<PAGE>

                                                                     EXHIBIT 13


                          ANNUAL REPORT TO SHAREHOLDERS
                     FOR FISCAL YEAR ENDED DECEMBER 31, 1996
<PAGE>










                                      YOUR
                                     PARTNER
                                    FOR LIFE






                                     LA BANK







                            LAKE ARIEL BANCORP, INC.
                               1996 ANNUAL REPORT
















<PAGE>







                                      YOUR
                                     PARTNER
                                    FOR LIFE


                   LAKE ARIEL BANCORP, INC. 1996 ANNUAL REPORT



TABLE OF CONTENTS

-Financial Highlights                                           2
-Message to Our Stockholders                                    3
-Board of Directors                                             7
-Your Partner for Life                                          8
-Responsibilities for Preparation of Financial Statements      17
-Financial Review: Management's Discussion and Analysis        18
-Consolidated Financial Statements
    -Balance Sheet                                             33
    -Statement of Income                                       34
    -Statement of Changes in Stockholders' Equity              36
    -Statement of Cash Flows                                   37
    -Notes to Consolidated Financial Statements                39
    -Report of Independent Certified Public Accountants        56
-Investor Information                                          58
-Company Directors and Officers                                59
-Office Locations                                              61
-Business Development Boards                                   62
                                             


















                                        1
<PAGE>

FINANCIAL HIGHLIGHTS - 1996


                                                  (dollars in thousands, 
                                                  except per share data)
                                           1996           1995           1994
                                         --------      --------        --------

Total Assets .........................   $297,906       $251,859       $236,125 
Total Deposits .......................    253,196        208,759        192,187
Net Loans ............................    175,990        152,306        135,018
Stockholders' Equity .................     21,172         19,509         15,799
Book Value Per Share .................      12.02          11.77           9.64
Net Income ...........................      3,031          2,307          2,128
Earnings Per Share* ..................       1.73           1.33           1.24
Dividends Per Share ..................       0.70           0.59           0.55
Return on Average Total Assets .......       1.09%          0.92%          1.04%
Return on Average Stockholder's Equity      14.97%         13.17%         13.07%
Dividend Payout Ratio ................      39.14%         42.13%         42.15%
Stockholders' Equity to Total Assets .       7.11%          7.75%          6.69%
                                                                   


*Reflects adjustment for 5% stock dividend issued on October 1, 1996.





























                                        2
<PAGE>

MESSAGE TO OUR STOCKHOLDERS

Financial Success
         1996 was another extremely successful and exciting year for Lake Ariel
Bancorp, Inc. and its wholly owned subsidiary, LA Bank, N.A. Success can be
measured by our outstanding financial performance achieved in 1996. Our primary
objective is to create value for our shareholders. To that end, we produced
unprecedented results in 1996.

         Assets and deposits grew at an exceptional rate compared to other
financial institutions reported in published national averages. Net income,
dividend payment, and stockholders' equity all reached record levels.

         The past year was very challenging, but satisfying, to all our board
members, management and employees who are vital to our success.

Net Income - $3,031,000 - Up 31%
         Net income reached an all time record high of $3,031,000 - up 31% from
1995 earnings of $2,307,000. Operating earnings for the year were $1.73 per
share compared to $1.33 per share in 1995 (after adjustment for 5% stock
dividend issued on October 1, 1996). Return on average assets increased 18% to
1.09% in 1996, up from .92% in 1995, a very significant measurement of our
earnings performance. Improvement in net interest income and improved expense
management were the primary factors in this performance.

Stockholder Value - 65% Return
         At year-end 1996, our Company continued to be in a strong capital
position. Stockholders' equity was at $21,172,000. The Tier I, or core capital,
ratio was 11.72% and the total risk-based capital ratio was at 12.72%, this in
comparison to regulatory minimums of 4% and 8%, respectively. In view of our
strong capital position and record earnings, our Board of Directors voted to
increase cash dividends from $.59 in 1995 to $.70 per share and also pay a 5%
stock dividend during 1996. Our return on stockholders' equity increased 14%
from 13.17% in 1995 to 14.97% in 1996. Return on stockholders' equity is
arguably the most important measurement of a bank's performance and our return
ranks us among the top performing financial institutions reported in industry
reports.

         As stated above, in addition to the 19% increase in cash dividends paid
during 1996, on October 1, 1996 a 5% stock dividend was paid to stockholders.
The market value of the Bank stock increased during 1996 from $14.75 on January
1 to close at $22.75 on December 31. By factoring in the 1996 dividend payment
of $.70 per share, in conjunction with the $8.00 per share appreciation in the
market value and the 5% stock dividend valued at $.83 per share, a 65% total
return to our stockholders in 1996 was realized.

         Book value increased from $11.77 in 1995, up $.25 or 2.00%, to $12.02
in 1996. The Company's (LABN) market price closed at $22.75 per share on
December 31, 1996. At year end, the stock price was selling at 190% of book
value and at 13.2 times earnings.

Growth - Deposits Up 21%

         1996 proved to be another year of exceptional growth. Total assets
increased by 18% and deposits by 21% to $297,906,000 and $253,196,000,
respectively.

         Total loans increased by 16% to $175,990,000. During 1996, 490 or
$36,014,000 in residential mortgage loans were closed. Of this total, 130 or
$11,734,000 were sold or securitized in the secondary market.

         At year-end, our mortgage loan servicing pool totaled $120,000,000.
This portfolio is expected to generate service fee income of approximately
$325,000 in 1997.




                                        3
<PAGE>

Asset Quality
         Favorable trends in credit quality continued as nonperforming assets as
a percent of total assets decreased 25% in 1996 to 1.02% compared to 1.36% in
1995.

         Allowance for possible credit losses in 1996 grew to $1,830,000 or
1.03% of loans from $1,657,000 or 1.08% of loans in 1995. Provision for credit
losses decreased from $810,000 in 1995 to $650,000 in 1996. We are very
satisfied with our current asset quality and will continue to make it a top
priority.

Strengthening the Organization - Personnel, Branches, Products
         As we continue to strive for improvement by expanding our markets and
products, management changes are necessary to achieve our goals.

         During 1996, our management team was strengthened with the hiring of
John "Jack" Foley as Vice President in charge of the Bank's loan departments.
Jack's experience and expertise added strength specifically to our commercial
loan department.

         Also during the year, Dan Santaniello was named Assistant Vice
President to oversee loan operations, Lynn Thiel was appointed Auditor, Kathy
Horan was named Assistant Vice President in charge of compliance and Marcy
Swingle was promoted to Assistant Vice President in the Human Resources
Department. Treva Day, Lake Ariel Branch Manager and Peter Misura, Eynon Branch
Manager were promoted to Assistant Vice President. Doris Hellerman was
transferred to the Administration Center and promoted to Assistant Vice
President in charge of consumer loans.

         Three new branches were added in 1996. Lake Wallenpaupack opened on
November 25, 1996 and branches in Milford and Mountainhome were purchased from
PNC Bank and opened on December 23, 1996. These three new branches strengthened
our position in Pike County and extended our servicing area into Monroe County,
bringing our total banking network to fourteen offices serving Lackawanna,
Monroe, Pike and Wayne Counties. The value of our franchise will continue to
grow as we increase our strength in the marketplace with added locations and
strong financial performance.

         During the early part of 1996, the Bank took its latest aggressive step
by becoming one of the first banks in the area to establish a presence on the
World Wide Web. Management believes that this electronic link to the future is a
great way to inform the community about LA Bank's products and services. Taking
a proactive step towards the technological future will ensure LA Bank's
continued position at the top of community banking. Net surfers can visit LA
Bank's new home page at http:/www.labank.com.

         In the second quarter of the year, LA Bank also became one of the first
approved community banks in the area to participate in the IOLTA program
(Interest On Lawyers Trust Account). The account, which offers no minimum
balance requirement and pays the Bank's current Super Now interest rate, is
offered to lawyers who invest fiduciary funds for clients. The earnings on the
account may be conveyed to the IOLTA program which distributes the IOLTA funds
for the delivery of legal assistance to the poor and disadvantaged, legal
education clinical programs, the administration of justice and future
development of the IOLTA program.

         Other new products or services introduced during the third quarter
include a budget checking account for low-volume consumer and business accounts.
These products were developed in response to customer requests received through
a customer survey solicited during "Customer Appreciation Week" held during the
year at all branch offices. The week long event offers the customer a chance to
visit with the staff, offer suggestions to improve service and request new
products not currently offered by the Bank.

         In the fourth quarter of this year, the Bank also became one of the
leaders in the area in offering a new Visa(R) Check Card to the Bank's
customers. Tied to an LA Bank checking account, the card can be used to access
the customer's available checking balance at an ATM, or can be used as a check
replacement at merchant locations for purchases. The Bank hopes to attract new
customers to the Bank with the addition of this innovative new card.

                                        4
<PAGE>

Community Reinvestment
         During 1996, LA Bank was one of four Northeastern Pennsylvania
financial institutions to provide financing to preserve, renovate, and convert
The Hotel Jermyn in Scranton, Pennsylvania into 85 apartment units for the
elderly and people with disabilities.

         In the spring of 1996, LA Bank revised its "Welcome Neighbor" Program.
This program was developed to assist first time home buyers with low to moderate
incomes by offering mortgage plans with reduced rates and points based on family
income. Also, LA Bank held its second annual Home Buyer's fair at the Keyser
Valley Community Center. This annual event is designed to satisfy the credit
needs of the residents of our local communities and to inform them of the
various types of mortgage financing options available to them. Builders,
lawyers, insurance agents, and mortgage loan originators were present to answer
questions prospective borrowers may have regarding the home buying and building
process.

         LA Bank has always prided itself in being the area's leader in home
mortgage loans. In November of this year, we were notified by the Federal
Reserve Bank of Philadelphia that LA Bank was cited as the top mortgage lender
in Scranton for low and moderate income census tracts in 1995. The ranking was
based on information provided by the Department of Community and Consumer
Affairs, and included conventional mortgage lending for 1-4 unit, owner-occupied
residential properties. We are very proud of this accomplishment.

Your Partner For Life
         For the year ended December 31, 1996, LA Bank achieved record results
in all major aspects of financialWe are proud of this year's performance and
believe our strategy gives us optimism for future years.

         Our theme of this year's Annual Report is "Your Partner For Life". This
signifies our commitment to remain a community bank with local ownership and
management. We believe our philosophy of offering quality products with personal
customer service is vital to our existence and is the main reason we continue to
increase our market share within the communities we serve.

         In June of 1996, LA Bank once again received the top rating "Blue
Ribbon Bank" by Veribanc, which is an award reserved for those highly rated
financial institutions which have demonstrated exceptional attitude for safety,
soundness and financial strength and is the oldest national accolade presented
to banks by private sector analysis.

         Looking to the future, management believes that an excellent financial
franchise 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 operating efficiency provide
the nucleus for continued and improved earnings trends. However, for factors
that could influence these expectations, see "Factors That May Affect Future
Results" in the Management's Discussion and Analysis section of this annual
report.

         Unfortunately, during the past year, we lost three members of our LA
Bank family. In February, 1996, Eugene M. Cook, who was a Director of the Bank
from 1960 to 1979 and Bank President from 1967 to 1979, passed away. Mr. Cook's
29 years of dedicated service to our institution will be deeply missed. The Cook
family has been a vital part of our organization since the Bank's founding in
1910.

         Willis Gilpin, who joined our Bank in 1992 as a member of our Lake
Region Business Development Board, passed away after an illness in October,
1996. In January, 1997, Charles "Sid" Phillips passed away after a short
illness. Sid joined the Bank in 1986 as branch manager of our Greene-Dreher
Branch and after his retirement served on our Lake Region Business Development
Board. Both will be greatly missed and will be remembered for their contribution
and commitment to LA Bank.

                                        5
<PAGE>

         In 1996, we appointed several new members to our Business Development
Boards: Lake Region - Harry Howell, Brian Smolsky, Alice Trunzo and Michael
Walker, Esq.; Lackawanna Region - Ervin Brong, Dr. Dominick Cruciani, Ron Leas,
and Mark Suchter; Pocono Region - Donald W. Henderson, M.D. and Victor Decker,
Esq.

         We thank our Board of Directors, Business Development Boards,
management and employees for making 1996 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 your 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


                                        6
<PAGE>

Board of Directors

Attorney William C. Gumble- Age 59. 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.

Arthur M. Davis- Age 69. Mr. Davis is the senior member of our Board of
Directors, elected to the Board in 1969. He is President of Lake Ariel Hardware
and is a lifelong resident of Lake Ariel.

Bruce D. Howe- Age 65. 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.

Harry F. Schoenagel- Age 61. 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 50. 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 67. Serving on the Board since 1986, Mr. Clauss is the
newest member. 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 60. 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.



                                       7
<PAGE>

Caption:

Above: The Lake Ariel Bancorp Board members are pictured here, L to R: Attorney
Willian C. Gumble, Arthur M. Davis, Bruce D. Howe, Harry F. Schoenagel, John G.
Martine, Peter O. Clauss, Donald E. Chapman. The Board's membership has remained
stable and unchanged for most of the years since the formation of the Bancorp in
1983.

Board of Directors

1996 continued to be a year of growth for LA Bank. Throughout the year we
expanded our coverage area to include four counties: Lackawanna, Wayne, Pike and
Monroe. Throughout the last decade and a half LA Bank has achieved unprecedented
financial strength and market share by growing from a single unit financial
institution into a fourteen branch $298 million Bank. Although we have grown at
an exceptional pace, our focus on increased profitability and enhanced
stockholder value continue without sacrificing the quality products and services
we offer to the markets we reach. Technological innovation, the directives of
our Board, management's leadership and employee services allow LA Bank to remain
reactive to consumer needs while maintaining a pool of resources to meet
proactive consumer demands.

Caption:

Left: Member of the Board of Directors of the Lake Ariel Bancorp, Inc., Chairman
Bruce D. Howe (left), and Attorney William C. Gumble (right), are pictured
reviewing building plans for the LA Bank Lake Wallenpaupack Branch, opened
November, 1996.

Caption:

Right: Members of the Board of Directors of the Lake Ariel Bancorp, Inc., Harry
F. Schoenagel (left) and Arthur M. Davis (right) are pictured outside the new
Mountainhome Branch, opened December, 1996.

Caption:

Above: Members of the Board of Directors of the Lake Ariel Bancorp, Inc., John
G. Martines (left), Peter O. Clauss (Center), and Donald Chapman (right) meet in
the New Milford Facility, opened December, 1996.




                                        8
<PAGE>

"LA Bank is committed to meeting the ongoing financial needs of our customers
and prospective customers in ways that will allow us to reward the dedication of
our employees and shareholders." Our corporate mission statement continually
reminds us we are united with our customers, employees, and shareholders in a
sphere of common interest. We are challenged to meet the ongoing and
ever-changing needs of our customers, each reflective of their unique lifestyles
and situations. We meet this challenge by continually developing and improving a
full line of products and services to enhance the successful financial goals of
those who call LA Bank their Bank. Whether our customers begin their
relationship as a child, a teen, or a senior, LA Bank's diverse products and
responsive service establishes our position as the Bank who is Your Partner For
Life. Large or small, corporate or personal, LA Bank offers a full banking
relationship to our customers allowing us to reward the dedication of our
employees and shareholders. Our unique relationships have lead us to dedicate
this year's annual report to those whose lives we affect and in turn effect us,
those who have just begun to know and grow with us, as well as those who have
partnered with us throughout their ever-changing lives. We are LA Bank, Your
Partner For Life.




                                        9
<PAGE>

Caption: The Ceresko family of Mt. Cobb, featured on our cover and above, are
represented by Joseph S. and his wife Helen, Joseph P., his wife Nancy and their
children, Adam (11) and Ellen (4). The Ceresko's are the owners of Space Age
Plastics, a plastic product manufacturing company in Mt. Cobb, founded in 1966
by Joseph S. and Helen. Joseph S. began his affiliation with the Bank in 1981
when he became a charter member of LA Bank's Business Development Board. His
son, Joseph P. assumed his seat on the Board four years ago. Joseph P. notes,
"We have a great full-service relationship with LA Bank. We've used them since
the Mt. Cobb Branch opened. Being a Member of the Business Development Board has
allowed us to help enhance the progress of the Bank and our community."


                                       10
<PAGE>

Kids' Top Accounts

The children of the communities we serve are our future and as a result LA Bank
introduced the Kids Top savings account in 1996. The Kids Top account is one of
twenty personal deposit products marketed by LA Bank that fulfill the needs of
specific market segments of the Bank's consumer base. The account strengthens LA
Bank's commitment to community service by providing free photographing and
fingerprinting of each child who participates. LA Bank's commitment to the youth
of our communities is further conveyed by our employees, like Ann Marie DeRigge,
who provided educational instruction about banking to youths involved in The
Junior Achievement Program (pictured above). LA Bank looks forward to each child
growing with us and taking advantage of the many other products we can offer
them throughout their journey as partners for life.

Caption: Left, Below and Right: A Clarks Summit elementary education class
learns about banking from Ann Marie DeRigge, one of LA Bank's 1996 Junior
Achievement Program participants.

Caption: Below and Below Right: A Kids Top Day was recently held at the Bank's
Mall at Steamtown Branch where the children were treated to a visit from
WOLF-TV's "Topper". The children were provided with light refreshments,
balloons, activity and coloring books and information our Kids Top account.

Caption: Bonnie Robinson, Assistant Cashier, interacts with children at "Kids
Top Day."


                                       11
<PAGE>

Student Loans

LA Bank has assisted students in fulfilling their career ambitions by providing
student loans and accounts since 1910. LA Bank Branch Manager Pat Jenkins notes,
"We establish relationships with students that last a lifetime. We see many of
the students go on to become our community leaders of tomorrow." Our products
have offered financial assistance to professionals like educator Laurie Wagner
who has been an LA Bank customer since childhood. "As a member of the Lake Ariel
community, I began my relationship with LA Bank because it was a community bank.
I maintained my savings account with the Bank in my teens and received student
loans to help me pursue my undergraduate degree from Penn State University. I've
used LA for my home mortgage and auto loans. I've always felt there was
something special about the customer service I experienced."

Caption: Below Left and Right: Laurie Wagner, the daughter of Branch Manager
Treva Day, (pictured at right with Ann O'Reilly and Pat Jenkins) resides with
her husband Donald in Lake Ariel. Now at the "Head of Her Class", Laurie gives
back to the community by teaching 4th grade at the Robert D. Wilson School,
Western Wayne School District, Waymart, PA

Caption: Above Left and Below: Pat Jenkins, The Mall at Steamtown Branch
Manager, explains the economic benefits of enjoying a Graduate Checking Account
exempt from balance requirements to college students at the University of
Scranton's Orientation Day held this past summer.

                                       12
<PAGE>

Auto Loans and Leases

Whether our customers are looking for their first car or seeking financing for
company vehicles, LA Bank specifically tailors our auto product financing to the
individual needs of our customers. LA Lease, our wholly-owned subsidiary and the
only locally-owned independent leasing company in PA, offers leasing as a
popular alternative to financing. Thomas Dziak notes, "Because we know our
customers needs are diverse, we help them define the best financial solution for
their situation."

For a fourth consecutive year, LA Bank's dealer services department co-sponsored
a Used Car Dealer Tent Sale. Held at the Viewmont Mall with six participating
automobile dealers, the tent sale resulted in the financing of over 87 vehicles,
generating over $830,000 for LA Bank's dealer services loan portfolio.

Caption: Center and Below: Getting a quick decision on an auto loan from LA Bank
(less than 24 hours) was important for Keith Yurgosky. "My wife Marion was
suddenly left without a car to use for her 70 mile commute to work. We needed a
car as quickly as possible and went to LA Bank's Used Car Dealer Tent Sale where
there was a tremendous selection of automobiles. Erv Brong of Pier Motors took
the time to get to know us and our needs. Because of LA Bank's low rates, and
the friendliness and professionalism we experienced, we financed our car through
them. In fact, we recently purchased our second automobile in October." The
Yurgosky's, of Jermyn, PA, are pictured below caring for their GEO Prism.



                                       13
<PAGE>

Small Business Loans

Our customers know what they need to make their businesses competitive in
today's market, and they look to Jack Foley and Bill Kerstetter to get it. Jack
notes, "LA has the reputation for helping our customers become successful
because we are responsive to their needs for comprehensive banking services." LA
Bank strives to strengthen our communities by lending monies for equipment,
consolidation, expansion, modernization and other financing needs. We're proud
to enhance our communities by providing the financing which supports prosperity
through successful commerce and job opportunity.

Caption: Right and Below: Dunmore residents Margi and Bill McGrath, owners of
Universal Printing, are pictured in their Scranton facility. Universal
specializes in legal and financial printing as well as two-color traditional
commercial printing.

Caption: Margi notes, "We've had a relationship with LA since 1983. Without them
we wouldn't have grown as quickly as we have. Our business is capital intensive
and LA has been there for us. If ever there was a true example of how LA Bank
helps a business, this is it."

Caption: Above, Left and Below: Grace Farnham, Sole Proprietor of Combinations
by Grace, the Clarks Summit woman's boutique that supplied the upscale employee
uniforms for LA Bank notes, "My customers come to me for my personalized service
and advice on business and casual apparel and accessories.

Caption: After working with another bank and finding they were not responsive to
my needs, I contacted LA Bank. LA's Tom Byrne was such a gentleman. He took the
time to get to know me and what I needed. Within a week of application, it was
signed, sealed and delivered." LA Bank representatives met Ms. Farnham at a
local business card exchange, another example that illustrates how LA Bank is
the local community bank that is responsive to the demands of all of our
customers.


                                       14
<PAGE>

Home Mortgage Loans

LA Bank has made real estate financing our specialty since 1910. Whether our
customers are looking for their primary home, vacation home, or to finance
construction, we've helped hundreds of families realize their dream. Mary and
Barry Mohr of New Hope PA (above) received the mortgage for their lake-front
vacation home from LA Bank. Mary notes, "We were working with a financial
institution out of New York City, and were approved for our mortgage when we
received a devastating telephone call. Our mortgage loan would be cancelled
unless we destroyed the guest home on the property. I couldn't believe it. Our
credit history and income were ideal for owning a second home and the guest home
was only five years old. I turned to Peter Bilyk at LA Bank. He took the time to
visit the property and knew it's value. Because of LA Bank, we will enjoy many
wonderful weekends at Lake Wallenpaupack."

Caption: This Page: Barry and Mary Mohr, an Electrical Engineer and Educator
from New Hope, PA have been banking with LA for approximately 3 years. "LA Bank
provided friendly service and competitive interest rates. They were caring at a
time when we needed it most. Peter Bilyk even called us approximately one year
after our closing with refinancing information; it saves us money monthly. He
didn't have to do that. That's service."


                                       15
<PAGE>

Senior Accounts

LA Bank's Senior Account customers use our market specific products to help
plan, maintain and manage their finances. Our sound investment products, such as
our Certificates of Deposit, Add-On Cds and IRAs form the foundations for their
future financial security, while our Lifestyles and Lifestyles 55 accounts offer
our seniors immediate benefits which afford reduced costs, increased convenience
and special recognition. Karen Pasternak adds, "Our senior products provide
peace of mind to our customers. The customers work with our knowledgeable staff
to make 55 or better a time to enjoy the fruits of a successful life." Pictured
customers Joseph S. and Helen Ceresko note, "We opened our IRA accounts with LA
Bank in 1981. We are now at the time of our life when we see the benefits LA's
IRAs bring to us."

Caption: This Page: Joseph S. and Helen Ceresko enjoy low-cost, value-added
products designed for our senior customers. These products exemplify one more
way in which LA Bank meets the needs of the residents of our local communities.


                                       16
<PAGE>

Responsibilities for Preparation of Financial Statements

         The management of Lake Ariel Bancorp, Inc. ("LAB" or "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

                                       17
<PAGE>

Management's Discussion and Analysis

The consolidated financial review of Lake Ariel Bancorp, Inc. ("LAB" or "the
Company") provides a comparison of the performance of the Company for the years
ended December 31, 1996, 1995, and 1994. The financial information presented
should be reviewed in conjunction with the consolidated financial statements and
accompanying notes.

Background

Lake Ariel Bancorp, Inc. is a one bank holding company whose principal
subsidiary is LA Bank, N.A. LAB operates fourteen full-service branch banking
offices in its principal market area in Lackawanna, Monroe, Pike and Wayne
Counties. At December 31, 1996, LAB had 119 full-time equivalent employees.

Analysis of Results of Operation

Summary of Net Income
In 1996, net income increased 31% over 1995, while net income in 1995 increased
8% over 1994. On a per share basis, net income was $1.73 per share, when
compared to $1.33 for 1995. Weighted average shares outstanding for 1996 were
1,755,000 shares as compared with 1,652,000 shares for 1995. Earnings per share
and weighted average shares outstanding reflect adjustment for the 5% stock
dividend issued on October 1, 1996.

The growth in net income during 1996 is again attributable to the improvement in
net interest income, which increased by 12% for the year, coupled with a 9% or
$225 thousand increase in other operating income. This net increase more than
offset the 3% increase in other operating expenses. The Company will continue to
focus its efforts toward retail banking services within its market area with
specific attention given to increasing market share.

The growth in net income during 1995 is also attributable to the improvement in
net interest income, which increased by 10% for the year, coupled with a 48% or
$802 thousand increase in other operating income. This net increase more than
offset the 14% increase in other operating expenses.

Net Interest Income
Net interest income is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowed funds. The
principal components of earning assets are loans and investment securities. The
sources used to fund these assets are deposits, borrowed funds and capital. For
purposes of this review, income that is exempt from federal income taxes has
been adjusted to a tax equivalent basis using the statutory federal income tax
rate of 34% for each period.

In 1996, net interest income increased by $1.1 million or 12% over 1995 levels.
During 1996, net interest income was positively impacted by the volume increase
in earning assets and the positive improvement in the net interest expense
charged on interest-bearing liabilities.

Average earning assets grew by 11% or $24 million over 1995 levels. Average
loans and leases increased by 13% or $20 million from 1995 levels. Average
commercial loans grew 9% or $4 million over 1995 levels. Interest income on
commercial loans increased $141 thousand or 3%, due to the increased volume
offset by the decreasing rates through most of 1996. The national prime rate as
reported in a national publication published daily, an index to which the
majority of these loans are tied, was 8.25% and 8.50% at December 31, 1996 and
1995, respectively. Average real estate loans increased 23%, which contributed
to a 23% increase in interest income. Average consumer loans, which include
credit card receivables, increased $232 thousand or 1% over 1995, and resulted
in a 3% increase in related interest income.

                                       18
<PAGE>

On average, investment securities increased $5 million or 6% over 1995 levels,
compared to a $19 million or 31% increase in 1995. Income earned on investment
securities increased by 6% in 1996 compared to a 34% growth in 1995. As is
discussed under Financial Condition, the asset/liability management and
investment strategies that were employed during 1996 generated increased volume
thus creating an increase in investment income. The mix of securities in the
investment portfolio changed slightly during 1996. Taxable securities, which
represented 79% of the investment portfolio in 1995, decreased to 76% in 1996.
Tax-exempt securities now represent 24% of the portfolio compared to 21% in
1995. In 1996, tax-exempt securities, for part of the year, provided better
after-tax investment returns than taxable issues in similar maturity and quality
ranges. In addition, from a Federal income tax standpoint, a mid-year strategy
of increased investments in tax-exempt securities provided more favorable
returns than were available in taxable securities. Accordingly, average balances
on State and municipal securities increased $3.5 million in 1996.

Average interest-bearing deposits increased $23 million or 13% in 1996. As
interest rates rose in 1995 and continued constant through most of 1996, more
depositors sought higher rate, longer-term deposits. Savings and
interest-bearing demand deposits, which averaged $67.1 million in 1995, have
decreased to $64.2 million in 1996. As a percentage of total average
interest-bearing deposits, savings and interest-bearing demand deposits
represent 31% of the total in 1996 compared to 37% in 1995. Due to the shift in
the mix of deposits, the rates at which they were repricing and the volume
increase, interest expense on deposits increased $784 thousand, or 10% in 1996.
These results were reflected in the cost of funds which increased 7% from 1995
through 1996, while the volume increased by 10%. However, interest expense as a
percent of earning assets decreased by 13 basis points due to the volume
increase in earning assets. There were no brokered deposits within the Company's
deposit base during 1996, 1995 or 1994.

Short-term borrowings, which included federal funds purchased and securities
sold under agreements to repurchase, averaged $3.6 million in 1996 compared to
$5.2 million in 1995. These borrowings remained relatively constant through
1996. During 1996, borrowings of $5 million from the Federal Home Loan Bank of
Pittsburgh ("FHLB") were repaid.

The overall effect of the increase in interest rates, the shift in mix of
deposit accounts and the growth in earning assets still produced a positive
impact on net interest margin, in spite of overall decreasing margins. The net
interest margin increased by 5 basis points to 4.20% in 1996 from 4.15% in 1995.
During 1997, the net interest margin is expected to improve because of the
anticipated decrease in the Company's cost of funds while maintaining the
current rate of interest income on earning assets. However, for a discussion on
factors that could influence the net interest margin, see "Factors That May
Affect Future Results."

In 1995, net interest income grew by 9%, or $760 thousand over the same period
in 1994. The continued strong growth of earning assets, which grew 24% over 1994
levels, had a significant positive impact on this growth.

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 month-end 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% each year.


                                       19
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity
Interest Rates and Interest Differential
<TABLE>
<CAPTION>
                                                                                  (in thousands)
----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31,                      1996                            1995                         1994
----------------------------------------------------------------------------------------------------------------------------------
                                               Average   Annual  Interest   Average   Annual  Interest   Average   Annual  Interest
                                               Balance   Rate    Income/    Balance   Rate    Income/    Balance   Rate    Income/
                                               (1)               Expense    (1)               Expense    (1)               Expense
<S>                                            <C>       <C>      <C>        <C>      <C>      <C>        <C>      <C>     <C>
Assets                                         
Federal funds sold                            $  3,124   5.25%   $   164    $  2,889  5.33%   $   154    $  1,835   4.03%    $   74
Deposits in Federal Home Loan Bank                 145   4.14%         6         479  4.59%        22         121   3.31%         4
Investment Securities:                        
   U.S. government agencies                     63,443   6.81%     4,323      61,842  6.77%     4,187      41,237   6.17%     2,544
   State and municipal (2)                      20,393   8.20%     1,673      16,890  8.57%     1,448      18,932   8.95%     1,695
   Other securities                              1,460   5.89%        86       1,790  6.54%       117       1,210   4.38%        53
                                              --------  -----    -------    -------- -----    -------    --------  ------    ------
     Total Investment Securities                85,296   7.13%     6,082      80,522  7.14%     5,752      61,379   6.99%     4,292
Loans and Leases:                             
   Commercial, financial and industrial(4)      48,626   9.43%     4,585      44,438 10.00%     4,444      41,975   8.71%     3,655
   Real estate-construction and mortgage        80,395   8.16%     6,557      65,250  8.15%     5,318      52,990   7.76%     4,114
    Installment loans to individuals(3)         34,213   9.50%     3,251      34,664  9.31%     3,226      26,459   9.33%     2,469
   Lease financing (3)                           2,114   9.41%       199       1,431  8.67%       124       1,158  10.79%       125
                                              --------  -----    -------    -------- -----    -------    --------  -----     ------
     Total Loans and Leases                    165,348   8.83%    14,592     145,783  8.99%    13,112     122,582   8.45%    10,363
Total Earning Assets                           253,913   8.21%    20,844     229,673  8.29%    19,040     185,917   7.92%    14,733
Cash and due from banks                          9,834     --         --       9,368    --         --       9,598     --         --
Premises and equipment, net                      7,769     --         --       7,718    --         --       6,489     --         --
Other assets, less allowance for possible
   credit losses and loan fees                   5,438     --         --       4,343    --         --       1,673     --         --
                                               -------  -----    -------    -------- -----    -------    --------  -----    -------
Total Assets                                  $276,954   7.53%   $20,844    $251,102  7.58%   $19,040    $203,677   7.23%   $14,733
                                              ========  =====    =======    ======== =====    =======    ========  =====    =======
Liabilities and Stockholders' Equity
Interest-Bearing Deposits:                    
   Demand                                     $ 25,764   2.08%   $   537    $ 25,993  2.38%   $   618    $ 26,094   2.42%   $   631
   Savings                                      38,472   4.03%     1,549      41,186  3.70%     1,524      45,600   2.61%     1,192
   Time                                        105,883   5.05%     5,350      86,980  5.37%     4,671      58,092   4.59%     2,669
   Time over $100,000                           33,811   4.50%     1,521      26,960  5.04%     1,360      16,461   4.24%       698
                                              --------  -----    -------    -------- -----    -------    --------  -----    -------
     Total Interest-Bearing Deposits           203,930   4.39%     8,957     181,119  4.51%     8,173     146,247   3.55%     5,190
Short-term borrowings                            3,312   5.25%       174       4,698  5.39%       253       4,805   4.29%       206
Securities sold under agreements              
   to repurchase                                   338   5.03%        17         546  5.31%        29         731   4.10%        30
Long-term debt                                  16,275   6.36%     1,035      17,898  5.92%     1,059      10,601   5.10%       541
                                             ---------  -----    -------    -------- -----    -------    --------  -----    -------
       Total Interest-Bearing Liabilities      223,855   4.55%    10,183     204,261  4.66%     9,514     162,384   3.67%     5,967
Noninterest-bearing demand deposits             29,545     --         --      26,172    --         --      23,479     --         --
Other liabilities                                3,312     --         --       3,157    --         --       1,535     --         --
                                             ---------  -----    -------    -------- -----    -------    --------  -----    -------
Total Liabilities                              256,712   3.97%    10,183     233,590  4.07%     9,514     187,398   3.18%     5,967
Stockholders' Equity                            20,242     --         --      17,512    --         --      16,279     --         --
                                              --------  -----    -------    -------- -----    -------    --------  -----    -------
Total Liabilities and                         
   Stockholders' Equity                       $276,954   3.68%   $10,183    $251,102  3.79%   $ 9,514    $203,677   2.93%   $ 5,967 
                                              ========  =====    =======    ======== =====    =======    ========  =====    =======
Margin Analysis
     Interest income/earning assets                      8.21%   $20,844              8.29%   $19,040               7.92%   $14,733
     Interest expense/earning assets                     4.01%    10,183              4.14%     9,514               3.21%     5,967
                                                        -----    -------             -----    -------              -----    -------
     Net interest income/earning assets                  4.20%   $10,661              4.15%   $ 9,526               4.71%   $ 8,766
                                                        =====    =======             =====    =======              =====    =======
</TABLE>
    (Percentage distributions may not add due to rounding.)
(1) Average balances have been computed using daily balances in 1996 and
    month-end balances in 1995 and 1994. Nonaccrual loans are included in loan
    balances.
(2) Interest and yield are presented on a tax-equivalent basis using
    34% for 1996, 1995, and 1994.
(3) Installment loans and leases are presented net of unearned interest.
(4) Does not include recovered interest of $49,000 on nonaccrual loan paid off 
    during 1995.

                                       20
<PAGE>

Rate/Volume Variance Analysis Calculation

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                      1996 Compared to 1995 (5)           1995 Compared to 1994 (5)
-----------------------------------------------------------------------------------------------------------------------
                                               Total        Caused by                 Total       Caused by
                                               Variance       Rate        Volume      Variance      Rate        Volume
                                               --------       ----        ------      --------      ----        ------
<S>                                            <C>          <C>          <C>          <C>          <C>          <C>
Interest Income
Federal funds sold                             $    10      $    (2)     $    12      $    80      $    28      $    52
Deposits in Federal Home Loan Bank                 (16)          (2)         (14)          18           10            8
Investment Securities:
     U.S. government agencies                      136           27          109        1,643          268        1,375
     State and municipal                           225          (63)         288         (247)         (69)        (178)
     Other securities                              (31)         (11)         (20)          64           33           31
                                               -------      -------      -------      -------      -------      -------

       Total Investment Securities                 330          (47)         377        1,460          232        1,228
Loans and Leases:
     Commercial, financial and industrial          141         (266)         407          789          566          223
     Real estate-construction and mortgage       1,239            4        1,235        1,204          213          991
     Installment loans to individuals               25           67          (42)         757           (7)         764
     Lease financing                                75           12           63           (1)         (28)          27
                                               -------      -------      -------      -------      -------      -------

       Total Loans and Leases                    1,480         (183)       1,663        2,749          744        2,005
                                               -------      -------      -------      -------      -------      -------

Total Earning Assets                             1,804         (234)       2,038        4,307        1,014        3,293
                                               -------      -------      -------      -------      -------      -------

Interest Expense
Interest-Bearing Deposits:
     Demand                                        (81)         (77)          (4)         (13)         (11)          (2)
     Savings                                        25          129         (104)         332          557         (225)
     Time                                          679         (286)         965        2,002          508        1,494
     Time over $100,000                            161         (157)         318          662          151          511
                                               -------      -------      -------      -------      -------      -------

       Total Interest-Bearing Deposits             784         (391)       1,175        2,983        1,205        1,778
Short-term borrowings                              (79)          (6)         (73)          47           52           (5)
Securities sold under agreements
   to repurchase                                   (12)          (2)         (10)          (1)           7           (8)
Long-term debt                                     (24)          76         (100)         518          125          393
                                               -------      -------      -------      -------      -------      -------

Total Interest-Bearing Liabilities                 669         (323)         992        3,547        1,389        2,158
                                               -------      -------      -------      -------      -------      -------

Net Interest Income Variances                  $ 1,135      $    89      $ 1,046      $   760      $  (375)     $ 1,135
                                               =======      =======      =======      =======      =======      =======
</TABLE>

(5) 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.

                                       21
<PAGE>

Provision for Possible Credit Losses
The provision for possible credit losses was based on management's evaluation of
the allowance for possible credit losses in relation to the credit risk inherent
in the loan portfolio. Management considered various conditions including loan
concentrations, charge-off history, delinquent loan percentages, review of
specific loans and general economic conditions. For instance, management
employed a loan grading of larger loans (usually loans of $500,000 or more) to
ensure the early identification of potential problem loans which may have a
potential negative impact on the future earnings of the Company. Quarterly, the
loan review committee reviewed pertinent information relative to both specific
credits and the total portfolio in general. Such information was used in
determining the amount to be charged to the provision for possible credit
losses, which thereby increased the allowance for possible credit losses. For a
discussion on some of the factors that could influence management's evaluation
of the allowance for possible credit losses, see "Factors That May Affect Future
Results."

During 1996, the provision for possible credit losses was $650 thousand compared
to $810 thousand in 1995. In 1996, the provision for possible credit losses was
136% of net charge-offs compared to 125% in 1995. The provision represented
management's assessment of the risks inherent in the loan and lease portfolio
while providing the amounts necessary to cover charge-offs.

In 1996, net charge-offs decreased 27% compared to a 53% increase in 1995. The
current year's net charge-offs is primarily attributed to the commercial real
estate sector. The Company wrote down one commercial real estate loan during
1996 which had been in litigation for approximately one year. The ratio of net
charge-offs to average loans outstanding was at .30% for 1996 and .44% for 1995.

Net charge-offs on commercial and industrial loans for 1996 were $118 thousand
or 25% of net charge-offs compared to $286 thousand or 44% of net charge-offs in
1995. Consumer and credit card, and real estate related debt accounted for 45%
and 30% of net charge-offs, respectively.

Other Operating Income
                                            1996          1995       1994
                                            ----          ----       ----
                                                      (in thousands)
Loan origination fees                       $   266     $   179     $   422
Customer service charges and fees             1,217       1,066         683
Mortgage servicing fees                         327         302         221
Investment security gains, net                   43         331         112
Gain (loss) on sales of loans, net              114         132        (131)
Other income                                    739         471         372
                                            -------     -------     -------

   Total other operating income             $ 2,706     $ 2,481     $ 1,679
                                            =======     =======     =======

Other operating income increased $225 thousand or 9% in 1996 compared to an
increase of $802 thousand or 48% in 1995. Fees generated from the origination
and sale of residential mortgage loans provided 10% or $266 thousand of total
other operating income. These fees increased by 49% or $87 thousand, because of
the increase in residential mortgage loans sold for cash. Mortgage servicing
fees were earned by servicing residential mortgage loans for investors in the
secondary market. Mortgage servicing fee income increased by 8% or $25 thousand
when compared to 1995. These fees were directly influenced by the volume of
loans that were sold in the secondary market. 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 $114 thousand
recorded in 1996, compared with the net gain of $132 thousand in 1995, was
indicative of the changes in interest rates during the periods in which the
sales occurred.

Fee income from service charges on demand deposits, item processing, return
items and other service fees increased 14% or $151 thousand in 1996. These fees,
which represented 45% of other operating income, were influenced by both pricing
changes and increases in the number of consumer and business demand deposit
accounts which increased $7 million in 1996.

                                       22
<PAGE>

Net gains on available-for-sale securities represented approximately 2% of other
operating income in 1996. The sales of these securities in 1996 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' life insurance policies,
credit card annual fees and merchant discounts, safe deposit box rentals and
other general service fees. The increase in these fees in 1996 was 57% compared
to 27% in 1995. Fees from credit card holders and other fee income contributed
to the 1996 increase.

In 1995, other operating income increased 48% primarily as a direct result of
the impact of the volume of mortgage loans sold and the increase in demand
deposit accounts and related fees. Mortgage servicing fees increased by 37% or
$81 thousand. Customer service charges grew by 56% or $383 thousand primarily
due to the additional number of demand deposit accounts. Other income grew 27%
due to fees from credit card holders.

Other Operating Expenses
                                             1996        1995        1994
                                            ------      ------      ------ 
                                                    (in thousands)
Salaries and benefits                       $3,684      $3,559      $3,003
Equipment expense                              824         747         602
Occupancy expense                            1,053       1,036         923
FDIC insurance                                   2         222         321
Foreclosed asset expenses                       51          26          44
Amortization of intangible assets              108         108         108
Advertising                                    249         242         243
Other expenses                               2,026       1,823       1,587
                                            ------      ------      ------

   Total other operating expenses           $7,997      $7,763      $6,831
                                            ======      ======      ======

Total other operating expenses increased 3% in 1996, most of which was directly
related to the payment of salaries and benefits. Salaries and benefits, which
were the most significant of the non-interest expenses, increased by 4% or $125
thousand over 1995 amounts. The increase was 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 increased 10% and 2%, respectively, during
1996. Again, the increases in these expenses were primarily attributable to the
growth in the number of branch offices, in addition to overall increases in
overhead expenses, maintenance costs and equipment upgrades (including computer
hardware and software) throughout the branch network.

FDIC insurance assessments decreased from $222 thousand to $2 thousand. 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. Foreclosed asset expenses doubled
to $51 thousand in 1996. The increase was a result of the acquisition of
properties in 1996 without any material dispositions. Amortization of intangible
assets remained constant in 1996 and was related to the premium the Company paid
for the core deposits when it acquired the Milford Township Branch office.
Advertising expenses also remained constant in 1996. Other expenses grew by $203
thousand or 11% in 1996 and include such costs as legal fees, professional and
audit, state shares tax, directors' fees and other general operating expenses.

Total other operating expenses increased 14% in 1995 with much of the increase
related to payment of salaries and benefits. Salaries and benefits rose by 19%
because of added staff levels, merit increases and health care costs. Equipment
expenses grew by 24% due to recurring costs such as maintenance, replacements
and upgrades. Occupancy expenses were up 12% because of the additional
facilities acquired and the general increases in overhead costs at all banking
offices. FDIC insurance assessment decreased by 31%. The 31% decrease in the
FDIC insurance assessment was directly related to an FDIC refund of assessments
paid for the period form June 1, 1995 through September 30, 1995. The refund was
a result of the FDIC assessment reduced from 23 cents per $100 deposits to 4
cents per $100 deposits, effective June 1, 1995. Expenses related to foreclosed
assets included maintenance, repairs, taxes, insurance, legal fees and

                                       23
<PAGE>

writedowns on properties. These expenses were 1% of total operating expenses in
both 1995 and 1994. Advertising expenses remained constant in 1995. Other
expenses, which increased by 15%, included costs such as legal fees,
professional and audit, state shares tax, directors' fees, bonus incentives,
amortization of intangible assets and other general operating expenses.

Income Taxes
The provision for income taxes increased 76% or $485 thousand in 1996 compared
to a 19% or $100 thousand increase in 1995. Pretax income increased 41% or $1.2
million in 1996 as compared to a 10% or $279 thousand increase in 1995. The
effective tax rate for 1996 was 27% compared to 22% in 1995.

Financial Condition

Statement of Condition
At December 31, 1996, the Company's total assets were $297.9 million,
representing an increase of $46 million or 18% from the December 31, 1995
balance of $251.9 million. The increase in assets was primarily attributable to
a $24 million growth in net loans and a $14 million increase in investment
securities.

The amortized cost of investment securities, both held-to-maturity (HTM) and
available-for-sale (AFS), increased $15 million or 20% from December 31, 1995 to
December 31, 1996. 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 yield
pickup between the interest on deposits and borrowings versus the invested
funds. During 1996, the Company purchased $10 million of securities with funds
borrowed from the FHLB. The strategy that was employed provided a favorable
yield pickup between the invested and borrowed funds. At December 31, 1996,
gross unrealized gains in the held-to-maturity investments were $368 thousand
while gross unrealized losses amounted to $405 thousand.

The maturity distribution based on amortized cost and yield of all investment
securities at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
                            Within       Two-         Six-          After         No
                            One          Five         Ten           Ten           Fixed
                            Year         Years        Years         Years         Maturity      Total
                            ---------    ---------    ----------    ----------    ----------    -------
                                                      (dollars in thousands)
<S>                         <C>          <C>           <C>          <C>            <C>          <C>
U.S. government agencies
   and corporations         $     410    $     298    $   12,831    $   47,555    $     --      $61,094
     Yield                       7.79%        8.51%         6.97%         6.88%                    6.91%
Obligations of states and
   political subdivisions         645        2,110         8,509        13,562                   24,826
      Yield (1)                  6.89%        7.90%         7.56%         8.22%                    7.94%
Equity securities                                                                      1,443      1,443
     Yield                       5.98%        5.98%
                            ---------    ---------    ----------    ----------    ----------    -------
Total maturities            $   1,055    $   2,408    $   21,340    $   61,117    $    1,443    $87,363
                            =========    =========    ==========    ==========    ==========    =======

       Weighted yield            7.24%        7.98%         7.21%         7.18%         5.98%      7.19%
</TABLE>

(1) Yields on obligations of states and political subdivisions are presented on
a tax-equivalent basis utilizing an effective tax rate of 34% for all
maturities.

Total net loans increased by 16% from $152 million at the end of 1995, to $176
million at the end of 1996. The increase in net loans was directly related to
the significant growth in consumer loans and residential mortgages. Residential
mortgage loans, which included real estate construction loans, increased $15
million or 20% from year-end 1995 to 1996. Residential mortgage loans
represented the most significant increase of net loans in 1996.

                                       24
<PAGE>

At December 31, 1996, consumer loans, net of unearned discounts, totaled $37
million, or $2 million higher than the December 31, 1995 balance of $35 million.
The increases in home improvement loans and the expansion of the Company's
indirect lending program to automobile dealers provided the majority of growth
in the consumer portfolio. Commercial loans increased $6 million or 14% in 1996.
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.

Total deposits increased $44 million or 21% from $209 million in 1995 to $253
million in 1996. Noninterest-bearing demand deposits increased by $6 million.
In aggregate, savings and interest-bearing demand deposits decreased by $291
thousand or 1% from 1995 to 1996. As a percentage of total deposits, savings and
interest-bearing demand deposits represented 26% in 1996, compared to 31% in
1995. Savings deposits decreased by $1.7 million in 1996 as interest rates rose
and certificates of deposits offered competitive alternatives. Time deposits,
which include certificates of deposit in denominations of $100 thousand or more,
increased $39 million or 33% in 1996. As a percentage of total deposits, these
deposits increased to 62% in 1996 from 56% in 1995. Certificates of deposits in
the amount of $100 thousand or more grew from $26.9 million at December 31, 1995
to $40.2 million at December 31, 1996. Approximately, $8.3 million or 62% of the
growth was from public funds of school districts, county governments and local
municipalities located within the Company's market area.

The Company considers its current deposit base to be stable and generally
consumer in nature. The deposit mix was, in general, equally distributed among
all products without any significant concentrations. For a discussion of factors
that could adversely affect the stability of the Company's current deposit base,
see "Factors That May Affect Future Results."

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 represents nonperforming assets of the Company for 1996, 1995
and 1994:

                                       1996      1995      1994
                                      ------    ------    ------
                                              (in thousands)

Loans past due 90 days or more        $1,593    $1,716    $1,125
Impaired loans in nonaccrual status      542     1,216      --
Other nonaccrual loans                    73       487     1,786
                                      ------    ------    ------
     Total nonperforming loans         2,208     3,419     2,911

Foreclosed assets held for sale          841        52       191
                                      ------    ------    ------
     Total nonperforming assets       $3,049    $3,471    $3,102
                                      ======    ======    ======

Nonperforming loans as a
   percentage of loans                  1.24%     2.19%     2.13%

Nonperforming assets as a
   percentage of assets                 1.02%     1.36%     1.31%

Nonperforming loans decreased 35% from year-end 1995. Nonaccrual loans decreased
$1.1 million or 64% from year-end 1995. Commercial loans accounted for 88% of
all nonaccruals, followed by real estate loans at 12%. Within the $615 thousand
of total nonaccrual loans, 100% were secured by mortgages, primarily first
liens, against residential or commercial properties. Loans past due ninety days
or more decreased $123 thousand from 1995 year-end levels. These loans included
$1.2 million in real estate mortgages, $293 thousand in consumer credit, $21
thousand in commercial loans and $103 thousand in leasing. These loans were
reviewed by management at its quarterly loan review meetings regarding
collection efforts.

                                       25
<PAGE>

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

Foreclosed assets held for sale were $841 thousand at year-end 1996 compared to
$52 thousand at year-end 1995. The increase was a result of a foreclosure of a
commercial loan involving land for development and five residential properties.
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.

Potential Problem Loans
At December 31, 1996, the Company had approximately $896 thousand 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, 1996. 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 declining 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 stringent underwriting standards in commercial lending which
resulted in a decrease in the allowance for possible credit losses. 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, 1996, the allowance for
possible credit losses was 1.03% of loans compared to 1.08% in 1995 and 1.10% in
1994. Although the allowance decreased while total net loans increased in 1996,
the growth was concentrated in the least risky categories, such as residential
and consumer loans. For further discussion on factors that could influence the
allowance for possible credit losses, see "Factors That May Affect Future
Results."

The allowance for possible credit losses has been allocated by category as set
forth in the following table. Amounts shown in the table do not purport to be an
indication of future charge-off trends. Percentages shown in the table represent
the percentage of loans by type to total loans.

                            1996              1995              1994
                            ----              ----              ----
                                                (in thousands)
                            Amount       %    Amount       %    Amount       %
Real estate                 $  248       14   $  279       17   $  370       43
Commercial and industrial      574       31      700       42      631       32
Consumer installment           428       23      437       26      386       24
Lease financing                 62        3       52        3       52        1
Unallocated                    518       29      189       12       57     --
                            ------   ------   ------   ------   ------   ------
   Total                    $1,830      100   $1,657      100   $1,496      100
                            ======   ======   ======   ======   ======   ======


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 payments on loans and investments,
sales of assets, growth in core deposits, short and long-term borrowings,
repurchase agreements and other fees and charges.

                                       26
<PAGE>

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 the level of interest rates. For
additional factors that could influence the Company's liquidity position, see
"Factors That May Affect Future Results."

At December 31, 1996, the Company maintained $16 million in cash and cash
equivalents in the form of cash and due from banks (including federal funds
sold). In addition, the Company had $60 million of available- for-sale
investment securities. This combined total of $76 million represented 26% of
total assets at December 31, 1996, as compared to $63.1 million or 25% of total
assets at December 31, 1995. The Company believes that its liquidity is
adequate.

The Company considered 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. At December 31, 1996,
approximately 85% of the Company's assets were funded by core deposits acquired
within its market area, and 7% of the assets were funded by the Company's
equity. These two components provide a substantial and stable source of funds.

Net cash provided by operating activities was $6.4 million for the year ended
December 31, 1996, as compared to $740 thousand for the comparable period in
1995. This $5.7 million increase was primarily related to the decrease in
mortgage loans held for resale. Net cash used in investing activities increased
$36 million in 1996 compared to a $69.3 million decrease in 1995. The net cash
used in securities transactions accounted for $22 million of the change. An
increase of $13 million in loan and lease funding made up the remaining increase
in cash used in investing activities. Net cash provided by financing activities
increased to $43.4 million at December 31, 1996 from $10.4 million at December
31, 1995, a net increase of $33 million. The net change in proceeds from and
repayments of both short-term and long-term borrowings of $5 million resulted in
a net increase in cash provided by financing activities. As discussed
previously, the Company borrowed funds from the FHLB under both short and
long-term borrowing arrangements. The borrowings mature at various periods
through November, 2005.

The Company also placed emphasis on maintaining additional sources of asset
liquidity. Other liquid assets included mortgage loans held for resale. The
Company also established lines of credit with correspondent banks for short-term
borrowing needs in addition to an estimated borrowing capacity of approximately
$103 million with the FHLB. In viewing the combination of all of these factors,
management considered the Company's liquidity position, both short and
long-term, to be sufficient to meet its cash flow needs.

Interest Rate Sensitivity
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.

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.

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.

                                       27
<PAGE>

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.

To manage the interest sensitivity position, an asset/liability model called
"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 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.

During 1995, the 2-year Treasury yield declined 247 basis points. Given this
decline, the odds (on a percentage basis) and market sentiment were building
toward a future rise in interest rates. Therefore, the Company adopted a
defensive asset/liability strategy. In January, 1996, low coupon mortgage
securities were sold and reinvested into adjustable rate securities. In
addition, the liability structure was extended utilizing FHLB advances. At the
time this strategy was adopted, management made the decision to extend duration
of its assets should interest rates rise to attractive levels.

By August, 1996, the 2-year Treasury yield had increased 117 basis points on
stronger than expected economic growth and inflation fears. At this point, the
Company began to extend duration slightly to capitalize on the higher yields now
available. Municipal bonds were also added at this time to shelter a portion of
the Company's income from federal income taxes.

By September, 1996, interest rates had trended down modestly as no inflationary
pressure materialized. At that time, the Company used the proceeds of a security
sale to pay off FHLB advances and to provide liquidity for loan demand. The
security transaction involved selling a combination of fixed and floating rate
securities, leaving virtually no impact on the asset/liability position.

During most of the fourth quarter of 1996, rates continued their decline. The
2-year Treasury yield fell an additional 49 basis points between September and
November, 1996, then reversed course and began to rise. With the interest rate
environment uncertain and rates nearing the lows of 1995, a decision was made to
return to a defensive stance. The Company executed an investment strategy,
purchasing adjustable rate securities for interest rate protection and municipal
bonds for call protection and federal income tax reduction.

Overall, the strategies were effective and well timed, coinciding with interest
rate changes during the year. Finally, the Company continued to utilize its
excess capital during 1996 in order to improve its return on equity for its
stockholders. The Company borrowed longer-term from the FHLB and purchased
mortgage related securities. The longer term nature of the borrowing and
investment had little impact on the asset/liability position. However, income
was enhanced from the resulting spread between the investment yields and
borrowing rates.

The strategy for 1997 involves continuing to be defensive by both borrowing from
the FHLB and purchasing adjustable rate securities. In addition, attractive
callable agency bonds will be added. With rates unlikely to fall, their call
risk is mitigated. Finally, should interest rates rise by 200 basis points, the
Adjustable Rate Mortgage securities ("ARMs") will be liquidated and higher fixed
rate yields will be locked into the portfolio by extending maturities.

The Company's modeling results at December 31, 1996, indicate that the level of
net interest income at risk due to varying interest rate movements was within
internal risk tolerance guidelines. These guidelines restricted the impact on
net interest income to less than 10 percent assuming a 200 basis point increase
or decrease in market interest rates.

At December 31, 1996, the Company maintained a one year cumulative GAP of
negative $13.6 million or 4.57% of total assets. The effect of this GAP position
provided a negative mismatch of assets and liabilities which exposes the Company
to interest rate risk during a period of rising interest rates such as was
experienced in 1996.

                                       28
<PAGE>

The following table, "Statement of Interest Sensitivity Gap," reflects the
Company's gap position at December 31, 1996:

<TABLE>
<CAPTION>

                                           STATEMENT OF INTEREST SENSITIVITY GAP
                                                   (in thousands)
                                   3 months   3 through    1 through      Over
                                   or less    12 months    3 years       3 years      Total
                                   --------   ---------    ---------     --------     -----
<S>                                <C>         <C>          <C>          <C>         <C>     
Cash and Cash Equivalents          $ 11,370    $   --       $   --       $   --      $ 11,370
Investment securities(1)(2)          24,759       7,789       16,391       43,022      91,961
Loans(2)                             46,302      24,892       37,067       67,640     175,901
Fixed and Other Assets                 --          --           --         18,866      18,866
                                   --------    --------     --------     --------    --------
   Total Assets                    $ 82,431    $ 32,681     $ 53,458     $129,528    $298,098
                                   ========    ========     ========     ========    ========

Non interest-bearing transaction
   deposits (2)                    $  8,140    $   --       $  8,140     $ 16,281    $ 32,561
Interest-bearing
  transaction deposits (2)             --         5,341       18,903       40,547      64,791
Time                                 31,071      45,803       22,243       21,375     120,492
Time over $100,000                    9,829      22,262        1,677        1,612      35,380
Repurchase agreements                   300        --           --           --           300
Short-term borrowings                  --          --           --           --          --
Long-term debt                        5,232         750        2,000       12,040      20,022
Other Liabilities                      --          --           --          3,141       3,141
                                   --------    --------     --------     --------    --------
   Total                           $ 54,572    $ 74,156     $ 52,963     $ 94,996    $276,687
                                   ========    ========     ========     ========    ========

Interest Sensitivity Gap           $ 27,859    $(41,475)    $    495     $ 34,532
Cumulative Gap                     $ 27,859    $(13,616)    $(13,121)    $ 21,411
Cumulative Gap to Total Assets         9.35%      (4.57)%      (4.40)%       7.18%
</TABLE>

(1) Gross of unrealized gains/losses on available for sale securities.

(2) Investments and loans were included in the earlier of the period in which
interest rates were next scheduled to adjust or the period in which they were
due. In addition, loans were included in the periods in which they were
scheduled to be repaid based on scheduled amortization. For amortizing loans and
mortgage-backed securities, annual prepayment rates were assumed reflecting
historical experience as well as management's knowledge and experience of its
loan products.

(3) The Company's demand and savings accounts were generally subject to
immediate withdrawal. However, management considered 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 FDICIA 305 recommended
maturity distribution limits for non-maturing deposits.

Upon reviewing the current interest sensitivity scenario for the next 12 months,
decreasing interest rates could positively effect net income because the Company
is liability sensitive. In a rising interest rate environment, net income could
be negatively affected because more liabilities than assets will reprice during
a given period.

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. See
"Factors That May Affect Future Results" for further discussion.

                                       29
<PAGE>

Capital
The adequacy of the Company's capital is reviewed on an ongoing basis with
reference to size, composition and quality of its 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, 1996
was 8.24% compared to 7.59% at December 31, 1995. For 1996 and 1995, the ratios
were well above minimum regulatory guidelines.

As required by federal banking 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 certain off-balance-sheet instruments. For the Company, Tier I
capital (core capital) consists of common stockholders' equity less intangible
assets, and Tier II capital includes the allowance for possible credit losses,
which cannot exceed 1.25% of risk-weighted assets. Regulatory guidelines require
that core capital and total risk-based capital must be at least 4.00% and 8.00%,
respectively. The table below illustrates the Company's capital ratios as of
December 31, 1996 as required under the guidelines.

Primary Capital              $ 21,412
Intangible Assets                 762
                             --------
Tier I Capital               $ 20,650
Tier II Capital                 1,767
                             --------
Total Risk-Based capital     $ 22,417
                             ========

Total Risk-Weighted Assets   $176,179
                             ========
Tier I Ratio                    11.72%
                             ========
Risk-Based Capital Ratio        12.72%
                             ========

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 and its Bank subsidiary may
adversely affect the future results of operations of the Company and its Bank
subsidiary. Management does not expect any one particular factor to affect the
Bank subsidiary's results of operations. A downward trend in several areas,
however, including real estate, construction and consumer spending, could have
an adverse impact on the Bank subsidiary's ability to maintain or increase
profitability. Therefore, there is no assurance that the Company and its Bank
subsidiary will be able to continue their current rates of income and growth.
See "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.

                                       30
<PAGE>

As of December 31, 1996, total interest-earning assets maturing or repricing
within one year were less than total interest-bearing liabilities maturing or
repricing in the same period by $13.6 million, representing a cumulative
one-year interest rate sensitivity gap as a percentage of total assets of
negative 4.57%. This condition suggests that the yield on the Company's
interest-earning assets should adjust to changes in market interest rates at a
slower rate than the cost of the Company's interest-bearing liabilities.
Consequently, the Company's net interest income could decrease during periods of
rising interest rates. See "Interest Rate Sensitivity."

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 currently believes that the allowance for possible credit losses is
adequate, but that there can be no assurance that nonperforming loans will not
increase in the future.

Local Economic Conditions. The success of the Company is dependent, to a certain
extent, upon the general economic conditions in the geographic market served by
the Bank subsidiary. Although the Company expects that economic conditions will
continue to be favorable in this market, no assurance can be given that these
economic conditions will continue. Adverse changes in economic conditions in the
geographic market that the Bank subsidiary serves would likely impair the Bank
subsidiary's ability to collect loans and could otherwise have a material
adverse effect on the consolidated results of operations and financial condition
of the Company.

Competition. The Banking industry is highly competitive, with rapid changes in
product delivery systems and in consolidation of service providers. Many of the
Company's competitors are bigger than the Company in terms of assets and have
substantially greater technical, marketing and financial resources. Because of
their size, many of these competitors can (and do) offer products and services
that the Company does not offer. The Company is constantly striving to meet the
convenience and needs of its customers and to enlarge its customer base. No
assurance can be given that these efforts will be successful in maintaining and
expanding the Company's customer base.

Future Outlook
In 1995, rates began moving steadily upward as the Federal Reserve System
tightened its monetary policy. In early 1995, rates rose and continued rising
through the middle of the year, with the national prime rate peaking at 9.00%.
The national prime rate fell to 8.50% at December 31, 1995, falling again to
8.25% in February, 1996, where it remained at December 31, 1996. Of course,
management and the Board of Directors do not have the ability to determine if
another rate increase will occur; however, it is felt that the Company is very
well positioned to meet the challenges and effects of a rising interest rate
environment. 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 ever-changing. At the time of
this writing, the Company was not aware of any pending pronouncements that would
have a material impact on the results of operations.

Beginning September 1995, bank holding companies may acquire banks in other
states without regard to state law. In addition, banks can merge with other
banks in another state beginning in June 1997. Predictions are that
consolidation will occur as the banking industry strives for greater cost
efficiencies and market share. Management believes that such consolidation may
enhance its competitive position as a community bank.

A normal examination of the Bank by the Office of the Comptroller of the
Currency in 1996 resulted in no significant findings and no impact is
anticipated on current or future operations.

                                       31
<PAGE>

The FDIC Board of Directors voted on November 26, 1996, to retain the existing
Bank Insurance Fund (BIF) assessment schedule of 0 to 27 basis points (annual
rates) for the first semiannual period of 1997, and to collect an assessment
against BIF-assessable deposits to be paid to the Financing Corporation (FICO).
In addition, the Board eliminated the $2,000 minimum annual assessment and
authorized the refund of the fourth-quarter minimum assessment of $500 paid by
certain BIF-insured institutions on September 30, 1996.

The Bank's current and future FDIC BIF assessment is expected to be $0; however,
the FICO assessment for 1997 is expected to be approximately $15,000.

Our twelfth branch office in Lake Wallenpaupack (Pike County) opened in
November, 1996. In addition, we 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 of this year. The expected
amortization of the customer lists is $100,000 for 1997.

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 negative impact on the Company's
earnings until the growth in deposits reaches a level to offset these expenses.




                                       32
<PAGE>

Consolidated Balance Sheet

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                           -------------------------
                                                                             1996              1995
                                                                             ----              ----
                                                                               (in thousands)
<S>                                                                        <C>              <C>
ASSETS
Cash and cash equivalents                                                  $  15,971        $  12,519
Available-for-sale securities                                                 60,399           50,580
Held-to-maturity securities (fair value of
  $26,564 and $22,866 in 1996 and 1995, respectively)                         26,601           22,589

Loans and leases                                                             186,494          159,170
Mortgage loans held for resale                                                   315            3,405
     Less unearned income and loan fees                                       (8,989)          (8,612)
     Less allowance for possible credit losses                                (1,830)          (1,657)
                                                                           ---------        ---------
       Net loans and leases                                                  175,990          152,306

Premises and equipment, net                                                   10,005            7,785
Accrued interest receivable                                                    2,349            1,971
Foreclosed assets held for sale                                                  841               52
Other assets                                                                   5,750            4,057
                                                                           ---------        ---------
       TOTAL ASSETS                                                        $ 297,906        $ 251,859
                                                                           =========        =========
LIABILITIES
Deposits:
     Noninterest-bearing                                                   $  32,539        $  26,866
     Interest-bearing:
       Demand                                                                 27,070           25,686
       Savings                                                                37,713           39,388
       Time                                                                  115,634           89,876
       Time $100,000 and over                                                 40,240           26,943
                                                                           ---------        ---------
     Total Deposits                                                          253,196          208,759

Accrued interest payable                                                       2,416            1,746
Short-term borrowings                                                           --              5,000
Securities sold under agreements to repurchase                                   300              400
Long-term debt                                                                20,023           15,156
Other liabilities                                                                799            1,289
                                                                           ---------        ---------
     Total Liabilities                                                       276,734          232,350
                                                                           ---------        ---------
STOCKHOLDERS' EQUITY
Preferred stock: Authorized 1,000,000 shares of
   $1.25 par value each; no outstanding shares                                  --               --
Common stock: Authorized, 5,000,000 shares of $.42
   par value each; issued and outstanding 1,761,776
   shares in 1996 and 1,657,449 shares in 1995                                   740              696
Capital surplus                                                               11,099            9,414
Retained earnings                                                              9,572            9,118
Net unrealized gains (losses) on available-for-sale securities                  (239)             281
                                                                           ---------        ---------
     Total Stockholders' Equity                                               21,172           19,509
                                                                           ---------        ---------
       TOTAL LIABILITIES AND
           STOCKHOLDERS' EQUITY                                            $ 297,906        $ 251,859
                                                                           =========        =========
</TABLE>

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

                                       33
<PAGE>

Consolidated Statement of Income

<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                               ------------------------------------
                                                1996           1995           1994
                                                ----           ----           ----
                                                 (in thousands, except share data)
<S>                                           <C>            <C>            <C>
INTEREST INCOME
Loans and leases                              $ 14,592       $ 13,112       $ 10,363
Investment securities:
     Taxable                                     4,323          4,187          2,544
     Exempt from federal income taxes            1,104            956          1,119
     Dividends                                      86            117             53
                                              --------       --------       --------
     Total investment securities income          5,513          5,260          3,716
                                              --------       --------       --------
Deposits in bank                                     6             22              4
Federal funds sold                                 164            154             74
                                              --------       --------       --------
TOTAL INTEREST INCOME                           20,275         18,548         14,157
                                              --------       --------       --------
INTEREST EXPENSE
Deposits                                         8,957          8,165          5,190
Long-term debt                                   1,143          1,215            541
Short-term borrowings                               66            105            206
Securities sold under agreements
   to repurchase                                    17             29             30
                                              --------       --------       --------
TOTAL INTEREST EXPENSE                          10,183          9,514          5,967
                                              --------       --------       --------
NET INTEREST INCOME                             10,092          9,034          8,190
PROVISION FOR POSSIBLE CREDIT LOSSES               650            810            375
                                              --------       --------       --------
NET INTEREST INCOME AFTER PROVISION
   FOR POSSIBLE CREDIT LOSSES                    9,442          8,224          7,815
                                              --------       --------       --------
OTHER OPERATING INCOME
Loan origination fees                              266            179            422
Customer service charges and fees                1,217          1,066            683
Mortgage servicing fees                            327            302            221
Investment security gains, net                      43            331            112
Gain (loss) on sale of loans, net                  114            132           (131)
Other income                                       739            471            372
                                              --------       --------       --------
TOTAL OTHER OPERATING INCOME                     2,706          2,481          1,679
                                              --------       --------       --------
OTHER OPERATING EXPENSES
Salaries and benefits                            3,684          3,559          3,003
Occupancy expense                                1,053          1,036            923
Equipment expense                                  824            855            602
FDIC assessment                                      2            222            321
Foreclosed asset expenses                           51             26             44
Advertising                                        249            242            243
Other expenses                                   2,134          1,823          1,695
                                              --------       --------       --------
</TABLE>
                                       34
<PAGE>

<TABLE>
<CAPTION>
<S>                                              <C>            <C>            <C>  
TOTAL OTHER OPERATING EXPENSES                   7,997          7,763          6,831
                                              --------       --------       --------
INCOME BEFORE PROVISION FOR INCOME
   TAXES                                         4,151          2,942          2,663
PROVISION FOR INCOME TAXES                       1,120            635            535
                                              --------       --------       --------
NET INCOME                                    $  3,031       $  2,307       $  2,128
                                              ========       ========       ========
EARNINGS PER SHARE*                           $   1.73       $   1.33       $   1.24
                                              ========       ========       ========
DIVIDENDS PER SHARE                           $    .70       $   0.59       $   0.55
                                              ========       ========       ========
WEIGHTED AVERAGE NUMBER OF
   SHARES OUTSTANDING*                           1,755          1,734          1,712
</TABLE>
*Reflects adjustment for 5% stock dividend issued on October 1, 1996.

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







                                       35
<PAGE>

Consolidated Statement of Changes in Stockholders' Equity

<TABLE>
<CAPTION>
                                                                                                Net Unrealized  
                                                                                                Gains (Losses)
                                                                                                On Available-
                                                Common          Capital         Retained        For-Sale
                                                Stock           Surplus         Earnings        Securities      Total
                                                --------        --------        --------        --------------  --------
                                                                             (in thousands)
<S>                                             <C>             <C>             <C>             <C>             <C>     
BALANCES, DECEMBER 31, 1993                     $    685        $  9,034        $  6,553                        $ 16,272
Net income                                                                         2,128                           2,128
Issuance of 8,541 shares of common stock
    through Dividend Reinvestment Plan                 3             105                                             108
Cash dividends declared ($.55 per share)                                            (898)                           (898)
Implementation of SFAS No. 115                                                                  $    602             602
Change in net unrealized securities
   gains (losses)                                                                                 (2,413)         (2,413)
                                                --------        --------        --------        --------        --------
BALANCES, DECEMBER 31, 1994                          688           9,139           7,783          (1,811)         15,799
Net income                                                                         2,307                           2,307
Issuance of 16,809 shares of common stock
  through Dividend Reinvestment Plan                   7             252                                             259
Issuance of 2,099 shares of common stock
  through Employee Stock Purchase Plan                 1              23                                              24
Cash dividends declared ($.59 per share)                                            (972)                           (972)
Change in net unrealized securities
  gains (losses)                                                                                   2,092           2,092
                                                --------        --------        --------        --------        --------
BALANCES, DECEMBER 31, 1995                          696           9,414           9,118             281          19,509
Net income                                                                         3,031                           3,031
Issuance of 16,053 shares of common stock
  through Dividend Reinvestment Plan                   7             265                                             272
Issuance of 5,462 shares of common stock
  through Employee Stock Purchase Plan                 2              70                                              72
Cash dividends declared ($.70 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)
Change in net unrealized securities
  gains (losses)                                                                                    (520)           (520)
                                                --------        --------        --------        --------        --------
BALANCES, DECEMBER 31, 1996                     $    740        $ 11,099        $  9,572        $   (239)       $ 21,172
                                                ========        ========        ========        ========        ========
</TABLE>

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

                                       36
<PAGE>

Consolidated Statement of Cash Flows

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                 ----------------------------------------
                                                                   1996            1995            1994
                                                                   ----            ----            ----
                                                                              (in thousands)
<S>                                                              <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                       $  3,031        $  2,307        $  2,128
Adjustments to reconcile net income to net
   cash provided by operating activities:
     Provision for possible credit losses                             650             810             375
     Depreciation, amortization and accretion                         720             710             685
     Deferred income taxes                                             45               8              85
     (Increase) decrease in mortgage loans held for resale          3,090          (3,286)         11,623
     Investment security gains, net                                   (43)           (331)           (112)
     (Gain) loss on sale of foreclosed assets                          (1)             93              12
     (Gain) loss on sale of leased assets                               2              (5)             (2)
     (Gain) loss on sale of equipment                                  (1)            138              11
(Increase) decrease in accrued interest receivable                   (378)             95            (615)
Increase in accrued interest payable                                  670              74             899
Increase in other assets                                             (869)           (695)         (1,219)
Increase (decrease) in other liabilities                             (490)            822             314
                                                                 --------        --------        --------
NET CASH PROVIDED BY
  OPERATING ACTIVITIES                                              6,426             740          14,184
                                                                 --------        --------        --------
CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities :
     Proceeds from maturities                                         339          17,060           1,336
     Purchases                                                     (4,351)         (4,947)        (20,001)
Available-for-sale securities:
     Proceeds from maturities                                       6,505           3,955           4,201
     Proceeds from sales                                           34,130          18,702          19,179
     Purchases                                                    (51,190)        (27,729)        (17,160)
Net increase in loans and leases                                  (28,303)        (15,229)        (64,873)
Purchases of premises and equipment                                (2,962)         (1,659)         (1,666)
Proceeds from sale of leased assets                                    19              20              15
Proceeds from sale of equipment                                        13               8              15
Proceeds from sale of foreclosed assets                                70             448             283
Purchase of intangible assets                                        (600)             --              --
                                                                 --------        --------        --------
NET CASH USED IN INVESTING ACTIVITIES                             (46,330)         (9,371)        (78,671)
                                                                 --------        --------        --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits                                           44,437          16,572          46,133
Increase (decrease) in short-term borrowings                       (5,000)         (9,750)          4,125
Decrease in securities sold under
  agreements to repurchase                                           (100)           (600)          1,000
Proceeds from long-term debt                                        5,000          25,000          15,000
Principal payments on long-term debt                                 (133)        (20,102)            (62)
Proceeds from issuance of common stock                                344             283             108
Cash dividends                                                     (1,192)           (972)           (898)
                                                                 --------        --------        --------
NET CASH PROVIDED BY
  FINANCING ACTIVITIES                                             43,356          10,431          65,406
                                                                 --------        --------        --------
</TABLE>

                                       37
<PAGE>

<TABLE>
<CAPTION>
<S>                                                             <C>              <C>              <C>
INCREASE IN CASH AND
  CASH EQUIVALENTS                                                  3,452           1,800             919

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                                12,519          10,719           9,800
                                                                 --------        --------        --------
CASH AND CASH EQUIVALENTS AT
  END OF YEAR                                                    $ 15,971        $ 12,519        $ 10,719
                                                                 ========        ========        ========
CASH PAID DURING THE YEAR FOR:
     Interest                                                    $  9,513        $  9,588        $  5,068
                                                                 ========        ========        ========
     Income taxes                                                $  1,025        $    578        $    385
                                                                 ========        ========        ========
</TABLE>

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







                                       38
<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
subsidiary, LA Lease, 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 Bank's subsidiary, LA Lease, Inc., primarily
provides equipment leases to small business entities.

The Company provides a variety of financial services to individuals and
corporate customers through its fourteen branch banking offices in Wayne,
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.

                                       39
<PAGE>

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, 1996, 1995 and 1994.

Available-for-sale securities consist of bonds, notes, debentures and certain
equity securities not classified as trading securities nor as held-to-maturity
securities. Unrealized holding gains and losses, net of tax, on
available-for-sale securities are reported as a net amount in a separate
component of stockholders' equity until realized.

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-owns
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.

                                       40
<PAGE>

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 $119,898,000,
$121,375,000 and $113,551,000 at December 31, 1996, 1995 and 1994, 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 following 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.

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 eight years using the
straight-line method. Amortization for 1996, 1995 and 1994 was $108,000 per
year.

Employee Benefit Plans
The Company maintains and funds a defined contribution profit-sharing plan which
covers substantially all eligible employees. The Company also adopted (effective
July 1, 1995) and 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.

                                       41
<PAGE>

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 1996, 1995 and 1994, the Company transferred $858,000, $422,000 and $367,000,
respectively, from its loan portfolio to foreclosed assets held for sale.

During 1995 and 1994, the Company swapped $430,000 and $23,479,000,
respectively, of its mortgage loans for participation certificates of a similar
amount issued by the Federal Home Loan Mortgage Corporation. No mortgage loans
were swapped for participation certificates during 1996. These investments do
not involve the transfer of cash for cash flow purposes.

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.

Earnings Per Share
Earnings per share is computed using the weighted average number of shares
outstanding after giving effect to the 5% stock dividend issued on October 1,
1996 and the assumed exercise of stock options. The weighted average number of
shares outstanding was 1,755,000 in 1996, 1,734,000 in 1995 and 1,712,000 in
1994.

Reclassifications
Certain prior year amounts have been reclassified to conform to the 1996
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 1996 and 1995 was
approximately $375,000. In addition, at December 31, 1996 and 1995, required
compensating reserve balances with correspondent banks were $2,010,000 and
$1,881,000, 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.

                                       42
<PAGE>

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, 1996 and 1995 were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                        December 31, 1996
                                                        -----------------
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                  $50,253         $   100         $   549         $49,804
Obligations of states and
   political subdivisions              9,066             120              34           9,152
                                     -------         -------         -------         -------
       Total debt securities          59,319             220             583          58,956
Equity securities                      1,443              --              --           1,443
                                     -------         -------         -------         -------
       Total                         $60,762         $   220         $   583         $60,399
                                     =======         =======         =======         =======

Held-to-maturity securities:
                                                     Gross           Gross
                                     Amortized       Unrealized      Unrealized      Fair
                                     Cost            Gains           Losses          Value
                                     ---------       ----------      ----------      --------
U.S. government agencies
   and corporations                  $10,841         $    --         $   370         $10,471
Obligations of states and
   political subdivisions             15,760             368              35          16,093
                                     -------         -------         -------         -------
     Total                           $26,601         $   368         $   405         $26,564
                                     =======         =======         =======         =======

                                                        December 31, 1995
                                                        -----------------
Available -for-sale securities:
                                                     Gross           Gross
                                     Amortized       Unrealized      Unrealized      Fair
                                     Cost            Gains           Losses          Value
                                     ---------       ------------    ----------      -------
U.S. government agencies
   and corporations                  $43,041          $  335         $   169         $43,207
Obligations of states and
   political subdivisions              5,810             267               8           6,069
                                     -------         -------         -------         -------
       Total debt securities          48,851             602             177          49,276
Equity securities                      1,304              --              --           1,304
                                     -------         -------         -------         -------
       Total                         $50,155         $   602         $   177         $50,580
                                     =======         =======         =======         =======

Held-to-maturity securities:
                                                     Gross           Gross
                                     Amortized       Unrealized      Unrealized      Fair
                                     Cost            Gains           Losses          Value
                                     ---------       ------------    ----------      -------
U.S. government agencies
   and corporations                  $11,065          $   --         $   119         $10,946
Obligations of states and
   political subdivisions             11,524             396                   -      11,920
                                     -------         -------         -------         -------
     Total                           $22,589          $  396         $   119         $22,866
                                     =======         =======         =======         =======
</TABLE>

                                       43
<PAGE>

The amortized cost and estimated fair value of debt securities at December 31,
1996, 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                        $ 1,055               $ 1,068           $    --         $    --
Due after one year through five years            2,408                 2,429                --              --
Due after five years through ten years          13,654                13,583             7,686           7,808
Due after ten years                             42,202                41,876            18,915          18,756
                                               -------               -------           -------         -------
     Total                                     $59,319               $58,956           $26,601         $26,564
                                               =======               =======           =======         =======
</TABLE>

Gross realized gains and gross realized losses on sales of available-for-sale
securities were as follows for the years ended December 31, 1996, 1995, and 1994
(in thousands):

<TABLE>
<CAPTION>
                                                            December 31,
                                                            ------------
Gross realized gains:                      1996                1995                1994
                                           ----                ----                ----
<S>                                        <C>                 <C>                <C>
   U.S. government agencies
     and corporations                      $ 78                $309                $ 78
   Obligations of states and
     political subdivisions                 114                  36                  58
                                           ----                ----                ----
       Total                               $192                $345                $136
                                           ====                ====                ====
Gross realized losses:
   U.S. government agencies
     and corporations                      $149                $ 14                $ 13
   Obligations of states and
     political subdivisions                  --                  --                  11
                                           ----                ----                ----
       Total                               $149                $ 14                $ 24
                                           ====                ====                ====
</TABLE>


Investment securities carried at $17,144,000 in 1996 and $20,713,000 in 1995
were pledged to secure 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.

The unamortized premiums on mortgage-backed securities amounted to $557,000 and
$283,000 as of December 31, 1996 and 1995, respectively. The unaccreted discount
on mortgage-backed securities amounted to $208,000 and $320,000 as of December
31, 1996 and 1995, respectively.

                                       44
<PAGE>

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

                                                      (in thousands)
                                                 1996                1995
                                                 ----                ----
Real estate-construction                      $   3,214           $   4,726
Real estate-mortgage                             84,352              68,006
Commercial and industrial                        51,485              45,210
Consumer installment                             45,170              42,891
Lease financing                                   2,588               1,742
Unearned income                                  (8,091)             (7,641)
Unearned loan fees, net                            (898)               (971)
                                              ---------           ---------
   Total loans and leases                       177,820             153,963
Allowance for possible credit losses             (1,830)             (1,657)
                                              ---------           ---------
     Net loans and leases                     $ 175,990           $ 152,306
                                              =========           =========

Total nonaccrual loans outstanding at December 31, 1996 were approximately
$615,000 as compared to $1,703,000 at December 31, 1995. Included in nonaccrual
loans are $542,000 of impaired loans in nonaccrual status, for which $184,000
has been provided for in the allowance for possible credit losses to cover
potential losses from these impaired loans. At December 31, 1996 and 1995, there
were no outstanding commitments to lend funds to debtors with nonaccrual loans.
At December 31, 1996 and 1995, no loans were being accounted for as a troubled
debt restructuring. Accruing loans past due ninety days or more as to principal
or interest amounted to $1,593,000 and $1,716,000 at December 31, 1996 and 1995,
respectively.

Further information regarding the balance of nonaccrual loans at December 31,
1996, and related interest payment information, is as follows (in thousands):

<TABLE>
<CAPTION>
                                                       Cash Payments Received During 1996
                                                       Were Applied As Follows:

                                           Book         Contractual                 Recovery
                                           Balance      Balance       Interest      Of Prior     Reduction Of
                                           12/31/96     12/31/96      Income        Charge-Off   Principal
                                           --------     -----------   --------      ----------   ------------
<S>                                        <C>           <C>           <C>          <C>           <C>
Contractually past due with:
     Substantial performance               $ 82          $ 82          $--           $--          $  4
     Limited performance                    103           103            4            --             7
     No performance                         135           144           --            --            --

Contractually current, however:
     Payment of full principal or
       interest in doubt                    207           207           --            --            65
     Other                                   88            88            3            --             3
                                           ----          ----          ---           ---          ----
     Total                                 $615          $624          $ 7           $--          $ 79
                                           ====          ====          ===           ===          ====
</TABLE>

At December 31, 1996 and 1995, 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 $421,000 and $317,000 respectively. Such indebtedness
was incurred in the ordinary course of business on substantially the same terms
as those prevailing at the time for comparable transactions with other persons.
New loans in 1996 and 1995 were $363,000 and $19,000, respectively, while
payments were $259,000 and $130,000 respectively, during the same periods.

                                       45
<PAGE>

A summary of selected loan maturities and interest sensitivity analysis at
December 31, 1996 is as follows:

<TABLE>
<CAPTION>
                                            Maturity Distribution
                                            And Interest Rate Sensitivity
                                                  (in thousands)
                                Within One    Two-Five      After Five
                                Year          Years         Years         Total
<S>                             <C>           <C>           <C>           <C>    
Real estate-construction        $ 3,214       $  --         $  --         $ 3,214
Commercial and industrial        11,590         7,633        32,262        51,485
                                -------       -------       -------       -------
   Total                        $14,804       $ 7,633       $32,262       $54,699
                                =======       =======       =======       =======
Fixed interest rate             $ 4,075       $ 2,943       $ 6,821       $13,839
Adjustable interest rate         10,729         4,690        25,441        40,860
                                -------       -------       -------       -------
   Total                        $14,804       $ 7,633       $32,262       $54,699
                                =======       =======       =======       =======
</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, 1996, 1995 and 1994 were as follows:

<TABLE>
<CAPTION>
                                                           (in thousands)
                                                  1996          1995          1994
                                                  ----          ----          ----
<S>                                              <C>           <C>           <C>   
Balance at beginning of period                   $1,657        $1,496        $1,544
                                                 ------        ------        ------
Charge-offs:
     Real estate-construction                        --            --            --
     Real estate-mortgage                           143           200            14
     Commercial and industrial                      158           294           321
     Consumer installment                           274           206           157
     Lease financing                                 --            --             7
                                                 ------        ------        ------
       Total                                        575           700           499
                                                 ------        ------        ------
Recoveries:
     Real estate-construction                        --            --            --
     Real estate-mortgage                            --            --             2
     Commercial and industrial                       40             8            12
     Consumer installment                            58            43            58
     Lease financing                                 --            --             4
                                                 ------        ------        ------
       Total                                         98            51            76
                                                 ------        ------        ------
Net charge-offs                                     477           649           423
Provision for possible credit losses                650           810           375
                                                 ------        ------        ------
Balance at end of period                         $1,830        $1,657        $1,496
                                                 ======        ======        ======
Ratio of net charge-offs during period to
   average loans outstanding during period          .30%          .44%          .35%
                                                 ======        ======        ======
</TABLE>

                                       46
<PAGE>

5. Premises and Equipment
Premises and equipment at December 31 are summarized as follows:

                                                  (in thousands)
                                            1996              1995
                                            ----              ----
Land and land improvements                $ 1,420           $ 1,019
Buildings and improvements                  7,446             5,375
Furniture, fixtures and equipment           4,853             4,413
                                          -------           -------
   Total                                   13,719            10,807

Less accumulated depreciation               3,714             3,022
                                          -------           -------
   Net                                    $10,005           $ 7,785
                                          =======           =======

Depreciation expense was $730,000, $743,000, and $619,000 in 1996, 1995 and
1994, respectively.

Certain facilities and equipment are leased under short and long-term agreements
expiring at various dates to the year 2003. Rental expenses on these operating
leases amounted to $348,000 in 1996, $339,000 in 1995 and $274,000 in 1994.
Required future minimum annual rentals under all such noncancelable operating
leases as of December 31, 1996 are as follows (in thousands):

1997                      $  399
1998                         344
1999                         316
2000                         253
2001                         186
Thereafter                 1,368
                          ------
   Total                  $2,866
                          ======

6. Deposits
Included in interest-bearing deposits are certificates of deposit in amounts of
$100,000 or more. 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:

                                        (in thousands)
                                      1996          1995
                                      ----          ----
Three months or less                 $11,375       $11,708
Over three through six months         17,847         5,701
Over six through twelve months         6,376         8,213
Over twelve months                     4,642         1,321
                                     -------       -------
   Total                             $40,240       $26,943
                                     =======       =======

7. Short-term Borrowings
There were no short-term borrowings outstanding at December 31, 1996 as compared
to $5,000,000 at December 31, 1995. The maximum amount of outstanding month-end
short-term borrowings during 1996, 1995 and 1994 were $5,000,000, $10,050,000,
and $11,750,000, respectively. The approximate average amount outstanding during
1996, 1995, and 1994 was $2,179,000, $5,037,000, and $4,805,000 respectively.
The average interest rate on the balances during 1996, 1995, and 1994 were
5.25%, 5.39%, and 4.29%, respectively.

                                       47
<PAGE>

8. Long-term Debt
Long-term debt at December 31 is as follows:
                                                         (in thousands)
                                                     1996              1995
                                                     ----              ----
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           $    94          $  156
Collateralized borrowings, interest and
  principal payable monthly; fixed interest
  rate of 6.49%, maturing October 17, 2001            4,929              --
Collateralized borrowings, interest
   payable monthly and principal at
   maturity; interest rates are both
   fixed and variable and range from
   prime to 6.41% at December 31, 1996               15,000          15,000
                                                    -------         -------
     Total                                          $20,023         $15,156
                                                    =======         =======

Annual maturities of long-term debt are as follows: $942,000 in 1997, $969,900
in 1998, $1,001,200 in 1999, $6,068,200 in 2000, $1,041,800 in 2001, $5,000,000
in 2002 and $5,000,000 in 2005. Investment securities are pledged to
collateralize the $15,000,000 in borrowings with the Federal Home Loan Bank of
Pittsburgh.

9. Common Stock
The Company has reserved 100,000 shares under its 1994 Stock Option Plan
("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
have been adjusted pursuant to paragraph 13 of the Company's 1994 Stock Option
Plan to reflect the 5% dividend payable in common stock on October 1, 1996. The
following information has been adjusted to increase the outstanding stock
options to 105,000 shares and reduce the respective exercise price by 5%.

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, 1995:

                                      As Reported             Pro Forma
                                      -----------             ---------
Net Income (in thousands):              $2,307                 $2,121

Earnings per share:                     $ 1.33                 $ 1.22


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                      3.80%
               Expected volatility                28.14%
               Risk-free interest rate             6.66%
               Expected lives                   10 years

                                       48
<PAGE>

A summary of the status of the Company's Option Plan as of December 31, 1996,
1995 and 1994, and changes during the years then ended, is presented below:

<TABLE>
<CAPTION>
                                          1996                        1995                         1994
                                  -----------------------   ---------------------------  ---------------------------
                                                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              105,000       $14.01        36,750          $14.40           --          $   --
Granted                                --                     68,250           13.80       36,750           14.40
Exercised                              --                         --                           --
Forfeited                              --                         --                           --
                                  -------                    -------                       ------
Outstanding, end of year          105,000       $14.01       105,000          $14.01       36,750          $14.40
                                  =======                    =======                       ======
</TABLE>

The following summarizes information about stock options outstanding at December
31, 1996:
                                     Weighted-Average
                                     Remaining
    Exercise Price      Number       Contractual Life      Options Exercisable

    $14.40              36,750       7.6 years             36,750
    $13.80              68,250       8.6 years             68,250

The Company also reserved 50,000 shares of common stock under the Company's
Employee Stock Purchase Plan. 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 1996 and 1995, 5,462 and 2,099 shares,
respectively, were purchased under the plan.

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. Three-hundred thousand
shares of common stock 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, 1996 and
1995, 16,053 and 16,809 shares, respectively, were issued under this plan.


10. Income Taxes
The following temporary differences gave rise to the deferred tax asset included
in other assets at December 31, 1996 and 1995 (in thousands):

                                                  1996              1995
                                                  ----              ----
Deferred tax assets:
   Unrealized losses on available-for-sale
     securities                                   $123              $ --
   Allowance for possible credit losses            361               316
   Loan fees and costs                             231               289
   Deferred compensation                           104                76
                                                 -----             -----
       Total                                       819               681
                                                 -----             -----

                                       49
<PAGE>

Deferred tax liabilities:
     Unrealized gains on available-for-
        sale securities                            --              (145)
     Depreciation                                (199)             (168)
     Bond accretion                               (23)              (25)
     Leasing                                     (166)             (135)
                                                ------            ------
       Total                                     (388)             (473)
                                                ------            ------
       Deferred tax asset, net                  $ 431             $ 208
                                                ======            ======

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

                               Year Ended December 31,
                     1996              1995              1994
                     ----              ----              ----
Current             $1,075            $  627            $  450
Deferred                45                 8                85
                    ------            ------            ------
   Total            $1,120            $  635            $  535
                    ======            ======            ======

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 1996, 1995 and 1994 to the actual provision for income taxes
reflected in the accompanying consolidated financial statements.

                                                    Year Ended December 31,
                                               1996         1995         1994
                                               ----         ----         ----
Provision at the expected statutory rate     $ 1,411      $ 1,000      $   905
Effect of tax-exempt income                     (322)        (323)        (380)
Other items                                       31          (42)          10
                                             -------      -------      -------
Provision for income taxes                   $ 1,120      $   635      $   535
                                             =======      =======      =======

11. 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 $214,000 in 1996, $181,000 in
1995, and $223,000 in 1994.

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 1996 and 1995
contributions to this plan were $58,000 and $25,000, respectively.


12. Regulatory Matters
The Company may not pay 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
dividends in 1997 may not exceed $1,789,000 plus Company net income for 1997.
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.

                                       50
<PAGE>

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, 1996, 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, 1996:
   Total Capital
     (to Risk Weighted Assets)        $22,417      12.72%           $14,100      8.0%           $17,600       10.0%
   Tier I Capital                                                                              
     (to Risk Weighted Assets)        $20,650      11.72%           $ 7,050      4.0%           $10,570        6.0%
   Tier I Capital                                                                              
     (to Average Assets)              $20,650       7.46%           $11,100      4.0%           $13,850        5.0%
                                                                                               
As of December 31, 1995:                                                                       
   Total Capital                                                                               
     (to Risk Weighted Assets)        $20,631      13.82%           $11,940      8.0%           $14,930       10.0%
   Tier I Capital                                                                              
     (to Risk Weighted Assets)        $19,026      12.75%           $ 5,970      4.0%           $8,960         6.0%
   Tier I Capital                                                                              
     (to Average Assets)              $19,026       7.58%           $10,040      4.0%           $12,560        5.0%
</TABLE>

13. 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.

                                       51
<PAGE>

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 were as follows (in thousands):

                                     1996             1995
                                     ----             ----
Commitments to extend credit        $16,458          $14,816
Standby letters of credit           $   953          $   632

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.

14. 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.

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.

                                       52

<PAGE>

Financial Assets and Liabilities

The following represents the carrying values and estimated fair values as of
December 31, 1996:

<TABLE>
<CAPTION>
                                                     1996                           1995
                                                     ----                           ----
                                            Carrying      Estimated        Carrying       Estimated
                                             Value        Fair Value        Value         Fair Value
                                            --------      ----------       --------       ----------
                                                                (in thousands)
<S>                                        <C>             <C>             <C>             <C>
FINANCIAL ASSETS:

   Cash and Cash Equivalents               $ 15,971        $ 15,971        $ 12,519        $ 12,519
   Investment Securities                     87,000          86,963          73,169          73,446
   Net Loans                                175,990         181,587         152,306         151,495
   Accrued Interest Receivable                2,349           2,349           1,971           1,971

FINANCIAL LIABILITIES:

   Deposits                                $253,196        $254,536        $208,759        $210,534
   Accrued Interest Payable                   2,416           2,416           1,746           1,746
   Short-Term Borrowings                         --              --           5,000           5,000
   Securities Sold Under Agreements
     to repurchase                              300             300             400             400
   Long-term Debt                            20,023          19,652          15,156          15,086
</TABLE>

15. Condensed Financial Information -Parent Company Only
Condensed parent company only financial information is as follows (in
thousands):

                                          Condensed Balance Sheet
                                                December 31,

                                            1996             1995
                                            ----             ----
Assets:
   Cash                                   $    --          $    --
   Investment in subsidiary                21,172           19,509
                                          -------          -------
     Total Assets                         $21,172          $19,509
                                          =======          =======
Liabilities and Stockholders' Equity:
   Stockholders' equity                   $21,172          $19,509
                                          =======          =======

                                        Condensed Statement of Income
                                            Year Ended December 31,

                                    1996             1995              1994
                                    ----             ----              ----
Earnings of Subsidiary:
   Received as dividends           $1,287           $  972            $  898
   Undistributed                    1,744            1,335             1,230
                                   ------           ------            ------
Net Income                         $3,031           $2,307            $2,128
                                   ======           ======            ======

                                       53
<PAGE>

                                           Condensed Statement of Cash Flows
                                                 Year Ended December 31,

                                          1996            1995            1994
                                          ----            ----            ----
Operating Activities:
   Net income                           $ 3,031         $ 2,307         $ 2,128
     Less undistributed earnings
       of subsidiary                      1,744           1,335           1,230
                                        -------         -------         -------
     Net cash provided by
       operating activities               1,287             972             898
                                        -------         -------         -------
Investing Activities:
     Investment in subsidiary              (445)           (391)           --
                                        -------         -------         -------
Financing Activities:
     Cash dividends paid
       to stockholders                   (1,186)           (972)           (898)
     Issuance of common stock               344             283             108
                                        -------         -------         -------
     Net cash used in
       financing activities                (842)           (689)           (790)
                                        -------         -------         -------
Increase (decrease) in Cash                  --            (108)            108

Cash at Beginning of Year                    --             108              --
                                        -------         -------         -------
Cash at End of Year                     $    --         $    --         $   108
                                        =======         =======         =======

16.  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, 1996.

17. Significant Group Concentrations of Credit Risk
Most of the Company's business activity is with customers located within the
state. 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, 1996, the Company's receivables from, guarantees of, and obligations of
companies in the used automobile sales industry were approximately $6.5 million,
or 31% of capital. This dealer-related debt was comprised of floorplan inventory
lines of credit, real estate secured operating lines of credit, business term
loans which were mainly real estate secured, and recourse or repurchase
third-party paper. Additionally, obligations such as residential mortgages and
other personal debt, whose repayment is dependent on the operation of these
dealerships, is included in this concentration. Overall, these relationships
have been handled in a satisfactory manner.

                                       54
<PAGE>

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.


18. Selected Quarterly Financial Data (Unaudited)

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

                                                                          Quarter Ending
                                                  March 31,          June 30,        September 30,    December 31,
                                                    1996              1996               1996             1996
                                                    ----              ----               ----             ----
<S>                                               <C>                <C>               <C>               <C>    
Interest income                                   $ 4,740            $ 5,007           $ 5,177           $ 5,351
Interest expense                                    2,354              2,505             2,563             2,761
Net interest income                                 2,386              2,502             2,614             2,590
Provision for possible credit losses                  115                135               175               225
Investment security gains (losses), net               (48)                 1                90              --
Net income                                            703                798               777               753
Earnings per share*                               $   .40            $   .46           $   .44           $   .43
</TABLE>

<TABLE>
<CAPTION>
                                                                          Quarter Ending
                                                   March 31,          June 30,      September 30,      December 31,
                                                    1995               1995             1995              1995
                                                    ----               ----             ----              ----
<S>                                               <C>                <C>               <C>               <C>    
Interest income                                   $ 4,430            $ 4,741           $ 4,752           $ 4,625
Interest expense                                    2,214              2,561             2,459             2,280
Net interest income                                 2,216              2,180             2,293             2,345
Provision for possible credit losses                  135                225               140               310
Investment security gains (losses), net                --                227                24                80
Net income                                            447                459               671               730
Earnings per share*                               $   .25            $   .26           $   .40           $   .42
</TABLE>

*Reflects adjustment for 5% stock dividend issued on October 1, 1996.

                                       55
<PAGE>

Report of Independent Certified Public Accountants


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







Wilkes-Barre, Pennsylvania
January 24, 1997














                                       56
<PAGE>

                COMMON STOCK MARKET PRICE AND DIVIDENDS PER SHARE

Lake Ariel Bancorp, Inc. common stock is listed on the NASDAQ Stock Market under
Small-Cap Issues under the symbol "LABN" or designation "Lake Ariel." The
following table sets forth: (1) the quarter-end bid and asked prices for a share
of Bancorp's Common Stock during the periods indicated; and (2) quarterly
dividends on a share of the Common Stock with respect to each quarter since
January 1, 1995. The following quotations represent prices between buyers and
sellers and do not include retail markup, markdown or commission. They may not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                                           Average Stock Prices
                                                           ---------------------          Dividends
                                                            Bid           Asked           Declared
                                                            ---           -----           ---------
<S>                                                       <C>            <C>               <C>
1996:
         First quarter ...........................        $15.25         $16.50             $.15
         Second quarter ..........................        $15.75         $16.75             $.16
         Third quarter ...........................        $15.88         $17.25             $.17
         Fourth quarter ..........................        $22.75         $23.75             $.22
</TABLE>

<TABLE>
<CAPTION>
                                                            Average Stock Prices            
                                                           ---------------------          Dividends
                                                            Bid           Asked           Declared
                                                            ---           -----           ---------
<S>                                                       <C>            <C>               <C>
1995:
         First quarter ...........................         $16.50        $17.50             $.13
         Second quarter ..........................         $16.00        $17.00             $.13
         Third quarter ...........................         $14.50        $15.50             $.14
         Fourth quarter ..........................         $14.75        $16.25             $.19
</TABLE>

                                  MARKET MAKERS

<TABLE>
<CAPTION>
<S>                                   <C>                                   <C>
Herzog, Heine, Geduld, Inc.           Janney Montgomery Scott, Inc.         Ryan, Beck and Co.
26 Broadway                           1801 Market Street                    80 Main Street
New York, NY 10004                    Philadelphia, PA 19103                West Orange, NJ 07052
1-800-221-3600                        1-800-526-6397                        1-800-325-7926

Hopper Soliday & Co., Inc.            Legg Mason Wood Walker, Inc.          Wheat First Securities
1703 Oregon Pike                      330 Montage Mountain Road             P.O. Box 6570
Lancaster, PA 17601                   Scranton, PA 18507                    Glen Allen, VA 23058
1-800-526-6371                        1-800-346-4346                        1-800-727-0304

J.C. Bradford & Co.
330 Commerce Street
Nashville, TN 37201
1-800-251-1060
</TABLE>

                                       57
<PAGE>

                              INVESTOR INFORMATION


STOCK LISTING Lake Ariel Bancorp, Inc. common stock is listed on the NASDAQ
Stock Market under Small-Cap Issues. In newspaper listings, Lake Ariel shares
are frequently listed as "Lake Ariel" or "LABN".

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.

CORPORATE OFFICE                INDEPENDENT AUDITORS

Lake Ariel Bancorp, Inc.        Parente, Randolph, Orlando, Carey & Associates
P.O. Box 67                     46 Public Square
Lake Ariel, PA 18436            Wilkes-Barre, PA 18701
(717)698-5695                   (717)820-0100

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, 1996, including financial statements and the
schedules thereto, required to be filed with the Securities and Exchange
Commission, may be obtained, without charge, by contracting the Chief Financial
Officer, Lake Ariel Bancorp, Inc., P.O. Box 67, Route 191, Lake Ariel, PA 18436
(717)698-5695.

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

E.MAIL ADDRESS
labank@epix.net





                                       58
<PAGE>

<TABLE>
<CAPTION>
<S>                                                       <C>                                        <C>
Lake Ariel Bancorp, Inc.                                                        Administration Division

Officers                                                  Daniel Santaniello                         John J. Morgan
                                                          Assistant Vice President                   Assistant Vice President
Bruce D. Howe                                             Kathy Enslin                               Gary Lavelle
President                                                 Vice President & Cashier                   Assistant Vice President
John G. Martines                                          Gregory G. Gula                            Lynn M. Thiel
Chief Executive Officer                                   Vice President                             Internal Auditor
Louis M. Martarano                                        Karen T. Pasternak                         Marcy Swingle
Vice President & Assistant Secretary                      Vice President                             Assistant Vice President
Joseph J. Earyes, CPA                                     Cynthia A. Smaniotto                       Kathleen Horan
Vice President & Treasurer                                Vice President                             Assistant Vice President
Donald E. Chapman                                         Jeri S. Prussia                            Bonnie Robinson
Secretary                                                 Assistant Vice President                   Assistant Cashier
                                                          Stephanie A. Ganz, CPA                     Jennifer L. Klein
Directors of                                              Assistant Vice President                   Assistant Cashier
Corporation and Bank                                      & Controller
Donald E. Chapman
Peter O. Clauss
Arthur M. Davis                                                                 Retail Division
William C. Gumble
Bruce D. Howe                                             John Foley                                 Theodore Daniels
John G. Martines                                          Vice President                             Vice President
Harry F. Schoenagel                                       William R. Kerstetter                      Thomas Dziak
                                                          Vice President                             Assistant Vice President
                                                          Thomas Byrne                               Penny Cola
                                                          Assistant Vice President                   Assistant Cashier
                                                          Larry Highhouse                            Doris Hellerman
                                                          Assistant Vice President                   Assistant Vice President

                                                          Lake Ariel Branch                          Clarks Green Branch
LA Bank, N.A.                                             Treva J. Day                               Ellen Ball
                                                          Assistant Vice President &                 Branch Manager
Executive Officers                                        Branch Manager                             Ann Marie DeRigge
                                                                                                     Assistant Branch Manager
Bruce D. Howe                                             Mt. Cobb Branch
Chairman                                                  Daniel Roberts                                 The Mall At
John G. Martines                                          Branch Manager                             Steamtown Branch
President and Chief Executive Officer                                                                Patricia A. Jenkins
Louis M. Martarano                                        Greene-Dreher Branch                       Branch Manager
Senior Vice President &                                   Mary Ellen Bentler
Chief Operating Officer                                   Branch Manager                             Lords Valley Branch
Joseph J. Earyes, CPA                                                                                Laura Schultz
Senior Vice President &                                   Hamlin Corners Branch                      Branch Manager
Chief Financial Officer                                   Ann O'Reilly
Donald E. Chapman                                         Branch Manager                             Carbondale Branch
Secretary                                                                                            Cheryl Rupp
                                                          Eynon Branch                               Branch Manager
LA Lease, Inc.                                            Pete Misura
                                                          Assistant Vice President &                 Lake Wallenpaupack Branch
Bruce D. Howe                                             Branch Manager                             Beverly Simons
Chairman                                                  Autumn Molinaro                            Branch Manager
John G. Martines                                          Assistant Branch Manager
President and Chief Executive Officer                                                                Milford Branch
Thomas Byrne                                              Keyser Valley Branch                       John Gouse
Vice President                                            Doreen Swingle                             Branch Manager
Stephanie A. Ganz, CPA                                    Branch Manager
Secretary & Treasurer
</TABLE>

                                       59
<PAGE>

<TABLE>
<CAPTION>
<S>                                                       <C>                                        <C>
                                                                                                     Mountainhome Branch
                                                          Milford Township Branch                    Marian Caprista
                                                          Cynthia Halliday                           Branch Manager
                                                          Branch Manager


                                                                          Mortgage Loan Originators
 
                                                          Peter Bilyk                                Kathy Smith
                                                          Lori A. Rudalavage                         Steve Zazzera
</TABLE>
<PAGE>


                                OFFICE LOCATIONS

<TABLE>
<CAPTION>
<S>                                      <C>                             <C>
CORPORATE ADDRESSES                      BRANCH ADDRESSES

Lake Ariel Bancorp, Inc.                 Lake Ariel                      Clarks Green
P.O. Box 67                              P.O. Box 67                     318 East Grove Street
Route 191                                Route 191                       Clarks Green, PA 18411
Lake Ariel, PA 18436                     Lake Ariel, PA 18436            (717) 587-0505
(717) 698-5695                           (717) 698-5695
                                                                         The Mall At Steamtown
LA Bank, N.A.                            Mt. Cobb                        220 The Mall at Steamtown
P.O. Box 67                              Routes 348 & 247                Scranton, PA 18503
Route 191                                Lake Ariel, PA 18436            (717) 341-8000
Lake Ariel, PA 18436                     (717) 689-2694
1-800-4LA-BANK                                                           Lords Valley
(Pennsylvania only)                      Greene-Dreher                   Lords Valley Shopping Plaza
                                         Route 191                       Route 739, South
LA Bank, N.A.                            Newfoundland, PA 18445          Lords Valley, PA 18428
Administration and Loan Center           (717) 676-4767                  (717) 775-8800
120 N. Keyser Avenue
Scranton, PA 18504                       Hamlin Corners                   Carbondale
(717) 343-8200                           Route 191 & 590                  93 Brooklyn Street
                                         Hamlin, PA 18427                 Ames Shopping Plaza
LA Bank, N.A.                            (717) 689-0944                   Carbondale, PA 18407
Operations Center                                                         (717) 282-7400
P.O. Box 790                             Eynon
Route 191 S                              685 Scranton-Carbondale Hwy.    Lake Wallenpaupack
Hamlin, PA 18427                         Eynon, PA 18403-1022            HC 6 Box 6931
(717) 689-5300                           (717) 876-1637 / 342-2242       Hawley, PA 18428
                                                                         (717) 226-5300
LA Lease, Inc.                           Keyser Valley
120 N. Keyser Avenue                     130 N. Keyser Avenue            Milford
Scranton, PA 18504                       Scranton, PA 18504              214 W. Harford Street
(717) 343-8200                           (717) 341-8100                  Milford, PA 18337
                                                                         (717) 296-0200
                                         Milford Township
                                         Routes 6 & 209                  Mountainhome
                                         Milford, PA 18337               Route 390 Barrett Twp.
                                         (717) 296-5600                  Mountainhome, PA 18342
                                                                         (717) 595-6400
</TABLE>

                                       61
<PAGE>

Business Development Boards

Lackawanna Region             Lake Region              Pocono Region       
Martin Andrews                Joseph P. Ceresko        T. Scot Brown       
Eli Arenberg                  Edward Cimoch            Victor Decker, Esq. 
Francis Bianconi              Forrest Compton          Robert E. Derse     
Ervin Brong                   Joseph M. Dombrowski     Peter Helms         
Mary Alice Burke              John W. Donaghy          Donald W. Henderson, M.D.
Carol Chisdak                 Jeanne Heater*           Douglas J. Jacobs, Esq.
Harry T. Coleman, Esq.        Harry Howell             Joseph F. Kameen, Esq. 
Dr. Dominick Cruciani         Andrew J. Krompasky      Michelle Koziara      
Gilbert Hoban*                Kerry Nix                Robert Lankenau      
Joseph Karam                  James R. Shorten         Ellen McDermott     
Kevin K. Kearney              Brian Smolsky            Dr. Michael Newmark  
Ron Leas                      John E. Spewak           Edward S. Nikles     
Robert A. Mazzoni             Alice Trunzo             Robert Pityo         
Mark Suchter                  Joanne C. Valanda        Edmund J. Riess, Jr. 
John J. Vanston               Michael Walker, Esq.     William Sanquilly    
Dr. Joseph Zandarski, CPA     Louis J. Zefran          Edward J. Shafer     
Sandor Zangardi                                        George Schmitt       
                                                       Thomas H. Wiss, IV   
                                                       David Zeiler         
                                                         
*Appointed January, 1997










                                       62