EXHIBIT 13

<PAGE>

                         [** PHS BANCORP, INC. LOGO **]



                               1998 ANNUAL REPORT
     -----------------------------------------------------------------------




<PAGE>




                                PHS BANCORP, INC.
                               1998 ANNUAL REPORT


--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------



Letter to Stockholders................................................... 1

Selected Financial and Other Data........................................ 2

Corporate Profile and Stock Market Information............................4

Management's Discussion and Analysis of
  Financial Condition and Results of Operations...........................5

Independent Auditors' Report.............................................16

Consolidated Balance Sheet...............................................17

Consolidated Statement of Income.........................................18

Consolidated Statement of Changes in Stockholders' Equity................19

Consolidated Statement of Cash Flows.....................................20

Notes to Consolidated Financial Statements...............................21

Office Locations and Other Corporate Information.........................45




<PAGE>





                                PHS BANCORP, INC.





To Our Stockholders:



     The past year has been marked by  significant  changes in your Company.  In
January the Bank converted its data  processing  system to an in-house  computer
system using Jack Henry's  Silverlake  software and an IBM AS 400  computer.  In
conjunction with the system conversion,  the Bank has made significant  progress
towards the completion of its year 2000 compliance program.

     On November 9, 1998, the Bank completed its reorganization by the formation
of PHS Bancorp,  Inc., a mid-tier stock holding company, which is majority owned
by PHS Bancorp,  M.H.C. We believe that the stockholding  company structure will
provide greater flexibility for future growth and expansion.

     We are proud to present to you our annual  report for the fiscal year ended
December 31, 1998. PHS Bancorp,  Inc.  completed the year profitably and in good
financial condition.

     As we begin fiscal 1999, we retain our goal of providing  personal  service
to our customers and  stockholders.  At the same time, we will  concentrate  our
energies on solid financial results and enhancing shareholder value.

     Each  member of your  Board of  Directors,  and our  employees,  join me in
thanking you for your continued dedication, loyalty and trust.


Sincerely,

/s/ James P. Wetzel, Jr.
-------------------------------------
James P. Wetzel, Jr.
President and Chief Executive Officer

March 18, 1999


<PAGE>



                                PHS BANCORP, INC.
                        SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Selected Financial Data
----------------------------------------------------------------------------------------------------
At December 31,                                         1998      1997      1996      1995     1994
----------------------------------------------------------------------------------------------------
                             (Dollars in Thousands)
<S>                                                  <C>       <C>       <C>      <C>      <C>     
Assets..............................................  $244,253  $217,735  $202,216 $198,939 $188,122
Loans...............................................    99,914    99,691    95,773   87,330   82,877
Mortgage-backed securities held to maturity.........    48,287    40,234    31,138   30,051   45,814
Mortgage-backed securities available
  for sale..........................................    32,878    30,159    25,794   25,442    3,909
Investment securities held to maturity..............    18,146    10,015    10,768   13,774   41,103
Investment securities available for sale............    25,197    24,253    26,688   32,727    5,960
Interest-bearing deposits with other institutions...     9,332     3,308     3,004    1,809    1,116
Federal Home Loan Bank stock........................     1,545     1,020       972      925      849
Deposits............................................   181,113   174,286   175,925  173,545  169,278
Other borrowings....................................     1,388     1,116         -        -        -
Advances from Federal Home Loan Bank................    30,895    12,117     8,100    7,400    3,851
Stockholders' equity(1).............................    29,184    28,609    16,645   16,643   13,893


Selected Consolidated Operating Data
----------------------------------------------------------------------------------------------------
Year Ended December 31,                                  1998      1997     1996      1995     1994
----------------------------------------------------------------------------------------------------
                             (Dollars in Thousands)

Interest income.....................................   $16,112   $14,950   $14,584  $13,950  $11,709
Interest expense....................................     8,523     7,857     7,882    7,598    6,154
                                                        ------    ------    ------   ------   ------
  Net interest income...............................     7,589     7,093     6,702    6,352    5,555
Provision for loan losses...........................       365       555       455      370      300
                                                       -------    ------    ------   ------   ------
  Net interest income after provision
    for loan losses.................................     7,224     6,538     6,247    5,982    5,255
Total non-interest income...........................       914       937       781      848      872
Total non-interest expense..........................     6,245     5,687     6,638(2) 5,000    5,039
                                                       -------    ------    ------   ------   ------
Income before income taxes..........................     1,893     1,788       390    1,830    1,088
Income taxes........................................       391       150      (319)     353      168
                                                       -------    ------   ------    ------   ------
  Net income........................................  $  1,502   $ 1,638   $   709  $ 1,477  $   920
                                                       =======    ======    ======   ======   ======
</TABLE>

                          (footnotes on following page)

                                        2

<PAGE>






<TABLE>
<CAPTION>

Other Selected Data
-----------------------------------------------------------------------------------------------------
At or for the Year Ended December 31,                   1998     1997        1996       1995    1994
-----------------------------------------------------------------------------------------------------
<S>                                                   <C>        <C>         <C>       <C>     <C>  
Return on average assets (net income
  divided by average total assets)..................... 0.65%     0.79%        .35%(2)   .76%    .50%
Return on average equity (net income
  divided by average equity assets).................... 5.24%     7.33%       4.37%(2) 10.09%   6.65%
Average equity to average assets ......................12.50%    10.81%       8.06%     7.52%   7.53%
Net interest rate spread............................... 3.21%     3.48%       3.50%     3.40%   3.08%
Per Share Information:
  Diluted earnings per shares(3)....................... $0.56     $0.33         N/A      N/A     N/A
  Tangible book value per shares(3)....................$10.57    $10.37         N/A      N/A     N/A
Non-performing assets to total assets.................. 0.22%     0.41%        .66%      .80%   0.66%
Non-performing assets to loans assets.................. 0.52%     0.87%       1.33%     1.50%   1.09%
Allowance for loan losses to total loans............... 1.28%     1.39%       1.49%     1.45%   1.31%
</TABLE>

---------------------
(1)  Prior to December 30, 1997,  represents  retained  earnings  (substantially
     restricted).
(2)  Includes a one-time  special  assessment of $1,106,000 to recapitalize  the
     SAIF.
(3)  No shares of common stock were outstanding  until July 10, 1997,  therefore
     per share  information  for December 31, 1997 is based upon the period from
     July  10,  1997  to  December  31,  1997,  with  weighted   average  shares
     outstanding of 2,705,880.

                                        3

<PAGE>



                                PHS BANCORP, INC.

Corporate Profile

         The  Company is a  Pennsylvania-chartered,  middle  tier stock  holding
company  organized in November 1998 (the  "Reorganization")  at the direction of
Peoples Home Savings Bank (the "Bank").  In connection with the  Reorganization,
PHS Bancorp,  M.H.C. (the "M.H.C.") and the stockholders of Peoples Home Savings
Bank (the "Bank")  exchanged their shares of common stock in the Bank for shares
of common stock in the Company,  on a one for one basis.  Upon completion of the
Reorganization,  the M.H.C.,  a  Pennsylvania-chartered  mutual holding company,
owned 55% of the  Company's  common stock with the  remaining 45% being owned by
common  stock  investors.  As a  result  of  the  Reorganization,  the  Bank,  a
Pennsylvania  stock  savings  bank,  became  a  wholly-owned  subsidiary  of the
Company. References to the "Bank" herein, unless the context required otherwise,
also refer to the Company and M.H.C. on a consolidated basis.

          Originally  chartered in 1888, the Bank is a community oriented,  full
service retail savings institution  offering  traditional mortgage loan products
and consumer loans, notably automobile loans. Its deposits are federally insured
by the Savings  Association  Insurance Fund ("SAIF") and the Bank is a member of
the Federal Home Loan Bank ("FHLB") System.  The Bank attracts its deposits from
the  general  public  and has  historically  used  such  deposits  primarily  to
originate  mortgage and consumer  (particularly new and used automobile)  loans.
Excess liquidity is invested in mortgage-backed securities.

Stock Market Information

         In July 1997, the Bank, among other things,  changed from a mutual form
of  ownership  to that of a stock form.  As a result,  the Bank's  common  stock
commenced  trading  on  the  Nasdaq  National  Market.  In  November  1998,  the
shareholders of the Bank exchanged  their common stock for the Company's  common
stock, resulting in Company's common stock to commence its trading on the Nasdaq
National  Market and the Bank's  Common Stock to cease its trading.  The Company
retained  the Bank's old symbol and trades  under  "PHSB." The  following  table
reflects the stock price as published by the Nasdaq National Market and includes
the prices of the  Company as well as the Bank  before the  Reorganization.  The
quotations reflect inter-dealer prices,  without retail mark-up,  mark-down,  or
commission, and may not represent actual transactions. On December 31, 1998, the
Company's common stock closed at $14.125.



                                                                CASH        
                                                            DIVIDENDS PAID
           QUARTER ENDED             HIGH          LOW        PER SHARE
           -------------            ------       ------     --------------

           December 31, 1998        14.625        11.00         0.07
           September 30, 1998       19.50         13.75         0.07
           June 30, 1998            23.25        18.375         0.06
           March 31, 1998           20.50         18.00         0.06
           December 31, 1997        21.25         16.50            -
           September 30, 1997       17.25         12.75            -



                                        4

<PAGE>



         The  number of  stockholders  of record of common  stock as of March 5,
1998,  the record  date for the 1999  annual  meeting of  stockholders  ("Record
Date"),  was  approximately  684. This does not reflect the number of persons or
entities who held stock in nominee or "street"  name through  various  brokerage
firms. As of the Record Date, there were 2,760,000 shares outstanding.

         The Company's  ability to pay dividends to  stockholders  is subject to
the requirements of Pennsylvania law. No dividend may be paid by the Bank to the
Company if the effect  thereof would cause the Bank's  regulatory  capital to be
reduced below (1) the amount required for the liquidation account established in
connection  with the Bank's  conversion  from mutual to stock  form,  or (2) the
regulatory  capital  requirements  imposed  by  the  Federal  Deposit  Insurance
Corporation and the Pennsylvania Department of Banking.


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

         The Private  Securities  Litigation  Act of 1995  contains  safe harbor
provisions regarding forward- looking statements.  When used in this discussion,
the words  "believes",  "anticipates",  "contemplates",  "expects",  and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties  which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest  rates,  risks  associated  with the effect of opening a new
branch,  the ability to control costs and expenses,  the year 2000 problem,  and
general economic conditions. The Company and the Bank undertake no obligation to
publicly  release  the  results  of  any  revisions  to  those  forward  looking
statements which may be made to reflect events or  circumstances  after the date
hereof or to reflect the occurrence of unanticipated events.

Financial Condition

         Total  assets at December  31, 1998 of $244.3  million  represented  an
increase of $26.5  million or 12.18% from  December 31, 1997.  This increase was
primarily the result of increases in investment and  mortgage-backed  securities
of $19.8 million and interest-bearing deposits of $6.0 million.

         Loans receivable at December 31, 1998, of $99.9 million  represented an
increase of 0.2% from $99.7 million at December 31, 1997.  Increases in mortgage
loans of $3.9 million and commercial loans of $1.2 million were partially offset
by decreases in consumer  loans of $5.0  million.  The increases in mortgage and
commercial  loans were primarily due to increased loan demand for these types of
loans due to the current  interest  rate  environment.  The decrease in consumer
loans was  primarily  attributable  to  decreases  in  automobile  loans of $3.0
million due to increased  competition  by other  lenders for these loans and the
sale of a major portion of the Bank's  education loan portfolio of $1.3 million.
Historically,  the Bank has originated student loans and subsequently sold these
loans when they begin repayment.

         The  allowance  for loan losses  decreased  $107,000 for the year ended
December  31,  1998.  The overall  ratio of the  allowance  to loans  receivable
declined to at 1.28% at December 31, 1998,  as compared to 1.39% at December 31,
1997.  The  ratio of the  allowance  for loan  losses  to  non-performing  loans
increased to 244.2% at December 31, 1998,  from 160.2% at December 31, 1997. The
relationship  between the allowance and loans receivable is a function of credit
quality and known risk factors of the loan portfolio.

         Investment and  mortgage-backed  securities  increased $19.8 million to
$124.5 million at December 31, 1998, from $104.7 million at December 31, 1997.
This increase was the result of purchases of $48.7

                                        5

<PAGE>



million which were funded by sales of $2.3 million,  maturities of $7.8 million,
principal  repayments  of $18.9  million and  increased  Federal  Home Loan Bank
advances of $18.8 million.  The purchases  funded by fixed rate  borrowings were
part of the Bank's  leverage  strategy.  The Bank's leverage  strategy  utilizes
borrowed  funds  to fund  asset  purchases  in an  effort  to use  capital  more
efficiently  and improve  operating  results.  The sales of  securities  were in
conjunction with a restructuring of the securities portfolio to reduce levels of
tax exempt  securities to maximize the tax benefits of such  securities in light
of alternative minimum tax computations.

         Total  deposits  at  December  31,  1998,  were  $181.1  million for an
increase of $6.8 million or 3.9% from $174.3 million at December 31, 1997. Total
deposits increased $0.8 million net of interest credited of $6.0 million for the
year ended December 31, 1998.

         Advances from the Federal Home Loan Bank of Pittsburgh  increased $18.8
million to $30.9 million at December 31, 1998 from $12.1 million at December 31,
1997.  This increase was the result of additional  borrowings to fund securities
purchases, as discussed above.

         Other borrowings increased $0.3 million to $1.4 million at December 31,
1998 due to additional  borrowings  to fund the Employee  Stock  Ownership  Plan
(ESOP).

         Stockholders' equity increased $575,000 for the year ended December 31,
1998, due to net income of $1,502,000 and an increase in net unrealized gains on
securities of $128,000.  These increases were partially offset by an increase in
unearned ESOP shares of $301,000,  an increase in unearned Restricted Stock Plan
(RSP) shares of $43,000 and cash dividends paid of $696,000.

                                        6

<PAGE>



Average Balance Sheets and Interest Analysis

         The  following  tables set forth  certain  information  relating to the
Bank's  average  balance  sheet and  reflects  the  average  yield on assets and
average cost of  liabilities  for the periods  indicated and the average  yields
earned and rates paid.  Such yields and costs are derived by dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                             ---------------------------------------------------------------------------------
                                                       1998                        1997                       1996
                                             ---------------------------------------------------------------------------------
                                             Average                    Average                    Average
                                             Balance  Interest  Yield   Balance  Interest  Yield   Balance   Interest    Yield
                                             -------  --------  -----   -------  -------   -----   -------   --------    -----
                                                                          (Dollars in Thousands)
<S>                                         <C>        <C>     <C>    <C>       <C>       <C>     <C>      <C>           <C>  
ASSETS                                                                    
Interest-earning assets:
 Loans(1)....................................$ 99,253   $8,378  8.44%  $ 99,594  $ 8,308   8.34%   $ 92,834 $  7,920      8.53%
 Mortgage-backed securities..................  41,906    2,729  6.51     30,784    2,086   6.78      32,441    2,198      6.78
 Investment securities(2)....................  22,271    1,244  5.59     16,138    1,005   6.23      16,804    1,028      6.12
 Securities held for sale....................  58,339    4,272  7.32     53,757    4,196   7.81      53,980    4,118      7.63
                                              -------  -------  ----    -------   ------  -----      ------  -------     -----
  Total interest-earning assets.............. 221,769   16,623  7.50%   200,273   15,595   7.79%    196,059   15,264      7.79%
                                                       -------                    ------                     -------     
Noninterest-earning assets...................   7,576                     6,324                       5,144              
                                              -------                   -------                     -------              
  Total assets...............................$229,345                  $206,597                    $201,203              
                                              =======                   =======                     =======              

LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                     
Interest-bearing liabilities:                                                                                            
  Savings(3).................................  29,863      637  2.13%  $ 31,253  $   770   2.46%  $  33,762  $   825      2.44%
  NOW and money markets......................  45,876      954  2.08     39,220      752   1.92      31,142      290      0.93
  Time deposits.............................. 102,289    5,673  5.55    105,266    5,950   5.65     110,852    6,310      5.69
  Advances from FHLB.........................  19,435    1,145  5.89      6,131      349   5.69       8,059      457      5.67
  Other borrowings...........................   1,457      114  7.82        439       36   8.20           -        -         -
                                              -------  -------  ----    -------  -------  -----     -------  -------     -----
  Total interest-bearing liabilities......... 198,920    8,523  4.28%   182,309    7,857   4.31%    183,815    7,882      4.29%
                                                       -------                   -------                     -------   
Non-interest bearing liabilities.............   1,747                     1,955                       1,170              
                                              -------                   -------                    --------              
 Total liabilities........................... 200,667                   184,264                     184,985              
Stockholders' equity.........................  28,678                    22,333                      16,218              
                                              -------                   -------                     -------              
 Total liabilities and retained earnings.....$229,345                  $206,597                    $201,203              
                                              =======                   =======                     =======              
Net interest income, interest rate spread(4)           $ 8,100  3.21%            $ 7,738   3.48%              $7,382      3.50%
                                                        ======  ======             =====  ======              ======    ======
Net yield on interest-earning assets.........                   3.65%                      3.86%                          3.77%
                                                                ======                    ======                        ======
Ratio of average interest-earning assets                                                                                 
 to average interest-bearing liabilities.....                 111.49%                    109.85%                        106.66%
                                                              ======                     ======                         ======
</TABLE>

---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes  interest-bearing  deposits in other  financial  institutions.  (3)
Includes  advances by borrowers for taxes and insurance.  (4) Interest income is
shown on a fully tax equivalent basis assuming a 34%
     federal income tax rate.

                                        7

<PAGE>

Rate/Volume Analysis

         The volume and rate relationship of the Bank's  interest-earning assets
and interest-bearing liabilities are determining factors of net interest income.
The following table reflects the significant  sensitivity to changes in interest
rates of the interest income and interest expense of the Bank. For each category
of  interest-earning  assets and  interest-bearing  liabilities,  information is
provided on changes  attributable  to (i)  changes in volume  (changes in volume
multiplied by old rate) and, (ii) changes in rate (changes in rate multiplied by
old volume).  Changes  which are not solely  attributable  to rate or volume are
allocated to changes in rate due to rate sensitivity of interest-earning  assets
and interest-bearing liabilities. <TABLE> <CAPTION>


                                                              Year Ended December 31,
                                        -------------------------------------------------------------------
                                              1998 vs. 1997                        1997 vs. 1996
                                        --------------------------------  ---------------------------------
                                           Increase (Decrease)                  Increase (Decrease)
                                                 Due to                               Due to
                                        --------------------------------  ---------------------------------
                                          Volume     Rate         Net        Volume      Rate        Net
                                        ----------  ---------  ---------  ----------  ----------  ---------
                                                               (In Thousands)
<S>                                     <C>         <C>          <C>        <C>          <C>       <C>  
Interest income:
 Loans................................   $   (28)    $  98        $  70      $ 577        $(189)    $ 388
 Mortgage-backed securities...........       754      (111)         643       (112)           -      (112)
 Investment securities (1)............       382      (143)         239        (41)          18       (23)
 Securities available for sale (1)....       358      (282)          76        (17)          95        78
                                           -----      ----        -----       ----         ----      ----
  Total interest-earning assets.......     1,466      (438)       1,028        407          (76)      331
                                           -----      ----        -----       ----         ----      ----

Interest expense:
  Savings.............................       (34)      (99)        (133)       (61)           6       (55)
  NOW and money markets...............       128        74          202         75          387       462
  Time deposits.......................      (168)     (109)        (277)      (318)         (42)     (360)
  Advances from FHLB..................       757        39          796       (109)           1      (108)
  Other borrowings....................        83        (5)          78         36            0        36
                                          ------     -----        -----       ----        -----     -----
   Total interest-bearing liabilities.       766      (100)         666       (377)        (352)      (25)
                                           -----      ----         ----       ----         ----      ----

Net change in interest income.........    $  700    $ (338)       $ 362      $ 784        $(428)    $ 356
                                           =====     =====         ====       ====         ====      ====
</TABLE>

--------------------------------
(1)  Income and yields derived from state and political subdivisions  securities
     are shown on a fully tax equivalent basis assuming a 34% federal income tax
     rate.


Comparison of Operating Results for the Years Ended December 31, 1998 and 1997.

         General.  Net income for the year ended  December 31, 1998 decreased by
$136,000 to  $1,502,000,  from  $1,638,000 for the year ended December 31, 1997.
This decrease was primarily due to increases in non-interest expense of $558,000
and increased income tax provisions of $241,000 along with a $23,000 decrease in
non-interest  income.  These decreases to net income were partially offset by an
increase in net interest  income of $496,000 along with a decrease in provisions
for loan losses of $190,000.

         Net Interest  Income.  Reported net interest income increased $ 496,000
or 6.5% for the year ended  December  31,  1998.  Net  interest  income on a tax
equivalent  basis  increased  by $362,000 or 4.7% in a period when both  average
interest  earning  assets and  average  interest-bearing  liabilities  increased
(increased  $21.5 million and $16.4  million,  respectively).  The Company's net
interest  rate spread  decreased  27 basis  points  (with 100 basis points being
equal to 1%) to 3.21% for the year ended  December  31,  1998.  The  increase in
average  earning  assets of $21.5  million was  primarily due to a $21.9 million
increase in average investment and mortgage-backed  securities  partially offset
by a $0.3 million decrease

                                        8

<PAGE>



in  average  loans.  Due to the  volume of  obligations  of state and  political
subdivision  in the  Company's  investment  portfolio,  net interest  income and
interest  income are presented on a tax  equivalent  basis.  See also "- Average
Balance Sheets and Interest Analysis."

         Interest  Income.  Interest  income  on a fully  tax  equivalent  basis
totaled  $16.6  million for the year ended  December  31,  1998,  an increase of
$1,028,000 or 6.6% over the total of $15.6  million for the year ended  December
31, 1997.  This increase was mainly due to an increase in the Company's  average
interest-earning  assets of $21.5 million for the year ended  December 31, 1998.
Interest  earned on loans  increased  $70,000 or 0.8%, in 1998. The increase was
due to a 10 basis point increase in the yield earned  partially offset by a $0.3
million decrease in the average balance of loans.  Interest earned on investment
and mortgage-backed  securities  (including  securities held for sale) increased
$958,000 or 13.1%, in 1998. The increase was due to a $21.8 million  increase in
the average  balance of  investment  and  mortgage-backed  securities  partially
offset by a 51 basis point decrease in the yield earned.

         Interest Expense.  Interest expense increased  $666,000 to $8.5 million
for the year ended December 31, 1998.  The increase in interest  expense was due
to  a  $16.6  million  increase  in  the  average  balance  of  interest-bearing
liabilities  primarily  due to  increased  borrowings  pursuant  to  the  Bank's
leverage  strategy  partially  offset by a three  basis  point  decrease  in the
average cost of interest-bearing liabilities.

         Provision for Losses on Loans.  The provision for loan losses decreased
by $190,000 to $365,000 for the year ended December 31, 1998,  from $555,000 for
the year ended  December  31,  1997.  Gross loans at December  31, 1998  totaled
$101.2 million  compared to $101.1 million at December 31, 1997 resulting in the
allowance  for loan losses  being 1.28% of total loans at December  31, 1998 and
1.39% of total loans at December 31, 1997.  While  management  believes that the
allowance  for  loan  losses  is  sufficient,  there  can be no  assurance  that
regulators, in reviewing the Company's loan portfolio, will not request the Bank
to significantly increase its allowance for loan losses, or that a deteriorating
real estate market will cause the Bank to  significantly  increase its allowance
for loans losses,  therefore negatively effecting the Bank's financial condition
and earnings.

         Non-interest Income.  Non-interest income decreased $23,000 to $914,000
for the year ended December 31, 1998,  from $937,000 for the year ended December
31, 1997.  This decrease was  primarily due to a decrease in service  charges of
$94,000,  due to check  printing  charges being  charged  directly to depositors
accounts  instead  the  printer  charging  the Bank  and the  Bank  subsequently
charging depositors.  In addition,  gains on the sale of securities for the year
ended  December  31, 1998 of $117,000,  a decrease of $15,000 from  $132,000 for
year ended December 31, 1997, due primarily to the  restructuring  of the Bank's
portfolio as previously  discussed.  These  decreases were  partially  offset by
increases  in gains on sales of loans of  $17,000,  increased  automated  teller
machine fees of $15,000, and increased rental income of $4,000.

         Non-interest  Expense.   Non-interest  expense  increased  $558,000  to
$6,245,000  for the year ended December 31, 1998,  from  $5,687,000 for the year
ended  December  31,  1997.  This  increase  was  primarily  due to increases in
compensation  and  employee  benefits  (including  stock  related  benefits)  of
$491,000.

         The  increase in  compensation  and  employee  benefits of $491,000 was
primarily  the result of  increased  compensation  of $318,000  due to employees
working  additional hours during the Company's  computer system conversion along
with  staffing  increases  and normal  merit  increases,  a $30,000  increase in
expense related to the Bank's ESOP, and expense related to the Bank's Restricted
Stock Plan of $129,000.


                                        9

<PAGE>



         Income Tax Expense.  Income tax expense increased  $241,000 to $392,000
for the year ended December 31, 1998,  from $150,000 for the year ended December
31, 1997.

Comparison of Operating Results for the Years Ended December 31, 1997 and 1996.

         General.  Net income for the year ended  December 31, 1997 increased by
$929,000 to $1,638,000, from $709,000 for the year ended December 31, 1996. This
increase was  primarily due to the SAIF Special  Assessment of $1,106,000  which
was recognized by the Company in the third quarter of 1996.

         Net Interest  Income.  Reported net interest income increased $ 390,000
or 5.8% for the year ended  December  31,  1997.  Net  interest  income on a tax
equivalent basis increased by $356,000 or 4.8% in a period when average interest
earning  assets  increased and average  interest-bearing  liabilities  decreased
(increased $4.2 million and decreased $1.5 million, respectively). The Company's
net  interest  rate spread  decreased 2 basis points to 3.48% for the year ended
December 31, 1997.  The increase in average  earning  assets of $5.4 million was
primarily due to a $6.8 million  increase in average loans. Due to the volume of
obligations  of state and  political  subdivision  in the  Company's  investment
portfolio,  net  interest  income and  interest  income are  presented  on a tax
equivalent basis. See also "- Average Balance Sheets and Interest Analysis."

         Interest  Income.  Interest  income  on a fully  tax  equivalent  basis
totaled  $15.6  million for the year ended  December  31,  1997,  an increase of
$331,000 or 2.2% over the total of $15.3 million for the year ended December 31,
1996.  This  increase  was mainly due to an  increase in the  Company's  average
interest-earning  assets of $4.2  million for the year ended  December 31, 1997.
Interest earned on loans  increased  $388,000 or 4.9%, in 1997. The increase was
due to a $6.8  million  increase  in the  average  balance  of loans  which  was
partially offset by a 19 basis point decrease in the yield earned. This increase
reflects the Bank's increased emphasis on lending activities. Interest earned on
investment and mortgage-backed  securities  (including securities held for sale)
decreased  $57,000 or 0.8%,  in 1997.  The  decrease  was due to a $2.5  million
decrease in the average  balance of investment  and  mortgage-backed  securities
offset by a 13 basis point increase in the yield earned.

         Interest  Expense.  Interest expense  decreased $25,000 to $7.9 million
for the year ended December 31, 1997.  The decrease in interest  expense was due
to  a  $1.5  million  decrease  in  the  average  balance  of   interest-bearing
liabilities  offset  by  a 2  basis  point  increase  in  the  average  cost  of
interest-bearing liabilities.

         Provision for Losses on Loans.  The provision for loan losses increased
by $100,000 to $555,000 for the year ended December 31, 1997,  from $455,000 for
the year ended December 31, 1996.  This increase was a result of a higher volume
of loans charged off during the year ended December 31, 1997 and the increase in
the Company's gross loan portfolio at December 31, 1997 compared to December 31,
1996.  Gross loans at December 31, 1997 totaled $101.1 million compared to $96.1
million at December 31, 1996  resulting in the  allowance  for loan losses being
1.39% of total loans at  December  31, 1997 and 1.49% of total loans at December
31,  1996.  While  management  believes  that the  allowance  for loan losses is
sufficient,  there can be no assurance that regulators,  in reviewing the Bank's
loan  portfolio,  will  not  request  the  Bank to  significantly  increase  its
allowance for loan losses, or that a deteriorating real estate market will cause
the Bank to  significantly  increase its allowance  for loans losses,  therefore
negatively effecting the Bank's financial condition and earnings.

         Non-interest Income. Non-interest income increased $156,000 to $937,000
for the year ended December 31, 1997,  from $781,000 for the year ended December
31, 1996. This increase was primarily

                                       10

<PAGE>



due to the fact  that the  bank had no gains on the sale of  securities  for the
year ended December 31, 1996 compared to $132,000 for the year ended December 31
1997.

         Non-interest  Expense.   Non-interest  expense  decreased  $950,000  to
$5,687,000  for the year ended December 31, 1997,  from  $6,637,000 for the year
ended  December 31, 1996.  This  increase was  primarily  due to the decrease in
deposit insurance  premiums of $1,290,000 due to the SAIF Special  Assessment of
$1,106,000  which  was  recognized  by the Bank in the  third  quarter  of 1996,
partially offset by increases in compensation and employee  benefits of $323,000
and occupancy expenses of $ 83,000 for the year ended December 31, 1997.

         The  increase in  compensation  and  employee  benefits of $323,000 was
primarily  the result of  increased  compensation  of  $117,000  due to staffing
increases  and normal merit  increases  and  $137,000 in expense  related to the
Bank's newly formed ESOP.

         Income Tax Expense.  Income tax expense increased  $469,000 to $150,000
for the year ended  December  31,  1997,  from a tax benefit of $319,000 for the
year ended  December  31,  1996.  The  $319,000  tax benefit was the result of a
taxable  loss for the  year  ended  December  31,  1996 due to the SAIF  special
assessment  along with the tax  benefits of the Banks  investments  in municipal
obligations.

Market Risk Analysis

         Interest rate sensitivity and the repricing  characteristics  of assets
and liabilities are actively monitored by management. The Bank's objective is to
maintain a consistent level of profitability  within  acceptable risk tolerances
across a broad range of potential interest rate environments.  The Bank uses the
Olson Research Associates,  Inc., Columbia, Maryland, to monitor its exposure to
interest rate risk, which calculates changes in market value of portfolio equity
and net interest income.  Reports  generated from assumptions  provided by Olson
and modified by  management  are  reviewed by the  Interest  Rate Risk and Asset
Liability Management Committee and reported to the Board of Directors quarterly.
The Balance  Sheet Shock  Report  shows the degree to which  balance  sheet line
items and the market value of portfolio equity are potentially affected by a 200
basis point upward and downward  parallel  shift  (shock) in the Treasury  yield
curve.  Exception  tests are conducted as recommended  under The Federal Deposit
Insurance  Corporation  Improvement  Act  ("FDICIA")  to  determine  if the bank
qualifies as low risk and may therefore be exempt from  supplemental  reporting.
In addition,  the possible  impact on risk-based  capital is assessed  using the
methodology  which had been  previously  proposed under FDICIA.  An Income Shock
Report shows the degree to which income  statement line items and net income are
potentially  affected by a 200 basis point upward and downward parallel shift in
the Treasury yield curve.

         The following  table displays  interest-sensitivity  as of December 31,
1998:


                                                   Increase     Decrease
--------------------------------------------------------------------------------
                                                    +200 bp      -200 bp
--------------------------------------------------------------------------------
Net interest income increase (decrease)             -0.20%      -1.40%
Increase (decrease) in return on average equity      0.00%      -5.50%
Increase (decrease) in basic and diluted                      
  earnings per share                                $0.00      -$0.03
Portfolio equity increase (decrease)                -7.54%       6.88%




                                       11

<PAGE>



         From  analysis  and  discussion  of the  aforementioned  reports  as of
December 31,  1998,  management  has assessed  that the Bank's level of interest
rate risk is appropriate for current market conditions. The percentage change in
market value of the  portfolio  equity for an upward and  downward  shift of 200
basis points are (11.85)% and 1.88%, respectively. Net interest income decreased
by  $12,000  or 0.2%  for an  upward  shift in rates  of 200  basis  points  and
decreased by $108,000 or 1.4%, for a downward shift of 200 basis points.  Excess
Net  Interest  Rate  Risk  was  within  those  limits  outlined  in  the  Bank's
Asset/Liability  Management and Interest Rate Risk Policy. The Bank's calculated
(total)  risk-based  capital before the interest rate risk impact was 27.46% and
24.36% after the interest  rate risk impact.  Results fall within  policy limits
for all applicable tests.

         Management  believes  that the  assumptions  used are  reasonable.  The
interest rate sensitivity of assets and liabilities could vary  substantially if
differing  assumptions  were  used or if  actual  experience  differs  from  the
assumptions  used in the  analysis.  For example,  although  certain  assets and
liabilities may have similar maturities or periods to repricing,  they may react
in differing degrees to changes in the market interest rates. The interest rates
on certain types of assets and  liabilities  may fluctuate in advance of changes
in market  interest  rates,  while  interest rates on other types may lag behind
changes  in  market  rates.  Further,  in the event of a  significant  change in
interest  rates,  prepayment  and early  withdrawal  levels would likely deviate
significantly from those assumed.  Finally,  the ability of borrowers to service
their  adjustable-rate  debt  may  decrease  in the  event of an  interest  rate
increase.  The  operating  results  of the  Company  are not  subject to Foreign
Currency exchange or commodity price risk.

Liquidity and Capital Requirements

         Liquidity refers to the Company's  ability to generate  sufficient cash
to meet the funding needs of current loan demand,  savings deposit  withdrawals,
and to pay operating expenses.  The Company has historically  maintained a level
of liquid assets in excess of regulatory requirements.  Maintaining a high level
of liquid  assets tends to decrease  earnings,  as liquid  assets tend to have a
lower  yield than other  assets  with longer  terms  (e.g.  loans).  The Company
adjusts liquidity as appropriate to meet its asset/liability objectives.

         The Company's  primary sources of funds are deposits,  amortization and
prepayment  of loans and  mortgage-backed  securities,  maturities of investment
securities  and  funds  provided  from  operations.  While  scheduled  loan  and
mortgage-backed  securities  repayments are a relatively  predictable  source of
funds,  deposit flows and loan and  mortgage-backed  securities  prepayments are
greatly influenced by interest rates,  economic  conditions and competition.  In
addition,  the Company invests excess funds in overnight  deposits which provide
liquidity to meet lending requirements

         The primary activity of the Company is originating loans and purchasing
investment and mortgage-backed  securities.  During the years ended December 31,
1998,  1997,  and 1996,  the Company  originated  loans in the amounts of $49.8,
$45.3, and $46.2 million,  respectively.  The Company also purchases  investment
and  mortgage-backed  securities  to invest  excess  liquidity and to supplement
local loan demand. During the years ended December 31, 1998, 1997, and 1996, the
Company purchased  investment and  mortgage-backed  securities in the amounts of
$48.7, $33.5, and $15.4 million, respectively.

         The Company has other  sources of  liquidity  if a need for  additional
funds  arises,  such as FHLB  of  Pittsburgh  advances.  Additional  sources  of
liquidity  can be found  in the  Company's  balance  sheet,  such as  investment
securities  and  unencumbered   mortgage-backed   securities  that  are  readily
marketable.  Management believes that the Company has adequate resources to fund
all of its commitments.


                                       12

<PAGE>



         The Bank may not declare or pay a cash  dividend on any of its stock if
the effect thereof would cause the Bank's regulatory capital to be reduced below
(1) the amount  required for the liquidation  account  established in connection
with the Bank's mutual holding company reorganization and stock issuance, or (2)
the regulatory capital  requirements  imposed by the Pennsylvania  Department of
Banking  (the  "Department")  and  the  Federal  Deposit  Insurance  Corporation
("FDIC").

         Regulatory Capital  Requirements.  As a condition of deposit insurance,
current FDIC regulations  require that the Bank calculate and maintain a minimum
regulatory  capital level on a quarterly  basis and satisfy such  requirement at
the calculation date and throughout the ensuing quarter.

         At December 31, 1998, the Bank's Tier I risk-based and total risk-based
capital ratios were 26.2% and 27.5%,  respectively.  Current regulations require
Tier I risk-based capital of 6% and total risk - based capital of 10% risk-based
assets to be considered well capitalized. The Bank's leverage ratio was 11.3% at
December  31,  1998.  Current  regulations  require a  leveraged  ratio 5% to be
considered well capitalized.

Impact of Inflation and Changing Prices

         The Company's  financial  statements and related data presented  herein
have been prepared in accordance with generally accepted accounting  principles,
which require the  measurement  of financial  position and operating  results in
terms  of  historical  dollars,  without  considering  changes  in the  relative
purchasing  power  of  money  over  time  due to  inflation.  Unlike  industrial
companies,   virtually  all  of  the  assets  and  liabilities  of  a  financial
institution  are  monetary in nature.  As a result,  interest  rates have a more
significant impact on a financial institution's  performance than the effects of
general levels of inflation.  Interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.

         Inflation can have a more direct  impact on categories of  non-interest
expenses such as salaries and wages,  supplies and employee benefit costs. These
expenses normally fluctuate more in line with changes in the general price level
and are very closely  monitored by management  for both the effects of inflation
and increases  related to such items as staffing  levels,  usage of supplies and
occupancy costs.

Year 2000 Compliance

         The following  discussion of the  implications of the year 2000 problem
for the Bank,  contains numerous forward looking  statements based on inherently
uncertain  information.  The cost of the  project and the date on which the Bank
plans to complete the internal year 2000 modifications are based on management's
best  estimates,  which are derived  utilizing a number of assumptions of future
events  including the  availability  of internal and external  resources,  third
party modifications and other factors.  However,  there can be no guarantee that
these  statements  will be achieved and actual  results could differ.  Moreover,
although management believes it will be able to make the necessary modifications
in advance,  there can be no guarantee  that failure to modify the systems would
not have a material adverse effect on the Bank or the Company.

         During fiscal 1998,  the Company  adopted a Year 2000  Compliance  Plan
(the "Plan") and established a Year 2000 Compliance Committee (the "Committee").
The  objectives of the Plan and the Committee are to prepare the Company for the
millennium.  As recommended by the Federal  Financial  Institutions  Examination
Council,  the Plan  encompasses  the following  phases:  Awareness,  Assessment,
Renovation, Validation and Implementation.  These phases will enable the Company
to identify risks, develop an action plan, perform adequate testing and complete
certification that its processing systems

                                       13

<PAGE>



will be Year 2000 ready.  Execution of the plan is  currently  on schedule.  The
Company  is  currently  in Phase  4,  Validation,  (which  includes  testing  of
incremental   changes  to  hardware  and  software,   testing  connections  with
third-party vendors and establishing controls to ensure timely completion of all
hardware and software prior to final implementation.) Prioritization of the most
critical  applications  has been  addressed,  along with  contract  and  service
agreements.

         The  primary  operating  software  for  the  Company  is  obtained  and
maintained by an external  provider of software (the "External  Provider").  The
Company has maintained  ongoing contact with this vendor so that modification of
the software is a top priority and has been completed. The Company has contacted
all other material  vendors and suppliers  regarding  their Year 2000 readiness.
Each of these third parties has delivered  written assurance to the Company that
they  expect to be Year 2000  compliant  prior to the Year 2000.  No  contracts,
written  assurances,  or oral  assurances  with the  Bank's  External  Provider,
material vendors, and suppliers include any type of remedy or penalty for breach
of contract in the event that any of these parties are not year 2000  compliant.
The Company has  contacted  material  customers and  non-information  technology
suppliers  (i.e.,  utility  systems,  telephone  systems and  security  systems)
regarding  their Year 2000 state of readiness.  The only  critical  vendors that
have not confirmed that they are Year 2000  compliant are the utility  companies
and some of our correspondent banks. The Company is unable to test the Year 2000
readiness  of its  significant  suppliers  of  utilities  and is  relying on the
utility companies'  internal testing and representations to provide the required
services that drive the Bank's data systems.  The  Validation  phase is targeted
for  completion by March 31, 1999. The  Implementation  phase is to certify that
systems  are Year 2000  ready,  along with  assurances  that any new systems are
compliant on a going forward  basis.  The  implementation  phase is targeted for
completion by June 30, 1999.

         As a practical  matter,  individual  mortgage  loan,  consumer loan and
small  commercial  loan customers were not contacted  regarding  their Year 2000
readiness.  It was deemed to be beyond the scope of our  testing  parameters  to
contact these  borrowers.  Further,  most of these are individuals with adequate
collateral for their loans.

         The  Company  expects  to  incur  internal  staffing  costs  as well as
consulting and other expenses related to testing and enhancements to prepare the
systems for the Year 2000.  The  Company  does not  anticipate  that the related
costs will be material in any single year. In total, the Company  estimates that
it's cost for compliance will amount to approximately $155,000 over the two year
period from 1998 - 1999. A significant  portion of these costs are not likely to
be incremental  costs to the Company,  but rather the  redeployment  of existing
resources.  As of December  31, 1998 the Company  estimates  that  approximately
$75,000 of these costs have been  incurred.  No assurance  can be given that the
Year 2000  Compliance  Plan will be completed  successfully by the Year 2000, in
which event the Company could incur significant costs. The Company has completed
testing of the  software  provided by the External  provider and material  third
party  providers.  During the course of this  testing,  no material  problems or
exceptions were  encountered,  however,  if the External  Provider or a material
third party  provider is unable to resolve the  potential  problem in time,  the
Company would likely experience significant data processing delays,  mistakes or
failures.  These delays,  mistakes or failures could have a significant  adverse
impact on the financial statements of the Company.

         The Bank is currently developing  contingency plans to address the Year
2000 issues of the Bank which could  negatively  affect the Bank or  necessitate
transacting business manually.  Among other things, failure of utility companies
to provide  necessary  service,  failure of the primary software and other third
party providers is addressed in the plan. The Bank will attempt to monitor these
uncertainties  by  continuing  to  request  updates  on all  critical  providers
throughout the remainder of

                                       14

<PAGE>



1999. If the Bank  identifies any concern  related to any critical  application,
the  contingency  plans  will be  implemented  immediately  to assure  continued
service to the Bank's customers.

         Despite the best efforts of management to address this issue,  the vast
number of external entities that have direct and indirect business relationships
with the Bank, such as customers,  vendors,  payment system  providers and other
financial institutions,  makes it impossible to assure that a failure to achieve
compliance  by one of these  entities  would not have a  material  impact on the
operations of the Bank.


                                       15
<PAGE>

[LOGO]
                         REPORT OF INDEPENDENT AUDITORS
                         ------------------------------


Board of Directors and Stockholders
PHS Bancorp, Inc.


We have audited the accompanying consolidated balance sheet of PHS Bancorp, Inc.
and  subsidiary as of December 31, 1998 and 1997,  and the related  consolidated
statements of income,  changes in stockholders'  equity, and cash flows for each
of the three  years in the period  ended  December  31,  1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of PHS
Bancorp,  Inc. and  subsidiary as of December 31, 1998 and 1997, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1998 in conformity with generally accepted  accounting
principles.


/s/ S.R. Snodgrass, A.C.
-----------------------------------
Wexford, PA
January 29, 1999



                                       16
<PAGE>


                                PHS BANCORP, INC.
                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>


                                                                         December 31,
                                                                   1998              1997
                                                             -----------------  -----------------
<S>                                                        <C>                <C>              
ASSETS
     Cash and amounts due from other institutions           $       2,136,601  $       2,388,632
     Interest-bearing deposits with other institutions              9,332,219          3,307,604
     Investment securities:
         Available for sale                                        25,197,294         24,252,738
         Held to maturity (market value $18,581,867
           and $10,073,052)                                        18,145,662         10,014,815
     Mortgage-backed securities:
         Available for sale                                        32,877,841         30,159,139
         Held to maturity (market value $48,767,611
           and $40,885,072)                                        48,287,244         40,233,666
     Loans (net of allowance for loan losses of $1,287,496  
       and $1,394,084)                                             99,913,716         99,691,337
     Accrued interest receivable                                    1,516,677          1,393,399
     Premises and equipment                                         4,501,659          4,424,493
     Federal Home Loan Bank stock                                   1,544,800          1,019,500
     Other assets                                                     798,957            849,960
                                                             -----------------  -----------------

         TOTAL ASSETS                                       $     244,252,670  $     217,735,283
                                                             =================  =================

LIABILITIES                                                                      
     Deposits                                               $     181,112,564  $     174,286,149
     Advances from Federal Home Loan Bank                          30,894,800         12,117,000
     Other borrowings                                               1,387,618          1,115,765
     Accrued interest payable and other liabilities                 1,673,579          1,607,431
                                                             -----------------  -----------------

         TOTAL LIABILITIES                                        215,068,561        189,126,345
                                                             -----------------  -----------------

STOCKHOLDERS' EQUITY
     Preferred stock, no par value; 2,000,000 shares
       authorized; none issued and outstanding                              -                  -
     Common stock, par value $.10 per share; 8,000,000
       shares authorized; 2,760,000 issued and outstanding            276,000            276,000
     Additional paid-in capital                                    10,588,940         10,560,263
     Retained earnings - substantially restricted                  18,489,177         17,728,095
     Net unrealized gain on securities                              1,088,415            959,693
     Unallocated shares held by Employee Stock              
       Ownership Plan (ESOP)                                       (1,215,723)          (915,113)
     Unallocated shares held by Restricted Stock Plan (RSP)           (42,700)                 -
                                                             -----------------  -----------------

         TOTAL STOCKHOLDERS' EQUITY                                29,184,109         28,608,938
                                                             -----------------  -----------------

         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $     244,252,670  $     217,735,283
                                                             =================  =================
</TABLE>


See accompanying notes to the consolidated financial statements.

                                       17

<PAGE>
                                PHS BANCORP, INC.
                        CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>

                                                                   1998                1997               1996
                                                             ------------------  -----------------  -----------------
<S>                                                       <C>                  <C>                <C>              
INTEREST INCOME
      Loans                                                $         8,377,792  $       8,307,944  $       7,920,535
      Investment securities:
          Taxable                                                    1,348,081            978,151          1,345,413
          Exempt from federal income tax                               991,341          1,252,465          1,318,764
      Mortgage-backed securities                                     5,098,561          4,165,100          3,878,511
      Interest-bearing deposits with other institutions                295,675            245,884            121,181
                                                             ------------------  -----------------  -----------------
               Total interest income                                16,111,450         14,949,544         14,584,404
                                                             ------------------  -----------------  -----------------

INTEREST EXPENSE
      Deposits                                                       7,263,761          7,471,775          7,425,240
      Advances from Federal Home Loan Bank                           1,144,625            348,454            457,241
      Other borrowings                                                 114,173             36,452                  -
                                                             ------------------  -----------------  -----------------
               Total interest expense                                8,522,559          7,856,681          7,882,481
                                                             ------------------  -----------------  -----------------

               Net interest income                                   7,588,891          7,092,863          6,701,923

PROVISION FOR LOAN LOSSES                                              365,000            555,000            455,000
                                                             ------------------  -----------------  -----------------

NET INTEREST INCOME AFTER PROVISION
      FOR LOAN LOSSES                                                7,223,891          6,537,863          6,246,923
                                                             ------------------  -----------------  -----------------

NONINTEREST INCOME
      Service charges on deposit accounts                              460,788            546,669            546,992
      Investment securities gains, net                                 116,858            131,931                  -
      Gain on sale of loans, net                                        27,765             11,250             11,086
      Rental income, net                                                89,898             85,416             84,660
      Other income                                                     218,700            162,171            137,953
                                                             ------------------  -----------------  -----------------
               Total noninterest income                                914,009            937,437            780,691
                                                             ------------------  -----------------  -----------------

NONINTEREST EXPENSE
      Compensation and employee benefits                             3,372,162          2,881,255          2,557,717
      Occupancy and equipment costs                                  1,039,833            838,664            755,904
      Deposit insurance premium                                        105,362            112,453          1,401,966
      Data processing costs                                             90,920            319,747            254,685
      Other expenses                                                 1,636,239          1,535,350          1,666,860
                                                             ------------------  -----------------  -----------------
               Total noninterest expense                             6,244,516          5,687,469          6,637,132
                                                             ------------------  -----------------  -----------------

Income before income taxes                                           1,893,384          1,787,831            390,482
Income taxes (benefit)                                                 391,759            150,316           (318,515)
                                                             ------------------  -----------------  -----------------

               NET INCOME                                  $         1,501,625  $       1,637,515  $         708,997
                                                             ==================  =================  =================

EARNINGS PER SHARE
  (Since inception July 10, 1997)
      Basic                                                $              0.56  $            0.33                N/A
      Diluted                                                             0.56                N/A                N/A
</TABLE>


See accompanying notes to the consolidated financial statements.

                                       18
<PAGE>
                                PHS BANCORP,INC.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                           Net       Unallocated Unallocated
                                                Additional              Unrealized     Shares      Shares     Total
                                        Common   Paid-in    Retained    Gain (Loss)   Held by   Held by   Stockholders'Comprehensive
                                        Stock    Capital    Earnings    on Securities   ESOP        RSP       Equity       Income
                                     --------  ----------- -----------  ----------  ------------ ---------- -----------  -----------
<S>                                <C>       <C>          <C>         <C>         <C>            <C>       <C>           <C>       
Balance, December 31, 1995          $      -  $         -  15,381,583  $1,261,147  $          -          -  $16,642,730             

Net income                                                    708,997                                           708,997   $  708,997
Other comprehensive income:
  Unrealized loss on available
    for sale securities                                                  (707,060)                             (707,060)   (707,060)
                                                                                                                           ---------
Comprehensive income                                                                                                      $    1,937
                                     --------  ----------- -----------  ----------  ------------ ----------  ----------    =========

Balance, December 31, 1996                 -            -  16,090,580     554,087             -          -   16,644,667

Net income                                                  1,637,515                                         1,637,515   $1,637,515
Other comprehensive income:
  Unrealized gain on available
    for sale securities, net of
    reclassification adjustment                                           405,606                               405,606      405,606
                                                                                                                           ---------
Comprehensive income                                                                                                      $2,043,121
                                                                                                                           =========
Sale of common stock                 276,000   11,551,733                                                    11,827,733
Capitalization of PHS Bancorp, M.H.C.          (1,000,000)                                                   (1,000,000)
Common shares acquired by ESOP                                                       (1,043,625)             (1,043,625)
ESOP shares released                                8,530                               128,512                 137,042
                                     --------  ----------- -----------  ----------  ------------ ----------  ----------

Balance, December 31, 1997           276,000   10,560,263  17,728,095     959,693      (915,113)         -   28,608,938

Net income                                                  1,501,625                                         1,501,625   $1,501,625
Other comprehensive income:
  Unrealized gain on available
    for sale securities, net of
    reclassification adjustment                                           128,722                               128,722      128,722
                                                                                                                           ---------
Comprehensive income                                                                                                      $1,630,347
                                                                                                                           =========
Cash dividends declared ($.26 per share)                     (695,792)                                         (695,792)
Common stock acquired by ESOP                                                          (448,512)               (448,512)
ESOP shares released                               18,941                               147,902                 166,843
Common stock acquired by RSP                                  (44,751)                            (171,212)    (215,963)
RSP shares released                                 9,736                                          128,512      138,248
                                     --------  ----------- -----------  ----------  ------------ ----------  ----------

Balance, December 31, 1998          $276,000 $ 10,588,940  18,489,177 $ 1,088,415 $  (1,215,723)$  (42,700) $29,184,109 
                                     ========  =========== ===========  ==========  ============ ==========  ==========

                                                                            1998            1997         1996
                                                                        -----------      -----------     ---------  
Components of comprehensive income:                                                                      
    Change in net unrealized gain (loss)                                                                 
      on investments held for sale                                     $  205,848        $  492,680     $(707,060)
Realized gains included in net income, net of tax                         (77,126)          (87,074)            -
                                                                         --------         ---------      --------
                                                                                                         
Total                                                                  $  128,722        $  405,606     $(707,060)
                                                                         ========         =========      ========
</TABLE>                                                        

   See accompanying notes to the consolidated financial statements.


                                       19

<PAGE>
                                PHS BANCORP, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                        Year Ended December 31,
                                                                    --------------------------------------------------------------
                                                                          1998                   1997                   1996
                                                                    -----------------      ----------------       ----------------
                                                                    -----------------      ----------------       ----------------
<S>                                                                 <C>                  <C>                  <C>              
OPERATING ACTIVITIES
Net income                                                            $   1,501,625         $   1,637,515         $     708,997 
Adjustments to reconcile net income to net cash                                                                   
  provided  by  operating activities:                                                                             
     Provision for loan losses                                              365,000               555,000               455,000
     Provision for depreciation                                             502,955               329,039               275,348
     Amortization of discounts, premiums,                                                                         
       and loan origination fees                                          1,022,329             1,040,439             1,078,407
     Investment securities gains, net                                      (116,858)             (131,931)                    -
     Gain on sale on loans, net                                             (27,765)              (11,250)              (11,086)
     Decrease in loans held for sale                                      1,073,254                 3,183               140,911
     Decrease (increase) in accrued interest receivable                    (123,278)               69,963               140,245
     Increase (decrease) in accrued interest payable                         46,377               (46,591)               36,120
     Amortization of ESOP unearned compensation                             166,843               137,042                     -
     Amortization of RSP unearned compensation                              138,248                     -                     -
     Other, net                                                            (315,884)                4,383               (83,831)
                                                                       -------------         -------------         -------------
             Net cash provided by operating activities                    4,232,846             3,586,792             2,740,111
                                                                       -------------         -------------         -------------
                                                                                                                  
INVESTING ACTIVITIES                                                                                              
     Investment and mortgage-backed                                                                               
       securities available for sale:                                                                             
        Proceeds from sales                                               2,259,493             6,617,750                     -
        Proceeds from maturities and principal repayments                 8,009,594             6,291,492            10,666,964
        Purchases                                                       (13,617,911)          (14,081,142)           (5,993,106)
     Investment and mortgage-backed securities held to maturity:                                                  
        Proceeds from maturities and principal repayments                18,718,865            10,983,348            11,106,134
        Purchases                                                       (35,098,662)          (19,452,555)           (9,379,524)
     Increase in loans, net                                              (2,485,946)           (5,716,736)           (9,950,271)
     Proceeds from sales of repossessed assets                              306,784               671,650                28,246
     Purchase of premises and equipment                                    (542,980)           (1,819,879)             (507,125)
     Purchase of Federal Home Loan Bank Stock                              (525,300)              (47,400)              (47,100)
                                                                       -------------         -------------         -------------
             Net cash used for investing activities                     (22,976,063)          (16,553,472)           (4,075,782)
                                                                       -------------         -------------         -------------
                                                                                                                  
FINANCING ACTIVITIES                                                                                              
     Increase (decrease) in deposits, net                                 6,826,415            (1,638,896)            2,380,435
     Proceeds from advances from Federal Home Loan Bank                  20,377,800             4,017,000               700,000
     Repayment of advances from Federal Home Loan Bank                   (1,600,000)                    -                     -
     Proceeds from other borrowings                                         271,853             1,115,765                     -
     Common stock acquired by ESOP                                         (448,512)           (1,043,625)                    -
     Common stock acquired by RSP                                          (215,963)                    -                     -
     Cash dividends paid                                                   (695,792)                    -                     -
     Proceeds from sale of common stock                                           -            11,827,733                     -
     Capitalization of PHS Bancorp, M.H.C.                                        -            (1,000,000)                    -
                                                                       -------------         -------------         -------------
             Net cash provided by financing activities                   24,515,801            13,277,977             3,080,435
                                                                       -------------         -------------         -------------
                                                                                                                  
             Increase in cash and cash equivalents                        5,772,584               311,297             1,744,764
                                                                                                                  
CASH AND CASH EQUIVALENTS AT                                                                                      
  BEGINNING OF YEAR                                                       5,696,236             5,384,939                     -
                                                                       -------------         -------------         -------------
                                                                                                                  
CASH AND CASH EQUIVALENTS AT END OF YEAR                              $  11,468,820         $   5,696,236         $   5,384,939
                                                                       =============         =============         =============
</TABLE>                                         

See accompanying notes to the consolidated financial statements.

                                       20

<PAGE>


                                PHS BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

PHS  Bancorp,  Inc.  (the  "Company")  is  a  Pennsylvania  corporation  and  is
registered  under the Bank Holding  Company Act. The Company was organized to be
the holding company of Peoples Home Savings Bank (the "Bank"). The Company's and
the  Bank's   principal   sources  of  revenue   emanate  from  its  investment,
mortgage-backed securities, and mortgage and consumer loan portfolios as well as
a variety of deposit services  provided to its customers through nine locations.
The Company is  supervised  by the Federal  Reserve  Board,  while the Bank is a
state-chartered  savings  bank  supervised  by  the  Federal  Deposit  Insurance
Corporation and the Pennsylvania Department of Banking.

The  consolidated  financial  statements of the Company  include the accounts of
Peoples Home Savings Bank and its wholly-owned subsidiary,  HOMECO. Intercompany
transactions have been eliminated in consolidation.

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

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

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

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

Loans
-----

Loans are stated at the principal  amount  outstanding net of deferred loan fees
and the allowance for loan losses. Interest income on loans is recognized on the
accrual method.  Accrual of interest on loans is generally  discontinued when it
is  determined  that a  reasonable  doubt  exists  as to the  collectibility  of
principal, interest, or both. Loans are returned to accrual status when past due
interest is collected, and the collection of principal is probable.

                                       21
<PAGE>


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans (Continued)
-----

Loan  origination and commitment fees as well as certain direct loan origination
costs are being  deferred and the net amount  amortized as an  adjustment to the
related loan's yield.  These amounts are being  amortized  over the  contractual
lives of the related loans.

Qualifying  education  loans are  being  held for  sale.  These  loans are being
carried at cost since they are generally sold for face value and serviced by the
Student Loan Marketing Association.

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

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

Impaired loans are  commercial and commercial  real estate loans for which it is
probable  the Company  will not be able to collect all amounts due  according to
the contractual terms of the loan agreement.  The Company individually evaluates
such  loans  for  impairment  and  does  not  aggregate   loans  by  major  risk
classifications.  The  definition  of  "impaired  loans"  is not the same as the
definition of  "nonaccrual  loans,"  although the two  categories  overlap.  The
Company  may  choose  to  place  a loan  on  nonaccrual  status  due to  payment
delinquency  or  uncertain  collectibility,  while not  classifying  the loan as
impaired if the loan is not a commercial or commercial real estate loan. Factors
considered by management in determining  impairment  include  payment status and
collateral  value. The amount of impairment for these types of impaired loans is
determined  by the  difference  between the present  value of the expected  cash
flows related to the loan,  using the original  interest  rate, and its recorded
value,  or as a practical  expedient in the case of  collateralized  loans,  the
difference  between the fair value of the collateral and the recorded  amount of
the loans.  When  foreclosure  is probable,  impairment is measured based on the
fair value of the collateral.

Mortgage loans on one-to-four family properties and all consumer loans are large
groups of smaller  balance  homogeneous  loans and are measured  for  impairment
collectively.  Loans that experience  insignificant  payment  delays,  which are
defined as 90 days or less, generally are not classified as impaired. Management
determines the  significance  of payment  delays on a case-by-case  basis taking
into  consideration  all  circumstances  surrounding  the loan and the  borrower
including the length of the delay, the borrower's prior payment record,  and the
amount of shortfall in relation to the principal and interest owed.

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

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


                                       22
<PAGE>



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Real  estate  acquired  in  settlement  of loans is  stated  at the lower of the
recorded  investment in the property or its fair value minus  estimated costs of
sale.  Prior to foreclosure  the value of the  underlying  collateral is written
down by a charge to the allowance for loan losses if necessary.  Any  subsequent
write-downs are charged against operating  expenses.  Operating expenses of such
properties, net of related income and losses on their disposition,  are included
in other expenses.

Income Taxes
------------

The Company and its subsidiary  file a  consolidated  federal income tax return.
Deferred tax assets or liabilities are computed based on the difference  between
financial statement and the income tax basis of assets and liabilities using the
enacted  marginal tax rates.  Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.

Earnings Per Share
------------------

Earnings  per  share  computations  for  1997  are  based  on net  income  since
inception,  July  10,  1997,  amounting  to  $884,176.  No  earnings  per  share
computation is applicable for the period ending 1996.

The Company provides dual  presentation of Basic and Diluted earnings per share.
Basic earnings per share  utilizes net income as reported as the numerator,  and
the actual average shares  outstanding as the denominator.  Diluted earnings per
share  includes  any  dilutive  effects of options,  warrants,  and  convertible
securities.

Employee Benefit Plans
----------------------

The Bank  sponsors a  trusteed,  deferred  benefit  pension  plan  covering  all
eligible employees.  The Bank's funding policy is to make annual  contributions,
as needed, based upon the funding formula developed by the plan's actuary.

Stock Options
-------------

The Company  maintains  a stock  option plan for the  Directors,  officers,  and
employees.  The  stock  options  typically  have  expiration  terms of ten years
subject to certain  extensions  and early  terminations.  The per share exercise
price of a stock  option  shall be, at a  minimum,  equal to the fair value of a
share of common  stock on the date the option is granted.  Because the  exercise
price of the Company's  stock options  equals the market price of the underlying
stock on the  date of  grant,  no  compensation  expense  is  recognized  in the
Company's financial statements.  Pro forma net income and earnings per share are
presented to reflect the impact of the stock option plan  assuming  compensation
expense had been affected  based on the fair value of the stock options  granted
under this plan.

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

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

                                       23

<PAGE>


1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash Flow Information
---------------------

The Company has defined cash and cash  equivalents  as cash and amounts due from
depository institutions and interest-bearing deposits with other institutions.

For the years ended  December 31, 1998,  1997,  and 1996,  the Company made cash
payments for interest of $8,476,182,  $7,903,272, and $7,846,361,  respectively.
The Company also made cash payments for income taxes of $358,000,  $198,100, and
$20,000, respectively, during these same periods.

Pending Accounting Pronouncements
---------------------------------

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

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

Reclassification
----------------

Certain items in the prior year financial  statements have been  reclassified to
conform to the current year presentation.  Such reclassifications did not affect
net income.


                                       24
<PAGE>



2.  EARNINGS PER SHARE

The following table sets forth the computation of Basic and Diluted earnings per
share. There were no convertible  securities which would affect the numerator in
calculating  Basic and  Diluted  earnings  per share;  therefore,  net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following table sets forth a reconciliation  of the denominator of the Basic
and Diluted earnings per share computation.

                                                                  1998
                                                            -----------------
     Denominator:
        Denominator for Basic earnings per
          share - weighted-average shares                          2,686,537
        Employee stock options                               
                                                                      12,560
                                                            -----------------
        Denominator for Diluted earnings per
           share - adjusted weighted-average
           assumed conversions                                     2,699,097
                                                            =================

3.  INVESTMENT SECURITIES

The amortized  cost and  estimated  market value of  investment  securities  are
summarized as follows:
<TABLE>
<CAPTION>
                                                                            1998
                                         ----------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
Available for Sale
<S>                                     <C>                  <C>                 <C>                 <C>         
U.S. Treasury securities                  $     8,991,872      $     140,278       $           --      $  9,132,150

Obligations of state and political
   subdivisions                                15,235,785            727,594                   --        15,963,379

Real estate mortgage investment
   conduits                                       101,619                146                   --           101,765
                                         -----------------  -----------------   -----------------  -----------------

           Total                          $    24,329,276      $    868,018       $            --     $ 25,197,294
                                         =================  =================   =================  =================
</TABLE>

<TABLE>
<CAPTION>
                                                                            1997
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                     <C>                  <C>                 <C>                 <C>         
Available for Sale
U.S. Treasury securities                  $     5,994,936       $     91,914      $           --      $   6,086,850
Obligations of state and political
   subdivisions                                16,869,675            728,913                  --         17,598,588
Real estate mortgage investment
   conduits                                       508,252              9,933                  --            518,185
Corporation obligations                            46,701              2,414                  --             49,115
                                         -----------------  -----------------   -----------------  -----------------
           Total                          $    23,419,564       $    833,174      $           --      $  24,252,738
                                         =================  =================   =================  =================
</TABLE>

                                       25
<PAGE>

3.  INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
                                                                            1998
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                     <C>                  <C>                 <C>                 <C>         
Held to Maturity
U.S. Government agency
   securities                             $    13,927,031       $    393,549      $           --      $  14,320,580
Obligations of states and political
   subdivisions                                 1,237,521             42,656                  --          1,280,177
Corporate obligations                           2,981,110                 --                  --          2,981,110
                                         -----------------  -----------------   -----------------  -----------------
           Total                          $    18,145,662       $    436,205      $           --      $  18,581,867
                                         =================  =================   =================  =================
</TABLE>

<TABLE>
<CAPTION>
                                                                            1997
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                     <C>                  <C>                 <C>                 <C>         
Held to Maturity
U.S. Government agency
   securities                             $     6,998,462       $     22,158      $           --      $   7,020,620
Obligations of states and political
   subdivisions                                 2,016,738             29,094                  --          2,045,832
Corporate obligations                             999,615              6,985                  --          1,006,600
                                         -----------------  -----------------   -----------------  -----------------

           Total                          $    10,014,815       $     58,237      $           --      $  10,073,052
                                         =================  =================   =================  =================
</TABLE>

The amortized cost and estimated market value of debt securities at December 31,
1998, by contractual maturity, are shown below.
<TABLE>
<CAPTION>

                                                   Available for Sale                      Held to Maturity
                                         ------------------------------------   ------------------------------------
                                                               Estimated                              Estimated
                                            Amortized            Market            Amortized            Market
                                               Cost              Value                Cost              Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                     <C>                  <C>                 <C>                 <C>         

Due in one year or less                   $     4,998,109       $  5,072,170      $    3,981,025      $   3,982,980
Due after one year through
  five years                                    9,408,350          9,737,684           7,597,332          7,635,530
Due after five years through
  ten years                                       986,503          1,085,255           3,022,721          3,240,653
Due after ten years                             8,936,314          9,302,185           3,544,584          3,722,704
                                         -----------------  -----------------   -----------------  -----------------
      Total                               $    24,329,276       $ 25,197,294      $   18,145,662      $  18,581,867
                                         =================  =================   =================  =================

</TABLE>

                                       26

<PAGE>



3.  INVESTMENT SECURITIES (Continued)

The following is a summary of proceeds  received,  gross gains, and gross losses
realized on the sale of investment  securities  available for sale for the years
ended December 31:

                                  1998            1997           1996
                             --------------   ------------    ----------- 

     Proceeds from sales     $   2,259,493    $  6,617,750     $    --  
     Gross gains                   116,858         243,484          --   
     Gross losses                       --         111,553          --

4.  MORTGAGE-BACKED SECURITIES

The amortized cost and estimated market value of mortgage-backed  securities are
summarized as follows:
<TABLE>
<CAPTION>

                                                                            1998
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                     <C>                  <C>                 <C>                 <C>         
Available for Sale
Government National Mortgage
   Association securities                $     32,068,134     $      785,420      $      (5,608)      $  32,847,946
Federal Home Loan Mortgage
   Corporation securities                          28,610              1,285                 --              29,895
                                         -----------------  -----------------   -----------------  -----------------
            Total                        $     32,096,744     $      786,705      $      (5,608)      $  32,877,841
                                         =================  =================   =================  =================

</TABLE>
<TABLE>
<CAPTION>
                                                                            1997
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
                                         -----------------  -----------------   -----------------  -----------------
<S>                                     <C>                  <C>                 <C>                 <C>         
Available for Sale
Government National Mortgage
   Association securities                $     29,455,297     $      646,707      $     (25,694)      $  30,076,310
Federal Home Loan Mortgage
   Corporation securities                          82,937              1,347             (1,455)             82,829
                                         -----------------  -----------------   -----------------  -----------------
            Total                        $     29,538,234     $      648,054      $     (27,149)      $  30,159,139
                                         =================  =================   =================  =================

</TABLE>



                                       27

<PAGE>



4.  MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
                                                                            1998
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                        -----------------  -----------------   -----------------  -----------------
<S>                                     <C>                  <C>                 <C>                 <C>         
Held to Maturity
Government National Mortgage
   Association securities                $     37,495,485     $      316,725      $     (42,889)      $  37,769,321
Federal Home Loan Mortgage
   Corporation securities                       5,576,332            142,611                 --           5,718,943
Federal National Mortgage
   Association securities                       5,215,427             70,430             (6,510)          5,279,347
                                         -----------------  -----------------   -----------------  -----------------
            Total                        $     48,287,244     $      529,766      $     (49,399)      $  48,767,611
                                         =================  =================   =================  =================
</TABLE>

<TABLE>
<CAPTION>
                                                                            1997
                                         ---------------------------------------------------------------------------
                                                                 Gross               Gross            Estimated
                                            Amortized          Unrealized          Unrealized           Market
                                               Cost              Gains               Losses             Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                     <C>                  <C>                 <C>                 <C>         
Held to Maturity
Government National Mortgage
   Association securities                $     22,544,957     $      161,710      $           --      $  22,706,667
Federal Home Loan Mortgage
   Corporation securities                       8,779,192            202,321                  --          8,981,513
Federal National Mortgage
   Association securities                       8,909,517            287,375                  --          9,196,892
                                         -----------------  -----------------   -----------------  -----------------
            Total                        $     40,233,666     $      651,406      $           --      $  40,885,072
                                         =================  =================   =================  =================
</TABLE>

The amortized cost and estimated market value of  mortgage-backed  securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
of securities could differ from  contractual  maturities  because  borrowers may
have  the  right  to call or  prepay  obligations  with  or  without  prepayment
penalties. <TABLE> <CAPTION>
                                                 Available for Sale                      Held to Maturity
                                         ------------------------------------   ------------------------------------
                                                               Estimated                              Estimated
                                            Amortized            Market            Amortized            Market
                                               Cost              Value                Cost              Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                     <C>                  <C>                 <C>                 <C>         
Due in one year or less                  $            --      $          --       $           --      $          --
Due after one year through
  five years                                       28,442             29,109                  --                 --
Due after five years through
  ten years                                       624,934            632,391                  --                 --
Due after ten years                            31,443,368         32,216,341          48,287,244         48,767,611
                                         -----------------  -----------------   -----------------  -----------------
      Total                              $     32,096,744     $   32,877,841      $   48,287,244      $  48,767,611
                                         =================  =================   =================  =================
</TABLE>



                                       28

<PAGE>

5.  LOANS

Loans consist of the following:

                                                1998            1997
                                            -------------  -------------
     Mortgage loans:
        1 - 4 family units                  $ 49,084,140   $ 45,107,966
        Multi-family units                       554,241        217,167
        Construction                             325,823        303,943
        Commercial real estate                   940,708      1,378,309
                                            -------------  -------------
                                              50,904,912     47,007,385
                                            -------------  -------------

     Commercial loans                          3,617,244      2,465,075
                                            -------------  -------------

     Consumer:
        Consumer credit line                   5,288,136      5,467,558
        Automobile                            36,617,849     39,569,376
        Education loans held for sale                         1,075,321
                                                   2,067
        Other                                  3,988,179      4,782,834
                                            -------------  -------------
                                              45,896,231     50,895,089
                                            -------------  -------------
     Less:
       Loans in process                          219,313        370,328
       Deferred loan costs, net               (1,002,138)    (1,088,200)
       Allowance for loan losses               1,287,496      1,394,084
                                            -------------  -------------
                                                 504,671        676,212
                                            -------------  -------------

            Total                           $ 99,913,716   $ 99,691,337
                                            =============  =============

Total  nonaccrual loans and the related interest for the years ended December 31
are as follows. In management's opinion, these loans did not meet the definition
of impaired loans.
<TABLE>
<CAPTION>
                                                      1998                1997               1996
                                                  ---------------   -----------------  -----------------
<S>                                                <C>               <C>                <C>          
     Principal outstanding                           $   391,503       $     805,334      $   1,152,694
     Contractual interest due                             47,158              84,913             59,051
     Interest income recognized                           28,562              50,069             55,866
</TABLE>

Activity in the allowance for loan losses for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
                                                      1998                1997               1996
                                                  ---------------   -----------------  -----------------

<S>                                                <C>               <C>                <C>          
     Balance, January 1,                             $ 1,394,084       $   1,433,776      $   1,274,430
         Add:
            Provisions charged to operations             365,000             555,000            455,000
            Loan recoveries                               54,993              57,390             12,039

         Less loans charged off                          526,581             652,082            307,693
                                                  ---------------   -----------------  -----------------

     Balance, December 31,                           $ 1,287,496       $   1,394,084      $   1,433,776
                                                  ===============   =================  =================
</TABLE>

                                       29

<PAGE>


5.  LOANS (Continued)

The Company's loan  portfolio is  predominantly  made up of  one-to-four  family
first mortgage loans and consumer loans in the Beaver and Lawrence County areas.
These loans have been granted in compliance with regulatory  guidelines relating
to  collateral  requirements  and credit  policies.  Although  the Company has a
diversified loan portfolio at December 31, 1998 and 1997,  loans  outstanding to
individuals  and  businesses  are  dependent  upon the local  conditions  in its
immediate trade area.

6.  ACCRUED INTEREST RECEIVABLE

Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>

                                                                  1998               1997
                                                            -----------------  -----------------
<S>                                                            <C>                <C>      
     Interest-bearing deposits with other institutions          $     24,267        $    27,065
     Investment securities                                           506,975            363,458
     Mortgage-backed securities                                      486,528            483,515
     Loans                                                           498,907            519,361
                                                            -----------------  -----------------

            Total                                               $  1,516,677        $ 1,393,399
                                                            =================  =================
</TABLE>

7.  PREMISES AND EQUIPMENT

Premises and equipment consist of the following:
<TABLE>
<CAPTION>
                                                                  1998               1997
                                                            -----------------  -----------------
<S>                                                            <C>                <C>      
     Land                                                       $    515,726        $   515,726
     Office buildings                                              4,034,469          3,932,253
     Furniture, fixtures, and equipment                            2,790,626          2,330,172
     Leasehold improvements                                          405,798            405,798
                                                            -----------------  -----------------
                                                                   7,746,619          7,183,949
     Less accumulated depreciation and amortization                3,244,960          2,759,456
                                                            -----------------  -----------------
            Total                                               $  4,501,659        $ 4,424,493
                                                            =================  =================
</TABLE>

Depreciation  expense for the years ended December 31, 1998,  1997, and 1996 was
$502,955, $329,039, and $275,348, respectively.


                                       30
<PAGE>



8.  DEPOSITS

Comparative details of deposit accounts follow:
<TABLE>
<CAPTION>
                                                      1998                                     1997
                                      -------------------------------------     ------------------------------------
                                                            Percent of                                Percent of
                                           Amount            Portfolio               Amount           Portfolio
                                      -----------------  ------------------     -----------------  -----------------
<S>                                   <C>                          <C>          <C>                         <C>    
NOW accounts                            $   25,853,525                14.3 %      $   22,262,362               12.7 %
Money market
   demand accounts                          25,130,858                13.9            21,569,797               12.4
Savings accounts                            27,601,326                15.2            28,733,040               16.5
                                      -----------------  ------------------     -----------------  -----------------
                                            78,585,709                43.4            72,565,199               41.6
                                      -----------------  ------------------     -----------------  -----------------
Time certificates of deposit:

     2.01%  -  4.00%                         6,056,411                 3.3                    --                 --
     4.01%  -  6.00%                        79,039,874                43.7            81,983,671               47.0
     6.01%  -  8.00%                        17,430,570                 9.6            19,444,833               11.2
     8.01%  - 10.00%                                --                  --               292,446                0.2
                                      -----------------  ------------------     -----------------  -----------------
                                           102,526,855                56.6           101,720,950               58.4
                                      -----------------  ------------------     -----------------  -----------------
            Total                       $  181,112,564               100.0 %      $  174,286,149              100.0 %
                                      =================  ==================     =================  =================
</TABLE>

Time deposits  include  certificates of deposit in  denominations of $100,000 or
more.  Such deposits  aggregated  $9,153,519 and $7,882,872 at December 31, 1998
and 1997, respectively, with maturities as follows:

     Within three months                           $          818,266
     Beyond three but within six months                     1,281,887
     Beyond six but within twelve months                      879,455
     Beyond one year                                        6,173,911
                                                     -----------------

            Total                                  $        9,153,519
                                                     =================

Interest  expense by deposit  category  for the years ended  December  31, is as
follows:
<TABLE>
<CAPTION>
                                             1998           1997           1996
                                        -------------  -------------  -------------
<S>                                    <C>            <C>            <C>         
Savings accounts                        $    636,965   $    769,805   $    825,444
NOW and money market deposit accounts        954,283        752,198        289,685
Time certificates of deposit               5,672,513      5,949,772      6,310,111
                                        -------------  -------------  -------------

            Total                       $  7,263,761   $  7,471,775   $  7,425,240
                                        =============  =============  =============

</TABLE>


                                       31
<PAGE>



9.  ADVANCES FROM FEDERAL HOME LOAN BANK

The following table sets forth  information  concerning both short and long-term
advances from FHLB:
<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                            1998               1997
                                                     ---------------    ---------------
<S>                                                <C>                <C>           
     Balance at year end                             $   30,894,800     $   12,117,000
     Average balance outstanding                         19,434,945          6,131,000
     Maximum month-end balance                           30,894,800         12,117,000
     Weighted-average rate at year end                        5.59%              6.11%
     Weighted-average rate during the year                    5.89%              5.69%
</TABLE>

The scheduled maturities of advances outstanding are as follows:
<TABLE>
<CAPTION>
                                            1998                                      1997
                                      -------------------------------------     ---------------------------------
              Year Ending                                    Weighted-                                Weighted-
              December 31,                 Amount          average Rate              Amount          average Rate
     -------------------------------  -----------------  ------------------     -----------------  --------------
<S>                                   <C>                           <C>         <C>                     <C>   
                  1999                  $    2,600,000                5.98 %      $    1,600,000          5.75 %
                  2000                       4,600,000                5.90             2,600,000          5.98
                  2001                       2,000,000                5.77             3,600,000          6.10
                  2002                       3,317,000                5.99             1,000,000          6.32
          2003 and thereafter               18,377,800                5.37             3,317,000          5.99
                                      -----------------  ------------------     -----------------  ------------
                 Total                  $   30,894,800                5.59 %      $   12,117,000          6.11 %
                                      =================  ==================     =================  ============
</TABLE>

FHLB  stock  and  certain  first  mortgage  loans  with a value in excess of 120
percent of outstanding advances are pledged to secure such borrowings.

10. OTHER BORROWINGS

Other borrowings at December 31, 1998 and 1997 include a loan from a third party
to purchase  shares for the Employee  Stock  Ownership Plan as well as a loan to
finance  an  equipment  lease.  The  outstanding  balances  of the ESOP loan and
equipment lease were $1,224,994 and $162,624 at December 31, 1998, respectively,
and $912,592 and $203,173 at December 31, 1997,  respectively.  Terms associated
with the ESOP loan call for a term of ten years at a rate of 8.00  percent  with
principal payments in an amount equal to one-tenth the original principal amount
of the loan payable on the last day of December.  As security for the  repayment
of the loan, the Bank is required to pledge and deliver the  unallocated  shares
acquired by the Bank through the use of proceeds.  Terms for the equipment  loan
call for a five-year term at a rate of 4.90 percent with equal monthly payments.

11. SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION

On September 30, 1996, the President signed into law legislation which included,
among other things,  recapitalization of the Savings Association  Insurance Fund
("SAIF") of the Federal  Deposit  Insurance  Corporation by a one-time charge to
SAIF-insured  institutions  of 65.7  basis  points  per one  hundred  dollars of
insurable deposits. The surcharge expense to the Bank amounted to $1,106,055 and
is reflected in the consolidated statement of income for the year ended December
31, 1996.


                                       32
<PAGE>



12. INCOME TAXES

The  provision  (benefit)  for  income  taxes for the years  ended  December  31
consists of:

                                          1998           1997           1996
                                    -------------   ------------  -------------
Currently payable (refundable):
     Federal                        $    310,802    $   199,605   $   (93,820)
     State                                                       
                                          67,568         88,663        (6,172)
                                    -------------   ------------  -------------
                                         378,370        288,268       (99,992)
Deferred                                  13,389       (137,952)     (218,523)
                                    -------------   ------------  -------------
            Total                   $    391,759    $   150,316   $  (318,515)
                                    =============   ============  =============

Income taxes applicable to investment  securities gains were $48,613 in 1998 and
$54,883 in 1997. There were no investment securities gains in 1996.

The tax effects of deductible and taxable  temporary  differences that gave rise
to  significant  portions  of the net  deferred  tax assets and  liabilities  at
December 31, are as follows:

                                                      1998             1997
                                                 -------------     ------------
Deferred tax assets:
     Allowance for loan losses                  $     437,749     $    473,989
     Premises and equipment                            30,498           38,973
     Accrued employee benefits                        228,870          213,500
     Alternative minimum tax credit                   293,367          265,001
     Other                                             26,233           38,643
                                                 -------------     ------------
         Total gross deferred tax assets            1,016,717        1,030,106
                                                 -------------     ------------

Deferred tax liabilities:
     Net unrealized gain on securities                560,699          494,387
                                                 -------------     ------------
         Total gross deferred tax liabilities         560,699          494,387
                                                 -------------     ------------
         Net deferred tax assets                $     456,018     $    535,719
                                                 =============     ============

No valuation  allowance was established at December 31, 1998 and 1997 in view of
certain tax  strategies  coupled with the  anticipated  future taxable income as
evidenced by the Company's earnings potential.


                                       33
<PAGE>



12. INCOME TAXES (Continued)

The following is a reconciliation  between the actual provision for income taxes
and the amount of income taxes which would have been provided at statutory rates
for the years ended December 31: <TABLE> <CAPTION>

                                            1998                           1997                           1996
                                  --------------------------     --------------------------     -------------------------
                                                    % of                           % of                          % of
                                                  Pre-tax                        Pre-tax                        Pre-tax
                                     Amount        Income           Amount        Income           Amount       Income
                                  -------------  -----------     -------------  -----------     -------------  ----------
<S>                                <C>               <C>          <C>               <C>          <C>             <C>    
Provision at statutory rate        $   643,751         34.0 %      $  607,863         34.0 %     $   132,764        34.0 %
State income tax expense,
   net of federal tax benefit           44,595          2.4            58,518          3.3                --          --
Tax-exempt interest                   (335,448)       (17.7)         (427,556)       (23.9)         (442,080)     (113.2)
Other, net                              38,861          2.0           (88,509)        (5.0)           (9,199)       (2.4)
                                  -------------  -----------     -------------  -----------     -------------  ----------

Actual expense (benefit)
   and effective rate              $   391,759         20.7 %      $  150,316          8.4 %      $ (318,515)      (81.6) %
                                  =============  ===========     =============  ===========     =============  ==========
</TABLE>

On August 20, 1996,  the Small  Business  Jobs  Protections  Act (the "Act") was
signed into law. The Act  eliminated  the  percentage of taxable income bad debt
deduction for thrift  institutions  for tax years  beginning  after December 31,
1995.  The Act  provides  that bad debt  reserves  accumulated  prior to 1988 be
exempt from recapture.  Bad debt reserves  accumulated after 1987 are subject to
recapture.  The Company has  accumulated  no additional  bad debt reserves since
1987.

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

13.   EMPLOYEE BENEFITS

Pension Plan

The Bank sponsors a trusteed, defined benefit pension plan covering all eligible
Bank employees and officers.  The plan calls for benefits to be paid to eligible
employees at retirement  based primarily upon years of service and  compensation
rates  near   retirement.   The  Bank's   funding   policy  is  to  make  annual
contributions, if needed, based upon the funding formula developed by the plan's
actuary.

                                       34

<PAGE>



13.   EMPLOYEE BENEFITS (Continued)

Pension Plan (Continued)

The following table sets forth the change in plan assets and benefit  obligation
at December 31:
<TABLE>
<CAPTION>
                                                                1998               1997
                                                          -----------------  -----------------
<S>                                                       <C>                 <C>               
     Plan assets at fair value, beginning of year          $     2,988,963     $    2,745,332
     Actual return on plan assets                                  211,831            200,430
     Employer contribution                                         200,732            115,612
     Benefits paid                                                 (72,692)           (72,411)
                                                          -----------------  -----------------
     Plan assets at fair value, end of year                      3,328,834          2,988,963
                                                          -----------------  -----------------

     Benefit obligation, beginning of year                       3,422,049          2,773,809
     Service cost                                                  181,425            136,776
     Interest cost                                                 249,500            200,998
     Amendments                                                    135,483            382,877
     Benefits paid                                                (72,692)           (72,411)
                                                          -----------------  -----------------
     Benefit obligation, end of year                             3,915,765          3,422,049
                                                          -----------------  -----------------

     Funded status                                                (586,931)          (433,086)
     Transition adjustment                                        (221,629)          (242,443)
     Unrecognized net loss from past experience
         different from that assumed                               645,435            494,504
                                                          -----------------  -----------------

     Accrued pension liability                             $      (163,125)    $     (181,025)
                                                          =================  =================
</TABLE>

The plan assets are invested primarily in bonds, stocks, and mortgages under the
control of the plan's trustees as of December 31, 1998.

Assumptions used in determining net periodic pension cost are as follows:

                                              1998          1997         1996
                                             -------       -------      -------
     Discount rate                            6.50%         7.00%        7.00%
     Expected return on plan assets           8.00%         8.00%        8.00%
     Rate of compensation increase            5.00%         5.00%        5.00%

The plan utilizes the  straight-line  method of  amortization  for  unrecognized
gains and losses.

Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
                                                                1998           1997            1996
                                                           ------------    -----------   -------------
<S>                                                        <C>            <C>             <C>      
     Service cost of the current period                    $   181,425     $  136,776     $   134,419
     Interest cost on projected benefit obligation             249,500        200,998         193,221
     Actual return on plan assets                             (211,831)      (200,430)       (192,589)
     Net amortization and deferral                             (36,262)       (36,876)        (35,343)
                                                           ------------    -----------    ------------
     Net periodic pension cost                             $   182,832     $  100,468     $    99.708
                                                           ============    ===========     ===========

</TABLE>



                                       35
<PAGE>



13.   EMPLOYEE BENEFITS (Continued)

Supplemental Retirement Plans

Board of Directors
------------------

The Bank  maintains a Directors'  Consultation  and  Retirement  Plan to provide
post-retirement  payments over a ten-year  period to non-officer  members of the
Board of Directors who have completed twenty or more years of service.  The plan
was amended on November 6, 1996, to provide post-retirement  payments to members
who have  completed  fifteen or more years of  service.  Expenses  for the years
ended  December 31,  1998,  1997,  and 1996  amounted to $75,699,  $57,000,  and
$222,861,  respectively,  and are  included  as a component  of other  operating
expenses.

President
---------

The Bank maintains a Supplemental  Retirement Plan for the President of the Bank
for the purpose of providing the  President  with  supplemental  post-retirement
benefits for life in addition to those  provided  under the Bank's  pension plan
for all  eligible  employees.  Expenses  for the years ended  December 31, 1998,
1997, and 1996, amounted to $34,400, $12,100, and $13,950, respectively, and are
included as a component of compensation and employee benefits.

Profit Sharing Plan
-------------------

The Bank maintains a profit  sharing plan covering all employees.  Contributions
to the plan are made  annually  at the  discretion  of the  Board of  Directors.
Contributions for the years ended December 31, 1998, 1997 and 1996,  amounted to
$67,052, $61,556, and $52,370, respectively.

Stock Option Plan
-----------------

On October 22, 1998, the Board of Directors  approved and stockholders  ratified
the  formation  of a stock  option  plan.  The plan will  provide  for  granting
incentive stock options and  nonstatutory  stock options for executive  officers
and  nonemployee  Directors  of the  Company.  A  total  of  124,200  shares  of
authorized  but unissued  common stock are reserved for issuance under the plan,
which expires ten years from the date of shareholder ratification. The per share
exercise  price of an option  granted  will not be less than the fair value of a
share of common stock on the date the option is granted.  The options granted on
October 22, 1998 are currently available for exercise.

                                       36

<PAGE>



13.     EMPLOYEE BENEFITS (Continued)

Stock Option Plan (Continued)
-----------------

No compensation  expense has been recognized with respect to the options granted
under the stock option plan.  Had  compensation  expense been  determined on the
basis of fair value,  net income and  earnings per share would have been reduced
as follows:

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

    Net income:
       As reported                       $     1,501,625
                                           ==============

       Pro forma                         $     1,323,801
                                           ==============

    Basic earnings per share:
       As reported                       $          0.56
                                           ==============

       Pro forma                         $          0.49
                                           ==============

    Diluted earnings per share:
       As reported                       $          0.56
                                           ==============

       Pro forma                         $          0.49
                                           ==============

The following table presents share data related to the stock option plan:

                                                               Weighted-
                                                                Average
                                                               Exercise
    Shares Under Option                         1998            Price
    -------------------                    --------------   -------------

    Outstanding, January 1,                            --              --    
          Granted                                 124,200      $    11.81
         Exercised                                     --              -- 
         Forfeited                                     --              --
                                           --------------
    Outstanding, December 31,                    124,200        $   11.81
                                           ==============

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

The Company has an ESOP for the benefit of  employees  who meet the  eligibility
requirements which include having completed one year of service with the Company
or its  subsidiaries and attained age 21. The ESOP trust purchased 96,000 shares
of common stock since the date of  conversion  with proceeds from a loan from an
independent  third party.  The Company  makes cash  payments to the  independent
third party on an annual basis.


                                       37


<PAGE>



13.     EMPLOYEE BENEFITS (Continued)

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

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

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

     Allocated shares                              8,940                 --

     Shares released for allocation                9,600              8,940

     Unreleased shares                            77,460             63,660
                                             ------------      -------------

     Total ESOP shares                            96,000             72,600
                                             ============      =============
     Fair value of unreleased shares        $  1,094,123       $  1,201,583
                                             ============      =============

Restricted Stock Plan (RSP)
---------------------------

In 1998,  the Board of  Directors  adopted a RSP for  directors,  officers,  and
employees  which was  approved  by  stockholders  at a special  meeting  held on
October 22,  1998.  The  objective of this plan is to enable the Company and the
Bank to retain its corporate officers, key employees, and directors who have the
experience and ability necessary to manage these entities. Directors,  officers,
and key employees who are selected by members of a Board-appointed committee are
eligible to receive  benefits under the RSP. The  non-employee  directors of the
Company and the Bank serve as trustees for the RSP, and have the  responsibility
to invest all funds contributed by the Bank to the Trust created for the RSP.

In December  1998,  the Trust  purchased,  with funds  contributed  by the Bank,
14,888  shares of the common  stock of the  Company,  of which 3,726 shares were
issued to  directors,  7,449  shares were issued to  officers,  and 3,713 shares
remained  unissued  as of  December  31,  1998.  Directors,  officers,  and  key
employees who  terminate  their  association  with the Company shall forfeit the
right to any shares which were awarded but not earned.

The  Company  granted a total of 49,680  shares of common  stock on October  22,
1998, of which 11,175 shares became  immediately  vested under the plan with the
remaining  shares  vesting over a four-year  period for directors and five years
for officers and employees beginning, October 22, 1999. A total of 11,175 shares
were vested as of December 31, 1998. The RSP shares purchased  initially will be
excluded from stockholders' equity. The Company recognizes  compensation expense
in the  amount of fair value of the common  stock at the grant  date,  pro rata,
over the years  during  which the shares are payable and recorded as an addition
to the stockholders'  equity. Net compensation  expense attributable to the RSPs
amounted to $128,512 for the year ended December 31, 1998.


                                       38
<PAGE>



14. COMMITMENTS

In the  normal  course  of  business,  there  are  outstanding  commitments  and
contingent  liabilities,   such  as  commitments  to  extend  credit,  financial
guarantees,  and letters of credit,  which are not reflected in the accompanying
financial statements.  The Company does not anticipate any losses as a result of
these transactions.  These instruments involve, to varying degrees,  elements of
credit  and  interest  rate  risk in  excess  of the  amount  recognized  in the
consolidated   balance  sheet.   The  contract  or  notional  amounts  of  those
instruments  reflect the extent of involvement the Company has in the particular
classes of financial instruments.

These commitments  represent financial  instruments with off-balance sheet risk.
Outstanding commitments for the years ended December 31, are as follows:

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

     Fixed rate commitments               $   13,791,721     $    8,747,460
     Variable rate commitments                 6,135,362          6,025,107
                                          ---------------    ---------------
          Total                           $   19,927,083     $   14,772,567
                                          ===============    ===============

The range of interest  rate  residential  mortgage  loan  commitments  was 6.125
percent to 7.125 percent at December 31, 1998,  and 7.00 percent to 9.74 percent
at December 31, 1997.

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  drawn  upon,  the total  commitment  amounts do not  necessarily
represent future cash requirements.

15. REGULATORY MATTERS

Loans
-----

Federal law prevents the Company from  borrowing  from the Bank unless the loans
are secured by specific collateral.  Further,  such secured loans are limited in
amount to ten percent of the Bank's common stock and capital surplus.

Dividend Restrictions
---------------------

The Bank is subject to legal  limitations on the amount of dividends that can be
paid to the Company. The Pennsylvania Banking Code restricts the availability of
surplus for dividend purposes. At December 31, 1998 surplus funds of $10,588,940
were not available for dividends.

16. REGULATORY CAPITAL REQUIREMENTS

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



                                       39
<PAGE>



16. REGULATORY CAPITAL REQUIREMENTS (Continued)

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

As of December 31, 1998, the most recent  notification  from the Federal Reserve
Board has  categorized  the  Company as well  capitalized  under the  regulatory
framework for prompt  corrective  action.  To be categorized as well capitalized
the  Company  and the  Bank  must  maintain  minimum  Total  Risk-based,  Tier I
Risk-based,  and Tier I Leverage  ratios at least 100 to 200 basis  points above
those  ratios set forth in the table.  There have been no  conditions  or events
since that notification that management believes have changed their category.

The  following   table  reflects  the  Company's   capital  ratios  and  minimum
requirements  at December 31. The Bank's  capital ratios are  substantially  the
same as the Company's.
<TABLE>
<CAPTION>
                                                          1998                                     1997
                                             ------------------------------     ----------------------------          
                                                 Amount            Ratio             Amount           Ratio
                                             --------------       ---------     --------------      --------      
Total Capital (to Risk-
     weighted Assets)
----------------------------------------
<S>                                         <C>                    <C>          <C>                 <C>    
     Actual                                  $  29,383,190          27.46 %      $ 28,922,333        28.43 %
     For Capital Adequacy Purposes               8,266,640           8.00           8,138,080         8.00
     To Be Well Capitalized                     10,358,300          10.00          10,172,600        10.00

Tier I Capital (to Risk-
     weighted Assets)
----------------------------------------
     Actual                                  $  28,095,694          26.21 %      $ 27,649,245        27.18 %
     For Capital Adequacy Purposes               4,143,320           4.00           4,069,040         4.00
     To Be Well Capitalized                      6,214,980           6.00           6,103,560         6.00

Tier I Capital (to Average Assets)
----------------------------------------
     Actual                                  $  28,095,694          11.31 %      $ 27,649,245        13.11 %
     For Capital Adequacy Purposes               9,606,960           4.00           8,434,440         4.00
     To Be Well Capitalized                     12,008,700           5.00          10,543,050         5.00

</TABLE>

Prior to the  enactment of the Small  Business Job  Protection  Act discussed in
Note 12, the Bank accumulated  approximately  $2,485,000 of retained earnings at
December  31,  1996,  which would  represent  allocations  of income to bad debt
deductions for tax purposes only.  Since there is no amount that  represents the
accumulated bad debt reserves prior to 1988, no provision for federal income tax
has been made for such amount.  If any portion of this amount is used other than
to absorb loan losses (which is not anticipated),  the amount will be subject to
federal income tax at the current corporate rate.



                                       40
<PAGE>



17. FAIR VALUE DISCLOSURE

The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
                                                        1998                                   1997
                                         ------------------------------------   ------------------------------------
                                             Carrying             Fair              Carrying             Fair
                                              Value              Value               Value              Value
                                         -----------------  -----------------   -----------------  -----------------
<S>                                  <C>                 <C>                <C>                 <C>               
Financial assets:
  Cash and amounts due
    from other institutions           $         2,136,601 $        2,136,601 $         2,388,632 $        2,388,632
  Interest-bearing deposits
    with other institutions                     9,332,219          9,332,219           3,307,604          3,307,604
  Investment securities:
    Available for sale                         25,197,294         25,197,294          24,252,738         24,252,738
    Held to maturity                           18,145,662         18,581,867          10,014,815         10,073,052
  Mortgage-backed securities:
    Available for sale                         32,877,841         32,877,841          30,159,139         30,159,139
    Held to maturity                           48,287,244         48,767,611          40,233,666         40,885,072
  Loans, net                                   99,913,716        101,427,098          99,691,337         98,624,000
  Federal Home Loan Bank stock                  1,544,800          1,544,800           1,019,500          1,019,500
  Accrued interest receivable                   1,516,677          1,516,677           1,393,399          1,393,399
                                         -----------------  -----------------   -----------------  -----------------
       Total                          $       238,952,054 $      241,382,008 $       212,460,830 $      212,103,136
                                         =================  =================   =================  =================

Financial liabilities:
  Deposits                            $       181,112,564 $      184,038,666 $       174,286,149 $      175,317,717
  Advances from Federal
    Home Loan Bank                             30,894,800         31,521,246          12,117,000         12,154,280
  Other borrowings                              1,387,618          1,415,754           1,115,765          1,119,720
  Advances from borrowers
    for taxes and insurance                       558,052            558,052             540,283            540,283
  Accrued interest payable                        289,748            289,748             243,371            243,371
                                         -----------------  -----------------   -----------------  -----------------
       Total                          $       214,242,782 $      217,823,466 $       188,302,568 $      189,375,371
                                         =================  =================   =================  =================
</TABLE>

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

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

As certain  assets and  liabilities,  such as deferred tax assets,  premises and
equipment,  and  many  other  operational  elements  of  the  Company,  are  not
considered  financial  instruments but have value,  this estimated fair value of
financial instruments would not represent the full market value of the Company.

                                       41
<PAGE>



17. FAIR VALUE DISCLOSURE (Continued)

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

Cash and Amounts Due from  Depository  Institutions,  Interest-bearing  Deposits
with Other  Institutions,  Accrued  Interest  Receivable,  Advance  Payments  by
Borrowers for Taxes and Insurance, and Accrued Interest Payable

The fair value approximates the current book value.

Investment Securities,  Mortgage-backed  Securities,  and Federal Home Loan Bank
--------------------------------------------------------------------------------
Stock
-----

The fair value of securities  held as investments,  mortgage-backed  securities,
and securities available for sale is equal to the available quoted market price.
If no quoted market price is available, fair value is estimated using the quoted
market price for similar securities. Since the FHLB stock is not actively traded
on a secondary market and held exclusively by member financial institutions, the
estimated fair market value approximates the carrying amount.

Loans, Deposits, Advances from the FHLB, and Other Borrowings
-------------------------------------------------------------

The  estimated  fair values for loans are estimated by  discounting  contractual
cash flows and adjusting for prepayment estimates. Discount rates are based upon
rates  generally  charged for such loans with similar  characteristics.  Demand,
savings,  and money market deposit  accounts are valued at the amount payable on
demand as of year end.  Fair values for time deposits and advances from the FHLB
are estimated using a discounted cash flow calculation that applies  contractual
costs currently being offered in the existing  portfolio to current market rates
being offered for deposits and notes of similar remaining maturities.

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

These  financial  instruments  are generally not subject to sale,  and estimated
fair values are not readily  available.  The carrying value,  represented by the
net deferred fee arising from the unrecognized  commitment,  and the fair value,
determined by  discounting  the remaining  contractual  fee over the term of the
commitment  using fees currently  charged to enter into similar  agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 14.

18. CORPORATE REORGANIZATION AND STOCK ISSUANCE

On  July  10,  1997,  the  Bank  adopted  a  plan  of   reorganization   into  a
Pennsylvania-chartered mutual holding company. The Bank received the approval of
the Federal  Reserve,  the Department of Banking,  and the FDIC for transactions
contemplated by the plan of  reorganization,  which authorized the Bank to offer
stock in one or more public  stock  offerings up to a maximum of 49.9 percent of
the  issued  and  outstanding  shares of its  common  stock.  As a result of the
offering in July 1997, PHS Bancorp,  M.H.C.  (mutual holding  company)  received
1,518,000  shares (55 percent) of the Bank stock.  Also as a result of the stock
offering,  the Bank received gross proceeds of $12,420,000.  Expenses associated
with the offering totaled  $592,267,  resulting in net capital  additions to the
Bank of  $11,827,733.  The Bank  recorded  common  stock at par of $276,000  and
additional paid-in capital of $11,551,733 from the stock issuance.



                                       42
<PAGE>



18. CORPORATE REORGANIZATION AND STOCK ISSUANCE (Continued)

On May 21, 1998, the Bank adopted an Agreement and Plan of  Reorganization  (the
"Plan") whereby the Bank would form the Company,  an intermediate  stock holding
company under  Pennsylvania  law. The Plan received  stockholder  approval as of
October  22,  1998 and  subsequently  received  all  regulatory  approvals.  The
reorganization  was  completed  on  November  9, 1998.  Upon  completion  of the
reorganization, the Bank became a wholly-owned subsidiary of the Company and the
Company became a majority-owned subsidiary of the M.H.C. The common stock of the
Company replaces the Bank's stock.

19.      PARENT COMPANY

The following are condensed financial statements for the parent company.

                             CONDENSED BALANCE SHEET

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

ASSETS
     Cash and due from banks                              $       978,101
     Investment in subsidiary bank                             28,240,812
     Other assets                                                  52,326
                                                          ----------------

TOTAL ASSETS                                              $    29,271,239
                                                          ================

LIABILITIES AND STOCKHOLDERS' EQUITY
     Other liabilities                                    $        87,130
     Stockholders' equity                                      29,184,109
                                                          ----------------

TOTAL LIABILITIES AND
     STOCKHOLDERS' EQUITY                                 $    29,271,239
                                                          ================

                          CONDENSED STATEMENT OF INCOME

                                                          For the Period of
                                                          November 9, 1998
                                                                 to
                                                          December 31, 1998
                                                          -----------------

INCOME                                                         
     Interest income                                      $           287

EXPENSES                                                            1,914
                                                          ----------------

Loss before equity in undistributed net
 income of subsidiary                                              (1,627)

Equity in undistributed net income of subsidiary                  213,869
                                                          ----------------

NET INCOME                                                $       212,242
                                                          ================


                                       43
<PAGE>


19.      PARENT COMPANY (Continued)

                        CONDENSED STATEMENT OF CASH FLOWS

                                                              For the Period of
                                                               November 9, 1998
                                                                     to
                                                              December 31, 1998
                                                             -------------------

OPERATING ACTIVITIES
     Net income                                                    $   212,242
     Adjustments to reconcile net income to net cash provided
        by operating
activities:
             Equity in undistributed net income of subsidiary         (213,869)
                 Other, net                                             24,477
                                                                   ------------
                  Net cash provided by operating activities             22,850
                                                                   ------------

FINANCING ACTIVITIES
     Purchase of RSP shares                                            (44,749)
     Capitalization of the Company                                   1,000,000
                                                                   ------------
     Net cash provided by financing activities                         955,251
                                                                   ------------

                  Increase in cash                                     978,101

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

CASH AT END OF PERIOD                                              $   978,101
                                                                   ============



                                       44

<PAGE>




                            PEOPLE HOMES SAVINGS BANK
                                OFFICE LOCATIONS

                      Administrative Office and Loan Center
                                744 Shenango Road
                        Beaver Falls, Pennsylvania 15010
                                 (412) 846-7300




                              [MAP TO BE INSERTED]








                                       45

<PAGE>

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

<S>                                      <C>
 Board of Directors                        Executive Officers
 Douglas K. Brooks                         James P. Wetzel, Jr.
 Emlyn Charles                                 President and Chief Executive Officer
 John C. Kelly                             Richard E. Canonge
 Earl F. Klear                                 Vice President Finance, Chief Financial
 Howard B. Lenox                                 Officer and Treasurer
 John M. Rowse                             John M. Rowse
 James P. Wetzel, Jr.                           Secretary
                                           David E. Ault
                                                Vice President-Community Banking and
                                                  Assistant Secretary
                                           Paul W. Jewell
                                                Vice President-Human Resources and
                                                  Business Development
                                           Joseph R. Pollock III
                                                Vice President-Lending

 Corporate Counsel:                        Independent Auditors:
 George A. Verlihay                        S.R. Snodgrass, A.C.
 2521 Darlington Road                      101 Bradford Road
 Beaver Falls, Pennsylvania  15010         Wexford, Pennsylvania  15090

 Special Counsel:                          Transfer Agent and Registrar:
 Malizia, Spidi, Sloane & Fisch, P.C.      Registrar and Transfer Company
 One Franklin Square                       70 Commerce Drive
 1301 K Street, N.W., Suite 700 East       Cranford, New Jersey 07016-3572
 Washington, D.C.  20005                   (800) 456-0596

</TABLE>
--------------------------------------------------------------------------------
The Company's  Annual Report for the Year Ended December 31, 1998 filed with the
Securities  Exchange  Commission  on Form 10-K  without  exhibits  is  available
without  charge upon written  request.  For a copy of the Form 10-K or any other
investor  information,  please  write the  Secretary of the Bank at 744 Shenango
Road, Beaver Falls,  Pennsylvania 15010. Copies of any exhibits to the Form 10-K
are available at cost.

The Annual Meeting of  Stockholders  will be held on April 22, 1999 at 9.00 a.m.
at the Beaver Valley Country Club, Patterson Heights, Beaver Falls, PA 15010.


                                       46