<PAGE>
                         Carnegie Financial Corporation

Corporate Profile

     Carnegie   Financial   Corporation   (the   "Company")  is  a  Pennsylvania
corporation organized in February 1998 at the direction of Carnegie Savings Bank
(the  "Bank") to acquire  all of the  capital  stock that the Bank issued in its
conversion  from the mutual to stock form of ownership  (the  "Conversion").  On
July 10,  1998,  the Bank  completed  the  Conversion  and became a wholly owned
subsidiary  of the  Company.  The Company is a unitary  savings and loan holding
company which, under existing laws,  generally is not restricted in the types of
business  activities  in which it may engage  provided  that the Bank  retains a
specified  amount of its  assets in  housing-related  investments.  The  Company
conducts no significant business or operations of its own other than holding all
of the outstanding  stock of the Bank and investing the Company's portion of the
net proceeds obtained in the Conversion.

     The Bank is subject to  examination  and  comprehensive  regulation  by the
Office of Thrift Supervision  ("OTS"), and its deposits are federally insured by
the Federal Deposit Insurance Company.  The Bank is a member of and owns capital
stock in the Federal Home Loan Bank ("FHLB") of Pittsburgh,  which is one of the
12 regional  banks in the FHLB system.  The Bank operates a traditional  savings
bank  business,  attracting  deposit  accounts from the general public and using
those deposits,  together with other funds, primarily to originate and invest in
loans secured by single family  residential real estate primarily in the borough
of Carnegie and the surrounding municipalities.

Stock Market Information

     The Company's  common stock has been traded on the OTC Electronic  Bulletin
Board under the trading symbol of "CAFN" since it commenced  trading on July 10,
1998. The following table reflects high and low bid  quotations.  The quotations
reflect inter-dealer prices,  without retail mark-up, mark- down, or commission,
and may not  represent  actual  transactions.  During  and  for the  year  ended
December 31, 1998, the Company did not pay nor declare any dividends.


                       Date                  High ($)            Low ($)
                       ----                  --------            -------

July 10, 1998 to August 31, 1998              11.88               9.31

September 1, 1998 to December 31, 1998        10.00               8.13




     The number of  shareholders of record of common stock as of the record date
of March 15, 1999,  was  approximately  171. This does not reflect the number of
persons or entities who held stock in nominee or "street"  name through  various
brokerage firms. At March 15, 1999, there were 238,050 shares  outstanding.  The
Company's  ability  to pay  dividends  to  stockholders  is  dependent  upon the
dividends  it  receives  from the Bank.  The Bank may not  declare or pay a cash
dividend  on any of its stock if the  effect  thereof  would  cause  the  Bank's
regulatory  capital  to be reduced  below the  regulatory  capital  requirements
imposed by the OTS.

                                       2


<PAGE>


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The Private  Securities  Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking  statements.  When used in this discussion,
the words  "believes,"  "anticipates,"  "contemplates,"  "expects,"  and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties  which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in  interest  rates,  the  ability to control  costs and  expenses,  and
general  economic  conditions.  Carnegie  Financial  Corporation  undertakes  no
obligation  to publicly  release the results of any  revisions to those  forward
looking  statements which may be made to reflect events or  circumstances  after
the date hereof or to reflect the occurrence of unanticipated events.

General

     Carnegie  Financial   Corporation   ("Carnegie"  or  the  "Company")  is  a
Pennsylvania corporation organized in February 1998 at the direction of Carnegie
Savings  Bank (the  "Bank") to acquire  all of the  capital  stock that the Bank
issued  in its  conversion  from the  mutual  to stock  form of  ownership  (the
"Conversion").  On July 10, 1998, the Bank completed the Conversion and became a
wholly owned  subsidiary  of the Company.  In  addition,  Carnegie  sold 238,050
shares of common stock at $10 per share,  raising net proceeds of  approximately
$1.9 million (the "initial public offering").

     Carnegie  is a  unitary  savings  and loan  holding  company  which,  under
existing laws,  generally is not restricted in the types of business  activities
in which it may engage provided that the Bank retains a specified  amount of its
assets in  housing-related  investments.  The Company  conducts  no  significant
business or  operations  of its own other than  holding  all of the  outstanding
stock  of the Bank and  investing  the  Company's  portion  of the net  proceeds
obtained in the Conversion.

Asset/Liability Management

     The Bank's net interest  income is sensitive to changes in interest  rates,
as the rates paid on interest-bearing  liabilities  generally change faster than
the rates earned on  interest-earning  assets. As a result,  net interest income
will  frequently  decline in periods of rising  interest  rates and  increase in
periods of decreasing interest rates.

     The board of directors  manages the interest rate  sensitivity  of the Bank
through the  determination  and adjustment of  asset/liability  composition  and
pricing strategies. The board of directors meets quarterly to monitor the impact
of interest rate risk and developed strategies to manage its liquidity,  shorten
the effective  maturities of certain  interest  earning  assets and increase the
effective maturities of certain liabilities,  to reduce the exposure to interest
rate fluctuations.  These strategies include focusing its investment  activities
on short and medium-term securities , maintaining and increasing the transaction
deposit accounts, as these accounts are considered to be relatively resistent to
changes  in  interest  rates and  utilizing  Federal  Home  Loan  Bank  ("FHLB")
borrowings.

                                       3
<PAGE>
Gap Analysis

     As rates on  sources  of funds  have  become  deregulated  and  subject  to
competitive  pressures,  savings associations have become increasingly concerned
with the extent to which they are able to match  maturities of  interest-earning
assets  and  interest-bearing  liabilities.  Such  matching  is  facilitated  by
examining the extent to which such assets and  liabilities  are  "interest  rate
sensitive" and by monitoring an institution's  interest rate sensitivity  "gap."
An asset or liability is  considered  to be interest  rate  sensitive if it will
mature or reprice within a specific time period.  The interest rate  sensitivity
gap is defined as the difference between the amount of  interest-earning  assets
maturing  or  repricing  within a specific  time  period  over  interest-bearing
liabilities  maturing or repricing  within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest  rate  sensitive  liabilities.  A gap is  considered  negative when the
amount of interest  rate  sensitive  liabilities  exceeds the amount of interest
rate sensitive assets.  During a period of rising interest rates, a negative gap
theoretically  would tend to adversely affect net interest  income.  Conversely,
during a period of  falling  interest  rates,  a  negative  gap  position  would
theoretically tend to result in an increase in net interest income.

     These assumptions change over time based upon the current economic outlook.
Management  believes that these  assumptions  approximate  actual experience and
considers  them   appropriate  and  reasonable.   However,   the  interest  rate
sensitivity  of the Bank's assets and  liabilities  illustrated in the following
table would vary  substantially if different  assumptions were used or if actual
experience differs from that indicated by such assumptions. No consideration has
been provided for the impact of future commitments and loans in process.

     Certain  shortcomings are inherent in the methods of analysis  presented in
the following table setting forth the maturing and repricing of interest-earning
assets and interest-bearing  liabilities.  For example,  although certain assets
and  liabilities may have similar  maturities or periods to repricing,  they may
react in  different  degrees to  changes in market  interest  rates.  Also,  the
interest  rates on certain  types of assets and  liabilities  may  fluctuate  in
advance of changes in market  interest rates while interest rates on other types
of assets may lag behind changes in market rates. Additionally,  certain assets,
such as adjustable-rate  loans, have features which restrict changes in interest
rates both on a short-term basis and over the life of the asset. Further, in the
event of a change in interest  rates,  prepayment  and early  withdrawal  levels
would likely deviate  significantly from those assumed in calculating the table.
Finally,  the  ability of many  borrowers  to make  scheduled  payments on their
adjustable-rate loans may decrease in the event of an interest rate increase.

                                       4
<PAGE>

     The following  table sets forth the amount of  interest-earning  assets and
interest-bearing  liabilities  outstanding  at  December  31,  1998,  which  are
expected  to reprice or mature in each of the future  time  periods  shown.  The
amount  of  assets  or  liabilities  shown  which  reprice  or  mature  during a
particular  period were determined in accordance  with the contractual  terms of
the asset or liability.
<TABLE>
<CAPTION>

                               Less than      1-5        5-10       Over
                                 1 year      Years       Years    10 Years      Total
                                 ------      -----       -----    --------      -----
<S>                            <C>         <C>         <C>        <C>        <C>   
Interest-earning assets:

  Loans receivable             $  1,442    $  1,549    $  1,130    $ 10,530   $ 14,651

  Mortgage-backed securities      1,667         148          22         256      2,093

  Investment Securities              55         245         499         951      1,750

  Other interest-earning
    assets                          752          --         199          --        951
                               --------     -------     -------     -------    -------
  Total interest-earning          3,916       1,942       1,850      11,737     19,445
    assets                     ========     =======     =======     =======    =======


Interest-bearing liabilities

  NOW accounts                 $  1,248    $     --    $     --    $     --   $  1,248

  Savings accounts                3,648          --          --          --      3,648

  Certificates of deposit         6,316       2,976         602          --      9,894

  Other interest-bearing
    liabilities                     200       1,000          --          --      1,200
                               --------     -------     -------     -------    -------
  Total interest-bearing
    liabilities                $ 11,412    $  3,976    $    602          --   $ 15,990
                               ========     =======     =======     =======    =======

Excess interest-earning
  assets (liabilities)         $ (7,496)   $ (2,034)   $  1,248    $ 11,737

Cumulative interest-
  earning assets               $  3,916    $  5,858    $  7,708      19,445

Cumulative interest-
  bearing liabilities            11,412      15,388      15,990      15,990
                               --------     -------     -------     -------    

Cumulative gap                 $ (7,496)   $ (9,530)   $ (8,282)   $  3,455
                               ========     =======     =======     =======    
Cumulative interest rate
  sensitivity ratio (1)           (0.34)      (0.38)      (0.48)       1.22
                               ========     =======     =======     =======    
</TABLE>
____________________________
(1)  Cumulative  interest-earning assets divided by cumulative  interest-bearing
     liabilities.


                                       5
<PAGE>

FINANCIAL CONDITION

     Total assets increased by approximately  $3,365,000 or 20.1% to $20,085,000
at December 31, 1998 from  $16,719,000  at December  31,  1997.  The increase in
assets  was  funded  primarily  as a result of  receipt  of $1.9  million in net
proceeds from the sale of 238,050  shares of common stock in the initial  public
offering, and a $1,000,000 FHLB advance.

     Total investment and  mortgage-backed  securities  decreased  $1,217,000 or
24.0% from  $5,059,000  at December 31, 1997 to $3,842,000 at December 31, 1998.
The overall  declining  interest rate environment has resulted in an increase in
the receipt of principal  prepayments on  mortgage-backed  securities during the
year, and has stimulated an increase in debt securities being called.  There has
been limited  activity by  management  during the period as focus on  investment
opportunities has been directed toward meeting a demanding loan environment.

     Net loans  receivable  increased  $4,927,000  or 51.4% from  $9,585,000  at
December 31, 1997 to $14,512,000 at December 31, 1998. The loan growth generated
during 1998 was largely from  increases  in loans  secured by  residential  real
estate and the offering of a commercial line of credit  product.  These segments
of  the  portfolio  increased  $4,521,000  and  $304,000,  respectively.  Of the
residential  mortgage loan increase,  $1,001,000  consisted of new  construction
loans. In addition, the Company has approximately $2.1 million in commitments to
fund loans as a direct  result of the economic  health of the  Company's  market
area and the competitive pricing of its loan products. As previously stated, the
funding of this loan  growth was mainly  provided by the usage of funds from the
stock  offering,  principal  repayments from  mortgage-backed  securities and an
advance from the FHLB.

     Deposits remained relatively  stagnant,  increasing slightly by $194,000 to
$15,372,000  at December 31, 1998 from  $15,178,000  at December 31, 1997 due to
the competitiveness of deposits within the Company's market area, as well as the
usage of deposits for subscriptions in the stock offering.  Money market deposit
accounts increased 273,000 or 8.1%,  transaction  accounts increased $253,000 or
16.0%,  while total  certificates of deposit  decreased  $331,000 or 3.2%. These
events  seem to  indicate  the  customers  willingness  to  maintain  accessible
deposits at slightly lower interest rates until more advantageous  interest rate
products become available.

     In order to support its business  development  and interest rate risk,  the
Company  obtained  funding  through a variety  of  borrowings  from the FHLB for
$1,200,000.  These borrowing arrangements have staggering maturities which range
from one to five years.

     Stockholder's  equity  increased  $1,867,000  to $3,037,000 at December 31,
1998 from  $1,170,000  at December  31, 1997 as a result of the  $1,905,000  net
proceeds  received in the initial public  offering.  This increase was offset by
$190,000 from the  implementation  of an Employee Stock  Ownership Plan ("ESOP")
for the benefit of participating employees.
 
RESULTS OF OPERATIONS

     Net loss decreased $16,000 or 29.6%, to $38,000 for the year ended December
31,  1998  from a net loss of  $54,000  for the same  period  ended  1997.  This
decrease was the result of increases in net interest and  noninterest  income of
$83,000 and $27,000,  respectively,  and an offsetting  increase to  noninterest
expense of $83,000 coupled with a decrease in income tax benefit of $41,000.

                                       6
<PAGE>

     The Company's net interest income increased  $83,000 or 14.7% from $565,000
for the year ended  December  31, 1997  compared to $648,000 for the same period
ended 1998,  due to an increase  of $107,000 or 8.7% in interest  income,  which
totaled  $1,344,000 for 1998 as compared to $1,237,000 for 1997. The increase in
interest  income  more than  offset the  $25,000 or 3.6%  increase  in  interest
expense.  Overall,  the interest rate spread  decreased  from 3.20% for the year
ended  December 31, 1997 to 3.01% for the same period  ended 1998.  Contributing
significantly  to the  interest  rate  spread  decline was a decline in the loan
interest rate  environment  coupled with the Bank's  competitive  pricing of its
certificate of deposit products.


                                       7
<PAGE>

Average Balance Sheet

     The  following  table  sets  forth  certain  information  relating  to  the
Company's  average  balance  sheet and reflects the average  yield on assets and
average cost of  liabilities  for the periods  indicated and the average  yields
earned and rates paid.  Such yields and costs are derived by dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                   --------------------------------------------------------------------------
                                                                  1998                                    1997
                                                   ------------------------------------    ----------------------------------
                                                                             (Dollars in thousands)
                                                   Average                 Average        Average                  Average
                                                   Balance     Interest    Yield/Cost     Balance      Interest    Yield/Cost
                                                   -------     --------    ----------     -------      --------    ----------
Interest-earning assets:
<S>                                                <C>          <C>       <C>           <C>            <C>        <C>  
 Loans receivable(1)............................    $ 11,709     $  998      8.52%        $ 9,730        $  873      8.97%
 Mortgage-backed securities.....................       2,467        162      6.57%          2,690           173      6.43%
 Investment securities..........................       2,291        140      6.11%          2,369           137      5.78%
 Other interest-earning assets(2)...............         829         44      5.31%            943            53      5.62%
                                                    --------      -----     -----         -------         -----      ----       
  Total interest-earning assets.................      17,296      1,344      7.77%         15,732         1,236      7.86%
                                                                  -----                                   -----
Non-interest-earning assets.....................       1,075                                  516
                                                     -------                               ------
  Total assets..................................    $ 18,371                              $16,248
                                                     -------                               ------
Interest-bearing liabilities:
 NOW accounts...................................    $  1,111         23      2.07%         $1,150            13      1.13%
 Savings accounts...............................       3,532         89      2.52%          3,346            87      2.60%
 Certificates of deposit........................       9,777        575      5.88%          9,888           571      5.77%
 Other liabilities..............................         212          9      4.26%             12            --        --%
                                                    --------      -----     -----         -------         -----      

  Total interest-bearing liabilities...........       14,632        696      4.76%         14,396           671      4.66%
                                                     -------      -----                   -------         -----
Non-interest bearing liabilities:...............
 Other liabilities..............................       1,811                                  596
                                                     -------                              -------
 Total liabilities..............................      16,443                               14,992
                                                     =======                              =======
Stockholders' equity............................       1,928                                1,256
                                                     -------                              -------
 Total liabilities and stockholders' equity.....    $ 18,371                              $16,248
                                                     =======                              =======

Net interest income.............................                 $  648                                  $  565
                                                                  =====                                   =====
Interest rate spread(3).........................                             3.01%                                   3.20%
                                                                           ======                                  ======
Net yield on interest-earning assets(4).........                             3.75%                                   3.59%
                                                                           ======                                  ======
Ratio of average interest-earning assets to
  average interest-bearing liabilities..........                           118.20%                                 109.28%
                                                                           ======                                  ======

</TABLE>
_________________________________
(1)  Average balances include non-accrual loans.
(2)  Includes investment-bearing deposits in other financial institutions.
(3)  Interest-rate spread represents the difference between the average yield on
     interest-earning   assets  and  the   average   cost  of   interest-bearing
     liabilities.
(4)  Net yield on  interest-earning  assets  represents net interest income as a
     percentage of average interest-earning assets.


                                       8
<PAGE>

Rate/Volume Analysis

     The table below sets forth  certain  information  regarding  changes in our
interest  income  and  interest  expense  for the  periods  indicated.  For each
category  of   interest-earning   assets  and  interest-  bearing   liabilities,
information  is  provided  on  changes  attributable  to  (i) changes  in volume
(changes  in  average  volume  multiplied  by old rate);  (ii) changes  in rates
(changes in rate multiplied by old average volume).  Increases and decreases due
to both  rate and  volume,  which  cannot  be  separated,  have  been  allocated
proportionally to the change due to volume and the change due to rate.

                                             Year Ended December 31,
                                                 1998 vs. 1997
                                               Increase (Decrease)
                                                     Due to
                                      --------------------------------------
                                      Volume           Rate           Net
                                      ------           ----           ---
                                                 (In Thousands)
Interest income:
Loans receivable.....................  $ 178           $(53)         $125
Mortgage-backed securities...........    (14)             3           (11)
Investment securities................     (4)             7             3
Other interest-earning assets........     (6)            (3)           (9)
                                        -----          -----         -----
  Total interest-earning assets......   $154           $(46)         $108
                                       ======          =====         =====
Interest expense:
 NOW accounts........................  $  --            $10          $ 10
 Savings deposits....................      5             (3)            2
 Certificates of deposit.............     (6)            10             4
 Other interest-bearing liabilities..     --              9             9
                                        -----          -----         -----
  Total interest-bearing liabilities.     (1)            26            25
                                        -----          -----         -----

Change in net interest income........  $ 155           $(72)         $ 83
                                       ======          =====         =====
                                       


     The  increase in interest  income  resulted  primarily  from an increase of
$125,000 or 14.3% in earnings on loans while offset by smaller  fluctuations  in
all other interest income  categories.  The average  principal balance for loans
increased $1,979,000 or 20.3%, driven substantially by the Company's residential
real  estate  market.  As stated  previously,  this  increase  is the result the
economic  viability  of the  Company's  market  area.  The  overall  increase in
interest income on loans was softened slightly by the impact of a decline in the
yield on loans from 8.97% for 1997 compared to 8.52% for 1998.

     The increase in interest  expense  resulted from an increase in interest on
deposits and  borrowings  of $16,000 and $8,000,  respectively,  from a total of
$671,000  for the year ended  December  31, 1997 to $696,000 for the same period
ended 1998. This increased expense was primarily due to an increase in the total
average principal balance of $236,000 coupled with a slight increase in the cost
of funds from 4.66% for the year ended  December  31, 1997 to 4.76% for the same
period ended 1998.

     Based  upon  management's  continuing  evaluation  of the  adequacy  of the
allowance for loan losses which encompasses the overall risk  characteristics of
the various  portfolio  segments,  past  experience  with losses,  the impact of
economic conditions on borrowers,  and other relevant factors, the provision for
loan losses  decreased by $29,000 for the year ended  December 31, 1998 compared
to the same period ended 1997. Management believes the allowance for loan losses
is at a level that is considered to be adequate to provide for estimated losses;
however,  there can be no assurance  that further  additions will not be made to
the allowance and that such losses will not exceed the estimated amount.

                                       9
<PAGE>


     Noninterest  income,  which is  comprised  of  service  charges  on deposit
accounts,  gains and losses on sales of securities,  and other income  increased
$27,000 or 64.1% to $69,000 for the year ended 1998  compared to $42,000 for the
same period  ended 1997.  There was an  increase  of $8,000  resulting  from the
addition  of two ATM's  during  1998 and the  imposition  of an ATM  convenience
charge for  noncustomers,  as well as smaller dollar  increases in various other
income accounts.

     Noninterest  expense  increased  $83,000 or 12.8% to $725,000  for the year
ended  December  31,  1998  from  $643,000  for  the  same  period  ended  1997.
Compensation  and  benefits  increased  $58,000 or 19.7%  compared  to the prior
period due to increased benefit costs associated with an increase in salaries to
employees  coupled  with the  implementation  of the ESOP.  On January 11, 1999,
stockholders of the Company  approved the  implementation  of a restricted stock
plan  ("RSP")  for  the  benefit  of  participating   employees  and  directors.
Compensation  and  benefits  will  increase  during  fiscal year 1999 due to the
implementation of the RSP.

     New data processing  expenses increased $26,000 or 28.4% due to both volume
of transactions  and an increase in third party costs relating both to the stock
conversion  and year 2000  readiness.  There also was an  increase of $67,000 in
real estate operations  expense due to the settlement of approximately  $480,000
in previously foreclosed  properties.  Offsetting these increases was a decrease
in other  expenses of $77,000 due mainly to the  implementation  of a director's
benefit plan in 1997.

     Income tax  benefit  decreased  $40,000 or 75.0% from  $54,000 for the year
ended December 31, 1997 as compared $14,000 for the same period ended 1998. This
decrease is the result of a decrease in pretax loss of $56,000.

LIQUIDITY AND CAPITAL RESOURCES

     The  primary  sources  of  funds  are  deposits,  repayment  of  loans  and
mortgage-backed  securities,  maturities  of  investments  and  interest-bearing
deposits,  funds  provided  from  operations  and  advances  from  the  FHLB  of
Pittsburgh.  While scheduled repayments of loans and mortgage-backed  securities
and  maturities  of  investment  securities  are  predictable  sources of funds,
deposit flows and loan  prepayments are greatly  influenced by the general level
of interest  rates,  economic  conditions,  and  competition.  The Bank uses its
resources  primarily  to fund  existing  and future loan  commitments,  maturing
certificates  of deposit and demand  deposit  withdrawals,  investments in other
interest-earning  assets,  maintenance  of  necessary  liquidity,  and  to  meet
operating expenses.

     Net cash provided by operating  activities  for the year ended December 31,
1998 was  $290,000  as  compared to net cash used for  operating  activities  of
$73,000 for the same period ended 1997.  This  increase was primarily the result
of an  increase in the net losses on sales of real  estate  owned of $72,000,  a
decrease  in  deferred  income  taxes of  $61,000,  and an  increase  in accrued
expenses  relating to employee benefit plans and costs associated with operating
a public company.  These increases to net cash provided by operating  activities
were partially offset by a decreases of $29,000 in provision for loan losses.

     Net cash used for investing activities for the year ended December 31, 1998
increased  $2,394,000 to $3,511,000  from $3,117,000 for the year ended December
31, 1997. This increase was primarily  attributable to a $4,835,000  increase in
net loans  receivable  while being  offset  somewhat  by a net  increase in cash
provided by investment and  mortgage-backed  securities of $2,200,000.  As noted
previously,  management  funded its loan  demand by  reducing  its  holdings  in
investment and mortgage-backed securities.

     Net cash provided from our financing activities for the year ended December
31, 1998 increased  $1,851,000 to $3,336,000 from $1,484,000 for the same period
ended 1997.  This increase  consisted of receipt of $1,905,000 from net proceeds
in the initial public offering and an increase in borrowed funds

                                       10
<PAGE>

of $1,200,000  offset by a decline in the increase in deposits of $1,606,000 due
primarily from conversion of subscription orders to common stock.

     Liquidity  may  be  adversely  affected  by  unexpected  deposit  outflows,
excessive interest rates paid by competitors,  adverse publicity relating to the
savings and loan industry,  and similar matters.  Management  monitors projected
liquidity  needs  and  determines  the  level  desirable,  based  in part on the
Company's commitment to make loans and management's  assessment of the Company's
ability to generate  funds.  The Company is also subject to federal  regulations
that impose certain minimum capital requirements.

IMPACT OF INFLATION AND CHANGING PRICES

     The consolidated  financial statements and the accompanying notes presented
elsewhere in this  document,  have been  prepared in accordance  with  generally
accepted  accounting  principles,  which  require the  measurement  of financial
position  and  operating   results  in  terms  of  historical   dollars  without
considering the change in the relative  purchasing  power of money over time and
inflation.  The impact of inflation is  reflected in the  increased  cost of our
operations. As a result, interest rates have a greater impact on our performance
than do the  effects  of  general  levels of  inflation.  Interest  rates do not
necessarily  move in the same  direction  or to the same extent as the prices of
goods and services.

YEAR 2000

     Rapid and accurate data  processing is essential to the Bank's  operations.
Many  computer  programs can only  distinguish  the final two digits of the year
entered (a common  programming  practice  in prior  years) are  expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt to
compute  payment,  interest,  delinquency  and  other  data.  The  Bank has been
evaluating both information  technology  (computer systems) and  non-information
technology systems (e.q. vault timers and electronic door lock). Based upon such
evaluations, management has determined that the Bank has year 2000 risk in three
areas: (1) Bank's own computer and software, (2) computers of others used by the
Bank's  borrowers,  and (3)  computers  of  others  who  provide  the Bank  with
processing of certain services.

     Bank's own  computers  and software.  The Bank spent  approximately  $4,000
through  December 31, 1998 to upgrade its  computer  system and  software.  This
upgrade is expected  to have  eliminated  the year 2000 risk.  The Bank does not
expect to have material  costs to address this risk after December 31, 1998. The
Bank considers itself, though there is no assurance,  to be year 2000 "ready" in
this risk area as of December 31, 1998.

     Computers of others used by the Bank's  borrowers.  The Bank has  evaluated
most of their borrowers and does not believe the year 2000 problem should, on an
aggregate  basis,  impact their ability to make  payments to the Bank.  The Bank
believes  that most of their  residential  borrowers  are not dependent on their
home  computers  for income and that none of their  commercial  borrowers are so
large that a year 2000 problem  would  render them unable to collect  revenue or
rent and, in turn, continue to make loan payments to the Bank. The Bank does not
expect any material  costs to address this risk area and believes  they are year
2000 "ready" in this risk area.

     Computers  of others  who  provide  the Bank  with  processing  of  certain
services.  This risk is primarily focused on one third party service bureau that
provides  virtually all of the Bank's data  processing.  The service  bureau has
communicated that it is substantially  year 2000 "ready" and subsequent  results
of testing by the Bank have been positive.

                                       11
<PAGE>


     Contingency Plan. The Bank will continue monitoring their service bureau to
evaluate whether its data processing system will fail and is being provided with
periodic updates on the status of testing and upgrades being made by the service
bureau.  If the Bank service  bureau  fails,  the Bank will attempt to locate an
alternative   service  bureau  that  is  year  2000  "ready."  If  the  Bank  is
unsuccessful,  the Bank  will  enter  deposit  balances  and  interest  with its
existing  computer  system.  If this  labor  intensive  approach  is  necessary,
management  and employees  will become much less  efficient.  However,  the Bank
believes  that they would be able to operate in this  manner in the  short-term,
until their existing  service  bureau,  or their  replacement,  is able to again
provide data processing  services.  If very few financial  institution  services
bureaus were operating in the year 2000, the Bank's replacement costs,  assuming
the Bank could negotiate an agreement, could be material.

     Successful  and  timely  completion  of the year 2000  project  is based on
management's best estimates  derived from various  assumptions of future events,
which are  inherently  uncertain,  including  the  progress  and  results of our
external  provider,  testing  plans,  and all  vendors,  suppliers  and customer
readiness.


                                       12
<PAGE>
          SNODGRASS
[LOGO]    CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS


                         REPORT OF INDEPENDENT AUDITORS
                         ------------------------------


Board of Directors and Stockholders
Carnegie Financial Corporation

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Carnegie
Financial  Corporation and subsidiary,  as of December 31, 1998, and the related
consolidated  statements of income,  changes in stockholders'  equity,  and cash
flows for the year then ended. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these  financial  statements  based on our audit.  The  financial  statements of
Carnegie Savings Bank as of December 31, 1997 and for the year then ended,  were
audited by other  auditors whose report,  dated February 17, 1998,  expressed an
unqualified opinion on those financial statements.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Carnegie Financial
Corporation  and  subsidiary  as of  December  31, 1998 and the results of their
operations  and their  cash  flows for the year then  ended in  conformity  with
generally accepted accounting principles.




/s/ S.R. Snodgrass, A.C.
-----------------------------------------------
Wexford, PA
February 12, 1999


S.P. SNODGRASS, A.C.
101 BRADFORD ROAD, SUITE 100 WEXFORD, PA 15090-6909 PHONE: 724-934-0344
FACSIMILE: 724-934-0345

                                       13
<PAGE>

                         CARNEGIE FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                                                              December 31,
                                                                           1998         1997
                                                                        -----------  ----------
<S>                                                                  <C>          <C>        
ASSETS
     Cash and due from banks                                          $    316,515  $  108,753
     Interest-bearing overnight deposits in other banks                    648,973     742,138
                                                                        -----------  ----------
     Cash and cash equivalents                                             965,488     850,891

     Certificates of deposit in other banks                                199,000     199,000
     Investment securities available for sale                            1,259,532   1,516,685
     Investment securities held to maturity (market
       value of $503,083 and $922,716)                                     489,287     913,903
     Mortgage-backed securities available for sale                       1,026,442     906,869
     Mortgage-backed securities held to maturity (market
       value of $1,082,927 and $1,744,013)                               1,066,910   1,721,250
     Loans receivable (net of allowance for loan losses
       of $138,860 and $114,832)                                        14,512,121   9,585,360
     Accrued interest receivable                                           114,675     107,361
     Premises and equipment                                                248,228     184,878
     Real estate owned                                                           -     480,326
     Federal Home Loan Bank stock                                          102,900           -
     Other assets                                                          100,061     252,918
                                                                        ----------  ----------
             TOTAL ASSETS                                             $ 20,084,644 $16,719,441
                                                                        ==========  ==========
LIABILITIES
     Deposits                                                         $ 15,372,170 $15,177,917
     Borrowed funds                                                      1,200,000           -
     Advances by borrowers for taxes and insurance                         179,563     143,129
     Accrued interest payable and other liabilities                        295,492     228,350
                                                                        ----------  ----------
             TOTAL LIABILITIES                                          17,047,225  15,549,396
                                                                        ----------  ----------
Commitments and contingencies

STOCKHOLDERS' EQUITY
     Preferred stock, no par value; 2,000,000 shares
       authorized; none issued                                                   -           -
     Common stock, $.10 par value; 4,000,000 shares                         23,805           -
       authorized; 238,050 issued and outstanding
     Additional paid-in capital                                          2,072,044           -
     Retained earnings-substantially restricted                          1,118,054   1,156,387
     Unallocated shares held by Employee Stock Ownership Plan (ESOP)      (180,918)          -
     Net unrealized gain on securities                                       4,434      13,658
                                                                        ----------   ---------
             TOTAL STOCKHOLDERS' EQUITY                                  3,037,419   1,170,045
                                                                        ----------   ---------

             TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY               $ 20,084,644 $16,719,441
                                                                        ==========  ==========

</TABLE>

See accompanying notes to the consolidated financial statements.

                                        14

<PAGE>

                         CARNEGIE FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
                             Year Ended December 31,
                                    1998 1997
                                                                                 ------------------  ------------------
<S>                                                                                 <C>               <C>      
INTEREST AND DIVIDEND INCOME
     Loans receivable                                                                $     997,850      $     873,301
     Interest-bearing deposits in other banks                                               44,351             53,305
     Investment securities
         Taxable                                                                           112,545            105,923
         Exempt from federal income tax                                                     27,371             31,393
     Mortgage-backed securities                                                            161,926            172,627
                                                                                      -------------      -------------
             Total interest and dividend income                                          1,344,043          1,236,549
                                                                                      -------------      -------------
INTEREST EXPENSE
     Deposits                                                                              686,825            670,680
     Borrowed funds                                                                          8,941                567
                                                                                      -------------      -------------
             Total interest expense                                                        695,766            671,247
                                                                                      -------------      -------------
NET INTEREST INCOME                                                                        648,277            565,302

Provision for loan losses                                                                   43,938             73,000
                                                                                      -------------      -------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                                        604,339            492,302
                                                                                      -------------      -------------
NONINTEREST INCOME
     Service fees                                                                           35,281             27,973
     Investment securities gains, net                                                        2,606              1,677
     Other income                                                                           31,070             12,371
                                                                                      -------------      -------------
             Total noninterest income                                                       68,957             42,021
                                                                                      -------------      -------------
NONINTEREST EXPENSE
     Compensation and employee benefits                                                    352,756            294,604
     Occupancy and equipment                                                                43,114             34,262
     Real estate operations, net                                                            60,867             (6,178)
     Data processing                                                                       117,611             91,600
     Other                                                                                 150,901            228,261
                                                                                      -------------      -------------
             Total noninterest expense                                                     725,249            642,549
                                                                                      -------------      -------------

Loss before income tax benefit                                                             (51,953)          (108,226)
Income tax benefit                                                                         (13,620)           (54,425)
                                                                                      -------------      -------------

NET LOSS                                                                             $     (38,333)     $     (53,801)
                                                                                      =============      =============

LOSS PER SHARE (Since inception July 10, 1998)                                       $       (0.13)     $  N/A

WEIGHTED AVERAGE SHARES OUTSTANDING                                                        219,429         N/A

</TABLE>


See accompanying notes to the consolidated financial statements.


                                        15

<PAGE>

                         CARNEGIE FINANCIAL CORPORATION
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                                             Net
                                                  Additional                              Unrealized       Total
                                       Common       Paid-in      Retained     Unearned    Gain (Loss)   Stockholders' Comprehensive
                                         Stock       Capital     Earnings       ESOP     on Securities     Equity          Loss
                                      --------    -----------   ----------- -----------   -------------  --------------  --------
<S>                                  <C>         <C>          <C>          <C>           <C>           <C>              <C>
Balance, December 31, 1996             $     -     $       -    $1,210,188   $        -    $  (14,514)   $ 1,195,674

Net loss                                                           (53,801)                                  (53,801)    $(53,801)
Other comprehensive income:
    Unrealized gain on available
      for sale securities, net of
      reclassification adjustment                                                              28,172         28,172       28,172
                                                                                                                          --------
Comprehensive loss                                                                                                       $(25,629)
                                       -------     ----------    ---------  -----------     ---------      ----------     ========
Balance, December 31, 1997                   -              -    1,156,387            -        13,658      1,170,045

Net loss                                                           (38,333)                                  (38,333)    $(38,333)
Other comprehensive income:
    Unrealized loss on available
      for sale securities, net of
      reclassification adjustment                                                              (9,224)        (9,224)      (9,224)
                                                                                                                          --------
Comprehensive loss                                                                                                       $(47,557)
                                                                                                                          ========
Issuance of 238,050 shares of
  common stock on July 10, 1998,
  net of conversion costs               23,805      2,072,044                  (190,440)                   1,905,409
Release of earned ESOP shares                                                     9,522                        9,522
                                       --------  ------------    ---------   -----------    ---------     ----------  
Balance, December 31, 1998           $  23,805   $  2,072,044   $1,118,054   $ (180,918)    $   4,434    $ 3,037,419
                                       ========  ============    =========   ===========    =========     ==========  
</TABLE>
<TABLE>
<CAPTION>


                                                                                1998             1997
                                                                            ----------       -----------   
<S>                                                                        <C>           <C>       
Components of comprehensive loss:
    Change in net unrealized gain (loss)
    on investment securities available for sale                              $   (7,504)   $   29,279
    Realized gains included in net income, net of tax                            (1,720)       (1,107)
                                                                              ----------     ---------
    Total                                                                    $   (9,224)   $   28,172
                                                                              =========      =========
</TABLE>


See accompanying notes to the consolidated financial statements.

                                       16
<PAGE>

                         CARNEGIE FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                                    1998              1997
                                                                                ------------     ------------
<S>                                                                          <C>                <C>     
OPERATING ACTIVITIES
     Net loss                                                                  $    (38,333)      $    (53,801)
     Adjustments to reconcile net loss to
       net cash provided by operating activities:
         Provision for loan losses                                                   43,938             73,000
         Depreciation, amortization, and accretion, net                              10,973             10,246
         Net losses (gains) on sale of real estate owned                             58,479            (13,693)
         Investment securities gains, net                                            (2,606)            (1,677)
         Deferred income taxes                                                      (20,124)           (81,525)
         Increase in accrued interest receivable                                     (7,314)            (6,117)
         Other, net                                                                 244,875                788
                                                                                 -----------       ------------      
         Net cash used for operating activities                                     289,888            (72,779)
                                                                                 -----------       ------------
INVESTING ACTIVITIES
     Investment securities available for sale:
         Purchases                                                               (1,616,699)        (2,322,748)
         Proceeds from sales                                                        417,248            748,062
         Maturities and repayments                                                1,467,029            646,313
     Maturities and repayments of investments held to maturity                      425,000            548,450
     Mortgage-backed securities available for sale:
         Purchases                                                                 (508,321)        (1,053,921)
         Proceeds from sales                                                        143,493                  -
         Maturities and repayments                                                  240,915            167,304
     Maturities and repayments of mortgage-backed securities
       held to maturity                                                             656,853            291,936
     Net increase in loans receivable                                            (4,970,699)          (135,810)
     Proceeds from sale of real estate owned                                        421,847             10,000
     Purchase of Federal Home Loan Bank stock                                      (102,900)                 -
     Purchase of premises and equipment, net                                        (85,153)           (17,025)
                                                                                 -----------       ------------
         Net cash used for investing activities                                  (3,511,387)        (1,117,439)
                                                                                 -----------       ------------
FINANCING ACTIVITIES
     Net increase in deposits                                                       194,253          1,800,092
     Net increase (decrease) in advances by borrowers
       for taxes and insurance                                                       36,434            (15,641)
     Proceeds from borrowed funds                                                 1,200,000                  -
     Repayment of borrowed funds                                                          -           (300,000)
     Net proceeds from the issuance of common stock                               1,905,409                  -
                                                                                 -----------       ------------
         Net cash provided by financing activities                                3,336,096          1,484,451
                                                                                 -----------       ------------
         Increase in cash and cash equivalents                                      114,597            294,233

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                      850,891            556,658
                                                                                 -----------       ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                       $    965,488        $   850,891
                                                                                 ===========       ============

SUPPLEMENTAL CASH FLOW DISCLOSURE
  Cash paid during the year for:
         Interest on deposits and borrowings                                   $    705,086        $   660,954
         Income taxes                                                                26,378             28,932

</TABLE>

See accompanying notes to the consolidated financial statements.


                                       17
<PAGE>


                         CARNEGIE FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary  of  significant  accounting  and  reporting  policies  applied in the
presentation of the accompanying financial statements follows:

Nature of Operations and Basis of Presentation
----------------------------------------------

On July 10, 1998,  Carnegie Financial  Corporation (the "Company") was formed as
part  of  a  corporate   reorganization   completed  in   connection   with  the
mutual-to-stock  conversion of the Carnegie  Savings Bank (the "Bank") (see Note
15). As a result of this transaction,  the Bank became a wholly-owned subsidiary
of the Company. The Company's principal sources of revenue emanate from interest
earnings  on its  investment,  mortgage-backed  securities,  and  mortgage  loan
portfolios.  The Bank is a  federally-chartered  stock  savings  bank located in
Carnegie,  Pennsylvania.  The Company and the Bank are subject to regulation and
supervision by the Office of Thrift Supervision.

The consolidated financial statements of the Company include the accounts of its
wholly-owned  subsidiary,  the Bank.  All  intercompany  transactions  have been
eliminated  in  consolidation.  The  investment  in  subsidiary  on  the  parent
company's financial  statements is carried at the parent company's equity in the
underlying net assets.

The  accounting  principles  followed by the Company and the methods of applying
these principles conform with generally accepted accounting  principles and with
general  practice  within the  banking  industry.  In  preparing  the  financial
statements, management is required to make estimates and assumptions that affect
the reported  amounts of assets and liabilities as of the balance sheet date and
revenues and expenses for the period.  Actual results could differ significantly
from those estimates.

Investment and Mortgage-backed Securities
-----------------------------------------

Investment securities,  including mortgage-backed  securities, are classified at
the time of purchase,  based upon  management's  intentions  and  abilities,  as
securities held to maturity or securities  available for sale. Debt  securities,
including  mortgage-backed  securities,  acquired with the intent and ability to
hold to maturity are  classified  as held to maturity and are stated at cost and
adjusted  for  amortization  of premium and  accretion  of  discount,  which are
computed  using a method  which  approximates  a level yield and  recognized  as
adjustments  of  interest  income.  Certain  other  debt  securities  have  been
classified as available for sale to serve  principally as a source of liquidity.
Unrealized  holding  gains  and  losses on  available  for sale  securities  are
reported as a separate  component of  stockholders'  equity,  net of tax,  until
realized.  Realized  securities gains and losses are computed using the specific
identification  method.  Interest and  dividends on  investment  securities  are
recognized as income when earned.

Common stock of the Federal Home Loan Bank (the "FHLB") represents  ownership in
an  institution  which is wholly  owned by other  financial  institutions.  This
equity  security  is  accounted  for at  cost  and  reported  separately  on the
accompanying balance sheet.

Loans Receivable
----------------

Loans  receivable  are  stated at their  unpaid  principal  amounts,  net of the
allowance for loan losses. Interest on loans is recognized as income when earned
on the accrual method. Interest accrued on loans more than 90 days delinquent is
generally offset by a reserve for uncollected  interest and is not recognized as
income.

                                       18

<PAGE>

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans Receivable (Continued)
----------------

The accrual of interest is generally  discontinued  when  management has serious
doubts about further  collectibility  of principal or interest,  even though the
loan is currently  performing.  A loan may remain on accrual  status if it is in
the process of collection and is either guaranteed or well secured.  When a loan
is placed on  nonaccrual  status,  unpaid  interest is charged  against  income.
Interest received on nonaccrual loans is either applied to principal or reported
as interest income,  according to management's judgment as to the collectibility
of principal.

Allowance for Loan Losses
-------------------------

The allowance for loan losses  represents the amount which management  estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing  for loan losses.  Accordingly,  all loan losses are
charged to the  allowance,  and all recoveries are credited to it. The allowance
for loan  losses is  established  through a provision  for loan losses  which is
charged to operations.  The provision is based on management's evaluation of the
adequacy of the  allowance  for loan losses which  encompasses  the overall risk
characteristics of the various portfolio segments,  past experience with losses,
the impact of economic conditions on borrowers,  and other relevant factors. The
estimates  used in  determining  the adequacy of the  allowance for loan losses,
including  the  amounts  and timing of future  cash flows  expected  on impaired
loans, are particularly susceptible to significant changes in the near term.

A loan is  considered  impaired  when it is probable the borrower will not repay
the loan  according to the  original  contractual  terms of the loan  agreement.
Management  has  determined  that first  mortgage  loans on  one-to-four  family
properties  and all consumer  loans  represent  large groups of  smaller-balance
homogeneous loans that are to be collectively evaluated. Management considers an
insignificant delay, which is defined as less than 90 days by the Company,  will
not cause a loan to be classified as impaired.  A loan is not impaired  during a
period of delay in payment if the  Company  expects to collect  all  amounts due
including  interest  accrued at the contractual  interest rate for the period of
delay.  All  loans  identified  as  impaired  are  evaluated   independently  by
management.  The Company  estimates credit losses on impaired loans based on the
present  value  of  expected  cash  flows or the  fair  value of the  underlying
collateral if the loan  repayment is expected to come from the sale or operation
of such collateral. Impaired loans, or portions thereof, are charged off when it
is determined  that a realized loss has occurred.  Until such time, an allowance
for loan losses is maintained  for estimated  losses.  Cash receipts on impaired
loans  are  applied  first to  accrued  interest  receivable,  unless  otherwise
required by the loan terms,  except when an impaired  loan is also a  nonaccrual
loan in which case the portion of the receipts related to interest is recognized
as income.

Premises and Equipment
----------------------

Premises  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation is calculated using the straight-line  method over the useful lives
of the related assets.  Expenditures  for maintenance and repairs are charged to
operations  as  incurred.   Costs  of  major  additions  and   improvements  are
capitalized.

Real Estate Owned
-----------------

Real estate owned  acquired in settlement of foreclosed  loans is carried at the
lower of cost or fair value minus estimated cost to sell.  Valuation  allowances
for  estimated  losses are  provided  when the carrying  value  exceeds the fair
value.  Direct  costs  incurred on such  properties  are recorded as expenses of
current operations.

                                       19
<PAGE>



1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Federal Income Taxes
--------------------

Deferred tax assets or liabilities are computed based on the difference  between
the financial statement and income tax basis of assets and liabilities using the
enacted  marginal tax rates.  Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.

Comprehensive Income
--------------------

Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting  Comprehensive  Income." In adopting Statement No.
130, the Company is required to present  comprehensive income and its components
in a full set of general purpose financial statements for all periods presented.
The Company has  elected to report the effects of  Statement  No. 130 as part of
the Statement of Changes in Stockholders' Equity.

Loss Per Share
--------------

The Company currently maintains a simple capital structure; therefore, there are
no  dilutive  effects  on  earnings  per  share.  As such,  earnings  per  share
computations  are based upon the weighted  number of shares  outstanding for the
period since inception, July 10, 1998, to December 31, 1998 less unreleased ESOP
shares. The net operating loss during this same period, and used in the loss per
share calculation, was $27,516.

Reclassification of Comparative Amounts
---------------------------------------

Certain  comparative  account balances for the prior year have been reclassified
to conform to the current period classifications. Such reclassifications did not
affect net income or stockholders' equity.

Recent Accounting Pronouncements
--------------------------------

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and  Hedging  Activities."  The  Statement  provides  accounting  and  reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other  contracts,  by requiring  the  recognition  of those items as
assets or liabilities in the statement of financial  position,  recorded at fair
value.  Statement  No. 133  precludes  a  held-to-maturity  security  from being
designated as a hedged item; however, at the date of initial application of this
Statement, an entity is permitted to transfer any held-to-maturity security into
the  available-for-sale  or trading  categories.  The unrealized holding gain or
loss on such  transferred  securities  shall  be  reported  consistent  with the
requirements of Statement No. 115,  "Accounting for Certain  Investments in Debt
and  Equity  Securities."  Such  transfers  do not raise an issue  regarding  an
entity's  intent to hold other debt  securities to maturity in the future.  This
Statement  applies  prospectively for all fiscal quarters of all years beginning
after June 15, 1999.  Earlier  adoption is permitted for any fiscal quarter that
begins after the issue date of this Statement.

In March 1998, the Accounting  Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained  for  Internal  Use." This SOP,  which is  effective  for fiscal  years
beginning after December 15, 1998, provides guidance on accounting for the costs
of  computer  software  developed  or obtained  for  internal  use and  provides
guidance for  determining  whether  computer  software is for internal  use. The
Company  will adopt SOP 98-1 in the first  quarter of 1999 and does not  believe
the effect of adoption will be material.


                                       20
<PAGE>


2.    INVESTMENT SECURITIES

The  amortized  cost  and  estimated  market  values  of  investment  securities
available for sale and held to maturity are summarized as follows:
<TABLE>
<CAPTION>

                                                                            1998
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                  <C>                 <C>                <C>                 <C>               
Available for Sale
U.S. Government agency
  securities                          $         1,258,263 $                - $           (9,025) $        1,249,238
Mutual funds                                        9,203              1,091                   -             10,294
                                         -----------------  -----------------   -----------------  -----------------
               Total                  $         1,267,466 $            1,091 $           (9,025) $        1,259,532
                                         =================  =================   =================  =================

Held to Maturity
Obligations of state and
  political subdivisions              $           489,287 $           13,796 $                 - $          503,083
                                         =================  =================   =================  =================


                                                                          1997
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
Available for Sale
U.S. Treasury securities              $           204,645 $            1,149  $          (1,466) $          204,328

U.S. Government agency
  securities                                      808,704              2,066             (1,404)            809,366
                                         -----------------  -----------------   -----------------  -----------------
     Total debt securities                      1,013,349              3,215             (2,870)          1,013,694
Mutual funds                                      502,991                  -                  -             502,991
                                         -----------------  -----------------   -----------------  -----------------

               Total                  $         1,516,340 $            3,215 $           (2,870) $        1,516,685
                                         =================  =================   =================  =================

Held to Maturity
U.S. Government agency
  securities                          $           300,000 $                - $             (998) $          299,002
Obligations of state and
  political subdivisions                          613,903              9,811                  -             623,714
                                         -----------------  -----------------   -----------------  -----------------

               Total                  $           913,903 $            9,811 $             (998) $          922,716
                                         =================  =================   =================  =================


</TABLE>

                                       21
<PAGE>



2.    INVESTMENT SECURITIES (Continued)

The amortized cost and estimated  market value of investments in debt securities
by contractual maturity are shown below.
<TABLE>
<CAPTION>

                                                 Available for Sale                      Held to Maturity
                                         ------------------------------------   ------------------------------------
                                                               Estimated                              Estimated
                                            Amortized            Market            Amortized            Market
                                               Cost              Value                Cost              Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                      <C>               <C>                <C>                <C>    
     Due within one year                  $        -        $         -        $     45,030         $   45,266
     Due after one year through
       five years                                  -                  -             245,000            247,114
     Due after five years through
       ten years                             298,805            300,076             199,257            210,703
     Due after ten years                     959,458            949,162                   -                  -
                                           ----------        -----------        ------------        -----------

                    Total                 $1,258,263        $ 1,249,238        $    489,287         $  503,083
                                           ==========        ===========        ============        ===========
</TABLE>

Proceeds from sales of investment  securities available for sale and gross gains
and losses  realized  on those  sales for the year ended  December  31,  were as
follows:

                                       1998               1997
                                  ----------          ----------
     Proceeds from sales         $  417,248          $ 748,062
     Gross gains                      2,795              2,234
     Gross losses                       616                557



                                       22
<PAGE>



3.    MORTGAGE-BACKED SECURITIES

The amortized  cost and estimated  market values of  mortgage-backed  securities
available for sale and held to maturity are summarized as follows:
<TABLE>
<CAPTION>
                                                                            1998
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                <C>                  <C>                 <C>                <C>          
Available for Sale
     Government National
       Mortgage Association          $      104,860       $        559        $         -        $    105,419
     Federal Home Loan
       Mortgage Corporation                 170,074                                                   171,526
                                                                 1,593               (141)
     Federal National Mortgage
       Association                          394,215                                                   397,162
                                                                 3,371               (424)
     Collaterized mortgage
       obligations                          342,641              9,694                  -             352,335
                                      --------------       ------------        ------------       ------------
                    Total            $    1,011,790       $     15,217        $      (565)       $  1,026,442
                                      ==============       ============        ============       ============

Held to Maturity
     Government National
       Mortgage Association          $    1,031,893       $     16,039        $         -        $  1,047,932
     Federal Home Loan
       Mortgage Corporation                  22,378                211                  -              22,589
     Federal National Mortgage
       Association                           12,639                  -               (233)             12,406
                                      --------------       ------------        ------------       ------------
                    Total            $    1,066,910       $     16,250        $      (233)       $  1,082,927
                                      ==============       ============        ============       ============


</TABLE>

                                       23
<PAGE>



3.    MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>

                                                                            1997
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                  <C>                 <C>                <C>                 <C>               
Available for Sale
     Government National
        Mortgage Association          $           210,083 $            1,354  $               -   $         211,437
     Federal Home Loan
        Mortgage Corporation                       67,156              1,736                  -              68,892     
     Federal National Mortgage
        Association                               299,195              5,415                  -             304,610
     Collaterized mortgage
        obligations                               310,086             11,844                  -             321,930
                                         -----------------  -----------------   -----------------  -----------------
                    Total             $           886,520 $           20,349  $               -   $         906,869
                                         =================  =================   =================  =================

Held to Maturity
     Government National
        Mortgage Association          $         1,630,734 $           25,545  $               -   $       1,656,279
     Federal Home Loan
        Mortgage Corporation                       48,230                  -             (2,004)             46,226
     Federal National Mortgage
        Association                                42,286                  -               (778)             41,508
                                         -----------------  -----------------   -----------------  -----------------
                    Total             $         1,721,250 $           25,545  $          (2,782)  $       1,744,013
                                         =================  =================   =================  =================

</TABLE>

The amortized cost and estimated market value of  mortgage-backed  securities by
contractual  maturity are shown below.  Mortgage-backed  securities  provide for
periodic  payments of principal and interest.  Due to expected  repayment  terms
being  significantly  less than the  underlying  mortgage loan pool  contractual
maturities,  the  estimated  lives of these  securities  could be  significantly
shorter. <TABLE> <CAPTION>
                                                 Available for Sale                      Held to Maturity
                                         ------------------------------------   -------------------------------------
                                                               Estimated                              Estimated
                                            Amortized            Market            Amortized            Market
                                               Cost              Value                Cost              Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                  <C>                 <C>                <C>                 <C>               
     Due after one year through
       five years                     $           147,438 $          147,700 $                 -  $               - 
     Due after five years through
       ten years                                   87,682             87,897              22,378             22,588
     Due after ten years                          776,670            790,845           1,044,532          1,060,339
                                         -----------------  -----------------   -----------------  -----------------
                    Total             $         1,011,790 $        1,026,442 $         1,066,910  $       1,082,927
                                         =================  =================   =================  =================
</TABLE>

Proceeds  from  sales  of  mortgage-backed  securities  available  for  sale was
$143,493 and gross gains of $427 were realized on those sales for the year ended
December 31, 1998. There were no sales in 1997.

                                       24

<PAGE>


4.    LOANS RECEIVABLE

Loans receivable consists of the following:

                                                1998               1997
                                          -----------------  -----------------
Mortgage loans:
     One-to-four family                $        10,988,748 $        7,656,395
     Home equity                                   766,497            578,979
     Construction                                1,251,904            251,322
     Commercial                                    490,626            343,195
                                          -----------------  -----------------
                                                13,497,775          8,829,891
                                          -----------------  -----------------
Consumer loans:
     Share loans                                   111,061            119,764
     Automobile loans                              450,524            382,974
     Other                                         287,887            367,563
                                          -----------------  -----------------
                                                   849,472            870,301
                                          -----------------  -----------------
Commercial:
     Commercial lines of credit                    303,734                  -
                                          -----------------  -----------------

                    Subtotal                    14,650,981          9,700,192
Less:
     Allowance for loan losses                     138,860            114,832
                                          -----------------  -----------------

                    Total              $        14,512,121 $        9,585,360
                                          =================  =================

The Company's  primary  business  activity is with customers  located within its
local trade area.  Residential,  consumer,  and  commercial  loans are  granted.
Although the Company has a diversified  loan  portfolio at December 31, 1998 and
1997,  the  repayment  of these  loans is  dependent  upon  the  local  economic
conditions in its immediate trade area.

Activity in the allowance  for loan losses for the year ended  December 31 is as
follows:

                                                       1998           1997
                                                 -----------      ---------

     Balance, January 1                       $      114,832     $   39,144
     Add:
       Provisions charged to operations               43,938         73,000
       Loan recoveries                                     -          2,688

     Less loans charged off                           19,910              -
                                                 -----------      --------- 
     Balance, December 31                     $      138,860     $  114,832
                                                 ===========      ========= 

The Company had nonaccrual loans of $57,000 and $42,000 at December 31, 1998 and
1997, respectively, which in management's opinion did not meet the definition of
impaired.  Interest  income on loans  would  have been  increased  by $1,919 and
$2,916,  respectively,  if these loans had  performed in  accordance  with their
original terms.

In the normal  course of business,  loans are extended to  directors,  executive
officers, and their associates.  A summary of loan activity for those directors,
executive officers,  and their associates with aggregate loan balances in excess
of $60,000 for the year ended December 31, 1998, is as follows:

          1997            Additions           Repayments            1998
    -----------------  -----------------   -----------------  -----------------
      $  303,190           $     -           $   10,381         $  292,809



                                       25

<PAGE>

5.    ACCRUED INTEREST RECEIVABLE

      Accrued interest receivable consists of the following:

                                                          1998          1997
                                                      -----------    ----------
     Investment securities                         $      21,191     $   23,219
     Mortgage-backed securities                           17,772         22,802
     Interest-bearing deposits                             2,336          1,112
     Loans receivable                                     73,376         60,228
                                                      -----------    ----------
                  Total                            $     114,675     $  107,361
                                                      ===========    ========== 

6.    PREMISES AND EQUIPMENT

      Premises and equipment consist of the following:

                                                          1998           1997
                                                      -----------    ----------
     Land and improvements                         $       7,900     $    7,900
     Buildings and improvements                          254,384        254,384
     Furniture and equipment                             173,630    
                                                                         88,477
                                                      -----------    ---------- 
                                                         435,914        350,761
     Less accumulated depreciation                       187,686        165,883
                                                      -----------    ---------- 

                    Total                          $     248,228 $      184,878
                                                      ===========    ==========

Depreciation  expense for the years ended December 31, 1998 and 1997 was $21,803
and $21,057, respectively.

7.    FEDERAL HOME LOAN BANK STOCK

The Bank is a member of the FHLB  System.  As a member,  the Bank  maintains  an
investment in the capital stock of the FHLB of Pittsburgh, at cost, in an amount
not less than the greater of one percent of its  outstanding  home loans or five
percent of its outstanding notes payable to the FHLB of Pittsburgh as calculated
at December 31 of each year.

                                       26

<PAGE>



8.    DEPOSITS

Comparative details of deposits are as follows:
<TABLE>
<CAPTION>
                                                 1998                          1997
                                      -----------------------       ---------------------------
                                           Amount         %             Amount            %
                                      ------------   --------       ------------  -------------
<S>                                  <C>             <C>          <C>                  <C>     
Noninterest-bearing                   $    582,489      3.79 %     $    546,886           3.60 %
                                       ------------  --------       ------------  ------------- 
Interest-bearing
     Savings                             3,647,869     23.73          3,374,959          22.24
     NOW checking                        1,247,990      8.12          1,031,088           6.79
                                       ------------  --------       ------------  -------------
                                         4,895,859     31.85          4,406,047          29.03
                                       ------------  --------       ------------  -------------

Time certificates of deposit
     2.00 - 3.99%                          513,490      3.34                  -              -
     4.00 - 5.99%                        4,398,613     28.61          4,462,000          29.40
     6.00 - 7.99%                        4,879,018     31.74          5,510,000          36.30
     8.00 - 9.99%                          102,701      0.67            252,984           1.67
                                       ------------  --------       ------------  -------------
                                         9,893,822     64.36         10,224,984          67.37
                                       ------------  --------       ------------  -------------
               Total                  $ 15,372,170    100.00 %     $ 15,177,917         100.00 %
                                       ============  ========       ============  =============
</TABLE>

The aggregate  amount of certificates of deposit with a minimum  denomination of
$100,000  was   $1,253,000  and  $1,441,000  at  December  31,  1998  and  1997,
respectively. Deposits in excess of $100,000 are not federally insured.

The scheduled maturities of time certificates of deposit as of December 31, 1998
are as follows:

     Within one year                                $        6,315,726
     Beyond one year but within two years                    1,409,153
     Beyond two years but within three years                   592,837
     Beyond three years but within five years                  974,458
     Beyond five years                                         601,648
                                                      -----------------

          Total                                     $        9,893,822
                                                      =================

Interest  expense by deposit  category  for the years  ended  December  31 is as
follows:

                                                1998               1997
                                            -----------       -----------

     Savings                               $    89,104       $     86,996
     NOW                                        22,841             12,801
     Time certificates of deposit              574,880            570,883
                                            -----------       -----------
           Total                           $   686,825       $    670,680
                                            ===========       ===========

9.       BORROWED FUNDS

In 1998, the Bank entered into a five-year "Convertible Select" fixed commitment
advance  arrangement for $1,000,000 with the FHLB at an initial interest rate of
4.18  percent.  Rates may be adjusted at the FHLB's  discretion,  on a quarterly
basis,  based on the three-month  LIBOR rate. At each rate change,  the Bank may
exercise a put option and satisfy the obligation without penalty.


                                       27
<PAGE>



9.  BORROWED FUNDS (Continued)

On December 31, 1998, the Bank entered into a five-day "RepoPlus" advance credit
arrangement  for $200,000 with the FHLB which bears  interest at a fixed rate of
5.00 percent.

The Bank has the  capability  to borrow  additional  funds  through  the  credit
arrangement  with the FHLB. The FHLB  borrowings are subject to annual  renewal,
incur no service  charges,  and are secured by a blanket  security  agreement on
certain  investment  and  mortgage-backed  securities,   qualifying  residential
mortgages, and the Bank's investment in FHLB stock. As of December 31, 1998, the
Bank's maximum borrowing capacity with the FHLB was $11.2 million.

10.   INCOME TAXES

The  components  of income  tax  benefit  for the years  ended  December  31 are
summarized as follows:

                                                 1998                  1997
                                             ------------        -------------
Current payable:
     Federal                                $      (6,755)       $    27,100
     State                                         13,259                  -
                                             -------------        -----------
                                                    6,504             27,100
Deferred taxes:
     Federal                                      (20,124)           (81,525)
                                             -------------        -----------
                         Total              $     (13,620)       $   (54,425)
                                             =============        ===========

The following temporary differences gave rise to the net deferred tax assets:

                                                   1998               1997
                                             ---------------    -------------  
Deferred tax assets:
     Allowance for loan losses               $        47,212    $     39,043   
     Accrual to cash adjustment                       58,504          31,857  
     State net operating loss carryforward            10,634          12,900
                                                -------------    ------------
           Total gross deferred tax assets           116,350          83,800
           Less valuation allowance                  (10,634)              -
                                                -------------    ------------
              Net deferred tax assets                105,716          83,800
                                                -------------    ------------
Deferred tax liabilities:
     Net unrealized gain on securities                 5,099           7,036
     Premises and equipment                           19,556          17,764
                                                -------------    ------------
           Total gross deferred tax liabilities       24,655          24,800
                                                -------------    ------------

              Net deferred tax assets        $        81,061    $     59,000
                                                =============    ============


                                       28

<PAGE>



10.   INCOME TAXES (Continued)

The  reconciliation  of the federal  statutory rate and the Company's  effective
income tax rate is as follows:
<TABLE>
<CAPTION>
                                             1998                           1997
                                 ---------------------------     --------------------------     
                                                     % of                            % of
                                                    Pre-tax                        Pre-tax
                                      Amount        Income            Amount        Income
                                 ------------   ------------     -----------   -------------    
<S>                           <C>                   <C>          <C>               <C>     
Benefit at statutory rate      $    (17,664)         (34.0) %     $(36,797)        (34.0) %
State tax expense (benefit),
  net of federal tax                  8,751           16.8          (8,514)         (7.9)
Tax-exempt income                    (9,200)         (17.7)        (10,674)         (9.9)
Other                                 4,493            8.7           1,560           1.5
                                 ------------   ------------      -----------  ------------
     Actual tax benefit
        and effective rate     $    (13,620)         (26.2) %     $(54,425)        (50.3) %
                                 ============   ============      ===========  ============
</TABLE>

The Bank is subject to the Pennsylvania Mutual Thrift Institution's tax which is
calculated at 11.5 percent of earnings  based on generally  accepted  accounting
principles with certain adjustments.

11.   EMPLOYEE BENEFITS

Simplified Employee Pension Plan (SEP)
--------------------------------------

The Company  maintains a SEP plan which provides for an annual  contribution  at
the  discretion  of the Board of  Directors  up to 15  percent  of the  eligible
employee's  compensation.  Employees are eligible when they attain the age of 21
and have  worked  for the  Company  at least  one and a half of the  immediately
preceding  five plan  years and have  received  compensation  of at least  three
hundred  dollars.  Contributions  charged  to  operations  for the  years  ended
December 31, 1998 and 1997 were $22,067 and $14,799, respectively.

Directors Consultation and Retirement Plan
------------------------------------------

On December 15, 1997, the Board of Directors  adopted a  nonqualified  Directors
Consultation   and   Retirement   Plan  (the   "Directors   Plan")  to   provide
post-retirement  benefits  over a period of ten years to members of the Board of
Directors  who have  completed  not  less  than ten  years of  service  and have
attained the age of 60.  Pursuant to the  Directors  Plan  benefits  also become
fully-vested  and payable upon  disability,  death,  or change of control of the
Company.  Directors  Plan  expense  charged  to  operations  for the year  ended
December 31, 1997 was $122,920.  No expense was incurred for year ended December
31, 1998.

Supplemental Executive Retirement Plan
--------------------------------------

Effective  December 15,  1997,  the Board of  Directors  adopted a  nonqualified
Supplemental  Executive  Retirement  Plan (the  "Plan") to provide an  executive
officer with  post-retirement  benefits for a period of ten years,  assuming not
less than 25 years of service following retirement after age 65. Pursuant to the
Plan, benefits become fully-vested and payable upon disability, death, or change
of control of the Company. Total expenses incurred for both years ended December
31, 1998 and 1997 amounted to $35,580.


                                       29
<PAGE>



11.   EMPLOYEE BENEFITS (Continued)

Employee Stock Ownership Plan (ESOP)
------------------------------------

The Company has an ESOP for the benefit of  employees  who meet the  eligibility
requirements which include having completed one year of service with the Company
and having  attained age 21. The ESOP Trust  purchased  19,044  shares of common
stock in the initial public offering with proceeds from a loan from the Company.
The Bank makes cash  contributions  to the ESOP on an annual basis sufficient to
enable the ESOP to make the  required  loan  payments to the  Company.  The loan
bears  interest at 8.50 percent with  interest  payable  quarterly and principal
payable in equal annual  installments over ten years. The loan is secured by the
shares of the stock purchased.

As debt is  repaid,  shares  are  released  from  collateral  and  allocated  to
qualified  employees  based on the  proportion of debt service paid in the year.
The shares pledged as collateral are reported as unallocated  ESOP shares in the
consolidated balance sheet. As shares are released from collateral,  the Company
reports  compensation  expense equal to the current  market price of the shares,
and the shares become outstanding for earnings per share computations. Dividends
on  allocated  ESOP shares are  recorded as a  reduction  of retained  earnings;
dividends on unallocated ESOP shares are recorded as a reduction of debt.

Compensation  expense for the ESOP was $21,123 for the year ended  December  31,
1998.

                                                   1998
                                             -----------------

Allocated shares                                            -

Shares released for allocation                            952

Unreleased shares                                      18,092
                                             -----------------

Total ESOP shares                                      19,044
                                             =================

Fair value of unreleased shares           $           156,044
                                             =================

12.   COMMITMENTS AND CONTINGENT LIABILITIES

Commitments
-----------

In the normal course of business,  the Company makes various  commitments  which
are not reflected in the accompanying  financial  statements.  These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The Company's  exposure to credit
loss in the  event of  nonperformance  by the  other  parties  to the  financial
instruments is represented by the contractual amounts as disclosed.  The Company
minimizes its exposure to credit loss under these commitments by subjecting them
to credit approval and review  procedures and collateral  requirements as deemed
necessary.  Commitments generally have fixed expiration dates within one year of
their origination.

                                       30

<PAGE>



12.   COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

The off-balance sheet commitments were comprised of the following:

                                                1998               1997
                                          -----------------  -----------------
     Commitments to extend credit:
        One-to-four family             $         2,112,904 $          516,000
        Lines of credit                            467,491            297,000
                                          -----------------  -----------------

               Total                   $         2,580,395 $          813,000
                                          =================  =================

All of the  Company's  commitments  to fund future loans are fixed rate,  and at
December 31, 1998 those rates ranged from 6.00 percent to 8.50 percent.

Contingent Liabilities
----------------------

In the normal  course of  business,  the Company is  involved  in various  legal
proceedings  primarily  involving the collection of outstanding  loans.  None of
these  proceedings  are  expected  to have a  material  effect on the  financial
position or operations of the Company.

13.   CAPITAL REQUIREMENTS

The Company,  on a consolidated  basis, is subject to various regulatory capital
requirements  administered by the federal banking agencies. The Office of Thrift
Supervision sets forth capital standards  applicable to all thrifts.  Failure to
meet minimum capital  requirements can initiate certain mandatory,  and possibly
additional  discretionary  actions by the regulators that, if undertaken,  could
have a direct material effect on the Company's and Bank's financial  statements.
Capital adequacy guidelines involve  quantitative  measures of the Company's and
Bank's assets,  liabilities,  and certain  off-balance sheet items as calculated
under regulatory accounting practices.  The Company's and Bank's capital amounts
and classification  are also subject to qualitative  judgments by the regulators
about components, risk-weightings, and other factors.

Quantitative  measures  established by the regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Total
and Tier I capital (as defined in the regulations) to Risk-weighted  assets, and
of tangible and core capital (as defined in the  regulations) to adjusted assets
(as defined).  Management believes, as of December 31, 1998, the Company and the
Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 1998, the most recent notification from the Company's and the
Bank's  primary  regulator   categorized  the  Company  and  the  Bank  as  well
capitalized under the regulatory  framework for prompt corrective  action. To be
categorized as well capitalized the Bank must maintain minimum  tangible,  core,
and  Risk-based  ratios.  There  have been no  conditions  or events  since that
notification  that management  believes have changed the Company's or the Bank's
category.


                                       31
<PAGE>



13.   CAPITAL REQUIREMENTS (Continued)

The  following  table  reconciles  the  Company's  and the Bank's  capital under
generally accepted accounting principles to regulatory capital at December 31:

                                                         1998           1997
                                                    ------------    -----------
                                                      (Company)        (Bank)

 Total stockholder's equity                         $  3,037,419   $  1,170,045
 Unrealized gain on securities available for sale         (4,434)       (13,658)
                                                     ------------   ------------

 Tier I, core, and tangible capital                    3,032,985      1,156,387
 General allowance for loan losses                       128,537        101,938
 Unrealized gains on equity securities                       491            N/A
                                                     ------------   ------------
 Risk-based capital                                 $  3,162,013  $   1,258,325
                                                     ============  =============


The Company's and the Bank's actual  capital  amounts and ratios were as follows
at December 31:
<TABLE>
<CAPTION>
                                                       1998                                    1997
                                        ------------------------------------   -------------------------------------
                                             Amount             Ratio               Amount              Ratio
                                        -----------------  -----------------   -----------------   -----------------
                                           (Company)                                  (Bank)
<S>                                    <C>                    <C>           <C>                         <C>              
Total Capital
  (to Risk-weighted Assets)

Actual                                   $  3,162,013           30.8 %        $  1,258,325                15.4  %        
For Capital Adequacy Purposes                 821,814            8.0               651,368                 8.0           
To Be Well Capitalized                      1,027,268           10.0               814,211                10.0

Tier I Capital
  (to Risk-weighted Assets)

Actual                                   $  3,032,985           29.5 %        $  1,156,387                14.2 %           
For Capital Adequacy Purposes                 410,907            4.0               325,684                 4.0           
To Be Well Capitalized                        616,361            6.0               688,526                 6.0


Core Capital
  (to Adjusted Assets)

Actual                                   $  3,032,985           16.6 %        $  1,156,387                 7.0 %           
For Capital Adequacy Purposes                 731,411            4.0               658,000                 4.0           
To Be Well Capitalized                        914,263            6.0               822,500                 5.0


Tangible Capital
  (to Adjusted Assets)

Actual                                   $  3,032,985           16.6 %        $  1,156,387                 7.0 %           
For Capital Adequacy Purposes                 548,558            3.0               493,500                 3.0           
To Be Well Capitalized                            N/A            N/A                   N/A                 N/A


</TABLE>




                                       32
<PAGE>



                                                          
14.   FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of the Company's financial  instruments at December 31
are as follows:
<TABLE>
<CAPTION>
                                                1998                       1997
                                         ---------------------   ------------------------
                                        Carrying     Fair         Carrying        Fair
                                         Value       Value          Value         Value
                                         -------    ----------   ------------ -----------
<S>                                <C>          <C>           <C>           <C>          
Financial assets:
     Cash and due from banks,
        interest-bearing deposits
        in other banks             $    965,488  $    965,488  $    850,891  $    850,891
     Certificates of deposit in
        other banks                     199,000       199,000       199,000       199,000
     Investment securities:
           Available for sale         1,259,532     1,259,532     1,516,685     1,516,685
           Held to maturity             489,287       503,083       913,903       922,716
     Mortgage-backed securities:
           Available for sale         1,026,442     1,026,442       906,869       906,869
           Held to maturity           1,066,910     1,082,927     1,721,250     1,744,013
     Loans receivable                14,512,121    14,680,910     9,585,360    10,003,917
     Accrued interest receivable        114,675       114,675       107,361       107,361
     FHLB stock                         102,900       102,900           --            --
                                    -----------   -----------   -----------   -----------
        Total                        19,736,355  $ 19,934,957  $ 15,801,319  $ 16,251,452
                                    ===========   ===========   ===========   ===========

Financial liabilities:
     Deposits                       $15,372,170    15,839,354    15,177,917    15,242,239
     Borrowed funds                   1,200,000     1,188,357            --            --  
     Advances by borrowers
        for taxes and insurance         179,563       179,563       143,129       143,129
     Accrued interest payable            12,480        12,480        21,800        21,800
                                    -----------   -----------   -----------   -----------
        Total                      $ 16,764,213  $ 17,219,754  $ 15,342,846  $ 15,407,168
                                    ===========   ===========   ===========   ===========
</TABLE>

Financial  instruments are defined as cash, evidence of an ownership interest in
an entity,  or a contract  which  creates an  obligation  or right to receive or
deliver  cash or  another  financial  instrument  from/to  a  second  entity  on
potentially favorable or unfavorable terms.

Fair value is defined as the  amount at which a  financial  instrument  could be
exchanged  in a current  transaction  between  willing  parties  other than in a
forced  or  liquidation  sale.  If a  quoted  market  price is  available  for a
financial  instrument,  the estimated fair value would be calculated  based upon
the market price per trading unit of the instrument.

If no readily  available  market exists,  the fair value estimates for financial
instruments are based upon  management's  judgment  regarding  current  economic
conditions,  interest rate risk,  expected cash flows,  future estimated losses,
and other factors as  determined  through  various  option  pricing  formulas or
simulation modeling.  As many of these assumptions result from judgments made by
management  based upon estimates which are inherently  uncertain,  the resulting
estimated fair values may not be indicative of the amount realizable in the sale
of a particular financial instrument. In addition, changes in the assumptions on
which the estimated  fair values are based may have a significant  impact on the
resulting estimated fair values.

As certain assets,  such as deferred tax assets and premises and equipment,  are
not  considered  financial  instruments,  the estimated  fair value of financial
instruments would not represent the full value of the Company.





                                       33
<PAGE>



14.   FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The Company employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available based
upon the following assumptions:

Cash and Due from Banks,  Interest-bearing Deposits in Other Banks, Certificates
of Deposit,  Accrued Interest Receivable,  FHLB Stock, Advances By Borrowers for
Taxes and Insurance, and Accrued Interest Payable

The fair value is equal to the current carrying value.

Investment and Mortgage-backed Securities
-----------------------------------------

The fair  value of these  securities  is equal to the  available  quoted  market
price. If no quoted market price is available, fair value is estimated using the
quoted market price for similar securities.

Loans Receivable, Deposits, and Borrowed Funds
----------------------------------------------

The fair value of loans is estimated by discounting  the future cash flows using
a simulation  model which estimates  future cash flows based upon current market
rates adjusted for prepayment risk and credit quality.  Savings,  checking,  and
money market  deposit  accounts are valued at the amount payable on demand as of
year end. Fair values for time deposits and borrowed funds are estimated using a
discounted cash flow calculation that applies  contractual costs currently being
offered in the  existing  portfolio to current  market  rates being  offered for
deposits and borrowings of similar remaining maturities.

Commitments to Extend Credit
----------------------------

These  financial  instruments  are generally not subject to sale,  and estimated
fair values are not readily  available.  The carrying value,  represented by the
net deferred fee arising from the unrecognized  commitment,  and the fair value,
determined by  discounting  the remaining  contractual  fee over the term of the
commitment  using fees currently  charged to enter into similar  agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 12.

15. CONVERSION TO A STOCK FORM OF OWNERSHIP AND FORMATION OF HOLDING COMPANY

On December 15, 1997, the Board of Trustees,  subject to regulatory approval and
approval by the members of the Bank,  adopted a Plan of Conversion  (the "Plan")
to convert from a state-chartered  mutual savings bank to a  federally-chartered
stock savings bank and the concurrent formation of a holding company.

As part of the  conversion,  Carnegie  Financial  Corporation  was  organized in
December  1997 at the  direction  of the Board of  Trustees  of the Bank for the
purpose of  acquiring  all of the capital  stock to be issued by the Bank in the
conversion.  The  Company  became a holding  company  with its only  significant
assets  being  all of the  outstanding  capital  stock of the  Bank,  which  was
acquired  on July 10,  1998 by  exchanging  approximately  $1.0  million  of the
proceeds  received  in the public  offering  for all of the common  stock of the
Bank. From the proceeds of the Conversion,  approximately  $24,000 was allocated
to common stock and $2.1 million,  which is net of $285,000 in conversion costs,
was allocated to additional paid-in capital.


                                       34
<PAGE>



15.  CONVERSION TO A STOCK FORM OF OWNERSHIP  AND  FORMATION OF HOLDING  COMPANY
(Continued)

In accordance  with  regulations,  at the time the Bank  converted from a mutual
savings  bank to a stock  savings  bank,  a portion  of  retained  earnings  was
restricted by establishing a liquidation  account.  The liquidation account will
be  maintained  for the benefit of  eligible  account  holders  who  continue to
maintain  their  accounts  at the Bank  after the  Conversion.  The  liquidation
account will be reduced  annually to the extent that  eligible  account  holders
have reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event of a
complete  liquidation  of the Bank,  each  account  holder  will be  entitled to
receive a distribution from the liquidation  account in an amount  proportionate
to the current adjusted qualifying balances for accounts then held.

16. CONDENDSED FINANCIAL  INFORMATION OF CARNEGIE FINANCIAL  CORPORATION (PARENT
COMPANY ONLY)

                             CONDENSED BALANCE SHEET



                                                                  1998
                                                             -------------
ASSETS
     Cash and due from banks                               $      622,933
     Investment securities available for sale                     248,413
     Investment in subsidiary bank                              1,980,429
     Loan receivable from ESOP                                    180,918
     Other assets                                                  33,044
                                                             -------------
TOTAL ASSETS                                               $    3,065,737
                                                             =============

LIABILITIES AND STOCKHOLDERS' EQUITY
     Other liabilities                                     $       28,318
     Stockholders' equity                                       3,037,419
                                                             -------------
TOTAL LIABILITIES AND
     STOCKHOLDERS' EQUITY                                  $    3,065,737
                                                             ============



                                       35
<PAGE>

16. CONDENDSED FINANCIAL  INFORMATION OF CARNEGIE FINANCIAL  CORPORATION (PARENT
COMPANY ONLY) (Continued)

                          CONDENSED STATEMENT OF INCOME
                                                              For the Period of
                                                                July 10, 1998
                                                                     to
                                                              December 31, 1998
                                                             -------------------

INCOME                                                            
     Interest income                                             $      11,898

EXPENSES                                                                 1,785
                                                                  -------------

Income before equity in undistributed net loss of subsidiary            10,113

Equity in undistributed net loss of subsidiary                         (37,629)
                                                                  -------------

NET LOSS                                                         $     (27,516)
                                                                  =============


CONDENSED STATEMENT OF CASH FLOWS
                                                              For the Period of
                                                                July 10, 1998
                                                                     to
                                                              December 31, 1998
                                                             -------------------

OPERATING ACTIVITIES
     Net loss                                                    $     (27,516)
     Adjustments to reconcile net loss to net cash provided
        by operating activities:
             Equity in undistributed net loss of subsidiary             37,629
                 Other, net                                             (4,186)
                                                                  -------------
                  Net cash provided by operating activities              5,927
                                                                  -------------

INVESTING ACTIVITIES
     Purchase of investment securities available for sale             (250,000)
     Payments from ESOP                                                  9,522
     Purchase of savings bank stock                                 (1,047,925)
                                                                  -------------
                  Net cash used for investing activities            (1,288,403)
                                                                  -------------

FINANCING ACTIVITIES
     Proceed from issuance of common stock                           1,905,409
                                                                  -------------
                  Net cash provided by financing activities          1,905,409
                                                                  -------------
                  Increase in cash                                     622,933

CASH AT BEGINNING OF PERIOD                                                  -
                                                                  -------------

CASH AT END OF PERIOD                                            $     622,933
                                                                  =============


                                       36