SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K
(Mark one)
[X]                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                      OR
[ ]               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
           FOR THE TRANSITION PERIOD FROM ____________TO_____________
                         COMMISSION FILE NUMBER 33-88802

                          PEOPLES FINANCIAL CORP., INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
           PENNSYLVANIA                                  25-1469914
           ------------                                  ----------
          (State or other jurisdiction of               (I.R.S. Employer
           Incorporation or organization)                Identification No.)
           323 FORD STREET, FORD CITY, PA                 16226
           --------------------------------               ------
          (Address of principal executive offices)       (Zip Code)
           Registrants telephone number, including area code:     (814) 275-3133

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

                                                         Name of each exchange
    Title of each class                                  on which registered
    -------------------                                  ---------------------

Common Stock, par value of $0.30 per share                      None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

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

The Issuer's revenues for the year ended December 31, 1998, were:  $20,982,293.

State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $36,782,980 on March 1, 1999

Indicate the number of shares outstanding of the registrant's common stock, as
of March 1, 1999: Peoples Financial Corp., Inc. Common Stock, par value $0.30
per share: 1,768,694 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

Excerpts from the following documents have been incorporated by reference in
answer or partial answer to certain Items required herein and are attached
hereto as Exhibits:
1) Annual Report to Shareholders, Part I - II.
2) Proxy Statement pursuant to Regulation 14A promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, Part III.

<PAGE>


DESCRIPTION OF PEOPLES FINANCIAL CORP, INC. AND PFC BANK

                                     Part I

ITEM 1 - DESCRIPTION OF BUSINESS

Peoples Financial Corp, Inc., ("PFC", "Corporation" or the "Company") is a
Pennsylvania business corporation, incorporated in June, 1984. PFC was organized
as a holding company for Peoples Bank of PA. Peoples Bank of PA, in turn owned
approximately 53% of New Bethlehem Bank common stock. Effective April 1, 1995,
New Bethlehem merged with and into Peoples and changed its name to PFC Bank (the
"Bank").

The Bank is a Pennsylvania-chartered banking institution and, as successor to
Peoples and New Bethlehem, traces its origins to 1914 and 1895, respectively.
PFC Bank offers a full range of banking services through seven banking offices
in Pennsylvania, two of which are located in Ford City, two in New Bethlehem,
one in each of Clarion and Indiana, and the seventh banking office opened in
Butler, Pennsylvania, in September 1998, as a full service branch. As of
December 31, 1998, the Bank had total assets of $266.0 million and stockholders'
equity of $40.6 million. All of PFC Bank's outstanding common stock is owned by
PFC.

PFC Service Corporation (the "Service Corp") is a Delaware corporation and a
wholly owned subsidiary of the Bank. The Service Corp was incorporated in
Delaware, on May 16, 1997. The primary purpose of the Service Corp is to buy and
sell equity securities, primarily Pennsylvania bank securities. As of December
31, 1998, the Service Corp had total assets of $37.4 million and shareholder's
equity of $27.1 million.

Forward-Looking Statements

From time to time, the Corporation may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Corporation notes that a variety of
factors could cause the Corporation's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Corporation's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development and results of the Corporation's
business include the following: general economic conditions, including their
impact on capital expenditures; business conditions in the banking industry; the
regulatory environment; rapidly changing technology and evolving banking
industry standards; competitive factors, including increased competition with
community, regional and national financial institutions; new service and product
offerings by competitors and price pressures; the inability of the Corporation
to accurately estimate the cost of systems preparation for Year 2000 compliance
and similar items.

Employees

As of December 31, 1998, PFC, PFC Bank and PFC Service Corp. had 83 full-time
employees and 20 part-time employees.

<PAGE>



Competition

The Financial services industry in the Company's service area is extremely
competitive. The Company's competitors within its service area include
multi-bank holding companies, with resources substantially greater than those of
the Company. Many competitor financial institutions have legal lending limits
substantially higher than the Bank's legal lending limit. In addition, the Bank
competes with savings banks, savings and loan associations, credit unions, money
market and other mutual funds, mortgage companies, leasing companies, finance
companies, and other financial services companies that offer products and
services similar to those offered by the Bank on competitive terms. The Bank is
not dependent on one or a few major competitors.

In September 1994, federal legislation was enacted that is expected to have a
significant effect in restructuring the banking industry in the United States.
As a result, the Company expects the operating environment for
Pennsylvania-based financial institutions to become increasingly competitive.

Additionally, the manner in which banking institutions conduct their operations
may change materially as the activities increase in which bank holding companies
and their banking and nonbanking subsidiaries are permitted to engage, and
funding and investment alternatives continue to broaden, although the long-range
effects of these changes cannot be predicted with reasonable certainty at this
time. These changes probably will further narrow the differences and intensify
competition between and among commercial banks, thrift institutions, and other
financial service companies.

Supervision and Regulation of PFC and PFC Bank

PFC is subject to the provisions of the Bank Holding Company Act of 1956, and to
supervision by the Board of Governors of the Federal Reserve System. Under
Federal Reserve Board policy, PFC, as a holding company, is expected to act as a
source of financial strength to its subsidiaries and to commit resources to
support the subsidiaries. This support may be required at times when, absent
such Federal Reserve Board policy, PFC may not be in a position to provide it.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" (as defined
by regulations) with the terms of any capital restoration plan filed by such
subsidiary with its appropriate federal banking agency, up to specified limits.

Under the Bank Holding Company Act, the Federal Reserve Board has the authority
to require a bank holding company to terminate any activity or relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve Board's determination that such activity or control
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the bank holding company.

The Bank Holding Company Act prohibits the Company from acquiring direct or
indirect control of more than 5% of the outstanding shares of any class of
voting stock or substantially all of the assets of any bank or merging or
consolidating with another bank holding company without prior approval of the
Federal Reserve Board. Such a transaction would also require approval of the
Pennsylvania Department of Banking. Pennsylvania law permits Pennsylvania bank
holding companies to control an unlimited number of banks.

Additionally, the Bank Holding Company Act prohibits the Company from engaging
in or from acquiring ownership or control of more than 5% of the outstanding
shares of any class of voting stock of any company engaged in a nonbanking
business unless such business is determined by the Federal Reserve Board to be
so closely related to banking as to be a proper incident thereto.

<PAGE>

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

As a bank holding company, PFC is required to file reports with the Federal
Reserve Board and is subject to examinations thereby.

The activities that the Federal Reserve has determined by regulation to be
permissible are:

          (1)    making, acquiring, or servicing loans or other extensions of
                 credit for its own account or for the account of others;

          (2)    operating an industrial bank, Morris Plan bank, or industrial
                 loan company, in the manner authorized by state law, so long as
                 the institution is not a bank;

          (3)    operating as a trust company in the manner authorized by
                 federal or state law so long as the institution is not a bank
                 and does not make loans or investments or accept deposits,
                 except as may be permitted by the Federal Reserve Board;

          (4)    subject to limitations, acting as an investment or financial
                 advisor (i) to a mortgage or real estate investment trust, (ii)
                 to certain registered investment companies, (iii) by providing
                 portfolio investment advice to other persons, (iv) by
                 furnishing general economic information and advice, general
                 economic statistical forecasting services, and industry
                 studies, (v) by providing financial advice to state and local
                 governments, or (vi) by providing financial and transaction
                 advice to corporations, institutions, and certain persons in
                 connection with mergers, acquisitions, and other financial
                 transactions;

          (5)    subject to limitations, leasing real or personal property or
                 acting as agent, broker, or adviser in leasing such property in
                 accordance with prescribed conditions;

          (6)    investing in corporations or projects designed primarily to
                 promote community welfare;

          (7)    providing to others data processing services and data
                 transmission services, data bases, and facilities, within
                 certain limitations;

          (8)    subject to limitations, engaging in certain agency and
                 underwriting activities with respect to credit insurance, and
                 certain other insurance activities as permitted by the Federal
                 Reserve Board;

          (9)    owning, controlling, or operating a savings association, if the
                 savings association engages only in deposit-taking activities
                 and lending and other activities that are permissible for bank
                 holding companies under Federal Reserve Board regulations;

          (10)   providing courier services for certain financial documents;

          (11)   subject to limitations, providing management consulting advice
                 to nonaffiliated bank and nonbank depository institutions;
<PAGE>

          (12)   retail selling of money orders and similar consumer-type
                 payment instruments having a face value of $1,000 or less,
                 selling U.S. Savings Bonds, and issuing and selling traveler's
                 checks;

          (13)   performing appraisals of real estate and personal property;

          (14)   subject to limitations, acting as intermediary for the
                 financing of commercial or industrial income-producing real
                 estate by arranging for the transfer of the title, control, and
                 risk of such a real estate project to one or more investors;

          (15)   providing certain securities brokerage services;

          (16)   subject to limitations, underwriting and dealing in government
                 obligations and certain other instruments;

          (17)   subject to limitations, providing foreign exchange and
                 transactional services;

          (18)   subject to limitations, acting as a futures commission merchant
                 for nonaffiliated persons;

          (19)   subject to limitations, providing investment advice on
                 financial futures and options to futures;

          (20)   subject to limitations, providing consumer financial
                 counseling;

          (21)   subject to limitations, tax planning and preparation;

          (22)   providing check guaranty services;

          (23)   subject to limitations, operating a collection agency; and,

          (24)   operating a credit bureau.

Federal Reserve Board approval may be required before the Company or its nonbank
subsidiaries may begin to engage in any such activity and before any such
business may be acquired.

PFC is a legal entity separate and distinct from the Bank. The Company's
revenues (on a parent Company only basis) result almost entirely from dividends
paid to the Company by its subsidiary. The right of the Company, and
consequently the right of creditors and shareholders of the Company, to
participate in any distribution of the assets or earnings of any subsidiary
through the payment of such dividends or otherwise is necessarily subject to the
prior claims of creditors of the subsidiary (including depositors, in the case
of the Bank), except to the extent that claims of the Company in its capacity as
a creditor may be recognized.

Federal and state laws regulate the payment of dividends by the Company's
subsidiaries.

Further, it is the policy of the Federal Reserve Board that bank holding
companies should pay dividends only out of current earnings. Federal banking
regulators also have the authority to prohibit banks and bank holding companies
from paying a dividend if they should deem such payment to be an unsafe or
unsound practice. 
<PAGE>

Capital Adequacy

Bank holding companies are required to comply with the Federal Reserve Board's
risk-based capital guidelines. The required minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half (4%) of the total capital is
required to be "Tier 1 capital," consisting principally of common stockholders'
equity, noncumulative perpetual preferred stock, a limited amount of cumulative
perpetual preferred stock, and minority interests in the equity accounts of
consolidated subsidiaries, less certain intangible assets. The remainder ("Tier
2 capital") may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance. In addition to the risk-based capital guidelines, the
Federal Reserve Board requires a bank holding company to maintain a minimum
"leverage ratio." This requires a minimum level of Tier 1 capital (as determined
under the risk-based capital rules) to average total consolidated assets of 3%
for those bank holding companies that have the highest regulatory examination
ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies that have the highest regulatory
examination ratings and are not contemplating or experiencing significant growth
or expansion. All other bank holding companies are expected to maintain a ratio
of at least 1% to 2% above the stated minimum. Further, the Federal Reserve
Board has indicated that it will consider a "tangible Tier 1 capital leverage
ratio" (deducting all intangibles) and other indicia of capital strength in
evaluating proposals for expansion or new activities. The Federal Reserve Board
has not advised management of any specific minimum leverage ratio applicable to
PFC.

Pursuant to Federal Deposit Insurance Corporation Improvement Act, the federal
banking agencies have specified, by regulation, the levels at which an insured
institution is considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or critically
undercapitalized." Under these regulations, an institution is considered "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio of 5% or
greater, and is not subject to any order or written directive to meet and
maintain a specific capital level. PFC and PFC Bank, at December 31, 1998,
qualify as "well capitalized" under these regulatory standards.

PFC Bank is subject to supervision, regulation and examination by the
Commonwealth of Pennsylvania Department of Banking (the "Department of Banking")
and the Federal Deposit Insurance Corporation ("FDIC"). In addition, the Bank is
subject to a variety of local, state and federal laws that affect its operation.

The laws of the Department of Banking applicable to PFC Bank include, among
other things, provisions that:

o    require the maintenance of certain reserves against deposits;
o    limit the type and amount of loans that may be made and the interest that
     may be charged thereon
o    restrict investments and other activities; and, 
o    limit the payment of dividends. The amount of funds that the Bank may lend
     to a single borrower is generally limited under Pennsylvania law to 15% of
     the aggregate of its capital, surplus, undivided profits, loan loss
     reserves and capital securities of the Bank, all as defined by statute and
     regulation.

Applicable Pennsylvania law also requires that a bank obtain the approval of the
Department of Banking prior to effecting any merger where the surviving bank
would be a Pennsylvania-chartered bank. In reviewing merger applications,
consideration is given, among other things, to whether the merger would be
consistent with adequate and sound banking practices and in the public interest
on the basis of several factors, including the potential effect of the merger on
competition and the convenience and needs of the area primarily to be served by
the bank resulting from the merger.
<PAGE>

Applicable Pennsylvania law permits Pennsylvania-chartered banks to engage in
banking activity in other states (interstate banking) provided that such
activity is within a state that permits reciprocal privileges.

The FDIC, which has primary supervisory authority over the Bank, regularly
examines banks in such areas as reserves, loans, investments, management
practices, and other aspects of operations. These examinations are designed for
the protection of the Bank's depositors rather than the Company's stockholders.
The Bank must furnish annual and quarterly reports to the FDIC, which has the
authority under the Financial Institutions Supervisory Act to prevent a state
non-member bank from engaging in an unsafe or unsound practice in conducting its
business.

Federal and state banking laws and regulations govern, among other things, the
scope of a bank's business, the investments a bank may take, the reserves
against deposits a bank must maintain, the types and terms of loans a bank may
make and the collateral it may take, the activities of a bank with respect to
mergers and consolidations, and the establishment of branches. Pennsylvania law
permits statewide branching.

Under the Federal Deposit Insurance Act, as amended, the Bank is required to
obtain the prior approval of the FDIC for the payment of dividends if the total
of all dividends declared by the Bank in one year would exceed the Bank's net
profits (as defined and interpreted by regulation) for the current year plus its
retained net profits (as defined and interpreted by regulation) for the two
preceding years, less any required transfers to surplus. In addition, the Bank
may only pay dividends to the extent that its retained net profits (including
the portion transferred to surplus) exceed statutory bad debts (as defined by
regulation). Under Federal Deposit Insurance Corporation Improvement Act, any
depository institution, including the Bank, is prohibited from paying any
dividends, making other distributions or paying any management fees if, after
such payment, it would fail to satisfy its minimum capital requirements.

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

The Bank, and the banking industry in general, are affected by the monetary and
fiscal policies of government agencies, including the Federal Reserve Board.
Through open market securities transactions and changes in its discount rate and
reserve requirements, the Board of Governors of the Federal Reserve exerts
considerable influence over the cost and availability of funds for lending and
investment.

Year 2000 Issues

The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact on the Corporation of the Year 2000 issue
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.

The "Year 2000 Problem" ("Y2K") arose because many existing computer programs
use only the last two digits to refer to a year. Therefore, these computer
programs do not properly recognize a year that begins with "20" instead of the
familiar "19". If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. This could cause entire system
failures, miscalculations, and disruptions of normal business operations
<PAGE>

including, among other things, a temporary inability to process transactions,
send statements, or engage in similar day to day business activities. The extent
of the potential impact of the Year 2000 Problem is not yet known, and if not
timely corrected, it could affect the global economy.

The Bank is subject to the regulation and oversight of various banking
regulators, whose oversight includes the provision of specific timetables,
programs and guidance regarding Year 2000 issues. Regulatory examination of the
Bank's Year 2000 programs are conducted on a periodic basis.

Corporation's State of Readiness

The Board of Directors is committed to ensuring that the Corporation's daily
operations suffer little or no impact from the century date change. The
Corporation has applied due diligence throughout the Y2K process, following the
guidelines contained in the series of Federal Financial Institutions
Examinations Council's Interagency Guidelines. The guidelines identify the
following phases: awareness, assessment, renovation or remediation, testing or
validation and implementation.

Based on an ongoing assessment, the Corporation has determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly use dates beyond December 31, 1999. The Corporation
presently believes that as a result of modifications to existing software and
hardware and conversions to new software, the Year 2000 Problem can be
mitigated. However, if such modifications and conversions are not made, or are
not completed on a timely basis, the Year 2000 Problem could have a material
adverse impact on the operations of the Corporation.

Management has initiated an enterprise-wide program to prepare the Corporation's
computer systems and applications for the Year 2000. The Corporation has
developed a comprehensive inventory of all mainframe and PC based applications,
third-party relationships, environmental systems, proprietary programs and
noncomputer related systems (such as postage meters and fax machines). This
assessment identified 112 systems, processes or proprietary programs, which
could be impacted by the century date change. As of March 1, 1999, the
Corporation has remedied 110 or 98% of the programs, systems to be Year 2000
ready, with all systems expected to be ready/compliant by April 30, 1999.

The Corporation has acquired its mission-critical system which supports the
Corporation's core business processes from a highly regarded third-party vendor.
Thus, even though the Corporation does not have direct control over the
renovation process, it is monitoring the progress of its third-party vendors to
assess the status of their Y2K readiness efforts and plans to retest their
systems for Y2K compliance in May 1999. However, because most computer systems
are, by their very nature, interdependent, it is possible that noncompliant
third-party computers could impact the Corporation's computer systems. The
Corporation could be adversely affected by the Y2K problem if it or unrelated
parties fail to successfully address the problem. The Corporation has taken
steps to communicate with the unrelated parties with whom it deals to coordinate
Year 2000 compliance. Additionally, the Corporation is dependent on external
suppliers, such as, wire transfer systems, telephone systems, electric
companies, and other utility companies for continuation of service. The
Corporation is also assessing the impact, if any, the century date change may
have on its credit risk.

The Corporation has initiated communications with all of its significant
vendors, suppliers and large commercial customers to determine the extent to
which the Corporation is vulnerable to those third-parties' failure to remedy
their own Year 2000 Problems. The Y2K Project Manager has available each
vendor's Y2K readiness efforts. In the event that any of the Corporation's
significant vendors, suppliers and large commercial customers do not
successfully achieve Year 2000 compliance in a timely manner, the Corporation's
business or operations could be adversely affected. For significant vendors, the
<PAGE>

Corporation will validate that they are Year 2000 compliant by March 31, 1999,
or make plans to switch to a new vendor or system that is compliant. For
insignificant vendors, the Corporation will not necessarily validate that they
are Year 2000 compliant. However, for any insignificant vendor who responds that
they will not be compliant by March 31, 1999, the Corporation will seek a new
vendor or system that is compliant.

Year 2000 Issues also affect certain of the Bank's customers, particularly in
the areas of access to funds and additional expenditures to achieve compliance.
The Bank has engaged in a program of contacting its commercial customers
regarding the customers' awareness of the Year 2000 Issue. The Corporation
cannot guarantee that the inability of loan customers to adequately correct the
Year 2000 Issue will not have an adverse effect on the Corporation. For large
commercial loan customers, the Bank will take appropriate action based upon
their level of readiness for Year 2000. Nevertheless, the Corporation does not
believe that the cost of addressing the Y2K issues will be a material event or
uncertainty that would cause reported financial information not to be
necessarily indicative of future operating results or financial conditions, not
does it believe that the costs or the consequences of incomplete or untimely
resolution of its Year 2000 issues represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.

Costs of Year 2000

The Corporation will use both internal and external resources to reprogram, or
replace, and test its software and hardware for the Year 2000 modifications.
Concurrent with the Year 2000 project, the Corporation will also be converting
all its major data processing systems, both hardware and software, to current
technology. The Corporation plans to complete both the Year 2000 and systems
conversion projects no later than June 30, 1999, for all critical systems.

As of March 1, 1999, $27,500 has been expended as Year 2000 costs. Management
expects to spend a total of $110,000 for the entire project. Of the total
project's cost, approximately $61,000 is attributable to the purchase of new
software which will be capitalized. The remaining $21,500 will be expensed as
incurred through December 31, 1999. The estimated Year 2000 project costs
include the costs and time associated with the impact of third-parties' Year
2000 issues, and are based on presently available information. The total cost of
the project is being funded through operating cash flows. The Corporation
continues to evaluate appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized. Accordingly, the Corporation does not expect the amounts
required to be expensed through December 31, 1999 to have a material effect on
the financial position or results of operation. However, if compliance is not
achieved in a timely manner by the Corporation or any of its significant related
third-parties, be it a supplier of services or customer, the Y2K issue could
possibly have a material effect on the Corporation's operations and financial
position.

The cost of the projects and the date on which the Corporation plans to complete
both Year 2000 modifications and systems conversions are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
<PAGE>

Risks of Year 2000

At present, management believes it's progress is remedying the Corporation's
systems, programs and applications and installing Y2K compliant upgrades is on
target. The Y2K computer problem creates risk for the Corporation from
unforeseen problems in its own computer systems and from third-party vendors who
provide the majority of mainframe and PC based computer applications. Failure of
third-party systems relative to the Y2K issue could have a material impact on
the Corporation's ability to conduct business.

Contingency Plans

The Corporation is in the process of obtaining back-up service providers,
working up contingency plans and assessing the potential adverse risks to the
Corporation. The Corporation's contingency plans involve the use of manual labor
to compensate for the loss of certain automated computer systems and
inconveniences caused by disruption in command systems.

The Corporation is in the process of working up contingency plans and assessing
the potential adverse risks to the Corporation. The Corporation's contingency
plans involve the use of manual labor to compensate for the loss of certain
automated computer systems and inconveniences caused by disruption in command
systems.

A business resumption contingency plan was developed for mission-critical and
required mainframe and PC based applications, third-party relationships,
proprietary programs and non-computer related systems. This contingency plan
identifies scheduled completion dates. The plan was ratified by the Board of
Directors on October 21, 1998.

FDIC Insurance

PFC Bank's deposits are insured by the FDIC pursuant to the system of federal
deposit insurance initially established by the Banking Act of 1933. This
insurance covers $100,000 per deposit account. The Bank pays insurance premiums
into a fund according to rates established by the FDIC. The Federal Deposit
Insurance Corporation Improvement Act was enacted, in part, to prevent the
deposit insurance funds related to savings institutions from becoming insolvent.
The act authorized the FDIC to raise insurance premium assessments in order to
achieve and maintain an adequate level of funds. The depletion of the deposit
insurance funds had been due, in part, to a large number of failed financial
institutions in the 1980's, as well as increases in coverage per deposit
account. As a result, the future cost of deposit insurance for the Bank is in
large part dependent upon the extent of future banking failures and the amount
of insurance coverage provided by the FDIC per deposit account, neither of which
is within the Bank's control. Moreover, the act required the FDIC to establish a
risk-based insurance premium assessment system in order to differentiate between
higher and lower risk institutions and to assess lower premiums against
institutions in a lower risk category. As a result, the Bank's future cost of
deposit insurance will depend, in part, upon its risk rating.

Interstate Banking Legislation

In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency
Act was enacted. The Interstate Banking Act facilitates the interstate expansion
and consolidation of banking organizations:

o    by permitting bank holding companies that are adequately capitalized and
     adequately managed, beginning September 29, 1995, to acquire banks located
     in states outside their home states regardless of whether such acquisitions
     are authorized under the law of the host state;
o    by permitting the interstate merger of banks after June 1, 1997, subject to
     the right of individual states to "opt in" or "opt out" of this authority
     before that date;

<PAGE>

o    by permitting banks to establish new branches on an interstate basis
     provided that such action is specifically authorized by the law of the host
     state;
o    by permitting, beginning September 29, 1995, a bank to engage in certain
     agency relationships (i.e., to receive deposits, renew time deposits, close
     loans (but not including loan approvals or disbursements), service loans,
     and receive payments on loans and other obligations) as agent for any bank
     or thrift affiliate, whether the affiliate is located in the same state or
     a different state then the agent bank; and
o    by permitting foreign banks to establish, with approval of the regulators
     in the United States, branches outside their "home" states to the same
     extent that national or state banks located in the home state would be
     authorized to do so. One effect of this legislation will be to permit the
     Company to acquire banks and bank holding companies located in any state
     and to permit qualified banking organizations located in any state to
     acquire banks and bank holding companies located in Pennsylvania,
     irrespective of state law.

Since 1995, the Pennsylvania Banking Code has authorized full interstate banking
and branching under Pennsylvania law. Specifically, the legislation:

o    eliminates the "reciprocity" requirement previously applicable to
     interstate commercial bank acquisitions by bank holding companies,
o    authorizes interstate bank mergers and reciprocal interstate branching into
     Pennsylvania by interstate banks, and
o    permits Pennsylvania institutions to branch into other states with the
     prior approval of the Pennsylvania Department of Banking.

Overall, this federal and state legislation has, as was predicted, had the
effect of increasing consolidation and competition and promoting geographic
diversification in the banking industry.

Proposed Legislation and Regulations

From time to time, various federal and state legislation is proposed that could
result in additional regulation of, and restrictions on, the business of the
Company and the Bank, or otherwise change the business environment.

Management cannot predict whether any of this legislation, if enacted, will have
a material effect on the business of the Company.

Environmental Laws

Neither PFC nor the Bank anticipate that compliance with environmental laws and
regulations will have any material effect on capital, expenditures, or earnings.
However, environmentally related hazards have become a source of high risk and
potentially unlimited liability for financial institutions. Environmentally
contaminated properties owned by an institution's borrowers may result in a
drastic reduction in the value of the collateral securing the institution's
loans to such borrowers, high environmental clean up costs to the borrower
affecting its ability to repay the loans, the subordination of any lien in favor
of the institution to a state or federal lien securing clean up costs, and
liability to the institution for clean up costs if it forecloses on the
contaminated property or becomes involved in the management of the borrower. To
minimize this risk, the Bank may require an environmental examination of and
report with respect to the property of any borrower or prospective borrower if
circumstances affecting the property indicate a potential for contamination
taking into consideration a potential loss to the institution in relation to the
borrower. Such examination must be performed by an engineering firm experienced
in environmental risk studies and acceptable to the institution, and the cost of
<PAGE>

such examinations and reports are the responsibility of the borrower. These
costs may be substantial and may deter prospective borrowers from entering into
a loan transaction with the Bank. PFC is not aware of any borrower who is
currently subject to any environmental investigation or clean up proceeding that
is likely to have a material adverse effect on the financial condition or
results of operations of the Bank.

In 1995, the Pennsylvania General Assembly enacted the Economic Development
Agency, Fiduciary and Lender Environmental Liability Protection Act which, among
other things, provides protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and contamination
caused by others. A lender who engages in activities involved in the routine
practices of commercial lending, including, but not limited to, the providing of
financial services, holding of security interests, workout practices,
foreclosure or the recovery of funds from the sale of property shall not be
liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental Resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substances on
or from the property, or knowingly and willfully compel a borrower to commit an
action which caused such release or violate an environmental act. The Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection Act,
however, does not limit federal liability which still exists under certain
circumstances.

ITEM 2 - DESCRIPTION OF PROPERTIES

The Corporation has seven full service offices at the following locations:

1.   Ford City Office, 323 Ford Street, Ford City, Pennsylvania, Corporate
     office, containing 8,300 square feet;

2.   New Bethlehem Office, 363 Broad Street, New Bethlehem, Pennsylvania,
     Operations Office, containing 11,867 square feet;

3.   Clarion Office, 650 Main Street, Clarion, Pennsylvania, containing 7,101
     square feet;

4.   Butler Office, 181 New Castle Road, Butler, Pennsylvania, containing 1,400
     square feet;

5    Indiana Office, 500 Philadelphia Street, Indiana, Pennsylvania, containing
     4,000 square feet;

6.   New Bethlehem Branch Office, 628 Broad Street, New Bethlehem, Pennsylvania,
     containing 2,800 square feet;

7.   Manor Township Office, Pleasantview Drive, Ford City, Pennsylvania,
     containing 1,600 square feet;

All properties listed are owned by the Company and are used by the Company in
its operations. In management's opinion, the above properties are in good
condition and are adequate for the Bank's purposes.

ITEM 3 - LEGAL PROCEEDINGS

Management believes there are no proceedings pending to which PFC or the Bank is
a party or to which its property is subject, which, if determined adversely,
would be material in relation to its undivided profits or financial condition.
There are no proceedings pending other than routine litigation incidental to the
<PAGE>

business of PFC and the Bank. In addition, no material proceedings are pending
or are known to be threatened or contemplated against PFC or the Bank by
governmental authorities.

ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

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



<PAGE>
                                     Part II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PFC's common stock is held by 385 stockholders of record as of March 1, 1999,
and is rarely traded. Management of PFC believes that a few securities dealers
are attempting to form a market for the PFC Common Stock even though there are
very few trades recorded. As of March 1, 1999, there were 1,768,694 shares
outstanding after payment of a 100% stock dividend, in the form of a 2 for 1
stock split, payable February 10, 1999, to stockholders of record January 20,
1999. PFC paid dividends of $0.24 per share the first and second quarters of
1997 followed by dividends in each of the third and fourth quarters of 1997 of
$0.25 per share. A special dividend of $0.15 per share was paid December 22,
1997. A dividend of $0.25 per share was paid in each of the first two quarters
of 1998 followed by a $0.26 per share dividend in the third and fourth quarters.
A special dividend of $0.15 per share was paid December 22, 1998. Because
corporate and banking laws limit the amount of dividends that can be paid
generally, there can be no assurance that dividends will be paid in the future
and, if paid, the amount of such dividends. See Note 11, Regulatory Matters, in
the footnotes to PFC's financial statement attached at Exhibit 13.

The following table sets forth quarterly highs and lows of PFC Common Stock for
the years 1996 through 1998. Quotations were received from Elmer Powell and
Associates and reflect inter-dealer prices, without retail markup, mark down or
commission and may not represent actual transactions.

                                  Common Stock
                               Market Performance
                                  (in dollars)

                     --------------------------------------
                       Qtr.           High       Low
                     --------------------------------------
                      1996
                     --------------------------------------
                        1            25.25       24.00
                        2            27.00       24.00
                        3            29.75       28.25
                        4            38.25       29.00
                     --------------------------------------
                      1997
                     --------------------------------------
                        1            38.25       36.50
                        2            38.25       38.25
                        3            38.25       38.25
                        4            38.25       38.25
                     --------------------------------------
                      1998
                     --------------------------------------
                        1            43.00       42.00
                        2            42.00       42.00
                        3            50.00       50.00
                        4          * 30.00     * 30.00
                     --------------------------------------

* Adjusted stock price to reflect retroactive treatment of 100% stock dividend
in the form of a stock split.



<PAGE>

ITEM 6 - SELECTED FINANCIAL DATA


The following is selected financial data of PFC and its wholly owned subsidiary,
PFC Bank. Dollar amounts are in thousands, except per share data. The average
balances shown consist of daily average balances.
<TABLE>
<CAPTION>

                                                                               Years Ended
                                                    -----------------------------------------------------------------------
Summary of Operations                                  12/31/98       12/31/97       12/31/96       12/31/95       12/31/94
                                                    ------------------------------------------------------------------------
<S>                                                  <C>            <C>            <C>            <C>            <C>       
   Total interest income                             $   17,355     $   15,571     $   13,933     $   13,168     $   12,792
   Net interest income                                    8,905          8,082          7,457          6,869          7,506
   Provision for loan losses                                200             80             75             60            192
   Gains on securities                                    3,001          1,065          1,053          1,253          2,405
   Other operating income                                   626            870          1,067            661            568
   Other operating expenses                               6,037          5,934          6,830          6,835          6,578
   Net income before deducting minority interest          4,464          2,997          2,110          1,542          2,679
   Net income                                             4,464          2,997          2,110          1,378          1,872
   Earnings per share (2)                                  2.53           1.70           1.20            .88           1.52
   Earnings per share (fully diluted) (2)                  2.53           1.70           1.20            .88           1.52


Average Balance Sheet Totals
   Total assets (1)                                     227,803        206,871        185,907        180,598        190,810
   Investment securities (1)                             43,337         41,946         41,846         56,678         70,088
   Loans & leases (net of unearned income
       and allowance for loan losses)                   163,520        142,266        123,115        110,803        106,390
   Total deposits                                       203,096        183,770        164,496        156,450        155,774
   Stockholders' equity (1)                              21,230         18,505         17,737         19,075         24,980
   Historical number of shares outstanding
       at period end (2)                              1,768,694      1,764,336      1,759,980      1,759,980        997,728
   Weighted average number of shares
       outstanding (2)                                1,765,792      1,761,126      1,759,980      1,570,114      1,234,084
Period End Total Assets (3)                             266,002        240,271        210,812        186,888        181,259
                                                                                                  
</TABLE>


(1)  Excludes the effect of SFAS No. 115 (Statement of Financial Accounting
     Standards No. 115 - Accounting for Certain Debt and Equity Securities).
(2)  Reflects retroactive effect of 333 to 1 stock split in August 1994 and 100%
     stock dividend in the form of a stock split in February 1999.
(3)  Reflects the effect of SFAS No. 115.









<PAGE>


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following is management's discussion and analysis of the consolidated
financial condition and results of operations of PFC and its wholly owned
subsidiary, PFC Bank. The consolidated financial information should be read in
conjunction with PFC's the consolidated financial statements included at Exhibit
13 to this report. Substantially all of the income and expenses of PFC are
attributable to PFC Bank and the Bank's subsidiary, PFC Service Corporation.


Financial Condition

The total assets of PFC at December 31, 1998 were $266.0 million, an increase of
$25.7 million, or 10.70% over total assets at December 31, 1997 of $240.3
million. Total assets at December 31, 1997 increased by $29.5 million or 13.99%
over December 31, 1996.

The increase in total assets from December 31, 1997 to December 31, 1998 was
comprised primarily of an increase in the loan portfolio of over $22.3 million
and an increase in interest-bearing balances with depository institutions of
over $8.2 million offsetting a decrease in federal funds sold of $2.2 million.

The increase in total assets as of December 31, 1997 over December 31, 1996 was
comprised primarily of an increase of over $16.3 million in loan balances in
addition to increases of $12.8 million in securities available-for-sale and $6.7
million in securities held to maturity. These increases more than offset a
decrease of over $3.2 million in federal funds sold.

Total liabilities of PFC increased by $22.5 million from $202.9 million at
December 31, 1997 to $225.4 million at December 31, 1998. This increase was due
to an increase in interest-bearing deposits of $20.0 million and an increase in
non-interest bearing deposits of $2.9 million.

The total liabilities of PFC at December 31, 1997 were $202.9 million, an
increase of $18.9 or 10.28% over total liabilities at December 31, 1996 of
$183.9 million. The increase in liabilities during the 12 months ended December
31, 1997 resulted primarily from interest bearing deposit increases of $11.8
million and a deferred tax increase of almost $4.6 million due primarily to the
tax effects of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities.


Net Income

PFC reported net income, before deducting the income taxes for the 12 month
period ended December 31, 1998 of $6,295,000 as compared to $4,003,000 for the
12 month period ended December 31, 1997, an increase of $2,292,000 or 57.26%. An
increase in interest income of $1,784,000 was slightly offset by an increase in
interest expense of $961,000. PFC's net income for the period ended December 31,
1998, after deducting taxes, was $4,464,000 as compared to $2,996,000 for the
year ended December 31, 1997. PFC reported net income, before deducting income
taxes, for the year ended December 31, 1997 of $4,003,000 which was an increase
of $1,330,000 or 49.76% as compared to $2,673,000 reported for the year ended
December 31, 1996. PFC's net income, after taxes, for the year ended December
31, 1997 was $886,000 higher than for the year ended December 31, 1996.

Earnings per share adjusted for the 100% stock dividend in the form of a 2 for 1
stock split effective February 10, 1999 to shareholders of record January 20,
1999, for the 12 month periods ended December 31, 1998, 1997 and 1996 was $2.53,
$1.70 and $1.20, respectively.
<PAGE>

Since most of the assets and liabilities of banks are monetary in nature,
changes in interest rates can have a significant effect on earnings. PFC,
through its asset and liability management, positions itself to react and
compensate for the volatility of interest rates. See additional analysis of
interest rate sensitivity presented on page 25.


Interest Income and Expenses

Total interest income increased to $17,355,000 in 1998 from $15,571,000 in 1997,
an increase of $1,784,000 or 11.46%. This increase is primarily attributable to
an increase in interest earned on loans of $1,523,000 or 12.35% along with an
increase in interest on interest bearing deposits of $292,000 and investment
securities of $188,000. The average yield on interest-earning assets decreased
from 7.31% for the 12 month period ended December 31, 1997 to 7.07% for the 12
month period ended December 31, 1998. The average yield on interest-earning
assets decreased from 7.53% for the 12 month period ended December 31, 1996 to
7.31% for the 12 month period ended December 31, 1997. The increase in total
interest income from 1997 to 1998 results from an increase in average earning
assets of $33.0 million. Total average loans increased by $20.0 million while
average investment securities and interest-bearing deposits increased by $8.8
and $7.7 million, respectively.

Total interest income increased to $15,571,000 in 1997 from $13,933,000 for the
year ended December 31, 1996, an increase of $1,638,000 or 11.76%. The increase
in total interest income from 1996 to 1997 results from an increase in earning
assets of $32.7 million. Total securities increased by $19.5 million while gross
loans increased by over $16.3 million.

Total interest expense increased to $8,450,000 in 1998 from $7,489,000 in 1997,
an increase of $961,000, or 12.83%. This increase is the result of an increase
in interest bearing deposits of $19.9 million. Total interest expense increased
to $7,489,000 in 1997 from $6,475,000 in 1996, an increase of $1,014,000 or
15.66%. The increase is primarily the result of an increase in interest bearing
deposits of $11.8 million for the year ended December 31, 1997. The average rate
on interest-bearing liabilities was 4.74% for the 12 months ended December 31,
1998 and 4.66% and 4.52% for the 12 month periods ended December 31, 1997 and
1996, respectively.

Net interest income is the difference between the interest earned on loans and
other investments, including dividends received on equity securities, and the
interest paid on deposits and other sources of funds. Net interest income for
the 12 month period ended December 31, 1998 was $8,905,000 as compared to
$8,082,000 for the 12 month period ended December 31, 1997, an increase of
$823,000 or 10.18%. Net interest income increased $625,000 or 8.38% in 1997 as
compared to $7,457,000 for the year ended December 31, 1996.

PFC obtains a portion of its funds from non-interest bearing deposits.
Therefore, the rate paid for all funds is lower than the rate on interest
bearing funds alone. PFC has been able to retain a significant base of
inexpensive deposits, which consists of checking and savings accounts. These
deposits for the years ended December 31, 1998, 1997 and 1996 comprise
approximately 50.20%, 52.56% and 56.02% of total deposits, respectively.

<PAGE>

Interest Income and Expenses (continued)

The following tables present the average major asset and liability categories
for the 12 month periods ended December 31, 1998, 1997 and 1996 along with
interest income and yields. The average balances shown consist of daily average
balances. Non-performing loans are included in the average balance and yield
calculations.

Average Balance Sheets & Net Interest Analysis for 1998
(in thousands)

<TABLE>
<CAPTION>

Selected Asset Categories               Average Balances   Interest   Yield/rate
-------------------------               ----------------   --------   ----------

   Interest-bearing assets
<S>                                          <C>          <C>             <C>  
          Loans & direct lease financing     $163,520     $ 13,846        8.47%
             (net of unearned discount)
          Investment securities                70,696        3,018        4.27%
          Federal funds sold                    3,743          198        5.29%
          Due from banks                        7,684          293        3.81%
   Non-interest bearing assets
          Cash and due from banks               4,242          N/A         N/A
          Premises and equipment                3,354          N/A         N/A
          Other assets                          2,436          N/A         N/A



Selected Liability Categories

   Interest-bearing liabilities
          Demand deposits                    $ 48,843     $  1,752        3.59%
          Savings deposits                     28,138          894        3.18%
          Time deposits                       101,135        5,804        5.74%
          Short-term borrowings                     0            0           0
   Non-interest-bearing liabilities
          Demand deposits                      24,980          N/A         N/A
          Other                                12,779          N/A         N/A
                                                                          


Net interest income                          $  8,905
Net interest margin                              3.63%
Average yield on interest-bearing assets         7.07%
Average rate on interest-bearing liabilities     4.74%

</TABLE>



<PAGE>


Interest Income and Expenses (continued)
<TABLE>
<CAPTION>


Average Balance Sheets & Net Interest Analysis for 1997
(in thousands)


Selected Asset Categories                    Average Balances   Interest      Yield/rate
-------------------------                    ----------------   --------      ----------

   Interest-bearing assets
<S>                                               <C>           <C>              <C>  
              Loans & direct lease financing      $143,529      $ 12,323         8.59%
                 (net of unearned discount)
              Investment securities                 61,864         2,831         4.58%
              Federal funds sold                     7,637           417         5.46%
              Due from banks                             0             0         0
   Non-interest bearing assets
              Cash and due from banks                7,100           N/A          N/A
              Premises and equipment                 3,598           N/A          N/A
              Other assets                           3,047           N/A          N/A


Selected Liability Categories

   Interest-bearing liabilities
              Demand deposits                     $ 45,058      $  1,590         3.53%
              Savings deposits                      28,353           901         3.18%
              Time deposits                         87,246         4,998         5.73%
              Short-term borrowings                      0             0            0
   Non-interest-bearing liabilities
              Demand deposits                       23,113           N/A          N/A
              Other                                 10,168           N/A          N/A
                                                                                    


Net interest income                               $  8,082
Net interest margin                                   3.79%
Average yield on interest-bearing assets              7.31%
Average rate on interest-bearing liabilities          4.66%

</TABLE>






<PAGE>


Interest Income and Expenses (continued)

<TABLE>
<CAPTION>

Average Balance Sheets & Net Interest Analysis for 1996
(in thousands)


Selected Asset Categories                     Average Balances    Interest     Yield/rate
-------------------------                     ----------------    --------     ----------

   Interest-bearing assets
<S>                                                <C>           <C>              <C>  
               Loans & direct lease financing      $124,380      $ 10,891         8.76%
                  (net of unearned discount)
               Investment securities                 54,657         2,738         5.00%
               Federal funds sold                     5,885           304         5.17%
               Due from banks                             0             0            0
   Non-interest bearing assets
               Cash and due from banks                7,101           N/A          N/A 
               Premises and equipment                 3,788           N/A          N/A
               Other assets                           2,907           N/A          N/A



Selected Liability Categories

   Interest-bearing liabilities
               Demand deposits                     $ 41,665      $  1,465         3.52%
               Savings deposits                      29,172           921         3.19%
               Time deposits                         72,339         4,089         5.65%
               Short-term borrowings                     27             2         7.41%
   Non-interest-bearing liabilities
               Demand deposits                       21,320           N/A          N/A
               Other                                  7,673           N/A          N/A



Net interest income                                $  7,457
Net interest margin                                    4.03%
Average yield on interest-bearing assets               7.53%
Average rate on interest-bearing liabilities           4.52%

</TABLE>




<PAGE>


Non-interest income

Non-interest income for the twelve month period ended December 31, 1998 totaled
$3,627,000 as compared to $1,935,000 for the same period ended 1997, an increase
of $1,692,000 or 88.44%. Non-interest income for the year ended December 31,
1997 decreased from the total in 1996 of $2,121,000 by $186,000. Changes in the
level of non-interest income during 1998 is primarily attributable to an
increase in net investment gains of $1,936,000 from 1997 to 1998. Changes in the
level of non-interest income during 1997 is primarily attributable to a decrease
in flood proceeds of $153,000 from 1996 to 1997.

Non-interest Expenses

Non-interest expenses for the twelve month period ended December 31, 1998
totaled $6,037,000 as compared to $5,934,000 for the same period in 1997, an
increase of $103,000 or 1.74%. The increase is primarily related to the net of
an increase in salaries and employee benefits of $199,000 and decreases of
$69,000 in legal and professional fees and $48,000 in miscellaneous operating
expenses. Non-interest expense for the twelve month period ended December 31,
1997 registered a decrease of $896,000 or 13.12% as compared to the same period
in 1996. The decrease is primarily related to a $544,000 decrease in early
retirement expenses from 1996 to 1997. Other expenses for the year ended
December 31, 1996 were substantially the same as 1995.

Investment Securities

Investments are second only to the loan portfolio when analyzing the source of
PFC's earning assets. In addition to generating revenue, securities provide the
primary source of liquidity and also serve as collateral for public deposits.
PFC historically invests in U.S. Treasury securities, obligations of U.S.
government agencies, obligations of state and political subdivisions, selected
corporate notes and equity securities of other local and regional financial
institutions. PFC accounts for investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, which requires
PFC to classify investment securities as either held to maturity, available for
sale or trading. Management has the ability and intent to hold held-to-maturity
securities until maturity. PFC has classified all equity securities as available
for sale. Substantially all of these securities are held in PFC Service
Corporation, Inc. There are no securities held in PFC's investment portfolio
which are considered trading securities. Under SFAS No. 115, PFC is required to
adjust the carrying value of its available-for-sale securities to market value.
These unrealized gains (losses) are recognized as an increase (decrease) to the
carrying value of such securities; the offset of which is an increase (decrease)
to PFC's stockholder's equity, adjusted for the deferred income tax effects
thereon. For the period ended December 31, 1998, PFC's net unrealized gain on
available-for-sale securities was $26.7 million. As of December 31, 1997
the net unrealized gain was $27.1.

PFC's investment securities balance for the period ended December 31, 1998 was
$70.8 million, a $400,000 or 0.50% decrease compared to the period ended
December 31, 1997. The December 31, 1997 securities balance of $71.2 million was
an incease of $19.6 million over the same time period in 1996. This increase was
due to increased pledging needs as well as a 91.08% increase in unrealized gains
on available-for-sale securities.

Average federal funds sold and securities sold under agreement to repurchase
were $3.7 million and $7.6 million for the year ended December 31, 1998 and
1997, respectively.

The table on the following page summarizes the maturity distribution and
itemized breakdown of the investment portfolio as of December 31, 1998.

<PAGE>


Maturity Distribution of Investment Securities for 1998
(in thousands and excluding SFAS No. 115)

<TABLE>
<CAPTION>

                                   No                Within                  1 to 5                 5 to 10
                                Maturity   Yield     1 Year      Yield        Years      Yield       Years      Yield      Total
                                --------   -----     -------     -----       -------     -----      -------     -----      -----
<S>                             <C>        <C>       <C>          <C>        <C>          <C>       <C>          <C>       <C>
U.S. Treasuries/Agencies                             $7,248      6.16%       $22,494      5.78%      $  997     7.33%     $30,739
State/Municipal                                         805      4.02%           310      4.73%          25     4.65%       1,140
Other Securities                                        750      7.28%            --      0.00%          --     0.00%         750
Equity Securities                $11,515    9.41%                                                                           11,515
                                 --------------------------------------------------------------------------------------------------
Totals                           $11,515    9.41%    $8,803      6.06%       $22,804      5.77%      $1,022     7.26%      $44,144
                                 ==================================================================================================
</TABLE>


Short-term Borrowings
(in thousands)

For each period:                            1998            1997          1996
                                            ----            ----          ----
Balance at period end                       $ 0             $ 0         $    0
Weighted average interest rate                0               0           5.67%
Maximum amount outstanding                    0               0          2,100
Maximum amount at any month end               0               0              0
Average amount outstanding                    0               0             27

<PAGE>
Loans

As of December 31, 1998, the net loan portfolio of PFC Bank comprised 65.67% of
total consolidated assets as compared with 63.43% for the year ending December
31, 1997.

Traditionally, PFC Bank has been highly dependent on home mortgage lending.
While this type of loan comprises a large portion of the loan portfolio, PFC
Bank has a wide range of other loans.

While the Bank offers a variety of loans to individual and corporate customers
in Armstrong, Butler, Clarion and Indiana Counties of Pennsylvania, they
concentrate their lending activities in residential mortgages in their local
market area. These loans comprised approximately 62.57% of PFC Bank's gross loan
portfolio as of December 31, 1998. As of that date, the remainder of the
portfolio was made up of real estate construction loans comprising loans of
1.39%, commercial and agricultural loans of 19.91%, consumer loans of 13.69%;
and, other loans comprising 2.44% of the loan portfolio. Although PFC Bank has a
significant concentration of residential and commercial mortgage loans
collateralized by first mortgage liens located in the Bank's lending areas,
there is no concentration of loans to borrowers engaged in similar economic
activities which exceed 10% of the loans at December 31, 1998.

The risks associated with the various types of loans placed by PFC Bank are
varied. The practices employed by the Bank in addressing these risks constantly
evolves in response to economic conditions.

With respect to secured real estate lending, PFC Bank has traditionally placed
heavy reliance on collateral value but has tightened its lending policies and is
placing more reliance on the borrower's ability to repay. Because the Bank's
market is comprised largely of an outlying but moderately prosperous section of
Pennsylvania, PFC Bank has been somewhat cushioned from the real estate
recessions as well as real estate booms, leaving values at very conservative
levels through the years. The Bank experienced a decrease in non-performing
assets from 1997 to 1998 of $68,000 or 7.11% following a decrease of $559,000 or
36.87% from 1996 to 1997. Restructured loans, non-accrual loans and loans 90
days or more past-due decreased by 7.64%, 57.14% and 3.77%, respectively. The
tightening of lending policies has not decreased loan demand. In fact, total
loans as of December 31, 1998, have increased over the balances at December 31,
1997, by $22.3 million following an increase from 1996 to 1997 of $16.3 million.
The Bank intends to continue its policy of performing formal credit analyses in
support of loan requests.

PFC's total consolidated loans (net of unearned income and the allowance for
loan losses) at December 31, 1998, were $174,704,000, an increase of $22,308,000
or 14.64% as compared to $152,396,000 at December 31, 1997. The December 31,
1997 balance increased $16,346,000 or 12.01% over the year ended December 31,
1996. The increase in 1998 was due primarily to a $23.0 million increase in
residential property loans. The increase in 1997 was due primarily to increases
in residential loans and commercial loans and changes in PFC's pricing structure
relative to the marketplace, and a general increase in loan demand due to the
economic environment.

<PAGE>

Loans (continued)
<TABLE>
<CAPTION>

(in thousands and net of unearned income, but not the allowance for loan losses)

                                                           12/31/98      12/31/97      12/31/96      12/31/95      12/31/94
                                                           ----------------------------------------------------------------

<S>                                                        <C>           <C>           <C>           <C>           <C>     
Commercial, financial, agriculture                         $ 12,089      $ 17,200      $ 13,859      $  9,918      $  7,555
Real estate-construction                                      2,439         1,966         2,558           947         1,002
Real estate-mortgage                                        133,035       102,222        90,129        71,038        73,992
Consumer                                                     24,085        28,646        27,774        30,303        28,403
Other                                                         4,294         3,611         2,984         2,639         1,866
                                                           --------      --------      --------      --------      --------
          Totals                                           $175,942      $153,645      $137,304      $114,845      $112,818
                                                           ========      ========      ========      ========      ========
</TABLE>

<TABLE>
<CAPTION>

Percent of Loan Categories to Total Loans

                                           12/31/98    12/31/97     12/31/96     12/31/95     12/31/94
                                           -----------------------------------------------------------

<S>                                          <C>         <C>          <C>           <C>          <C>  
Commercial, financial, agriculture           6.87%       11.19%       10.09%        8.63%        6.70%
Consumer/Other                              16.13%       21.00%       22.40%       28.69%       26.83%
Real estate                                 77.00%       67.81%       67.51%       62.68%       66.47%
                                           ------       ------       ------       ------       ------
                                           100.00%      100.00%      100.00%      100.00%      100.00%
                                           ======       ======       ======       ======       ======
</TABLE>

<TABLE>
<CAPTION>
Maturity Table as of December 31, 1998

                           Due
                    1 year or less   1-5 years     After 5 years      Totals
                    ---------------------------------------------------------

<S>                  <C>             <C>             <C>             <C>     
Floating rate        $    915        $   --          $   --          $    915
Fixed rate             28,396          63,053          83,578         175,027
                     --------        --------        --------        --------
                     $ 29,311        $ 63,053        $ 83,578        $175,942
</TABLE>

<PAGE>

Allowance/Provision for Loan Losses

An allowance for possible loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an evaluation of
known and inherent risks in the loan portfolio. Management's judgment is based
upon evaluation of individual loans, past loss experience, current economic
conditions and other relevant factors. While management uses the best
information available to make such evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluation. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgment of information
available to them at the time of their examination.

The evaluation of the adequacy of the allowance for loan losses includes a
consideration of the following factors: the level and trends in loan
delinquencies and non-accrual loans; the current and anticipated local, regional
and national economic outlook; concentrations of credit risk; historical
charge-off and recovery experience; trends in loan classifications; an
assessment of inherent risk and overall portfolio quality; and, consideration of
PFC Bank's loan origination standards.

Based on this information, management concluded that the Bank's allowance for
loan losses was adequate to provide for known and inherent losses which may
exist in the loan portfolio as of December 31, 1998.

The provision for loan losses was $200,000 for the twelve month period ended
December 31, 1998 and $80,000 for the same period ended December 31, 1997. The
allowance for loan losses was $1,238,000 at December 31, 1998, which was $11,000
less than the amount at December 31, 1997.

The provision for loan losses of $80,000 for the twelve month period ended
December 31, 1997 was a $5,000 increase over the provision of $75,000 for the
same period ended December 31, 1996. The allowance for loan losses decreased
$5,000 from $1,254,000 at December 31, 1996 to $1,249,000 at December 1997.

The provision for loan losses for the year ended December 31, 1996 as compared
to the year ended December 31, 1995, increased $15,000 from $60,000 or 25.00%.
The allowance for loan losses of $1,254,000 at December 31, 1996 was $10,000
more than the amount reported at December 31, 1995.

Management recognizes the need to maintain an adequate reserve to meet the
ongoing risks associated with a growing loan portfolio and intends to continue
to maintain the allowance at appropriate levels based on ongoing evaluations of
the loan portfolio. Net loan charge-offs were $211,000 for the twelve month
period ended December 31, 1998 as compared to 1997 and 1996 net charge-offs of
$85,000 and $65,000, respectively. The increase in net charge-offs in 1998 was
due to a single loan charge-off of $151,000 arising from a successor letter of
credit, derived from a letter of credit originally issued in 1985 by past
management.

Non-performing assets of $889,000 were 71.81% of the allowance for loan losses
at December 31, 1998. Non-performing assets compared to the allowance for loan
losses at December 31, 1997 and 1996 were 76.62% and 120.89%, respectively.
Non-performing assets consist of loans no longer accruing interest, loans
accruing interest past due more than 90 days, restructured loans and other real
estate owned (foreclosed assets).

The table on the following page summarizes the loan portfolio and loan
charge-offs for the five years ended December 31, 1998.

<PAGE>

Allowance/Provision for Loan Losses (continued)
<TABLE>
<CAPTION>

Loan Loss Summary
(in thousands)                                                              Years Ended
                                                -----------------------------------------------------------------------
                                                  12/31/98      12/31/97       12/31/96       12/31/95      12/31/94
                                                -----------------------------------------------------------------------
<S>                                              <C>            <C>            <C>            <C>            <C>     
Amount of loans outstanding at end
  of period, net of unearned income              $175,942       $153,645       $137,304       $114,845       $112,818
                                                 ========       ========       ========       ========       ========

Daily average amounts of loans                   $163,520       $143,529       $124,380       $111,927       $107,758
                                                 ========       ========       ========       ========       ========

Allowance for loan losses
  at the beginning of period                     $  1,249       $  1,254       $  1,244       $  1,383       $  1,311
Loans Charged-off:
  Commercial, financial, agriculture                  151              4              0            113            164
  Real-estate construction                              0              0              0              0              0
  Real-estate mortgage                                  0              0              0              0              0
  Consumer                                             95            101            107            110            136
  Leasing and other                                     0              0              0              0              0
                                                 --------       --------       --------       --------       --------
             Totals                                   246            105            107            223            300
Recoveries of loans previously charged-off:
  Commercial, financial, agriculture                    8              8              9             10            148
  Real estate - construction                            0              0              0              0              0
  Real estate - mortgage                                0              0             28              2              2
  Consumer                                             27             12              5             12             30
  Leasing and other                                     0              0              0              0              0
                                                 --------       --------       --------       --------       --------
             Totals                                    35             20             42             24            180
                                                 --------       --------       --------       --------       --------

Net loans charged off                            $    211       $     85       $     65       $    199       $    120

Additions to allowance charged
   to operations
                                                      200             80             75             60            192
                                                 --------       --------       --------       --------       --------
Allowance for loan losses                        $  1,238       $  1,249       $  1,254       $  1,244       $  1,383
                                                 ========       ========       ========       ========       ========

Ratio of net charge-offs during period
   to average loans outstanding                      0.13%          0.06%          0.05%          0.17%          0.11%
Ratio of reserves to net loans at end
   of period                                         0.70%          0.81%          0.91%          1.08%          1.23%

Allocation of Allowance for Loan Losses

Loan Type
  Commercial. financial, agriculture             $    260       $    421       $    600       $    600       $    439
  Real estate - construction/mortgage
                                                      100            100            100            164            193
  Consumer and other
                                                      180            505            118            140            189
  Not allocated
                                                      698            223            436            340            562
                                                 --------       --------       --------       --------       --------
             Totals                              $  1,238       $  1,249       $  1,254       $  1,244       $  1,383
                                                 ========       ========       ========       ========       ========
</TABLE>

<PAGE>


Non-Performing Assets

The table below presents non-performing assets in each of the five years ended
December 31, 1998. Management is not aware of any significant loans outstanding
which are current, but for which there is a serious doubt as to whether the
customer can comply with loan repayment terms.

PFC Bank's non-performing assets consist of: (i) non-accrual loans; (ii) loans
past due 90 or more days as to interest or principal and still accruing
interest; (iii) restructured loans; and, (iv) other real estate acquired through
foreclosure, including in-substance foreclosures.

As part of its policy, PFC Bank places all loans that are past due 90 days or
more on non-accrual status, unless they are adequately capitalized and in the
process of collection.

Properties acquired by foreclosure, or deed in lieu of foreclosure, and
properties classified as in-substance foreclosed are transferred to other real
estate and recorded at the lower of cost or fair value, less estimated disposal
costs. This method of accounting is consistent with the American Institute of
Certified Public Accountants' Statement of Position 92-3, Accounting for
Foreclosed Assets (SOP 92-3). Management of PFC believes that the adoption of
SOP 92-3 has not had a material impact on the financial statements of PFC Bank

<TABLE>
<CAPTION>
Non-Performing Assets
(in thousands)


                                            12/31/98    12/31/97    12/31/96    12/31/95   12/31/94
                                            -------------------------------------------------------

<S>                                          <C>         <C>         <C>         <C>         <C>   
Non-accrual loans                            $   93      $  217      $  332      $  498      $  518
Accruing loans past due 90 days or more         434         451         799         819         416
Restructured loans                              133         144         155         167          83
Other real estate                               229         145         230          82         271
                                             ------      ------      ------      ------      ------
     Totals                                  $  889      $  957      $1,516      $1,566      $1,288
                                             ======      ======      ======      ======      ======


                                            12/31/98    12/31/97    12/31/96    12/31/95   12/31/94
                                            -------------------------------------------------------                 
                                                                                                    
Interest income which would have been
   recorded under original terms                $ 7         $26         $27         $32         $34
Interest income recorded during period           40           4           9          14          21
Commitments to lend additional funds            N/A         N/A         N/A         N/A         N/A

</TABLE>




<PAGE>



Deposits

PFC Bank continues to rely upon deposits as its primary source of funds.
Deposits consist of interest bearing and non-interest bearing demand deposits,
savings deposits and time deposits.

The table below presents average daily deposits and interest rates and
maturities of time deposits of $100,000 or more for the years ended December 31,
1998, 1997 and 1996.
<TABLE>
<CAPTION>

Deposits
(in thousands)

                                                            Average Amount                            Average Rate
                                               -----------------------------------------------------------------------------
                                                   1998         1997         1996           1998       1997        1996
                                               -----------------------------------------------------------------------------
<S>                                                 <C>          <C>          <C>          <C>         <C>        <C>  
Non-interest bearing demand deposits                $24,980      $23,113      $ 21,320     --          --         --     
Interest bearing demand deposits                     48,843       45,058        41,665     3.59%       3.53%       3.52%
Savings deposits                                     28,138       28,353        29,172     3.18%       3.18%       3.19%
Time deposits                                       101,135       87,246        72,339     5.74%       5.73%       5.64%
                                               ----------------------------------------
   Totals                                          $203,096     $183,770     $ 164,496
                                               ========================================

Maturities of Time Deposits of $100,000 or more

                                                   1998         1997         1996
                                               ----------------------------------------
Three months or less                                $20,624      $12,626       $ 6,710
Over three through twelve months                     14,871       13,246         6,393       
Over 1 year through 5 years                           5,987        7,208         9,898   
Over 5 years                                            100         --             100                  
                                               ----------------------------------------
   Totals                                           $41,582      $33,080      $ 23,101
</TABLE>


PFC's consolidated deposit balance as of December 31, 1998 was $213,359,000,
which is a $22,786,000 increase over the December 31, 1997 balance of
$190,573,000. The December 31, 1997 balance was a $14,308,000 increase over the
December 31, 1996 balance of $176,265,000. The majority of the deposit growth
experienced in 1998 and 1997 occurred in time deposits.

Liquidity

PFC Bank's liquidity is a measure of its ability to fund loans, withdrawals of
deposits and other cash outflows in a cost effective and timely manner.

PFC Bank's principal sources of funds are deposits, scheduled payments and
pre-payments of loan principal, maturities of investment securities and
short-term investments, and other funds provided by operations. While loan
payments and maturing investments are a relatively predictable source of funds,
deposit flows are greatly influenced by general interest rates, economic
conditions and competition. In order to meet the cash needs for 1998, PFC Bank
maintained an average balance of federal funds sold of $3.7 million for the 12
months ended December 31, 1998, as compared to $7.6 million at December 31,
1997. At December 31, 1998, PFC held $8.8 million of investment securities and
$29.3 million of loans maturing in less than one year. PFC Bank has the option
to borrow funds from the Federal Home Loan Bank and the Federal Reserve Bank.
The Bank also relies on the sale of bank equities as a secondary source of
liquidity through the planned taking of capital gains. Management believes that
the Bank's liquidity position is adequate at the present time.
<PAGE>

Interest Rate Sensitivity

The objective of interest rate sensitivity management is to minimize the Bank's
risks associated with changing interest rates by managing interest sensitive
assets and liabilities in such a manner that they can be repriced in response to
changes in market interest rates. PFC Bank's objective is to maintain a
reasonable balance between rate sensitive assets and rate sensitive liabilities.

The difference between interest sensitive assets and liabilities (i.e., balance
sheet gap) cannot solely be used to control interest rate sensitivity. Interest
rates themselves must be monitored and adjusted to maintain an acceptable return
on assets. Management's ability to forecast and simulate rate movements allows
changes to be made quickly and advantageously. Although management recognizes
PFC Bank's short-term, highly liability sensitive position, it continues to
evaluate its earning assets versus liabilities to reduce this gap. Management
believes the gap ratio, as indicated in the table below, is acceptable.
Management's study of the Bank's primary core deposit base revealed that even in
times of interest rate fluctuation, the base has remained stable. As a result,
management believes that these core deposits (demand, NOW and savings accounts)
are not necessarily tied to interest rate sensitivity.
<TABLE>
<CAPTION>

Interest Sensitivity Cumulative Gap Analysis
(in thousands)

                                                                         December 31, 1998

                                                    0-3                  0-6                 0-12                 0-5
Assets:                                            Months               Months              Months               Years
                                                 ---------            ---------           ----------            ---------
<S>                                              <C>                  <C>                  <C>                  <C>      
Investments Securities                           $   3,754            $   6,404            $   9,601            $  31,456
Loans                                                9,006               17,016               29,311               92,364
Federal Funds sold                                   1,900                1,900                1,900                1,900
Interest Bearing Depository Balances                 8,268                8,268                8,268                8,268
                                                 ---------            ---------            ---------            ---------
     Total Earning Assets                        $  22,928            $  33,588            $  49,080            $ 133,988


Liabilities:
NOW Accounts                                     $   8,776            $   8,776            $   8,776            $   8,776
MMDA                                                17,568               17,568               17,568               17,568
>$100,000                                           20,624               30,264               35,495               41,482
<$100,000                                           16,067               25,202               43,639               65,780
                                                 ---------            ---------            ---------            ---------
     Total Interest-bearing Liabilities          $  63,035            $  81,810            $ 105,478            $ 133,606


Cumulative Gap                                     (40,107)             (48,222)             (56,398)                 382
Cumulative Gap Ratio                                (15.07)              (18.11)              (21.19)                0.14
Rate Sensitive Assets/
         Rate Sensitive Liabilities                  36.37%               41.06%               46.53%              100.29%

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


Peoples Financial Corp., Inc.
Changes in Interest Income/ Expense
(in thousands)                                                             December 31
                                                                          1998 vs. 1997
                                                                      Increase/Decrease due
                                                                          to change in
Interest income on:                                       Volume              Rate              Net
                                                          -------           ---------         -------
<S>                                                       <C>               <C>               <C>    
     Loans                                                $ 1,719           $  (196)          $ 1,523
     Investment securities                                    408              (219)              189
     Due from banks                                           459              (168)              291
     Federal funds sold and securities purchases             (213)               (6)             (219)
                                                          -------           -------           -------
             Total interest-earning assets                $ 2,373           $  (589)          $ 1,784

Interest expense on:
     Demand deposits                                      $   134           $    29           $   163
     Savings deposits                                          (7)                0                (7)
     Time deposits                                            795                10               805
     Short-term borrowings                                      0                 0                 0
                                                          -------           -------           -------
             Total interest-bearing liabilities           $   922           $    39           $   961

</TABLE>
 
<TABLE>
<CAPTION>

                                                                          December 31
                                                                         1997 vs. 1996
                                                                    Increase/Decrease due
                                                                         to change in
Interest income on:                                       Volume              Rate              Net
                                                          -------           ---------         -------
<S>                                                       <C>               <C>               <C>    
     Loans                                                $ 1,677           $  (245)          $ 1,432
     Investment securities                                    357              (263)               94
     Due from banks                                             0                 0                 0
     Federal funds sold and securities purchases               91                22               113
                                                          -------           -------           -------
             Total interest-earning assets                $ 2,125           $  (486)          $ 1,639

Interest expense on:
     Demand deposits                                      $   120           $     5           $   125
     Savings deposits                                         (17)               (3)              (20)
     Time deposits                                            822                87               909
     Short-term borrowings                                      0                 0                 0
                                                          -------           -------           -------
             Total interest-bearing liabilities           $   925           $    89           $ 1,014

</TABLE>


<TABLE>
<CAPTION>
                                                                        December 31
                                                                       1996 vs. 1995
                                                                    Increase/Decrease due
                                                                        to change in
Interest income on:                                       Volume             Rate               Net
                                                          -------           -------           -------
<S>                                                       <C>               <C>               <C>    
     Loans                                                $ 1,106           $  (159)          $   947
     Investment securities                                    235              (347)             (112)
     Due from banks                                             0                 0                 0
     Federal funds sold and securities purchases              (30)              (40)              (70)
                                                          -------           -------           -------
             Total interest-earning assets                $ 1,311           $  (546)          $   765

Interest expense on:
     Demand deposits                                      $   106           $   (17)          $    89
     Savings deposits                                         (20)               (9)              (29)
     Time deposits                                            197               (51)              146
     Short-term borrowings                                    (48)               20               (28)
                                                          -------           -------           -------
             Total interest-bearing liabilities           $   235           $   (57)          $   178
</TABLE>



<PAGE>


Capital Resources

Capital resources are provided by common stock, capital surplus and retained
earnings. The objective of management is to emphasize current and future capital
needs based upon anticipated growth.

PFC Bank has historically maintained an adequate capital position. The
regulations of the FDIC require it to maintain a Leverage Ratio, Tier I Capital
to Risk-Weighted Assets Ratio, and a Total Capital to Risk-Weighted Asset Ratio
of 3%, 4%, and 8%, respectively. PFC Bank exceeds each of these ratios as shown
in the following table representing PFC Bank at December 31, 1998, not including
SFAS No. 115.

                                    PFC Bank

Leverage Ratio                        9.48%

Tier I Capital to Risk
Weighted Assets                      13.18%

Total Capital to Risk
Weighted Assets                      20.91%



<TABLE>
<CAPTION>

Return on Equity and Assets
(not including SFAS No. 115)

                                                        12/31/98         12/31/97       12/31/96       12/31/95         12/31/94
                                                        --------         --------       --------       --------         ---------

Return on Assets
<S>                                                        <C>             <C>             <C>             <C>             <C>  
 (net income divided by  avg  total assets)                1.96%           1.45%           1.13%           0.76%           0.98%

Return on Equity
  (net income divided by average equity)                  21.03%          16.19%          11.90%           7.22%           7.49%

Equity to assets ratio
 (average equity divided by avg total assets)              9.32%           9.15%           9.54%          10.56%          13.15%
</TABLE>


ITEM 8 - FINANCIAL STATEMENTS

The financial statements required by this Item are set forth at Exhibit 13, and
incorporated herein by reference.








<PAGE>



ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.

                                    Part III

ITEM 10 -  DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS

The information required by this Item, relating to directors, executive
officers, control persons is set forth on pages 4 through 7 of the Registrant's
Proxy Statement to be used in connection with the 1999 Annual Meeting of
Shareholders, which pages are incorporated herein by reference.

Section 16(a) Beneficial Ownership Compliance. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires the Registrant's officers and
directors, and persons who own more than 10% of a registered class of the
Registrant's equity securities, to file reports of ownership with the Securities
and Exchange Commission. Officers, directors and greater than 10% shareholders
are required by SEC regulation to furnish the Registrant with copies of all
Section 16(a) forms they file

Based solely on its review of the copies of such forms received by it or written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Registrant believes that during the period January 1, 1998
through December 31, 1998, its officers and directors were in compliance with
all filing requirements applicable to them.

ITEM 11 - EXECUTIVE COMPENSATION

The information required by this Item, relating to executive compensation, is
set forth in pages 8 and 9 of the Registrant's Proxy Statement to be used in
connection with the 1999 Annual Meeting of Shareholders, which pages are
incorporated herein by reference.


ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item, relating to beneficial ownership of the
Registrant's Common Stock, is set forth in pages 10 and 12 of the Registrant's
Proxy Statement to be used in connection with the 1999 Annual Meeting of
Shareholders, which pages are incorporated herein by reference.









<PAGE>


ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PFC Bank has a policy of granting loans to eligible directors, officers,
employees and members of their immediate families. Loans are made in the
ordinary course of business and on the same terms, including collateral
requirements and interest rates, as those prevailing at the time for comparable
transactions and do not involve more than the normal risk of collection. The
table below sets forth information concerning each loan made by PFC Bank to
executive officers, directors and major shareholders, for which a loan balance
was outstanding at any time since January 1, 1998.
                                                                LARGEST AMOUNT
<TABLE>
<CAPTION>
                                                  DATE OF        OUTSTANDING         BALANCE
NAME                          POSITION             LOAN       SINCE JAN. 1, 1998   DEC. 31, 1998
----                          --------             ----       ------------------   -------------
<S>                           <C>                 <C>              <C>              <C>       
Timothy P. Reddinger          Secretary           various          191,229          155,974(1)
Frank T. Baker                Chairman               1998           85,000           82,460
Darl Hetrick                  Director            various          174,260          145,226(2)
James L. Kifer                Exec. V.P.             1998           72,339           72,339(3)
R.B. Robertson                Pres./CEO                                -0-              -0-(4)

</TABLE>


(1) Comprised primarily of Standby Letters of Credit fully secured by cash on
    deposit.
(2) Comprised primarily of third party receivables associated with equipment
    sales by Mr. Hetrick's farm supply business. The receivables were purchased
    by PFC Bank from Mr. Hetrick with recourse to Mr. Hetrick in the event of
    non-payment by the equipment purchaser.
(3) Construction of Residential Mortgage.
(4) Letter of Credit























<PAGE>


                                     Part IV
<TABLE>
<CAPTION>

ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
          FORM  8-K.

         <S>      <C>                      
         (a)      1.  Financial Statements.

                      The following financial statements are included
                      by reference in Part II, Item 8 hereof:

                      Report of Independent Certified Public Accountants.
                      Consolidated Balance Sheets.
                      Consolidated Statements of Income.
                      Consolidated Statements of Changes in Stockholders' Equity.
                      Consolidated Statement of Cash Flows.
                      Notes to Consolidated Financial Statements.

                  2.  Financial Statement Schedules.

                      Financial Statement Schedules are omitted because the
                      required information is either not applicable, not
                      required or is shown in the respective financial
                      statements or in the notes thereto.

                  3.  The following Exhibits are files herewith or incorporated by 
                      reference as a part of this Annual Report

                      3(i)     Registrant's Articles of Incorporation.
                              (Incorporated by Reference to Registrant's
                               January 27, 1995, filing of Form S-4.

                      3(ii)    Registrant's By-Laws. 
                              (Incorporated by Reference to Registrant's January 27, 1995,
                               filing of Form S-4.)

                      10(i)    Agreement between R.B. Robertson and Bank.
                              (Incorporated by Reference to the Registrant's
                               September 30, 1997 filing of Form 10-QSB.)

                      10(ii)   Settlement Agreement. 
                              (Incorporated by Reference to the Registrant's 
                               December 31, 1996 filing of Form 10-KSB.)

                      10(iii)  General Release. 
                              (Incorporated by Reference to the Registrant's
                               December 31, 1996 filing of Form 10-KSB.)


                      11       Statement re: Computation of Earnings Per Share.
                              (Refer to Exhibit 13, page 3, Consolidated
                               Statement of Income.)

                      13       Annual report to Security Holders.
                              (Included with Financial Statements, which are 
                               attached as Exhibit 13 hereto.)

                      21       Subsidiaries of the Registrant.
<PAGE>

                      23       Consent of Independent Auditors.

                      27       Financial Data Schedule.

                      99       Proxy Statement.

            (b)  Reports on Form 8-K.

            (c) The exhibits required herein are included at Item 14(a), above.

            (d)  Not Applicable.
</TABLE>

<PAGE>

Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
                                                   Peoples Financial Corp., Inc.
                                                   (Registrant)

March 26, 1999                                      By    R.B. Robertson  
                                                          --------------      
                                                          R.B. Robertson   
                                                          President/CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signature                                                Title                            Date
---------                                                -----                            -----

<S>                                                      <C>                              <C> 
R.B. Robertson                                           President/CEO                    March 26, 1999
                                                         and Director

Frank Baker                                              Chairman/Director                March 26, 1999

Darl Hetrick                                             Vice President and Director      March 26, 1999

Timothy Reddinger                                        Secretary and Director           March 26, 1999

William H. Toy                                           Director                         March 26, 1999

R.B. Robertson, Jr                                       Director                         March 26, 1999

Howard H. Shreckengost                                   Director                         March 26, 1999

J. Jack Sherman                                          Director                         March 26, 1999

Francis E. Kane                                          Director                         March 26, 1999

James L. Kifer                                           Executive Vice President         March 26, 1999
                                                         Principal Financial Officer
                                                         Principal Accounting Officer

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                  EXHIBIT INDEX

                                                                                                           PAGE NO.
                                                                                                        IN MANUALLY
                                                                                                             SIGNED
                                                                                                        EXHIBIT NO.
                                                                                                           ORIGINAL

        <S>       <C>                      
         (a)      1.  Financial Statements.

                      The following financial statements are included by
                      reference in Part II, 39 Item 8 hereof:

                       Report of Independent Certified Public Accountants.
                       Consolidated Balance Sheets.
                       Consolidated Statements of Income.
                       Consolidated Statements of Changes in Stockholders' Equity.
                       Consolidated Statement of Cash Flows.
                       Notes to Consolidated Financial Statements.

                  2.  Financial Statement Schedules.

                       Financial Statement Schedules are omitted because the
                       required information is either not applicable, not
                       required or is shown in the respective financial
                       statements or in the notes thereto.

                  3.  The following Exhibits are files herewith or incorporated by reference as a
                       part of this Annual Report

                      3(i)     Registrant's Articles of Incorporation.
                               (Incorporated by Reference to Registrant's
                               January 27, 1995, filing of Form S-4.

                      3(ii)    Registrant's By-Laws.
                               (Incorporated by Reference to Registrant's
                               January 27, 1995, filing of Form S-4.)

                      10(i)    Agreement between R.B. Robertson and Bank.
                               (Incorporated by Reference to the Registrant's
                               September 30, 1997 filing of Form 10-QSB.)

                      10(ii)   Settlement Agreement.
                               (Incorporated by Reference to the Registrant's
                               December 31, 1996 filing of Form 10-KSB.)

                      10(iii)  General Release.
                               (Incorporated by Reference to the Registrant's
                               December 31, 1996 filing of Form 10-KSB.)


                      11       Statement re: Computation of Earnings Per Share.
                               (Refer to Exhibit 13, page 3, Consolidated
                               Statement of Income.)

                      13       Annual report to Security Holders.
                               (Included with Financial Statements, which are
                               attached as Exhibit 13 hereto.)

                      21       Subsidiaries of the Registrant.                                                   64
<PAGE>

                      23       Consent of Independent Auditors.                                                  65

                      27       Financial Data Schedule.                                                          66

                      99       Proxy Statement.                                                                  68

         (b)  Reports on Form 8-K.

         (c) The exhibits required herein are included at Item 14(a), above.

         (d)  Not Applicable.

</TABLE>

<PAGE>