EXHIBIT 13
<PAGE>

                            PEOPLES SAVINGS FINANCIAL
                                   CORPORATION




     -----------------------------------------------------------------------
                               1997 ANNUAL REPORT









<PAGE>




                      PEOPLES SAVINGS FINANCIAL CORPORATION
                               1997 ANNUAL REPORT

--------------------------------------------------------------------------------


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




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

Corporate Profile and Stock Market Information..............................   2

Financial Highlights........................................................   3

Management's Discussion and Analysis of
  Financial Condition and Results of Operations.............................   4

Report of Independent Certified Public
  Accountants Auditors......................................................  11

Consolidated Balance Sheet..................................................  12

Consolidated Statement of Income............................................  13

Consolidated Statement of Change in Stockholders Equity.....................  14

Consolidated Statement of Cash Flows........................................  15

Notes to Consolidated Financial Statements..................................  16

Office Locations and Other Corporate Information............................  34










<PAGE>











                      PEOPLES SAVINGS FINANCIAL CORPORATION






To Our Stockholders:


Peoples Savings Financial  Corporation completed the year profitably and in good
financial  condition  despite a one-time charge due to Congressional  action. In
1996, we finally had some significant progress with banking legislation that now
allows  our  Bank to  compete  on a more  equal  footing  with  commercial  bank
competitors. The disparity in FDIC deposit insurance was resolved with a special
assessment  to our Bank and all  other  thrifts.  The  special  assessment  cost
$235,000  before  taxes,  resulting in an after tax  reduction of  approximately
$155,000 in income.  The special assessment reduced earnings per share by $0.34.
Beginning with the fourth  quarter 1996 our cost for deposit  insurance has been
reduced by  approximately  72%.  Additionally,  legislation  was passed that put
thrifts on an equal footing with commercial  banks in the treatment of bad debts
for tax purposes.

As we approach fiscal 1998, we retain our goal of providing  personal service to
our customers and  stockholders.  As a  community-based  financial  institution,
Peoples  Savings Bank plays a special  role in serving the lending  needs of the
communities  in our market  area.  At the same  time,  we will  concentrate  our
energies on achieving solid financial results and enhancing stockholder value.

Each member of your Board of Directors,  and our employees,  join me in thanking
your  for  your  continued   dedication,   loyalty,   and  trust.   Despite  the
ever-changing economic challenges,  you have our commitment that we will utilize
our very best efforts to continue producing profitable results of operations.

Sincerely,


/s/Norbert J. Pontzer
Norbert J. Pontzer
President




<PAGE>



                      PEOPLES SAVINGS FINANCIAL CORPORATION

Corporate Profile

Peoples Savings Financial  Corporation (the "Company") is the parent company for
Peoples  Savings Bank  ("Peoples" or the "Bank").  The Company is a bank holding
company  which,  under  existing  laws, is  restricted  to activities  generally
related to banking. At the present time, the Company does not conduct any active
business,

Peoples is a Pennsylvania-chartered stock savings bank headquartered in Ridgway,
Pennsylvania,  which was  originally  chartered in 1891 under the name  "Peoples
Building  and  Loan  Association."  The  Bank is a  community  oriented  savings
institution  and  conducts  its  business  from  its  main  office  in  Ridgway,
Pennsylvania  and two full  service  branch  offices  located in  Jefferson  and
Clearfield Counties, Pennsylvania.

Peoples  attracts  deposits  from the  general  public  and uses such  deposits,
together with borrowings and other funds, primarily to invest in mortgage-backed
and investment  securities and to originate  loans secured by first mortgages on
owner-occupied,  one-to-four family residences in its market area. The Bank also
makes home  equity  loans,  loans  secured  by  deposits,  automobile  loans and
personal   loans  and  invests  in   municipal   obligations,   mortgages-backed
securities, and other investments.

Stock Market Information

Since its issuance in January 1994,  the Company's  common stock has been traded
on an over the counter basis through brokers participating in the National Daily
Quotation Service ("pink sheets").  The following table reflects the stock price
as published by the National Daily Quotation Service.

                                                      HIGH     LOW
                                                      ----     ---
        July 1, 1997 - August 31, 1997 .......     $ 24.25  $ 21.75
        April 1, 1997 - June 30, 1997 ........       23.50    21.50
        January 1, 1997 - March 31, 1997 .....       23.50    20.25
        October 1, 1996 - December 31, 1997 ..       23.00    21.25
        July 1, 1996 - September 30, 1996 ....       25.25    24.25
        April 1, 1996 - June 30, 1996 ........       28.00    21.00
        January 1, 1996 - March 31, 1996 .....       23.00    21.00
        September 30, 1995 - December 31, 1996       22.50    22.50
        July 1, 1995 - September 30, 1995 ....       26.25    19.00

Quotations  reflect  inter-dealer  prices without retail  mark-up,  mark-down or
commission,  and may not  represent  actual  transactions.  Trades in the Common
Stock have occurred infrequently and generally involve a relatively small number
of shares.  Because of the limited  market  activity in the Common  Stock,  such
transactions  may not be  representative  of the actual fair market value of the
Common Stock at the time of such  transaction  due to the  infrequency of trades
and the  limited  market for the Common  Stock.  The number of  shareholders  of
record  of  common  stock as of the  record  date of  September  10,  1997,  was
approximately  244.  This does not reflect the number of persons or entities who
held stock in nominee or "street"  name  through  various  brokerage  firms.  At
September 10, 1997, there were 442,516 shares outstanding. Dividends of $.40 per
share were paid during fiscal 1997.  For a discussion of the  limitations on the
Company's ability to pay dividends, see "Management's Discussion and Analysis of
Financial   Condition   and   Results   of   Operation-Liquidity   and   Capital
Requirements."

                                      - 2 -

<PAGE>
Financial Highlights

         The  following  tables set forth  certain  information  concerning  the
consolidated financial position and certain performance ratios of the Company at
the dates indicated:
<TABLE>
<CAPTION>
                                                                                      At June 30,
                                                    --------------------------------------------------------------------------
                                                           1997           1996           1995           1994           1993
                                                          ------         ------         ------         ------         -----
                                                                                   (In Thousands)
<S>                                                      <C>            <C>            <C>            <C>            <C>    
Assets..............................................     $44,835        $44,852        $43,624        $45,050        $43,015
Loans receivable....................................      31,948         32,127         29,374         25,879         23,428
Mortgage-backed securities..........................       6,123          7,466          9,634         10,949         14,354
Investments  (1)....................................       2,825          4,053          3,645          5,892          2,807
Cash and cash equivalents...........................         117            742            515          1,864          2,035
Savings deposits....................................      34,976         35,865         35,171         37,035         39,079
Other borrowings....................................         500              -              -              -              -
Total stockholders' equity/retained earnings........       9,184          8,912          8,345          7,966          3,875
</TABLE>


<TABLE>
<CAPTION>
                                                                                  Year Ended June 30,
                                                    --------------------------------------------------------------------------
                                                           1997           1996           1995           1994           1993
                                                          ------         ------         ------         ------         -----
                                                                                    (In Thousands)
<S>                                                       <C>            <C>            <C>            <C>            <C>   
Interest Income.....................................      $3,430         $3,430         $3,254         $3,092         $3,261
Interest Expense....................................       1,694          1,778          1,600          1,627          1,839
Net Interest Income.................................       1,736          1,652          1,654          1,465          1,422
Provision for Loan Losses...........................          24             24             24             24             18
Net Income..........................................         301            446            458            426            427
</TABLE>


         The table below sets forth  certain  performance  ratios of the Company
for the periods indicated:
<TABLE>
<CAPTION>

                                                                          At or For the Year Ended June 30,
                                                       ---------------------------------------------------------------------------
                                                           1997           1996           1995           1994           1993
                                                           ----           ----           ----           ----           ----
<S>                                                     <C>            <C>            <C>            <C>            <C>  
Return on average assets (net income divided
  by average total assets) .........................       0.67%          1.00%          1.04%          0.95%          0.99%
Return on average equity (net income divided
  by average equity)................................       3.33           5.17           5.62           7.86          11.65
Average equity to average assets ratio (average
  equity divided by average total assets)...........      20.09          19.30          18.47          12.05           8.49
Equity to assets at period end......................      20.49          19.87          19.13          17.68           9.01
Net interest rate spread............................       2.96           2.83           3.01           2.80           2.97
Net yield on average interest earning assets........       3.89           3.79           3.79           3.35           3.34
Non-performing assets to total assets...............       1.95           0.97           0.33           0.83           0.65
Non-performing loans to total loans.................       2.64           1.34           0.49           1.45           1.19
Allowance for loan losses to non-performing assets..      29.70          52.30         144.52          48.94          62.27
Average interest earning assets to average
  interest-bearing liabilities......................     124.38         123.66         121.43         114.68         108.42
Net interest income after provision for possible
  loan losses, to total other expenses..............     135.82         161.27         156.64         156.84         146.38

</TABLE>
--------------
(1)  Includes Federal Home Loan Bank ("FHLB") stock.

                                      - 3 -

<PAGE>
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

General

The earnings of the Company  depend  primarily on its net interest  income.  Net
interest  income is affected by the interest  rates that the Bank  receives from
its loans and  investments  and by the interest rates that the bank must pay for
its sources of funds. The difference between average rates of interest earned on
interest  earning  assets  and  the  average  rates  paid  on  interest  bearing
liabilities is the "interest rate spread". When interest earning assets equal or
exceed  interest  bearing  liabilities,  any positive  interest rate spread will
produce net interest income.

To a lesser extent, the Bank receives income from service charges and other fees
and  occasionally  from sales of real estate owned.  The Bank incurs expenses in
addition  to  interest  expense in the form of salaries  and  benefits,  deposit
insurance,  property  operations and maintenance,  advertising and other related
business expenses.

The  operations  of the  Bank are  influenced  significantly  by local  economic
conditions  and  by  policies  of  financial  institution  regulatory  agencies,
including the Pennsylvania  Department of Banking ("Department") and the Federal
Deposit Insurance Corporation  ("FDIC").  The Bank's cost of funds and return on
loans and investments are influenced by interest rates on comparing  investments
and general market interest rates. Lending activities are affected by the demand
for financing of real estate and other types of loans, which in turn is affected
by market interest rates and general economic conditions.

Management Strategy

The Bank's management  strategy has been to maintain  profitability and a strong
capital  position  through  growth at a rate that does not exceed its ability to
generate earnings.  The Bank's lending strategy has historically  focused on the
origination  for retention in its portfolio of  traditional  one- to four-family
mortgage loans and, to a lesser extent,  consumer  loans,  including home equity
loans,  share loans,  automobile  loans and personal loans.  This focus, and the
application of prudent underwriting standards, is designed to reduce the risk of
loss on the Bank's  loan  portfolio.  The Bank's  lending  activities  have been
supplemented by the purchase of mortgage-backed securities.

Management has increased the interest rate  sensitivity of the Bank's assets and
decreased the interest rate  sensitivity of its liabilities,  while  maintaining
asset  quality.   This  strategy  has  been   accomplished  by  (i)  originating
adjustable-rate mortgage loans and shorter-term consumer loans, (ii) emphasizing
the  solicitation  and retention of core deposits,  (iii) purchasing for its own
portfolio adjustable-rate  mortgage-backed  securities, (iv) investing in short-
and intermediate-term investment and mortgage-backed securities, (v) adhering to
prudent underwriting and investment standards and (vi) managing deposit interest
rates.

The current  strategy of  management  has been to purchase for its own portfolio
five- to seven-year  Federal Home Loan Bank ("FHLB") notes and seven and 15-year
Federal Home Loan Mortgage Corporation ("FHLMC") mortgage-backed  securities and
one-year adjustable rate FHLMC,  Federal National Mortgage  Association ("FNMA")
and  Government   National   Mortgage   Association   ("GNMA")   mortgage-backed
securities.  To the  extent  the Bank is  unable  to  invest  its funds in these
securities, it will invest in shorter term high quality investment securities or
overnight funds.


                                      - 4 -
<PAGE>
Since the  mid-1980s,  the Bank has  purchased AA and AAA  tax-exempt  municipal
bonds, with the intent to hold until maturity or until called. At June 30, 1997,
the Bank had $527,000 of obligations of states and political subdivisions,  most
of which are rated AAA.

The Bank  attempts  to manage  the  interest  rates it pays on  deposits,  while
maintaining a stable deposit base and providing  convenient and quality services
to its  customers.  Historically,  the Bank has limited its  borrowings  and has
relied primarily upon savings deposits as its primary source of funds.

Changes in Financial Condition

Total assets at June 30, 1997  amounted to  $44,835,000,  a decrease of $18,000,
compared  to  $44,852,000  at June 30,  1996.  Total  cash and cash  equivalents
increased by $2,278,000 to $3,021,000 at June 30, 1997 from $742,000 at June 30,
1996. This increase was funded by maturity of investment  securities,  principal
repayments  on  mortgage-backed  securities  and loans.  Management is presently
developing  an   investment   strategy  in   coordination   with  its  liquidity
requirements for these funds.  Investment  securities  decreased $870,000,  from
$3,694,000 at June 30, 1996 to $2,824,000 at June 30, 1997,  due to  maturities.
Mortgage-backed  securities  principal  repayments of $1,343,000  resulted in an
18.0% decrease, from $7,466,000 at June 30, 1996 to $6,123,000 at June 30, 1997.
Net loans receivable  decreased from $32,127,000 at June 30, 1996 to $31,948,000
at June 30, 1997,  or  approximately  $179,000.  The net decrease was  primarily
attributable  to a decrease in  commercial  real  estate of $555,000  due to the
early  payoff of a  participation  loan,  and a decrease of $192,000 in consumer
loans  and  consumer  lines  of  credit,  offset  somewhat  by  an  increase  of
one-to-four family mortgages of $521,000.

Deposits  decreased  $889,000  or 2.5%,  to  $34,976,000  at June 30,  1997 from
35,865,000  at June 30,  1996.  Certificates  of deposit  and  savings  accounts
declined $1,178,000 and $652,000,  respectively, which was offset somewhat by an
increase in NOW accounts and money market  accounts of $940,000.  Advances  from
the FHLB increased by $500,000 as a result of the decline in deposits.

Stockholders' equity increased $272,000 or 3.0%, to $9,184,000 at June 30, 1997.
The increase was the result of net retained  income of $133,000 and  recognition
of shares in the Management  Stock Bonus Plan and the Employee  Stock  Ownership
Plan  amounting to $139,000.  Through June 30, 1997,  the Company  initiated the
payment of dividends of $.40 per share, while maintaining capital ratios well in
excess of regulatory guidelines.  Future dividend policies will be determined by
the Board of Directors in light of the earnings and  financial  condition of the
Company, including applicable governmental regulations and policies.

Non-performing Assets

Nonperforming  loans  increased  by $410,000 in fiscal  1997.  At June 30, 1997,
$449,000 of the  $845,000 of  non-accrual  loans at the Company  consisted  of a
single  lending  relationship  involving six loans secured by  residential  real
estate, a constructed  single-family  home, and two  automobiles.  The borrowers
filed for bankruptcy in fiscal 1997.  Although  there can be no assurances,  the
Company does not expect any material losses  regarding such loans. The remaining
increase in nonperforming loans during 1997 was due an increase in delinquencies
of loans secured by single family residential properties. The delinquencies were
due to the individual  borrowers' economic  circumstances.  See "--Comparison of
Operating  Results for the Years Ended June 30, 1997 and 1996 --  Provision  for
Possible Loan Losses."


                                      - 5 -

<PAGE>



Average Balances

The following tables set forth for the periods indicated,  information regarding
the  average   balances   of   interest-earning   assets  and   interest-bearing
liabilities,  the dollar amount of interest income earned on such assets and the
resultant yields, the dollar amount of interest expense paid on such liabilities
and the  resultant  rates.  The tables also reflect the interest rate spread for
such  periods,  the net yield on  interest-earning  assets  (i.e.,  net interest
income as a  percentage  of average  interest-earning  assets)  and the ratio of
average interest-earning assets to average interest-bearing liabilities. Average
balances are based on month end balances.  Management  does not believe that the
use of  month-end  balances  instead of daily  average  balances  has caused any
material difference in the information presented.
<TABLE>
<CAPTION>

                                                                     Year Ended June 30,                            At June 30,
                                            ------------------------------------------------------------------ --------------------
                                                            1997                           1996                        1997
                                            ----------------------------------- ------------------------------ --------------------
                                                 Average              Average    Average             Average
                                                 Balance   Interest  Yield/Cost  Balance   Interest Yield/Cost Balance Yield/Cost
                                                        (Dollars in Thousands)
<S>                                              <C>        <C>       <C>        <C>      <C>       <C>        <C>      <C>  
Interest-earning assets:
 Loans receivable(1).....................        $32,294    $2,630       8.14%   $31,026  $2,585      8.33%    $32,199     8.02%
 Mortgage-backed securities..............          6,737       456       6.77      8,421     578      6.86       6,123     7.09
 Investment securities(2)................          5,561       344       6.19      4,085     267      6.54       6,090     5.87
                                                  ------    ------                ------   -----                ------
  Total interest-earning assets..........         44,592     3,430       7.69     43,532   3,430      7.88      44,412     7.60
                                                             -----                         -----
Non-interest-earning assets..............            386                             574                           423
                                                 -------                          ------                       -------
  Total assets...........................        $44,978                         $44,106                       $44,835
                                                  ======                          ======                        ======

Interest-bearing liabilities:
 Interest-bearing demand deposits........        $ 4,451       113       2.54     $3,624      97      2.68     $ 4,984     2.44
 Certificates of deposit.................         25,062     1,392       5.55     25,515   1,495      5.86      24,760     5.63
 Savings deposits........................          5,407       137       2.53      5,814     169      2.91       5,232     2.50
 Short-term borrowings...................            931        52       5.59        250      17      6.80         500     5.75
                                                 -------    ------                ------   -----               -------
  Total interest-bearing liabilities.....         35,851     1,694       4.73     35,203   1,778      5.05      35,476     4.72
Non-interest bearing liabilities.........             89                              77                           174
                                                 -------                          ------                       -------
 Total liabilities.......................         35,940                          35,280                        35,650
Stockholders equity......................          9,038                           8,826                         9,185
                                                  ------                          ------                        ------
 Total liabilities and stockholders' equity      $44,978                         $44,106                       $44,835
                                                  ======                          ======                        ======
Net interest income......................                   $1,736                        $1,652
                                                             =====                         =====
Interest rate spread(3)..................                                2.96                         2.83                 2.88
                                                                         ====                         ====                 ====
Net yield on interest-earning assets(4)..                                3.89                         3.79                 3.67
                                                                         ====                         ====                 ====
Ratio of average interest-earning assets to
  average interest-bearing liabilities...                              124.38                       123.66               125.19
                                                                       ======                       ======               ======
</TABLE>


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

                                      - 6 -

<PAGE>



Rate/Volume Analysis

The table below sets forth  certain  information  regarding  changes in interest
income and interest expense of the Company for the periods  indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information  is  provided  on  changes  attributable  to (i)  changes  in volume
(changes  in  average  volume  multiplied  by old rate);  (ii)  changes in rates
(changes in rate multiplied by old average volume). 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 June 30,
                                                  ---------------------------------------------------------------------------
                                                              1997 vs. 1996                         1996 vs. 1995
                                                  -----------------------------------      ----------------------------------
                                                          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 receivable.....................              $ 106        $ (61)        $  45        $ 223        $  46         $ 269
 Mortgage-backed securities...........               (116)          (6)         (122)        (115)          22           (93)
 Investment securities................                 96          (19)           77          (55)          55            --
                                                    -----        -----          ----         ----        -----         -----
  Total interest-earning assets.......                 86          (86)            -           53          123           176
                                                    -----        -----          ----         ----        -----         -----

Interest expense:
  Interest-bearing demand deposits....                 22           (6)           16           (5)           4            (1)
  Certificates of deposit.............                (27)         (76)         (103)         (18)         206           188
  Savings deposits....................                (12)         (20)          (32)          (8)          (8)          (16)
  Short-term borrowings...............                 46          (11)           35            7           --             7
                                                    -----        -----          ----         ----        -----          ----
   Total interest-bearing
    liabilities.......................                 29          (113)         (84)         (24)         202           178
                                                    -----        -----          ----         ----        -----         -----

Net change in interest income.........              $  57        $   27        $  84         $ 77        $ (79)        $  (2)
                                                    =====        ======         ====         ====        =====         =====
</TABLE>



                                                       - 7 -

<PAGE>



Comparison of Operating Results for the Years Ended June 30, 1997 and 1996.

Net  Income.  Primarily  as a  result  of a  one  time  charge  to  SAIF-insured
institutions,  net income for the year ended June 30, 1997  declined  32.5%,  to
$301,000 or $.68 per share, from $446,000 or $1.01 per share for the same period
ended 1996.

Net  Interest  Income.  Net  interest  income  increased  $84,000  or  5.1%,  to
$1,736,000  for the year ended June 30, 1997 compared to $1,652,000 for the year
ended  June 30,  1996  primarily  due to a  decrease  in  interest  expense.  In
addition,  during these periods, the Company's average interest rate spread (the
difference between the weighted average yield on interest-earning assets and the
weighted average rate on interest-bearing  liabilities) increased from 2.83% for
the year ended June 30, 1996 to 2.96% for the same period  ended June 30,  1997.
At June 30, 1997, the Company's interest rate spread was a positive 2.88%.

Interest Income.  Interest income remained relatively stable during fiscal years
1996 and 1997, totalling $3,430,000 for both years. Increases to interest income
were  primarily  concentrated  in  loans  of  $45,000  or  1.7%  and  investment
securities of $87,000 or 53.5%.  These increases,  which were due to an increase
in the average principal  balances of $1,268,000 or 4.1%, and $612,000 or 18.7%,
respectively,  were  funded by a decrease in the  average  principal  balance of
mortgage-backed  securities  of  $1,684,000  or 20.0% and an increase in average
interest-bearing  liabilities  of $648,000 or 1.8%.  In  addition,  the yield on
interest-earning  assets decreased from 7.9% for the year ended June 30, 1996 to
7.7% for the same period  ended June 30, 1997.  This  decrease was the result of
the maturity of higher yielding securities and a slight decline in rates.

Interest Expense.  Interest expense decreased from $1,777,000 for the year ended
June 30, 1996 to $1,694,000 for the same period ended June 30, 1997. Interest on
deposits  declined by $119,000 or 6.8%.  Such decrease was offset somewhat by an
increase of $36,000 or $212.5% in other interest expense. The overall decline is
primarily due to the decreasing  principal  average  balances of certificates of
deposit, $453,000 or 1.8%, and savings deposits, $407,000 or 7.0%. Counteracting
this   decline   was  an  increase   in  the   average   principal   balance  of
interest-bearing demand deposits of $827,000 or 22.8%.  Furthermore,  the yields
on  certificates  of deposit and savings  deposits  decreased by 31 and 38 basis
points, respectively. There was an increase in interest expense on advances from
FHLB of $36,000  or 212.5%  which is the result of an  increase  in the  average
principal  balance  of  $681,000  offset by a decrease  in the cost of  borrowed
funds.  The cost to borrow funds declined from 5.0% as of June 30, 1996 compared
to 4.7% as of June 30, 1997, or 6.4%.

Provision for Loan Losses. Based upon management's  continuing evaluation of the
adequacy of the  allowance  for loan losses which  encompasses  the overall risk
characteristics of the various portfolio segments,  past experience with losses,
the impact of economic conditions on borrowers,  and other relevant factors, the
provision  for loan  losses was  $24,000  for the years  ended June 30, 1997 and
1996. While asset quality has slightly  declined during this period,  management
believes that the underlying  collateral supporting such loans provides adequate
coverage.  The Company  maintains a desirable  level in it loan loss  provisions
based upon the  Company's  review of the  market,  loan  portfolio,  and overall
assessment  of  the  adequacy  of  the  valuation  allowance.  There  can  be no
assurances,  however,  that additional provisions will not be required in future
periods.

Noninterest Income. Noninterest income which is comprised principally of service
charges on deposit accounts and loan service fees decreased  $17,000 or 28.1% to
$44,000 for the year ended June 30, 1997 from  $61,000 for the same period ended
1996. Other income declined $20,000 or 57.0% due to a

                                      - 8 -

<PAGE>



decline in  commissions  from  consumer  lending for  accidental  death and life
insurance from the Company's carrier coupled with other smaller dollar decreases
in other income accounts.

Noninterest  Expense.   Noninterest  expense  increased  $251,000  or  24.9%  to
$1,261,000 for the year ended June 30, 1997 from $1,010,000 as of June 30, 1996.
This increase is largely  attributed to a one time charge of $235,000 in federal
insurance  premiums.  On  September  30,  1996,  the  President  signed into law
legislation  which  included  the  recapitalization  of the Savings  Association
Insurance  Fund  ("SAIF")  of the  FDIC by a one  time  charge  to  SAIF-insured
institutions of 65.7 basis points per one hundred dollars of insurable deposits.
Compensation  and  benefits  increased  $33,000  or  7.1%,  primarily  due to an
increase in employee  stock  ownership  plan expenses from the  distribution  of
additional  shares.  Other  noninterest  expense  increased  by  $16,000 or 7.2%
through the year ended June 30,  1997 as compared to the same period  ended June
30, 1996. For fiscal year ended 1996, other interest expense included $13,000 in
principal  payments  on  mortgage-backed  securities  which had been  previously
written-off  due to the  inability  to collect  payments  from the  instrument's
trustee,  coupled  with a  $12,000  credit to the  Bank's  checking  account  as
resolution for prior years' erroneous charges.

Income Taxes.  Income tax expense  decreased $39,000 or 16.8% for the year ended
June 30, 1997 to $195,000 from $234,000 for the same period ended June 30, 1996.
The decrease was the result of a decline in pretax earnings during the period.

Possible Year 2000 Computer Program Problems

     A great deal of information has been disseminated about the global computer
crash  that may occur in the year 2000.  Many  computer  programs  that can only
distinguish  the final  two  digits of the year  entered  (a common  programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment,  interest or delinquency  based on the wrong date
or are expected to be unable to compute payment, interest or delinquency.  Rapid
and accurate data  processing  is essential to the  operation of the Bank.  Data
processing is also essential to most other financial institutions and many other
companies.

     All of the material  data  processing of the Bank that could be affected by
this problem is provided by a third party service bureau.  The service bureau of
the Bank has advised the Bank that it expects to resolve this potential  problem
before the year 2000.  However,  if the service bureau is unable to resolve this
potential  problem in time, the Bank would likely  experience  significant  data
processing  delays,  mistakes or failures.  These  delays,  mistakes or failures
could have a significant  adverse impact on the financial  condition and results
of operation of the Bank.

Liquidity and Capital Requirements

General.  Liquidity refers to the Bank's ability to generate  sufficient cash to
meet the funding needs of current loan demand, savings deposit withdrawals,  and
to pay  operating  expenses.  The Bank 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 Bank  adjusts
liquidity as appropriate to meet its asset/liability objectives.

The Bank'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 general

                                      - 9 -

<PAGE>



interest  rates,  economic  conditions and  competition.  In addition,  the Bank
invests  excess  funds in overnight  deposits  which  provide  liquidity to meet
lending requirements.

The primary  activity of the Bank is  originating  mortgage loans and purchasing
mortgage-backed  securities.  During the years ended June 30, 1997 and 1996, the
Bank  originated  loans in the amounts of $7.0 and $10.6 million,  respectively.
The Bank also  purchases  mortgage-backed  securities  and FHLB  notes to invest
excess liquidity and to supplement local loan demand.  The Bank did not purchase
any  mortgage-backed  securities  during fiscal 1997 or 1996.  Other  investment
activities  include  investment  in  tax-exempt  municipal  bonds  and  FHLB  of
Pittsburgh stock.

The Bank 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  Bank's  balance  sheet,   such  as  investment   securities  and
unencumbered mortgage-backed securities that are readily marketable.  Management
believes that the Bank has adequate resources to fund all of its commitments.

The Company's  ability to pay dividends to stockholders  is primarily  dependent
upon the dividends it receives from the Bank.  The Bank may not declare or pay a
cash  dividend on any of its stock if the effect  thereof would cause the Bank's
regulatory  capital  to be  reduced  below  (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
Department and the 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 June 30, 1997,  the Bank's Tier I  risk-based  and total  risk-based  capital
ratios were 43.3% and 44.5%,  respectively.  Current  regulations require Tier I
risk-based  capital of 4% and total risk-based  capital of 8% risk-based assets.
The Bank's leverage ratio was 20.5% at the end of fiscal 1997.

Impact of Inflation and Changing Prices

The financial  statements and related data 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
consideration  for changes in the relative  purchasing  power of money over time
caused by inflation.

Unlike  industrial  companies,  nearly 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 general
levels  of  inflation.  Interest  rates  do not  necessarily  move  in the  same
direction  or in the same  magnitude as the price of goods and  services,  since
such goods and services are affected by inflation.  In the current interest rate
environment,  liquidity  and the  maturity  structure  of the Bank's  assets and
liabilities are critical to the maintenance of acceptable performance levels.




                                     - 10 -
<PAGE>



[SNODGRASS LETTERHEAD]


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





Board of Directors and Stockholders
Peoples Savings Financial Corporation

We have audited the accompanying  consolidated  balance sheet of Peoples Savings
Financial  Corporation  and  Subsidiary  as of June 30,  1997 and 1996,  and the
related consolidated  statements of income, changes in stockholders' equity, and
cash  flows  for the  years  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Peoples  Savings
Financial  Corporation  and  Subsidiary  as of June 30,  1997 and 1996,  and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.

As explained in the notes to the consolidated  financial  statements,  effective
July 1, 1995, the Company changed its method of accounting for the impairment of
loans and the related allowance for loan losses.





/s/ S.R. Snodgrass, A.C.


Wexford, PA
July 25, 1997

S.R. Snodgrass, A.C.
101  Bradford  Road  Wexford,  PA  15090-6909  Phone:   412-934-0344  Facsimile:
412-934-0345

                                      - 11 -
<PAGE>

                      PEOPLES SAVINGS FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                        June 30,
                                                                                  1997            1996
                                                                             -------------   -------------

ASSETS
<S>                                                                          <C>             <C>         
Cash and due from banks                                                      $    116,612    $    115,026
Interest-bearing deposits with other institutions                               2,904,240         627,318
Investment securities (market value of $2,811,553
   and $3,648,567)                                                              2,824,595       3,694,375
Mortgage-backed securities (market value of $6,104,940
   and $7,415,043)                                                              6,123,442       7,466,452
Loans receivable (net of allowance for loan losses
   of $250,865 and $227,171)                                                   31,947,791      32,126,518
Accrued interest receivable                                                       290,147         278,533
Premises and equipment                                                             60,407          64,001
Federal Home Loan Bank stock                                                      361,100         358,900
Other assets                                                                      206,248         121,346
                                                                             ------------    ------------

                   TOTAL ASSETS                                              $ 44,834,582    $ 44,852,469
                                                                             ============    ============

LIABILITIES
Deposits                                                                     $ 34,975,539    $ 35,864,622
Advance from Federal Home Loan Bank                                               500,000              --
Accrued interest payable and other liabilities                                    174,869          75,766
                                                                             ------------    ------------
                    TOTAL LIABILITIES                                          35,650,408      35,940,388
                                                                             ------------    ------------

STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares
   authorized; none issued                                                             --              --
Common stock, $.10 par value; 2,000,000 shares authorized,
   452,966 issued                                                                  45,297          45,297
Additional paid-in capital                                                      4,275,914       4,222,897
Retained earnings - substantially restricted                                    5,338,997       5,205,770
Unallocated shares held by Employee Stock Ownership Plan (ESOP)                  (214,241)       (254,790)
Unallocated shares held by Management Stock Bonus Plan (MSBP)                     (67,930)       (113,230)
Treasury stock (10,450 shares, at cost)                                          (193,863)       (193,863)
                                                                             ------------    ------------
                   TOTAL STOCKHOLDERS' EQUITY                                   9,184,174       8,912,081
                                                                             ------------    ------------

                   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                $ 44,834,582    $ 44,852,469
                                                                             ============    ============
</TABLE>



See accompanying notes to the consolidated financial statements.

                                      - 12 -
<PAGE>

                      PEOPLES SAVINGS FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                             Year Ended June 30,
                                                              1997         1996
                                                           ----------   ----------
INTEREST INCOME
<S>                                                        <C>          <C>       
       Loans receivable                                    $2,629,735   $2,584,661
       Mortgage-backed securities                             456,571      578,468
       Investment securities:
            Taxable                                           249,433      162,478
            Exempt from federal income tax                     26,547       56,119
       Interest-bearing deposits with other institutions       67,986       47,932
                                                           ----------   ----------
            Total interest income                           3,430,272    3,429,658
                                                           ----------   ----------

INTEREST EXPENSE
       Deposits                                             1,641,614    1,760,789
       Advance from Federal Home Loan Bank                     52,390       16,763
             Total interest expense                         1,694,004    1,777,552
                                                           ----------   ----------

NET INTEREST INCOME                                         1,736,268    1,652,106

Provision for loan losses                                      24,000       24,000
                                                           ----------   ----------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES         1,712,268    1,628,106
                                                           ----------   ----------

NONINTEREST INCOME
       Service charges on deposit accounts                     29,317       26,897
       Other income                                            14,866       34,580
                                                           ----------   ----------
              Total noninterest income                         44,183       61,477
                                                           ----------   ----------

NONINTEREST EXPENSE
       Compensation and employee benefits                     491,463      458,826
       Occupancy and equipment                                 45,543       59,673
       Deposit insurance premiums                             272,034       82,954
       Professional fees                                      110,704       84,955
       Data processing charges                                103,913      102,083
       Other expenses                                         237,054      221,036
                                                           ----------   ----------
               Total noninterest expense                    1,260,711    1,009,527
                                                           ----------   ----------

Income before income taxes                                    495,740      680,056
Income taxes                                                  194,718      234,189
                                                           ----------   ----------

NET INCOME                                                 $  301,022   $  445,867
                                                           ==========   ==========

EARNINGS PER SHARE
       Primary                                             $     0.68   $     1.01
       Fully Diluted                                       $     0.68   $     1.01

</TABLE>


See accompanying notes to the consolidated financial statements.

                                      - 13 -
<PAGE>

                     PEOPLES SAVINGS FINANCIAL CORPORATION
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                 Retained      Unallocated     Unallocated
                                    Additional   Earnings -      Shares           Shares
                            Common    Paid-In  Substantially     Held by          Held by         Treasury
                            Stock     Capital   Restricted        ESOP             MSBP            Stock          Total
                          --------  ----------  ----------     -----------     -----------      -----------    -----------

<S>                       <C>       <C>         <C>            <C>             <C>              <C>            <C>        
Balance, June 30, 1995    $ 45,297  $4,180,857  $4,759,903     $ (288,762)     $ (158,530)      $ (193,863)    $ 8,344,902
   Release of earned
   ESOP shares                          42,040                     33,972                                           76,012

   Accrued
   compensation
   expense for MSBP                                                                45,300                           45,300

   Net income                                      445,867                                                         445,867
                           --------  ----------  ----------     ----------      ----------       ----------     -----------

Balance, June 30, 1996      45,297   4,222,897   5,205,770       (254,790)       (113,230)        (193,863)      8,912,081

   Release of earned
   ESOP shares                          53,017                     40,549                                           93,566

   Accrued
   compensation
   expense for MSBP                                                                45,300                           45,300

Cash dividends declared
    ($.40 per share)                              (167,795)                                                       (167,795)

   Net income                                      301,022                                                         301,022
                           --------  ----------  ----------     ----------      ----------       ----------     -----------

Balance, June 30, 1997    $ 45,297  $4,275,914  $5,338,997     $ (214,241)     $  (67,930)      $ (193,863)    $ 9,184,174
                          ========  ==========  ==========     ==========      ==========       ==========     ===========

</TABLE>

See accompanying notes to the consolidated financial statements.

                                      - 14 -
<PAGE>

                      PEOPLES SAVINGS FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                  Year Ended June 30,
                                                                  1997          1996
                                                              -----------    -----------

OPERATING ACTIVITIES
<S>                                                           <C>            <C>        
Net income                                                    $   301,022    $   445,867
Adjustments to reconcile net income to net cash provided
   by operating activities:
   Provision for loan losses                                       24,000         24,000
   Provision for depreciation                                       7,257         12,839
   Amortization of discounts and premiums                           1,966         52,742
   Decrease (increase) in accrued interest receivable             (11,614)         2,221
   Increase (decrease) in accrued interest payable                 23,358         (4,156)
   Amortization of ESOP and MSBP unearned compensation            138,866        121,312
   Other, net                                                     (93,375)       (38,369)
                                                              -----------    -----------
       Net cash provided by operating activities                  391,480        616,456
                                                              -----------    -----------

INVESTING ACTIVITIES
   Proceeds from the maturities of investment securities        1,620,000      2,650,000
   Purchases of investment securities                            (749,750)    (3,047,047)
   Principal repayments on mortgage-backed securities           1,320,674      2,142,943
   Decrease (increase) in loans receivable, net                   174,627     (2,803,206)
   Increase in Federal Home Loan Bank stock                        (2,200)       (12,500)
   Purchases of premises and equipment                             (3,663)       (12,938)
                                                              -----------    -----------
       Net cash provided by (used for) investing activities     2,359,688     (1,082,748)
                                                              -----------    -----------

FINANCING ACTIVITIES
   Increase (decrease) in deposits, net                          (889,083)       693,299
   Increase in advance from Federal Home Loan Bank                500,000           --
   Cash dividends paid                                            (83,577)          --
                                                              -----------    -----------
       Net cash provided by (used for) financing activities      (472,660)       693,299
                                                              -----------    -----------

       Increase in cash and cash equivalents                    2,278,508        227,007

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                    742,344        515,337
                                                              -----------    -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                      $ 3,020,852    $   742,344
                                                              ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
   Cash paid during the period for:
       Interest on deposits and borrowings                    $ 1,670,646    $ 1,781,708
       Income taxes                                               250,512        237,925

</TABLE>


See accompanying notes to the consolidated financial statements.

                                      -15-
<PAGE>


                     PEOPLES SAVINGS FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Peoples  Savings  Financial  Corporation  (the  "Company") is a  Pennsylvania
   corporation  organized  as the holding  company of Peoples  Savings Bank (the
   "Bank").  The Bank is a  state-chartered  bank located in  Pennsylvania.  The
   Company and its subsidiary derive substantially all their income from banking
   and bank-related services which include interest earnings on its portfolio of
   residential real estate and consumer loans, as well as, interest  earnings on
   investment and  mortgage-backed  securities and a variety of deposit services
   provided to its customers through three locations.  The Company is supervised
   by the Board of Governors of the Federal  Reserve  System,  while the Bank is
   subject  to  regulation  and  supervision  by the FDIC  and the  Pennsylvania
   Department of Banking.

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

   The financial  statements  have been prepared in  conformity  with  generally
   accepted  accounting  principles.  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 date of the  balance
   sheet and revenues and expenses for the period.  Actual  results could differ
   significantly  from  those  estimates.  The  major  accounting  policies  and
   practices are summarized below.

   Investment Securities and Mortgage-Backed Securities
   ----------------------------------------------------

   Debt  securities,  including  mortgage-backed  securities  acquired  with the
   intent  and  ability to hold to  maturity  are  stated at cost  adjusted  for
   amortization of premium and accretion of discount, which are computed using a
   level yield method and recognized as adjustments of interest income. Interest
   on securities is recognized as income when earned.

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

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

   Loans are stated at the  principal  amount  outstanding  net of deferred loan
   fees and the  allowance  for loan  losses.  Interest  income on mortgage  and
   consumer loans is recognized on the accrual method. Loan fees which represent
   an adjustment to interest  yield are deferred and amortized  over the life of
   the loan.

   Loans on which  accrued  interest has been  discontinued  are  designated  as
   nonaccrual loans. Accrual of interest on loans is generally discontinued when
   it is determined that a reasonable doubt exists as to the  collectibility  of
   additional interest. When a loan is placed on nonaccrual status, all interest
   previously  accrued but not  collected  is reversed  against  current  period
   income.  Loans are  returned  to accrual  status  when past due  interest  is
   collected and the collection of principal is probable.

                                     - 16 -
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

   Effective July 1, 1995, the Company adopted Statement of Financial Accounting
   Standards No. 114,  "Accounting  by Creditors  for  Impairment of a Loan," as
   amended by Statement  No. 118.  Under this  Standard,  the Company  estimates
   credit  losses on impaired  loans based on the present value of expected cash
   flows or fair value of the  underlying  collateral  if the loan  repayment is
   expected  to come from the sale or  operation  of such  collateral.  Prior to
   1995,  the credit  losses  related to these  loans  were  estimated  based on
   undiscounted  cash  flows or the fair  value  of the  underlying  collateral.
   Statement  No. 118  amends  Statement  No.  114 to permit a  creditor  to use
   existing   methods  for   recognizing   interest  income  on  impaired  loans
   eliminating  the income  recognition  provisions  of  Statement  No. 114. The
   adoption of these  statement did not have a material  effect on the Company's
   financial position or results of operations.

   Impaired loans are  commercial and commercial  real estate loans for which it
   is  probable  that 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 by
   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 of  the  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.

   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.

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

   Premises  and  equipment  are stated at cost less  accumulated  depreciation.
   Depreciation is calculated using an accelerated  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.

                                     - 17 -
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

   The  Company  and the Bank file a  consolidated  federal  income tax  return.
   Deferred tax assets and liabilities are reflected at currently enacted income
   tax  rates  applicable  to the  period in which the  deferred  tax  assets or
   liabilities are expected to be realized or settled. As changes in tax laws or
   rates are enacted,  deferred tax assets and liabilities are adjusted  through
   the provision for income taxes.

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

   Earnings  per  share  for the years  ended  June 30,  1997 and 1996 have been
   calculated  based upon the weighted  average number of issued and outstanding
   common  shares,  including  common  stock  equivalents,  if such items have a
   dilutive effect. For purposes of primary  computations,  the number of shares
   used were  445,364  and  440,740  for the years  ended June 30, 1997 and 1996
   respectively.  For purposes of the fully diluted computations,  the number of
   shares used were 444,906 and 442,646 respectively.

   Shares  outstanding  for 1997 and 1996 do not  include  ESOP shares that were
   purchased and unallocated during 1997 and 1996.

   Cash and Cash Equivalents
   -------------------------

   Cash  and  cash   equivalents   include   cash   and  due  from   banks   and
   interest-bearing deposits with other institutions.

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

   In June 1996, the Financial  Accounting  Standards Board issued  Statement of
   Accounting  Standards  No. 125,  "Accounting  for  Transfers and Servicing of
   Financial  Assets  and   Extinguishment   of  Liabilities,"   which  provides
   accounting  and reporting  standards for transfers and servicing of financial
   assets  and   extinguishment   of   liabilities.   This   statement   applies
   prospectively  in  fiscal  years  beginning  after  December  31,  1996,  and
   establishes new standards that focus on control, whereas, after a transfer of
   financial  assets, an entity recognizes the financial and servicing assets it
   controls and the liabilities it has incurred,  derecognizes  financial assets
   when  control  has  been  surrendered,   and  derecognizes  liabilities  when
   extinguished.

   In December 1996, the Financial  Accounting  Standards Board issued Statement
   of Financial Accounting Standards No. 127, "Deferral of the Effective Date of
   Certain  Provisions of FASB Statement No. 125."  Statement 127 defers for one
   year the effective date of certain portions of Statement No. 125 that address
   secured  borrowings  and  collateral  for  all  transactions.   Additionally,
   Statement  No. 127 defers for one year the  effective  date of  transfers  of
   financial assets that are part of repurchase agreements,  securities lending,
   and  similar  transactions.  The  Company  does not  expect the  adoption  of
   Statements  125  and  127  to  have  a  material   impact  on  the  Company's
   consolidated financial condition or results of operations.

   In February 1997 the Financial Accounting Standards Board issued Statement of
   Financial  Accounting  Standards No. 128, "Earnings Per Share," effective for
   financial  statements  issued for periods ending after December 15, 1997. The
   new  standard  specifies  the  computation,   presentation,   and  disclosure
   requirements  for earnings per share for entities  with  publicly held common
   stock. The Company does not anticipate  adoption to have a material impact on
   presentation and disclosure for earnings per share.

                                     - 18 -
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

   Recent Accounting Pronouncements (Continued)
   --------------------------------------------

   In July 1997 the Financial  Accounting  Standards  Board issued  Statement of
   Financial  Accounting  Standards No. 130, "Reporting  Comprehensive  Income".
   Statement No. 130 is effective for fiscal years  beginning after December 15,
   1997. This statement  establishes standards for reporting and presentation of
   comprehensive  income  and its  components  (revenues,  expenses,  gains  and
   losses) in a full set of general purpose  financial  statements.  It requires
   that all items that are required to be recognized under accounting  standards
   as components of  comprehensive  income be reported in a financial  statement
   that is presented  with the same  prominence as other  financial  statements.
   Statement  No.  130  requires  that  companies  (i)  classify  items of other
   comprehensive  income  by their  nature  in a  financial  statement  and (ii)
   display the accumulated balance of other comprehensive income separately from
   retained earnings and additional paid-in capital in the stockholders'  equity
   section of the balance sheet.  Reclassification  of financial  statements for
   earlier periods provided for comprehensive purposes is required.

NOTE 2 - INVESTMENT SECURITIES

   The amortized cost and estimated  market values of investment  securities are
   as follows:
<TABLE>
<CAPTION>
                                                    1997
                               ----------------------------------------------------
                                              Gross        Gross       Estimated
                               Amortized   Unrealized    Unrealized      Market
                                  Cost        Gains        Losses        Value
                               ----------  -----------   -----------   ------------
   U. S. Government agency
<S>                            <C>          <C>          <C>           <C>       
      securities               $2,298,161   $    3,572   $  (17,365)   $2,284,368
   Obligations of states and
      political subdivisions      526,434          751         --         527,185
                               ----------   ----------   ----------    ----------

         Total                 $2,824,595   $    4,323   $  (17,365)   $2,811,553
                               ==========   ==========   ==========    ==========
</TABLE>


<TABLE>
<CAPTION>
                                                     1996
                               ---------------------------------------------------
                                              Gross         Gross
                                Amortized   Unrealized   Unrealized     Market
                                  Cost        Gains        Losses        Value
                               ----------   -----------  ----------    ------------
   U. S. Government agency
   <S>                         <C>          <C>          <C>           <C>       
      securities               $2,797,199   $       --   $  (42,872)   $2,754,327
   Obligations of states and
      political subdivisions      897,176          772       (3,708)      894,240
                               ----------   ----------   ----------    ----------
   
         Total                 $3,694,375   $      772   $  (46,580)   $3,648,567
                               ==========   ==========   ==========    ==========
</TABLE>

                                     - 19 -
<PAGE>


NOTE 2 - INVESTMENT SECURITIES (Continued)

   The amortized cost and estimated  market value of debt securities at June 30,
   1997,  by  contractual  maturity are shown below.  Expected  maturities  will
   differ from contractual  maturities  because  borrowers may have the right to
   call or prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                              Estimated
                                                 Amortized      Market
                                                    Cost         Value
                                                 -----------  ----------
   
<S>                                              <C>          <C>       
        Due in one year or less                  $       --   $       --
        Due after one year through five years     2,574,595    2,566,683
        Due after five years through ten years      250,000      244,870
                                                 ----------   ----------
   
               Total                             $2,824,595   $2,811,553
                                                 ==========   ==========
   </TABLE>
   

   As of June 30, 1997 and 1996, all of the Company's investments in obligations
   of  states  and  political   subdivisions  are  within  the  Commonwealth  of
   Pennsylvania.  Although the Company has a diversified  investment  portfolio,
   there is one investment, amounting to $526,000 or 18.6% and $587,000 or 15.9%
   at June 30, 1997 and 1996, respectively, of the investment portfolio which is
   dependent upon tax revenues of an individual municipality.

NOTE 3 - MORTGAGE - BACKED SECURITIES

   The amortized cost and estimated market values of mortgage-backed  securities
   are as follows:
<TABLE>
<CAPTION>
                                                         1997
                                  --------------------------------------------------
                                                 Gross         Gross       Estimated
                                   Amortized   Unrealized    Unrealized      Market
                                     Cost        Gains         Losses         Value
                                  ----------   ----------   -----------   ----------
   Federal National Mortgage
<S>                               <C>          <C>          <C>           <C>       
     Association securities       $2,268,550   $    8,950   $  (19,117)   $2,258,383
   Government National Mortgage
     Association securities        1,452,824       41,037           --     1,493,861
   Federal Home Loan Mortgage
     Corporation securities        2,187,136        1,396      (50,581)    2,137,951
   Collateralized mortgage
     obligations                     214,932           --         (187)      214,745
                                  ----------   ----------   ----------    ----------

            Total                 $6,123,442   $   51,383   $  (69,885)   $6,104,940
                                  ==========   ==========   ==========    ==========

</TABLE>

                                     - 20 -
<PAGE>

NOTE 3 - MORTGAGE - BACKED SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                        1996
                                  --------------------------------------------------
                                                 Gross        Gross       Estimated
                                  Amortized    Unrealized   Unrealized      Market
                                     Cost        Gains        Losses        Value
                                  ----------   ----------   -----------   ----------
   Federal National Mortgage
   <S>                            <C>          <C>          <C>           <C>       
     Association securities       $2,635,786   $    9,243   $  (30,198)   $2,614,831
   Government National Mortgage
     Association securities        1,915,675       54,456           --     1,970,131
   Federal Home Loan Mortgage
     Corporation securities        2,644,515          540      (86,324)    2,558,731
   Collateralized mortgage
     obligations                     270,476        1,011         (137)      271,350
                                  ----------   ----------   ----------    ----------
   
          Total                   $7,466,452   $   65,250   $ (116,659)   $7,415,043
                                  ==========   ==========   ==========    ==========
   </TABLE>

   The amortized cost and estimated market value of  mortgage-backed  securities
   at June 30, 1997, by  contractual  maturity are shown below.  Mortgage-backed
   securities provide for periodic,  generally monthly payments of principal and
   interest and have  contractual  maturities  ranging from three to  thirty-one
   years. However, due to expected repayment terms being significantly less than
   the underlying mortgage loan pool contractual maturities, the estimated lives
   of these securities could be significantly shorter.

<TABLE>
<CAPTION>

                                                                Estimated
                                                 Amortized       Market
                                                    Cost          Value
                                                 ----------   -----------
        
        <S>                                      <C>          <C>       
        Due in one year or less                  $       --   $       --
        Due after one year through five years       604,178      585,500
        Due after five years through ten years           --           --
        Due after ten years                       5,519,264    5,519,440
                                                 ----------   ----------
        
                  Total                          $6,123,442   $6,104,940
                                                 ==========   ==========
</TABLE>


                                     - 21 -
<PAGE>

NOTE 4 - LOANS RECEIVABLE

   Loans receivable are comprised of the following:

<TABLE>
<CAPTION>

                                          1997            1996
                                     -------------   -------------
    Mortgage loans:
<S>                                   <C>             <C>          
        1 - 4 family dwellings        $  29,524,341   $  29,002,826
        Commercial                        1,194,880       1,750,204
                                      -------------   -------------
                                         30,719,221      30,753,030
                                      -------------   -------------

    Consumer loans:
        Home equity                       1,358,869       1,523,071
        Automobile                          324,179         391,168
        Share loans                         489,415         480,636
        Other                               223,658         192,932
                                      -------------   -------------
                                          2,396,121       2,587,807
                                      -------------   -------------

    Less:
        Loans in process                    828,394         897,410
        Net deferred loan fees               88,292          89,738
        Allowance for loan losses           250,865         227,171
                                      -------------   -------------
                                          1,167,551       1,214,319
                                      -------------   -------------

                  Total               $  31,947,791   $  32,126,518
                                      =============   =============
</TABLE>


   In the  normal  course of  business,  loans are  extended  to  directors  and
   executive  officers and their  associates.  In management's  opinion,  all of
   these loans are on  substantially  the same terms and  conditions as loans to
   other individuals and businesses of comparable creditworthiness. A summary of
   loan activity for those directors,  executive officers,  and their associates
   with loan  balances  in excess of $60,000 for the year ended June 30, 1997 is
   as follows:

<TABLE>
<CAPTION>

                         Balance                                     Balance
                        June 30,                        Amounts      June 30,
                          1996          Additions      Collected       1997
                     -----------       ----------      ---------    ---------

<S>                  <C>               <C>             <C>          <C>      
                     $   469,960       $  49,148       $ 158,550    $ 360,558
</TABLE>


   The Bank is a party to financial instruments with off-balance-sheet  risk, in
   the normal course of business,  to meet the financing needs of its customers.
   These financial instruments include commitments to extend credit amounting to
   $2,347,000  and  $1,375,000,   at  June  30,  1997  and  1996,  respectively.
   Commitments  to extend credit are agreements to lend to a customer as long as
   there is no violation of any  condition  established  in the loan  agreement.
   These  commitments are comprised of the  undisbursed  portion of construction
   loans and residential loan  originations.  The Bank's exposure to credit loss
   from  nonperformance  by the other party to these  financial  instruments  is
   represented by the contractual amount. The Bank uses the same credit policies
   in  making   commitments   and   conditional   obligations  as  it  does  for
   on-balance-sheet instruments.  Generally,  collateral, usually in the form of
   real estate, is required to support financial instruments with credit risk.

   The Bank's loan portfolio is predominantly made up of one to four family unit
   first  mortgage  loans in the Elk,  Clearfield,  and Jefferson  County areas.
   These loans are typically  secured by first lien  positions on the respective
   real  estate  properties  and are  subject  to the Bank's  loan  underwriting
   policies. In general, the Bank's loan portfolio performance is dependent upon
   the local economic conditions.

                                     - 22 -
<PAGE>


NOTE 5 - ALLOWANCE FOR LOAN LOSSES

   Activity in the  allowance  for loan losses for the years ended June 30, 1997
   and 1996 is summarized as follows:

<TABLE>
<CAPTION>
                                                       1997                 1996
                                                  -------------        ------------

<S>                                           <C>                  <C>         
       Balance, beginning of period               $     227,171        $    207,815
       Add:
           Provisions charged to operations              24,000              24,000
           Loan recoveries                                  541               1,226
                                                  -------------        ------------
                                                        251,712             233,041
       Less loans charged off                               847               5,870
                                                  -------------        ------------
    
       Balance, end of period                     $     250,865        $    227,171
                                                  =============        ============
    </TABLE>
    
NOTE 6 - ACCRUED INTEREST RECEIVABLE

   Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
                                                      1997                 1996
                                                  -------------        ------------
    
    <S>                                           <C>                  <C>         
        Investment securities                     $      60,431        $     41,123
        Mortgage-backed securities                       35,790              50,208
        Loans receivable                                193,926             187,202
                                                  -------------        ------------
    
                  Total                           $     290,147        $    278,533
                                                  =============        ============
    </TABLE>
    
NOTE 7 - PREMISES AND EQUIPMENT

   Premises and equipment consist of the following:

<TABLE>
<CAPTION>
                                                      1997                 1996
                                                  -------------        ------------
    
    <S>                                           <C>                  <C>         
       Land                                       $      29,500        $     29,500
       Building and improvements                        217,620             217,620
       Furniture and equipment                          268,316             264,653
                                                        515,436             511,773
       Less accumulated depreciation                    455,029             447,772
                                                  -------------        ------------
    
                 Total                            $      60,407        $     64,001
                                                  =============        ============
</TABLE>

   Depreciation  expense  for the years  ended June 30, 1997 and 1996 was $7,257
   and $12,839 respectively.

NOTE 8 - FEDERAL HOME LOAN BANK STOCK

   The Bank is a member of the Federal Home Loan Bank System.  As a member,  the
   Bank  maintains an  investment  in the capital stock of the Federal Home Loan
   Bank of  Pittsburgh  in an amount  not less than 1% of its  outstanding  home
   loans or 1/20 of its outstanding  notes payable,  if any, to the Federal Home
   Loan Bank of Pittsburgh,  whichever is greater,  as calculated December 31 of
   each year.

                                     - 23 -
<PAGE>



NOTE 9 - DEPOSITS

   Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
                                              1997                               1996
                                -----------------------------     --------------------------------
                                                   Percent of                           Percent of
                                    Amount         Portfolio           Amount           Portfolio
                                -------------      ----------     --------------      ------------
                                                                                      
<S>                             <C>                 <C>          <C>                    <C>  
      NOW accounts              $   3,353,222          9.6 %      $    2,497,778           7.0 %
      Savings accounts              5,232,215         15.0             5,883,799          16.4
      Money market accounts         1,630,908          4.7             1,546,184           4.3
                                -------------        -----        --------------         -----  
                                   10,216,345         29.3             9,927,761          27.7
                                -------------        -----        --------------         -----  
                                                                                      
      Savings certificates:                                                           
           4.00% or less               86,348          0.2               209,688           0.6
           4.01 - 6.00%            17,327,014         49.5            17,017,001          47.4
           6.01 - 8.00%             7,345,832         21.0             8,710,172          24.3
                                -------------        -----        --------------         -----  
                                   24,759,194         70.7            25,936,861          72.3
                                -------------        -----        --------------         -----  
                                                                                      
                Total           $  34,975,539        100.0 %      $   35,864,622         100.0 %
                                =============        =====        ==============         =====  
</TABLE>

   The maturities of savings certificates at June 30, 1997, are as follows:

<TABLE>
<CAPTION>


<S>                                                                               <C>         
      Within one year                                                             $ 14,309,261
      Beyond one years but within three years                                        7,131,529
      Beyond three years                                                             3,318,404
                                                                                  ------------

                Total                                                             $ 24,759,194
                                                                                  ============
</TABLE>

   Savings certificates with balances of $100,000 or more amounted to $2,677,276
   and  $2,355,348  on June 30, 1997 and 1996,  respectively.  The Bank does not
   have any brokered deposits.

   Interest  expense by deposit  category  for the years ended June 30, 1997 and
   1996 is as follows:

<TABLE>
<CAPTION>
                                                                       1997           1996
                                                                  --------------  ------------

<S>                                                               <C>             <C>         
       NOW and money market accounts                              $      112,751  $     96,970
       Savings accounts                                                  136,574       168,981
       Savings certificates                                            1,392,289     1,494,838
                                                                  --------------  ------------

                 Total                                            $    1,641,614  $  1,760,789
                                                                  ==============  ============

</TABLE>

NOTE 10 - SAVINGS ASSOCIATION INSURANCE FUNDS 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 gross effect to the Company  amounted to
   $234,747,  which is reflected in the financial results of the Company for the
   year ended June 30, 1997.

                                     - 24 -
<PAGE>


NOTE 11 - ADVANCE FROM FEDERAL HOME LOAN BANK
                                   
   The scheduled maturities of advances outstanding are as follows:

<TABLE>
<CAPTION>
                                    Interest                          June 30,
                Maturity              Rate                       1997          1996
           ------------------       --------                  ----------    ---------

<S>                                  <C>                      <C>           <C>     
           September 22, 1997        5.75 %                   $  500,000    $      -

</TABLE>

   FHLB stock,  mortgage-backed securities and certain first mortgage loans with
   a value in excess of 120% of outstanding  advances are pledged to secure such
   borrowings under a blanket floating agreement.

   The Bank has a line of credit,  with a borrowing limit of approximately  $3.4
   million,  with the Federal Home Loan Bank of Pittsburgh.  This credit line is
   subject to annual renewal and incurs no service charges. At June 30, 1997 and
   1996, there were no outstanding borrowings on this line of credit.

NOTE 12 - INCOME TAXES

   The provision for income taxes consists of:

<TABLE>
<CAPTION>
                                                           1997                  1996
                                                       -------------         ------------
   Currently payable:                                 
<S>                                                    <C>                   <C>         
       Federal                                         $     157,964         $    189,130
       State                                                  22,654               45,194
                                                       -------------         ------------
                                                             180,618              234,324
       Deferred                                               14,100                 (135)
                                                       -------------         ------------
                                                      
          Total                                        $     194,718         $    234,189 
                                                       =============         ============ 
</TABLE>                                    

   The following  temporary  differences gave rise to the net deferred tax asset
   at June 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                           1997                 1996
                                                       -------------         ------------

   Deferred tax assets:
<S>                                                    <C>                   <C>         
       Allowance for loan losses                       $      85,294         $     77,238
       Deferred loan origination fees, net                     2,345                6,503
       Deferred compensation                                   7,701               43,652
       Other, net                                             21,820                8,224
                                                       -------------         ------------
          Total gross deferred tax assets                    117,160              135,617
                                                       -------------         ------------

   Deferred tax liabilities:
       Tax reserve for loan losses                            32,671               37,150
       Premises and equipment                                  4,946                4,824
                                                       -------------         ------------
          Total gross deferred tax liabilities                37,617               41,974
                                                       -------------         ------------

          Net deferred tax asset                       $      79,543         $     93,643
                                                       =============         ============
</TABLE>

                                     - 25 -
<PAGE>


NOTE 12 - INCOME TAXES (Continued)

   The  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 June 30, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
                                                   1997                           1996
                                         ----------------------        ------------------------
                                           Amount       Percent           Amount       Percent
                                         ---------      -------        -----------    ---------

<S>                                      <C>             <C>           <C>               <C>   
   Provision at statutory rate           $ 168,552       34.0 %        $  231,219        34.0 %
    State income tax expense, net of
        federal tax benefit                 14,951        2.9              29,828         4.4
   Tax exempt interest                      (9,026)      (1.8)            (19,080)       (2.8)
   Other, net                               20,241        2.7              (7,778)       (1.2)
                                         ---------       ----          ----------        ----  

               Total                     $ 194,718       37.8 %        $  234,189        34.4 %
                                         =========       ====          ==========        ====  

</TABLE>

   On August 20, 1996,  the Small  Business Job  Protection  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  recapture  tax  will be paid in six  equal  installments
   beginning  after the 1998 tax year.  At December  31,  1995,  the Company had
   $96,092  in bad  debt  reserves  in  excess  of the  base  year.  Subject  to
   prevailing  corporate tax rates,  the Company owes $32,671 in federal  income
   taxes which is reflected as a deferred tax liability.

   No valuation  allowance was established at June 30, 1997 and 1996, in view of
   the Company's  carryback to taxes paid in previous years,  future anticipated
   taxable income,  which is evidenced by the Company's earning  potential,  and
   deferred tax liabilities at June 30.

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

NOTE 13 - RETAINED EARNINGS-SUBSTANTIALLY RESTRICTED

   The  Company  and  the  Bank  are  subject  to  various   regulatory  capital
   requirements  administered by the federal banking  agencies.  Failure to meet
   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 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  entity's  assets,  liabilities,  and  certain
   off-balance sheet items as calculated under regulatory  accounting practices.
   The  capital  amounts  and  classification  are also  subject to  qualitative
   judgments by the regulators  about  components,  risk  weightings,  and other
   factors.

                                     - 26 -
<PAGE>

NOTE 13 - RETAINED EARNINGS-SUBSTANTIALLY RESTRICTED (Continued)

   Quantitative  measures  established by regulation to ensure capital  adequacy
   require the Company  and the Bank to maintain  minimum  amounts and ratios of
   Total and Tier I (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 June 30, 1997, that the Company and the Bank meet all capital
   adequacy requirements to which it is subject.

   As of June 30, 1997, the most recent  notification from the primary regulator
   has  categorized  the  Company  as  well  capitalized  under  the  regulatory
   framework  for  prompt   corrective   action.   To  be  categorized  as  well
   capitalized,  it 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  the  Company's
   category.

   The  following  table  reflects the  Company's  ratios at June 30 (the Bank's
   ratios do not significantly differ from the Company).

<TABLE>
<CAPTION>
                                                   1997                              1996
                                     ----------------------------       --------------------------
<S>                                  <C>                   <C>          <C>                 <C>   
   Total Capital (to Risk
    Weighted Assets)

      Actual                         $   9,435,039         44.5 %       $  9,139,252        43.8 %
      For Capital Adequacy
          Purposes                       1,695,851          8.0            1,668,357         8.0
      To Be Well Capitalized             2,119,814         10.0            2,085,446        10.0

   Tier I Capital (to Risk
    Weighted Assets)

      Actual                         $   9,184,174         43.3 %       $  8,912,081        42.7 %
      For Capital Adequacy
          Purposes                         847,925          4.0              834,178         4.0
      To Be Well Capitalized             1,271,888          6.0            1,251,267         6.0

   Tier I Capital (to Average
    Assets)

      Actual                         $   9,184,174         20.5 %       $  8,912,081        19.7 %
      For Capital Adequacy
          Purposes                       1,791,920          4.0            1,806,556         4.0
      To Be Well Capitalized             2,239,900          5.0            2,258,195         5.0

</TABLE>

   Prior to the enactment of The Small  Business Job Protection Act discussed in
   Note 12, the Company accumulated  approximately $103,800 of retained earnings
   at June  30,  1997,  which  represents  allocations  of  income  to bad  debt
   deductions  for  tax  purposes  only.   Since  this  amount   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.

                                     - 27 -
<PAGE>

NOTE 14 - EMPLOYEE BENEFITS

   Employee Savings Plan
   ---------------------

   The Bank maintains a 401(k)  Retirement  Savings Plan for  substantially  all
   employees.  Employees are eligible for  admittance to the plan after one year
   of employment  and full vesting occurs after five years of  participation  in
   the Plan.  For employees  participating  in the Plan, the Bank makes matching
   contributions  to  the  plan  of  up  to 2%  of  the  participant's  eligible
   compensation.  The total 401(k) Retirement Savings Plan expense for the years
   ending June 30, 1997 and 1996 was $5,531 and $5,808 respectively.

   Management Stock Bonus Plan (MSBP)
   ----------------------------------

   In 1994,  the  Board  of  Directors  adopted  a MSBP  for  certain  officers,
   directors,  and  employees  which was approved by  stockholders  at a special
   meeting held on March 31, 1994.  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
   MSBP.  The  non-employee  directors  of the  Company  and the  Bank  serve as
   trustees  for the MSBP,  which  has the  responsibility  to invest  all funds
   contributed by the Bank to the Trust created for the MSBP.

   On January 14, 1994, the Trust purchased with funds  contributed by the Bank,
   22,648  shares of the common stock  issued in the  Company's  conversion  and
   reorganization to stock form, of which 18,342 shares were issued to directors
   and 4,306  shares  were  issued to  officers.  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  22,648  shares  of  common  stock  on the
   conversion date of which no shares became  immediately vested under the plan.
   These shares vest over a five year period beginning January 14, 1994. A total
   of 4,530 shares were vested in both 1997 and 1996. The MSBP shares  purchased
   in the conversion  initially will be excluded from stockholder's  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 stockholders'  equity.  Net
   compensation  expense  attributable  to the MSBPs amounted to $45,300 in 1997
   and 1996.

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

   The Company has an ESOP for the benefit of employees who meet the eligibility
   requirements  which  include  having  completed  six months  service with the
   Company and having attained age twenty-one.  The ESOP Trust purchased  33,972
   shares of common stock in the initial  public  offering  with proceeds from a
   loan from the Company.  The Bank makes cash  contributions  to the ESOP on an
   annual basis sufficient to enable the ESOP to make the required loan payments
   to the Company.  The loan bears  interest at the prime rate plus one percent,
   adjustable  quarterly.  Interest payable  quarterly and principal  payable in
   equal annual  installments  over ten years. The loan is secured by the shares
   of the stock purchased.

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

   Compensation expense for the ESOP was $91,915 and $76,012 for the years ended
   June 30, 1997 and 1996.

                                     - 28 -
<PAGE>


NOTE 14 - EMPLOYEE BENEFITS (Continued)

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

   The following table presents the components of the ESOP shares.

<TABLE>
<CAPTION>
                                                 1997                    1996
                                            --------------         ---------------

<S>                                        <C>                     <C>  
   Allocated shares                                 10,849                   6,794

   Shares released for allocation                    1,699                   1,699

   Shares distributed                               (1,295)                   (754)

   Unreleased shares                                21,424                  25,479
                                            --------------          --------------

   Total ESOP shares                                32,677                  33,218
                                            ==============          ==============

   Fair value of unreleased shares          $      492,753          $      560,538
                                            ==============          ==============
</TABLE>

NOTE 15 - STOCK OPTION PLAN

   The Company  maintains a Stock Option Plan for the directors,  officers,  and
   employees.  An aggregate of 45,297 shares of authorized  but unissued  common
   stock of the Company were reserved for future  issuance  under the plan.  The
   stock options  typically have  expiration  terms ranging  between one and 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.  Proceeds
   from the  exercise of the stock  options are credited to common stock for the
   aggregate par value and the excess is credited to additional paid-in capital.

   On January 14, 1994,  upon  conversion,  qualified stock options were granted
   for the purchase of 45,297 shares  exercisable at the market price of $10 per
   share at a rate of one fifth per year beginning January 14, 1995. All options
   expire  ten years  from the date of  grant.  At June 30,  1997 and 1996,  the
   initial stock options granted remain outstanding with none being exercised.

                                     - 29 -
<PAGE>

NOTE 16 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

   The  estimated  fair values of the  Company's  financial  instruments  are as
   follows:

<TABLE>
<CAPTION>
                                                      1997                                          1996
                                      ------------------------------------           ------------------------------------
                                        Carrying                Fair                     Carrying               Fair
                                         Value                  Value                     Value                 Value
                                      ------------          --------------           ---------------      ---------------
   Financial assets:

<S>                                   <C>                   <C>                      <C>                   <C>           
     Cash and due from banks          $    116,612          $      116,612           $     115,026         $      115,026
     Interest-bearing deposits
         with other institutions         2,904,240               2,904,240                 627,318                627,318
     Investment securities               2,824,595               2,811,553               3,694,375              3,648,567
     Mortgage-backed securities          6,123,442               6,104,940               7,466,452              7,415,043
     Loans receivable                   31,947,791              32,912,000              32,126,518             32,682,000
     Accrued interest receivable           290,147                 290,147                 278,533                278,533
     Federal Home Loan Bank
         stock                             361,100                 361,100                 358,900                358,900
                                      ------------          --------------           -------------         --------------

                                      $ 44,567,927          $   45,500,592           $  44,667,122         $   45,125,387
                                      ============          ==============           =============         ==============
   Financial liabilities:

     Deposits                         $ 34,975,539          $   34,797,000           $  35,864,622         $   35,752,000
     Advance from Federal Home
         Loan Bank                         500,000                 500,000                      -                      -
     Accrued interest payable               56,261                  56,261                  32,903                 32,903
                                      ------------          --------------           -------------         --------------

                                      $ 35,531,800          $   35,353,261           $  35,897,525         $   35,784,903
                                      ============          ==============           =============         ==============

</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  would be based  upon  management's  judgment  regarding  current
   economic  conditions,   interest  rate  risk,  expected  cash  flows,  future
   estimated  losses,  and other factors,  as determined  through various option
   pricing formulas or simulation modeling.  As many of these assumptions result
   from judgments made by management  based upon estimates  which are inherently
   uncertain,  the resulting  estimated fair values may not be indicative of the
   amount  realizable  in the  sale of a  particular  financial  instrument.  In
   addition,  changes in the  assumptions on which the estimated fair values are
   based may have a significant impact on the resulting estimated fair values.

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

                                     - 30 -
<PAGE>


NOTE 16 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)

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

   Cash and Due From Banks,  Interest-bearing  Deposits with Other Institutions,
   -----------------------------------------------------------------------------
   Accrued  Interest  Receivable,  Federal  Home Loan Bank Stock,  Advance  from
   -----------------------------------------------------------------------------
   Federal Home Loan Bank, and Accrued Interest Payable
   ----------------------------------------------------

   The fair value is equal to the current carrying value.

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

   The fair value of investment  securities held to maturity and mortgage-backed
   securities is equal to the available quoted market price. If no quoted market
   price is available, fair value is estimated using the quoted market price for
   similar securities.

   Loans Receivable and Deposits
   -----------------------------

   The fair value of loans is  estimated  by  discounting  the future cash flows
   using a simulation  model which  estimates  future cash flows and  constructs
   discount rates that consider reinvestment opportunities,  operating expenses,
   non-interest income,  credit quality,  and prepayment risk. Demand,  savings,
   and money market deposit  accounts are valued at the amount payable on demand
   as of year end. Fair value for time deposits 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
   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 4.

                                     - 31 -
<PAGE>

NOTE 17 - PARENT COMPANY

   The  Company's  balance  sheet  as of June 30,  1997  and  1996  and  related
   statements  of income  and cash flows for the years  ended June 30,  1997 and
   1996 are as follows:

                            CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                          June 30,
                                                                  1997               1996
                                                              -----------        ------------
<S>                                                           <C>                <C>         
   ASSETS
   Cash on deposit in subsidiary bank                         $   967,196        $    884,485
   Investment in subsidiary                                     8,039,402           7,649,170
   Loan receivable from ESOP                                      214,241             271,776
   Other assets                                                    47,553             124,515
                                                              -----------        ------------

               Total assets                                   $ 9,268,392        $  8,929,946
                                                              ===========        ============

   LIABILITIES AND STOCKHOLDERS' EQUITY
   Other liabilities                                          $    84,218        $     17,865
   Stockholders' equity                                         9,184,174           8,912,081
                                                              -----------        ------------

               Total liabilities and stockholders' equity     $ 9,268,392        $  8,929,946
                                                              ===========        ============
</TABLE>


                         CONDENSED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                    Year Ended June 30,
                                                                 1997                1996
                                                              -----------        ------------

<S>                                                           <C>                <C>         
   Undistributed earnings of subsidiary                       $   287,397        $    441,991
   Interest on loan to ESOP                                        20,182              24,757
                                                              -----------        ------------
                                                                  307,579             466,748

   Expenses                                                         9,690              14,483
                                                              -----------        ------------

   Income before income taxes                                     297,889             452,265

   Income tax expense                                              (3,133)              6,398
                                                              -----------        ------------

   Net income                                                $    301,022        $    445,867
                                                             ============        ============

</TABLE>

                                     - 32 -
<PAGE>

NOTE 17 - PARENT COMPANY (Continued)

                        CONDENSED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    Year Ended June 30,
                                                                                 1997                  1996
                                                                              ----------           ----------
<S>                                                                           <C>                  <C>       
   OPERATING ACTIVITIES:
       Net income                                                             $  301,022           $  445,867
       Adjustment to reconcile income to net cash used:
            Undistributed earnings of subsidiary                                (287,397)            (441,991)
            Decrease (increase) in other assets                                   95,128               (2,310)
                                                                             -----------           ---------- 
                      Net cash provided by operating activities                  108,753                1,566
                                                                             -----------           ---------- 

   INVESTING ACTIVITIES:
       Payments from ESOP                                                         57,535               33,972
                                                                             -----------           ---------- 
                      Net cash provided by investing activities                   57,535               33,972
                                                                             -----------           ---------- 

   FINANCING ACTIVITIES:
       Cash dividends paid                                                       (83,577)                  -
                                                                             -----------           ---------- 
                      Net cash used for financing activities                     (83,577)                  -
                                                                             -----------           ---------- 

       Increase in cash and cash equivalents                                      82,711               35,538

   CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                884,485              848,947
                                                                             -----------           ---------- 

   CASH AND CASH EQUIVALENTS AT END OF YEAR                                  $   967,196           $  884,485 
                                                                             ===========           ========== 
</TABLE>

                                     - 33 -
<PAGE>


                                Corporate Office
 Peoples Savings Financial Corporation and Peoples Savings Bank

                         173 Main Street
                        Ridgway, PA 15853
                         (814) 773-3195

              Branch Offices - Peoples Savings Bank

 263 Main Street                           17 W. Long Avenue
 Brookville, PA 15825                      DuBois, PA 15801


   Board of Directors of Peoples Savings Financial Corporation
          and Board of Trustees of Peoples Savings Bank

 Norbert J. Pontzer                        Roger M. Hasselman
 Chairman of the Board

 Paul A. Brazinski                         William L. Murnaghan

 Carl W. Gamarino                          Jane P. Weilacher


                       Executive Officers

 Norbert J. Pontzer                        William L. Murnaghan
 President, Chief Executive Officer        Senior Vice President
   and Chairman of the Board

                         Glenn R. Pentz
               Chief Financial Officer, Treasurer
                     and Corporate Secretary
                                                           
 Corporate Counsel                         Special Counsel
 Pontzer & Foradora                        Malizia, Spidi, Sloane & Fisch, P.C.
 9 South Mill Avenue, No. 4                One Franklin Square
 Ridgway, PA 15853                         1301 K Street, N.W., Suite 700 East
                                           Washington, D.C.  20005

 Independent Auditors                      Transfer Agent and Registrar
 S.R. Snodgrass A.C.                       Registrar and Transfer Company
 101 Bradford Road                         10 Commerce Drive
 Wexford, PA  15090                        Cranford, NJ 07016

                           Form 10-KSB

 Peoples  Savings  Financial  Corporation's  Annual  Report for the year
 ended June 30, 1997 filed with the Securities  and Exchange  Commission
 on Form 10-KSB,  excluding  exhibits,  is available without charge upon
 written  request.  For a copy of the Form 10-KSB or any other  investor
 information,  please  write  or call  the  Corporate  Secretary  at the
 Company's Corporate Office in Ridgway, Pennsylvania. The Annual Meeting
 of  Stockholders  will be held on October  23, 1997 at 9:30 a.m. at the
 Company's   main   office   located  at  173  Main   Street,   Ridgway,
 Pennsylvania.


                                     - 34 -