EXHIBIT 13


                          ANNUAL REPORT TO SHAREHOLDERS
                     FOR FISCAL YEAR ENDED DECEMBER 31, 1997















<PAGE>






                                             LAKE ARIEL BANCORP, INC.
                                                1997 ANNUAL REPORT





























<PAGE>





                   LAKE ARIEL BANCORP, INC. 1997 ANNUAL REPORT



TABLE OF CONTENTS

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








Except for  historical  information  that is  contained  in this annual  report,
certain matters presented in this report may contain forward-looking  statements
that involve risks and uncertainties in the banking  industry,  including timely
availability and acceptance of new products,  the impact of competitive products
and pricing,  the management of growth and the other risks detailed from time to
time in the  Company's  SEC reports,  including  the report on Form 10-K for the
year  ended  December  31,  1997,  and  the  section  in  this  report  entitled
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."












<PAGE>


<TABLE>


FINANCIAL HIGHLIGHTS - 1997

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

                                             1997                1996                1995                1994           1993

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

Net Income ...........................       $3,431    13.2%     $3,031    31.4%     $2,307    8.4%      $2,128       $2,052
Earnings Per Share - Basic* ..........       $0.92     12.2%     $0.82     30.2%     $0.63     6.8%      $0.59        $0.76
Earnings Per Share - Diluted* ........       $0.88     7.3%      $0.82     30.2%     $0.63     6.8%      $0.59        $0.76
Dividends Per Share* .................       $0.38     18.8%     $0.32     18.5%     $0.27     8.0%      $0.25        $0.19
Return on Average Total Assets .......       1.00%     -9 bpts.  1.09%     +17 bpts  0.92%     -12 bpt   1.04%        1.40%
Return on Average Stockholders' Equity       15.24%    +27 bpts  14.97%    +180 bpt  13.17%    +10 bpt   13.07%       19.44%
Dividend Payout Ratio ................       39.90%    -         39.14%    -         42.13%    -         42.15%       24.51%
</TABLE>
<TABLE>



FINANCIAL POSITION
<CAPTION>

                                             1997                1996                1995                1994      1993

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

Total Assets .......................         $368,073  23.6%     $297,906  18.3%     $251,859  6.7%     $236,125    $169,189
Total Deposits .....................         $280,450  10.8%     $253,196  21.3%     $208,759  8.6%     $192,187    $146,054
Net Loans ..........................         $208,236  18.3%     $175,990  15.6%     $152,306  12.8%    $135,018    $109,302
Stockholders' Equity** .............         $35,815   69.2%     $21,172   8.5%      $19,509   23.5%    $15,799     $16,272
Book Value Per Share* ..............         $7.87     37.6%     $5.72     2.1%      $5.60     22.0%    $4.59       $4.52
Stockholders' Equity to Total Assets         9.73%     +262 bpt  7.11%     -64 bpts  7.75%     +106 bpt 6.69%       9.62%
<FN>


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

          **Beginning with 1994,  reflects  adjustment to capital as a result of
          the implementation of SFAS No. 115.
</FN>
</TABLE>



<PAGE>



MESSAGE TO OUR STOCKHOLDERS


Company Overview
         1997 was a landmark year for Lake Ariel Bancorp,  Inc. (the "Company").
Strategic moves were made in order to establish a foundation to take the Company
into the next level of financial growth and profitability.

         During 1997, to meet the  challenges  of the 21st Century,  the Company
completed a very successful  stock sale;  consolidated  its  Administration  and
Operations to a new Financial Center;  more than doubled the capabilities of its
computer system; and formed a new subsidiary, Ariel Financial Services, Inc., to
meet the ever growing demand for non-traditional bank products.

         Success,  however,  is only  measured by the financial  performance  we
achieved  in  1997.  Assets,   deposits,  net  income,   dividend  payment,  and
stockholders'  equity all reached  record  levels.  Our primary  objective is to
create value for our  stockholders.  1997 will always be viewed as the year that
produced unprecedented results for our stockholders.

Stockholders' Value
         Significant events  during  1997 had  major  impacts  on the  Company's
                  capital position:
- $12 million stock sale completed
- Nasdaq National  Market  listing (LABN)
- 5% stock dividend - 2-for-1 stock split
- Cash  dividend  increased by 15%
- 15.24% Return on Average  Equity
- 64% Increase in Market Value
- 74% Return to Stockholders

         During the fourth  quarter of 1997,  the Company  raised $12 million in
new capital by selling  805,000  shares of common stock at $16.00 per share.  At
year-end 1997, our Company was in a very strong capital position.  Stockholders'
equity was at $36 million.  The Tier I, or core capital ratio was 17.12% and the
total  risk-based  capital  ratio  was  at  18.12%,  this  is in  comparison  to
regulatory minimums of 4% and 8%, respectively.
The new capital will be used to continue the Bank's expansion goals.

         In addition to the stock sale, the Company had a 2-for-1 stock split on
November 10, 1997 and, on November 21, 1997,  was listed on the Nasdaq  National
Market.

         During 1997, for the 14th consecutive  year, the Company  increased its
per share cash  dividend  from $.32 in 1996 to $.38 in 1997, a 19% increase and,
also,  for the second  consecutive  year,  paid a 5% stock  dividend.  Per share
information  for all prior years has been restated to reflect the effects of the
stock split and this stock dividend.

         Our return on average  stockholders' equity continued to be exceptional
in  1997  at  15.24%,  up 27  basis  points  from  14.97%  in  1996.  Return  on
stockholders'  equity  is  arguably  the  most  important  measure  of a  bank's
performance  and  our  return  ranks  us  among  the  top  performing  financial
institutions reported in the industry.

         Book value  increased  from $5.72 in 1996 to $7.87 in 1997, an increase
of 38%. The Company's (LABN) market price closed at $17.75 per share on December
31, 1997, an increase of 64% from $10.83 (adjusted) at December 31, 1996.

         By  factoring in the cash and stock  dividends  and the increase in the
market price of the common stock,  our  stockholders  realized an incredible 74%
return on their investment in 1997.





<PAGE>



Net Income
         1997     proved  to be  another  strong  earnings  performance  for the
                  Company:  - Record  Earnings - $3,431,000 - up 13% - Return On
                  Average Assets - 1.00% - 9.6% Growth in Net Interest  Income -
                  Earnings  per  share - basic - $0.92 -  Earnings  per  share -
                  diluted - $0.88

         The Company's net income for 1997 was $3,431,000, 13.2% higher than the
$3,031,000  reported for 1996.  Net income was  positively  influenced by a 9.6%
growth in net interest  income after  provision for possible credit losses and a
25.7% growth in other  operating  income.  Overhead  costs were $9.2 million for
1997,  an increase of $1.2 million or 15.2% from $8.0 million  reported in 1996.
Overhead  costs were  impacted  by the  opening of three  branch  offices in the
fourth quarter of 1996.

         Operating  earnings  for the year  were at $.92 per  share - basic  and
$0.88 per  share - diluted  compared  to $.82 per share - basic and  diluted  in
1996. Return on average assets was 1.00% for 1997.

Growth
         1997 proved to be another year of exceptional increases:
                  - Assets                   -        24%
                  - Deposits                 -        11%
                  - Loans                    -        18%
                  - Investment Securities    -        32%

         Total assets  increased to $368.1 million at year-end 1997, an increase
of $70.2  million or 23.6%  from  $297.9  million at  December  31,  1996.  This
increase was primarily  attributable to a $27.8 million growth in securities and
$32.2 million growth in net loans and leases.

         Investment  securities  increased  to $114.8  million at  year-end,  an
increase of $27.8 million or 31.9% from $87.0 million at December 31, 1996. This
increase was attributable to an investment strategy implemented in January, 1997
whereby the Company  borrowed  $25  million  from the Federal  Home Loan Bank of
Pittsburgh  ("FHLB") and invested in a combination of various fixed and variable
rate investments.

         Total net loans  increased to $208.2  million at December 31, 1997,  an
increase of $32.2 million or 18.3% from $176.0 million at December 31, 1996. For
the year 1997,  residential  mortgage  loans  increased  to $103.0  million,  an
increase of $15.4 million or 17.6% from $87.6 million at December 31, 1996. This
increase was  attributable  to the increased  mortgage loan activity  during the
period,  particularly during the second half of 1997, net of mortgage loans sold
during  1997 of  approximately  $28.9  million.  As of  year  end,  LA Bank  was
servicing over $130,000,000 in residential mortgage loans.

         During 1997, total deposits increased to $280.5 million, an increase of
$27.3 million or 10.8% from $253.2 million at December 31, 1996.

New Financial Center
         In  November,  1997,  our Company  solidified  our presence in downtown
Scranton with the opening of its new Financial Center in the Historic  Oppenheim
Building. LA Bank consolidated its Executive,  Administrative,  Operations, Data
Processing and other non-branch  activities into this building's  21,000 sq. ft.
second floor.

         In addition to the needed space and the  potential  for future  growth,
the  move  gave  us  access  to  a  greater  infrastructure  for  training,  the
availability of superior  telecommunications systems and the quality of a larger
potential work force.

         Also, the location of the new financial center  reinforces our presence
and image  which  should  give us an  advantage  over other  community  banks in
Northeastern Pennsylvania.



<PAGE>



Strengthening the Organization - Branches, Personnel and Technology
         In October of 1997,  our 15th branch  location  was opened on the first
floor of the  Oppenheim  Building in Downtown  Scranton.  This new branch office
will enable us to better  serve the needs of the downtown  employers,  employees
and shoppers.

         During  1998,  the  Company  will be bringing  its  services to two new
locations,  thanks to LA Bank's satellite  branches planned for the new Wal-Mart
Supercenters  at the  Dickson  City  Crossings  and at the  location on Route 6,
Honesdale. The new branches in the Wal-Mart Supercenters will be the Bank's 16th
and 17th full-service branches and the first to be located in a retail store. As
we grow our  franchise,  plans  for  additional  locations  are  progressing  to
increase our presence in the market  place.  The  continued  rapid growth of our
Company  includes the expansion into new markets with  additional  products.  To
achieve these goals,  management and technology  changes are necessary.  Looking
forward  to the 21st  Century,  technology  will be vital to the  success of our
institution.  In  1997,  we more  than  doubled  the  capacity  of our  existing
electronic data processing system.

         During 1997 and during the first quarter of 1998, the following changes
were made to strengthen our organization: Lou Martarano and Joe Earyes were both
elevated to Executive Vice President and Cindy  Smaniotto,  Karen  Pasternak and
Jack Foley were all  promoted to Senior Vice  President.  Also,  Tom Dziak,  Dan
Santaniello  and Tom  Byrne  were all  promoted  to Vice  President,  while  new
Assistant Vice Presidents  included Jennifer  Nichols,  Bonnie Robinson and Lynn
Thiel, Auditor. Susan Lenko became Assistant Cashier and IRA Administrator.  Sal
DeFrancesco  became our new  Assistant  Vice  President and  Controller  and new
Branch Managers  included  Marilynn  Palmer in  Mountainhome  and Sheila Dick in
Carbondale.

         In  December,  1997,  Attorney  Paul D. Horger was  appointed to the LA
Bank's  Board  of  Directors  and in  January,  1998,  he was  appointed  to the
Company's Board of Directors.  Attorney  Horger adds  tremendous  experience and
wisdom to our Board and will fill the vacancy of Director  Arthur Davis who will
be retiring  when his term expires in April 1998.  Mr. Davis has been a valuable
member of our Board for the past 29 years and we extend  our  gratitude  for his
loyal support of our organization.

Marketing, Products and Services
         During 1997, great emphasis was placed on marketing the Bank's mortgage
program.  During the first  quarter,  LA Bank  established a new Smart  Mortgage
Direct Information toll free number,  1-888-343-HOUSE which allows potential new
mortgage   customers   the   opportunity   to  speak   directly  to  a  mortgage
representative to receive  information on LA Bank's mortgage rates and products.
During the third  quarter,  LA Bank  introduced  a new "Welcome  Home"  mortgage
pre-approval  program.  The  program  takes  home  financing  a step  further by
allowing  customers to be  pre-approved  before  shopping  for a new home.  This
program has been a tremendous help in evaluating how much a first-time homeowner
can afford before making any commitment.

         During the second  quarter,  the Bank's  Home Equity Line of Credit was
revised.  The PrimeLine  Equity Loan offered an introductory  rate of 6.99% APR.
This  product  was  marketed  aggressively  during the year to new and  existing
customers.

         In the third quarter, a new Business  Development  Software program was
installed to track business  generated by officers' calls,  follow-up  contacts,
cross sell ratios and teller referrals.  The system generates reports for senior
management  which will evaluate the  performance  of each officer in relation to
their goals, and will also identify the quality of the calls.











<PAGE>



         Also, during the year, LA Bank's site on the World Wide Web was updated
on a monthly basis to keep the  information on our home page current.  All print
and broadcast  advertising  reference our site address and reciprocal links were
established  with the  Scranton/Wilkes-Barre  Red Barons and to the Nasdaq page,
allowing browsers the opportunity to receive  accurate,  real-time market quotes
of the stock  price for the  Company's  shares or  request a copy of our  annual
report on-line.  In 1997, the web site was made interactive to allow browsers to
request  information  on-line  and  even  contact  our  Executive  Officers  and
Marketing Department.  A new financial information page was added which contains
LA Bank's  current  financial  information.  This web site will be  updated  and
expanded during 1998.

         In 1997,  notification  was  received  that LA Bank  earned a  superior
ranking for the period ended  December 31, 1996 as published by "Bank  Financial
Quarterly",  one of the  nation's  prime  sources of bank  quality  rankings  as
published by IDC Financial  Publishing.  The superior rating achieved by LA Bank
indicates LA Bank is one of the safest institutions in the United States.

         In  addition,  LA Bank was the  recipient  of an award for  outstanding
participation  during  Community  Banking Week, held in April each year. LA Bank
won the award for the Best  Children's  Project in Pennsylvania in the $176-$400
million asset category. LA Bank offers a Kids Top Savings Account which includes
no  minimum   balance   requirements,   a  Polaroid  Print  Kids  Photo  ID  and
fingerprinting  provided  at no charge at time of  account  opening,  and an age
appropriate gift which focuses on educating the accountholders.  In addition, LA
Bank sends periodic newsletters to reinforce these concepts.

Ariel Financial Services, Inc.
         To meet the ever  growing  demand for  non-traditional  bank  products,
Ariel Financial Services, Inc. ("Ariel Financial Services") was formed in 1997.

         We  fully  expect  that  Ariel  Financial  Services  will  bring  added
dimension to our  organization by allowing us to be more competitive in the ever
changing financial markets. These new non-traditional bank products will prevent
disintermediation;  create  one-stop  customer  shopping;  satisfy  the needs of
tomorrow's  more  sophisticated  customer;  and most  importantly,  generate fee
income.

         The need for Ariel  Financial  Services is dictated by the ever growing
"Baby Boomer" market.  This generation of investors makes different  savings and
investment choices than their parents,  and the ability to deliver products such
as  mutual  funds,  securities,  annuities  (fixed  and  variable)  and  various
insurance  products  is  essential  to retain and  attract  these  sophisticated
investors.

         We expect Ariel Financial Services to not only help retain our existing
customer  base,  but also to add  customers to our  organization.  The added fee
income generated from these new products will help offset the shrinking interest
margin of our traditional bank deposits.

Community Reinvestment and Development
         During  1997,  LA  Bank   continued  to  participate  in  the  Scranton
Neighborhood  Housing Mortgage Program. The program provides financing to low to
moderate  income  families  that would not  normally be eligible  for a mortgage
loan,  thereby  giving them the  opportunity  to  purchase a home.  LA Bank also
maintains  their own "Welcome  Home"  program for first time  homebuyers  in the
low-to-moderate  income  level  and  makes  homeownership  a  reality  for  many
customers who would not qualify under our normal  underwriting  guidelines.  The
program has been a great success and will continue to be offered again in 1998.

         During the first  quarter of 1997,  a Smart  Mortgage  Direct  Planning
guide was  developed  to help  educate  first time  homebuyers  on the  mortgage
process  covering  topics  from the  application  process  through  closing.  In
addition,  a new ATM/Visa  Check Card safety  brochure was  developed to educate
accountholders  of the risk  associated with using and maintaining an electronic
banking card.






<PAGE>



         During April, LA Bank sponsored its third annual  homebuyers fair at LA
Bank's Loan Center on Keyser  Avenue in Scranton.  The event offers  prospective
homebuyers the  opportunity to meet with  originators,  attorneys,  builders and
insurance agents to discuss the various aspects of the homebuying process.

         Also  during the year,  LA Bank  funded a $800,000  revolving  loan for
United  Neighborhood  Centers of Lackawanna  County  ("UNC") to fund  renovation
costs to the  Progressive  Center.  The  center is  located  in a  central  city
neighborhood  with the highest  poverty rate in Lackawanna  County.  This center
houses the services for families in crisis; a day care program;  an after-school
program for local children;  an evening program for teens and young adults; plus
many other vital programs for the low and moderate  income families of the local
community.

Year In Review
         For the year ended  December 31, 1997, LA Bank achieved  record results
in all major aspects of financial measurements. We are very proud of this year's
performance and believe our strategy gives us optimism for future years.

         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.

         We  thank  our  Board  of  Directors,   Business   Development  Boards,
management and employees for making 1997 a very  successful  year.  Their effort
and support,  coupled with invaluable experience,  are appreciated by all of us.
Once again,  as a  stockholder,  we sincerely hope that you continue to support,
promote and  patronize LA Bank so that we may continue in our efforts to grow as
a strong locally-owned community bank.




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




Bruce D. Howe
President of the Corporation
and Chairman of the Subsidiaries




<PAGE>



Board of Directors

          William C. Gumble, Esquire - Age 60. 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 70. 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 66. Mr.  Howe is  Chairman of the Board of LA Bank,
          N.A.,  and is a resident of Lake  Ariel.  He is  President  of John T.
          Howe,  Inc. which  operates  local fuel and heating oil  companies,  a
          motel,  interstate  truck  stop  and  convenient  stores.  He is  also
          President of Howe's Twin Rocks, Inc., a local restaurant.

          Harry F.  Schoenagel- Age 62. 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 51. 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 68. Mr.  Clauss  has served on the Board  since
          1986.  He  was  the  former  President  of  C & D  Builders,  Inc.,  a
          contracting  firm,  and is  presently  retired  and a resident of Lake
          Ariel.

          Donald  E.  Chapman-  Age 61.  Mr.  Chapman  has been on the  Board of
          Directors  since  1972.  He is a resident of Lake Ariel and owner of a
          Nationwide Insurance agency for the past 35 years. He also serves as a
          Wayne County Commissioner.

          Paul D. Horger, Esquire - Age 60. Attorney Horger is the newest member
          on the Board. A practicing  attorney for 34 years,  Attorney Horger is
          Senior Partner at the law firm of Oliver,  Price & Rhodes in Scranton,
          Pennsylvania.











In April 1998,  after 29 years with our  Company,  Arthur M. Davis  retired as a
member of our Board of Directors.  His general business understanding helped set
the stage for the  Company's  growth to its  present  size from a single bank in
Lake Ariel,  Pennsylvania.  As important  as his  strategic  leadership  was his
strong commitment to customer satisfaction,  and his active support of community
involvement. We wish him many more years of good health and happiness.





<PAGE>



 Board of Directors

1997  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  financial
strength and market share by growing  from a single unit  financial  institution
into a 15  branch,  $368  million  asset  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.





<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 your  bank.  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 led us to  dedicate  this  year's
annual  report to those whose  lives we affect and in turn affect 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.




<PAGE>



Responsibilities for Preparation of Financial Statements

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

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

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

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



Joseph J. Earyes, CPA
Vice President and Treasurer



<PAGE>



Management's Discussion and Analysis

The consolidated  financial  review of Lake Ariel Bancorp,  Inc. ("the Company")
provides a  comparison  of the  performance  of the  Company for the years ended
December 31, 1997, 1996, and 1995. The financial information presented should be
reviewed  in  conjunction  with  the  consolidated   financial   statements  and
accompanying notes appearing elsewhere in this annual report.

Background

The Company is a one bank holding company whose principal subsidiary is LA Bank,
N.A.  The  Company  operates  15  full-service  branch  banking  offices  in its
principal  market  area in  Lackawanna,  Monroe,  Pike and  Wayne  Counties.  At
December 31, 1997, the Company had 133 full-time equivalent employees.

Analysis of Results of Operation

Overview
         Net income for 1997 increased to $3.4 million,  an increase of $400,000
or 13.2%  over  1996.  Net  income for 1996 was $3.0  million,  an  increase  of
$724,000 or 31.4% over 1995.  On a per share  basis,  net income was $0.92 basic
and $0.88  diluted in 1997,  $0.82 basic and diluted in 1996 and $0.63 basic and
diluted in 1995.  Weighted  average shares  outstanding  for 1997, 1996 and 1995
were 3,886,000, 3,686,000, and 3,641,000,  respectively.  Earnings per share and
weighted  average  shares  outstanding  reflect  adjustment  for  the  5%  stock
dividends  paid on October 1, 1997 and 1996,  and the  two-for-one  stock  split
effective November 10, 1997.

         The  growth  in  net  income  during  1997  was   attributable  to  the
improvement  in net  interest  income,  which  increased  to $10.3  million,  an
increase of $903,000 or 9.6% over 1996,  and which was coupled  with an increase
in other operating income to $3.4 million, an increase of $695,000 or 25.7% over
1996. This increase more than offset the increase in other operating expenses to
$9.2  million,  an  increase  of $1.2  million or 15.2% over 1996.  The  Company
continued 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  in  1996  was  also  attributable  to the
improvement in net interest income, which increased to $9.4 million, an increase
of $1.2  million or 14.8% over 1995 and which was also  coupled with an increase
in other operating income to $2.7 million,  an increase of $225,000 or 9.1% over
1995. This increase more than offset the increase in other operating expenses to
$8.0 million, an increase of $234,000 or 3.0% over 1995.

Analysis of Net Interest Income
         In 1997, net interest income  (tax-equivalent basis) increased to $11.9
million,  an increase of $1.3 million or 12.0% over 1996 levels.  Average  loans
and leases  increased to $194.1  million,  an increase of $28.8 million or 17.4%
over 1996. Average commercial loans grew to $61.2 million,  an increase of $12.6
million or 25.8% over 1996 levels. Interest income on commercial loans increased
to $6.0 million, an increase of $1.4 million or 29.8% over 1996. This was due to
increased volume and increased  lending rates through most of 1997. The national
prime rate as reported in a national  publication  published  daily, an index to
which the majority of these loans were tied,  was 8.5% and 8.25% at December 31,
1997 and 1996,  respectively.  Average real estate loans increased 15.7%,  which
contributed to a 12.2% increase in interest income on real estate loans. Average
consumer  loans,  which included credit card  receivables and leases,  increased
$3.6  million or 9.8% over 1996,  and  resulted  in a 4.4%  increase  in related
interest income.

         Net interest income  (tax-equivalent basis) for 1996 increased to $10.7
million,  an increase of $1.1 million or 11.9% over 1995.  This increase was due
to the  continued  strong growth of earning  assets,  which grew 10.6% over 1995
levels.




<PAGE>



         On average,  investment securities in 1997 increased to $114.2 million,
an increase of $28.9 million or 33.9% over 1996 levels. Investment securities in
1996 increased to $85.3  million,  an increase of $4.8 million or 5.9% over 1995
levels.  Income earned on investment  securities  increased to $8.3 million,  an
increase of $2.2 million or 36.2% over 1996.  Income earned in 1996 increased to
$6.1 million,  an increase of $330,000 or 5.7% over 1995. As is discussed  under
"Financial Condition," the asset/liability  management and investment strategies
that were  employed  during 1997  resulted in increased  holdings of  investment
securities and created an increase in investment  income.  The mix of securities
in the investment  portfolio changed slightly during 1997.  Taxable  securities,
which represented 76.1% of the investment  portfolio in 1996, decreased to 73.9%
or  $84.4  million  in  1997.  At  December  31,  1997,   tax-exempt  securities
represented 26.1% of the portfolio  compared to 23.9% in 1996 and 21.0% in 1995.
In 1997, tax-exempt securities,  for part of the year, provided better after-tax
investment  returns than taxable issues in similar  maturity and quality ranges.
Accordingly,  average balances on state and municipal securities at December 31,
1997 increased to $29.8 million, an increase of $9.4 million or 46.1% over 1996.
Average  balances  on state  and  municipal  securities  at  December  31,  1996
increased  to $20.4  million,  an increase  of $3.5  million or 20.7% from $16.9
million at December 31, 1995.

         Average  interest-bearing  deposits at December  31, 1997  increased to
$232.6  million,  an  increase  of $28.7  million or 14.1%  over  1996.  Average
interest-bearing  deposits at December 31, 1996 increased to $203.9 million,  an
increase of $22.8 million or 12.6% from $181.1  million at December 31, 1995. As
interest  rates rose in 1995 and  continued  constant  through  most of 1996 and
1997,  more depositors  sought higher rate,  longer-term  deposits.  Savings and
interest-bearing  demand  deposits  at  December  31,  1997  increased  to $70.6
million,   an  increase  of  $6.4  million  or  9.9%  over  1996.   Savings  and
interest-bearing  demand  deposits  at  December  31,  1996  decreased  to $64.2
million,  a decrease of $2.9 million or 4.4% from $67.2  million at December 31,
1995. As a percentage of total average  interest-bearing  deposits,  savings and
interest-bearing  demand deposits  represented  30.4% in 1997, 31.5% in 1996 and
37.1% 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 at December
31, 1997 increased to $10.4  million,  an increase of $1.4 million or 16.1% over
1996.  Interest  expense on  deposits at December  31,  1996  increased  to $9.0
million, an increase of $784,000 or 9.6% from $8.2 million at December 31, 1995.
These results were reflected in the cost of funds which increased 1.8% from 1996
through 1997, and decreased 2.7% from 1995 to 1996, while volume increased 14.1%
and  12.6%,  respectively.  However,  interest  expense  as a percent of earning
assets  increased  by 31 basis points from 4.01% in 1996 to 4.32% in 1997 due to
the volume  increase in interest  bearing  liabilities  and the  increase in the
related  interest  rates  paid.  There  were no  brokered  deposits  within  the
Company's deposit base during 1997, 1996 and 1995.

         Short-term  borrowings,  which  included  federal  funds  purchased and
securities sold under  agreements to repurchase,  averaged $2.1 million in 1997,
$3.7  million  in 1996  and $5.2  million  in 1995.  These  borrowings  remained
relatively constant through 1997.

         The overall effect of the increase in interest rates paid, the shift in
mix of and  growth in  deposit  accounts  and  long-term  debt and the growth in
earning  assets  produced  a negative  impact on net  interest  margin.  The net
interest  margin  decreased  by 39 basis  points to 3.81% in 1997 from  4.20% in
1996. The net interest margin was 4.15% in 1995.

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





<PAGE>

<TABLE>
<CAPTION>


                                                                          For The Year Ended December 31,
                                             1997                            1996                      1995
                                             Average       Interest          Average Interest          Average     Interest
                                             Balance       Income/    Yield/ Balance Income/   Yield/   Balance    Income/   Yield/
                                              (1)          Expense    Rate   (1)     Expense   Rate      (1)       Expense   Rate
                                                                      (Dollars in thousands)
<S>                                          <C>            <C>       <C>    <C>    <C>        <C>       <C>       <C>         <C>

Earning assets:
Federal funds sold .......................     $4,640        $264     5.69%  $3,124   $ 164      5.25%     $2,889    $154      5.33%
Deposits in Federal Home Loan Bank .......        160           9     5.63   145          6      4.14      479       22        4.59
Investment securities:
   U.S. government agencies ..............     81,567       5,738     7.03   63,443   4,323      6.81      61,842    4,187     6.77
   State and municipal(2) ................     29,798       2,391     8.02   20,393   1,673      8.20      16,890    1,448     8.57
   Other securities ......................      2,850         154     5.40   1,460    86         5.89      1,790     117       6.54
     Total investment securities .........    114,215       8,283     7.25   85,296   6,082      7.13      80,522    5,752     7.14
Loans and leases:
   Commercial, financial and industrial(3)     61,163       5,952     9.73   48,626   4,585      9.43      44,438    4,444     10.00
   Real estate-construction and mortgage .     92,998       7,356     7.91   80,395   6,557      8.16      65,250    5,318     8.15
    Installment loans to individuals(4) ..     36,793       3,299     8.97   34,213   3,251      9.50      34,664    3,226     9.31
   Lease financing(4) ....................      3,110         302     9.71   2,114      199      9.41      1,431     124       8.67
     Total loans and leases ..............    194,064      16,909     8.71   165,348 14,592      8.83      145,783   13,112    8.99

Total earning assets .....................    313,079      25,465     8.13   253,913 20,844      8.21      229,673   19,040    8.29

Cash and due from banks ..................     10,469                        9,834                         9,368
Premises and equipment ...................     10,901                        7,769                         7,718
Other, less allowance for credit losses
   and loan fees .........................      9,617                        5,438                         4,343
Total assets .............................   $344,066                        $276,954                      $251,102

Liabilities and stockholders' equity:
Interest-bearing deposits:
   Demand ................................    $30,245       $627      2.07   $25,764  $537       2.08%     $25,993   $618      2.38%
   Savings ...............................     40,377       1,611     3.99   38,472   1,549      4.03      41,186    1,524     3.70
   Time ..................................    123,054       6,157     5.00   105,883  5,350      5.05      86,980    4,671     5.37
   Time over $100,000 ....................     38,918       2,000     5.14   33,811   1,521      4.50      26,960    1,360     5.04
     Total interest-bearing deposits .....    232,594      10,395     4.47   203,930  8,957      4.39      181,119   8,173     4.51
Short-term borrowings ....................      1,843          99     5.37   3,312      174      5.25      4,698     253       5.39
Securities sold under agreements
   to repurchase .........................        259          13     5.02   338         17      5.03      546       29        5.31
Long-term debt ...........................     47,663       3,018     6.33   16,275   1,035      6.36      17,898    1,059     5.92
Total interest-bearing liabilities .......    282,359      13,525     4.79   223,855 10,183      4.55      204,26    9,514     4.66
Demand - noninterest - bearing ...........     35,518                        29,545                        26,172
Other liabilities ........................      3,674                        3,312                         3,157
Total liabilities ........................    321,551                        256,712                       233,590
Stockholders' equity .....................     22,515                        20,242                        17,512
Total liabilities and stockholders' equity   $344,066                        $276,954                      $251,102

Net interest income ......................                $11,940                   $10,661                         $9,526
Net interest spread ......................                            3.34%                      3.66%                         3.63%
Net interest margin(5) ...................                            3.81%                      4.20%                         4.15%
<FN>

------------------------------
(1)  Average  balances have been computed  using daily balances in 1997 and 1996
     and  month-end  balances  in 1995.  Nonaccrual  loans are  included in loan
     balances.
(2)  Interest and yield are  presented on a  tax-equivalent  basis using a 34.0%
     statutory tax rate for 1997, 1996 and 1995.
(3)  Does not include  recovered  interest of $49,000 on a nonaccrual  loan paid
     off during 1995.
(4)  Installment loans and leases are presented net of unearned interest.
(5)  Represents  the  difference  between  interest  earned and  interest  paid,
     divided by average total earning assets.
</FN>
</TABLE>













<PAGE>

<TABLE>
<CAPTION>


                                                            1997 Compared to 1996(1)      1996 Compared to 1995(1)
                                                               Caused by        Total         Caused by       Total
                                                            Volume     Rate     Variance  Volume     Rate     Variance
                                                                 (In thousands)
<S>     <C>                                                 <C>         <C>     <C>        <C>      <C>       <C>

Interest income:
   Federal funds sold............................           $  85        $15      $100     $ 12        $ (2)      $10
   Deposits in Federal Home Loan Bank .................         1          2         3       (14)        (2)      (16)
   Investment securities ..............................     2,101        100     2,201       377        (47)      330
   Loans and leases ...................................     2,553       (236)    2,317     1,663       (183)    1,480
Total interest income .................................     4,740       (119)    4,621     2,038       (234)    1,804

Interest expense:
   Demand and savings deposits ........................       169        (17)      152      (108)        52       (56)
   Time deposits ......................................     1,105        181     1,286     1,283       (443)      840
   Borrowed funds .....................................     1,904          -     1,904      (183)        68      (115)
Total interest expense ................................     3,178        164     3,342       992       (323)      669

Net interest income..............................           $1,562     $(283)    $1,279    $1,046       $89     $1,135
<FN>

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


Provision for Possible Credit Losses
         The  provision for possible  credit losses for the year ended  December
31, 1997 increased to $780,000,  an increase of $130,000 or 20.0% over 1996. The
provision for possible credit losses for 1996 decreased to $650,000,  a decrease
of $160,000 or 19.8% from $810,000 for 1995. In 1997, the provision for possible
credit  losses was  155.7% of net  charge-offs,  compared  to 136.3% in 1996 and
124.8% 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 potential charge-offs.

         Net  charge-offs in 1997 increased to $501,000,  an increase of $24,000
or 5.0% over 1996. Net charge-offs in 1996 decreased to $477,000,  a decrease of
$172,000  or 26.5%  from  $649,000  in 1995.  The net  charge-offs  in 1997 were
primarily   attributed  to  the  consumer  installment  loans  and  credit  card
portfolio.  The  net  charge-offs  in  1996  were  primarily  attributed  to the
commercial real estate loan  portfolio.  The ratio of net charge-offs to average
loans outstanding was at 0.26% for 1997, 0.30% for 1996 and 0.44% for 1995.

         Net  charge-offs  on  commercial  and  industrial  loans  for 1997 were
$64,000  or  12.8%  of net  charge-offs  compared  to  $118,000  or 24.7% of net
charge-offs for 1996 and $286,000 or 44.1% of net charge-offs for 1995. Consumer
and credit card and real estate related debt accounted for 87.2% in 1997,  75.3%
in 1996 and 55.9% in 1995, of net charge-offs, respectively.

Other Operating Income
         Other operating  income in 1997 increased to $3.4 million,  an increase
of $695,000 or 25.7% over 1996. Other operating income in 1996 increased to $2.7
million,  an  increase  of  $225,000  or 9.1% from $2.5  million  in 1995.  Fees
generated from the origination  and sale of residential  mortgage loans provided
$183,000 or 5.4% in 1997, $266,000 or 9.8% in 1996 and $179,000 or 7.2% in 1995,
of other operating  income.  Mortgage  servicing fee income in 1997 increased to
$349,000,  an  increase  of  $22,000  or 6.7%  over  1996.  Such  income in 1996
increased  to  $327,000,  an increase of $25,000 or 8.3% from  $302,000 in 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 $404,000 recorded in 1997, compared with the net
gain of $114,000 in 1996 and net gain of $132,000 in 1995, was indicative of the
changes in interest rates during the periods in which the sales occurred.







<PAGE>



         Fee income from service charges on demand  deposits,  item  processing,
return items and other service fees in 1997 remained  constant with 1996 at $1.2
million.  Such income in 1996 increased to $1.2 million, an increase of $151,000
or 14.2% from $1.1 million in 1995. These fees, which represented 36.7% of other
operating  income,  were influenced by both pricing changes and increases in the
number of consumer and business  demand deposit  accounts which  increased $11.8
million or 19.9% in 1997 over 1996.

         Net gains on available-for-sale  securities  represented  approximately
6.3% in  1997,  1.6% in 1996  and  13.3%  in  1995 of  other  operating  income,
respectively. The sales of these securities resulted from the Company's decision
to  liquidate  certain  securities  to capture  market gains with the ability to
reinvest in bonds with similar risk and yield.

         Included in other income are earnings on directors'  and officers' life
insurance policies, credit card annual fees and merchant discounts, safe deposit
box rentals, rental income on excess office space in two of the Company's branch
offices,  automated teller machine surcharge income, commissions on check orders
and other general service fees. These fees in 1997 increased to $1.0 million, an
increase  of  $265,000  or 35.9% over  1996.  These  fees in 1996  increased  to
$739,000,  an increase of  $268,000  or 56.9% from  $471,000 in 1995.  Automated
teller  machine  income,  which  did not  exist  in the  same  period  in  1996,
represented $196,000 of the increase.  Earnings on directors' and officers' life
insurance policies represented $161,000 of the remaining increase.

Other Operating Expenses
         Other operating expenses in 1997 increased to $9.2 million, an increase
of $1.2 million or 15.0% over 1996.  Other operating  expenses in 1996 increased
to $8.0  million,  an increase  of  $200,000 or 2.6% from $7.8  million in 1995.
Salaries  and  benefits,  which  were the most  significant  of the  noninterest
expenses,  increased  in each of the years  reported.  Salaries and benefits for
1997  increased  to $4.2  million,  an  increase of $522,000 or 14.2% over 1996.
Salaries and benefits in 1996 increased to $3.7 million, an increase of $125,000
or 3.5% from $3.6 million in 1995.  These  increases  were due to the additional
staffing needs in both new and existing branch and administrative offices, merit
increases and the added costs  associated  with health care  insurance and other
benefits which were provided by the Company.

         Equipment and occupancy expenses in 1997 increased to $2.3 million,  an
increase of $389,000 or 20.7% over 1996. Such expenses in 1996 remained constant
at $1.9  million as compared to 1995.  Again,  these  increases  were  primarily
attributable  to the  growth in the number of branch  offices,  in  addition  to
overall increases in overhead expenses, maintenance costs and equipment upgrades
(including computer hardware and software) throughout the branch network.

         FDIC insurance  assessments  decreased from $222,000 in 1995, to $2,000
in 1996 and $0 in 1997. 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,  then
reducing  this amount to zero in 1997.  Foreclosed  asset  expenses in 1997 were
$39,000,  a decrease of $12,000 or 23.5% over 1996. The decrease was a result of
the sales of properties in 1997 without any material additions. Foreclosed asset
expenses in 1996 were $51,000, an increase of $25,000 or 96.2% over 1995.

         Amortization  of  intangible  assets  increased to $154,000 in 1997, an
increase  of  $46,000 or 42.6% over 1996,  and was  related to the  premium  the
Company paid for the core deposits when it acquired the Milford  Township Branch
office,  and the  deposit  customer  lists  when it  acquired  the  Milford  and
Mountainhome Branch offices. Amortization of intangible assets remained constant
in 1996 and 1995 at $108,000 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 relatively constant in 1997, 1996 and 1995.

         Other  expenses  in 1997  increased  to $2.5  million,  an  increase of
$328,000 or 15.0% over 1996.  Other  expenses in 1996 increased to $2.2 million,
an increase of $336,000 or 18.2% over 1995. Included in these expenses were such
costs as legal fees,  professional and audit, state shares' tax, directors' fees
and other general operating expenses.




<PAGE>



Provision For Income Taxes
The  provision  for income  taxes for the year ended  December 31, 1997 was $1.1
million, a decrease of 1.3% or $15 thousand in 1997. For 1996, the provision for
income  taxes was $1.1  million,  an increase of $485,000 or 76.4% over the 1995
provision of  $635,000.  The  effective  tax rate for 1997,  1996,  and 1995 was
24.4%, 27.0% and 21.6%, respectively.

Financial Condition

December 31, 1997 Compared to December 31, 1996

         The Company's total assets  increased to $368.1 million at December 31,
1997, an increase of $70.2 million or 23.6% from $297.9  million at December 31,
1996.  The  increase in assets was  primarily  attributable  to a $32.2  million
growth in net loans and a $27.8 million increase in investment securities.

         The amortized cost of investment securities, including held-to-maturity
(HTM) and available-for-sale  (AFS), increased to $114.8 million at December 31,
1997,  an increase of $27.8  million or 31.9% from $87.0 million at 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
spread between the interest rate on deposits and borrowings  versus the yield on
invested  funds.  During 1997,  the Company  purchased $25 million of securities
with funds  borrowed from the FHLB.  The strategy  that was employed  provided a
favorable  spread between the rates on invested and borrowed  funds. At December
31, 1997,  gross  unrealized  gains in the HTM  investments  were $868,900 while
gross unrealized losses amounted to $106,800.

         The following  table  presents the maturity  distribution  and weighted
average yield of the  securities  portfolio of the Company at December 31, 1997.
Weighted  average  yields on  tax-exempt  obligations  have been  computed  on a
taxable equivalent basis.

<TABLE>
<CAPTION>

                                                       Available for Sale December 31, 1997
                                                 After 1 Year But           After 5 Years But       After 10 Years
                                   Within 1 Year       Within 5 Years      Within 10 Years     or no maturity      Total

                                   Amount    Yield    Amount   Yield       Amount    Yield   Amount   Yield        Amount   Yield
                                                                 (Dollars in thousands)
<S>                                     <C>  <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>

Amortized cost:
U.S. government agencies and
   corporations ...................   $257   8.16%     $-        - %       $12,644   6.70%     $33,433   7.18%   $46,334       7.05%
Obligations of state and
   political subdivisions .........    515   7.66      704       7.91      650       7.60      5,418     7.76      7,287       7.76
Equity securities .................      -   -          -                   -                  2,913     4.80      2,913       4.80
Total securities available for sale   $772   7.82%     $704      7.91%     $13,294   6.74%     $41,764   7.09%   $56,534       7.03%

</TABLE>
<TABLE>
<CAPTION>


                                                                 Held to Maturity December 31, 1997
                                                       After 1 Year But    After 5 Years But   After 10 Years
                                        Within 1 Year  Within 5 Years      Within 10 Years     or no maturity Total

                                        Amount   Yield Amount   Yield      Amount    Yield   Amount   Yield   Amount         Yield
                                                                 (Dollars in thousands)
<S>                                     <C>       <C>  <C>       <C>       <C>       <C>       <C>       <C>  <C>            <C>

Amortized cost:
U.S. government agencies and
   corporations .................       $ -       -    $ -       -         $10,200    7.55% $23,692   7.13%      $33,892       7.25%
Obligations of state and
   political subdivisions .......         -       -    1,284     7.10%     9,851      7.48%  13,218   8.18%       24,353       7.84
Total securities held to maturity       $ -       -    $1,284    7.10%     $20,051    7.51% $36,910   7.50%      $58,245       7.50%

</TABLE>





<PAGE>



         A summary  of  securities  available  for sale and  securities  held to
maturity at December 31, 1997, 1996, 1995, 1994 and 1993 follows (in thousands):
<TABLE>
<CAPTION>

                                                                           Securities
                                                                       Available for Sale
                                                                        at December 31,

                                                     1997       1996    1995        1994     1993
<S>                                                  <C>       <C>       <C>       <C>       <C>

U.S. government agencies and corporations ........   $46,334   $50,253   $43,041   $27,348   $22,736
Obligations of states and political subdivisions .     7,287     9,066     5,810     6,919    16,836
Equity securities(1) .............................     2,913     1,443     1,304     2,619       579
Total amortized cost of securities ...............   $56,534   $60,762   $50,155   $36,886   $40,151

Total fair value of securities ...................   $56,545   $60,399   $50,580   $34,142   $41,657

<FN>

(1)  Comprised  mostly  of  FHLB  stock,   Federal  Reserve  Bank  stock  and  a
Pennsylvania community bank stock.

</FN>
</TABLE>
<TABLE>
<CAPTION>

                                                                           Securities
                                                                        Held to Maturity
                                                                        at December 31,

                                                     1997      1996      1995      1994       1993
<S>                                                    <C>    <C>        <C>       <C>       <C>

U.S. government agencies and corporations ........   $33,892   $10,841   $11,065   $31,611   $  -
Obligations of states and political subdivisions .    24,353    15,760    11,524    10,924      -
Equity securities ................................         -         -         -         -
Total amortized cost of securities ...............   $58,245   $26,601   $22,589   $42,535   $  -

Total fair value of securities ...................   $59,008   $26,564   $22,866   $40,674   $  -
</TABLE>


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

<TABLE>
<CAPTION>

                                          1997         1996        1995         1994         1993
                                                        (in thousands)
<S>                                     <C>            <C>          <C>         <C>           <C>

Real estate-construction                  $3,338       $3,214       $4,726       $2,406       $3,547
Real estate-mortgage                      99,637       84,352       68,006       56,858       47,573
Commercial and industrial                 69,479       51,485       45,210       43,269       39,259
Consumer installment                      40,912       45,170       42,891       40,839       24,020
Lease financing                            3,711        2,588        1,742        1,119        1,313
Unearned income                           (6,067)      (8,091)      (7,641)      (6,947)      (3,812)
Unearned loan fees, net                     (665)        (898)        (971)      (1,030)      (1,054)

     Total loans and leases              210,345      177,820      153,963      136,514      110,846

Allowance for possible credit losses      (2,109)      (1,830)      (1,657)      (1,496)      (1,544)

     Net loans and leases               $208,236     $175,990     $152,306     $135,018     $109,302

</TABLE>



<PAGE>



         Total net loans  increased to $208.2  million at December 31, 1997,  an
increase of $32.2 million or 18.3% from $176.0 million at December 31, 1996. The
increase  in net  loans  was  directly  related  to the  significant  growth  in
commercial loans and residential  mortgages.  Residential  mortgage loans, which
included real estate construction loans, increased to $103.0 million at December
31, 1997,  an increase of $15.4  million or 17.6% from $87.6 million at December
31, 1996.

         Consumer loans, net of unearned  discounts,  decreased to $38.6 million
at December 31,  1997, a decrease of $1.1 million or 2.8% from $39.7  million at
December 31, 1996.  Commercial  loans increased to $69.5 million at December 31,
1997,  an increase of $18.0  million or 34.9% from $51.5 million at December 31,
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.

         Life  insurance  cash  surrender  value  increased  to $7.9  million at
December  31,  1997,  an increase of $5.4  million or 216% from $2.5  million at
December 31, 1996. The increase represents an investment in 1997 in various life
insurance  policies to fund both a  non-qualified  supplemental  retirement plan
(SERP)  and an  officer  group  term  life  insurance  replacement  plan  on the
executive officers and certain other officers of the Company.

         Total  deposits  increased to $280.5  million at December 31, 1997,  an
increase of $27.3  million or 10.8% from $253.2  million at December  31,  1996.
Noninterest-bearing  demand deposits  increased to $39.7 million at December 31,
1997,  an increase of $7.2  million or 22.0% from $32.5  million at December 31,
1996. In the aggregate,  savings and interest-bearing  demand deposits increased
to $68.2  million at December 31, 1997, an increase of $3.4 million or 5.3% from
$64.8 million at December 31, 1996. As a percentage of total  deposits,  savings
and  interest-bearing  demand deposits  represented  24.3% in 1997,  compared to
25.6% in 1996. Savings deposits decreased to $36.4 million at December 31, 1997,
a decrease of $1.3 million or 3.4% from $37.7 million at December 31, 1996. This
decrease is because of the rise in interest rates and,  therefore,  certificates
of deposit offered a competitive alternative for customers. Time deposits, which
include  certificates of deposit in denominations of $100,000 or more, increased
to $172.6  million at December 31, 1997,  an increase of $16.7  million or 10.7%
from $155.9  million at December 31, 1996.  As a percentage  of total  deposits,
these  deposits  remained  constant  at  61.5%  in  1997  from  61.6%  in  1996.
Approximately  $3.3  million or 19.8% of this  growth was from  public  funds of
school districts and local governments located within the Company's market area.

Included in interest-bearing  deposits are certificates of deposit in amounts of
$100,000 or more.  There are no brokered  deposits  included in  certificates of
deposit of $100,000 or more.  These  certificates of deposit and their remaining
maturities at December 31 are as follows:

<TABLE>
<CAPTION>

                                    1997     1996      1995      1994      1993
                                                 (in thousands)
<S>                                <C>       <C>       <C>       <C>       <C>

Three months or less             $15,217   $11,375   $11,708    $9,664    $4,526
Over three through six months     12,956    17,847     5,701     6,503     2,960
Over six through twelve months     6,814     6,376     8,213     6,424     2,130
Over twelve months                 9,032     4,642     1,321     2,072       957
         Total                   $44,019   $40,240   $26,943   $24,663   $10,573
</TABLE>











<PAGE>



Nonperforming Assets
         Nonperforming assets included nonperforming loans and foreclosed assets
held for sale. Nonperforming loans consisted of loans where the principal and/or
interest  was 90 days or more  past  due and  loans  that  had  been  placed  on
nonaccrual status. When loans were placed on nonaccrual status,  income from the
current  period was  reversed  from current  earnings  and  interest  from prior
periods was charged to the allowance for possible credit losses.  Consumer loans
were charged-off when principal or interest was 120 days or more delinquent,  or
were placed on nonaccrual status if a sufficient  amount of collateral  existed.
The following  table shows  information  concerning  loan  delinquency and other
nonperforming assets of the Company for 1997, 1996, 1995, 1994 and 1993:
<TABLE>
<CAPTION>

                                        1997      1996      1995    1994       1993
                                                    (in thousands)
<S>                                     <C>       <C>     <C>       <C>       <C>

Loans past due 90 days or more        $1,453    $1,593    $1,716    $1,125    $1,501
Impaired loans in nonaccrual status      411       542     1,216         -         -
Other nonaccrual loans                   123        73       487     1,786     1,585
         Total nonperforming loans     1,987     2,208     3,419     2,911     3,086

Foreclosed assets held for sale          523       841        52       191       119
         Total nonperforming assets   $2,510    $3,049    $3,471    $3,102    $3,205

Nonperforming loans as a
     percentage of loans                 .94%     1.24%     2.19%     2.13%     2.78%

Nonperforming assets as a
     percentage of assets                .68%     1.02%     1.36%     1.31%     1.89%

</TABLE>

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


                               For the Year Ended
                                  December 31,
                                1997   1996  1995   1994   1993
                                 (in thousands)

Interest income that would
   have been recorded had
   the loan been in accordance
   with their original terms .   $51   $92   $187   $171   $209
Interest income included in
   net income ................    21     7     12      -      -

         Nonperforming  loans  decreased  10.0% from year-end  1996.  Nonaccrual
loans decreased $81,000 or 13.2% from year-end 1996.  Commercial loans accounted
for 77.0% of all nonaccruals, followed by real estate loans at 23.0%. Within the
$534,000 of total nonaccrual loans, 100.0% were secured by mortgages,  primarily
first liens,  against  residential or commercial  properties.  Loans past due 90
days or more decreased $140,000 from 1996 year-end levels.  These loans included
$396,000 in real estate  mortgages,  $235,000  in consumer  credit,  $746,000 in
commercial loans and $76,000 in leasing. These loans were reviewed by management
at its quarterly loan review meetings regarding collection efforts.






<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 $523,000 at year-end 1997 compared
to $841,000 at year-end 1996. The decrease was a result of sales during the year
without any  substantial  additions.  The Company  does not expect any  material
losses  on the  sales of these  properties  based on  current  appraised  values
exceeding book values.  See "Factors That May Affect Future Results" for factors
that could affect sales prices of foreclosed assets.

Potential Problem Loans
         At December 31,  1997,  the Company had  approximately  $2.1 million of
potential problem loans not included in the nonperforming  loan  classification.
Known  information  about possible  credit  problems  related to these borrowers
caused  management to have serious doubts as to the ability of such borrowers to
comply with present loan repayment terms and may result in future classification
of such loans as  nonperforming.  These potential  problem loans were taken into
consideration  by management when  determining the adequacy of the allowance for
possible credit losses at December 31, 1997. 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 more stringent  underwriting standards in commercial lending as this
category of loans continues to grow. While management believed the allowance for
possible  credit losses was adequate,  future  additions to the allowance may be
necessary based on changes in economic conditions. The adequacy of the allowance
for possible  credit  losses was reviewed  quarterly by a loan review  committee
comprised  of members of the Board of  Directors  and senior  management  of the
Company.  The full Board of Directors  reviewed the relevant ratios with respect
to the allowance after the loan review  committee made its  recommendations.  At
December 31, 1997,  the allowance for possible  credit losses was 1.00% of loans
compared to 1.03% at  December  31, 1996 and 1.08% at  December  31,  1995.  For
further  discussion  on factors that could  influence the allowance for possible
credit losses, see "Factors That May Affect Future Results."




<PAGE>



Changes in the allowance for possible credit losses for the years ended December
31, 1997, 1996, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>

                                            1997       1996       1995     1994     1993
                                                      (dollars in thousands)
<S>                                          <C>       <C>      <C>        <C>       <C>

Balance at beginning of period              $1,830    $1,657    $1,496    $1,544    $1,254

Charge-offs:
         Real estate-construction                -         -         -         -         -
         Real estate-mortgage                  103       143       200        14         -
         Commercial and industrial             106       158       294       321       211
         Consumer installment                  363       274       206       157       196
         Lease financing                        11         -         -         7        39

                  Total                        583       575       700       499       446

Recoveries:
         Real estate-construction                -         -         -         -         -
         Real estate-mortgage                    -         -         -         2         -
         Commercial and industrial              42        40         8        12         8
         Consumer installment                   40        58        43        58        82
         Lease financing                         -         -         -         4         6

                  Total                         82        98        51        76        96

Net charge-offs                                501       477       649       423       350
Provision for possible credit losses           780       650       810       375       640

Balance at end of period                    $2,109    $1,830    $1,657    $1,496    $1,544

Ratio of net charge-offs during period to
  average loans outstanding during period     0.26%     0.30%     0.44%     0.35%     0.35%
</TABLE>


         The  Company's  management is unable to determine in what loan category
future  charge-offs and recoveries may occur. The following  schedule sets forth
the  allocation  of the  allowance  for possible  credit  losses  among  various
categories.  At  December  31,  1997,  approximately  63% of the  allowance  for
possible  credit  losses is  allocated  to general  risk to protect  the Company
against  potential  yet  undetermined  losses.  The  allocation  is  based  upon
historical  experience.  The entire  allowance  for  possible  credit  losses is
available to absorb future loan losses in any loan category.






<PAGE>
<TABLE>
<CAPTION>



                                                              At December 31,

                                                           1997           1996             1995            1994             1993
                                                           Percent        Percent          Percent         Percent          Percent
                                                           of Loans       of Loans         of Loans        of Loans         of Loans
                                                           in Each        in Each          in Each         in Each          in Each
                                                           Category       Category         Category        Category         Category
                                                       Amt toLoans(1) Amt toLoans(1)   Amt to Loans(1) Amt to Loans(1)  Amt Loans(1)
                                                                (Dollars in thousands)

<S>                                                    <C>    <C>       <C>    <C>     <C>     <C>       <C>

Allocation of allowance for possible credit losses:
Real Estate .......................................     $278    49%     $248    49%     $279    47%     $370    43%     $198    46%
Commercial and industrial .........................      868    33       574    29       700    29       631    32       924    35
Consumer installment ..............................      465    19       428    21       437    23       386    24       259    18
Lease financing ...................................       68     1        62     1        52     1        52     1        55     1
Unallocated .......................................      430     -       518     -       189     -        57     -       108     -
      Total .......................................   $2,109   100%   $1,830   100%   $1,657   100%   $1,496   100%   $1,544   100%

<FN>

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

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

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

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

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

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










<PAGE>




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

         At December 31, 1997, LA Bank  maintained a one year  cumulative gap of
negative $14.4 million or 3.90% of total assets. The effect of this gap position
provided a negative  mismatch of assets and liabilities which can expose LA Bank
to interest rate risk during a period of rising interest rates.
<TABLE>
<CAPTION>

                                             Interest Sensitivity Gap at December 31, 1997
                                             3 months       3 through      1 through Over
                                             or less        12 months      3 years   3 years   Total
                                                            (Dollars in thousands)
<S>                                               <C>       <C>           <C>        <C>         <C>

Cash and cash equivalents ..................    $17,109       $   -         $  -         $  -     $17,109
Investment securities(1)(2) ................      7,327       7,369       17,385       82,697     114,778
Loans(2) ...................................     84,683      36,224       34,462       52,764     208,133
Fixed and other assets .....................          -           -            -       27,864      27,864
Total assets ...............................   $109,119     $43,593      $51,847     $163,325    $367,884

Non interest-bearing transaction deposits(3)     $9,950       $   -       $9,950      $19,901     $39,801
Interest-bearing transaction deposits(3) ...          -       6,412       19,820       41,972      68,204
Time .......................................     35,069      55,039       19,562       18,868     128,538
Time over $100,000 .........................     15,127      20,089        4,481        4,322      44,019
Repurchase agreements ......................        200           -            -            -         200
Short-term borrowings ......................        730      12,098            -            -      12,828
Long-term debt .............................     10,590       1,770        4,721       17,748      34,829
Other liabilities ..........................          -           -            -        3,659       3,659
     Total Liabilities .....................    $71,666     $95,408      $58,534     $106,470    $332,078

Interest sensitivity gap ...................    $37,453    $(51,815)     $(6,687)     $56,855

Cumulative gap .............................    $37,453    $(14,362)    $(21,049)     $35,806

Cumulative gap to total assets .............     10.18%      (3.90)%      (5.72)%      9.73%
<FN>

------------------------------
(1)      Gross of unrealized gains/losses on available for sale securities.
(2)      Investments  and loans are  included  in the  earlier  of the period in
         which  interest  rates were next  scheduled  to adjust or the period in
         which they are due. In addition,  loans were included in the periods in
         which they are scheduled to be repaid based on scheduled  amortization.
         For amortizing loans and mortgage-backed securities,  annual prepayment
         rates  are  assumed  reflecting   historical   experience  as  well  as
         management's knowledge and experience of its loan products.
(3)      LA Bank's  demand  and  savings  accounts  were  generally  subject  to
         immediate withdrawal. However, management considers a certain amount of
         such accounts to be core accounts having significantly longer effective
         maturities  based on the  retention  experiences  of such  deposits  in
         changing interest rate environments. The effective maturities presented
         are  the  FDICIA  305  recommended  maturity  distribution  limits  for
         nonmaturing deposits.
</FN>
</TABLE>

         Upon reviewing the current interest  sensitivity  scenario,  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.



<PAGE>



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

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

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

         The  following  table  illustrates  the  simulated  impact of 200 basis
points upward or downward movement in interest rates on net interest income, net
income,  and the change in economic  value  (portfolio  equity).  This  analysis
assumed that  interest-earning  asset and  interest-bearing  liability levels at
December  31,  1997  remained  constant.  The impact of the rate  movements  was
developed by simulating the effect of rates changing over a twelve-month  period
from the December 31, 1997 levels.

                                   Rates +200   Rates -200

Earnings at risk:
   Percent change in:
      Net Interest Income .....       1.92%   (2.83)%
      Net Income ..............       4.25    (6.26)

Economic value at risk:
   Percent change in:
      Market value of portfolio
      equity (MVPE) ...........     (10.99)    2.94
      MVPE as a percent of
      book assets .............      (1.39)    0.37


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

Capital

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

         An important  indicator in the banking  industry is the leverage ratio,
defined as the ratio of common  stockholders'  equity less intangible assets, to
average quarterly assets less intangible  assets. The leverage ratio at December
31, 1997 was 10.26% compared to 8.24% at December 31, 1996. This increase is the
direct result of the increase in average assets in 1997 caused by the borrowings
from the FHLB which were invested in investment grade securities, in addition to
the increase in stockholders' equity as a result of the public stock offering in
1997.  For  1997 and  1996,  the  ratios  were  well  above  minimum  regulatory
guidelines.




<PAGE>



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


                              At December 31, 1997
                              (Dollars in thousands)

Primary capital ..........    $35,805
Intangible assets ........        573
Tier I capital ...........     35,232
Tier II capital ..........      2,041
Total risk-based capital .    $37,273

Total risk-weighted assets   $205,743
Tier I ratio .............      17.12%
Risk-based capital ratio .      18.12%
Tier I leverage ratio ....      10.26%


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

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

         At December 31, 1997, the Company  maintained $17.1 million in cash and
cash equivalents (including Federal funds sold) in the form of cash and due from
banks (after  reserve  requirements).  In addition,  the Company had $621,000 of
mortgage  loans  held for  resale  and $56.5  million  in AFS  securities.  This
combined  total of $74.2 million  represented  20.2% of total assets at December
31, 1997. The Company believes that its liquidity is adequate.

         The Company  considers  its primary  source of liquidity to be its core
deposit base. This funding source has grown steadily over the years and consists
of deposits  from  customers  throughout  the branch  network.  The Company will
continue to promote the acquisition of deposits  through its branch offices.  At
December 31, 1997,  approximately  76.2% of the Company's  assets were funded by
core deposits  acquired within its market area. An additional 9.7% of the assets
were funded by the Company's equity.  These two components provide a substantial
and stable source of funds.









<PAGE>



         Net cash provided by operating activities was $4.9 million for the year
ended  December  31,  1997,  as  compared  to net  cash  provided  by  operating
activities of $6.3 million for the comparable  period in 1996. This $1.4 million
decrease is primarily  related to a net $3.4  million  decrease in the change in
mortgage loans held for resale. Net cash used in investing  activities increased
$23.3 million for the year ended December 31, 1997,  from $46.2 million to $69.5
million,  which was primarily attributable to purchases of investment securities
and an increase in loans and leases.  Net cash provided by financing  activities
increased  $22.4  million from 1996. A net increase in FHLB  borrowings of $25.0
million and proceeds from issuance of common stock of $12.0 million were used to
fund investment purchases.  A net decrease in the annual growth of deposits from
1996 to 1997 of $17.2  million was the other  major  component  impacting  funds
provided by financing activities.

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

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

         Beginning  September  1995,  bank holding  companies  are  permitted to
acquire banks in other states  without  regard to state law. In addition,  banks
can merge with  other  banks in  another  state  beginning  in  September  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 LA Bank by the Office of the Comptroller of the
Currency  ("OCC") in 1997 resulted in no  significant  findings and no impact is
anticipated on current or future operations.

         The FDIC Board of Directors  voted on November 26, 1996,  to retain the
existing 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. LA Bank's current and
future FDIC BIF assessment is expected to be $0;  however,  the FICO  assessment
for 1998 is expected to be approximately $35,000.

         In 1996, LA Bank acquired the real estate and deposit customer lists of
the Milford (Pike County) and Mountainhome (Monroe County) branches of PNC Bank.
These branches  opened in December 1996. The  amortization of the customer lists
was $100,000 for 1997.

         On May 19, 1997, the OCC granted  approval to establish a new branch in
downtown Scranton  (Lackawanna  County).  LA Bank's downtown Scranton Branch and
its new  Financial  Center,  both  located in the historic  Oppenheim  Building,
opened in October 1997.








<PAGE>



         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.

Year 2000 Compliance; Management Information Systems

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

         The  Company  has  conducted  a  comprehensive  review of its  computer
systems that could be affected by the "Year 2000" issue and does not believe the
amounts to be  expended  over the next two years will have a material  impact on
its earnings or financial position.  It is anticipated that any modifications to
existing  hardware  and software  will be  completed by December 31, 1998,  thus
leaving the year 1999 for systems  testing.  However,  no assurance  can be made
that the systems of others that the Company  relies upon will be  converted on a
timely basis,  or that their  failure to be compliant  would not have an adverse
effect on the Company.

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

Factors That May Affect Future Results

General

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

Interest Rates

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










<PAGE>



         As of December  31, 1997,  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 $14.4  million,  representing  a
cumulative  one-year  interest  rate  sensitivity  gap as a percentage  of total
assets  of  negative  3.90%.  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 Risk Management."

Adequacy of Allowance for Possible Credit Losses

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

Effects of Inflation

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

New Financial Accounting Standards

Mortgage Servicing Rights

         In 1995,  the  FASB  issued  SFAS No.  122,  "Accounting  for  Mortgage
Servicing  Rights,"  which  amends  Statement  No. 65,  "Accounting  for Certain
Mortgage  Banking  Activities."  The Statement  applies to all mortgage  banking
activities  in which a mortgage loan is originated or purchased and then sold or
securitized with the right to service the loan retained by the seller. The total
cost of the mortgage loans is allocated  between the mortgage  servicing  rights
and the  mortgage  loans  based on their  relative  fair  values.  The  mortgage
servicing  rights are  capitalized  as assets and  amortized  over the period of
estimated net servicing income. Additionally,  they are subject to an impairment
analysis  based on their  fair  value  in  future  periods.  The  Statement  was
effective  for  transactions  in which  mortgage  loans are sold or  securitized
beginning  January 1, 1996. The impact on the Company's  financial  position and
results of operations will be dependent upon the future volume of mortgage loans
sold  with  servicing  rights  retained.  In  1996  and  1997,  the  impact  was
immaterial.















<PAGE>



Stock-Based Compensation

         In 1996, the Company adopted SFAS No. 123,  "Accounting for Stock-Based
Compensation."  This  standard  provides  the  Company  with a choice  of how to
account for the issuance of stock options and other stock grants.  The Statement
encourages  companies  to  account  for stock  options  at their  fair value and
recognize the expense as compensation over the service period,  but also permits
companies to follow existing accounting rules under Accounting  Principles Board
("APB")  Opinion No. 25.  Companies  electing to follow APB Opinion No. 25 rules
will be  required  to  disclose  pro forma net  income  and  earnings  per share
information as if the new fair value  approach had been adopted.  The Company is
continuing  to follow  existing  accounting  rules  under APB Opinion No. 25 for
options granted,  with pro forma disclosure in the footnotes to the consolidated
financial statements.

Earnings Per Share and Capital Structure

          In 1997, the FASB issued  Statement  No.128,  "Earnings Per Share" and
          Statement  No.  129,   "Disclosure   of   Information   about  Capital
          Structure."  Both  Statements  are effective for periods  ending after
          December  15,  1997.  Statement  No. 128 is designed  to simplify  the
          computation  of  earnings  per share and will  require  disclosure  of
          "basic earnings per share" and, if applicable,  "diluted  earnings per
          share."  Statement  No. 128 requires  restatement  of all prior period
          earnings per share data when  adopted.  The adoption of Statement  No.
          129 had no impact on the Company.

Reporting Comprehensive Income

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

Operating Segment Disclosure

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






<PAGE>

<TABLE>



Consolidated Balance Sheet
<CAPTION>

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

ASSETS
Cash and cash equivalents                                          $17,109      $15,971
Available-for-sale securities                                       56,545       60,399
Held-to-maturity securities (fair value of
  $59,008 and $26,564 in 1997 and 1996, respectively)               58,245       26,601

Loans and leases                                                   216,465      186,494
Mortgage loans held for resale                                         621          315
     Less unearned income and loan fees                             (6,741)      (8,989)
     Less allowance for possible credit losses                      (2,109)      (1,830)
       Net loans and leases                                        208,236      175,990

Premises and equipment, net                                         13,744       10,005
Accrued interest receivable                                          3,005        2,349
Foreclosed assets held for sale                                        523          841
Life insurance cash surrender value                                  7,891        2,539
Other assets                                                         2,775        3,211
       TOTAL ASSETS                                               $368,073     $297,906

LIABILITIES
Deposits:
     Noninterest-bearing                                           $39,689      $32,539
     Interest-bearing:
       Demand                                                       31,767       27,070
       Savings                                                      36,437       37,713
       Time                                                        128,538      115,634
       Time $100,000 and over                                       44,019       40,240
     Total Deposits                                                280,450      253,196

Accrued interest payable                                             2,975        2,416
Securities sold under agreements to repurchase                         200          300
Long-term debt                                                      47,656       20,023
Other liabilities                                                      977          799

     Total Liabilities                                             332,258      276,734

STOCKHOLDERS' EQUITY
Preferred stock: Authorized 1,000,000 shares of
   $1.25 par value each; no outstanding shares                           -            -
Common stock: Authorized, 10,000,000 shares of $.21
   par value each; issued and outstanding 4,548,383
   shares in 1997 and 3,699,730 shares in 1996                         956          740
Capital surplus                                                     25,717       11,099
Retained earnings                                                    9,135        9,572
Net unrealized gains (losses) on available-for-sale securities           7         (239)

     Total Stockholders' Equity                                     35,815       21,172

       TOTAL LIABILITIES AND
           STOCKHOLDERS' EQUITY                                   $368,073     $297,906
</TABLE>

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



<PAGE>




Consolidated Statement of Income
                                            Year Ended December 31,
                                            1997      1996       1995
                                   (in thousands, except per share data)

INTEREST INCOME
Loans and leases                          $16,907   $14,592   $13,112
Investment securities:
     Taxable                                5,738     4,323     4,187
     Exempt from federal income taxes       1,578     1,104       956
     Dividends                                154        86       117

     Total investment securities income     7,470     5,513     5,260

Deposits in bank                                9         6        22
Federal funds sold                            264       164       154

TOTAL INTEREST INCOME                      24,650    20,275    18,548

INTEREST EXPENSE
Deposits                                   10,395     8,957     8,165
Long-term debt                              3,018     1,143     1,215
Short-term borrowings                          99        66       105
Securities sold under agreements
   to repurchase                               13        17        29

TOTAL INTEREST EXPENSE                     13,525    10,183     9,514

NET INTEREST INCOME                        11,125    10,092     9,034
PROVISION FOR POSSIBLE CREDIT LOSSES          780       650       810

NET INTEREST INCOME AFTER PROVISION
   FOR POSSIBLE CREDIT LOSSES              10,345     9,442     8,224

OTHER OPERATING INCOME
Loan origination fees                         183       266       179
Customer service charges and fees           1,247     1,217     1,066
Mortgage servicing fees                       349       327       302
Investment security gains, net                214        43       331
Gain (loss) on sale of loans, net             404       114       132
Life insurance earnings                       288       127        87
Other income                                  716       612       384

TOTAL OTHER OPERATING INCOME                3,401     2,706     2,481

OTHER OPERATING EXPENSES
Salaries and benefits                       4,206     3,684     3,559
Occupancy expense                           1,334     1,053     1,036
Equipment expense                             932       824       855
FDIC assessment                                 -         2       222
Advertising                                   225       249       242
Other expenses                              2,513     2,185     1,849

TOTAL OTHER OPERATING EXPENSES              9,210     7,997     7,763
<PAGE>


INCOME BEFORE PROVISION FOR INCOME
   TAXES                                    4,536     4,151     2,942
PROVISION FOR INCOME TAXES                  1,105     1,120       635

NET INCOME                                 $3,431    $3,031    $2,307

EARNINGS PER SHARE - BASIC*                 $0.92     $0.82     $0.63

EARNINGS PER SHARE - DILUTED*               $0.88     $0.82     $0.63

DIVIDENDS PER SHARE*                        $0.38     $0.32     $0.27



*Reflects  adjustment for 5% stock dividends issued on October 1, 1997 and 1996,
and a two-for-one stock split effective November 10, 1997 (See Note 12).

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





<PAGE>

<TABLE>



Consolidated Statement of Changes in Stockholders' Equity
<CAPTION>

                                               Common     Capital     Retained  Net Unrealized  Total
                                               Stock      Surplus     Earnings  Gains (Losses)
                                                                                On Available-
                                                                                For-Sale
                                                                                                                   Securities
                                                                     (in thousands)

<S>                                               <C>    <C>          <C>       <C>       <C>

BALANCES, DECEMBER 31, 1994                    $688      $9,139      $7,783    $(1,811)   $15,799
Net income                                                            2,307                 2,307
Issuance of 16,809 shares of common stock
  through Dividend Reinvestment Plan              7         252                               259
Issuance of 2,099 shares of common stock
  through Employee Stock Purchase Plan            1          23                                24
Cash dividends declared ($.27 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 ($.32 per share)*                             (1,186)             (1,186)
Stock dividend declared (5% on
  October 1, 1996)                               35       1,350       (1,385)                  -
Cash paid for fractional shares on
   stock dividend                                                         (6)                 (6)
Change in net unrealized securities
  gains (losses)                                                                 (520)       (520)

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

Net income                                                            3,431                 3,431
Issuance of 33,625 shares of common stock
  through Dividend Reinvestment Plan*             8         393                                401
Issuance of 11,028 shares of common stock
  through Employee Stock Purchase Plan*           2          67                                 69
Cash dividends declared ($.38 per share)*                             (1,369)               (1,369)
Stock dividend declared (5% on
  October 1, 1997)                               37       2,448      (2,485)                     -
Cash paid for fractional shares on
   stock dividend                                                        (14)                  (14)
Sale of 805,000 shares of common stock
   through secondary stock offering             169      11,710                              11,879
Change in net unrealized securities
  gains (losses)                                                                     246        246

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

</TABLE>

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

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



<PAGE>


<TABLE>


Consolidated Statement of Cash Flows
<CAPTION>

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

CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                $3,431      $3,031      $2,307
Adjustments to reconcile net income to net
   cash provided by operating activities:
     Provision for possible credit losses                    780         650         810
     Depreciation, amortization and accretion                935         720         710
     Deferred income taxes                                   (62)         45           8
     Writedown of foreclosed assets held for sale            213           -           -
     Investment security gains, net                         (214)        (43)       (331)
     (Gain) on sale of loans                                (404)       (114)       (132)
     (Gain) loss on sale of foreclosed assets                  6          (1)         93
     (Gain) loss on sale of leased assets                      -           2          (5)
     (Gain) loss on sale of equipment                         38          (1)        138
(Increase) decrease in mortgage loans held for resale       (306)      3,090      (3,286)
(Increase) decrease in accrued interest receivable          (656)       (378)         95
Increase in accrued interest payable                         559         670          74
(Increase) decrease in other assets                          371        (869)       (695)
Increase (decrease) in other liabilities                     178        (490)        822

NET CASH PROVIDED BY
  OPERATING ACTIVITIES                                     4,869       6,312         608

CASH FLOWS FROM INVESTING ACTIVITIES
Held-to-maturity securities:
     Proceeds from maturities and paydowns                 2,974         339      17,060
     Purchases                                           (34,618)     (4,351)     (4,947)
Available-for-sale securities:
     Proceeds from maturities and paydowns                10,106       6,505       3,955
     Proceeds from sales                                  29,522      34,130      18,702
     Purchases                                           (35,193)    (51,190)    (27,729)
Purchase of life insurance policies                       (5,352)          -           -
Increase in loans and leases                             (61,670)    (39,923)    (31,215)
Purchases of premises and equipment                       (4,959)     (2,962)     (1,659)
Proceeds from sale of loans                               28,939      11,734      16,118
Proceeds from sale of leased assets                            -          19          20
Proceeds from sale of equipment                              253          13           8
Proceeds from sale of foreclosed assets                      514          70         448
Purchase of intangible assets                                  -        (600)          -

NET CASH USED IN INVESTING ACTIVITIES                    (69,484)    (46,216)     (9,239)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits                                  27,254      44,437      16,572
Decrease in short-term borrowings                              -      (5,000)     (9,750)
Decrease in securities sold under
  agreements to repurchase                                  (100)       (100)       (600)
Proceeds from long-term debt                              30,029       5,000      25,000
Principal payments on long-term debt                      (2,396)       (133)    (20,102)
Proceeds from issuance of common stock                    12,349         344         283
Cash dividends                                            (1,383)     (1,192)       (972)

NET CASH PROVIDED BY
  FINANCING ACTIVITIES                                    65,753      43,356      10,431


INCREASE IN CASH AND
  CASH EQUIVALENTS                                         1,138       3,452       1,800

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                       15,971      12,519      10,719

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

CASH PAID DURING THE YEAR FOR:
     Interest                                            $12,966      $9,513      $9,588

     Income taxes                                           $932      $1,025        $578
</TABLE>


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




<PAGE>



Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

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

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

The  Company  provides  a variety  of  financial  services  to  individuals  and
corporate  customers  through  its  fifteen  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.



<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, 1997, 1996, and 1995.

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-downs
of the individual  securities to their face value.  The related  write-downs are
included in earnings as realized losses.

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

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

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

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

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








<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  $131,509,000,
$119,898,000,   and   $121,375,000   at  December  31,  1997,   1996  and  1995,
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  1997,  1996 and  1995  was  $154,000,
$108,000, and $108,000, respectively.

Employee Benefit Plans
The Company maintains and funds a defined contribution profit-sharing plan which
covers substantially all eligible employees. The Company also 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.







<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 1997,  1996  and  1995,  the  Company  transferred  $420,000,  $858,000,  and
$422,000,  respectively,  from its loan portfolio to foreclosed  assets held for
sale.

No mortgage  loans were swapped for  participation  certificates  during 1997 or
1996.  During  1995,  the Company  swapped  $430,000 of its  mortgage  loans for
participation  certificates  of a similar amount issued by the Federal Home Loan
Mortgage Corporation.  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.

Reclassifications
Certain  prior  year  amounts  have been  reclassified  to  conform  to the 1997
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  1997  and  1996  was
approximately  $375,000.  In addition,  at December 31, 1997 and 1996,  required
compensating  reserve  balances with  correspondent  banks were  $2,003,000  and
$2,010,000, 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.




















<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, 1997 and 1996 were as follows (in
thousands):


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

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

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

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

     Total                  $58,245     $869           $106           $59,008


                              December 31, 1996
Available-for-sale securities:
                                                       Gross          Gross
                              Amortized Unrealized     Unrealized     Fair
                              Cost      Gains          Losses         Value
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
Restricted 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



<PAGE>



The amortized cost and estimated  fair value of debt  securities at December 31,
1997,  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.

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

                                        Amortized   Fair    Amortized    Fair
                                        Cost        Value   Cost         Value

Due in one year or less                     $772      $777      $  -      $  -
Due after one year through five years        704       706     1,284     1,290
Due after five years through ten years    13,293    13,213    20,052    20,624
Due after ten years                       41,765    41,849    36,909    37,094

     Total                               $56,534   $56,545   $58,245   $59,008


Gross realized gains and gross  realized  losses on sales of  available-for-sale
securities were as follows for the years ended December 31, 1997, 1996, and 1995
(in thousands):

                              December 31,

Gross realized gains:          1997   1996   1995
   U.S. government agencies
     and corporations          $116    $78   $309
   Obligations of states and
     political subdivisions     119    114     36
       Total                   $235   $192   $345

Gross realized losses:
   U.S. government agencies
     and corporations           $21   $149    $14
   Obligations of states and
     political subdivisions       -      -      -
       Total                    $21   $149    $14


Investment  securities  carried at $35,953,000  in 1997 and  $17,144,000 in 1996
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 $817,000 and
$557,000 as of December 31, 1997 and 1996, respectively. The unaccreted discount
on  mortgage-backed  securities  amounted to $14,000 and $208,000 as of December
31, 1997 and 1996, respectively.













<PAGE>



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


                                            1997       1996
                                             (in thousands)

Real estate-construction                  $3,338       $3,214
Real estate-mortgage                      99,637       84,352
Commercial and industrial                 69,479       51,485
Consumer installment                      40,912       45,170
Lease financing                            3,711        2,588
Unearned income                           (6,067)      (8,091)
Unearned loan fees, net                     (665)        (898)

   Total loans and leases                210,345      177,820

Allowance for possible credit losses      (2,109)      (1,830)

     Net loans and leases               $208,236     $175,990

Total  nonaccrual  loans  outstanding  at December  31, 1997 were  approximately
$534,000 as compared to $615,000 at December  31, 1996.  Included in  nonaccrual
loans are $411,000 of impaired  loans in nonaccrual  status,  for which $248,000
has been  provided  for in the  allowance  for possible  credit  losses to cover
potential losses from these impaired loans. At December 31, 1997 and 1996, there
were no outstanding  commitments to lend funds to debtors with nonaccrual loans.
At December 31, 1997 and 1996,  no loans were being  accounted for as a troubled
debt  restructuring.  Accruing loans past due 90 days or more as to principal or
interest  amounted to $1,453,000  and  $1,593,000 at December 31, 1997 and 1996,
respectively.

Further  information  regarding the balance of nonaccrual  loans at December 31,
1997, and related interest payment information, is as follows (in thousands):
<TABLE>
                    Cash Payments Received During 1997
                         Were Applied As Follows:
<CAPTION>

                                                                 Book              Contractual                Recovery
                                                                 Balance           Balance   Interest         Of Prior  Reduction Of
                                                                 12/31/97          12/31/97    Income         Charge-Off   Principal
<S>     <C>                                                      <C>               <C>            <C>             <C>           <C>

Contractually past due with:
     Substantial performance                                       $45             $45             $2            $ -              $3
     Limited performance                                           220             220             13              -             119
     No performance                                                104             104              -              -               -

Contractually current, however:
     Payment of full principal or
       interest in doubt                                            76              76              -              -               5
     Other                                                          89              89              6              -               -

     Total                                                        $534            $534            $21            $ -            $127
</TABLE>

At December 31, 1997 and 1996,  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  $370,000  and  $421,000,   respectively.   Such
indebtedness   was  incurred  in  the  ordinary  course  of  business,   and  on
substantially  the same  terms as those  prevailing  at the time for  comparable
transactions  with other  persons.  New loans in 1997 and 1996 were  $17,000 and
$363,000,  respectively,  while payments were $68,000 and $259,000 respectively,
during the same periods.



<PAGE>



A summary of selected  loan  maturities  and  interest  sensitivity  analysis at
December 31, 1997 is as follows:

                          Maturity Distribution
                        And Interest Rate Sensitivity

                              Within One     Two-Five  After Five
                              Year           Years     Years          Total
                                        (in thousands)
Real estate-construction       $3            $  -      $  -           $3
Commercial and industrial      11            10        48             69

   Total                      $14            $10       $48            $72

Predetermined interest rate    $3            $5        $10            $18
Floating or adjustable
  interest rate                11            5         38             54

   Total                      $14            $10       $48            $72

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, 1997, 1996 and 1995 were as follows:

                                             1997       1996       1995
                                               (dollars in thousands)

Balance at beginning of period               $1,830    $1,657    $1,496

Charge-offs:
     Real estate-construction                     -         -         -
     Real estate-mortgage                       103       143       200
     Commercial and industrial                  106       158       294
     Consumer installment                       363       274       206
     Lease financing                             11         -         -

       Total                                    583       575       700

Recoveries:
     Real estate-construction                     -         -         -
     Real estate-mortgage                         -         -         -
     Commercial and industrial                   42        40         8
     Consumer installment                        40        58        43
     Lease financing                              -         -         -

       Total                                     82        98        51

Net charge-offs                                 501       477       649
Provision for possible credit losses            780       650       810

Balance at end of period                     $2,109    $1,830    $1,657

Ratio of net charge-offs during period to
   average loans outstanding during period     0.26%     0.30%     0.44%



<PAGE>



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

                                      1997      1996
                                      (in thousands)

Land and land improvements           $1,545    $1,420
Buildings and improvements           10,301     7,446
Furniture, fixtures and equipment     6,195     4,853

   Total                             18,041    13,719

Less accumulated depreciation         4,297     3,714

   Net                              $13,744   $10,005

Depreciation  expense was  $932,000,  $730,000,  and $743,000 in 1997,  1996 and
1995, respectively.

Certain facilities and equipment are leased under agreements expiring at various
dates to the year 2003.  Rental expenses on these  operating  leases amounted to
$439,000 in 1997, $348,000 in 1996 and $339,000 in 1995. Required future minimum
annual rentals under all such noncancelable  operating leases as of December 31,
1997 are as follows (in thousands):

1998                                $489
1999                                519
2000                                538
2001                                559
2002                                523
Thereafter                         1,420

     Total                         $4,048

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:


                                   1997      1996
                                    (in thousands)

Three months or less             $15,217   $11,375
Over three through six months     12,956    17,847
Over six through twelve months     6,814     6,376
Over twelve months                 9,032     4,642
   Total                         $44,019   $40,240












<PAGE>



The aggregate amount of maturities for each of the five years following December
31, 1997 for all time  deposits  with a remaining  term of over twelve months at
December 31, 1997 are as follows (in thousands):

1998                                $55
1999                                34,779
2000                                8,430
2001                                2,530
2002                                1,725
Thereafter                          193

   Total                           $47,712

7. Short-term Borrowings
There were no short-term  borrowings  outstanding at December 31, 1997 and 1996.
The maximum amount of outstanding  month-end  short-term  borrowings during 1996
and 1995 was $5,000,000 and $10,050,000,  respectively.  The approximate average
amount   outstanding  during  1996  and  1995  was  $2,179,000  and  $5,037,000,
respectively. The average interest rate on the balances during 1996 and 1995 was
5.25% and 5.39%, respectively.

The Company  maintains a U.S.  Treasury tax and loan note option account for the
deposit of withholding taxes,  corporate income taxes and certain other payments
to the federal government.  Deposits are subject to withdrawal and are evidenced
by an  open-ended  interest-bearing  note.  Borrowings  under  this note  option
account  were  approximately  $1.0  million  at  December  31,  1997  and  1996,
respectively,  and  approximately  $100,000 at December 31, 1995. These deposits
are included in interest-bearing demand deposits for each period presented.

The Company has a flexible line of credit commitment available from the FHLB for
borrowings of up to approximately $10.0 million,  expiring March 25, 1998. There
were no borrowings under this line of credit at December 31, 1997 or 1996.

8. Long-term Debt
Long-term debt at December 31 is as follows:

                                                     1997        1996
                                                       (in thousands)

Unsecured  notes,  payable in the
   amount of $31,200  semiannually  plus  accrued
   interest at the New York City prime
   interest rate, maturing April 22, 1998               $31       $94
Collateralized borrowings, interest and
  principal payable monthly; fixed interest
  rate ranging from 6.40% to 6.49%, maturing
  October 17, 2001 and January 22, 2002              12,625     4,929
Collateralized borrowings, interest
   payable monthly and principal at
   maturity; interest rates are both
   fixed and variable and range from
   LIBOR to 6.45% at December 31, 1997               35,000    15,000

     Total                                          $47,656   $20,023

Annual  maturities  of  long-term  debt  are as  follows:  $12,828,000  in 1998,
$2,981,000 in 1999, $8,178,000 in 2000, $8,282,000 in 2001,  $10,387,000 in 2002
and $5,000,000 in 2005.  Investment  securities are pledged to collateralize the
$42,597,000 in borrowings with the Federal Home Loan Bank of Pittsburgh.




<PAGE>



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% dividends  payable in common stock on October 1, 1997 and
1996 and the two-for-one stock split effective  November 10, 1997. The following
information  has been  adjusted to increase  the  outstanding  stock  options to
220,500 shares and reduce the respective exercise prices.

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:                          $.63                       $.58


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

A summary of the status of the  Company's  Option Plan as of December  31, 1997,
1996 and 1995, and changes during the years then ended, is presented below:

                                    1997              1996             1995

                                    Weighted-          Weighted-       Weighted-
                                    Average            Average           Average
                                    Exercise           Exercise         Exercise
                           Shares   Price    Shares    Price    Shares    Price

Outstanding
   beginning of year       220,500   $6.67   220,500   $6.67    77,175    $6.86
Granted                          -                         -   143,325     6.57
Exercised                        -                                   -       -
Forfeited                        -                                   -       -

Outstanding, end of year   220,500   $6.67   220,500   $6.67   220,500    $6.67

The following summarizes information about stock options outstanding at December
31, 1997:

                         Weighted-Average
                         Remaining
Exercise Price Number    Contractual Life    Options Exercisable

$6.86          77,175    6.6 years           77,175
$6.57          143,325   7.6 years           143,325



<PAGE>



The Company reserved 50,000 shares of common stock under the Company's  Employee
Stock  Purchase  Plan,  increased to 100,000  effective  November 10, 1997, as a
result of the two-for-one  stock split.  Under the terms of the plan,  employees
may  purchase  common  stock of the  Company  at 85% of the fair  market  value.
Employees pay for their stock  purchases  through  periodic  payroll  deductions
subject  to a limit of 10% of base  pay.  During  1997,  1996 and  1995,  11,028
(adjusted), 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, 1997, 1996
and 1995, 33,625 (adjusted), 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, 1997 and 1996 (in thousands):

                                             1997      1996
Deferred tax assets:
   Unrealized losses on available-for-sale
     securities                               $  -     $123
   Allowance for possible credit losses        473      361
   Loan fees and costs                         130      231
   Deferred compensation                       156      104
   Amortization of core deposits                21        -
   Foreclosed assets held for sale              34        -

       Total                                   814      819
 Deferred tax liabilities:
     Unrealized gains on available-for-
        sale securities                         (4)       -
     Depreciation                             (228)    (199)
     Bond accretion                            (21)     (23)
     Leasing                                  (194)    (166)

       Total                                  (447)    (388)

       Deferred tax asset, net                $367     $431

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

             Year Ended December 31,
             1997      1996    1995

Current     $1,167    $1,075   $627
Deferred       (62)       45      8

   Total    $1,105    $1,120   $635










<PAGE>




The following tabulation presents a reconciliation of the expected provision for
income taxes (in thousands),  determined by using the current federal income tax
rate of 34% in  1997,  1996,  1995 to the  actual  provision  for  income  taxes
reflected in the accompanying consolidated financial statements.

                                             Year Ended December 31,
                                              1997      1996      1995

Provision at the expected statutory rate    $1,542     $1,411     $1,000
Effect of tax-exempt income                   (537)      (322)      (323)
Other items                                    100         31        (42)

Provision for income taxes                  $1,105     $1,120       $635

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 $251,000 in 1997,  $214,000 in
1996, and $181,000 in 1995.

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 1997, 1996 and
1995 contributions to this plan were $70,000, $58,000 and $25,000, respectively.

12. Earnings Per Share
Earnings per share (EPS) is computed using the weighted-average number of shares
of common stock outstanding after giving effect to the 5% stock dividends issued
on October 1, 1997 and 1996, the two-for-one stock split effective  November 10,
1997, and the assumed exercise of stock options.

In 1997,  the  Company  adopted  Statement  of  Financial  Accounting  Standards
("SFAS")  No. 128,  "Earnings  Per Share,"  which  changed  the  computation  of
earnings per share ("EPS") and requires  presentation of two new amounts,  basic
and diluted EPS, and additional informational disclosures.  The adoption of SFAS
No. 128 is  required  for all  reporting  periods  after  December  15, 1997 and
requires restatement for all prior periods.

The adoption of SFAS No. 128 had no effect on 1996 and 1995 EPS.




<PAGE>



The  following  data shows the amounts used in computing  earnings per share and
the  effects on income and the  weighted  average  number of shares of  dilutive
potential common stock for the years ended December 31, 1997, 1996 and 1995. The
common shares  denominators for 1996 and 1995 have been adjusted for the 1997 5%
stock dividend and two-for-one  stock split.  The 1995 common stock  denominator
has also been adjusted for the 1996 5% stock dividend.
<TABLE>
<CAPTION>

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

1997

   Basic EPS                                   $3,431,000    3,748,000         $0.92

   Dilutive effect of potential common stock
    Stock options:
       Exercise of options outstanding            220,500
       Hypothetical share repurchase at $17.75    (82,500)

   Diluted EPS                                 $3,431,000    3,886,000         $0.88

1996

   Basic EPS                                   $3,031,000    3,676,400         $0.82

   Dilutive effect of potential common stock
    Stock options:
       Exercise of options outstanding            220,500
       Hypothetical share repurchase at $6 98    (210,900)

   Diluted EPS                                 $3,031,000    3,686,000         $0.82

 1995

   Basic EPS                                   $2,307,000    3,625,700         $0.63

   Dilutive effect of potential common stock
    Stock options:
     Exercise of options outstanding              220,500
     Hypothetical share repurchase at $7.17      (205,200)

   Diluted EPS                                 $2,307,000    3,641,000         $0.63

</TABLE>
















<PAGE>



13. 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 1998 may not exceed  $3,887,000  plus Company net income for 1998.
Similar  banking  regulations  limit the amount of dividends that may be paid to
the Company by its bank subsidiary  without prior approval of the Comptroller of
the Currency.

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

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

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

                                                                      To Be Well
                                                                      Capitalized Under
                                                    For Capital       Prompt Corrective
                                        Actual      Adequacy Purposes:  Action Provisions:
                                   Amount    Ratio  Amount   Ratio    Amount    Ratio
<S>                                <C>       <C>    <C>     <C>       <C>       <C>

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


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%

</TABLE>







<PAGE>




14. Off-Balance Sheet Financial Instruments
The Company is a party to financial  instruments with off-balance  sheet risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These  financial  instruments  include  commitments to extend credit and standby
letters of credit.  These instruments  involve, to varying degrees,  elements of
credit,  interest rate or liquidity  risk in excess of the amount  recognized in
the  consolidated  balance  sheet.  The  contract  amount  of these  instruments
expresses the extent of  involvement  the Company has in  particular  classes of
financial instruments.

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

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

The  financial  instruments  whose  contract  amounts  represent  credit risk at
December 31 were as follows (in thousands):
                                    1997               1996

Commitments to extend credit       $16,985             $16,458
Standby letters of credit          $1,226              $953

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.

15. 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.





<PAGE>



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

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

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

Financial Assets and Liabilities

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

                                              1997               1996
                                    Carrying      Estimated Carrying  Estimated
                                      Value       Fair Value  Value   Fair Value
                                                 (in thousands)

FINANCIAL ASSETS:

   Cash and cash equivalents           $17,109    $17,109    $15,971    $15,971
   Investment securities               114,790    115,553     87,000     86,963
   Net loans                           208,236    209,254    175,990    181,587
   Accrued interest receivable           3,005      3,005      2,349      2,349

FINANCIAL LIABILITIES:

   Deposits                           $280,450   $282,614   $253,196   $254,536
   Accrued interest payable              2,975      2,975      2,416      2,416
   Short-term borrowings                     -          -          -          -
   Securities sold under agreements
     to repurchase                         200        200        300        300
   Long-term debt                       47,656     47,704     20,023     19,652
   Commitments                          18,211     18,211     17,411     17,411

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

                                    Condensed Balance Sheet
                                    December 31,

                                    1997               1996
Assets:
   Cash                            $ -                 $  -
   Investment in subsidiary        35,815              21,172
     Total Assets                  $35,815             $21,172

Liabilities and Stockholders' Equity:
   Stockholders' equity            $35,815             $21,172




<PAGE>



                                    Condensed Statement of Income
                                    Year Ended December 31,

                            1997     1996      1995
Earnings of Subsidiary:
   Received as dividends   $1,369   $1,287     $972
   Undistributed            2,062    1,744    1,335

Net Income                 $3,431   $3,031   $2,307

                                    Condensed Statement of Cash Flows
                                    Year Ended December 31,

                                      1997      1996       1995
Operating Activities:
   Net income                        $3,431     $3,031     $2,307
     Less undistributed earnings
       of subsidiary                  2,062      1,744      1,335

     Net cash provided by
       operating activities           1,369      1,287        972

Investing Activities:
     Investment in subsidiary       (12,349)      (445)      (391)

Financing Activities:
     Cash dividends paid
       to stockholders               (1,369)    (1,186)      (972)
     Issuance of common stock        12,349        344        283

     Net cash used in
       financing activities          10,980       (842)      (689)

Increase (decrease) in Cash               -          -       (108)

Cash at Beginning of Year                 -          -        108

Cash at End of Year                     $ -        $ -        $ -


17.    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, 1997 and 1996.









<PAGE>



18. Significant Group Concentrations of Credit Risk
Most of the  Company's  business  activity  is  with  customers  located  within
Pennsylvania.  Investments in state and municipal  securities  typically involve
governmental  entities  within the  Company's  market  area.  Concentrations  of
credit,  as defined by the Company's loan policy,  are groupings of loans with a
common repayment source that exceed 25% of the Company's capital. As of December
31, 1997, the Company had no such credit concentrations.

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

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

19. Selected Quarterly Financial Data (Unaudited) (in thousands, except per
    share data)


                                                 Quarter Ending

                                        March 31,     June 30, Sept 30,  Dec 31,
                                             1997     1997     1997        1997

Interest income                            $5,820     $6,049    $6,383   $6,398
Interest expense                            3,096      3,308     3,506    3,615
Net interest income                         2,724      2,741     2,877    2,783
Provision for possible credit losses          125        255       350       50
Investment security gains (losses), net        (8)        (1)       89      134
Net income                                    730        806       861    1,034
Earnings per share - basic*                  0.20       0.21      0.23     0.28
Earnings per share - diluted*               $0.19      $0.20     $0.22    $0.27


                                                 Quarter Ending

                                        March 31,  June 30,  Sept 30,   Dec 31,
                                            1996    1996      1996       1996

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 - basic*                  0.19      0.22     0.21     0.20
Earnings per share - diluted*               $0.19     $0.22    $0.21    $0.20


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





<PAGE>



Independent Auditor's Report


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

We have  audited  the  accompanying  consolidated  balance  sheets of Lake Ariel
Bancorp,  Inc. and  Subsidiary as of December 31, 1997 and 1996, 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, 1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Lake Ariel Bancorp,
Inc. and  Subsidiary  as of December  31, 1997 and 1996,  and the results of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1997, in conformity with generally accepted accounting principles.

          As discussed in Note 12 to the consolidated  financial statements,  in
          1997 the Company changed its method of computing earnings per share by
          adopting  Statement  of  Financial   Accounting   Standards  No.  128,
          "Earnings Per Share."


Parente, Randolph, Orlando, Carey & Associates

Wilkes-Barre, Pennsylvania
January 30, 1998






















<PAGE>




                              INVESTOR INFORMATION

MARKET INFORMATION

The Company's  common stock has been listed on the Nasdaq  National Market since
November 21, 1997,  and was  previously  listed on the Nasdaq  Small-Cap  Market
since   December  9,  1993.   "The  Nasdaq  Stock   Market"  or  "Nasdaq"  is  a
highly-regulated  electronic  securities  market  comprised of competing  Market
Makers whose trading is supported by a  communications  network  linking them to
quotation  dissemination,  trade reporting,  and order execution  systems.  This
market  also  provides   specialized   automation   services  for   screen-based
negotiations of transactions, on-line comparison of transactions, and a range of
informational  services  tailored  to  the  needs  of the  securities  industry,
investors and issuers.  The Nasdaq Stock Market  consists of two distinct market
tiers: the Nasdaq National Market(R) and the Nasdaq SmallCap Markets. The Nasdaq
Stock  Market is operated  by the Nasdaq  Stock  Market,  Inc.,  a  wholly-owned
subsidiary of the National  Association of Securities  Dealers,  Inc. The Nasdaq
National Market symbol for the Company's common stock is "LABN." At December 31,
1997,   the  total  number  of  holders  of  record  of  the  common  stock  was
approximately 1,200.

The table below  presents  the high and low bid prices  reported  for the Common
Stock and the cash  dividends  declared  on such  Common  Stock for the  periods
indicated. The range of high and low prices is based on trade prices reported on
the Nasdaq  Small-Cap  Market,  except for the  fourth  quarter of 1997.  Market
quotations reflect inter-dealer prices,  without retail mark-up,  mark-down,  or
commission, and may not necessarily reflect actual transactions. On December 31,
1997, the closing price of a share of Common Stock on the Nasdaq National Market
was $17.75.  All prices and dividends have been restated to reflect the 5% stock
dividends  paid in  October  1997 and  1996,  and the  two-for-one  stock  split
effective on November 10, 1997.

Year          Quarter  High     Low     Dividends Declared

1997          4th     $22.00   $13.90    $0.13
              3rd      14.05     9.50     0.09
              2nd       9.75     9.50     0.08
              1st      11.30     9.75     0.08

1996          4th      12.15     7.55    0.11
              3rd       8.20     7.20     0.08
              2nd       7.60     6.45     0.08
              1st       7.70     6.70     0.08

1995          4th       6.80     6.70    0.09
              3rd       7.60     6.25     0.07
              2nd       7.50     7.15     0.06
              1st       7.95     7.40     0.06


MARKET MAKERS

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

M.H. Myerson & Co., Inc.      Legg Mason Wood Walker, Inc   Wheat First Union
525 Washington Boulevard      330 Montage Mountain Road     901 E. Byrd Street
P.O. Box 260                  Scranton, PA 18507            P.O. Box 1357
Jersey City, NJ  07303        1-800-346-4346                Richmond, VA  23219
(212)425-1212                                               804-649-2311



<PAGE>





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

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

INDEPENDENT AUDITORS                    CORPORATE COUNSEL

Parente, Randolph, Orlando,             Oliver, Price & Rhodes
Carey & Associates                      Suite 300
46 Public Square                        220 Penn Avenue
Wilkes-Barre, PA 18701                  Scranton, PA 18501
(717)820-0100                           (717)343-6581

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

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

SEC REPORTS AND ADDITIONAL  INFORMATION Upon written request of any stockholder,
investor or  analyst,  a copy of the  Corporation's  report on Form 10-K for its
fiscal year ended  December 31, 1997,  including  financial  statements  and the
schedules  thereto,  required  to be filed  with  the  Securities  and  Exchange
Commission,  may be obtained,  without charge, by contacting the Chief Financial
Officer,  Lake Ariel Bancorp,  Inc., 409 Lackawanna Avenue, Suite 201, Scranton,
PA 18503, (717)343-8200.

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

E.MAIL ADDRESS
labank@epix.net






<PAGE>



<TABLE>
<CAPTION>

                                   Administration Division
<S>                                <C>                                     <C>


Lake Ariel Bancorp, Inc.
Officers                           Karen T. Pasternak                      Gary S. Lavelle
Bruce D. Howe                      Sr. Vice President                      Assistant Vice President
President                          Cynthia A. Smaniotto                    John J. Morgan
John G. Martines                   Sr. Vice President                      Assistant Vice President
Chief Executive Officer            Kathy Enslin                            Jennifer K. Nichols
Louis M. Martarano                 Vice President & Cashier                Assistant Vice President
Vice President & Assistant Sec.    Gregory G. Gula                         Jeri S. Prussia
Joseph J. Earyes, CPA              Vice President                          Assistant Vice President
Vice President & Treasurer         Daniel J. Santaniello                   Bonnie Robinson
Donald E. Chapman                  Vice President                          Assistant Vice President
Secretary                          Salvatore R. DeFrancesco, Jr., CPA      Marcy Swingle
                                   Assistant Vice President & Controller   Assistant Vice President
                                   Timothy S. Dunn                         Lynn M. Thiel
                                   Assistant Vice President                Assistant Vice President
Directors of                       Kathleen Horan                          & Internal Auditor
Corporation and Bank               Assistant Vice President                Susan T. Lenko
Donald E. Chapman                                                          Assistant Cashier
Peter O. Clauss
Arthur M. Davis                                                            Retail Division
William C. Gumble
Paul D. Horger, Esq.               John Foley                              William Kerstetter
Bruce D. Howe                      Sr. Vice President                      Vice President
John G. Martines                   Thomas Byrne                            Doris Hellerman
Harry F. Schoenagel                Vice President                          Assistant Vice President
                                   Theodore Daniels                        Penny Cola
                                   Vice President                          Assistant Cashier
                                   Thomas Dziak
                                   Vice President

                                   Lake Ariel Branch                       Milford Township
                                   Treva J. Day                            Cynthia Halliday
LA Bank, N.A.                      Assistant Vice President &              Branch Manager
Executive Officers                 Branch Manager
Bruce D. Howe                                                              Clarks Green Branch
Chairman                                                                   Ellen Ball
John G. Martines                   Mt. Cobb Branch                         Branch Manager
President and Chief Exec.officer   Daniel Roberts
Louis M. Martarano                 Branch Manager                          The Mall At Steamtown Branch
Executive Vice President &                                                 Patricia A. Jenkins
Chief Operating Officer            Greene-Dreher Branch                    Branch Manager
Joseph J. Earyes, CPA              Mary Ellen Bentler
Executive Vice President &         Branch Manager                          Lords Valley Branch
Chief Financial Officer                                                    Laura Schultz
Donald E. Chapman                  Hamlin Corners Branch                   Branch Manager
Secretary                          Ann O'Reilly
                                   Branch Manager                          Carbondale Branch
                                                                           Sheila Dick
                                   Eynon Branch                            Branch Manager
LA Lease, Inc.                     Peter Misura
Officers                           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 Exec.Officer                                           Milford Branch
Thomas Byrne                       Keyser Valley Branch                    John Gouse
Vice President                     Doreen Swingle                          Assistant Vice President &
Joseph J. Earyes, CPA              Branch Manager                          Branch Manager
Secretary & Treasurer



<PAGE>





Ariel Financial Services, Inc.     Mountainhome Branch
Officers                           Marilynn Palmer
Bruce D. Howe                      Branch Manager
Chairman
John G. Martines                   Scranton Branch
President and Chief Exec.Officer   Patricia A. Jenkins
Joseph J. Earyes, CPA              Branch Manager
Vice President
Louis M. Martarano
Secretary and Treasurer


                                   Mortgage Loan Originators

                                   Peter Bilyk
                                   Kathy Smith
                                   Lori A. Rudalavage
                                   Steve Zazzera

</TABLE>



<PAGE>




                                OFFICE LOCATIONS


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 Shop Plaza
                              Route 191                Route 739, South
LA Bank, N.A.                 Newfoundland, PA 18445   Lords Valley, PA 18428
Financial Center              (717)676-4767            (717)775-8800
409 Lackawanna Ave, St. 201
Scranton, PA 18503-2045       Hamlin Corners           Carbondale
(717)343-8200                 Route 191 & 590          93 Brooklyn Street
                              Hamlin, PA 18427         Ames Shopping Plaza
LA Lease Inc.                 (717)689-0944            Carbondale, PA 18407
P.O. Box 67                                            (717)282-7400
Route 191                     Eynon
Lake Ariel, PA  18436         685 Scrant-Carbale Hwy.  Lake Wallenpaupack
(717)698-5695                 Eynon, PA 18403-1022     HC 6 Box 6931
                              (717)876-1637 / 342-2242 Hawley, PA 18428
                                                       (717)226-5300
Ariel Financial Services,Inc. Keyser Valley
P.O. Box 67                   130 N. Keyser Avenue     Milford
Route 191                     Scranton, PA 18504       214 W. Harford Street
Lake Ariel, PA  18436         (717)341-8100            Milford, PA 18337
(717)698-8400                                          (717)296-0200
(717)876-8400                 Milford Township
                              Routes 6 & 209           Mountainhome
                              Milford, PA 18337        Route 390 Barrett Twp.
                              (717)296-5600            Mountainhome, PA 18342
                                                       (717)595-6400

                                                       Scranton
                                                       409 Lackawanna Avenue,
                                                       Suite 101
                                                       Scranton, PA  18503-2049
                                                       (717)341-8200

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



<PAGE>



Business Development Boards

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