclosed assets                           334              514               70
Purchase of intangible assets                                  (1,899)               -             (600)

NET CASH USED IN INVESTING ACTIVITIES                         (99,476)         (69,484)         (46,216)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits                                       32,292           27,254           44,437
Decrease in short-term borrowings                                   -                -           (5,000)
Increase (decrease) in securities sold under
   agreements to repurchase                                     3,083             (100)            (100)
Proceeds from long-term debt                                   85,658           30,029            5,000
Principal payments on long-term debt                          (17,854)          (2,396)            (133)
Net proceeds from issuance of common stock                        517           12,349              344
Cash dividends                                                 (1,903)          (1,383)          (1,192)

NET CASH PROVIDED BY FINANCING ACTIVITIES                     101,793           65,753           43,356

INCREASE IN CASH AND CASH EQUIVALENTS                           1,895            1,138            3,452

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                 17,109           15,971           12,519

CASH AND CASH EQUIVALENTS AT END OF YEAR                     $ 19,004          $17,109          $15,971

CASH PAID DURING THE YEAR FOR:
     Interest                                                  $16,455         $12,966          $ 9,513
     Income taxes                                                 $850        $    932          $ 1,025
</TABLE>


The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
                                       71
<PAGE>


Notes to Consolidated Financial Statements

1.   Summary of Significant Accounting Policies

Principles of Consolidation
The accompanying  consolidated financial statements include the accounts of Lake
Ariel Bancorp, Inc. and its wholly owned subsidiary, LA Bank, N.A. including its
subsidiaries,  LA Lease, Inc. and Ariel Financial Services,  Inc. (collectively,
"Company").  All material  intercompany balances and transactions are eliminated
in consolidation.

Nature of Operations
Lake  Ariel  Bancorp,  Inc.  is a  one  bank  holding  company  whose  principal
subsidiary is LA Bank, N.A. LA Lease,  Inc.,  provides auto and equipment leases
to individuals and small business entities.  Ariel Financial  Services,  a newly
formed   business   unit,   offers   stocks,   bonds,    annuities   and   other
insurance-related products.

The  Company  provides  a variety  of  financial  services  to  individuals  and
corporate  customers  through its twenty-one  branch  banking  offices in Wayne,
Luzerne,  Lackawanna,  Pike and  Monroe  Counties.  The Bank's  primary  deposit
products  are  both  noninterest  and   interest-bearing   demand  deposits  and
certificates  of  deposit.   Its  primary  lending  products  are  single-family
residential  loans which  qualify  for sale on the  secondary  residential  loan
market.

Use of Estimates
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 and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

Material  estimates that are  particularly  susceptible  to  significant  change
relate to the  determination of the allowance for possible credit losses and the
valuation of assets acquired in connection with  foreclosures or in satisfaction
of loans.  In connection with the  determination  of the allowances for possible
credit losses and foreclosed assets,  management obtains independent  appraisals
for significant properties.

A majority of the Company's loan portfolio consists of single-family residential
loans  in  the  Northeastern   Pennsylvania  area.  Accordingly,   the  ultimate
collectibility of a substantial  portion of the Company's loan portfolio and the
recovery of a substantial  portion of the carrying  amount of foreclosed  assets
are susceptible to changes in local market conditions.

While  management  uses available  information to recognize  losses on loans and
leases  and  foreclosed  assets,  future  additions  to  the  allowances  may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process,  periodically review
the Company's  allowances for possible credit losses and foreclosed assets. Such
agencies may require the Company to recognize  additions to the allowances based
on their  judgments  about  information  available  to them at the time of their
examination.  Because  of these  factors,  it is  reasonably  possible  that the
allowances  for  possible  credit  losses  and  foreclosed   assets  may  change
materially in the near term.

Investment Securities
Held-to-maturity  securities  are  bonds,  notes  and  debentures  for which the
Company  has  the  positive  intent  and  ability  to hold  to  maturity.  These
securities  are reported at cost,  adjusted for premiums and discounts  that are
recognized  in  interest  income  using the  interest  method over the period to
maturity.

Government   bonds  held   principally   for  resale  in  the  near  term,   and
mortgage-backed  securities  held for  sale in  conjunction  with the  Company's
mortgage banking  activities,  are classified as trading account  securities and
are  recorded  at their  fair  values.  Unrealized  gains and  losses on trading
account securities are included immediately in other income. The Company neither
held nor purchased  securities  which would be  categorized  as trading  account
securities   during  the  years  ended   December  31,  1998,   1997  and  1996.
Available-for-sale  securities consist of bonds,  notes,  debentures and certain
equity securities not classified as trading  securities nor as  held-to-maturity
securities.  These unrealized holding gains and losses, net of tax, are the sole
component of accumulated other comprehensive income.

                                       72
<PAGE>

Investment  gains and losses are  determined  using the specific  identification
method.

Declines in the fair value of individual held-to-maturity and available-for-sale
securities  below their cost that are other than temporary result in write-downs
of the individual  securities to their face value.  The related  write-downs are
included in earnings as realized losses.

Derivative Financial Instruments
The Company has no derivative financial  instruments  requiring disclosure under
SFAS No. 119.

Mortgage Loans Held for Resale
Mortgage loans  originated  and intended for resale in the secondary  market are
carried  at the lower of cost or fair  value in the  aggregate.  Net  unrealized
losses are recognized in a valuation allowance by charges to income. These loans
are sold in whole and without recourse to the Company.

Loans and Leases
Loans  are  reported  at the  principal  balance  outstanding,  net of  unearned
interest,  net deferred loan fees and the allowance for possible  credit losses.
Unearned  interest  on  installment  loans is  recognized  as  income  using the
actuarial  method.  Interest  on all other  loans is  recognized  on the accrual
basis,  based  on  the  principal  amount  outstanding.   Loan  fees,  including
origination and commitment fees, less certain direct loan origination costs, are
deferred and  recognized  over the  estimated  lives of the related  loans as an
adjustment  to  yield.  The  unamortized  balance  of these  fees and  costs are
included as part of the loan  balance to which it relates.  Prior to 1988,  such
fees and costs were  recognized  as income or expense  when  collected  or paid.
Impaired loans are placed in a nonaccrual  status when management  believes that
the collection of principal or interest is uncertain,  unless the loans are both
in the  process  of  collection  and well  secured.  When  interest  accrual  is
discontinued,  income  recorded in the current  year is reversed and the accrued
interest  from prior  years is  charged to the  allowance  for  possible  credit
losses.

Allowance for Possible Credit Losses
The allowance for possible credit losses is established  through a provision for
possible credit losses as a charge to operating  expense.  The Company  provides
for possible  credit losses based on an evaluation of the risk  associated  with
the Company's loan portfolio,  prior loan loss experience,  economic  conditions
and other factors.  Loans are charged  against the allowance for possible credit
losses when management believes that the collection of principal is unlikely.
Recoveries  on  previously  charged-off  loans  are added to the  allowance  for
possible credit losses.

Foreclosed Assets Held for Sale
Foreclosed  assets  held for sale are  carried at the lower of fair value  minus
estimated costs to sell, or cost.

Loan Servicing and Loan Servicing Rights
The Company  services real estate loans for investors in the secondary  mortgage
market,  which are not included in the accompanying  consolidated balance sheet.
The approximate  total amount of mortgages  serviced  amounted to  $141,381,000,
$131,509,000,   and   $119,898,000   at  December  31,  1998,   1997  and  1996,
respectively.

The cost of mortgage  servicing  rights is amortized in proportion  to, and over
the  period  of,  estimated  net  servicing  revenues.  Impairment  of  mortgage
servicing  rights is  assessed  based on the fair  value of those  rights.  Fair
values are  estimated  using  discounted  cash flows  based on a current  market
interest rate. For purposes of measuring  impairment,  the rights are stratified
based on the predominant risk  characteristics  of the underlying loans,  stated
term of the loan and interest rate.  The amount of impairment  recognized is the
amount by which the capitalized  mortgage  servicing rights for a stratum exceed
their fair value.
                                       73
<PAGE>

When participating  interests in loans sold have an average contractual interest
rate,  adjusted for normal servicing fees, that differs from the agreed yield to
the purchaser, gains or losses are recognized equal to the present value of such
differential  over the  estimated  remaining  life of such loans.  The resulting
"excess servicing  receivable" or "deferred servicing revenue" is amortized over
the estimated life using a method approximating the interest method.

Quoted market prices are not  available  for the excess  servicing  receivables.
Thus,  the  excess  servicing  receivables  and  the  amortization  thereon  are
periodically  evaluated  in relation to  estimated  future  servicing  revenues,
taking into consideration  changes in interest rates,  current prepayment rates,
and expected future cash flows. The Company  evaluates the carrying value of the
excess  servicing  receivables by estimating the future  servicing income of the
excess servicing  receivables  based on management's  best estimate of remaining
loan lives and discounted at the original discount rate.

Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Routine
maintenance and repair  expenditures are expended as incurred while  significant
expenditures are capitalized.  Depreciation  expense is determined  primarily on
the straight-line method over the following ranges of useful lives:

Buildings and improvements          10 to 40 years
Furniture, fixtures and equipment    5 to 20 years

Intangible Assets
Core deposit intangible assets and customer lists acquired are included in other
assets and are being  amortized  over a period of six to twelve  years using the
straight-line  method.  Amortization  for  1998,  1997 and  1996  was  $205,000,
$154,000, and $108,000, respectively.

Employee Benefit Plans
The Company maintains and funds a defined contribution profit-sharing plan which
covers substantially all eligible employees. The Company also maintains a 401(k)
savings  plan.  Substantially  all of the  Company's  employees  are eligible to
participate in the profit-sharing/401(k) savings plan on the January 1 or July 1
following their completion of six months of service and attaining age 20 1/2.

Income Taxes
Deferred tax assets and  liabilities  are reflected at currently  enacted income
tax  rates  applicable  to the  period  in which  the  deferred  tax  assets  or
liabilities  are expected to be realized or settled.  As changes to the tax laws
or rates are enacted,  deferred tax assets and liabilities are adjusted  through
the provision for income taxes.

Off-Balance Sheet Financial Instruments
In the  ordinary  course of business,  the Company has entered into  off-balance
sheet  financial  instruments  consisting  of  commitments  to extend credit and
standby  letters of credit.  Such  financial  instruments  are  recorded  in the
financial statements when they become payable.

Cash Flows
The Company  considers  amounts  due from banks and  federal  funds sold as cash
equivalents. Generally, federal funds are sold for one-day periods.

In 1998,  1997  and  1996,  the  Company  transferred  $266,000,  $420,000,  and
$858,000,  respectively,  from its loan portfolio to foreclosed  assets held for
sale.

Fair Values of Financial Instruments
Statement of Financial  Accounting  Standards  No. 107,  Disclosures  about Fair
Value of Financial  Instruments,  requires  disclosure of fair value information
about  financial  instruments,  whether or not  recognized  in the  statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are  significantly  affected by the assumption used,  including
the  discount  rate and  estimates  of future cash flows.  In that  regard,  the
derived  fair  value  estimates   cannot  be   substantiated  by  comparison  to
independent  markets  and,  in many cases,  could not be  realized in  immediate
settlement  of the  instruments.  Statement No. 107 excludes  certain  financial
instruments and all nonfinancial  instruments from its disclosure  requirements.
Accordingly,  the aggregate  fair value  amounts  presented do not represent the
underlying value of the Company.
                                       74
<PAGE>

Comprehensive Income
The  Company  adopted  SFAS No. 130,  "Reporting  Comprehensive  Income",  as of
January  1,  1998.   Accounting  principles  require  that  recognized  revenue,
expenses,  gains and losses be included in net income.  Although certain changes
in  assets   and   liabilities,   such  as   unrealized   gains  and  losses  on
available-for-sale  securities,  are  reported  as a separate  component  of the
equity  section of the balance  sheet,  such items,  along with net income,  are
components of comprehensive  income.  The adoption of SFAS No. 130 had no effect
on the Bank's net income or stockholder's equity.

Reclassifications
Certain  prior  year  amounts  have been  reclassified  to  conform  to the 1998
reporting format.

2.   Restrictions on Cash and Due From Bank Accounts
The Company is required to maintain  reserve  balances with the Federal  Reserve
Bank.  The  average   monthly   balance   required  during  1998  and  1997  was
approximately  $375,000.  In addition,  at December 31, 1998 and 1997,  required
compensating  reserve  balances with  correspondent  banks were  $2,239,000  and
$2,003,000, respectively.

Deposits  with any one  financial  institution  are insured up to $100,000.  The
Company  maintains  cash and  cash  equivalents  with  certain  other  financial
institutions in excess of the insured amount.

3.   Investment Securities
Debt and equity  securities  have been  classified in the  consolidated  balance
sheet  according to management's  intent.  The carrying amount of securities and
their  approximate fair values at December 31, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>

                                December 31, 1998
Available-for-sale securities:
                                                                      Gross            Gross
                                                 Amortized        Unrealized        Unrealized        Fair
                                                     Cost             Gains            Losses        Value
<S>                                                <C>               <C>             <C>           <C>     

U.S. government agencies
   and corporations                                 $64,332           $ 91              $482         $63,941
Obligations of states and
   political subdivisions                             9,520             39                34           9,525
       Total debt securities                         73,852            130               516          73,466
Restricted equity securities                          7,125              -                 -           7,125

       Total                                        $80,977           $130              $516         $80,591


Held-to-maturity securities:
                                                                      Gross            Gross
                                                 Amortized        Unrealized        Unrealized        Fair
                                                     Cost             Gains            Losses        Value
U.S. government agencies
   and corporations                                $ 89,016           $152              $330        $ 88,838
Obligations of states and
   political subdivisions                            22,810            706                 1          23,515

     Total                                         $111,826           $858              $331        $112,353
</TABLE>
                                       75
<PAGE>

<TABLE>
<CAPTION>

                                                                    December 31, 1997
Available-for-sale securities:
                                                                      Gross            Gross
                                                 Amortized        Unrealized        Unrealized        Fair
                                                     Cost             Gains            Losses        Value
<S>                                                <C>               <C>               <C>          <C>   

U.S. government agencies
   and corporations                                 $46,334           $120              $258         $46,196
Obligations of states and
   political subdivisions                             7,287            149                 -           7,436
       Total debt securities                         53,621            269               258          53,632
Restricted equity securities                          2,913              -                 -           2,913

       Total                                        $56,534           $269              $258         $56,545

Held-to-maturity securities:
                                                                      Gross            Gross
                                                 Amortized        Unrealized        Unrealized        Fair
                                                     Cost             Gains            Losses        Value
U.S. government agencies
   and corporations                                 $33,892           $260              $103         $34,049
Obligations of states and
   political subdivisions                            24,353            609                 3          24,959

     Total                                          $58,245           $869              $106         $59,008
</TABLE>

The amortized cost and estimated  fair value of debt  securities at December 31,
1998,  by  contractual  maturity,  are  shown  below  (in  thousands).  Expected
maturities will differ from contractual  maturities  because  borrowers may have
the right to call or  prepay  obligations  with or  without  call or  prepayment
penalties.
<TABLE>
<CAPTION>

                                               Available-for-sale securities       Held-to-maturity securities

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

Due in one year or less                         $21,713             $21,593          $ 24,593       $ 24,602
Due after one year through five years            11,916              11,816            35,163         35,201
Due after five years through ten years            5,830               5,843            17,852         18,070
Due after ten years                              41,518              41,339            34,218         34,480

     Total                                      $80,977             $80,591          $111,826       $112,353
</TABLE>


Gross realized gains and gross  realized  losses on sales of  available-for-sale
securities were as follows for the years ended December 31, 1998, 1997, and 1996
(in thousands):
<TABLE>
<CAPTION>

                                                                                         December 31,

Gross realized gains:                                                  1998             1997              1996
<S>                                                                   <C>               <C>               <C> 

     U.S. government agencies and corporations                          $98              $116              $78
     Obligations of states and political subdivisions                   354               119              114
       Total                                                           $452              $235             $192

Gross realized losses:
     U.S. government agencies and corporations                          $14               $21             $149
     Obligations of states and political subdivisions                     6                 -                -
       Total                                                            $20               $21             $149
</TABLE>
                                       76
<PAGE>

Investment  securities  carried at $96,308,000  in 1998 and  $35,953,000 in 1997
were pledged to secure Federal Home Loan Bank borrowings, governmental deposits,
public deposits, etc. as required by law. There is no significant  concentration
of investments in any individual  security issue (excluding U.S.  government and
its agencies) that was in excess of 10% of stockholders'  equity at December 31,
1998 or 1997.

The unamortized  premiums on mortgage-backed  securities  amounted to $1,671,000
and  $817,000 as of December  31, 1998 and 1997,  respectively.  The  unaccreted
discount on  mortgage-backed  securities  amounted to $318,000 and $14,000 as of
December 31, 1998 and 1997, respectively.

4.   Loans and Leases
A summary of the outstanding loans and leases by major categories 
at December 31 is as follows:
<TABLE>
<CAPTION>

                                                                       1998                      1997
                                                                                (in thousands)
<S>                                                                <C>                        <C>    

Real estate-construction                                           $   3,522                  $   3,338
Real estate-mortgage                                                 103,151                     99,637
Commercial and industrial                                             79,293                     69,479
Consumer installment                                                  40,907                     40,912
Lease financing                                                        5,392                      3,711
Unearned income                                                       (4,606)                    (6,067)
Unearned loan fees, net                                                 (545)                      (665)

   Total loans and leases                                            227,114                    210,345

Allowance for possible credit losses                                  (2,360)                    (2,109)

     Net loans and leases                                           $224,754                   $208,236
</TABLE>

Total  nonaccrual  loans  outstanding  at December  31, 1998 were  approximately
$2,396,000 as compared to $534,000 at December 31, 1997.  Included in nonaccrual
loans at December 31, 1998 and 1997 are $2,088,000  and $411,000,  respectively,
of  impaired  loans in  nonaccrual  status,  for which  $452,000  and  $248,000,
respectively, have been allocated in the allowance for possible credit losses to
cover potential losses from these impaired loans. At December 31, 1998 and 1997,
there were no outstanding  commitments to lend funds to debtors with  nonaccrual
loans.  At December 31, 1998 and 1997,  no loans were being  accounted  for as a
troubled  debt  restructuring.  Accruing  loans  past  due 90 days or more as to
principal or interest  amounted to $759,000 and  $1,453,000 at December 31, 1998
and 1997, respectively.

Further  information  regarding the balance of nonaccrual  loans at December 31,
1998, and related interest payment information, is as follows (in thousands):

                   Cash Payments Received During 1998 Were Applied As Follows:
<TABLE>
<CAPTION>

                                             Book       Contractual                  Recovery
                                            Balance        Balance      Interest      Of Prior     Reduction Of
                                           12/31/98       12/31/98      Income      Charge-Off         Principal
<S>                                        <C>            <C>           <C>         <C>            <C>

Contractually past due with:
     Substantial performance                 $  138        $  138         $ 4          $ -              $ 3
     Limited performance                      1,281         1,281           1            -               12
     No performance                             889           889           -            -                -

Contractually current, however:
     Payment of full principal or
       interest in doubt                          -             -           -            -                -
     Other                                       88            88           5            -                1

     Total                                   $2,396        $2,396         $10          $ -             $16
</TABLE>
                                       77
<PAGE>

At December 31, 1998 and 1997,  certain  officers and directors and/or companies
in which they have 10% or more beneficial ownership were indebted to the Company
in  the  aggregate   amount  of  $329,000  and  $370,000,   respectively.   Such
indebtedness   was  incurred  in  the  ordinary  course  of  business,   and  on
substantially  the same  terms as those  prevailing  at the time for  comparable
transactions  with other  persons.  New loans in 1998 and 1997 were  $42,000 and
$17,000,  respectively,  while  payments were $83,000 and $68,000  respectively,
during the same periods.

A summary of selected  loan  maturities  and  interest  sensitivity  analysis at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>

                                                     Maturity Distribution And Interest Rate Sensitivity

                                            Within One           Two-Five           After Five
                                                 Year               Years              Years           Total
                                                                        (in thousands)
<S>                                          <C>                <C>               <C>               <C> 

Real estate-construction                     $  3,522           $        -         $        -        $  3,522
Commercial and industrial                      14,481               11,017             53,795          79,293

   Total                                      $18,003              $11,017            $53,795         $82,815

Predetermined interest rate                  $  5,515             $  5,934           $  9,291         $20,735
Floating or adjustable
  interest rate                                12,493                5,083             44,504          62,080

   Total                                      $18,003              $11,017            $53,795         $82,815
</TABLE>

The maturity of loans is based upon contractual terms. The Company may, however,
extend the stated  maturities  at current rates and terms for economic or market
reasons.

Changes in the allowance for possible credit losses for the years ended December
31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>

                                                              1998              1997             1996
                                                                     (dollars in thousands)
<S>                                                          <C>               <C>              <C>     

Balance at beginning of period                               $2,109            $1,830            $1,657
Charge-offs:
     Real estate-construction                                     -                 -                 -
     Real estate-mortgage                                       122               103               143
     Commercial and industrial                                  512               106               158
     Consumer installment                                       282               363               274
     Lease financing                                             29                11                 -
       Total                                                    945               583              575
Recoveries:
     Real estate-construction                                     -                 -                 -
     Real estate-mortgage                                         -                 -                 -
     Commercial and industrial                                    6                42                40
     Consumer installment                                        59                40                58
     Lease financing                                              -                 -                -
       Total                                                     65                82               98
Net charge-offs                                                 880               501               477
Provision for possible credit losses                          1,130               780              650

Balance at end of period                                     $2,360            $2,109            $1,830

Ratio of net charge-offs during period to
   average loans outstanding during period                    0.40%             0.26%             0.30%
</TABLE>
                                       78
<PAGE>

5.   Premises and Equipment
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>

                                                                                1998             1997
                                                                                      (in thousands)
<S>                                                                          <C>              <C> 

Land and land improvements                                                   $  2,357          $  1,545
Buildings and improvements                                                     12,965            10,301
Furniture, fixtures and equipment                                               7,511             6,195

   Total                                                                       22,833            18,041

Less accumulated depreciation                                                   5,469             4,297

   Net                                                                        $17,364           $13,744
</TABLE>

Depreciation  expense was $1,245,000,  $932,000,  and $730,000 in 1998, 1997 and
1996, respectively.

Certain facilities and equipment are leased under agreements expiring at various
dates to the year 2003.  Rental expenses on these  operating  leases amounted to
$551,000  in 1998,  $439,000 in 1997,  and  $348,000  in 1996.  Required  future
minimum  annual  rentals  under all such  noncancelable  operating  leases as of
December 31, 1998 are as follows (in thousands):

                                    1999$   510
                                    2000    529
                                    2001    551
                                    2002    545
                                    2003    469

                       Thereafter         1,610

                                 Total   $4,214

6.   Deposits
There are no brokered  deposits  included in certificates of deposit of $100,000
or more.  These  certificates  of  deposit  and their  remaining  maturities  at
December 31 are as follows:
<TABLE>
<CAPTION>

                                                                       1998             1997
                                                                         (in thousands)
<S>                                                                  <C>               <C>  

Three months or less                                                  $14,039           $15,217
Over three through six months                                          11,217            12,956
Over six through twelve months                                         11,084             6,814
Over twelve months                                                      6,603             9,032
   Total                                                              $42,943           $44,019
</TABLE>

The aggregate amount of maturities for each of the five years following December
31, 1998 for all time  deposits  with a remaining  term of over twelve months at
December 31, 1998 are as follows (in thousands):

                                    2000   $23,167
                                    2001     7,756
                                    2002     2,612
                                    2003     2,209
                                    2004         7
                                    Thereafter   5
                            Total          $35,756
                                       79
<PAGE>

7.   Short-term Borrowings
There were no short-term  borrowings  outstanding at December 31, 1998 and 1997.
The maximum amount of outstanding  month-end  short-term  borrowings during 1998
and 1997 was $9,400,000 and $9,500,000,  respectively.  The approximate  average
amount   outstanding  during  1998  and  1997  was  $2,178,000  and  $2,102,000,
respectively. The average interest rate on the balances during 1998 and 1997 was
4.96% and 5.33%, respectively.

The Company  maintains a U.S.  Treasury tax and loan note option account for the
deposit of withholding taxes,  corporate income taxes and certain other payments
to the federal government.  Deposits are subject to withdrawal and are evidenced
by an  open-ended  interest-bearing  note.  Borrowings  under  this note  option
account  were  approximately  $300,000  at December  31, 1998 and  approximately
$1,000,000 at December 31, 1997. These deposits are included in interest-bearing
demand deposits for each period presented.

The Company has a line of credit commitment available from the Federal Home Loan
Bank for borrowings of up to  approximately  $10.0  million,  expiring March 24,
1999. There were no borrowings under this line of credit at December 31, 1998 or
1997.

8.   Long-term Debt
Long-term debt at December 31 is as follows:
<TABLE>
<CAPTION>

                                                                       1998             1997
                                                                           (in thousands)
<S>                                                                <C>               <C>  

Unsecured  notes,  payable in the amount of $31,200  
   semiannually  plus  accrued
   interest at the New York City prime
   interest rate, maturing April 22, 1998*                        $         -         $      31
Collateralized borrowings, interest and
  principal  payable  monthly;  fixed interest rate 
  ranging from 6.40% to 6.60%,
  maturing October 17, 2001, January 22, 2002 and
  May 1, 2008                                                          10,459            12,625
Collateralized borrowings, interest
   payable monthly and principal at
   maturity; interest rates are both
   fixed and variable and range from
   4.40% to 6.45% at December 31, 1998                                105,000            35,000

     Total                                                           $115,459           $47,656
</TABLE>


Annual  maturities  of  long-term  debt  are as  follows:  $3,032,000  in  1999,
$8,232,000 in 2000, $8,339,000 in 2001, $5,448,000 in 2002, $50,065,000 in 2003,
$69,000 in 2004,  $30,074,000  in 2005,  $79,000 in 2006,  $84,000 in 2007,  and
$10,037,000  in 2008.  Investment  securities are pledged to  collateralize  the
borrowings with the Federal Home Loan Bank of Pittsburgh.

9.   Common Stock
The Company has  reserved  284,025  shares  under its 1994 and 1997 Stock Option
Plans ("Option  Plan").  Options are granted to purchase  common stock at prices
not less than the fair  market  value of the common  stock on the date of grant.
Such shares and prices have been  adjusted  to reflect the stock  dividends  and
stock split.

The  Company  applies  Accounting  Principles  Board  Opinion No. 25 and related
interpretations in accounting for the Option Plan. Accordingly,  no compensation
expense has been recognized for the Option Plan. Had  compensation  cost for the
Option  Plan been  determined  based on the fair  values at the grant  dates for
awards  consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been adjusted to the pro forma  amounts  indicated
below for the year ended December 31, 1998:

                                       80

<PAGE>


                                             As Reported              Pro Forma
Net Income (in thousands):                      $3,771                  $3,726
Earnings per share-basic:                        $0.79                   $0.78

For purposes of the pro forma calculations,  the fair value of each option grant
is estimated using the  Black-Scholes  option - pricing model with the following
weighted - average assumptions for grants issued in 1995:

         Dividend yield                     3.51%
         Expected volatility               36.73%
         Risk-free interest rate            5.89%
         Expected lives                  10 years

A summary of the status of the  Company's  Option Plan as of December  31, 1998,
1997 and 1996, and changes during the years then ended, is presented below:
<TABLE>
<CAPTION>

                                               1998                                1997                               1996

                                                Weighted-                  Weighted-                 Weighted-
                                                 Average                    Average                   Average
                                                 Exercise                   Exercise                  Exercise
                                    Shares         Price      Shares          Price     Shares          Price
<S>                                <C>           <C>          <C>           <C>         <C>          <C>

Outstanding
   beginning of year               231,525       $ 6.35       231,525       $6.35       231,525       $6.35
Granted                             11,667        16.28             -                         -
Exercised                                -                          -                         -
Forfeited                                -                          -                         -

Outstanding, end of year           243,192       $ 6.83       231,525       $6.35       231,525       $6.35
</TABLE>

The following summarizes information about stock options outstanding at December
31, 1998:
<TABLE>
<CAPTION>

                                                     Weighted-Average
                                                           Remaining
       Exercise Price               Number             Contractual Life         Options Exercisable
<S>                                <C>                    <C>                       <C>    

           $ 6.53                    81,035               5.6 years                    81,035
           $ 6.26                   150,490               6.6 years                   150,490
           $16.28                    52,500               9.0 years                    11,667
</TABLE>

The Company reserved 115,763 shares of common stock under the Company's Employee
Stock  Purchase  Plan,  increased to 100,000  effective  November 10, 1997, as a
result of the two-for-one  stock split.  Under the terms of the plan,  employees
may  purchase  common  stock of the  Company  at 85% of the fair  market  value.
Employees pay for their stock  purchases  through  periodic  payroll  deductions
subject  to a limit of 10% of base  pay.  During  1998,  1997 and  1996,  5,500,
11,579, and 5,735 shares, respectively, were purchased under the plan.

The Company has a Dividend  Reinvestment and Stock Purchase Plan was implemented
during the year ended December 31, 1994 to provide  stockholders  an opportunity
to  automatically  reinvest  their  dividends in shares of common  stock.  Total
common  shares of 694,575 are reserved  under this plan.  The price per share of
common stock  purchased  from the Company is 95% of the fair market value on the
quarterly  dividend payment date. During the years ended December 31, 1998, 1997
and 1996,  38,890,  35,306, and 16,856 shares,  respectively,  were issued under
this plan.

                                       81
<PAGE>


10.  Other Comprehensive Income
The  components  of other  comprehensive  income and  related tax effects are as
follows (in thousands):
<TABLE>
<CAPTION>

                                                                             Years Ended December 31,
                                                                       1998             1997              1996
<S>                                                                   <C>              <C>               <C>  

Unrealized holding gains (losses)
   on available-for-sale securities                                   $  35             $ 587            $(745)
Less reclassification adjustment for
   gains realized in income                                            (432)             (214)             (43)

Net unrealized gain (loss)                                             (397)              373             (788)
Tax effect                                                              135              (127)             268

Net of tax amount                                                     $(262)            $ 246            $(520)

</TABLE>

11.  Income Taxes
The following  temporary  differences gave rise to the net deferred tax asset at
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>

                                                                                1998             1997
<S>                                                                             <C>              <C> 

Deferred tax assets:
   Unrealized losses on available-for-sale
     securities                                                               $  131           $    -
   Allowance for possible credit losses                                          551               473
   Loan fees and costs                                                           121               130
   Deferred compensation                                                         232               156
   Amortization of core deposits                                                  64                21
   Foreclosed assets held for sale                                                 -                34

       Total                                                                   1,099               814

 Deferred tax liabilities:
     Unrealized gains on available-for-
       sale securities                                                              -               (4)
     Depreciation                                                               (305)             (228)
     Bond accretion                                                              (24)              (21)
     Leasing                                                                    (399)             (194)

       Total                                                                    (728)             (447)

       Deferred tax asset, net                                                $  371             $367
</TABLE>

The  provision  for income taxes is comprised of the  following  components  (in
thousands):
<TABLE>
<CAPTION>

                                                                  Year Ended December 31,
                                                             1998              1997              1996
<S>                                                        <C>                <C>               <C> 

Current                                                    $   903            $1,167             $1,075
Deferred                                                       158               (62)                45

   Total                                                    $1,061            $1,105             $1,120

</TABLE>
                                       82
<PAGE>

The following tabulation presents a reconciliation of the expected provision for
income taxes (in thousands),  determined by using the current federal income tax
rate of 34% in  1998,  1997,  1996 to the  actual  provision  for  income  taxes
reflected in the accompanying consolidated financial statements.
<TABLE>
<CAPTION>

                                                                     Year Ended December 31,
                                                             1998               1997             1996
<S>                                                         <C>                <C>               <C>  

Provision at the expected statutory rate                    $1,643             $1,542            $1,411
Effect of tax-exempt income                                   (580)              (537)             (322)
Other items                                                     (2)               100                31

Provision for income taxes                                  $1,061             $1,105            $1,120
</TABLE>


12.  Employee Benefit Plans
The  Company  has a  profit-sharing  plan  for  the  benefit  of its  employees.
Contributions to the profit-sharing plan are made at the discretion of the Board
of Directors,  funded currently,  and amounted to $236,000 in 1998,  $251,000 in
1997, and $214,000 in 1996.

The Company also maintains a 401(k) savings plan. The Company contributes 50% of
the employee contribution up to 6% of compensation. The Company's 1998, 1997 and
1996   contributions   to  this  plan  were  $77,000,   $70,000,   and  $58,000,
respectively.

13.  Earnings Per Share
Earnings per share (EPS) is computed using the weighted-average number of shares
of common stock outstanding after giving effect to the 5% stock dividends issued
on  October  1, 1998,  1997 and 1996,  the  two-for-one  stock  split  effective
November 10, 1997, and the assumed exercise of stock options. The following data
shows the amounts used in computing earnings per share and the effects on income
and the weighted average number of shares of dilutive potential common stock for
the years ended December 31, 1998, 1997 and 1996. The common shares denominators
for 1997 and 1996 have been adjusted for the 1998 and 1997 5% stock dividend and
two-for-one stock split.
<TABLE>
<CAPTION>

                                                       Income           Common Shares
                                                     Numerator            Denominator            EPS
<S>                                                  <C>                 <C>                   <C> 

1998

   Basic EPS                                          $3,771,000           4,796,000            $0.79
   Dilutive effect of potential common stock
     Stock options:
       Exercise of options outstanding                                       243,000
       Hypothetical share repurchase at $12.42         _________            (133,000)
   Diluted EPS                                        $3,771,000           4,906,000            $0.77

1997

   Basic EPS                                          $3,431,000           3,748,000            $0.88
   Dilutive effect of potential common stock
     Stock options:
       Exercise of options outstanding                                       220,500
       Hypothetical share repurchase at $17.75         _________             (82,500)
   Diluted EPS                                        $3,431,000           3,886,000            $0.84
                                       83
<PAGE>


1996

   Basic EPS                                          $3,031,000           3,676,400            $0.78
   Dilutive effect of potential common stock
     Stock options:
       Exercise of options outstanding                                       220,500
       Hypothetical share repurchase at $6.98          _________            (210,900)
   Diluted EPS                                        $3,031,000           3,686,000            $0.78
</TABLE>

14.  Regulatory Matters
The Company may not pay cash dividends in any year in excess of the total of the
current  year's net income  and the  retained  net income of the prior two years
without the approval of the Federal  Reserve  Board.  Accordingly,  Company cash
dividends  in 1999 may not exceed  $3,912,000  plus Company net income for 1999.
Similar  banking  regulations  limit the amount of dividends that may be paid to
the Company by its bank subsidiary  without prior approval of the Comptroller of
the Currency.

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require  the Company to  maintain  minimum  amounts and ratios (set forth in the
table  below) of total and Tier I capital  (as  defined in the  regulations)  to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as  defined).  Management  believes,  as of December 31, 1997,  that the
Company meets all capital adequacy requirements to which it is subject.

To be  categorized  as well  capitalized,  the bank must maintain  minimum total
risk-based,  Tier I risk-based,  and Tier I leverage  ratios as set forth in the
table below.  There are no  conditions  or events since that  notification  that
management  believes  have changed the  institution's  category.  The  Company's
actual  capital  amounts (in  thousands)  and ratios are also  presented  in the
table.  No amounts were deducted from capital for  interest-rate  risk in either
year.
<TABLE>
<CAPTION>

                                                                                            To Be Well
                                                                                        Capitalized Under
                                                                   For Capital          Prompt Corrective
                                               Actual         Adequacy 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)           $37,855    14.96%     $20,250        8.0%       $25,300       10.0%
   Tier I Capital
     (to Risk Weighted Assets)           $35,587    14.07%     $10,150        4.0%       $15,200        6.0%
   Tier I Capital
     (to Average Assets)                 $35,587     7.72%     $18,450        4.0%       $23,050        5.0%


                                       84
<PAGE>


As of December 31, 1997:
   Total Capital
     (to Risk Weighted Assets)           $37,273    18.12%     $16,500        8.0%       $20,600       10.0%
   Tier I Capital
     (to Risk Weighted Assets)           $35,232    17.12%      $8,250        4.0%       $12,400        6.0%
   Tier I Capital
     (to Average Assets)                 $35,232    10.26%     $13,800        4.0%       $17,200        5.0%

</TABLE>

15.  Off-Balance Sheet Financial Instruments
The Company 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.  These instruments  involve, to varying degrees,  elements of
credit,  interest rate or liquidity  risk in excess of the amount  recognized in
the  consolidated  balance  sheet.  The  contract  amount  of these  instruments
expresses the extent of  involvement  the Company has in  particular  classes of
financial instruments.

The Company's exposure to credit loss from  nonperformance by the other party to
the financial  instruments  for commitments to extend credit and standby letters
of credit and financial  guarantees  written is represented  by the  contractual
amount of these instruments. The Company uses the same credit policies in making
commitments  and  conditional  obligations  as  it  does  for  on-balance  sheet
instruments.

Unless  noted  otherwise,  the  Company  does not  require  collateral  or other
security to support financial instruments with off-balance sheet credit risk.

The  financial  instruments  whose  contract  amounts  represent  credit risk at
December 31, 1998 were as follows (in thousands):

Commitments to extend credit         $15,123
Standby letters of credit               $950

Commitments  to  extend  credit  are  legally  binding  agreements  to  lend  to
customers.   Commitments   generally  have  fixed   expiration  dates  or  other
termination  clauses  and  may  require  payment  of  fees.  Since  many  of the
commitments  are  expected  to  expire  without  being  drawn  upon,  the  total
commitment amounts do not necessarily  represent future liquidity  requirements.
The Company evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral  obtained,  if deemed  necessary by the Company,  on an
extension  of  credit  is  based  on  management's   credit  assessment  of  the
counterparty.

Standby  letters of credit are  conditional  commitments  issued by the  Company
guaranteeing  performance by a customer to a third party.  Those  guarantees are
issued primarily 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.

16.  Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and cash  equivalents:  The carrying  amounts  reported in the statement of
financial condition for cash and cash equivalents approximate those assets' fair
values.

Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available,  fair
values are based on quoted market prices of comparable instruments.

                                       85
<PAGE>

Loans: For variable-rate  loans that reprice  frequently and with no significant
change in credit  risk,  fair  values are based on  carrying  amounts.  The fair
values for other  loans (for  example,  fixed rate  commercial  real  estate and
rental  property  mortgage  loans  and  commercial  and  industrial  loans)  are
estimated using discounted cash flow analysis, based on interest rates currently
being  offered  for loans with  similar  terms to  borrowers  of similar  credit
quality.  Loan fair value estimates include judgements regarding future expected
loss  experience  and risk  characteristics.  The  carrying  amount  of  accrued
interest receivable  approximates its fair value. Mortgage loans held for resale
are valued based on available market quotations.

Deposits:   The  fair  values   disclosed  for  demand  deposits  (for  example,
interest-bearing  checking  accounts and passbook  accounts) are, by definition,
equal to the amount  payable  on demand at the  reporting  date (that is,  their
carrying  amounts).  The fair values for  certificates  of deposit are estimated
using a discounted cash flow  calculation  that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual maturities
on  such  time  deposits.  The  carrying  amount  of  accrued  interest  payable
approximates its fair value.

Short-term  borrowings  and notes  payable:  The carrying  amounts of short-term
borrowings and notes payable approximate their fair values.

Other  liabilities:  Commitments  to extend credit were evaluated and fair value
was estimated using the fees currently charged to enter into similar agreements,
taking  into  account  the  remaining  terms of the  agreements  and the present
creditworthiness  of the counterparties.  For fixed-rate loan commitments,  fair
value also considers the difference between current levels of interest rates and
the committed rates.

Financial Assets and Liabilities
The following  represents  the notional or carrying  values and  estimated  fair
values as of December 31:
<TABLE>
<CAPTION>

                                                        1998                                1997
                                            Notional or                         Notional or
                                              Carrying        Estimated           Carrying       Estimated
                                                Value         Fair Value            Value        Fair Value
                                                               (in thousands)
<S>                                           <C>              <C>               <C>              <C> 

FINANCIAL ASSETS:

   Cash and cash equivalents                   $19,004          $19,004           $17,109          $17,109
   Investment securities                       192,417          192,944           114,790          115,553
   Net loans                                   224,754          226,191           208,236          209,254
   Accrued interest receivable                   3,210            3,210             3,005            3,005

FINANCIAL LIABILITIES:

   Deposits                                   $312,742         $294,649          $280,450         $282,614
   Accrued interest payable                      3,260            3,260             2,975            2,975
   Securities sold under agreements
     to repurchase                               3,283            3,283               200              200
   Long-term debt                              115,459          114,998            47,656           47,704
   Commitments                                  16,073           16,073            18,211           18,211


</TABLE>
                                       86
<PAGE>

17.  Condensed Financial Information -Parent Company Only
Condensed   parent  company  only  financial   information  is  as  follows  (in
thousands):
<TABLE>
<CAPTION>

                                                                           Condensed Balance Sheet
                                                                                   December 31,
<S>                                                                    <C>                       <C> 
                                                                       1998                      1997
Assets:
   Cash$        -                                                 $        -
   Investment securities                                                 288                          -
   Investment in subsidiary                                           37,652                     35,815
     Total Assets                                                    $37,940                    $35,815

Liabilities and Stockholders' Equity:
   Stockholders' equity                                              $37,940                    $35,815

</TABLE>
<TABLE>
<CAPTION>

                          Condensed Statement of Income
                             Year Ended December 31,
                                 1998 1997 1996
<S>                                                         <C>               <C>                <C>  

Earnings of Subsidiary:
   Received as dividends                                     $2,218            $1,369            $1,287
   Undistributed                                              1,553             2,062             1,744

Net Income                                                   $3,771            $3,431            $3,031

                        Condensed Statement of Cash Flows
                             Year Ended December 31,
                                                              1998              1997             1996
Operating Activities:
   Net income                                                 $3,771          $ 3,431            $3,031
     Less undistributed earnings
       of subsidiary                                           1,553            2,062             1,744

     Net cash provided by
       operating activities                                    2,218            1,369             1,287

Investing Activities:
     Purchase of investment
       securities                                               (288)               -                 -
     Investment in subsidiary                                   (562)         (12,349)             (445)

     Net cash used in investing
       activities                                               (850)         (12,349)             (445)

Financing Activities:
     Cash dividends paid
       to stockholders                                        (1,903)          (1,369)           (1,186)
     Issuance of common stock                                    535           12,349              344

     Net cash provided by (used in)
       financing activities                                   (1,368)          10,980              (842)

Increase (decrease) in Cash                                        -                -                 -
Cash at Beginning of Year                                          -                -                 -

Cash at End of Year                                        $       -       $        -         $       -
</TABLE>
                                       87
<PAGE>

18.  Contingencies
On February  5, 1996,  a complaint  was filed  against LA Bank ("the  Bank") and
certain directors and officers of the Bank. The plaintiffs demanded monetary and
punitive damages and the additional  payment of plaintiffs'  attorneys' fees and
disbursements and other court-related  costs.  Counsel  representing the Company
and the Bank are not currently  able to provide an evaluation of the  likelihood
of an unfavorable  outcome since an unfavorable  outcome is neither probable nor
remote.  In addition,  an estimate of the loss or range of loss, in the event of
an  unfavorable  outcome,  has not been provided  since the  probability  of the
inaccuracy  of such an  estimate  is more  than  slight.  No  provision  for any
liability has been made in the accompanying  financial statements as of December
31, 1998 and 1997.

19.  Significant Group Concentrations of Credit Risk
Most of the  Company's  business  activity  is  with  customers  located  within
Pennsylvania.  Investments in state and municipal  securities  typically involve
governmental  entities  within the  Company's  market  area.  Concentrations  of
credit,  as defined by the Company's loan policy,  are groupings of loans with a
common repayment source that exceed 25% of the Company's capital. As of December
31, 1998, the Company had no such credit concentrations.

The  distribution of commitments to extend credit  approximates the distribution
of loans  outstanding.  Commercial  and standby  letters of credit were  granted
primarily to commercial borrowers.  The Company, as a matter of policy, does not
extend credit in excess of 50% of the Bank's  regulatory  legal lending limit to
any single borrower or group of related borrowers.

The  contractual  amounts  of  credit-related   financial  instruments  such  as
commitments to extend credit,  credit-card  arrangements,  and letters of credit
represent the amounts of potential  accounting loss should the contract be fully
drawn upon,  the  customer  default,  and the value of any  existing  collateral
become worthless.

20.  Selected Quarterly Financial Data (Unaudited) (in thousands, except 
per share data)
<TABLE>
<CAPTION>

                                                                       Quarter Ending
                                               March 31,        June 30,        September 30,      December 31,
                                                  1998            1998          1998                    1998
<S>                                             <C>              <C>              <C>                 <C>  

Interest income                                 $7,068           $7,253            $7,371              $7,528
Interest expense                                 4,016            4,182             4,161               4,381
Net interest income                              3,052            3,071             3,210               3,147
Provision for possible credit losses               200              125               165                 640
Investment security gains (losses), net             55               23                 2                 352
Net income                                       1,079            1,006             1,023                 663
Earnings per share - basic*                       0.23             0.21              0.21                0.14
Earnings per share - diluted*                     0.22             0.21              0.21                0.13

</TABLE>
                                       88

<PAGE>
<TABLE>

<CAPTION>


                                                                  Quarter Ending
                                               March 31,        June 30,        September 30,      December 31,
                                                  1997              1997            1997               1997
<S>                                             <C>              <C>               <C>                 <C> 

Interest income                                 $5,820           $6,049            $6,383              $6,398
Interest expense                                 3,096            3,308             3,506               3,615
Net interest income                              2,724            2,741             2,877               2,783
Provision for possible credit losses               125              255               350                  50
Investment security gains (losses), net             (8)              (1)               89                 134
Net income                                         730              806               861               1,034
Earnings per share - basic*                       0.19             0.20              0.22                0.27
Earnings per share - diluted*                     0.18             0.19              0.21                0.26
</TABLE>

*Reflects  adjustment for 5% stock dividends issued on October 1, 1998 and 1997,
and a two-for-one stock split effective November 10, 1997.


                                       89


<PAGE>


Independent Auditor's Report


Board of Directors and Stockholders
Lake Ariel Bancorp, Inc. and Subsidiary:

We have  audited  the  accompanying  consolidated  balance  sheets of Lake Ariel
Bancorp,  Inc. and  Subsidiary as of December 31, 1998 and 1997, and the related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1998.  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 consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Lake Ariel Bancorp,
Inc. and  Subsidiary  as of December  31, 1998 and 1997,  and the results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1998, in conformity with generally accepted accounting principles.





Parente, Randolph, Orlando, Carey & Associates

Wilkes-Barre, Pennsylvania
January 25, 1999

                                       90


<PAGE>


                              INVESTOR INFORMATION

MARKET INFORMATION

The Company's  common stock has been listed on the Nasdaq  National Market since
November 21, 1997,  and was  previously  listed on the Nasdaq  Small-Cap  Market
since   December  9,  1993.   "The  Nasdaq  Stock   Market"  or  "Nasdaq"  is  a
highly-regulated  electronic  securities  market  comprised of competing  Market
Makers whose trading is supported by a  communications  network  linking them to
quotation  dissemination,  trade reporting,  and order execution  systems.  This
market  also  provides   specialized   automation   services  for   screen-based
negotiations of transactions, on-line comparison of transactions, and a range of
informational  services  tailored  to  the  needs  of the  securities  industry,
investors and issuers.  The Nasdaq Stock Market  consists of two distinct market
tiers: the Nasdaq National Market7 and the Nasdaq SmallCap  Markets.  The Nasdaq
Stock  Market is operated  by the Nasdaq  Stock  Market,  Inc.,  a  wholly-owned
subsidiary of the National  Association of Securities  Dealers,  Inc. The Nasdaq
National  Market symbol for the Company's  common stock is LABN. At December 31,
1998,   the  total  number  of  holders  of  record  of  the  common  stock  was
approximately 1,394.

The table below  presents  the high and low bid prices  reported  for the common
stock and the cash  dividends  declared  on such  common  stock for the  periods
indicated. The range of high and low prices is based on trade prices reported on
the Nasdaq  Small-Cap  Market,  except for the fourth quarter of 1997 and all of
1998. Market quotations  reflect  inter-dealer  prices,  without retail mark-up,
mark-down,  or commission,  and may not necessarily reflect actual transactions.
On December 31, 1998, the closing price of a share of common stock on the Nasdaq
National  Market was $12.375.  All prices and  dividends  have been  restated to
reflect the 5% stock  dividends  paid in October  1998,  1997 and 1996,  and the
two-for-one stock split effective on November 10, 1997.
<TABLE>
<CAPTION>

                      Year          Quarter         High          Low        Dividends Declared
<S>                                   <C>          <C>            <C>                <C>   

                      1998             4th          $13.25        $11.75             $0.13
                                       3rd           16.00         11.43              0.10
                                       2nd           16.19         14.88              0.09
                                       1st           16.55         14.76              0.09

                      1997             4th          $20.95        $13.24             $0.13
                                       3rd           13.38          9.05              0.09
                                       2nd            9.29          9.05              0.08
                                       1st           10.76          9.29              0.08

                      1996             4th          $11.57         $7.19             $0.11
                                       3rd            7.81          6.86              0.08
                                       2nd            7.24          6.14              0.08
                                       1st            7.33          6.38              0.08
</TABLE>

MARKET MAKERS

Janney Montgomery Scott, Inc.  Knight Securities, Inc.   Instinet Corporation
1801 Market Street             525 Washington Boulevard  875 3rd Avenue
11th Floor                     Newport Tower             29th Floor
Philadelphia, PA 19103         Jersey City, NJ 07310     New York, NY 10022
1-215-665-6500                 1-800-222-4910            1-212-310-9550

Legg Mason Wood Walker, Inc.   USCC Trading
One Battery Park Plaza         10 Exchange Place
26th Floor                     22nd Floor
New York, NY 10004             Jersey City, NJ 07302
1-212-428-4949                 1-800-526-3041
                                       91
<PAGE>

TRANSFER AGENT American  Stock  Transfer & Trust Company,  40 Wall Street,  46th
Floor, New York, New York 10005.  Stockholders who may have questions  regarding
their stock ownership should contact Shareholder Services at 1-800-937-5449.

DIVIDEND CALENDAR Dividends on Lake Ariel Bancorp's common stock, if approved by
the Board of Directors, are customarily paid on March 15, June 15, September 15,
and December 15.

INDEPENDENT AUDITORS                                CORPORATE COUNSEL

Parente, Randolph, Orlando,                         Oliver, Price & Rhodes
Carey & Associates                                  Suite 300
46 Public Square                                    220 Penn Avenue
Wilkes-Barre, PA 18701                              Scranton, PA 18501
(570)820-0100                                       (570)343-6581

AUTOMATIC DIVIDEND  REINVESTMENT PLAN Common stockholders of Lake Ariel Bancorp,
Inc.  may have their  dividends  reinvested  automatically  in Lake Ariel common
shares at a 5% discount from the "Fair Market  Value" on the quarterly  dividend
payment date.  Stockholders  participating  in the plan may also  purchase,  per
quarter,  up to $2,500 in additional shares at the price per share determined on
the quarterly dividend payment date. There are no brokerage fees, commissions or
service  charges on any stock purchases made by plan  participants.  Information
regarding the plan is available by contacting  American Stock Transfer and Trust
Company, Dividend Reinvestment Department, 40 Wall Street, 46th Floor, New York,
New York 10005, 1-800-278-4353.

DIVIDEND DIRECT DEPOSIT Common stockholders of Lake Ariel Bancorp, Inc. may have
their dividends  deposited  electronically into their bank account by contacting
Shareholder  Services,  American Stock Transfer & Trust Company, 40 Wall Street,
46th Floor, New York, New York 10005, 1-800-937-5449.

SEC REPORTS AND ADDITIONAL  INFORMATION Upon written request of any stockholder,
investor or  analyst,  a copy of the  Corporation's  report on Form 10-K for its
fiscal year ended  December 31, 1998,  including  financial  statements  and the
schedules  thereto,  required  to be filed  with  the  Securities  and  Exchange
Commission,  may be obtained,  without charge, by contacting the Chief Financial
Officer,  Lake Ariel Bancorp,  Inc., 409 Lackawanna Avenue, Suite 201, Scranton,
PA 18503, (570)343-8200.

INTERNET ADDRESS ON THE WORLD WIDE WEB
http://www.labank.com

E-MAIL ADDRESS
labank@labank.com


                                       92
<PAGE>


Lake Ariel Bancorp, Inc.
Officers
Bruce D. Howe
President
John G. Martines
Chief Executive Officer
Louis M. Martarano
Vice President & Assistant Secretary
Joseph J. Earyes, CPA
Vice President & Treasurer
Donald E. Chapman
Secretary

Directors of
Corporation and Bank
Donald E. Chapman
Peter O. Clauss
William C. Gumble
Paul D. Horger, Esq.
Bruce D. Howe
John G. Martines
Kenneth M. Pollock
Harry F. Schoenagel

LA Bank, N.A.
Executive Officers
Bruce D. Howe
Chairman
John G. Martines
President and Chief Executive Officer
Louis M. Martarano
Executive Vice President &
Chief Operating Officer
Joseph J. Earyes, CPA
Executive Vice President &
Chief Financial Officer
Donald E. Chapman
Secretary

LA Lease, Inc.
Officers
Bruce D. Howe
Chairman
John G. Martines
President and Chief Executive Officer
Thomas Dziak
Vice President
Joseph J. Earyes, CPA
Secretary & Treasurer

                                       93



<PAGE>


Ariel Financial Services, Inc.
Officers
Bruce D. Howe
Chairman
John G. Martines
President and Chief Executive Officer
Joseph J. Earyes, CPA
Vice President
Louis M. Martarano
Secretary and Treasurer


                             Administration Division

Karen T. Pasternak                                 Gary S. Lavelle
Sr. Vice President                                 Assistant Vice President
Cynthia A. Smaniotto                               Jeri S. Prussia
Sr. Vice President                                 Assistant Vice President
Treva J. Day                                       Bonnie Robinson
Vice President                                     Assistant Vice President
Kathy Enslin                                       Marcy Swingle
Vice President & Cashier                           Assistant Vice President
Gregory G. Gula                                    Susan T. Lenko
Vice President                                     Assistant Cashier
Daniel J. Santaniello
Vice President
Lynn P. Thiel
Vice President
Salvatore R. DeFrancesco, Jr., CPA
Assistant Vice President
Lawrence H. Highhouse
Assistant Vice President
Scott P. Hiller
Assistant Vice President


                                       94
<PAGE>


                                    Retail Division
John Foley                                           John A. Gouse
Sr. Vice President                                   Assistant Vice President
Maureen Straub                                       Doris Hellerman
Sr. Vice President                                   Assistant Vice President
Theodore Daniels                                     Peter Misura
Vice President                                       Assistant Vice President
Thomas Dziak                                         Thomas Wasilewski
Vice President                                       Assistant Vice President
Paul R. Freeman                                      Penny Cola
Vice President                                       Assistant Cashier
William Kerstetter                                   Susan Mroczka
Vice President                                       Consumer Loan Officer

Lake Ariel Branch                                    Milford Branch
Lisa A. Dowse                                        Laura Schultz
Branch Manager                                       Branch Manager

Mt. Cobb Branch                                      Mountainhome Branch
Mary Ellen Bentler                                   Marilynn Palmer
Branch Manager                                       Branch Manager
Joann Simyan
Assistant Branch Manager                             Scranton Branch
                                                     Lauri A. Nidoh
Greene Dreher Branch                                 Branch Manager
Mary Ellen Bentler
Branch Manager                                       Dickson City Branch
                                                     Saundra Roeckel
Hamlin Corners Branch                                Branch Sales Manager
Ann O'Reilly                                         Ellen T. Juseck
Branch Manager                                       Assistant Branch Sales Mgr.

Eynon Branch                                         Honesdale Branch
Lisa Akulonis                                        Deborah A. Aragona
Branch Manager                                       Branch Sales Manager
Autumn Molinaro                                      Annemarie Roberts
Assistant Branch Manager                             Assistant Branch Sales Mgr.

                                                     Taylor Branch
Keyser Valley Branch                                 Patricia A. Jenkins
Mary Auffhammer                                      Branch Manager
Branch Manager
                                                     Tannersville Branch
Milford Township Branch                              Marjorie A. Kunkle
Cynthia Halliday                                     Branch Manager
Branch Manager
                                                     Public Square Branch
Clarks Green Branch                                  Debra A. Skurkis
Ellen Ball                                           Branch Manager
Branch Manager
                                                     East Mountain Branch
The Mall At Steamtown Branch                         Sybil G. Kline
Lauri A. Nidoh                                       Branch Manager
Branch Manager
                                                     Kingston Branch
Lords Valley Branch                                  Patricia A. Williamson
Laura Schultz                                        Branch Manager
Branch Manager                                       Mortgage Loan Originators
Carbondale Branch              Catherine Langan      Paul S. Ochman
Sheila Dick                    Lori A. Rudalavage    Theresa A. Yocum
Branch Manager                 William J. Zernhelt
                                       95
<PAGE>


                                OFFICE LOCATIONS
<TABLE>
<CAPTION>


CORPORATE ADDRESSES                         BRANCH ADDRESSES
<S>                                         <C>                                    <C> 

Lake Ariel Bancorp, Inc.                    Lake Ariel                              Milford
P.O. Box 67                                 P.O. Box 67                             214 W. Harford Street
Route 191                                   Route 191                               Milford, PA 18337
Lake Ariel, PA 18436                        Lake Ariel, PA 18436                    (570)296-0200
(570)698-5695                               (570)698-5695
                                                                                    Mountainhome
LA Bank, N.A.                               Mt. Cobb                                Route 390 Barrett Twp.
P.O. Box 67                                 Routes 348 & 247                        Mountainhome, PA 18342
Route 191                                   Lake Ariel, PA 18436                    (570)595-6400
Lake Ariel, PA 18436                        (570)689-2694
1-800-4LA-BANK                                                                      Scranton
(Pennsylvania only)                         Greene-Dreher                           409 Lackawanna Avenue
                                            Route 191                               Suite 101                                 
LA Bank, N.A.                               Newfoundland, PA 18445                  Scranton, PA 18503-2049
Financial Center                            (570)676-4767                           (570)341-8200
409 Lackawanna Avenue, Suite 201
Scranton, PA 18503-2045                     Hamlin Corners                          Dickson City
(570)343-8200                               Routes 191 & 590                        900 Commerce Boulevard
                                            Hamlin, PA 18427                        Suite 1
LA Lease Inc.                               (570)689-0944                           Dickson City, PA 18519
P.O. Box 67                                                                         (570)489-6800
Route 191                                   Eynon
Ariel, PA 18436                             685 Scranton-Carbondale Hwy.            Honesdale
(570)698-5695                               Eynon, PA 18403-1022                    777 Old Willow Avenue Lake
                                            (570)876-1637/342-2242                  Suite 100
Ariel Financial Services, Inc.                                                      Honesdale, PA 18431
P.O. Box 67                                 Keyser Valley                           (570)253-3400
Route 191                                   130 N. Keyser Avenue
Lake Ariel, PA 18436                        Scranton, PA 18504                      Taylor
(570)698-8400                               (570)341-8100                           801 S. Main Street
(570)876-8400                                                                       Taylor, PA 18517
                                            Milford Township                        (570)562-2500
                                            Routes 6 & 209
                                            Milford, PA 18337                       Tannersville
                                            (570)296-5600                           P.O. Box 348
                                                                                    Tannersville, PA 18372
                                            Clarks Green                            (570)620-0100
                                            318 East Grove Street
                                            Clarks Green, PA 18411                  Public Square
                                            (570)587-0505                           4 Public Square
                                                                                    Wilkes-Barre, PA 18701
                                            The Mall At Steamtown                   (570)823-2900
                                            220 The Mall at Steamtown
                                            Scranton, PA 18503                      East Mountain
                                            (717)341-8000                           117 Meadow Avenue
                                                                                    Scranton, PA 18505
                                            Lords Valley                            (570)341-8900
                                            Lords Valley Shopping Plaza
                                            Route 739, South                        Kingston
                                            Lords Valley, PA 18428                  247 Wyoming Avenue
                                            (570)775-8800                           Kingston, PA 18704
                                                                                    (570)283-0500
                                            Carbondale
                                            93 Brooklyn Street
                                            Ames Shopping Plaza
                                            Carbondale, PA 18407
                                            (570)282-7400


                                            Ariel Financial Services, Inc.
                                            (2 Locations)
                                            Lake Ariel Office                        Eynon Office
                                            P.O. Box 67                              685 Scranton-Carbondale Hwy.
                                            Route 191                                Eynon, PA 18403-1022
                                            Lake Ariel, PA 18436                     (717)876-8400
                                            (717)698-8400
</TABLE>

                                       96
<PAGE>


Business Development Boards




<PAGE>


Lackawanna County
Martin Andrews
Eli Arenberg
Francis Bianconi
George Bieber*
Ervin Brong
Carol Chisdak
Harry T. Coleman, Esq.
Dominick Cruciani, M.D.
Gilbert Hoban
William T. Jones, Esq.
Kevin K. Kearney
Ron Leas
Dave Maddocks*
Robert A. Mazzoni
Regina Peters*
Ted Reap*
Henry Roever*
Mark Suchter
John J. Vanston
Joseph Zandarski, Ph.D., CPA
Sandor Zangardi

Monroe County**
Dario Belardi
Janet Howe Bursis
Harry Callie
H. Jane Cilurso
John W. Donaghy
Tony Farda
Rich Gommel
Jeanne Heater
Virginia Hood
Ryan Martens
Don Mick
Kerry Nix
George Royle IV, Esq.
Dennis Slayton
John E. Spewak
Mark Vultagglio
Frank Young


Wayne County
Joseph P. Ceresko
Edward Cimoch
Forrest Compton
Joseph M. Dombrowski
Harry Howell
Andrew J. Krompasky
Susan Howe Kwiatek*
James R. Shorten
Brian Smolsky
Jeffrey S. Treat, Esq.*
Alice Trunzo
Joanne C. Valanda
Michael Walker, Esq.
Louis J. Zefran



Luzerne County**
Frank Conyngham
Mary Griffin Cummings, Esq.
Mary Erwine, RN
Joan Evans
John J. Joyce
Clayton Karambelas
Thomas J. McGrath, Jr.
Christine McLaughlin, Esq.
Barbara Metcalf
Joseph F. Perugino
Joseph Peterson
Robert Riley
Joseph R. Rogowicz
Lynda Strey-Rowinski
Robert S. Tambur



Pike County
Stacey Beecher Chelak, Esq.*
Victor Decker, Esq.
Robert E. Derse
Robert J. Glasgow*
Peter Helms
Donald W. Henderson, M.D.
Douglas J. Jacobs, Esq.
Joseph F. Kameen, Esq.
Robert Lankenau
Dr. Michael Newmark
Edward S. Nikles
Robert Pityo
Karen Quick*
Edmund J. Riess, Jr.
William Sanquilly
Edward J. Shafer
George Schmitt
Thomas H. Wiss, IV
David Zeiler
*New Board Members appointed in 1999

**New Boards added in 1999
                                       97

<PAGE>


                                   EXHIBIT 21


                         LIST OF SUBSIDIARIES OF BANCORP


Direct Subsidiary:                 LA Bank, National Association, chartered 
                                   under the laws of the United States of 
                                   America, a national banking association.

Indirect Subsidiaries:             LA Lease, Inc.,  incorporated under the laws 
                                   of the Commonwealth of Pennsylvania,  a 
                                   Pennsylvania  business  corporation and
                                   wholly-owned subsidiary of LA Bank, National 
                                   Association.

                                   Ariel Financial Services,  Inc., incorporated
                                   under  the  laws  of  the   Commonwealth   of
                                   Pennsylvania,    a   Pennsylvania    business
                                   corporation and wholly-owned subsidiary of LA
                                   Bank, National Association.



                                       98
<PAGE>


                                   EXHIBIT 99A


                         SELECTED 5-YEAR FINANCIAL DATA
                         AND SELECTED YEAR-END BALANCES

                                       99
<PAGE>
                            LAKE ARIEL BANCORP, INC.
                            SELECTED FINANCIAL DATA

(in thousands, except per share data)
<TABLE>
<CAPTION>

Year Ended December 31                   1998      1997      1996     1995       1994
<S>                                    <C>       <C>       <C>      <C>       <C>

Interest Income                        $29,220   $24,650   $20,275   $18,548   $14,157
Interest Expense                        16,740    13,525    10,183     9,514     5,967
Net interest income                     12,480    11,125    10,092     9,034     8,190
Provision for possible credit losses     1,130       780       650       810       375
Other operating income                   4,934     3,401     2,706     2,481     1,679
Other operating expenses 11,452          9,210     7,997     7,763     6,831
Income before income taxes               4,832     4,536     4,151     2,942     2,663
Provision for income taxes               1,061     1,105     1,120       635       535
Net income                               3,771     3,431     3,031     2,307     2,128

Earnings per share - Basic (1)             .79       .88       .78       .63       .59
Earnings per share - Diluted (1)           .77       .84       .78       .63       .59
Dividends per share .41                              .38       .32       .27       .25
<FN>

(1)  Reflects adjustment for 5% stock dividends issued on October 1, 1998, 1997,
     and 1996, and two-for-one stock split effective November 10, 1997.

</FN>
</TABLE>

Year End Balances
                           1998       1997       1996       1995       1994
   

Total assts              $474,689   $368,073   $297,906   $251,859   $236,125
Investment securities     192,417    114,790     87,000     73,169     76,677
Loans and leases, net     224,754    208,236    175,990    152,306    135,018
Deposits                  312,742    280,450    253,196    208,759    192,187
Long Term debt            115,459     47,656     20,023     15,156     15,219
Stockholders' equity       37,940     35,815     21,172     19,509     15,799




                                      100