<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-K

                  Annual report pursuant to Section 13 of the
                        Securities Exchange Act of 1934

                  For the fiscal year ended December 31, 1998

                         Commission File No,:  0-25172

                            FIRST BELL BANCORP, INC.
             (exact name of registrant as specified in its charter)

           DELAWARE                                          25-1752651
(state or other jurisdiction of                      (I.R.S. Employer I.D. No.)
incorporation or organization)

          Suite 1704, 300 Delaware Avenue, Wilmington, Delaware 19801
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (302) 427-7883
       Securities registered pursuant to Section 12(b) of the Act:  None
          Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, par value $0.01 per share
                                (Title of class)

     The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

Yes     X        No          .
    ---------       --------

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

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e.,  persons other than directors and executive officers of
the registrant is $93,032,259 and is based upon the last sales price as quoted
on The Nasdaq Stock Market for March 1, 1999.

     As of March 1, 1999, the Registrant had 6,100,476 shares outstanding
excluding treasury shares).

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Annual Report to Stockholders for the year ended December
31, 1998 is incorporated by reference into Part II of this Form 10-K.

     Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders
is incorporated by reference into Part III of this Form 10-K.
 
 
<PAGE>
 
                                     INDEX

<TABLE> 
<CAPTION> 
                                                                          PAGE
                                                                          ----
<S>         <C>                                                            <C>
PART I
 
Item 1.     Business.....................................................   1
 
Item 2.     Properties...................................................  32
 
Item 3.     Legal Proceedings............................................  32
 
Item 4.     Submission of Matters to a Vote of Security Holders..........  32
 
 
PART II
 
Item 5.     Market for Registrant's Common Equity and Related Stockholder
            Matters......................................................  32
 
Item 6.     Selected Financial Data......................................  33
 
Item 7.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations....................................  33
 
Item 7A.    Quantative and Qualitative Disclosure about Market Risk......  33
 
Item 8.     Financial Statements and Supplementary Data..................  33
 
Item 9.     Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.....................................  33
 
 
PART III
 
Item 10.    Directors and Executive Officers of the Registrant...........  33
 
Item 11.    Executive Compensation.......................................  33
 
Item 12.    Security Ownership of Certain Beneficial Owners and
            Management...................................................  34
 
Item 13.    Certain Relationships and Related Transactions...............  34
 
PART IV
 
Item 14.    Exhibits, Financial Statement Schedules and Reports
            on Form 8-K..................................................  34
 
SIGNATURES                                                                 36
 
</TABLE>
<PAGE>
 
                                     PART 1
Item 1.  Business

General

     First Bell Bancorp, Inc. (the "Company") was organized by the Board of
Directors of Bell Federal Savings and Loan Association of Bellevue (the
"Association") for the purpose of acquiring all of the capital stock of the
Association to be issued in connection with the Association's conversion from
mutual to stock form, which was consummated on June 29, 1995, (the
"Conversion").  At December 31, 1998, the Company had consolidated total assets
of $767.6 million and total equity of $73.9 million.  The Company was
incorporated under Delaware law and is a savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal
Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC").  Currently, the Company does not transact any material
business other than through its subsidiary, the Association.  All references to
the Company include the Association unless otherwise indicated, except that
references to the Company prior to June 29, 1995 are to the Association.

     Bell Federal Savings and Loan Association of Bellevue was originally
founded in 1891 as the Commercial Building and Loan Association, a state
chartered building and loan association.  In 1941, the Association converted to
a federally chartered mutual savings and loan association and changed its name
to First Federal Savings and Loan Association of Bellevue.  The Association
again changed its name in 1971 to Bell Federal Savings and Loan Association of
Bellevue.  The Association's deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF").  The Association's business is
primarily conducted through six branch offices located throughout the suburban
Pittsburgh, Pennsylvania area and its principal office in the borough of
Bellevue.  The Company's principal executive office is located at Suite 1704,
300 Delaware Avenue, Wilmington, Delaware 19801 and its executive office
telephone number is (302) 427-7883.

     The principal business of the Company is to operate a traditional customer
oriented savings and loan association.  The Company attracts retail deposits
from the general public and invests those funds primarily in fixed-rate, owner-
occupied, single family conventional mortgage loans and, to a much lesser
extent, residential construction loans, multi-family loans, home equity loans
and consumer loans.  The Company's revenues are derived principally from
interest on conventional mortgage loans, interest and dividends on investment
securities and short-term investments, and other fees and service charges.  The
Company's primary source of funds is deposits and borrowings from the Federal
Home Loan Bank ("FHLB").

     The Association is subject to extensive regulation, supervision and
examination by the OTS, its primary regulator, and the FDIC, which insures its
deposits.  The Association is a member of the FHLB.
<PAGE>
 
Private Securities Litigation Reform Act Safe Harbor Statement

     In addition to historical information, this 10-K includes certain forward
looking statements based on current management expectations.  Examples of this
forward looking information can be found in, but are not limited to, the
allowance for losses discussion, certain sections of the 1998 Annual Report
incorporated herein and the Year 2000 compliance.  The Company's actual results
could differ materially from those management expectations.  Factors that could
cause future results to vary from current management expectations include, but
are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of the Company's loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices.

Market Area and Competition

     The Association has been, and continues to be, a community-oriented savings
institution offering a variety of financial services to meet the needs of the
community it serves.  Its primary market area is in the areas surrounding its
offices, while its lending activities extend throughout Allegheny County and
parts of Beaver, Butler, Washington and Westmoreland Counties, in Pennsylvania.
In addition to its principal office in Bellevue, the Association operates six
other retail offices, all of which are located in Allegheny County.

     The communities in Allegheny County are composed mostly of stable,
residential neighborhoods of predominantly one-and two-family residences and
middle-to-upper-income families. Management believes that, to a large degree,
the economic vitality of these communities depends on the economic vitality of
the City of Pittsburgh.

     The Greater Pittsburgh area has been in the process of restructuring over
the past decade.  Once centered on heavy manufacturing, primarily steel, its
economic base is now more diverse, including technology, health and business
services.  Several "Fortune 500" industrial firms are headquartered in the
Greater Pittsburgh area, including USX Corp. and Aluminum Company of America.
The largest employers in Pittsburgh, by the number of local employees, include
University of Pittsburgh Medical Center, USAirways, the University of Pittsburgh
and Mellon Bank Corp.  Seven colleges and universities are located in the
Greater Pittsburgh area.

     The Association serves its market area with a wide selection of residential
loans and other retail financial services.  Management considers the
Association's reputation for customer service as its major competitive advantage
in attracting and retaining customers in its market area.  The Association also
believes it benefits from its community orientation, as well as its established
deposit base and level of core deposits.

                                       2
<PAGE>
 
Lending Activities

     Loan and Mortgage-Backed Securities Portfolio Composition.  The loan
portfolio consists primarily of conventional mortgage loans secured by one- to
four-family, owner-occupied residences, and, to a much lesser extent,
residential construction loans, multi-family loans, home equity loans and
consumer loans.  Mortgage loans are originated to be held in the portfolio.  At
December 31, 1998, total loans receivable were $559.8 million, of which $535.9
million, or 95.7%, were conventional mortgage loans.  Of the conventional
mortgage loans outstanding at that date, 96.3% were fixed-rate loans.  At
December 31, 1998, the loan portfolio also included $17.9 million of residential
construction loans; $651,000 of multi-family loans; $4.5 million of residential
home equity loans; and $899,000 of other consumer loans.  The Association also
offers FHA/VA qualifying one- to four-family residential mortgage loans.

     The types of loans originated are regulated by federal law and regulations.
Interest rates charged on loans are affected principally by the demand for such
loans and the supply of money available for lending purposes.  These factors
are, in turn, affected by general and economic conditions, monetary policies of
the federal government, legislative and tax policies and governmental budgetary
matters.

     Set forth below is a table showing loan origination, purchase and sales
activity for the periods indicated.

<TABLE>
<CAPTION>
                                                         For the Year Ended December 31,
                                                         -------------------------------
                                                           1998       1997       1996
                                                         ---------  ---------  ---------
                                                                 (In thousands)
<S>                                                      <C>        <C>        <C>
Loans receivable at beginning of period................   $596,003   $547,210   $432,863
 
Additions:
 Originations of conventional mortgages (1)(2).........     66,825    129,043    168,915
 
Reductions:
 Transfer of mortgage loans to foreclosed real estate..        201        104        229
 Repayments............................................    102,781     50,157     54,339
 Loan sales............................................         --     29,989         --
                                                          --------   --------   --------
 
    Total reductions...................................    102,982     80,250     54,568
                                                          --------   --------   --------
 
    Total loans receivable at end of period............   $559,846   $596,003   $547,210
                                                          ========   ========   ========
 
Mortgage-backed securities at beginning of period......   $ 31,885   $     --   $     --
 
 Purchases.............................................         --     92,528         --
 Sales.................................................     30,255     46,676         --
 Repayments............................................      1,402     14,000         --
 Premium amortization..................................        228        197         --
 Unrealized gain or loss...............................         --        230         --
                                                          --------   --------   --------
 
Mortgage-backed securities at end of period............   $     --   $ 31,885   $     --
                                                          ========   ========   ========
--------------------------
</TABLE>
(1)  Includes conventional mortgages, residential construction loans and home
     equity mortgage loans.
(2)  The Association originated no multi-family loans during the periods shown.

                                       3
<PAGE>
 
  The following table sets forth the composition of loan portfolio and mortgage-
backed securities portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                                        At December 31,
                             -------------------------------------------------------------------------------------------------------
                                       1998                  1997                  1996                1995              1994
                             ----------------------  ---------------------  -------------------  ----------------- -----------------
                                         Percent of             Percent of           Percent of         Percent of        Percent of
                               Amount      Total      Amount      Total      Amount     Total    Amount    Total    Amount    Total
                             ----------  ----------  ---------  ----------  ---------  -------- --------  ------- -------- --------

<S>                          <C>         <C>         <C>        <C>        <C>        <C>      <C>       <C>      <C>       <C>
Real estate loans:
  Conventional mortgages...    $535,864      95.72%   $568,405     95.37%   $524,867   95.92%  $409,807   94.67%  $304,760   94.38%
  Residential construction
   loans...................      17,924       3.20      25,563      4.29      19,877    3.63     19,692    4.55     14,090    4.36
  Multi family loans.......         651        .12         860      0.14       1,220    0.22      2,075    0.48      2,646    0.82
  Second mortgage loans....       4,508        .81         268      0.05         297    0.06        330    0.08        354    0.11
                               --------     ------    --------    ------    --------  ------   --------  ------   --------  ------
   Total real estate loans.     558,947      99.85     595,096     99.85     546,261   99.83    431,904   99.78    321,850   99.67
 
Consumer loans:
  Loans on deposit accounts         895        .15         899      0.15         938    0.17        937    0.22      1,018    0.32
  Home improvement loans...           4         --           8       .--          11     .--         22     .--         46    0.01
                               --------     ------    --------  --------    --------  ------   --------  ------   --------  ------
   Total consumer loans....         899        .15         907      0.15         949    0.17        959    0.22      1,064    0.33
                               --------     ------    --------    ------    --------  ------   --------  ------   --------  ------
Total loans receivable.....     559,846     100.00%    596,003    100.00%    547,210  100.00%   432,863  100.00%   322,914  100.00%
                                            ======                ======              ======             ======             ======
 
Less:
  Undisbursed portion of
   loans in process........      10,354                 12,072                11,120             11,182              8,834
  Deferred net loan
   origination fees........       3,153                  3,822                 4,610              5,537              5,510
  Allowance for loan losses         805                    715                   665                575                575
                               --------               --------              --------           --------           --------
   Loans receivable, net...    $545,534               $579,394              $530,815           $415,569           $307,995
                               ========               ========              ========           ========           ========
 
Mortgage-backed securities:
  GNMA.....................           -         --    $ 26,958     84.55%   $     --     .--%  $     --     .--%  $    702   14.42%
  FHLMC....................           -         --          --       .--          --     .--         --     .--      2,103   43.18
  FNMA.....................           -         --       4,927     15.45          --     .--         --     .--      2,065   42.40
   Total mortgage-backed
    securities.............           -         --    $ 31,885    100.00%   $     --     .--%  $     --     .--%  $  4,870  100.00%
                               ========     ======    ========    ======    ========  ======   ========  ======   ========  ======
</TABLE>

                                       4
<PAGE>
 
Loan Maturity Schedule.  The following table sets forth certain information at
December 31, 1998 regarding the dollar amount of loans maturing in the portfolio
based on their remaining contractual terms to maturity.  The table does not
include the effect of prepayments or scheduled principal amortization.
Prepayments and scheduled principal amortization on loans totalled $102.8
million, $50.2 million and $54.3 million for the years ended December 31, 1998,
1997 and 1996, respectively.

<TABLE>
<CAPTION>
                                                            At December 31, 1998
                             ------------------------------------------------------------------------------------------------------
                                                                                                        More Than
                                Three       More Than       More Than     More Than      More Than        Five    
                              Months or    Three Months   Six Months to  One Year to    Three Years     Years to   More Than
                                Less      to Six Months  Twelve Months   Three Years   to Five Years    Ten Years  Ten Years  Total
                             ------------------------------------------------------------------------------------------------------
<S>                          <C>           <C>            <C>            <C>           <C>            <C>         <C>       <C>
Interest-earning Assets:
   Real estate loans:
      One-to-four-family
       adjustable-              
         rate loans........        $   --          $  --         $   --          $ --         $   95     $   258  $ 19,304  $ 19,657

      One-to-four-family              
       fixed-rate                      
         loans.............           169              1              3           280          2,329      42,148   471,277   516,207

      Residential                   
       construction loans..            --             --             --            --             --          --    17,924    17,924

      Multi family.........             1             --             --            57            136         261       196       651

     Second mortgage loans.         1,047              -             --            --          2,681         780        --     4,508
                                   ------             --             --          ----         ------     -------  --------  --------
         Total Real Estate          
         Loans                      1,217              1              3           337          5,241      43,447   508,701   558,947


Consumer Loans                        895             --             --             4             --          --        --       899
                                   ------             --             --          ----         ------     -------  --------  --------

         Total loans.......        $2,112             $1             $3          $341         $5,241     $43,447  $508,701  $559,846
                                   ======             ==             ==          ====         ======     =======  ========  ========

</TABLE>

                                       5
<PAGE>
 
     The following table sets forth the dollar amount of all loans and mortgage-
backed securities at December 31, 1998 which have fixed or adjustable interest
rates, and which are due after December 31, 1999.

<TABLE>
<CAPTION>
                                 Due After December 31, 1999
                              ---------------------------------- 
                               Fixed      Adjustable     Total
                              --------  --------------  --------
                                        (In thousands)
<S>                           <C>       <C>             <C>
Real estate loans:
  Conventional mortgages....  $516,034        $19,657   $535,691
  Residential construction..    14,840          3,084     17,924
  Multi-family..............       647              3        650
  Second mortgage...........     3,305            156      3,461
Consumer loans..............         4              -          4
                              --------        -------   --------
     Total loans............
                              $534,830        $22,900   $557,730
                              ========        =======   ========
</TABLE>

     One- to Four-Family Residential Mortgage Lending.  The residential mortgage
loans are primarily secured by owner-occupied, one- to four-family residences.
Loan originations are generally obtained from existing or past customers,
members of the local communities served, or referrals from local real estate
agents, attorneys and builders.  The Association primarily originates fixed-rate
loans, but also offers adjustable rate mortgage ("ARM") loans.  At December 31,
1998, conventional mortgage loans totalled $535.9 million, or 95.7%, of total
loans at such date.  Of the Association's conventional mortgage loans secured by
one- to four-family residences, $516.2 million, or 96.3%, were fixed-rate loans.

     Originated mortgage loans are held in the loan portfolio and are secured by
properties located within the Association's primary market area.  Historically,
the market interest rates of mortgage loans in the Pittsburgh area have been
below national averages.  The mortgage loan portfolio has increased from $321.9
million at December 31, 1994 to $558.9 million at December 31, 1998.

     The Association from time to time purchases one- to four-family mortgage
loans and loan participations.  A number of these loans are secured by
properties located outside the Association's market area, such as other regions
of Pennsylvania, California, Illinois, Maryland, New York, Texas, Virginia,
Utah, North Carolina, Tennessee and Georgia.  The Association did not purchase
any mortgage loans or participations in 1998.  At December 31, 1998, the
Association had $17.7 million in purchased mortgage loans and loan
participations serviced by others, totalling 3.2% of the total loan portfolio at
that date, primarily secured by one- to four-family residences.  The Association
intends to continue purchasing loans to supplement reduced loan demand as
needed.  Loans purchased generally must meet the same underwriting criteria as
loans originated by the Association.

                                       6
<PAGE>
 
     In 1998, the Association did not participate in any sales of conventional
mortgage loans.  During 1997, the Association sold $30.0 million in conventional
mortgages.  Most of the loan portfolio is underwritten in conformity with
Federal National Mortgage Association ("FNMA") secondary market requirements.
Although the Association has been approved by FNMA to sell loans in the
secondary market, there is no assurance that the Association will be able to
originate loans for sale in the secondary market or, that if originated, such
loans will be sold in the secondary market in the future.  Should the
Association decide to sell mortgage loans in the future, the lower interest
rates on such loans, characteristic of the Pittsburgh market, may tend to
diminish the demand for such loans in the secondary market.

     With the exception of Community Reinvestment Act ("CRA") loans, the maximum
loan-to-value ratio on conventional mortgage loans is 80%.  As a result, a
majority of borrowers are previous homeowners, whom the Association believes to
be relatively stable borrowers.  The Association also offers FHA/VA qualifying
one-to four-family residential mortgage loans.  One-to four-family residential
mortgage loans do not provide for negative amortization.  Mortgage loans in the
portfolio generally include due-on-sale clauses, which provide the Association
with the contractual right to demand the loan immediately due and payable in the
event that the borrower transfers ownership of the property that is subject to
the mortgage.  It is the Association's policy to enforce due-on-sale clauses.
The residential mortgage loans originated are generally for terms to maturity
from 15 to 30 years.  At December 31, 1998, the maximum one-to four-family loan
amount is $500,000, unless otherwise approved by the Board of Directors.

     Presently, four ARM loans are offered; a one-year, three-year, five-year
and 7/1 ARM loan.  The one-year ARM loan has an interest rate that adjusts
annually based on a spread of 2.50 percentage points above the rate on one-year
United States Treasury securities.  The one-year ARM loan is subject to a
limitation on interest rate increases and decreases of 2.0% per year, a lifetime
ceiling on interest rate increases of 6.0% above the origination rate, and a
floor rate equal to the origination interest rate.  This mortgage can convert to
a fixed-rate loan at specified times during the first five years.  The three-
year ARM loan has an interest rate that adjusts every three years based on a
spread of 2.75 percentage points above the rate on the three year United States
Treasury securities.  The three-year ARM is subject to a limitation on interest
rate increases and decreases of 2% per change, a lifetime ceiling on the
interest rate of 6.0% above the origination rate and a floor rate equal to the
origination interest rate.  The five-year ARM loan has an interest rate that
adjusts every five years based on a spread of 2.75 percentage points above the
rate on five-year United States Treasury securities.  The five-year ARM loan is
subject to a limitation on interest rate increases and decreases of 3.0% per
change, a lifetime ceiling on the interest rate of 6.0% above the origination
rate, and a floor rate equal to the origination interest rate.  The 7/1 ARM loan
has an interest rate that remains constant for the first seven years and then
the interest rate adjusts annually based on a spread of 2.50 percentage points
above the rate on one-year United States Treasury securities.  After the initial
seven years, this ARM loan is subject to a limitation on interest rate increases
and decreases of 2.0% per year, a lifetime ceiling on interest rate increases of
6.0% above the origination rate, and a floor equal to the origination interest
rate.  The mortgage can convert to a fixed-rate loan at the first change date.

                                       7
<PAGE>
 
     The volume and types of ARM loans originated are affected by such market
factors as the level of interest rates, competition, consumer preferences and
the availability of funds.  In recent years, demand for ARM loans has been weak
due to the low interest rate environment and consumer preference for fixed rate
loans.  In 1998, only $8.9 million of the $62.2 million, or 14.4%, of
conventional mortgage loans originated were adjustable mortgages.  Although ARM
loans will continue to be offered, there can be no assurance that in the future
ARM loans will be originated in sufficient volume to constitute a significant
portion of the loan portfolio.

     In an effort to provide financing for low and moderate income home buyers,
additional single family residential mortgage loans are offered to moderate
income borrowers and residents of the CRA neighborhoods, with terms of up to 30
years.  Such loans must be secured by a single family, owner-occupied unit.
These loans are originated using modified underwriting guidelines with reduced
down payments and expenses.  Private mortgage insurance is normally required.
Because the Association typically charges a lower rate of interest, lower
mortgage origination fees and a discount on closing costs on its CRA loans, a
lower rate of return is expected on such loans, as compared to other residential
mortgage loans.  For the years ended December 31, 1998, 1997 and 1996, the
Association originated 43, 24 and 24 loans under the CRA loan program, with
agregate dollar amounts of $2.0 million, $1.2 million and $1.1 million,
respectively.

     Residential Construction Loans.  The Association originates loans for the
construction of one-to four-family residential properties.  Such loans are made
on contract directly to the home buyer.  Residential construction loans are
subject to the same maximum loan amounts as conventional mortgage loans.
Residential construction loans are made for terms of up to one year, at which
time the loans convert to permanent conventional mortgage financing.
Residential construction loans are generally offered at the Association's
prevailing interest rate.  An additional fee may be charged for construction
servicing. Advances are made to builders as phases of construction of the
property are completed.  As of December 31, 1998, the Association's residential
construction loans totalled $17.9 million, or 3.2% of the total loan portfolio.
Of these construction loans, $10.4 million had been committed but were
undisbursed as of that date.

     Construction lending involves greater risks than other loans due the fact
that loan funds are advanced upon the security of the project under construction
and are predicated on the future value of the property upon completion of
construction.  Moreover, because of the uncertainties inherent in estimating
construction costs, delays resulting from labor problems, material shortages or
weather conditions and other unpredictable contingencies, it is relatively
difficult to evaluate accurately the total funds required to complete a project
and to establish the related loan-to-value ratio.  Because of these factors, the
analysis of prospective construction loan projects requires an expertise that is
different in significant respects from that which is required for residential
mortgage lending.

                                       8
<PAGE>
 
     Multi-Family Loans.  In prior years, the Association also originated multi-
family loans.  As of December 31, 1998, the Association's total loan portfolio
contained 18 multi-family loans, totalling $651,000, or 0.1%, of total loans.
Since 1991, the Association has not originated any multi-family mortgage loans.
In the future, the Association may originate a limited number of multi-family
loans on a case-by-case basis.

     The multi-family loans in the Association's portfolio consist of both
fixed-rate and adjustable-rate loans which were originated at prevailing market
rates.  The Association's policy has been to originate multi-family loans only
in its market area.  In making multi-family loans, the Association considers
primarily the ability of net operating income generated by the real estate to
support the debt service, the financial resources and income level and
managerial expertise of the borrower, the marketability of the property, and the
Association's lending experience with the borrower.

     Second Mortgage Loans.  During 1998, the Association began offering home
equity installment and line of credit loans to homeowners in its lending
territory.  The home equity installment loans are underwritten for a fixed rate,
five year term loan or an adjustable rate ten year term in which the rate
adjusts after the fifth year based on the prime rate.  The line of credit loans
can be drawn on for ten years and paid back in twenty years and are based on the
prime rate.  The Association offers second mortgage loans with maximum combined
loan-to-value ratios of up to 80%.  During 1998 the Association originated $3.7
million in installment loans and had made disbursements of $961,000 for line of
credit loans.  At December 31, 1998, the Association had $4.5 million or 0.8% of
total loans in second mortgage loans.

     Consumer Loans.  The Association also offers secured consumer loans.  At
December 31, 1998, the Association's consumer loans totalled $899,000, or 0.2%
of the Association's total loan portfolio.  Of that amount, loans secured by
deposit accounts totalled $895,000, or 99.6%, and home improvement loans
totalled $4,000, or 0.04%, of total consumer loans.

     Loan Servicing and Loan Fees.  Servicing on all loans that have been sold
has been retained.  Fees are received for these servicing activities, which
include collecting and remitting loan payments, inspecting the properties and
making certain insurance and tax payments on behalf of the borrowers.  At
December 31, 1998, the Association was servicing $24.4 million of loans for
others.  Loan servicing income was $9,000, $37,000 and $14,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.  The Association also
receives income in the form of service charges and other fees on loans. For the
years ended December 31, 1998, 1997 and 1996, the Association earned $198,000,
$214,000 and $192,000, respectively, in service charges and other fees.

     Mortgage-backed Securities.  At December 31, 1998, the Association had no
mortgage-backed securities.  During the first quarter of 1998, the remaining
balance of the mortgage-backed securities portfolio was sold which resulted in a
gain of $97,000.  In 1997, the Association purchased $92.5 million in adjustable
rate mortgage-backed securities.  These securities were classified as available-
for-sale.  Subsequently, in 1997, the Association sold $46.7 million of these
securities.  At December 31, 1997, mortgage-backed securities totaled

                                       9
<PAGE>
 
$31.9 million.  The Association had no mortgage-backed securities during 1996.
The Association may invest in mortgage-backed securities in the future to offset
any significant decrease in demand for one- to four-family loans.

     Loan Approval Procedures and Authority.  Loan approval authority has been
granted by the Board of Directors to the Association's Loan Committee.  All
mortgage loans must be approved by the Loan Committee.  As of December 31, 1998,
any loan application over $500,000 must be approved by the Board of Directors.

     Upon receipt of a completed loan application from a prospective borrower,
the Association generally orders a credit report, verifies employment, income
and other information, and, if necessary, obtains additional financial or credit
related information.  An appraisal of the real estate used for collateral is
also obtained.  All appraisals are performed by licensed or certified third
party appraisers.  The Board of Directors annually approves the independent
appraisers used by the Association and reviews the Association's appraisal
policy.  When the information is obtained and an appraisal is completed, loans
are presented for approval to the Association's Loan Committee.  The Loan
Committee must approve all one-to four-family mortgage loans originated by the
Association.

     The Association's policy is to require either title insurance or an
attorney's opinion of title, and hazard insurance on all real estate loans.
Borrowers are required to advance funds together with each payment of principal
and interest to a mortgage escrow account from which the Association makes
disbursements for items such as real estate taxes, hazard insurance premiums and
private mortgage insurance premiums, if required.

Asset Quality

     Loan Collection.  When a borrower fails to make a required payment on a
loan, the Association takes a number of steps to induce the borrower to cure the
delinquency and restore the loan to a current status.  The borrower is sent a
written notice of non-payment when the loan is 15 days past due.  In the event
payment is not then received, additional letters and phone calls generally are
made.  If the loan is still not brought current and it becomes necessary to take
legal action, which typically occurs after a loan is delinquent 120 days or
more, the Association may commence foreclosure proceedings against the real
property that secures the loan.  Decisions as to when to commence foreclosure
actions are made on a case by case basis.  If a foreclosure action is instituted
and the loan is not brought current, paid in full, or refinanced within 30 days
of delivery of the notice of default and intent to foreclose, the real property
securing the loan is generally sold at foreclosure or by the Association as soon
thereafter as practicable.

     On purchased mortgage loans or loan participations, monthly reports are
received from loan servicers in order to monitor the loan portfolio.  Based upon
servicing agreements with the servicers of the loans, the Association relies
upon the servicer to contact delinquent borrowers, collect delinquent amounts
and to initiate foreclosure proceedings, when necessary, all in accordance with
applicable laws, regulations and the terms of the servicing agreements between
the Association and its servicing agents.

                                       10
<PAGE>
 
     Delinquent Loans.  At December 31, 1998, 1997 and 1996, delinquencies in
the loan portfolio were as follows:

<TABLE>
<CAPTION>
                                              At December 31, 1998                               At December 31, 1997
                             -----------------------------------------------------   -----------------------------------------------
                                    60 - 89 Days              90 Days or More              60 - 89 Days            90 Days or More
                             ------------------------     ------------------------   -----------------------   ---------------------
                                            Principal                   Principal                 Principal                Principal
                               Number of   Balance of      Number of    Balance of     Number of  Balance of   Number of  Balance of
                                 Loans       Loans          Loans        Loans          Loans      Loans        Loans        Loans
                               ---------  ----------       -------     -----------   ----------  -----------  ---------- -----------
                                             (Dollars in thousands)                                 (Dollars in thousands)
<S>                            <C>        <C>             <C>          <C>           <C>         <C>           <C>        <C>
Conventional mortgage loans..          3      $ 156              7       $ 498              8        $ 436           13       $ 634
Multi-family loans...........         --         --             --          --             --           --           --          --
Consumer loans...............         --         --             --          --             --           --           --          --
                               ---------      -----      ---------       -----      ---------  -----------   ----------  ----------
     Total loans.............          3      $ 156              7       $ 498              8        $ 436           13       $ 634
                               =========      =====      =========       =====      =========  ===========   ==========  ==========
                                            
Delinquent to total loans....                  0.03%                      0.09%                       0.07%                    0.11%
                                              =====                      =====                 ===========               ==========
</TABLE> 
 
<TABLE> 
<CAPTION> 
                                                                 At December 31, 1996
                                        --------------------------------------------------------------------
                                                 60 - 89 Days                           90 Days or More
                                        ----------------------------              --------------------------
                                                         Principal                                Principal
                                           Number of    Balance of                  Number of    Balance of
                                             Loans         Loans                      Loans         Loans
                                          -----------   ----------                 -----------  -----------
 <S>                                     <C>            <C>                        <C>          <C> 
                                                                (Dollars in thousands)
Conventional mortgage loans..                       4    $ 258                           8          $ 400
Multi-family loans...........                      --       --                          --             --
Consumer loans...............                      --       --                          --             --
                                                -----    -----                        ----          -----
     Total loans.............                       4    $ 258                           8          $ 400
                                                =====    =====                        ====          =====
                                                                                               
Delinquent loans to total loans                           0.05%                                      0.08%
                                                         =====                                      =====
</TABLE>

                                       11
<PAGE>
 
     Non-Performing Loans and Real Estate Owned.  The following table sets forth
information regarding non-accrual mortgage and other loans and real estate owned
("REO").  Interest is not accrued on loans past due 90 days or more.  The
Association had $82,000 in real estate owned and no in substance foreclosures at
December 31, 1998.  During the years ended December 31, 1998, 1997 and 1996, the
amounts of interest income that would have been recorded on non-accrual loans,
had they been current, totalled $32,000, $29,000 and $24,000, respectively.
Interest income recorded on non-accrual loans was $18,000, $36,000 and $22,000
for each of the years ended December 31, 1998, 1997 and 1996, respectively.


<TABLE>
<CAPTION>
                                                          At December 31,
                                             ---------------------------------------
                                                1998    1997    1996    1995    1994
                                             ---------------------------------------
                                                       (Dollars in Thousands)
<S>                                            <C>     <C>     <C>     <C>     <C>
Non-accrual delinquent mortgage loans........  $ 498   $ 634   $ 400   $ 333   $ 726
Non-accrual delinquent other loans...........     --      --      --      --      15
                                               -----   -----   -----   -----   -----
  Total non-performing loans.................    498     634     400     333     741
Real estate owned............................     82      --     229     178      30
                                               -----   -----   -----   -----   -----
  Total non-performing assets................  $ 580   $ 634   $ 629   $ 511   $ 771
                                               =====   =====   =====   =====   =====
Total non-performing loans to total loans....   0.10%   0.11%   0.08%   0.08%   0.23%
Total non-performing assets to total assets..   0.08%   0.09%   0.10%   0.10%   0.19%
</TABLE>


     Classified Assets.  Federal regulations and the Association's policy
require the classification of loans and other assets, such as debt and equity
securities considered to be of lesser quality, as "Substandard," "Doubtful" or
"Loss" assets.  An asset is considered "Substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any.  "Substandard" assets include those characterized by
the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.  Assets classified as "Doubtful" have all of the
weaknesses inherent in those classified "Substandard," with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable.

     At December 31, 1998, classified assets totalled $498,000, or 0.08% of
total assets, and consisted of seven conventional mortgage loans classified as
"Substandard".
 

                                       12
<PAGE>
 
     Allowance for Loan Losses, Investments in Real Estate and Real Estate
Owned.  The allowance for loan losses is established and maintained through a
provision for loan losses based on management's evaluation of the risk inherent
in the loan portfolio and the condition of the local economy in the Company's
market area.  Such evaluation, which includes a review of all loans on which
full collectibility is not reasonably assured, considers among other matters,
the estimated fair value of the underlying collateral, economic and regulatory
conditions, and other factors that warrant recognition of an adequate loan loss
allowance. Management believes that the allowance for loan losses is adequate to
cover losses inherent in the portfolio as of December 31, 1998. Although
management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments
may be necessary if economic and other conditions differ substantially from the
economic and other conditions in the assumptions used in making the initial
determinations, such as a material increase in the balance of the loan
portfolio.

     In addition, the OTS and FDIC, as an integral part of their examination
process, periodically review the allowance for loan losses and real estate owned
and investments in real estate valuations.  Such agencies may require the
recognition of  additions to the allowance or additional write-downs based on
their judgments about information available to them at the time of their
examination.  The OTS, in conjunction with the other federal banking agencies,
adopted an interagency policy statement on the allowance for loan and lease
losses.  The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines.  Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management analyze
all significant factors that affect the collectibility of the portfolio in a
reasonable manner; and that management establish acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement.  As a
result of the declines in local and regional real estate market values and the
significant losses experienced by many financial institutions, there has been a
greater level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions undertaken as part of the examination of institutions by
the OTS and the FDIC.  While management believes that it has established an
adequate allowance for loan losses, there can be no assurance that regulators,
in reviewing the loan portfolio, will not request a material increase at that
time in the allowance for loan losses, thereby negatively affecting the
financial condition and earnings at such time.

                                       13
<PAGE>
 
The following table sets forth the allowance for loan losses at the dates
indicated.

<TABLE>
<CAPTION>
                                              For the Years Ended December 31,
                                         ---------------------------------------- 
                                            1998    1997    1996    1995    1994
                                         ----------------------------------------
<S>                                        <C>     <C>     <C>     <C>     <C>
                                                   (Dollars in thousands)
Allowance for loan losses:
Balance at beginning of period...........  $ 715   $ 665   $ 575   $ 575   $  598
Charge-offs:
    Conventional mortgages...............     --      --      --      --      (23)
    Residential construction.............     --      --      --      --       --
    Multi-family.........................     --      --      --      --       --
    Consumer.............................     --      --      --      --       --
                                           -----   -----   -----   -----   ------
      Total charge-offs..................     --      --      --      --      (23)
Total recoveries.........................     --       5      --      --        4
                                           -----   -----   -----   -----   ------
Provision for (recovery of) loan
    losses...............................     90      45      90      --       (4)
                                           -----   -----   -----   -----   ------
Balance at end of period(1)..............  $ 805   $ 715   $ 665   $ 575   $  575
                                           =====   =====   =====   =====   ======
Ratio of net charge-offs during the
    period to average loans
    outstanding during the period........     --%     --%     --%     --%    0.01%
Ratio of allowance for loan
    losses to total loans at the end of
    the period...........................   0.14%   0.12%   0.12%   0.13%    0.18%
Ratio of allowance for loan
    losses to non-performing assets
    at the end of the period.............  1.39x   1.13x   1.06x   1.13x    74.58%
</TABLE>
____________________________
(1)  The total amount of the allowance for loan losses for each of the periods
     shown was allocated to mortgage loans.  At the end of each reported period,
     mortgage loans represented in excess of 99.5% of total loans.


Investment Activities

     As a member of the FHLB System, the Association is required to maintain
liquid assets at minimum levels which vary from time to time.  The Association
increases or decreases its liquid investments depending on the availability of
funds, the comparative yields on liquid investments in relation to the return on
loans and in response to its interest rate risk management.  To meet liquidity
obligations, federally chartered savings institutions have authority to invest
in various types of assets, including U.S. Treasury obligations, securities of
various federal agencies, mortgage-backed and mortgage-related securities,
certain certificates of deposit of insured banks and savings institutions,
certain bankers acceptances, repurchase

                                       14
<PAGE>
 
agreements, loans of federal funds and, subject to certain limits, corporate
securities, commercial paper and mutual funds.  The Association's liquid
investments primarily consist of federal funds sold, U.S. Government securities,
federal agency securities and interest-bearing deposits.  Historically, the
Association has maintained its liquid assets at levels well above the minimum
regulatory requirements.  At December 31, 1998, $81.6 million, or 10.6%, of the
Association's total assets were invested in liquid assets.

     The Company's Investment Committee, which is appointed by the Chief
Executive Officer, formulates the investment policy of the Company.  The
Company's Investment Committee reports all purchases and sales of investments to
the Board of Directors.  The policy of the Association is to invest funds among
various categories of investments and maturities to meet the day-to-day,
cyclical and long-term changes in assets and liabilities.  In establishing its
investment strategies, the Company considers its cash position, the condition of
its loans, the stability of deposits, its capital position, its interest rate
risk and other factors.

     Investment Securities.  OTS guidelines regarding investment portfolio
policy and accounting require insured institutions to categorize securities and
certain other assets as held for "investment," "sale," or "trading."  The
Association's investment policy provides for "held for investment" and
"available for sale" portfolios.  Although the Association's investment policy
allows that some investments and loans will qualify to be held-to-maturity, the
policy enables for the sale of investments in certain specific instances, such
as when the quality of an asset deteriorates, or when regulatory changes require
that an asset be disposed.  At December 31, 1998, the Association had total
investments of $155.7 million, of which $145.7 million was classified as
available-for-sale and $10.0 million was classified as held to maturity.  The
$145.7 million investment classified as available-for-sale consisted of $119.0
million in municipal securities, $17.7 million in collateralized mortgage
obligations ("CMO's") and $9.0 in FHLB stock.  The $10.0 million investment
classified as held to maturity consists of U.S. government securities which have
maximum terms to maturity of up to six years.

                                       15
<PAGE>
 
     The following table sets forth certain information regarding the carrying
and market values of the portfolio of investment securities available for sale
and held to maturity at the dates indicated:

<TABLE>
<CAPTION>
                                                                 At December 31,
                                        ----------------------------------------------------------------
                                                 1998                 1997                  1996
                                        --------------------  --------------------  --------------------
                                          Carrying   Market   Carrying     Market   Carrying     Market
                                           Value     Value     Value        Value    Value       Value
                                        ----------  -------   --------     -------  --------    --------
<S>                                       <C>       <C>       <C>         <C>       <C>        <C>
                                                                  (In thousands)
Investment securities:
   Municipal securities.................  $118,986  $118,986  $     --      $   --   $    --     $    --
   U.S. Treasury securities.............     9,976    10,677     9,969      10,485    14,960      15,384
   Collateralized mortgage obligations..    17,691    17,691    15,902      15,902        --          --
   Other investments....................         4        89         4          68         4          45
   FHLB Stock...........................     9,000     9,000     5,148       5,148     3,999       3,999
                                          --------  --------   -------     -------   -------     -------
     Total investments..................  $155,657  $156,443   $31,023     $31,603   $18,963     $19,428
                                          ========  ========   =======     =======   =======     =======
</TABLE>

     The following table sets forth the carrying values, market values and
average yields for the Association's available for sale and held to maturity
investment portfolio by maturity, call date or repricing date, whichever is
first, at December 31, 1998.

<TABLE>
<CAPTION>
                              One Year or Less      One to Five Years       Five to Ten Years             Total Securities
                           ---------------------  --------------------   -----------------------   ------------------------------
                                       Weighted               Weighted                  Weighted                        Weighted
                             Carrying   Average   Carrying    Average    Carrying       Average    Carrying     Market  Average
                              Value      Yield     Value       Yield      Value          Yield      Value       Value    Yield
                           ----------  ---------  --------    --------   --------       --------   --------    -------  --------
<S>                          <C>       <C>        <C>         <C>         <C>           <C>        <C>         <C>      <C>
                                                                (Dollars in thousands)
Investment Securities:
   Municipal Securities.....       --        --%   $90,624      7.09%   $28,362           7.04%  $118,986     $118,986    7.08%
   U.S. treasury securities.    4,997      6.88         --        --      4,976           7.28      9,976       10,677    7.08
   Collateralized mortgage                                  
     obligations............    5,988      6.76      3,010      6.26      8,693           6.48     17,691       17,691    6.53
</TABLE>

                                       16
<PAGE>
 
Sources of Funds

     General.  The lending and investment activities are predominantly funded by
savings deposits, borrowings, interest and principal payments on loans and other
investments and loan origination fees.

     Deposits.  Deposits serve as the predominant source of funds.  The
Association offers interest rates on deposits that are competitive in the
Greater Pittsburgh market area to maintain a strong depositor base.  Deposits
consist of savings and club accounts, interest-bearing and non-interest-bearing
demand deposit accounts, money market deposit accounts and certificates of
deposit.  The Association relies on its competitive pricing policies and
customer service to maintain deposit growth.  The Association has produced an
overall increase in total deposits of 36.1%, from $363.7 million at December 31,
1994 to $495.1 million at December 31, 1998.  The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition.

     The following table presents the deposit activity for the periods
indicated.

<TABLE>
<CAPTION>
                                                   For the Years Ended December 31,
                                                   --------------------------------
                                                      1998       1997       1996
                                                   --------    --------   --------
<S>                                                 <C>        <C>        <C>
                                                            (In thousands)
Deposits..........................................  $701,925   $720,943   $805,469
Withdrawals.......................................   716,621    725,033    725,862
                                                    --------   --------   --------
Net increase (decrease) before interest credited..   (14,696)    (4,090)    79,607
Interest credited.................................    14,769     15,204     12,923
                                                    --------   --------   --------
Net increase in deposits..........................  $     73   $ 11,114   $ 92,530
                                                    ========   ========   ========
</TABLE>


     The following table indicates the amount of the certificates of deposit of
$100,000 or more by the time remaining until maturity as of December 31, 1998.

<TABLE>
<CAPTION>
                                          Amount
                                       -------------
                                       (In thousands)
<S>                                    <C>
Maturity Period:
   Three months or less...........        $ 6,091
   Over three through six months..          7,451
   Over six through 12 months.....          7,813
   Over 12 months.................         16,773
                                          -------
      Total.......................        $38,128
                                          =======
</TABLE>

                                       17
<PAGE>
 
     The following table sets forth the distribution of the average deposit
accounts and borrowings for the periods indicated and the weighted average
nominal interest rates on each category of deposits presented.  Average balances
for 1998 and 1997 are daily average while 1996 average balances are based on
month end balances.

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                            --------------------------------------------------------------------------------------------------
                                          1998                             1997                             1996
                            ------------------------------   -------------------------------  --------------------------------
                                                  Weighted                          Weighted                          Weighted 
                                                  Average                           Average                           Average
                              Average              Nominal   Average                 Nominal   Average                Nominal
                              Balance   Interest    Rate     Balance   Interest       Rate     Balance   Interest       Rate
                            ----------  --------  --------   -------   --------     --------   -------   --------     --------
<S>                           <C>       <C>       <C>        <C>       <C>         <C>        <C>       <C>       <C>
                                                            (Dollars in Thousands)
Money market and NOW
  deposits..................  $ 47,945   $ 1,147      2.39%  $ 46,634   $ 1,092         2.34%  $ 42,088  $ 1,040        2.47%
 
Savings deposits............    82,136     2,480      3.02     78,316     2,288         2.92     81,715    2,314        2.83
 
Certificates of deposit.....   362,720    21,186      5.84    387,557    23,306         6.01    323,199   18,504        5.73
 
Borrowings..................   142,481     8,031      5.64    102,649     5,643         5.50      5,833      191        3.27
                              --------   -------             --------   -------                --------   ------      
    Total interest-bearing
      liabilities...........  $635,282   $32,844      5.17%  $615,156   $32,329         5.26%  $452,825  $22,409        4.87%
                              ========   =======             ========   =======                ========  =======
</TABLE>

                                       18
<PAGE>
 
  The following table presents the amount of certificate accounts outstanding
based upon original contractual periods to maturity, at December 31, 1998, and
based upon contracted rates, at December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                  Period to Maturity from December 31, 1998               At December 31,
                          --------------------------------------------------------------------------------------
                            Less      One to   Two to   Three to   Four to Five to   Total
                          Than One     Two     Three      Four      Five     Ten    December
                            Year      Years    Years     Years     Years    Years   31, 1998    1997      1996
                          --------  --------  -------   -------     ----  -------   --------  --------  --------
<S>                      <C>        <C>       <C>      <C>       <C>      <C>      <C>        <C>       <C>
                                                        (In thousands)
Certificate Accounts:
  3.00% to 5.50%.......    $71,721  $ 89,917  $ 4,108   $ 6,922     $ 15  $ 2,596   $175,279  $ 74,933  $113,356
  5.501% to 6.00%......        530    59,557   13,285    27,112      258   22,619    123,361   156,885   121,968
  6.001% to 6.50%......         --     1,651    7,728    17,494      171   20,932     47,976   115,491    98,368
  6.501% to 7.50%......         --        --       --     2,118      102   14,559     16,779    26,200    30,860
  7.501% to 8.50%......         --        --       --        --       --    2,806      2,806     2,855     3,630
  8.501% to 9.50%......         --        --       --        --       --    2,887      2,887     3,559     4,346
  9.501% to 10.50%.....         --        --       --        --       --      298        298       281       266
                           -------  --------  -------   -------     ----  -------   --------  --------  --------
                           $72,251  $151,125  $25,121   $53,646     $546  $66,697   $369,386  $380,204  $372,794
                           =======  ========  =======   =======     ====  =======   ========  ========  ========
</TABLE>

Borrowings

     Borrowings are used in conjunction with deposits in funding the operating
and investment activity of the Association.  At December 31, 1998, the
Association had borrowings of $180.0 million.  Of these borrowings, $70.0
million have a contractual maturity of five years at a rate of 5.46%.  However,
every six months the FHLB has the option to convert the borrowings to an
adjustable rate based on the three month libor.  If the FHLB elects to convert
the borrowings to an adjustable rate, the borrowings can be repaid without
penalty.  The remaining $110.0 million in borrowings had a contractual maturity
of ten years.  These borrowings carry a fixed interest rate for the first five
years.  On the fifth anniversary date the FHLB has the option to convert the
borrowings to an adjustable rate base on three month libor.  Again, if the FHLB
elects to convert the borrowings to adjustable rates, the borrowing can be
repaid without penalty.  If the borrowings are not converted to an adjustable
rate, the rate remains fixed at the current contractual rate for the remaining
five years of the borrowings.  The weighted average rate on these borrowings is
5.68%.  The borrowings are secured by the assets of the Association.

Subsidiary Activities

     The Association does not maintain any subsidiaries.

                                       19
<PAGE>
 
                           REGULATION AND SUPERVISION

General

     As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the Office of Thrift Supervision ("OTS").  The Association is subject to
extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the FDIC, as the deposit insurer.  The Association is a
member of the Federal Home Loan Bank System and its deposit accounts are insured
up to applicable limits by the Savings Association Insurance Fund ("SAIF")
managed by the FDIC.  The Association must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions.  The OTS and/or the FDIC
conduct periodic examinations to test the Association's safety and soundness and
compliance with various regulatory requirements.  This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors.  The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.  Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the United States
Congress, could have a material adverse impact on the Company, the Association
and their operations.  Certain of the regulatory requirements applicable to the
Association and to the Company are referred to below or elsewhere herein.  The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and their
effects on the Association and the Company.

Holding Company Regulation

     The Company is a non-diversified unitary savings and loan holding company
within the meaning of federal law.  As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the
Association continues to be a qualified thrift lender ("QTL").  See "Federal
Savings Institution Regulation - QTL Test".  Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that
meets the QTL test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would generally be
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to the prior
approval of the OTS, and certain activities authorized by OTS regulation.

     A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of

                                       20
<PAGE>
 
a depository institution that is not insured by the FDIC.  In evaluating
applications by holding companies to acquire savings institutions, the OTS
considers the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the deposit insurance funds, the convenience and needs of the community and
competitive factors.

     The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions:  (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies; and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.  The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.

     Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Association must
notify the OTS 30 days before declaring any dividend to the Company.  In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.

Federal Savings Institution Regulation

     Business Activities.  The activities of federal savings institutions are
governed by federal law and regulations.  These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage.  In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.

     Capital Requirements.  The OTS capital regulations require savings
institutions to meet three minimum capital standards:  a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio.  In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier I risk-
based capital standard.  The OTS regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank.

     The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
assigned by the OTS capital regulation based on the risks OTS believed are

                                       21
<PAGE>
 
inherent in the type of asset.  Core (Tier 1) capital is defined as common
stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships.  The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% risk-weighted assets and up to 45% of unrealized
gains on available-for-sale equity securities with readily determinable fair
values.  Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.

     The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements.  For the present time, the OTS has deferred implementation
of the interest rate risk component.  At December 31, 1998, the Association met
each of its capital requirements and it is anticipated that the Association will
not be subject to the interest rate risk component.

     The following table presents the Association's capital position at December
31, 1998 relative to fully phased-in regulatory requirements.

<TABLE>
<CAPTION>
                                                                                      To Be Well
                                                                                  Capitalized Under
                                                                   For Capital         Prompt
                                                                    Adequacy      Correction Action
                                                    Actual          Purposes         Provisions
                                                ---------------  ---------------  ------------------ 
                                                Amount   Ratio   Amount   Ratio    Amount     Ratio
                                                -------  ------  -------  ------  ---------  -------
<S>                                             <C>      <C>     <C>      <C>     <C>        <C>
As of December 31, 1998
    Total Capital (to risk-weighted assets)...  $74,264 $22.41%  $26,515   8.00%    $33,144   10.00%
    Tier I Capital (to risk-weighted assets)..   73,459  22.16       N/A    N/A      19,886    6.00
    Tier I Capital (to total assets)..........   73,459   9.53    23,123   3.00      38,539    5.00
    Tangible Capital..........................   73,459   9.53    11,562   1.50         N/A     N/A
</TABLE>

     Liquidation Account.  In accordance with OTS conversion regulations, a
liquidation account was established in an amount equal to the retained earnings
of the Association as of June 30, 1995, which approximated $37.4 million.  At
December 31, 1998, the balance of the liquidation account was $12.2 million.  In
the unlikely event of a liquidation of the Association, eligible account holders
would be entitled to receive distributions of any assets remaining after payment
of all creditors' claims, but before any distributions are made to the
Association's stockholders, equal to their proportionate interests at that time
in the liquidation account.

     Prompt Corrective Regulatory Action.  The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization.  Generally, a
savings institution generally is considered "adequately capitalized" if its
ratio of total capital to risk-weighted assets is at least 8%, its ratio of Tier
I (core) capital to risk-weighted assets is at least 4%, and its ratio of Tier 1
(core) capital to total assets is at least 4% (3% if the institution receives
the highest CAMELS rating).  A

                                       22
<PAGE>
 
savings institution that has a ratio of total capital to risk-weighted assets of
less than 8%, a ratio of Tier I (CORE) capital to risk-weighted assets of less
than 4% or a ratio of Tier 1 capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized."  A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal or less
than 2% is deemed to be "critically undercapitalized."  Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized."  The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized."  Compliance
with the plan must be guaranteed by any parent holding company.  In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion.  The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.

     Insurance of Deposit Accounts.  Deposits of the Association are presently
insured by the SAIF.  The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information.  An institution's assessment rate depends upon
the categories to which it is assigned.  Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.

     In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980's by the Financing
Corporation ("FICO") to recapitalized the predecessor to the SAIF.  During 1998,
FICO payments for SAIF members approximated 6.10 basis points, while Bank
Insurance Fund ("BIF") members paid 1.22 basis points.  By law, there will be
equal showing of FICO payments between SAIF and BIF members on the earlier of
January 1, 2000 or the date the SAIF and BIF are merged.

     The Association's assessment rate for fiscal 1998 was 6.5 basis points and
the premium paid for this period was $305,000.  Payments toward the FICO bonds
amounted to $          .  The FDIC has authority to increase insurance
assessments.  A significant increase in SAIF insurance premiums would likely
have an adverse effect on the operating expenses and results of operations of
the Association.  Management cannot predict what insurance assessment rates will
be in the future.

     Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS.  The
management of the Association does not know of any practice, condition or
violation that might lead to termination of deposit insurance.

                                       23
<PAGE>
 
     Thrift Rechartering Legislation.  The September 30, 1996 law provides that
the BIF and SAIF will merge on January 1, 1999 if there are no more savings
associations as of that date.  That legislation also required that the
Department of Treasury submit recommendations to Congress regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished.  Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress.  The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date under some bills, or they would automatically become
national banks.  Converted federal thrifts would generally be required to
conform their activities to those permitted for the charter selected and
divestiture of nonconforming assets would be required over a two year period,
subject to two possible one year extensions.  State chartered thrifts would
become subject to the same federal regulation as applies to state commercial
banks.  A more recent bill reported by the House Banking Committee would allow
federal savings institutions to continue to engage in their current activities
and investments after converting to a bank charter.  Holding companies for
savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with a limited grandfather provision
for certain savings and loan holding company activities.  The Company is unable
to predict whether such legislation will be enacted or the extent to which the
legislation would restrict or disrupt its operations.

     Loans to One Borrower.  Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks.  A savings institution may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus.  An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by readily-marketable collateral.  At December 31, 1998,
the Association's limit on loans to one borrower was $10.4 million and the
Association's largest aggregate outstanding balance of loans to one borrower was
$419,000.

     QTL Test.  The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least 9 months out of each 12 month period.

     A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter.  As of
December 31, 1998, the Association maintained 83.0% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.  Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered "qualified thrift investments."

     Limitation on Capital Distributions.  OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase its shares and payments to shareholders of another
institution in a cash-out merger.  The rule, effective in 1998, establishes
three tiers of institutions based primarily on an institution's capital level.

                                       24
<PAGE>
 
An institution that exceeded all capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during a calendar year equal to the greater of (i) 100% of its net earnings to
date during the calendar year plus the amount that would reduce by one-half the
excess capital over its capital requirements at the beginning of the calendar
year, or (ii) 75% of its net income for the previous four quarters.  Any
additional capital distributions would require prior regulatory approval.  At
December 31, 1998, the Association was a Tier I Association.  Effective April 1,
1999, the OTS's capital distribution regulation will change.  Under the new
regulation, an application to and the prior approval of the OTS will be required
prior to any capital distribution if the institution does not meet the criteria
for "expedited treatment" of applications under OTS regulations (e.g.,
generally, examination ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with OTS.  If an
application is not required, the institution must still provide prior notice to
OTS of the capital distribution.  In the event the Association's capital fell
below its regulatory requirements or the OTS notified it that it was in need of
more than normal supervision, the Association's ability to make capital
distributions could be restricted.  In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.

     Liquidity.  The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings.  This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%.  Monetary
penalties may be imposed for failure to meet these liquidity requirements.  The
Association's liquidity ratio for December 31, 1998 was 12.3%, which exceeded
the applicable requirements.  The Association has never been subject to monetary
penalties for failure to meet its liquidity requirements.

     Assessments.  Savings institutions are required to pay assessments to the
OTS to fund the agency's operations.  The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly thrift financial report.  The assessments paid by the Association for
the fiscal year ended December 31, 1998 totalled $146,000.

     Branching.   OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute.  This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business.  The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.

                                       25
<PAGE>
 
     Transactions with Related Parties.  The Association's authority to engage
in transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by federal law.  The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution.  The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution's capital and surplus.  Certain transactions with
affiliates are required to be secured by collateral in an amount and of a type
described in federal law.  Transactions with affiliates must be on terms and
under circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.  In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.

     The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by federal law.  Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment.  Recent legislation created
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees.  The law also limits both the
individual and aggregate amount of loans the Association may make to insiders
based, in part, on the Association's capital position and requires certain board
approval procedures to be followed.

     Enforcement.  The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution.  Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance.  Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases.  The FDIC has the
authority to recommend to the Director of the OTS enforcement action to be taken
with respect to a particular savings institution.  If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.  Federal law also establishes criminal penalties for certain
violations.

     Standards for Safety and Soundness.  The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired.  If the OTS determines that an
institution fails to meet any standard prescribed by the guidelines, the OTS may
require the institution to submit an acceptable plan to achieve compliance with
the standard.
 

                                       26
<PAGE>
 
Federal Reserve System

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts).  The regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows:  for accounts aggregating $46.5 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million.  The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements.  The Association complies with the foregoing requirements.


                           FEDERAL AND STATE TAXATION

Federal Taxation

     General.  The Company and the Association report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below.  The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company.  The Association has not been
audited by the IRS during the last five years.  For its 1998 taxable year, the
Company is subject to a maximum federal income tax rate of 34%.

     Bad Debt Reserves.  For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve.  A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of  Taxable Income Method (the "PTI Method") or (ii)  the Experience
Method.  The reserve for non-qualifying loans was computed using the Experience
Method.

     The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves.  The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995.  Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method.  Thus, the PTI method of accounting for bad debts is
no longer available for any financial institution.

                                       27
<PAGE>
 
     A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS.
Any Section 481(a) adjustment required to be taken into income with respect to
such change generally will be taken into income ratably over a six-taxable
period beginning with the first taxable year after 1995, subject to a two-year
suspension if the "residential loan requirement" is satisfied.

     Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Association's taxable year of 1998, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.

     Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves.  In
addition, the Association is required to recapture (i.e., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987.  As
a result of such recapture, the Association will incur an additional tax
liability of approximately $1.2 million over six years beginning with the 1998
tax year.

     Distributions.  Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation.  Dividends paid out of the Association's current or
accumulated earnings and profits will not be so included in the Association's
income.

     The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution.  Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Association does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.

     Corporate Alternative Minimum Tax.  The Internal Revenue Code (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
The excess of the tax bad debt reserve deduction using the percentage of taxable
income method over the deduction that would have been allowable under the
Experience Method is treated as a preference item for purposes of computing the
AMTI.  Only 90% of AMTI can be offset by net operating loss

                                       28
<PAGE>
 
carryovers.  AMTI is increased by an amount equal to 75% of the amount by which
the Association's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses).

     SAIF Recapitalization Assessment.  The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995.  For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996.  The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under section 162 of the Code in the year of payment.

     Dividends Received Deduction and Other Matters.  The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations.  The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company owns more than 20% of the
stock of a corporation distributing a dividend, 80% of any dividends received
may be deducted.

State and Local Taxation

     The Association is subject to the Mutual Thrift Institutions Tax of the
Commonwealth of Pennsylvania based on the Association's financial net income
determined in accordance with generally accepted accounting principles with
certain adjustments.  The tax rate under the Mutual Thrift Institutions Tax is
11.5%.  Interest on state and federal obligations is excluded from net income.
An allocable portion of net interest expense incurred to carry the obligations
is disallowed as a deduction.  Three year carryforwards of losses are allowed.
The Company is subject to the Capital Stock Tax of the Commonwealth of
Pennsylvania and the Franchise Tax of the state of Delaware.

Personnel

     As of December 31, 1998, the Association had 50 full-time employees and 7
part-time employees.  The employees are not represented by a collective
bargaining unit, and the Association considers its relationship with its
employees to be good.

Preparation for the Year 2000

     Many computer systems may not correctly process information with dates
beyond December 31, 1999 due to programming assumptions that were made as
computer applications were developed.  The Company has assessed its primary
business information system with respect to the compatibility with the Year
2000.  The Company utilizes a third-party vendor for processing its primary
banking applications and several other third-party vendors for ancillary
computer applications.  The Company and all third-party vendors for the
Company's banking applications have modified, upgraded or replaced their
computer applications and are in the process of validating the changes to ensure
Year 2000 compliance.  The Company's primary

                                       29
<PAGE>
 
regulator, in conjunction with other regulatory agencies, has developed
guidelines which must be met by the Company to ensure that the Year 2000 issue
is properly addressed.  In accordance with these guidelines, the Board of
Directors has appointed a Year 2000 Committee, comprised of senior managers and
department heads to assess the impact that the Year 2000 will have on the
Company's operations and financial standing.  The Year 2000 Committee has
developed a Year 2000 Compliance Program, the ("Program").  The Program has been
divided into 5 subparts, awareness, assessment, renovation, validation and
implementation.  The awareness, assessment and renovation portions of the
program are complete.  The validation and implementation portions have been
completed with respect to the Company's mission critical systems.  Ancillary
computer communications, data exchanges and non information technology continue
to be tested as other third party vendors complete their Year 2000 computer
changes.  These final two portions of the plan are expected to be complete by
June 30, 1999.  In addition to internal processes, the Company monitors through
correspondence, the progress of other third party vendors to ensure that their
systems do not indirectly affect the Company's operations.

Costs

The Company has not and does not expect to incur any material expense to replace
data processing equipment.  The company does not currently expect that the cost
of its Year 2000 compliance program, including possible remediation costs, will
be material to its financial condition and expects that it will satisfy such
compliance program without material disruption of its operations.  The Company
estimates the costs related to Year 2000 compliance will be less then $75,000.

Risks and Contingencies

The Company does not have commercial loans outstanding.  However, the Company's
mortgage loans could be indirectly affected by the Year 2000 if the employer's
of the borrowers are affected by the Year 2000.  The Company has attempted to
make its borrowers aware of the Year 2000 issue but the effect that the Year
2000 will have, if any, on the Company's loans cannot be determined.

In the event that the Company's operations are affected by the Year 2000, either
internally or externally through significant vendors including utilities, other
financial institutions or supply companies, the Company's results of operations
and/or financial condition could be adversely affected.  In the event that
problems arise a contingency plan has been developed to ensure the continued
operation of the Company.

Item 2.   Properties

     The Company conducts its business by maintaining an office at 300 Delaware
Avenue, Suite 1704, Wilmington, Delaware 19801.  The Association conducts its
business through its main office located at 532 Lincoln Avenue, Pittsburgh,
Pennsylvania 15202 and six full-service branch offices, all of which are located
in Allegheny County.  Four of the Association's branch offices are leased.  Loan
originations are processed at the administrative office.  The Association
believes that its current facilities are adequate to meet the present and
immediately foreseeable needs of the Association and the Company.

                                       30
<PAGE>
 
Item 3.   Legal Proceedings

     Neither the Company nor its subsidiary are involved in any pending legal
proceedings other than routine legal proceedings occurring in the ordinary
course of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the financial condition and results of the
operations of the Association.

Item 4.   Submission of Matters to a Vote of Security Holders

     See the proxy for submission of matters to a vote of security holders.


                                    PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters

     Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" on page 52
in the Registrant's 1998 Annual Report to Stockholders and is incorporated
herein by reference.  Information relating to the dividend restrictions for
Registrant's common stock appears under Note 13 to the "Notes to Consolidated
Financial Statements Years Ended December 31, 1998, 1997 and 1996" on page 36 in
the Registrant's 1998 Annual Report to stockholders and is incorporated herein
by reference.

Item 6.   Selected Financial Data

     The above-captioned information appears under "Selected Financial and Other
Data of the Company" in the Registrant's 1998 Annual Report to Stockholders on
pages 2 and 3 is incorporated herein by reference.

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

      The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1998 Annual Report to Stockholders on pages 8 through 20 and is incorporated
herein by reference.

Item 7.a.    Quantitative and Qualitative Disclosure About Market Risks.

       The above-captioned information appears under the heading "Interest Rate
Sensitivity" in the registrant's 1998 Annual Report to Stockholders on pages 10
and 11 is incorporated herein by reference.

                                       31
<PAGE>
 
Item 8.  Financial Statements and Supplementary Data

     The Consolidated Financial Statements of First Bell Bancorp, Inc. and its
subsidiary, together with the report thereon by Deloitte & Touche LLP appears in
the Registrant's 1998 Annual Report to Stockholders on pages 21 through 50 and
are incorporated herein by reference.

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

     None.
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

     The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 1999,
at pages 5 through 7.

Item 11.  Executive Compensation

     The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 1999,
at pages 7 through 14 (excluding the Compensation Committee Report and Stock
Performance Graph).

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 26, 1999,
at pages 3 through 6.

Item 13.  Certain Relationships and Related Transactions

     The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 26, 1999, at page 14 and 15.

                                       32
<PAGE>
 
                                    PART IV

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

(a)  The following documents are filed as a part of this report:

(1)  Consolidated Financial Statements of the Company are incorporated by
     reference to the following indicated pages of the 1998 Annual Report to
     Stockholders.

<TABLE>
<CAPTION>
                                                                         PAGE
<S>                                                                      <C>
 
   Independent Auditors Report.........................................     21
 
   Consolidated Balance Sheets for the
     December 31, 1998 and 1997........................................     24
 
   Consolidated Statements of Income and Comprehensive Income for the
     Years Ended December 31, 1998, 1997 and 1996......................     25
 
 
   Consolidated Statements of Changes in Stockholders' Equity
     for the Years Ended December 31, 1998, 1997 and 1996..............     26
 
   Consolidated Statements of Cash Flows for the
     Years Ended December 31, 1998, 1997 and 1996......................     27
 
   Notes to Consolidated Financial Statements for the
     Years Ended December 31, 1998, 1997 and 1996......................  28-50
</TABLE>

   The remaining information appearing in the 1998 Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.

(2)  All schedules are omitted because they are not required or applicable, or
     the required information is shown in the consolidated financial statements
     or the notes thereto.


(3)  Exhibits

     (a) The following exhibits are filed as part of this report.

         3.1  Certificate of Incorporation of First Bell Bancorp, Inc.*
         3.2  Bylaws of First Bell Bancorp, Inc.*
         4.0  Stock Certificate of First Bell Bancorp, Inc.*
         __________________________________
         *  Incorporated herein by reference into this document from the
            Exhibits to the Form S-1, Registration Statement, originally filed
            on November 9, 1994, as amended and declared effective on May 9,
            1995, Registration No. 33-86160.

                                       33
<PAGE>
 
         10.1 First Bell Bancorp, Inc. 1995 Master Stock Option Plan**
         10.2 Bell Federal Savings and Loan Association of Bellevue Master
              Stock Compensation Plan**
         10.5 Form of Bell Federal Savings and Loan Association of Bellevue
              Supplemental Executive Retirement Plan*
         10.6 Employment Agreement between First Bell Bancorp, Inc. and certain
              executive officers, including Messrs. Eckert and Hinds (filed
              herewith)
         10.7 Employment Agreement between Bell Federal Savings and Loan
              Association of Bellevue and certain executive officers,
              including Messrs. Eckert and Hinds (filed herewith)
         11.0 Computation of earnings per share (filed herewith)
         13.0 Portions of the 1998 Annual Report to Stockholders (filed
              herewith)
         23.0 Consent of Independent Accountant (filed herewith)
         27.0 Financial Data Schedule (filed herewith)
         99.0 Proxy Statement for 1999 Annual Meeting of Stockholders to be held
              on April 26, 1999 and previously filed on March 19, 1999 is herein
              incorporated by reference.

         __________________________________
         *  Incorporated herein by reference into this document from the
            Exhibits to the Form S-1, Registration Statement, originally filed
            on November 9, 1994, as amended and declared effective on May 9,
            1995, Registration No. 33-86160.

         ** Incorporated herein by reference into this document from the
            Exhibits (Appendices) to the Proxy Statement for the Annual Meeting
            of Stockholders held on April 29, 1996, filed on March 22, 1996.

    (b)                       Reports on Form 8-K

                              None.

                                       34
<PAGE>
 
                                  SIGNATURES


     Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

Date:       March 31, 1999        By:  /s/ Albert H. Eckert II
       ------------------------        -------------------------------------
                                  Albert H. Eckert II,
                                  President, Chief Executive Officer
                                  and Director

Date:        March 31, 1999       By: /s/ Jeffrey M. Hinds
       ------------------------       --------------------------------------
                                  Jeffrey M. Hinds
                                  Executive Vice President, Chief Financial
                                  Officer and Director
 

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.

/s/ Albert H. Eckert, II      President, Chief Executive      March 31, 1999
----------------------------  Officer and Director            --------------
Albert H. Eckert, II     


/s/ Jeffrey M. Hinds          Executive Vice President,       March 31, 1999
----------------------------  Chief Financial Officer and     --------------
Jeffrey M. Hinds              Director                    
                         


/s/ David F. Figgins          Vice President and              March 31, 1999
----------------------------                                  --------------
David F. Figgins         


/s/ Thomas J. Jackson, Jr.    Director                        March 31, 1999
----------------------------                                  --------------
Thomas J. Jackson, Jr.


/s/ Robert C. Baierl          Secretary and Director          March 31, 1999
----------------------------                                  --------------
Robert C. Baierl


/s/ William S. McMinn         Vice President and              March 31, 1999
----------------------------  Director                        --------------
William S. McMinn        

                                       35
<PAGE>
 
/s/ Peter E. Reinert          Director                        March 31, 1999
---------------------------                                   --------------
Peter E. Reinert


/s/ Jack W. Schweiger         Director                        March 31, 1999
---------------------------                                   --------------
Jack W. Schweiger


/s/ Theodore R. Dixon         Director                        March 31, 1999
---------------------------                                   --------------
Theodore R. Dixon

                                       36