10-K

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of
      1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1998
 
                                       OR
 
[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 [NO FEE REQUIRED]
 
                        COMMISSION FILE NUMBER: 333-2692
                             PRESTIGE BANCORP, INC.
             (Exact name of registrant as specified in its charter)
 
                                            
                 PENNSYLVANIA                                    25-1785128
       (State or Other Jurisdiction of                        (I.R.S. Employer
        Incorporation or Organization)                     Identification Number)


 
           710 OLD CLAIRTON ROAD, PLEASANT HILLS, PENNSYLVANIA 15236
                    (Address of principal executive offices)
 
       Registrant's telephone number, including area code: (412) 655-1190
 
   Securities Registered Pursuant to Section 12(b) of the Act: ______________
 
 Securities Registered Pursuant to Section 12(g) of the Act:         X
 
                    COMMON STOCK, PAR VALUE $1.00 PER SHARE
                                (Title of Class)
 
     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes   X    No _____
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [     ]
 
     As of March 19, 1999, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates was $10.0 million. This figure is based on the
reported closing bid in the NASDAQ system of $13.125 per share of the
Registrant's Common Stock as of March 19, 1999. Although directors and executive
officers were assumed to be "affiliates" of the Registrant for purposes of this
calculation, the classification is not to be interpreted as an admission of such
status.
 
     As of March 19, 1999, there were outstanding 996,964 shares of the
Registrant's Common Stock.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
1. Annual Report to Shareholders for the fiscal year ended December 31, 1998
   (Parts I, Item I, II and IV).
 
2. Proxy Statement for the Annual Meeting of Shareholders to be held on May 5,
   1999 (Part I).
 
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                                     PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  PRESTIGE BANCORP, INC.
 
     Prestige Bancorp, Inc. (the "Company") was organized as a corporation under
the laws of the Commonwealth of Pennsylvania in March 1996 at the direction of
the Board of Directors of Prestige Bank, a Federal Savings Bank (the "Savings
Bank") for the purpose of acquiring all of the capital stock to be issued by the
Savings Bank in a conversion under and pursuant to the applicable rules and
regulations of the Office of Thrift Supervision, Department of the U.S. Treasury
(the "OTS") of the charter of the Savings Bank from a federal mutual chartered
savings association to a federal stock chartered savings association (the
"Conversion"). The Company has received the approval of the OTS to be a savings
and loan holding company.
 
     The Company currently conducts business as a unitary savings and loan
holding company. As of December 31, 1998, the Company holds the shares of the
Savings Bank's common stock acquired in the Conversion, a loan receivable from
the Prestige Bancorp Employee Stock Ownership Plan (the "ESOP") and debt and
equity investments of $1.4 million, and deposits maintained at the Savings Bank.
The Company has no significant liabilities. The Company is engaged principally
in community banking activities through its savings association subsidiary. At
December 31, 1998, the Company had total consolidated assets of $177.4 million,
total consolidated deposits of $109.7 million, total consolidated liabilities
(including deposits) of $162.6 million and total consolidated equity of $14.8
million.
 
     The Company neither owns nor leases any property, but instead uses the
premises, equipment and furniture of the Savings Bank. The Company does not
employ any persons other than officers who are also officers of the Savings
Bank. The Company utilizes the support staff of the Savings Bank from time to
time. The profitability of the Company is highly dependent on the profitability
of the Savings Bank. The Company's executive office is located at the home
office of the Savings Bank at 710 Old Clairton Road, Pleasant Hills,
Pennsylvania 15236, and its telephone number is (412) 655-1190.
 
  PRESTIGE BANK, A FEDERAL SAVINGS BANK
 
     The Savings Bank is a federally chartered savings bank that was organized
under the laws of the United States in 1935. The deposits of the Savings Bank
are insured by the Savings Association Insurance Fund (the "SAIF") administered
by the Federal Deposit Insurance Corporation (the "FDIC"). The Savings Bank
conducts business from its executive offices located in Pleasant Hills,
Pennsylvania and 5 full-service offices located in Allegheny and Washington
Counties, Pennsylvania. At December 31, 1998, the Savings Bank had total assets
of $175.9 million, total deposits of $110.0 million, total liabilities
(including deposits) of $162.9 million and total equity of $12.9 million. In
February 1998, the Savings Bank opened its fifth branch office in Elizabeth
Township, Pennsylvania.
 
     The Savings Bank's lending operations follow the traditional pattern of a
savings association by primarily emphasizing the origination of one-to-four
family residential loans for portfolio retention. However, since 1996, the
Savings Bank has begun to expand its loan products by promoting other types of
lending in order to meet its customer demands. These include commercial loans,
commercial real estate loans, construction loans, and consumer loans, including
home equity or home improvement loans, automobile loans, student loans, credit
card loans, cash collateral personal loans and unsecured personal loans. The
loan portfolio contains no loans to foreign governments, foreign enterprises or
foreign operations of domestic companies. Deposit services offered by the
Savings Bank include passbook savings accounts, tiered money market savings
accounts, NOW accounts, non-interest bearing checking accounts and certificates
of deposit with a minimum maturity of 6 months and a maximum maturity of 5
years. The Savings Bank does not utilize the services of deposit brokers.
 
     The gross earnings of the Company on a consolidated basis for the fiscal
year ending December 31, 1998, by loan category and investment securities are
shown on page 12 of the 1998 Annual Report to Shareholders.
 
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The gross interest expense of the Company on a consolidated basis for the fiscal
year ending December 31, 1998 is shown on page 3 of the 1998 Annual Report to
Shareholders. The amounts of the various deposit products of the Company
(through its sole subsidiary, the Savings Bank) by category for the fiscal year
ending December 31, 1998 is shown on pages 35, 36 and 37 of the 1998 Annual
Report to Shareholders.
 
     The Company's and the Savings Bank's profitability is highly dependent on
its net interest income which is the difference between income earned on
interest-earning assets less interest paid on interest-bearing liabilities. The
Company and Savings Bank are subject to interest rate risk and attempts to
minimize that risk by better matching asset and liability maturities and rates.
 
     The business of each of the Company and the Savings Bank is influenced by
prevailing economic conditions and governmental policies, both foreign and
domestic. The actions and policy directive of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") determine to a significant
degree the cost and the availability of funds obtained from money market sources
for lending and investing. The Federal Reserve Board's policies and regulations
also influence, directly and indirectly, the rates of interest paid by thrift
institutions on their time and savings deposits. The nature and impact on the
Company and the Savings Bank of future changes in economic conditions and
monetary and fiscal policies, both foreign and domestic, are not predictable.
 
     The Savings Bank operates five automated teller machines ("ATMs"), one at
each of the branch offices. The Savings Bank is affiliated with a regional ATM
network.
 
     The Savings Bank ended 1998 with a staff of 52 employees that comprised of
43 full-time and 9 part-time employees. Full-time equivalent employees averaged
47 in 1998.
 
     The Savings Bank's principal executive offices are located at 710 Old
Clairton Road, Pleasant Hills, Pennsylvania 15236 and its telephone number is
(412) 655-1190.
 
COMPETITION
 
     The Savings Bank's market area is primarily located in the southern portion
of the Pittsburgh metropolitan area. The largest employers in the Pittsburgh
area include the U.S. Government, the Pennsylvania State Government, USAir
Group, Inc., the University of Pittsburgh Medical Center, the University of
Pittsburgh, PNC Bank Corp. and Mellon Bank Corp. With the contraction of the
steel industry in the Pittsburgh area over the last 25 years, the number of
manufacturing jobs in the Pittsburgh area has declined as well as the overall
population for the Pittsburgh area. The Savings Bank's business and operating
results are affected significantly by the general economic conditions prevalent
in its primary market area including population levels, which are expected to
decline.
 
     The Savings Bank experiences significant competition in its local market
area in both originating loans and attracting deposits. Its most direct
competition comes from commercial banks, other thrift institutions and mortgage
banking companies. Many of these institutions maintain a state-wide or regional
presence and, in some cases, a national presence. Technological innovations have
also led to greater competition as well. With the advent of automated transfer
payment systems, competition between depository and nondepository institutions
has increased. These changes have led to even greater competition among
commercial banks, thrift institutions, credit unions, brokerage firms, money
market mutual funds, mutual bond funds, finance and insurance companies,
mortgage banking firms and retail establishments.
 
     The recent economic conditions in the Savings Bank's market area and the
increase in competitors has resulted in a reduction in eligible mortgage loans
which meet the underwriting criteria of the Savings Bank. This factor, together
with the directive of management to increase commercial and consumer loans, has
led to change in the composition of loan origination by the Savings Bank. Loan
originations for one-to-four family residential mortgages constituted $17.1
million for 1996, or 64.3% of all loan origination for such year, compared to
loan origination for one-to-four family residential mortgages of $25.7 million
for 1998, or 38.9% of all loan origination for such year.
 
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     Federal legislation in recent years has eliminated many of the distinctions
between commercial banks and thrift institutions and holding companies and
allowed bank holding companies to acquire thrift institutions. Such legislation
has generally resulted in an increase in the competition encountered by thrift
institutions and has resulted in a decrease in both the number of thrift
institutions and the aggregate size of the thrift industry.
 
     Commercial banks and thrift institutions have recently experienced
increasing consolidation. In the event of a downturn in the economy or
competitive pressures resulting from increasing consolidation, the Savings Bank
may experience reduced demand for mortgage loans. Interstate branch banking is
now permitted under Federal law subject to certain restrictions. Such interstate
branch banking will result in increased competition for deposits. The Savings
Bank may have difficulty attracting deposits in an environment of economic
downturn, increased consolidation or interstate branch banking. To date, the
Savings Bank has not experienced increased competition from an out-of-state
financial institution that has established a new branch in the Greater
Pittsburgh area. Management of the Savings Bank and the Company cannot predict
if out-of-state financial institutions will choose to open new branches in the
primary market of the Savings Bank.
 
YEAR 2000 ISSUES
 
     The Year 2000 problem arises from the fact that many existing information
technology ("IT") hardware and software systems and non-information technology
("non-IT") products containing embedded microchip processors were originally
programmed to represent any date with six digits (e.g., 12/31/99), as opposed to
eight digits (e.g., 12/31/1999). Accordingly, problems may arise for many such
products and systems when attempting to process information containing dates
that fall after December 31, 1999. As a result, many such products and systems
could experience miscalculations, malfunctions or disruptions caused by other
dates, such as September 9, 1999 (9/9/99), which was a date traditionally used
as a default date by computer programmers. This problem is commonly referred to
as the "Year 2000" problems, and the acronym "Y2K" is common substituted for the
phrase "Year 2000."
 
     Although the Company is unable at this time to assess the possible impact
on its results of operations liquidity or financial condition of any Y2K-related
disruptions to its business caused by the malfunctioning of any IT or non-IT
system and products that is uses or that third parties with which it has
material relationship use, management does not believe at the current time that
the cost of remediating the Company's internal Y2K problems will have a material
adverse impact upon its business, results of operations, liquidity or financial
condition.
 
     The Company and the Savings Bank began a process in 1997 that assigned an
individual to begin investigating the Y2K issues. It was determined that the
Savings Bank relies on external processing vendors for all of its mission
critical core application processing and that its approach would be based on the
five-phase approach recommended by the Federal Financial Institutions
Examination Council ("FFIEC"). The Board of Directors and senior management were
apprised of the Year 2000 issues.
 
     In 1997, a Y2K team was formed consisting of the President, Chief Financial
Officer and two employees of the Savings Bank and a member of the Board of
Directors. The initial focus of the team was to identify all issues that may be
affected by the date problem. This included computer hardware and software,
third party processing vendors, environmental factors (i.e., vaults, security
systems, etc.), and miscellaneous items such as preprinted forms, checkwriters,
date stamps, etc. The issues were then categorized as to their potential impact
on the ability of the Savings Bank to service its customers and ensure business
continuity for its shareholders, customers and employees. Communication was
initiated with all of the Savings Bank's vendors; for some vendors (i.e., PC and
network vendors) Year 2000 information was available via the Internet. Most
products and services that the Company and the Savings Bank receive are Year
2000 ready or are scheduled to be Year 2000 ready well in advance of the
millennium. A few products will not be Year 2000 ready and these have been
replaced or are scheduled to be replaced in early 1999. The Savings Bank
continues to monitor its suppliers of products and services to ensure their Year
2000 readiness. Contingency plans have been received from individual areas of
the Savings Bank and will be combined into an overall bank wide plan.
 
     The Savings Bank has developed a testing plan that includes documentation
for each vendor or product tested. The testing of the Savings Bank's PCs and
networks is near completion. Core applications systems are
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to be tested for compliance by the first quarter of 1999. All remaining issues
of serious consequence will be tested by early 1999 with final testing of all
issues planned to be completed by mid-1999.
 
     In the event that the Company's and its service providers' systems would
not handle the date changeover, the impact on the Company is at this point
uncertain. However, the Company's Y2K contingency plan would be enacted, which
would include evaluating the entire situation and contacting key personnel on
January 1, 2000, off-line manual postings of all transactions that are currently
done by our service provider, and detailed procedures to all personnel in
dealing with Y2K potential problems. This contingency plan will be tested and
reviewed throughout 1999 and modified where appropriate.
 
     The Company's costs associated with Year 2000 include various costs for
replacement of non-compliant computer, telephone, software, and related
equipment. Excluding costs of Company's personnel time, the Company estimates
that the total Year 2000 project costs will not exceed $131,000 (pre-tax). As of
December 31, 1998, the Company estimates that it has incurred $103,000 in
connection with its Y2K project plan. Most of these incurred costs related to
capital acquisitions and accordingly the capital related costs have been
capitalized.
 
SUPERVISION AND REGULATION
 
  PRESTIGE BANCORP. INC.
 
     General. The Company, as a savings and loan holding company within the
meaning of Home Owners' Loan Act of 1933, as amended ("HOLA"), has registered
with the OTS and will be subject to OTS regulations, examinations, supervision
and reporting requirements. In addition, if the Company acquired any non-savings
institution subsidiaries, the OTS will have enforcement authority over such
subsidiaries. As a subsidiary of a savings and loan holding company, the Savings
Bank will be subject to certain restrictions in its dealings with the Company
and any other affiliates thereof. This regulatory authority granted to the OTS
is intended primarily for the protection of the depositors of the Savings Bank
and not for the benefit of the stockholders of the Company.
 
     Federal Activities Restrictions. There are few restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings association so long as such savings association meets the "qualified
thrift lender" test (the "QTL Test"). In the first instance no savings and loan
holding company and no non-savings association subsidiary of a savings and loan
holding company may engage in any activity or render any service for or on
behalf of any savings association for the purpose, or with the effect of,
evading any law or regulation applicable to the related savings association. In
addition, if the Director of the OTS determines that there is reasonable cause
to believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the Director may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association; (ii) transactions between the
savings association and its affiliates; and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, under OTS regulations, any savings and loan
holding company is required to register as a bank holding company within one
year of the failure of the QTL Test by its subsidiary insured institution. Under
such circumstances, the holding company would become subject to all of the
provisions of the Bank Holding Company Act of 1956, as amended ("BHC Act"), and
other statutes applicable to bank holding companies, in the same manner and to
the same extent as if the company were a bank holding company. The Savings Bank
currently satisfies the QTL Test.
 
     If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Savings Bank,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Savings Bank or other subsidiary savings
associations) would thereafter be subject to further restrictions. No multiple
savings and loan holding
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company or subsidiary thereof which is not a savings association shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof any business activity, other than:
(i) furnishing or performing management services for a subsidiary savings
association; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association; (iv) holding or managing properties used or occupied by a
subsidiary savings association; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. The activities described in (i) through
(vi) above may only be engaged in after giving the OTS prior notice and being
informed that the OTS does not object to such activities. In addition, the
activities described in (vii) above also must be approved by the Director of the
OTS prior to being engaged in by a multiple savings and loan holding company.
 
     Limitations on Transactions with Affiliates. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act ("FRA"). An affiliate of a savings association is any
company or entity that controls, is controlled by or is under common control
with the savings association. In a holding company context, the parent holding
company of a savings association (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
association may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
 
     In addition, Sections 22(h) and (g) of the FRA places restrictions on loans
to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a savings institution (a "principal stockholder"), and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons and also requires prior board approval for certain loans. In addition,
the aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At December 31, 1998, the Savings Bank was in compliance with the
above restrictions.
 
     Restrictions on Acquisitions. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings association or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings association or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings association, other than
a subsidiary savings association, or of any other savings and loan holding
company.
 
     Restrictions on Dividends from Subsidiary Savings Bank. Every subsidiary
savings association must give the Director of the OTS not less than thirty days
notice of the proposed declaration by the board of directors of such savings
association of a dividend on the stock of such savings association held by its
parent holding
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company. Thus, the Savings Bank must notify the OTS thirty days before declaring
any dividend to the Company. The Savings Bank fully complied with this notice
requirement and paid a dividend of $400,000 to the Company on November 30, 1998.
 
     Federal Securities Laws. The Company's Common Stock is registered with the
SEC under the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
 
  PRESTIGE BANK, A FEDERAL SAVINGS BANK
 
     General. The Savings Bank is subject to examination and comprehensive
regulation by the OTS which is the Savings Bank's chartering authority. The
Savings Bank is also regulated by the FDIC, the administrator of the SAIF that
provides insurance for the deposits of the Savings Bank. The Savings Bank is
subject to certain reserve requirements established by the Board of Governors of
the Federal Reserve System ("FRB") and is a member of the FHLB of Pittsburgh,
which is one of the 12 regional banks comprising the Federal Home Loan Bank
System (the "FHLB System").
 
     The Savings Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Savings Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Savings Bank and their
operations. Certain of the regulatory requirements applicable to the Savings
Bank are referred to below or elsewhere herein.
 
     Business Activities. The activities of savings institutions are governed by
HOLA, and in certain respects, the Federal Deposit Insurance Act ("FDI Act").
The Federal banking statutes, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") (1) restrict the solicitation of
brokered deposits by savings institutions that are troubled or not
well-capitalized, (2) prohibit the acquisition of any corporate debt security
that is not rated in one of the four highest rating categories, (3) restrict the
aggregate amount of loans secured by non-residential real estate property to
400% of capital, (4) permit savings and loan holding companies to acquire up to
5% of the voting shares of non-subsidiary savings institutions or savings and
loan holding companies without prior approval, and (5) permit bank holding
companies to acquire healthy savings institutions.
 
     Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the Savings Bank's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. At December 31, 1998, the Savings Bank's largest aggregate
amount of loans to any one borrower consisted of $1.8 million that was below the
Savings Bank's loans to one borrower limit of $1.9 million at such date.
 
     QTL Test. The HOLA requires savings institutions to meet a QTL Test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets, (ii) intangibles, including goodwill, and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) on a monthly basis in 9 out of every 12
months.
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     A savings association that fails the QTL Test must either convert to a bank
charter or operate under certain restrictions. As of December 31, 1998, the
Savings Bank maintained 88.49% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL Test.
 
     Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters; provided that the institution would not be undercapitalized, as
that term is defined in the OTS Prompt Corrective Action regulations, following
the capital distribution. Any additional capital distributions would require
prior regulatory approval. The Savings Bank currently qualifies as a Tier 1
Association. In the event the Savings Bank's capital fell below its fully-phased
in requirement or the OTS notified it that it was in need of more than normal
supervision, the Savings Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
 
     Liquidity. On November 24, 1997, the OTS published its final rule on
changes to liquidity requirement calculations in order to conform with
provisions of FIRREA, and reduced the liquidity base by modifying the definition
of net withdrawable account to exclude accounts with maturities exceeding one
year. Under the new rule, the Savings Bank is required to maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances, specified U.S. Government, state or Federal agency obligations,
shares of certain mutual funds and certain corporate debt securities and
commercial paper) equal to a monthly average of not less than 4.0% of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4.0% to 10% depending upon economic conditions and the savings flow of
member institutions. The rule eliminates a separate limit that required each
savings institution to maintain an average daily balance of short-term liquid
assets equal to 1.0% of the total of its net withdrawable deposit accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Savings Bank's average monthly
liquidity ratio at December 31, 1998 was 48.09%, which exceeded the new
applicable requirements. The Savings Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements. Simply meeting the
minimum liquidity requirement does not automatically mean a thrift institution
has sufficient liquidity for safe and sound operation. The new final rule
includes a separate requirement that each thrift must maintain sufficient
liquidity to ensure safe and sound operation. Adequate liquidity may vary from
institution to institution depending on a thrift's overall asset/liability
structure, market conditions, the activities of financial service competitors
and the requirements of its own deposit and loan customers.
 
     Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The assessments paid
by the Savings Bank for the years ended December 31, 1998, 1997 and 1996 totaled
$45,000, $36,000 and $30,000, respectively.
 
     Branching. Under OTS regulations, Federally chartered savings associations
are permitted, subject to OTS approval, to branch nationwide to the extent
allowed by Federal statute. This permits Federal savings associations with
interstate networks to diversify their loan portfolios and lines of business.
The OTS authority preempts any state law purporting to regulate branching by
Federal savings associations. The OTS will evaluate a branching applicant's
record of compliance with the Community Reinvestment Act, as amended
                                        8
   9
 
("CRA") as part of any grant of permission to establish a new branch. A poor CRA
record may be the basis for denial of a branching application.
 
     Community Reinvestment. Under the CRA, as implemented by OTS regulations, a
savings institution has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institution. The CRA rating
system identifies four levels of performance that may describe an institution's
record of meeting community needs: "outstanding", "satisfactory", "needs to
improve" and "substantial noncompliance". The CRA also requires all institutions
to make public disclosure of their CRA ratings. The Savings Bank received a
"Satisfactory" CRA rating in its most recent Federal examination by the OTS.
Failure to maintain a satisfactory rating may establish a basis for the OTS to
deny the application of the Savings Bank to open new branch offices or an
application of the Savings Bank or the Company to undertake some other business
opportunity.
 
     Brokered Deposits. Under FDIC regulations, well-capitalized institutions
that are not troubled are subject to no brokered deposit limitations, while
adequately capitalized institutions are able to accept, renew or roll over
brokered deposits only (i) with a waiver from the FDIC and (ii) subject to the
limitation that they do not pay an effective yield on any such deposit which
exceeds by more than (a) 75 basis points of the effective yield paid on deposits
of comparable size and maturity in such institution's normal market area for
deposits accepted in its normal market area or (b) 120 basis points for retail
deposits and 130 basis points for wholesale deposits, respectively, of the
current yield on comparable maturity U.S. treasury obligations for deposits
accepted outside the institution's normal market area. Undercapitalized
institutions are not permitted to accept brokered deposits and may not solicit
deposits by offering an effective yield that exceeds by more than 75 basis
points of the prevailing effective yields on insured deposits of comparable
maturity in the institution's normal market area or in the market area in which
such deposits are being solicited. Although there exist no prohibitions under
FDIC regulations, the Savings Bank does not solicit nor accept brokered
deposits. The Savings Bank does not currently intend to change this policy.
 
     Transactions with Related Parties. The Savings Bank's authority to engage
in transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the FRA. Section 23A limits the
aggregate amount of transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of transactions with all affiliates to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
nonaffiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
nonaffiliated companies. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the BHC Act. Further, no savings institution may purchase the securities
of any affiliate other than a subsidiary.
 
     The Savings Bank's authority to extend credit to executive officers,
directors and 10% stockholders, as well as entities controlled by such persons,
is currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require such loans to be made
on terms substantially the same as those offered to unaffiliated individuals and
do not involve more than the normal risk of repayment, place limits on the
amount of loans the Savings Bank may make to such persons based, in part,
 
                                        9
   10
 
on the Savings Bank's capital position, and require certain approval procedures
to be followed. The OTS regulations, with certain minor variances, apply
Regulation O to savings institutions.
 
     Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. In addition, regulators have
substantial discretion to impose enforcement action on an institution that fails
to comply with its regulatory requirements, particularly with respect to the
capital requirements. Possible enforcement action ranges from the imposition of
a capital plan and capital directive to receivership, conservatorship or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings institution. If the director does not take
action, the FDIC has authority to take such action under certain circumstances.
 
     Standards for Safety and Soundness. The FDI Act, as amended by FDICIA,
requires each Federal banking agency to prescribe for all insured depository
institutions and their holding companies standards relating to, among other
things, internal controls, information systems and audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, liquidity, capital levels and compensation, fees and benefits and
such other operational and managerial standards as the agency deems appropriate.
Under the FDI Act, if an insured depository institution or its holding company
fails to meet any of its standards described above, it will be required to
submit to the appropriate Federal banking agency a plan specifying the steps
that will be taken to cure the deficiency. If an institution fails to submit an
acceptable plan or fails to implement the plan, the appropriate Federal banking
agency will require the institution or holding company, to correct the
deficiency and until corrected, may impose restrictions on the institution or
the holding company including any of the restrictions applicable under the
prompt corrective action regulations.
 
     The Federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness ("Safety
and Soundness Guidelines") and a final rule which implements the safety and
soundness standards established by FDICIA. The Safety and Soundness Guidelines
and the final rule set forth the safety and soundness standards that the Federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. The standards set forth in the
Safety and Soundness Guidelines address internal controls and information
systems: internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; and compensation, fees and benefits.
[The agencies also adopted a proposed rule that proposes asset quality and
earnings standards which, if adopted in final, would be added to the Safety and
Soundness Guidelines.] If the appropriate Federal banking agency determines that
an institution fails to meet any standard prescribed by the Safety and Soundness
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans.
 
     Capital Requirements. OTS capital regulations require savings institutions
to meet three capital standards: (1) tangible capital equal to 1.5% of total
adjusted assets, (2) a leverage ratio (core capital) equal to at least 3% of
total adjusted assets and (3) a risk-based capital requirement equal to 8.0% of
total risk-weighted assets.
 
     Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
 
     The capital standards require core capital (as defined above) equal to at
least 3% of adjusted total assets (as defined by regulation). As a result of the
prompt corrective action provisions of FDICIA, however, a
                                       10
   11
 
savings association must maintain a core capital ratio of at least 4% to be
considered adequately capitalized unless its supervisory condition is such to
allow it to maintain a 3% ratio. At December 31, 1998, the Savings Bank had no
intangibles that would affect the application of these tests.
 
     The OTS requires that only those savings associations rated a composite one
(the highest rating) under the CAMEL rating system for savings associations will
be permitted to operate at or near the regulatory minimum leverage ratio of 3%.
All other savings associations will be required to maintain a minimum leverage
ratio of 4% to 5%. The OTS will assess each individual savings association
through the supervisory process on a case-by-case basis to determine the
applicable requirement.
 
     The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8.0% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the allowance for loan and lease losses.
The portion of the allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.
Overall, supplementary capital is limited to 100% of core capital. A savings
association must calculate its risk-weighted assets by multiplying each asset
and off-balance sheet item by various risk factors as determined by the OTS,
which range from 0% for cash to 100% for delinquent loans, property acquired
through foreclosure, commercial loans and other assets.
 
     In August, 1995, the OTS and Federal Financial Institutions Examination
Council ("FFIEC") announced that effective October 1, 1995, they would not
require institutions to include unrealized gains and losses on available for
sale debt securities when calculating regulatory capital. This announcement
reversed prior OTS policy concerning the implementation of SFAS No. 115. As a
result, institutions must now value available for sale debt securities at
amortized cost, rather than at fair value, for purposes of calculating
regulatory capital. Institutions are still required to comply with SFAS No. 115
for financial reporting purposes.
 
     The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
 
     The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital will be based on the institution's Thrift
Financial Report filed two quarters earlier. Savings institutions with less than
$300 million in assets and a risk-based capital ratio above 12% are generally
exempt from filing the interest rate risk schedule with their Thrift Financial
Reports. However, the OTS may require any exempt institution that it determines
may have a high level of interest rate risk exposure to file such schedule on a
quarterly basis and may be subject to an additional capital requirement based
upon its level of interest rate risk as compared to its peers. The Savings Bank
is exempt from the interest rate risk component due to the institution's net
size and risk-based capital level.
 
     At December 31, 1998, the Savings Bank met each of its capital
requirements. For further information on the Savings Bank capital levels, see
page 38 of the 1998 Annual Report to Shareholders. For further information on
the application of the interest rate risk component, see pages 9, 10 and 11 of
the 1998 Annual Report.
                                       11
   12
 
     Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective Action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Generally, a savings institution that
has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1
capital ratio that is less than 4.0% is considered to be undercapitalized. A
savings institution that has total risk-based capital less than 6.0%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically undercapitalized". Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is critically undercapitalized. The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date an institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized". In addition,
numerous mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. The OTS could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.
 
     As of December 31, 1998, the Savings Bank was classified as a
"well-capitalized" institution (an institution with 10% or more total risk-based
capital ratio, a Tier I risk-based capital ratio of 6% or more, and a leverage
capital ratio of [5.0% or more]), and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any capital
measure and as such is not subject to any prompt corrective action measures.
 
     Insurance of Deposit Accounts. The FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period,
consisting of 1) well capitalized, 2) adequately capitalized or 3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
Federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. There are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied. Prior to
October 1, 1996, assessment rates for members of the SAIF ranged from 23 basis
points for an institution in the highest category (i.e., well-capitalized and
healthy) to 31 basis points for an institution in the lowest category (i.e.,
undercapitalized and substantial supervisory concern). After September 30, 1996,
assessment rates varied from 0 basis points for an institution rated in the
highest category to 27 basis points for an institution rated in the lowest
category. For the fiscal year ended December 31, 1998, the insurance fund
assessment paid by the Savings Bank was 6.45 basis points.
 
     The FDIC sets the assessment rate for institutions on a semi-annual basis.
The FDIC is authorized to raise the assessment rates in certain circumstances.
If the FDIC determined to increase the assessment rates for all institutions,
institutions in all risk categories could be affected. The FDIC has exercised
this authority several times in the past and may raise insurance premiums in the
future.
 
     Pursuant to the Deposit Insurance Funds Act of 1996, the FDIC imposed a one
time special assessment of 65.7 basis points against insured deposits of the
Savings Bank as of March 31, 1995. This special assessments was charged against
all financial institutions with deposits insured by the SAIF. This special
assessment was used to provide a capital infusion into the SAIF. The money
collected will capitalize the thrift fund and let thrift premiums be brought in
line with those of commercial banks by the year 2000. This legislation has as a
goal the merger of the thrift fund into the stronger Bank Insurance Fund (BIF)
by 1999, but not until the bank and thrift charters are combined. Under separate
proposed legislation, Congress is considering the elimination of the federal
thrift charter and elimination of the separate federal regulation of thrifts. As
a result, the Savings Bank might have to convert to a different financial
institution charter and be regulated under federal law as a commercial bank,
including being subject to the more restrictive activity limitations imposed on
national banks. Management cannot predict the impact of our conversion to, or
regulation as, a commercial bank until the legislation requiring such change is
enacted.
                                       12
   13
 
     Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Savings Bank does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
 
     Federal Home Loan Bank System. The Savings Bank is a member of the FHLB
System, which consists of 12 regional FHLBs. The FHLB provides a central credit
facility primarily for member institutions. The Savings Bank, as a member of the
FHLB, is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater.
The Savings Bank was in compliance with this requirement with an investment in
FHLB stock at December 31, 1998, of $2.5 million.
 
     The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1998, 1997 and 1996,
dividends from the FHLB to the Savings Bank amounted to $158,000, $89,000 and
$46,000 respectively. If dividends were reduced, or interest on future FHLB
advances increased, the Savings Bank's net interest income would likely also be
reduced. Further, there can be no assurance that the impact of FDICIA and the
FIRREA on the FHLBs will not also cause a decrease in the value of the FHLB
stock held by the Savings Bank.
 
     Federal Reserve System. The Federal Reserve Board regulations require
savings institutions to maintain non-interest-earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). The Federal
Reserve Board regulations generally require that reserves be maintained against
aggregate transaction accounts as follows: For accounts aggregating $46.5
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts greater than $46.5 million, the reserve
requirement is $1.3 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess of $46.5 million. The first $4.9 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The Savings Bank is in compliance with
the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Savings Bank's interest-earning assets. FHLB System
members are also authorized to borrow from the Federal Reserve "discount
window," but Federal Reserve Board regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
 
     FIRREA requires the OTS to establish accounting standards to be applicable
to all savings associations for purposes of complying with regulations, except
to the extent otherwise specified in the capital standards. Such standards must
incorporate generally accepted accounting principles to the same degree as is
prescribed by the Federal banking agencies for banks or may be more stringent
than such requirements.
 
     On September 2, 1992, the OTS amended a number of its accounting
regulations and reporting requirements (effective October 2, 1992). The
amendments reflected the adoption by the OTS of the following standards: (i)
regulatory reports will incorporate generally accepted accounting principles
when generally accepted accounting principles are used by Federal banking
agencies; (ii) savings association transactions, financial condition and
regulatory capital must be reported and disclosed in accordance with OTS
regulatory reporting requirements that will be at least as stringent as for
national banks; and (iii) the director of the OTS may prescribe regulatory
reporting requirements more stringent than generally accepted accounting
principles whenever the director determines that such requirements are necessary
to ensure the safe and sound reporting and operation of savings associations.
The OTS anticipates further similar revisions to its regulations in the near
future.
 
                                       13
   14
 
     The OTS adopted a statement of policy ("Statement") set forth in Thrift
Bulletin 52 concerning (i) procedures to be used in the selection of a
securities dealer, (ii) the need to document and implement prudent policies and
strategies for securities, whether held to maturity, trading or for sale, and to
establish systems and internal controls to ensure that securities activities are
consistent with the financial institution's policies and strategies, (iii)
securities trading and sales practices that may be unsuitable in connection with
securities held in an investment portfolio, (iv) high-risk mortgage securities
that are not suitable for investment portfolio holdings for financial
institutions, and (v) disproportionately large holdings of long-term,
zero-coupon bonds that may constitute an imprudent investment practice. The
Statement applies to investment securities, high-yield, corporate debt
securities, loans, mortgage-backed securities and derivative securities, and
provides guidance concerning the proper classification of, and accounting for,
securities held to maturity, sale, and trading. Securities held to maturity,
sale or trading may be differentiated based upon an institution's desire to earn
an interest yield (held to maturity), to realize a holding gain from assets held
for indefinite periods of time (held for sale), or to earn a dealer's spread
between the bid and asked prices (held for trading). Depository institution
investment portfolios are maintained to provide earnings consistent with the
safety factors of quality, maturity, marketability and risk diversification.
Securities that are purchased to accomplish these objectives may be reported at
their amortized cost only when the depository institution has both the intent
and ability to hold the assets for long-term investment purposes. Securities
held to maturity may be accounted for at amortized cost, securities held for
sale are to be accounted for at the lower of cost or market, and securities held
for trading are to be accounted for at market. The Savings Bank believes that
its investment activities have been and will continue to be conducted in
accordance with the requirements of OTS policies and generally accepted
accounting principles.
 
     Special Liquidation Rights. In connection with the Conversion, a special
"liquidation account" was established for the benefit of the eligible account
holders and the supplemental eligible account holders of the Savings Bank
determined in accordance with the plan of conversion adopted by the Savings Bank
under applicable law governing the conversion of mutual savings banks. This
liquidation account is equal to the amount of the net worth of the Savings Bank
as of the date of its latest statement of financial condition contained in the
final prospectus used in connection with the Conversion. This amount is
$7,085,000. Each eligible account holder and supplemental eligible account
holder, if he were to continue to maintain his deposit account at the Savings
Bank, would be entitled, on a complete liquidation of the Savings Bank after
Conversion, to an interest in the liquidation account prior to any payment to
the stockholders of the Savings Bank. Each such eligible account holder or
supplemental eligible account holder of the Savings Bank will have a pro rata
interest in the total liquidation account for each of his, her or its, as the
case may be, deposit accounts based on the proportion that the balance of each
such deposit account on the eligibility record dates for such account holders
bore to the balance of all deposit accounts in the Savings Bank on each of the
such eligibility record date. Under certain circumstances the interests of an
eligible account holder or a supplemental eligible account holder may be
terminated.
 
     Were a mutual savings bank to liquidate, all claims of creditors (including
those of depositors, to the extent of deposit balances) would be paid first.
Thereafter, if there were any assets remaining, depositors would receive such
remaining assets, pro rata, based upon the deposit balances in their deposit
accounts immediately prior to liquidation. These liquidation rules survived the
Conversion. In the event that the Savings Bank were to be liquidated after
Conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account" to the eligible account holders and
the supplemental eligible account holders of the Savings Bank, with any assets
remaining thereafter distributed to the Company as the holder of the Savings
Bank's capital stock. Pursuant to the rules and regulations of the OTS, a
post-Conversion merger, consolidation, sale of bulk assets or similar
combination or transaction with another insured savings institution would not be
considered a liquidation and, in such a transaction, the liquidation account
would be required to be assumed by the surviving institution.
 
                                       14
   15
 
FEDERAL AND STATE TAXATION
 
     General. The Company and the Savings Bank are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Internal
Revenue Code (the "Code") which apply to thrift and other types of financial
institutions. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Company and the Savings Bank.
 
     Fiscal Year. The Company and the Savings Bank will file a consolidated
Federal income tax return on a December 31 year end basis.
 
     Method of Accounting. The Company maintains its books and records for
Federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy, and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
 
     Bad Debt Reserves. With a limited exception, effective for taxable years
beginning after 1995, the Small Business Job Protection Act of 1996 (the "1996
Act") repealed the reserve method of accounting for bad debts by savings
institutions. The reserve method permitted savings institutions to establish
reserves for bad debts and to make annual additions thereto that qualified as
deductions from taxable income for federal tax purposes. Prior to the effective
date of repeal, the bad debt deduction was generally based on a savings
institution's actual loss experience (the "Experience Method") or, if certain
definitional tests relating to the composition of assets and the nature of its
business were met, by reference to a percentage of the savings institution's
taxable income (the "Percentage Method").
 
     The 1996 Act provides a limited exception to the repeal of the reserve
method by retaining the Experience Method for savings institutions, such as the
Savings Bank, which have assets with adjusted bases of $500 million or less. The
Percentage Method is no longer available for any savings institution. For
taxable years ended on or before December 31, 1995, the Savings Bank generally
had elected to use the Percentage Method to compute the amount of its bad debt
deduction.
 
     Under the Experience Method, the deductible annual addition continues to be
the amount necessary to increase the balance of the reserve at the close of the
taxable year to the greater of (i) the amount which bears the same ratio to
loans outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum of
the loans outstanding at the close of those six years, or (ii) the lower of (x)
the balance in the reserve account at the close of the Savings Bank's "base
year," which was its tax year ended December 31, 1987, or (y) if the amount of
loans outstanding at the close of the current year is less than the amount of
loans outstanding at the close of the base year, the amount which bears the same
ratio to loans outstanding at the close of the current year as the balance of
the reserve at the close of the base year bears to the amount of loans
outstanding at the close of the base year.
 
     Under the Percentage Method, the bad debt deduction with respect to
qualifying real property loans was computed as a percentage of the Savings
Bank's taxable income before such deduction, as adjusted for certain items (such
as capital gains and the dividends received deduction). Under the Percentage
Method, a qualifying institution such as the Savings Bank generally could deduct
8% of its taxable income.
 
     The 1996 Act mandates that a savings institution required to change its
method of computing reserves for bad debts shall take into income ratably over a
six taxable year period its "applicable excess reserve", commencing with the
first taxable year beginning after 1995. Under a special rule that is applicable
only for taxable years that begin after December 31, 1995 and before January 1,
1998, if a savings institution meets the "residential loan requirement" for a
taxable year, the recapture of the applicable excess reserve that would
otherwise be required to be taken into account will be suspended. The effect of
this is that all savings institutions will be required to recapture their
applicable excess reserves within six, seven or eight years after the effective
date of the change. The Savings Bank will meet the residential loan requirement
if, for a taxable
                                       15
   16
 
year, the principal amount of residential loans made by it are generally not
less than the average principal amount of residential loans made by it during
the six most recent taxable years beginning before January 1, 1996.
 
     The Savings Bank's "applicable excess reserves" would be the excess of (1)
the balance in its reserve account as of the close of its last taxable year
beginning before January 1, 1996, over (2) the greater of the balance of (a) its
pre-1988 reserves, or (b) what the Savings Bank's reserves would have been at
the close of its last taxable year beginning before January 1, 1996, had the
Savings Bank always used the Experience Method. The Savings Bank had maintained
the applicable residential loan requirement; and this recapture commenced with
the taxable year that began January 1, 1998. As of December 31, 1998, the
Savings Bank had an applicable excess reserve balance remaining of approximately
$107,000. Approximately $21,300 will be recaptured on an annual basis over the
next five fiscal years.
 
     The base year (i.e. December 31, 1987) bad debt reserve under the
Percentage Method is permanently suspended, and therefore not subject to
recapture, unless a base year loan contraction occurs in a subsequent year. A
base year loan contraction occurs when the total loans at the end of the year is
less than the total loans at December 31, 1987. In such cases, a proportionate
reduction to the base year bad debt reserve at December 31, 1987 is required and
the reduction to the reserve is recaptured. Furthermore, the base year bad debt
reserve constitutes a restriction for tax purposes of the Bank's use of retained
earnings for distributions or redemptions.
 
     In accordance with FASB statement No. 109, the Bank has recorded deferred
income tax associated with the temporary differences related to the portion of
the bad debt reserve arising in tax years after December 31, 1987. For the
period before December 31, 1987, there is an unrecognized deferred tax liability
of approximately $565,000 at December 31, 1998. If the suspended base year bad
debt reserve at December 31, 1987 is reduced by certain excess distributions,
redemptions or a base year loan contraction, income tax expense will be
recognized at the prevailing tax rate.
 
     Distributions. If the Savings Bank were to distribute cash or property to
its sole stockholder having a total fair market value in excess of its
accumulated tax-paid earnings and profits, or were to distribute cash or
property to its stockholder in redemption of its stock, the Savings Bank would
generally be required to recognize as income an amount which, when reduced by
the amount of Federal income tax that would be attributable to the inclusion of
such amount in income, is equal to the lesser of: (i) the amount of the
distribution or (ii) the sum of (a) the amount of the accumulated bad debt
reserve of the Savings Bank with respect to qualifying real property loans (to
the extent that additions to such reserve exceed the additions that would be
permitted under the Experience Method) and (b) the amount of the Savings Bank's
supplemental bad debt reserve. The Savings Bank will continue to deduct
additions to its bad debt reserves in the same manner as it has in past years.
 
     Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
items of tax preference that constitute AMTI include (a) tax exempt interest on
newly-issued (generally, issued on or after August 8, 1986) private activity
bonds other than certain qualified bonds and (b) for taxable years beginning
after 1989, 75% of the excess (if any) of (i) adjusted current earnings as
defined in the Code, over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating losses). Net operating losses
can offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years.
 
     Federal Income Tax Returns. The Company's and the Savings Bank's Federal
income tax returns have been filed for taxable years through December 31, 1997
(a consolidated Federal income tax return has been filed by the Company and the
Savings Bank for the taxable year ended December 31, 1996; and a consolidated
return for the Company and the Savings Bank will be filed for each tax year
commencing on and after January 1, 1997). The Company and the Savings Bank's
corporate income tax returns have been examined by the IRS through December 31,
1997. There were no material findings.
 
                                       16
   17
 
     Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Savings Bank as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Savings Bank will not file a
consolidated tax return, except that if the Company owns more than 20% of the
stock of a corporation distributing a dividend, 80% of any dividends received
may be deducted.
 
     State and Local Taxation. The Savings Bank is subject to the Mutual Thrift
Institutions Tax of the Commonwealth of Pennsylvania based on the Savings Bank's
financial net income determined in accordance with generally accepted accounting
principles with certain adjustments. The tax rate under the Mutual Thrift
Institutions Tax is 11.5%. Interest on Commonwealth of Pennsylvania and Federal
obligations is excluded from net income. An allocable portion of net interest
expense incurred to carry the obligations is disallowed as a deduction. Three
year carryforwards of losses are allowed.
 
     The Company is subject to the Corporate Net Income Tax and the Capital
Stock Tax of the Commonwealth of Pennsylvania.
 
STATISTICAL DISCLOSURE BY SAVINGS AND LOAN HOLDING COMPANIES
 
     Information regarding statistical disclosure for a savings and loan holding
company required by the Securities Act Industry Guide 3 is set forth in the
portions of the 1998 Annual Report which are incorporated herein by reference.
 
     I.   Distribution of Assets, Liabilities and Stockholders' Equity; Interest
          Rates and Interest Differential.
 
          Information required by this section is presented on pages 12 and 13
          of the 1998 Annual Report and is incorporated herein by reference.
 
     II.  Investment Portfolio.
 
          Information required by this section is presented on pages 30 through
          35 of the 1998 Annual Report and is incorporated herein by reference.
 
     III.  Loan Portfolio.
 
           Information required by this section is presented on pages 19 through
           30 of the 1998 Annual Report and is incorporated herein by reference.
 
     IV.  Summary of Loan Loss Experience.
 
          Information required by this section is presented on pages 26 through
          30 of the 1998 Annual Report and is incorporated herein by reference.
 
     V.   Deposits.
 
          Information required by this section is presented on pages 35 through
          37 of the 1998 Annual Report and is incorporated herein by reference.
 
     VI.  Return on Equity and Assets.
 
          Information required by this section is presented on pages 3 through 4
          of the 1998 Annual Report and is incorporated herein by reference.
 
     VII.  Short-Term Borrowing.
 
           Information required by this section is presented on page 37 of the
           1998 Annual Report and is incorporated herein by reference.
 
EXECUTIVE OFFICERS OF THE COMPANY
 


                 NAME                     AGE            POSITION WITH REGISTRANT
                 ----                     ---            ------------------------
                                           
John A. Stiver........................    54     Chief Executive Officer
Robert S. Zyla........................    51     President
Patricia A. White.....................    52     Vice President, Secretary and Treasurer
James M. Hein.........................    35     Controller

 
                                       17
   18
 
     John A. Stiver is Chairman of the Board of the Company and has performed
such duties since 1995. Effective as of December 30, 1998, Mr. Stiver was
appointed Chief Executive Officer of the Company. Mr. Stiver has been a member
of the Board of Directors of the Savings Bank since 1986. Each of Robert S.
Zyla, Patricia A. White and James M. Hein were elected to their respective
positions in connection with the Conversion. After the Annual Meeting of the
shareholders of the Company, the Board of Directors of the Company has a
reorganization meeting and elects the executive officers of the Company. The
positions held by the executive officers of the Savings Bank during the past
five years are as follows:
 


              NAME                    TERM             POSITION WITH SAVINGS BANK
              ----                    ----             --------------------------
                                           
John A. Stiver..................    1994-1998    Chief Executive Officer(1)
Robert S. Zyla..................    1994-1998    President and Treasurer(2)
Patricia A. White...............    1994-1998    Executive Vice President and Secretary
James M. Hein...................    1994-1998    Controller and Chief Financial
                                                 Officer(3)

 
- ---------
 
(1) John A. Stiver is Chairman of the Board of the Savings Bank and has
    performed such duties since 1995. Effective as of December 30, 1998, Mr.
    Stiver was appointed Chief Executive Officer of the Company.
 
(2) Mr. Zyla assumed the additional title of Treasurer on January 18, 1995.
 
(3) Mr. Hein assumed the additional title of Chief Financial Officer on January
    17, 1996.
 
ITEM 2. PROPERTIES
 
     The following table sets forth certain information with respect to the
Savings Bank's branch offices and operations center at December 31, 1998.
 


                                                         NET BOOK VALUE     AMOUNT OF
          DESCRIPTION/ADDRESS            LEASED/OWNED      OF PROPERTY      DEPOSITS
          -------------------            ------------      -----------      --------
                                                         (IN THOUSANDS)
                                                                   
Corporate and Main Office:
- ---------------------------------------
710 Old Clairton Road                       Owned            $1,148          $41,610
Pleasant Hills, Pennsylvania 15236
 
Branch Offices:
- ---------------------------------------
543 Brownsville Road                        Owned            $  430          $39,410
Mt. Oliver, Pennsylvania 15210
6257 Library Road                           Leased              N/A          $21,357
Bethel Park, Pennsylvania 15102
125 West Beau Street                        Leased              N/A          $ 2,444
Washington, Pennsylvania 15301
603 Scenery Drive                           Leased              N/A          $ 4,877
Elizabeth Township, Pennsylvania 15037

 
     The Savings Bank completed the expansion and remodeling of the Corporate
Headquarters of the Company and the Savings Bank in January 1998. The total cost
of this project was $616,000.
 
     In April 1996, the Savings Bank exercised its option to purchase a parcel
of land in Bethel Park, Pennsylvania located within 3/4 of a mile of the current
Bethel Park branch office of the Savings Bank. The purchase price for this
parcel was $250,000. The current book value of this property is $265,717. The
Company and the Savings Bank are currently exploring the development of this
property. Management is considering the construction of an office building on
this parcel. No final decision has been made to start this project.
 
                                       18
   19
 
ITEM 3. LEGAL PROCEEDINGS
 
     The Company is involved in routine legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by management to
be immaterial to the financial condition of the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
 
     During the fourth quarter of the fiscal year of the Company ending December
31, 1998, no matter was submitted to a vote of the security holders of the
Company through the solicitation of proxies or otherwise.
 
                                       19
   20
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
 
     Pages 2-5 of the 1998 Annual Report to Shareholders is herein incorporated
by reference.
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
 
     Pages 3-5 of the 1998 Annual Report to Shareholders is herein incorporated
by reference.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     Pages 6-19 of the 1998 Annual Report to Shareholders are herein
incorporated by reference.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     Pages 9-11 of the 1998 Annual Report to Shareholders are herein
incorporated by reference.
 
ITEM 8. FINANCIAL STATEMENTS
 
     Pages 40-67 of the 1998 Annual Report to Shareholders are herein
incorporated by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     There has been no change in public accountants for the Company or the
Savings Bank during the last two fiscal years.
 
                                    PART III
 
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
 
     Information concerning Directors of the Registrant and Executive Officers
of the Registrant who are not Directors are incorporated herein by reference to
pages 4-8 of the Registrant's definitive Proxy Statement dated March 24, 1999.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     Information concerning executive compensation is incorporated herein by
reference to pages 9-14 of the Registrant's definitive Proxy Statement dated
March 24, 1999.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Information concerning security ownership of certain owners and management
is incorporated herein by reference to pages 2-7 of the Registrant's definitive
Proxy Statement dated March 24, 1999.
 
ITEM 13. CERTAIN TRANSACTIONS
 
     Information concerning certain relationships and transactions is
incorporated herein by reference to pages 13-14 and pages 24 and 25 of the
Registrant's definitive Proxy Statement dated March 24, 1999.
 
                                       20
   21
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
  (a)(1) FINANCIAL STATEMENTS
 
     The following information appearing in the Registrant's 1998 Annual Report
to Shareholders for the year ended December 31, 1998 is incorporated by
reference from Item 8 hereof (see Exhibit 13).
 


                                                                PAGES IN
ANNUAL REPORT SECTION                                         ANNUAL REPORT
- ---------------------                                         -------------
                                                           
Independent Auditors' Report                                         40
Consolidated Balance Sheets                                          41
Consolidated Statements of Income                                    42
Consolidated Statements of Stockholders' Equity                      43
Consolidated Statements of Cash Flows                                44
Notes to Consolidated Financial Statements                        45-67

 
  (a)(2) FINANCIAL STATEMENT SCHEDULES
 
     All financial schedules have been omitted as the required information is
inapplicable or has been included in the Notes to Consolidated Financial
Statements.
 
  (a)(3) EXHIBITS REQUIRED BY ITEM 601
 


                                                                                    PAGE # WHERE
                                                                                  ATTACHED EXHIBITS
                                                               REFERENCE TO      ARE LOCATED IN THIS
                                                              PRIOR FILING OR     FORM 10-K REPORT
  REGULATION S-K                                              EXHIBIT NUMBER      OR THE INTEGRATED
  EXHIBIT NUMBER                  DOCUMENT                    ATTACHED HERETO       ANNUAL REPORT
  --------------                  --------                    ---------------       -------------
                                                                        
        3.1        Certificate of Incorporation of                   *             Not Applicable
                   Prestige Bancorp, Inc.

        3.2        Bylaws of Prestige Bancorp, Inc.                  *             Not Applicable

        4          Rights of Security Holders                      *****           Not Applicable

       10.1        1997 Recognition and Retention Plan and          ***            Not Applicable
                   Trust for Officers, Directors and
                   Employees**

       10.2        1997 Stock Option Plan for Officers,             ***            Not Applicable
                   Directors and Employees**

       10.3        Employment Agreement among the Company,           *             Not Applicable
                   the Savings Bank and Robert Zyla,
                   Patricia A. White and James M. Hein,
                   dated June 27, 1996**

       10.4        Loan Documents with FHLB of Pittsburgh          10.4           (filed with SEC;
                                                                                 copy available from
                                                                                 Company on request)

 
                                       21
   22
 


                                                                                    PAGE # WHERE
                                                                                  ATTACHED EXHIBITS
                                                               REFERENCE TO      ARE LOCATED IN THIS
                                                              PRIOR FILING OR     FORM 10-K REPORT
  REGULATION S-K                                              EXHIBIT NUMBER      OR THE INTEGRATED
  EXHIBIT NUMBER                  DOCUMENT                    ATTACHED HERETO       ANNUAL REPORT
  --------------                  --------                    ---------------       -------------
                                                                        
       10.5        Employment Agreement among the Company,         10.5           (filed with SEC,
                   the Savings Bank and John A. Stiver                           copy available from
                   dated as of December 30, 1998**                               Company on request)

       11          Statement re: Computation of Per Share          ****          Pages 47-48 of the
                   Earnings                                                      1998 Annual Report

       13          Annual Report to Shareholders              Not Applicable            ****

       21          Subsidiaries of Registrant                        *             Not Applicable

       27          Financial Data Schedule                  (For SEC use only)   (For SEC use only)

 
- ---------
 
    * Incorporated by reference from the Company's Registration Statement on
      Form S-1 (File No. 33-83666) filed by the Company with the SEC on May 9,
      1996, as amended.
 
   ** Management plan or compensatory plan or arrangement.
 
  *** Incorporated by reference from the Company's definitive proxy statement
      for its 1997 Annual Meeting filed by the Company with the SEC on April 4,
      1997.
 
 **** The Annual Report for 1998 is included as part of this integrated filing
      of 1998 Annual Report to Shareholders and Form 10-K Report.
 
***** Articles 6 and 14 of the Articles of Incorporation of Prestige Bancorp,
      Inc. Such Certificate of Incorporation can be found as an exhibit to the
      Company's Registration Statement on Form S-1 (File No. 33-83666) filed by
      the Company with the SEC on May 9, 1996, as amended. A summary discussion
      on certain limitations on the rights of Stockholders can be obtained at
      pages 16 and 17 and pages 98 through 108 of the final prospectus filed by
      the Company with the SEC in connection with such Form S-1.
 
  (b) REPORTS ON FORM 8-K
 
     The Registrant did not file any reports on Form 8-K during the quarter
ended December 31, 1998.
 
                                       22
   23
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be executed
on its behalf by the undersigned, thereunto duly authorized.
 
Date: March 24, 1999
                                               PRESTIGE BANCORP, INC.
 
                                               By:     /s/ JOHN A. STIVER
                                                   -----------------------------
                                                       John A. Stiver
                                                    Chief Executive Officer
                                                   and Chairman of the Board
                            
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 


                                                  
      /s/ JOHN A. STIVER                                        /s/ MICHAEL R. MACOSKO
- -----------------------------------                  --------------------------------------------
John A. Stiver,                                      Michael R. Macosko
Chief Executive Officer and                          Director
Chairman of the Board of Directors                   Date: March 24, 1999
(Principal Executive Officer)
Date: March 24, 1999                                 
                                                     
      /s/ ROBERT S. ZYLA                                        /s/ MARK R. SCHOEN
- -----------------------------------                  --------------------------------------------
Robert S. Zyla                                       Mark R. Schoen
President and Director                               Director
Date: March 24, 1999                                 Date: March 24, 1999

      /s/ PATRICIA A. WHITE                                     /s/ CHARLES P. MCCULLOUGH
- -----------------------------------                  --------------------------------------------
Patricia A. White                                    Charles P. McCullough
Treasurer, Secretary and Director                    Director
Date: March 24, 1999                                 Date: March 24, 1999

      /s/ MARTIN W. DOWLING                                     /s/ JAMES M. HEIN
- -----------------------------------                  --------------------------------------------
Martin W. Dowling                                    James M. Hein
Director                                             Controller
Date: March 24, 1999                                 (Principal Financial and Accounting Officer)
                                                     Date: March 24, 1999


 

 
                                       23

EX-10.5

   1
                                                                    Exhibit 10.5


                              EMPLOYMENT AGREEMENT


                  THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of
February 17, 1999 and effective as of the 30th day of December, 1998, between
PRESTIGE BANCORP, INC. (the "Corporation"), a Pennsylvania corporation, PRESTIGE
BANK, A FEDERAL SAVINGS BANK (the "Savings Bank"), a federally chartered capital
stock savings bank and a wholly-owned subsidiary of the Corporation, both with
an address of 710 Old Clairton Road, Pittsburgh, Pennsylvania 15236 and JOHN A.
STIVER (the "Executive"), a resident of Allegheny County, Pennsylvania.

                                   WITNESSETH:

                  WHEREAS, the Executive is presently the Chairman of the Board
of Directors of the Corporation and the Savings Bank; and

                  WHEREAS, the Corporation and the Savings Bank regard the
services of the Executive as key to the success of the business of the
Corporation and the Savings Bank and accordingly wish to employ the Executive as
the chief executive officer of the Corporation and the Savings Bank in
accordance with the terms and conditions hereinafter set forth; and

                  WHEREAS, the Executive is willing to be employed by the
Corporation and the Savings Bank in accordance with the terms and conditions
hereinafter set forth.

                  NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein contained, and intending to be legally bound, the
parties hereby agree as follows:

                  1. Definitions. The following words and terms shall have the
meanings set forth below for the purposes of this Agreement:

                           (a) Cause. Termination of the Executive's employment
for "Cause" shall mean termination because of personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement
which has not been cured by Executive within thirty (30) days of his receipt of
written notice of such breach.

                           (b) Code. "Code" shall mean the Internal Revenue Code
of 1986, as amended.

                           (c) Date of Termination. "Date of Termination" shall
mean (i) if the Executive's employment is terminated pursuant to Sections
5(a)(i), (ii), (iv), (v) or (vi), or because of Retirement pursuant to Section
5(a)(iii), the date specified in the Notice of Termination, and (ii) if the
Executive's employment is terminated because of death pursuant to Section
5(a)(iii), then the date of such death.

                           (d) Disability. "Disability" shall mean the
Executive's inability to perform his normal full-time duties for the Employers
due to any physical or mental impairment


   2

which qualifies the Executive for disability benefits under the applicable
long-term disability plan maintained by such Employers or any subsidiary or, if
no such plan applies, which would qualify the Executive for disability benefits
under the Federal Social Security System.

                           (e) Employer and Employers. "Employer" shall mean
each of the Corporation and the Savings Bank, individually, and "Employers"
shall mean the Corporation and the Savings Bank, collectively.

                           (f) Good Reason. Termination by the Executive of the
Executive's employment for "Good Reason" shall mean termination by the Executive
for any one or more of the following:

                                    (i) Without the Executive's express written
                  consent, the failure to elect or to re-elect or to appoint or
                  to re-appoint the Executive to the office of Chief Executive
                  Officer of the Corporation and/or Chief Executive Officer of
                  the Savings Bank, or a material adverse change made by the
                  Corporation and/or the Savings Bank in the Executive's
                  functions, duties or responsibilities as Chief Executive
                  Officer of the Corporation and/or Chief Executive Officer of
                  the Savings Bank;

                                    (ii) Without the Executive's express written
                  consent, a reduction by the Employers in the Executive's Base
                  Salary as the same may be increased from time to time or a
                  reduction in the Executive's total compensation and benefits
                  provided to him pursuant to Section 3 hereof;

                                    (iii) Without the Executive's express
                  written consent (A) the principal executive office of the
                  Corporation or the Savings Bank is relocated outside of a
                  twenty-five (25) mile radius of the City of Pittsburgh,
                  Pennsylvania, or (B) an Employer requires the Executive to be
                  based anywhere other than an area in which such Employer's
                  principal executive office is located, except for required
                  travel on business of such Employer;

                                    (iv) The failure by the Employers to obtain
                  the assumption of and agreement to perform this Agreement by
                  any successor as contemplated in Section 16 hereof;

                                    (v) Any change in control of either the
                  Corporation or the Savings Bank or both of them. For purposes
                  of this Agreement, "Change in Control of the Corporation or
                  Savings Bank", shall mean shall mean a change in control of a
                  nature that would be required to be reported in response to
                  Item 6(e) of Schedule 14A of Regulation 14A promulgated under
                  the Securities Exchange Act of 1934, as amended ("Exchange
                  Act") or any successor thereto, whether or not the Corporation
                  or Savings Bank, as the case may be, is registered under the
                  Exchange Act; provided that, without limitation, such a change
                  in control shall be deemed to have occurred if (i) any
                  "person" (as such term is used in Sections 13(d) and 14(d) of
                  the Exchange Act) is or becomes the "beneficial owner" (as
                  defined in Rule 13d-3 under the Exchange Act), directly or
                  indirectly, of securities of the Corporation or Savings Bank,
                  as the case may be, representing 25% or more of the combined
                  voting power of the Corporation's or Savings Bank's then
                  outstanding securities; or (ii) during any period of two
                  consecutive years,



                                      -2-
   3

                  individuals who at the beginning of such period constitute the
                  Board of Directors of the Corporation or Savings Bank, as the
                  case may be, cease for any reason to constitute at least a
                  majority thereof unless the election, or the nomination for
                  election by stockholders, of each new director was approved by
                  a vote of at least two-thirds of the directors then still in
                  office who were directors at the beginning of the period;

                                    (vi) The filing, as to either Employer, or
                  both of them of a voluntary or involuntary petition for
                  bankruptcy, reorganization, insolvency or an assignment for
                  the benefit of creditors or any similar proceeding or petition
                  during the term hereof; or

                                    (vii) Any breach of either Employer or both
                  of them of any material provision of this Agreement which has
                  not been cured by either Employer, or both of them, as the
                  case may be, within thirty (30) days of its or their receipt
                  of written notice of such breach.

                           (g) IRS. "IRS" shall mean the Internal Revenue
Service.

                           (h) Notice of Termination. Any purported termination
of the Executive's employment by an Employer or by the Executive, other than
termination due to the death of the Executive, shall be communicated by written
"Notice of Termination" to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon; (ii)
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated; (iii) specifies a Date of Termination, which shall be not less than
ninety (90) days after such Notice of Termination is given, except in the case
of the Employer's termination of Executive's employment for Cause in which case
the Date of Termination may be immediate or as otherwise determined by the
Employer; or except in the case of the Executive's termination of his employment
for Good Reason, in which case the Date of Termination may be immediate, but not
more than one hundred eighty (180) days after such Notice of Termination is
given; and (iv) is given in the manner specified herein.

                           (i) Regulatory Capital Compliance. "Regulatory
Capital Compliance" shall mean, at any time of determination and after taking
into account any proposed payment or accrual of an expense, the compliance of
the Savings Bank with each of the Tangible Capital Requirement, Core Capital
Requirement and the Risk-Based Capital Requirement and other current or future
capital requirements applicable to a savings association and/or its holding
company under federal law, and in addition after payment of the proposed expense
the Savings Bank shall continue to qualify as an Adequately Capitalized as
defined for savings association under federal law.

                           (j) Retirement. "Retirement" shall mean voluntary
termination by the Employee in accordance with the Employer's retirement
policies, including early retirement, generally applicable to their salaried
employees.

                           (k) Special Assessments. "Special Assessments" shall
mean such assessments or surcharges established and imposed by the federal
government on savings



                                      -3-
   4

banks as a class which are payable from the revenues of the Savings Bank, which
such assessments or surcharges are of a type not presently in existence.

                  2. Employment, Duties and Responsibilities.

                           (a) Term. The Corporation hereby employs the
Executive as the Chief Executive Officer of the Corporation and the Executive
hereby accepts said employment and agrees to render such services to the
Corporation on the terms and conditions set forth in this Agreement. The Savings
Bank hereby employs the Executive as the Chief Executive Officer of the Savings
Bank and the Executive hereby accepts said employment and agrees to render such
services to the Savings Bank on the terms and conditions set forth in this
Agreement. As mutually agreed upon between the Executive and the applicable
subsidiary of the Corporation, the Executive will serve as the Chief Executive
Officer of any subsidiary of the Corporation. The term of employment under this
Agreement shall be for two (2) years, commencing on the effective date of this
Agreement as set forth above and, subject to the requirements of the succeeding
sentence, shall be deemed automatically, without further action, to extend for
an additional year on each annual anniversary of the effective date of this
Agreement, provided that a Notice of Termination has not been communicated to
any party hereto, such that at any time the remaining term of this Agreement
(the "Remaining Term") shall be from one to two years. Prior to the first annual
anniversary of the effective date of this Agreement and each annual anniversary
thereafter, the Boards of Directors of the Employers shall consider and review
(with appropriate corporate documentation thereof, and after taking into account
all relevant factors, including the Executive's performance hereunder) the
extension of the term under this Agreement, and the term shall continue to
extend in the manner set forth above unless either the Board of Directors of an
Employer does not approve such extension and provides written notice to the
Executive of such event or the Executive gives written notice to the Employer of
the Executive's election not to extend the term, in each case with such written
notice to be given not less than thirty (30) days prior to any such anniversary
date, or unless the Executive's employment with the Employer has previously
terminated. References herein to the term of this Agreement and the Remaining
Term shall refer both to the initial term and successive terms.

                           (b) Duties and Responsibilities. During the term of
this Agreement, the Executive shall perform such executive services for the
Employers as set forth in the "Employment Description" attached hereto as
Exhibit "A" and incorporated herein by reference and made a part hereof. Said
Employment Description may be amended from time to time by the mutual agreement
of the applicable Employer's Board of Directors and the Executive, provided,
however, that any service described in such amendment is consistent with the
Executive's titles. The Executive shall have full authority to act as chief
executive officer of, and have direct oversight responsibility for, all
subsidiary corporations of the Corporation, the Savings Bank and any
subsidiaries or affiliates thereof. The Executive is hereby employed as a
full-time employee and he shall be required to devote at least 1,768 hours per
year to the business of the Employers during the term of this Agreement in
accordance with the Personnel Policy of the Employers, as amended from time to
time. The Executive shall not be restricted or prohibited from, directly or
indirectly, engaging in, or rendering, any services of a business, commercial or
professional nature to any other person or organization, or engaging in any
self-employment, during the term of this Agreement, provided that such
activities do not materially and adversely affect the performance of his duties
and responsibilities under this Agreement.



                                      -4-
   5

                           (c) Commercial Lending Authority. During the term of
this Agreement the Board of Directors of the Savings Bank shall, from time to
time, determine, in its sole discretion, the dollar amount of outstanding
Savings Bank commercial loans per borrower and/or guarantor which may be
authorized solely by the Executive without approval of the Board of Directors of
the Savings Bank (the "Commercial Lending Authority); provided, however, that
such Commercial Lending Authority shall not be less than $150,000, or such
lesser amount that may be required by applicable law.

                  3. Compensation and Benefits.

                           (a) Base Salary. The Employers, collectively, shall
pay Executive for Executive's services during the term of this Agreement a base
salary of One Hundred Fifty Thousand ($150,000.00) Dollars per year, which may
be increased from time to time in such amounts as may be determined by the
Boards of Directors of the Employers ("Base Salary") which may not be decreased
without the Executive's express written consent. Base Salary shall be payable
semi-monthly or in accordance with the Savings Bank's current payroll policy.
Base Salary shall be paid by and the expense allocated to the Savings Bank,
unless the Boards of Directors of the Corporation and the Savings Bank shall
determine otherwise, from time to time.

                           (b) Incentive Compensation. In addition to the
Executive's Base Salary, during the term of this Agreement the Corporation shall
pay to the Executive incentive compensation (the "Incentive Compensation") as
follows:

                                    (i) Subject to Section 3(b)(ii) below, no
                  later than forty-five (45) days following the last day of each
                  calendar quarter during the term of this Agreement, commencing
                  with the calendar quarter ending March 31, 1999, the
                  Corporation shall calculate and pay to the Executive an amount
                  equal to five (5%) percent of the Corporation's positive
                  consolidated net income before taxes and Special Assessments
                  for such calendar quarter ($0 if a net loss before taxes and
                  Special Assessments), as reflected in the Corporation's
                  published and reported earnings for such calendar quarter (the
                  "Quarterly Incentive Compensation").

                                    (ii) Notwithstanding Section 3(b)(i) to the
                  contrary, if at the time that the Quarterly Incentive
                  Compensation is to be expensed by the Corporation and/or the
                  Savings Bank: (i) the Corporation and/or the Savings Bank fail
                  to be in Regulatory Capital Compliance, or (ii) the amount of
                  the Quarterly Incentive Compensation expense is sufficient to
                  result in the Corporation and/or the Savings Bank failing to
                  be in Regulatory Capital Compliance, then the amount of the
                  Quarterly Incentive Compensation to be paid to the Executive
                  shall be deferred and paid to the Executive in the largest
                  installment(s) possible and at the earliest possible date when
                  the expense associated therewith may be incurred with the
                  Corporation and Savings Bank being and thereafter remaining in
                  Regulatory Capital Compliance.

                                    (iii) In determining the amount of the
                  Quarterly Incentive Compensation, in the event that the
                  Executive is employed under this Agreement for less than all
                  of the applicable calendar quarter, whether due to the
                  commencement of his employment on a date other than the first
                  day of the



                                      -5-
   6

                  applicable calendar quarter, the termination or expiration of
                  his employment for any reason prior to the last day of the
                  applicable calendar quarter or otherwise, the amount due the
                  Executive under this Agreement shall be adjusted, on a
                  pro-rata basis, based on the number of days employed pursuant
                  to this Agreement during the applicable calendar quarter.

                  Executive acknowledges and agrees that any Incentive
Compensation due the Executive under this Agreement shall be a joint obligation
of the Corporation and the Savings Bank, except as otherwise required by
applicable law or regulation.

                           (c) Discretionary Bonus. An Employer may pay to the
Executive such additional bonus payments as may be determined by the Board of
Directors of the Employer, from time to time, in its sole discretion.
Discretionary bonuses, if any, shall be paid by and allocated to the Savings
Bank, unless the Boards of Directors of the Corporation and the Savings Bank
shall determine otherwise, from time to time.

                           (d) Plans, Benefits and Privileges. During the term
of this Agreement, Executive shall be entitled to receive all of the same
employee benefits as the other executive employees of the Employers receive, and
the Executive shall participate in and receive the benefits of any group
insurance, health and accident insurance (including, without limitation,
medical, dental, vision and other health insurance), disability insurance, life
insurance, pension or other retirement benefit plan, profit sharing plan, 401(k)
plan, management recognition and retention plan, restricted stock plan, stock
option plan, employee stock ownership plan, or other plans, benefits and
privileges given to employees and executives of the Employers, to the extent
commensurate with Executive's then duties and responsibilities of the
Executive's office, as fixed by the Boards of Directors of the Employers. Each
Employer shall not make any changes in such plans, benefits or privileges which
would adversely affect Executive's rights or benefits thereunder, unless such
change occurs pursuant to a program applicable to all executive officers of the
Employer. The Executive shall also be entitled to such other perquisites and
remuneration as may be provided by each Employer from time to time pursuant to
its policies and procedures as applicable from time to time. Nothing paid to
Executive under any plan or arrangement presently in effect or made available in
the future shall be deemed to be in lieu of the salary payable to Executive
pursuant to Section 3(a) hereof.

                           (e) Stock Options. The parties acknowledge, ratify
and confirm that at the Corporation's Board of Directors meeting held December
16, 1998 the Executive was awarded incentive stock options effective December
30, 1998 in the amount of 6,000 shares of the Corporation's common stock and
non-incentive stock options in the amount of 6,000 shares of the Corporation's
common stock, which said awards are subject to the terms and conditions of the
Prestige Bancorp Inc. 1997 Stock Option Plan dated as of March 20, 1997, as
amended by the First Amendment thereto dated November 19, 1997, and by the
Second Amendment thereto dated December 16, 1998. Such stock option grants shall
be evidenced by a separate stock option agreement between the Executive and the
Corporation in the form attached hereto as Exhibit "B".

                           (f) Vacations and Holidays. During the term of this
Agreement, Executive shall be entitled to paid annual vacation and paid time off
for holidays in accordance with the policies as established from time to time by
the Boards of Directors of the Employers for executive employees with twenty or
more years of service, which shall in no event be less than five (5) weeks of
paid vacation time per annum and paid time off of ten (10) holidays per



                                      -6-
   7

annum. Executive shall be entitled to receive additional compensation from the
Employers for unused vacation within the policies as established by the Boards
of Directors of the Employers from time to time. Executive shall not be able to
accumulate unused vacation time from one year to the next, except to the extent
authorized by the Boards of Directors of the Employers.

                           (g) Supplemental Disability Benefits. In the event of
the Disability of the Executive during the term of this Agreement which
qualifies the Executive for disability benefits under any long-term disability
plan maintained by an Employer (the "Disability Plan"), beginning upon the date
that Executive receives the first payment of disability benefits under the
Disability Plan and ending upon the earlier of (i) the expiration of the
Remaining Term of employment pursuant hereto prior to the Notice of Termination
or (ii) the date upon which such disability benefits under the Disability Plan
cease for any reason or (iii) the Date of Termination for other than Disability,
the Employers shall supplement such Disability Plan benefits by paying to the
Executive the difference between 100% of the Executive's base salary and the
disability benefits paid under the Disability Plan, provided that such
supplemental disability benefits shall not exceed 50% of the Executive's Base
Salary. Notwithstanding the foregoing, the amount of any such supplemental
disability payments paid to the Executive shall be offset against any payment
due the Executive from the Employer under Section 5(b)(ii) hereof.

                           (h) Corporation Loan. The Corporation agrees to
extend to the Executive a term loan in the amount of $250,000 as evidenced by a
Term Promissory Note in the form attached hereto as Exhibit "C". The provisions
of the Term Promissory Note set forth as Exhibit "C" hereto shall not be altered
or amended by virtue of the termination of this Agreement.

                           (i) Automobile. The Employers will provide the
Executive with an automobile registered and leased by the Corporation or the
Savings Bank; provided, however, that the lease payments for the automobile
shall be $500 per month over a lease period not to exceed twenty-four (24)
months or such other lease payment or lease period as the parties may agree to
in writing from time to time. The Executive will insure the automobile under
terms and conditions reasonably acceptable to the Employers, at his cost and
expense. The Employers will pay all reasonable maintenance and operating costs
and expenses of the leased automobile.

                  4. Expenses. The Employers shall reimburse Executive or
otherwise provide for or pay for all reasonable expenses incurred by Executive
in furtherance of, or in connection with the business of the Employers,
including, but not by way of limitation, automobile and traveling expenses, and
all reasonable entertainment expenses (whether incurred at the Executive's
residence, while traveling or otherwise), subject to such reasonable
documentation and other limitations as may be established by the Board of
Directors of the Employers. If such expenses are paid in the first instance by
Executive, the Employers shall reimburse the Executive therefor, subject to such
reasonable documentation and other limitations as may be established by the
Board of Directors of the Employers.

                  5. Termination.

                           (a) This Agreement shall be terminated only under the
following conditions:



                                      -7-
   8

                                    (i) This Agreement may be terminated at any
                  time by the mutual agreement of the parties; or

                                    (ii) This Agreement may be unilaterally
                  terminated by an Employer for Cause; or

                                    (iii) This Agreement shall be automatically
                  terminated by the Retirement or death of the Executive; or

                                    (iv) This Agreement may be terminated by the
                  Employers after six (6) months of Disability in accordance
                  with the provisions of Section 6; or

                                    (v) This Agreement may be terminated by the
                  Executive for Good Reason; or

                                    (vi) This Agreement may be terminated by the
                  Employer at any time, subject to Section 5(b)(ii) hereof.

                           (b) In the event this Agreement is terminated:

                                    (i) Pursuant to any of 5(a)(i) through
                  5(a)(iv), or by the Executive other than pursuant to 5(a)(v),
                  the Executive shall be entitled to that compensation
                  (including Incentive Compensation) and benefits pursuant to
                  Section 3(a) through 3(f) and, if applicable, Section 6, which
                  have accrued through the Date of Termination; or

                                    (ii) By either or both Employers
                  unilaterally without Cause or other than pursuant to Sections
                  5(a)(i) through 5(a)(iv), or by the Executive pursuant to
                  Section 5(a)(v), the Executive shall be entitled to that
                  compensation (including Incentive Compensation) and benefits
                  pursuant to Section 3(a) through 3(f) and, if applicable,
                  Section 6, which have accrued through the Date of Termination,
                  and in addition, the Employers shall pay the Executive the
                  following amount in one lump sum no later than sixty (60) days
                  following the Date of Termination:

                                            (A) Subject to Section 5(b)(ii)(B),
                           an amount equal to the annual Base Salary of the
                           Executive as of the Date of Termination multiplied by
                           the number of years, or portions thereof, remaining
                           in the period (the "Period") commencing with the Date
                           of Termination and ending one year after the last day
                           of the Remaining Term (as defined in Section 2(a)
                           hereof) of this Agreement, discounted to present
                           value on the date of payment at a discount rate of 6%
                           per annum and based on the assumption that such
                           amount would otherwise be paid in equal installments
                           on the 15th and last day of each month throughout
                           such Period (the "Liquidated Damages");

                                             (B) Notwithstanding Section
                           5(b)(ii)(A) to the contrary, if at the time that the
                           Liquidated Damages are to be expensed by the
                           Corporation and/or the Savings Bank: (i) the
                           Corporation and/or the Savings Bank fail to be in
                           Regulatory Capital Compliance, or (ii) the



                                      -8-
   9

                           amount of the Liquidated Damages expense is
                           sufficient to result in the Corporation and/or the
                           Savings Bank failing to be in Regulatory Capital
                           Compliance, then the amount of the Liquidated Damages
                           to be paid to the Executive shall be deferred and
                           paid to the Executive in the largest installment(s)
                           possible and at the earliest possible date when the
                           expense associated therewith may be incurred with the
                           Corporation and Savings Bank being and thereafter
                           remaining in Regulatory Capital Compliance; and

                                            (C) The amount set forth in Section
                           5(b)(i)(A) and (B) above shall serve as liquidated
                           damages to compensate the Executive for such items as
                           a loss in income, costs to seek other employment,
                           relocation expenses, and legal costs associated with
                           negotiation and preparation of any agreement with a
                           future employer. The liquidated damages formula
                           herein has been established in this paragraph because
                           it would be difficult or impossible to determine the
                           amount of likely damages.

                  6. Disability.

                           (a) For any period for which it is determined (as
hereinafter described in Section 7) that the Executive has a Disability, he
shall be entitled to receive all of his compensation and benefits pursuant
hereto for a period of six (6) months, after which time the Employers may
terminate this Agreement.

                           (b) If the Executive, having once been disabled,
shall again be disabled for a succeeding period or periods, the succeeding
period or periods of disability shall be considered as continuations of the
first for purposes of computing the above compensation and benefits obligations
of the Employers. The foregoing shall not apply, however, if the Executive
returns to work, full-time, for three (3) consecutive months between two (2)
consecutive periods of Disability.

                  7. Determination of Disability. The determination of whether
the Executive is, or previously was, under a Disability during any period of his
employment shall be made by an independent physician selected by the mutual
agreement of the Employers and the Executive, whose services shall be paid for
by the Employers. In the event the parties are unable to agree upon a physician
within ten (10) days after the matter of the need for a physician to determine
the Executive's Disability has been raised by any party hereto, the selection of
a physician shall be submitted to arbitration as set forth in Section 15 hereof.
The physician selected shall fix the commencement date of any period of
Disability, whether currently or retroactively, and shall determine if and when
such period of Disability terminates. The Executive agrees to submit to such
examinations and testing as directed by said physician as are necessary to make
the determination required herein.

                  8. Mitigation; Exclusivity of Benefits.

                           (a) The Executive shall not be required to mitigate
the amount of any benefits hereunder by seeking other employment or otherwise,
nor shall the amount of any such benefits be reduced by any compensation earned
by the Executive as a result of employment by another employer after the Date of
Termination or otherwise.



                                      -9-
   10

                           (b) The specific arrangements referred to herein are
not intended to exclude any other benefits which may be available to the
Executive upon a termination of employment with the Employers pursuant to
employee benefit plans of the Employers or otherwise.

                  9. Books, Records and Files. It is understood and agreed that
any and all books, records, files and client lists maintained by the Executive
in connection with his employment by the Employers is the property of the
Employers and not the Executive and shall be made available to authorized
officers of the Employers upon request from time to time and shall be returned
to the Employers upon the termination of the Executive's employment with the
Employers. The books, records and other material referred to in this paragraph
shall include, but not be limited to, data maintained in any medium whatsoever,
whether paper or electronic and shall include all digitally maintained files. In
connection therewith, the Executive shall provide the Employers with all
passwords, encryption codes, encryption software and so on, to permit the
Employers to access the data maintained digitally on any electronic medium.

                  10. Confidentiality and Non-Disclosure. The Executive
recognizes that any and all information acquired during the course of his
employment by the Employers is confidential and proprietary and will not be
disclosed to any third party whatsoever (whether during the period of this
Agreement or thereafter) except in the ordinary course of the Executive's
employment as required by his duties and responsibilities and in accordance with
the understanding and directions of the Boards of Directors of the Employers.
Such information shall include, but not be limited to, information acquired
from, or about, third parties such as the Employers' customers, including, but
not limited to, account, general banking and financial information relating
thereto, trade secrets such as business plans, practices, marketing plans,
compilations of information, customer lists and all other information, records,
files and data bases owned by the Employers or to which the Executive has
access. It is further recognized that banking and account information acquired
by the Executive in the course of his employment with respect to customers of
the Employers are confidential pursuant to the laws of the Commonwealth of
Pennsylvania and the United States of America, and that the Executive will
strictly conform to all such laws and administrative regulations and will take
all action necessary or appropriate to cause all persons under the Executive's
supervisory responsibility to conform to all such laws and regulations.

                  11. Removal of Bank Property or Data from Premises. All files,
documents, electronic storage media or other material owned by, or in the
possession of, the Employers to which the Executive has been provided access by
virtue of his employment with the Employers shall be returned to the Employers
upon the Executive ceasing to be employed by the Employers and the Executive
shall in no event retain copies or duplicates (stored in any manner or medium
whatsoever) of any such material.

                  12. Permitted Disclosure. The restrictions in Sections 9, 10
and 11 hereinabove do not apply to any information or data which at the time of
the disclosure of said information or data: (i) is part of the public domain at
the time this Agreement becomes effective; (ii) is or becomes available to the
public through no violation of this Agreement by Executive; (iii) is lawfully
obtained by Executive from third parties; or (iv) is independently developed by
Executive on his own time without the use of Employer's resources.



                                      -10-
   11

                  13. Legal Requirements. The Executive shall exercise his
duties of employment in a manner consistent with the requirements of all
applicable statutes of the United States of America and the Commonwealth of
Pennsylvania and of the administrative rules and regulations issued thereunder
and of the procedures, rules and regulations of the applicable regulatory
agencies of the United States of America and the Commonwealth of Pennsylvania.

                  14. Withholding. All payments required to be made by the
Employers hereunder to the Executive shall be subject to the withholding of such
amounts, if any, relating to tax and other payroll deductions as the Employers
may reasonable determine should be withheld pursuant to any applicable law or
regulation.

                  15. Arbitration. The parties to this Agreement agree to submit
to arbitration any controversies arising from this contract. All arbitration
proceedings shall be conducted pursuant to the Uniform Arbitration Act, as last
adopted by the Commonwealth of Pennsylvania. The arbitration board shall consist
of three (3) arbitrators, each party shall appoint one arbitrator of their
choosing and both parties shall agree upon a third neutral arbitrator. If one
party refuses to submit a controversy to arbitration, the other party may
petition the Court of Common Pleas of Allegheny County, Pennsylvania, to compel
arbitration. All arbitration proceedings shall be conducted in Pittsburgh,
Pennsylvania. The decision of the arbitration board shall be final and binding
upon all parties and judgment upon the award rendered in such arbitration may be
entered in any court having jurisdiction. Except as hereinafter provided, the
parties shall each bear their own attorney's fees and shall share equally in the
cost of arbitration. However, if Executive prevails in all matters, Executive
shall be reimbursed by the Employers for any reasonable costs or expenses
incurred in such challenge, including reasonable attorney's fees and costs of
arbitration.

                  16. Assignability. Any Employer may assign this Agreement and
its rights and obligations hereunder in whole, but not in part, to any
corporation, bank or other entity with or into which the Employers may hereafter
merge or consolidate or to which the Employers may transfer all or substantially
all of its assets, if in any such case said corporation, bank or other entity
shall by operation of law or expressly in writing assume all obligations of the
Employer hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or its rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any rights
or obligations hereunder. Notwithstanding any such assignment, the Employers
shall remain fully liable to the Executive for the performance of all
obligations of the Employers hereunder; provided, however, that the Employers
shall not be so liable, and shall be released and discharged from all such
liability, in the event that the Employers obtain the prior written consent of
the Executive to the assignment, which consent shall not be unreasonably
withheld.

                  17. Notice. For the purposes of this Agreement, notices and
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered either personally, by
telegraph, by facsimile transmission (with a confirming copy by mail on the day
of transmission), by overnight courier or by certified or registered mail,
postage prepaid, return receipt requested, addressed to the respective addresses
set forth below:



                                      -11-
   12

         To the Employers:              Secretary
                                        Prestige Bancorp, Inc.
                                        Prestige Bank, A Federal Savings Bank
                                        710 Old Clairton Road
                                        Pleasant Hills, Pennsylvania  15236

         To the Executive:              John A. Stiver
                                        Chief Executive Officer
                                        Prestige Bancorp
                                        710 Old Clairton Road
                                        Pleasant Hills, Pennsylvania  15236

                  18. Integration, Amendment and Waiver. This Agreement is the
entire understanding and contract between the parties hereto, and there are no
other representations, understanding or contracts except as provided herein. No
provisions of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing signed by the
Executive and such officer or officers as may be specifically designated by the
Boards of Directors of the Employers to sign on their behalf. No waiver by any
party hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.

                  19. Governing Law. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the laws of the Commonwealth of
Pennsylvania.

                  20. Nature of Obligations. Nothing contained herein shall
create or require the Employers to create a trust of any kind to fund any
benefits which may be payable hereunder, and to the extent that the Executive
acquires a right to receive benefits from the Employers hereunder, such right
shall be no greater than the right of any unsecured general creditor of the
Employers.

                  21. Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.

                  22. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.

                  23. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.



                                      -12-
   13

                  24. Regulatory Provisions.

                           (a) Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the Federal Deposit Insurance Act ("FDIA") (12 U.S.C.
Section 1828(k)) and any regulations promulgated thereunder;

                           (b) Notwithstanding any other provision of this
Agreement to the contrary, if the Executive is suspended and/or temporarily
prohibited from participating in the conduct of the Savings Bank's affairs by a
notice served under Section 8(e)(3) or (g)(1) of FDIA (12 U.S.C. Sections
1818(e)(3) and (g)(1)) the Employers' obligations under this Agreement shall be
suspended as of the date of service unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the Employers may in their discretion
(i) pay the Executive all or part of the compensation withheld while the
Employers' contract obligations were suspended, and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.

                           (c) Notwithstanding any other provision of this
Agreement to the contrary, if the Executive is removed and/or permanently
prohibited from participating in the conduct of the Savings Bank's affairs by an
order issued under Section 8(e)(4) or (g)(1) of FDIA (12 U.S.C. Sections
1818(e)(4) and (g)(1)) all obligations of the Employers under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
parties hereto shall not be affected.

                           (d) Notwithstanding any other provision of this
Agreement to the contrary, if the Savings Bank is in default (as defined in
Section 3(x)(1) of FDIA), all obligations under this Agreement shall terminate
as of the date of default, but this Section 17(d) shall not affect any vested
rights of the parties hereto.

                           (e) Notwithstanding any other provision of this
Agreement to the contrary, all obligations under this Agreement shall be
terminated, except to the extent determined that continuation of this Agreement
is necessary to the continued operation of the Savings Bank: (i) by the Director
of the Office of Thrift Supervision or his or her designee (the "Director"), at
the time the Federal Deposit Insurance Corporation or Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Savings Bank under the authority contained in Section 13(c) of FDIA; or,
(ii) by the Director, at the time the Director approves a supervisory merger to
resolve problems related to operation of the Savings Bank or when the Savings
Bank is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by such action.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]



                                      -13-
   14



                  IN WITNESS WHEREOF, this Agreement has been executed as of the
date first above written.

                                           EMPLOYERS:

ATTEST:                                    PRESTIGE BANCORP, INC.

                                           By:
- ------------------------------                -----------------------------


ATTEST:                                    PRESTIGE BANK, A FEDERAL SAVINGS BANK

                                           By:
- ------------------------------                -----------------------------


WITNESS:                                   EXECUTIVE:


- ------------------------------             --------------------------------
                                           John A. Stiver



                                      -14-
   15



                                   EXHIBIT "A"

                             EMPLOYMENT DESCRIPTION


         The Executive shall perform such executive services to the Employees as
are consistent with and appropriate for his title. Without limiting the
foregoing, the Executive shall:

         (a)      oversee the implementation of policy established by the Boards
                  of Directors of the Corporation and the Savings Bank;

         (b)      oversee the overall administration of the Corporation and the
                  Savings Bank;

         (c)      oversee the implementation of the strategic plans of the
                  Corporation and the Savings Bank;


         (d)      be the primary spokesman for the Corporation and Savings Bank;
                  and

         (e)      develop a commercial lending program and initially be the
                  primary commercial lending officer for the Savings Bank.


   16


                                   EXHIBIT "B"

                             STOCK OPTION AGREEMENTS




   17


                          PRESTIGE BANCORP, INC.
                          1997 STOCK OPTION PLAN

               EMPLOYEE NON-INCENTIVE STOCK OPTION AGREEMENT

This Agreement (the "Agreement") is entered into by and between Prestige 
Bancorp, Inc. (the "Corporation") and John A. Stiver (the "Optionee"). This 
Agreement is made pursuant to the Prestige Bancorp, Inc. 1997 Stock Option Plan 
dated as of March 20, 1997 and effective as of April 23, 1997 (the "Plan").

Capitalized terms not defined in this Agreement shall have the meanings 
specified in the Plan.

1.  GRANT OF OPTIONS.

The Corporation hereby grants to the Optionee the right to purchase from the 
Corporation a total of 6,000 shares of Common Stock (the "Optioned Stock") on 
the terms and conditions contained in the Plan and this Agreement (the 
"Options"). The Options shall be Non-Incentive Stock Options intended not to 
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the 
"Code").

2.  EXERCISE PRICE.

The exercise price per share of the Optioned Stock is $12.75.

3.  TERM OF OPTIONS.

The term of the Options granted hereunder shall be ten (10) years beginning on 
the date of the grant of the Options on December 30, 1998 and expiring on 
December 30, 2008.

4.  VESTING OF OPTIONS.

The Options shall vest at the rate of twenty (20%) percent per year (1200 
shares of Optioned Stock per year) beginning on December 30, 1999 and on each 
consecutive December 30 thereafter through and including December 30, 2003 at 
which time the Options shall be fully vested; provided, however, that no 
vesting of the Options shall occur on or after an Optionee's employment with 
the Corporation, the Savings Bank, the Parent and/or any Subsidiary is 
terminated for any reason other than death or Disability (as defined in the 
Plan). Notwithstanding the foregoing, the Options shall become vested and 
exercisable in full on the date the Optionee's employment with the Corporation, 
the Savings Bank, the Parent and/or any Subsidiary is terminated because of the 
Optionee's death or Disability. In determining the number of shares of Common 
Stock with respect to which the Options are vested and/or exercisable, 
fractional shares will be rounded up to the nearest whole number if the 
fraction is 0.5 or higher, and down if it is less.
   18

5.  EXERCISE OF OPTIONS.

    (a)  Subject to Section 5(b) hereof, the Options shall be exercisable
         at any time on or after they vest until the earlier of (i) the
         expiration of the term of the Options as set forth in Section 3 of
         this Agreement, or (ii) the third anniversary of the date on which
         the Optionee ceases to be employed by the Corporation, the Savings
         Bank, the Parent and/or any Subsidiary. The Options shall be
         considered vested and exercisable upon the death or Disability of
         the Optionee as set forth in Section 4(b) of the Plan.    

    (b)  Notwithstanding Section 5(a) hereof, in the event of the death of
         the Optionee while in the employ of the Corporation, the Savings
         Bank, the Parent and/or any Subsidiary, or within three (3) years
         following the termination of the Optionee's employment as a result
         of Disability, retirement or resignation, the person or persons to
         whom the Optionee's rights under the Options pass by will or by
         the laws of descent and distribution (including the Optionee's
         estate during the period of administration) shall have the right
         to exercise the Options at any time prior to the earlier of (i))
         expiration of the term of the Options as set forth in Section 3 of
         this Agreement, or (ii) the date which is one (1) year after the
         date of death of the Optionee but only if, and to the extent that,
         the Options are vested and the Optionee was entitled to exercise
         the Options at the date of death. The Options shall be considered
         vested and exercisable upon the date of death of the Optionee as
         set forth in Section 4(b) of the Plan.

    (c)  The shares of Common Stock covered by and vested and exercisable
         Option may be exercised at any time within the applicable period
         set forth in Section 5 of this Agreement. To the extent that any
         Option shall not have been exercised within the applicable period
         set forth in Section 5 of this Agreement, the Option, and all
         rights to purchase or receive shares of Common Stock pursuant
         thereto, shall terminate on the last day of the applicable period.
         No shares of Common Stock covered by an Option (whether or not
         vested Shares) may be exercised after the Option terminates.

6.  PAYMENT OF EXERCISE PRICE.

    (a)  Full payment for each share of Common Stock purchased upon the
         exercise of any Option shall be made at the time of exercise of
         such Option and shall be paid in cash, or at the discretion of the
         Board, Common Stock or a combination of cash and Common Stock.
         Common Stock utilized in full or partial payment of the exercise
         price shall be valued at its Fair Market Value at the date of
         exercise. At the discretion of the Board, the Corporation shall
         accept full or partial payment in Common Stock only to the extent
         permitted by applicable law. No shares of Common Stock shall be
         issued until full payment therefor has been received by the
         Corporation. The Optionee shall not have any of the rights of a
         stockholder of the Corporation with respect to the Optioned Stock,
         including, without limitation, voting and dividend rights, until
         shares of Common Stock are issued to him and
   19


         his name is recorded on the Corporation's stockholder ledger as
         the holder of record of such Shares.

    (b)  Upon a valid exercise of any Option and payment of the total
         exercise price for the shares of the Common Stock to be purchased
         pursuant to the exercise of such Option, the Corporation shall
         issue certificate(s) in the Optionee's name for the number of
         shares of Common Stock purchased pursuant to the exercise of the
         Option, but subject to adjustment for any shares of Common Stock
         sold or withheld to satisfy the tax withholding requirements for
         the exercise of the Option. Said certificate(s) may be stamped
         with such legend or legends as the Board may deem advisable with
         respect to the requirements of the Securities and Exchange
         Commission, any stock exchange upon which shares of Common Stock
         are listed, and applicable Federal or state securities law.

7. TAX MATTERS.

The Corporation may withhold from any cash payment made under this Plan
sufficient amounts to cover any applicable withholding and employment
taxes, and if the amount of such cash payment is insufficient, the
Corporation may require the Optionee to pay to the Corporation the amount
required to be withheld as a condition to delivering the Shares acquired
pursuant to the Options. The Board is authorized to adopt rules,
regulations or procedures which provide for the satisfaction of the
Optionee's tax withholding obligation by the retention of shares of Common
Stock to which the Optionee would otherwise be entitled pursuant to the
Options and/or by the Optionee's delivery of previously-owned shares of
Common Stock or other property.

8.  REVOCATION FOR MISCONDUCT.

Notwithstanding anything in this Agreement or the Plan to the contrary, the
Board may by resolution immediately revoke, rescind and terminate the
Options, or any portion thereof, to the extent not yet vested, in the event
that the Optionee is discharged from the employ of the Corporation, the
Savings Bank, the Parent or any Subsidiary for cause, which, for purposes
hereof, shall mean termination of employment for personal dishonesty,
incompetence, gross negligence or willful misconduct, breach of fiduciary
duty involving personal profit, intentional failure to perform stated
duties, the conviction of a felony by a court of competent jurisdiction,
willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses), or final cease-and-desist order.

9.  TRANSFERABILITY.

The Options shall be exercised during the Optionee's lifetime only by the
Optionee and shall not be assignable or transferable otherwise than by will
or by the laws of descent and distribution.

10. CONDITIONS PRECEDENT.
    
    (a)  As conditions precedent to the Corporation's obligation to issue
         certificate(s) for the shares of Common Stock purchased pursuant
         to the exercise of the Options: 
   20
    (1)  Shares shall not be issued unless the issuance and delivery of
         such Shares shall comply with all relevant provisions of law,
         including, without limitation, the Securities Act of 1933, as
         amended, the rules and regulations promulgated thereunder, any
         applicable state securities law and the requirements of any stock
         exchange upon which the Shares may then be listed; and

    (2)  The Corporation may require the Optionee to make such
         representations and warranties as may be necessary to assure the
         availability of an exemption from the registration requirements of
         federal or state securities law.

    (b)  The inability of the Corporation to obtain from any regulatory
         body or authority deemed by the Corporation's counsel to be
         necessary to the lawful issuance and sale of any Shares hereunder
         shall relieve the Corporation of any liability in respect of the
         non-issuance or sale of such Shares.

11. PLAN PROVISIONS.

The Options shall be subject to all of the terms and provisions of the Plan. 
The terms and provisions of the Plan, as it may be amended from time to time, 
are hereby incorporated herein by reference. In the event of a conflict between 
a term or provision of this Agreement and a term or provision of the Plan, the 
applicable terms and provisions of the Plan shall govern and be controlling.

12. MODIFICATIONS OF THE OPTIONS.

    (a)  Except as set forth in Section 12(b) of this Agreement,
         termination, revocation or amendment of this Agreement shall be
         made in writing executed by the Corporation and the Optionee.

    (b)  At any time and from time to time, the Board may direct the
         execution of an instrument  providing for the modification,
         extension or renewal of the Options, provided that (i) no such
         modification, extension or renewal shall confer on the Optionee
         any right or benefit which could not be conferred on him by the
         grant of a new Award at such time, or shall not materially
         decrease the Optionee's benefits under the Options without the
         consent of the Optionee, except as otherwise permitted under
         Section 5(d) or Section 19 of the Plan, and (ii) all such
         modifications, extensions and/or renewals of outstanding Awards
         shall be in compliance with all applicable Office of Thrift
         Supervision rules and regulations. Notwithstanding the foregoing,
         the Board shall not have the authority to cancel outstanding
         Awards and reissue new Awards at a lower exercise price, or to
         modify, extend or renew Awards at a lower exercise price.
   21
13.  COUNTERPARTS.

This Agreement may be executed in any number of counterparts, each of which 
shall be deemed to be an original and all of which together shall be deemed to 
be one and the same instrument.

14.  EMPLOYMENT RIGHTS. 

Neither the Plan nor this Agreement, nor any action 
taken by the Board in connection with the Plan or this Agreement, shall create 
any right on the part of the Optionee to continue in the employ of the 
Corporation, the Savings Bank, the Parent or any Subsidiary.

         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to 
be executed on this 30th day of December, 1998.




                                             PRESTIGE BANCORP, INC.

                                             By:
                                                --------------------------------

                                             Title: President
                                                   -----------------------------

                                             Date: December 30, 1998
                                                  ------------------------------

The Optionee hereby acknowledges receipt and review of a copy of the Plan, 
which is attached hereto, and hereby accepts the Options in accordance with and 
subject to all of the terms and provisions of the Plan and this Agreement.



                                             OPTIONEE


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

                                             Name: John A. Silver
                                                  -----------------------------

                                             Date: December 30, 1998
                                                  ------------------------------
   22


                                   EXHIBIT "C"

                              TERM PROMISSORY NOTE



   23

                              TERM PROMISSORY NOTE

$250,000.00                                                 PLEASANT HILLS, PA
                                                            ____________, 19__

The undersigned, John A. Stiver, (hereinafter called "Maker") promises to pay to
the order of Prestige Bancorp, Inc. (hereinafter called "Corporation") at the 
Corporation's office located at 710 Old Clairton Road, Pittsburgh, Pennsylvania 
15236, the sum of Two-Hundred Fifty-Thousand Dollars ($250,000.00) (the 
"Loan"). Accrued and unpaid interest shall be paid on each February 15, May 15, 
August 15 and November 15 during the term hereof, commencing May 15, 1999. 
Principal shall be paid in ten equal annual installments due each February 15 
during the term hereof commencing February 15, 2000. This Loan shall mature on 
February 15, 2009, at which time all outstanding and unpaid principal, interest 
and other charges related to this Loan shall be due and payable. Nothing 
contained herein shall preclude Maker from making periodic payments of 
principal or prepaying this Loan in whole or in part.

VARIABLE INTEREST RATE. The Loan shall bear interest at a per annum floating 
rate equal to the per annum floating margin interest rate of Merrill Lynch on 
accounts with balances in excess of $100,000 (the "Loan Rate"), whether or not 
judgment has been entered on this note. Any change in the Loan Rate shall be 
effective at the beginning of the business day on the first of each month. The 
Loan Rate shall never exceed the maximum rate allowed from time to time by law.

LATE CHARGE. If any payment of principal and/or interest that is due hereunder 
is not received in full by the Corporation within 15 days after the due date, 
the Corporation will charge and the Maker agrees to pay a late charge equal to 
$15.00 or 4% of the amount past due. Late charges assessed by the Corporation 
are immediately due and payable and shall bear interest at the interest rate 
described above until paid. Payments are deemed made the banking day they are 
received by the Corporation.

ACCELERATION UPON DEFAULT. In the event any installment of principal or 
interest or any part thereof is not paid when it becomes due or in the event of 
any default of any obligation of the Maker to the Corporation, hereunder, the 
principal sum remaining unpaid hereunder, together with all accrued interest 
thereon, shall immediately and without notice become due and payable at the 
election of the holder at any time thereafter.

EVENTS OF DEFAULT AND ACCELERATION OF MATURITY.

     (a) This and all other obligations of the Maker to the holder hereof shall 
be and become automatically and immediately due and payable without any demand 
or notice whatsoever, upon the occurrence of any of the following described 
events, each of which will constitute an "EVENT OF DEFAULT":

          (i)   Any assignment for the benefit of the creditors of the Maker, or
                the commencement of any bankruptcy, receivership, insolvency,
                reorganization or liquidation proceeding by the Maker; or

          (ii)  Further, at the option of the Corporation, any failure of the
                Maker to make any payment when due of the principal or interest
                of this obligation of the Maker to the Corporation may be
                treated as an Event of Default, thereby causing this obligation
                to become automatically and immediately due and payable without
                any demand or notice whatsoever:

   24

     (b) No delay or omission on the part of the Corporation in exercising any 
right hereunder or otherwise available to the Corporation pursuant to 
applicable law, shall act as a waiver of such right or of any other right under 
this note or pursuant to applicable law. Presentment, demand, protest, notice 
of dishonor, and extension of time without notice are hereby waived by the 
Maker. Any notice to the Maker shall be sufficiently served for all purposes if 
placed in the mail, postage prepaid, addressed to or left upon the premises at, 
the address shown below or any other address shown on the Corporation's records.

GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH 
THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA, WITHOUT REGARD TO THE PRINCIPLES 
THEREOF REGARDING CONFLICTS OF LAWS, EXCEPTING APPLICABLE FEDERAL LAW AND 
EXCEPT ONLY TO THE EXTENT PRECLUDED BY THE MANDATORY APPLICATION OF THE LAW OF 
ANOTHER JURISDICTION.

FORUM. THE MAKER AND THE CORPORATION AGREE THAT ANY ACTION OR PROCEEDING 
ARISING OUT OF OR RELATING TO THIS NOTE MAY BE COMMENCED IN THE COURT OF COMMON 
PLEAS OF ALLEGHENY COUNTY, PENNSYLVANIA OR IN THE DISTRICT COURT OF THE UNITED 
STATES FOR THE WESTERN DISTRICT OF PENNSYLVANIA AND THE MAKER AND THE 
CORPORATION AGREE THAT A SUMMONS AND COMPLAINT COMMENCING AN ACTION OR 
PROCEEDING IN EITHER OF SUCH COURTS SHALL BE PROPERLY SERVED AND SHALL CONFER 
PERSONAL JURISDICTION IF SERVED PERSONALLY OR BY CERTIFIED MAIL TO THE PARTIES 
AT THEIR ADDRESSES SET FORTH IN THIS NOTE, OR AS OTHERWISE PROVIDED UNDER THE 
LAWS OF THE COMMONWEALTH OF PENNSYLVANIA. FURTHER, THE MAKER HEREBY 
SPECIFICALLY CONSENTS TO THE PERSONAL JURISDICTION OF THE COURT OF COMMON PLEAS 
OF ALLEGHENY COUNTY, PENNSYLVANIA AND THE DISTRICT COURT OF THE UNITED STATES 
FOR THE WESTERN DISTRICT OF PENNSYLVANIA AND WAIVES AND HEREBY ACKNOWLEDGES 
THAT IT IS ESTOPPED FROM RAISING ANY OBJECTION BASED ON FORUM NON CONVENIENS. 
ANY CLAIM THAT EITHER SUCH COURT LACKS PROPER VENUE OR ANY CLAIM THAT EITHER 
SUCH COURT LACKS PERSONAL JURISDICTION OVER THE MAKER SO AS TO PROHIBIT EITHER 
SUCH COURT FROM ADJUDICATING ANY ISSUES RAISED IN A COMPLAINT FILED WITH EITHER 
SUCH COURT AGAINST THE MAKER BY THE CORPORATION CONCERNING THIS NOTE OR 
PAYMENT TO THE CORPORATION. THE MAKER HEREBY ACKNOWLEDGES AND AGREES THAT THE 
CHOICE OF FORUM CONTAINED HEREIN SHALL NOT BE DEEMED TO PRECLUDE THE 
ENFORCEMENT OF ANY JUDGMENT OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION 
UNDER THIS NOTE TO ENFORCE THE SAME IN ANY APPROPRIATE JURISDICTION.

POWER TO CONFESS JUDGMENT. THE MAKER HEREBY AUTHORIZES AND EMPOWERS ANY 
PROTHONOTARY OR ANY ATTORNEY OR ANY COURT OR RECORD WITHIN THE UNITED STATES OR 
ELSEWHERE TO APPEAR FOR THE MAKER AND, WITH OR WITHOUT COMPLAINT FILED, CONFESS 
JUDGMENT AGAINST THE MAKER IN FAVOR OF THE CORPORATION FOR THE AMOUNTS OWNED 
HEREUNDER IF NOT PAID WHEN DUE, WHETHER BY ACCELERATION OR OTHERWISE, TOGETHER 
WITH COSTS OF SUIT AND THE ATTORNEY'S FEE FOR COLLECTION HEREINAFTER PROVIDED 
FOR, WITH RELEASE OF ERRORS AND WITHOUT ANY STAY OF EXECUTION OR RIGHT OF 
APPEAL. NO SINGLE EXERCISE OF THE FOREGOING POWER TO CONFESS JUDGMENT SHALL BE 
DEEMED TO EXHAUST THE POWER, WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY 
ANY COURT TO BE VALID, VOIDABLE OR VOID, BUT THE POWER SHALL CONTINUE 
UNDIMINISHED, AND IT MAY BE EXERCISED FROM TIME TO TIME AS OFTEN AS THE HOLDER 
SHALL ELECT, UNTIL SUCH TIME AS THE CORPORATION SHALL HAVE RECEIVED PAYMENT IN 
FULL OF THE AMOUNTS OWNED HEREUNDER, INCLUDING INTEREST AND COSTS.
   25

ATTORNEY'S FEE FOR COLLECTION. If this note is not paid when due and is placed 
with an attorney for collection, and whether or not suit is entered hereon 
against the Maker, the Maker further agrees to pay the Corporation, in addition 
to the principal and interest then due, the costs of suit or collection and an 
attorney's fee of 10% of such principal and interest or $300.00, whichever is 
greater, provided that the attorney's fee shall not exceed the amount permitted 
by law.

WITNESS the due execution and sealing hereof with the intent to be legally 
bound.

WITNESS / ATTEST:                                JOHN A. STIVER


_________________________________         By:___________________________(SEAL)

EX-13

   1

                                                                      Exhibit 13


                                      PRBC
                             PRESTIGE BANCORP, INC.



                               1998 ANNUAL REPORT
   2

 
                             PRESTIGE BANCORP, INC.
                710 Old Clairton Road, Pittsburgh, PA 15236-4300
                       412-655-1190 - (Fax) 412-655-2114
 
March 24, 1999
 
To Our Stockholders, Customers and Friends:
 
     I am pleased to present the 1998 Annual Report for Prestige Bancorp, Inc.,
the parent company of Prestige Bank, A Federal Savings Bank.
 
     Some of our achievements include an increase in net interest income after
provision for loan losses of $751,000, an increase in net loans of almost $27.7
million, and an increase in deposits in excess of $18.5 million. On February 18,
1998, we opened our fifth branch located at 603 Scenery Drive, Elizabeth
Township, PA.
 
     In August 1998, we announced a 5% stock repurchase. This buy-back was
completed September 15, 1998 which resulted in 52,597 shares being purchased at
a cost of $720,201 or an average cost of $13.69 per share. In October 1998, we
announced another 5% stock repurchase that was completed October 21, 1998. The
second buy-back resulted in 49,990 shares purchased at a cost of $671,927 or
$13.44 per share.
 
     Net income for the year ended December 31, 1998 was $743,000 as compared to
$784,000 for 1997. Our two newest branches continued their growth but additional
costs associated with the new branches were the primary cause for the overall
decline in net income.
 
     Assets increased to $177.4 million at December 31, 1998 which represents an
increase of $34.1 million over the assets of $143.3 million at December 31,
1997. This increase in asset growth reflects management's strategy of leveraging
the balance sheet. Future asset growth will not likely proceed at the 1998 pace
due to management's belief that capital levels are currently adequate.
Management realizes the importance of utilizing capital efficiently and will
continue to evaluate its capital levels.
 
     Cash dividends of $191,600 were distributed to shareholders during 1998
compared to $111,230 for 1997. It is the Company's intent to continue to pay
cash dividends. In addition, the Board of Directors of Prestige Bancorp, Inc.,
declared a 15% stock dividend on April 15, 1998 to shareholders of record of
June 2, 1998 paid on June 19, 1998.
 
     Corporate offices were completed in January 1998, providing an additional
5,000 square feet of space. The Bank sold its Bethel Park facility and will
lease the same facility under an agreement that will enable the branch to remain
in its present location until May 2003.
 
     The Bank has continued working toward completing the implementation of new
hardware and software to bring all systems compliant with the year 2000
requirements. The total anticipated cost to become 100% year 2000 compliant,
excluding costs of Company's personnel time, is $131,000.
 
     In the fourth quarter 1998, the Savings Bank introduced a debit card
program. Management believes that this program will be widely accepted by our
customers based on past survey results and customer requests.
 
     Management eagerly looks forward to the challenges of 1999. Shrinking
margins from the traditional core business of our industry make it necessary to
consider expanding the menu of financial services now offered.
 
     On behalf of the Board of Directors, management, and employees of Prestige
Bancorp, Inc. and Prestige Bank, I would like to thank you for your continued
support and confidence.
 
Sincerely,
/s/ John Stiver
John A. Stiver
Chairman of the Board and Chief Executive Officer
   3
 
                              GENERAL INFORMATION
 
     Prestige Bancorp, Inc. (the "Company") was formed in March, 1996 in
connection with the conversion of Prestige Bank, A Federal Savings Bank (the
"Savings Bank") from a mutual chartered savings association to a stock chartered
savings association (the "Conversion"). Upon completion of the Conversion on
June 27, 1996, the Company commenced operations as the holding company of the
Savings Bank, then existing as a stock-chartered federal savings association.
The Company is organized as a Pennsylvania corporation. Any comparison herein of
the Company's and the Savings Bank's performance to any period prior to June 27,
1996 is assumed to be a comparison to the performance of the Savings Bank for
such period.
 
     The Savings Bank is a stock-chartered savings bank organized under the laws
of the United States of America, which conducts business from offices located in
Allegheny and Washington Counties, Pennsylvania. The Savings Bank's operations
date back to 1935 with the incorporation of First Federal Savings and Loan
Association of Mt. Oliver in Allegheny County, Pennsylvania which, in March,
1991, converted its charter from a federal mutual savings and loan association
to a federal mutual savings bank and took the name Prestige Bank, A Federal
Savings Bank. On June 27, 1996, the Savings Bank converted to a stock-chartered
savings bank. The Savings Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to
the maximum extent permitted by law.
 
     The consolidated operating results of the Company and the Savings Bank
depend primarily upon net interest income, which is determined by the difference
between interest and dividend income on earning assets, principally loans,
investment securities and other investments and mortgage-backed securities and
interest expense on interest-bearing liabilities, which consist of deposits and
advances from the Federal Home Loan Bank of Pittsburgh. Other than the stock of
the Savings Bank, at December 31, 1998 the Company was holding only a loan
receivable from the Prestige Bank Employee Stock Ownership Plan (the "ESOP"),
debt and equity securities with a market value totaling $1.4 million at December
31, 1998, and a money-market and checking account with the Savings Bank. The
consolidated net income of the Company also is affected by the Savings Bank's
provision for loan losses, as well as the level of other consolidated income,
including late charges, and other expenses, such as salaries and employee
benefits, net occupancy and equipment expense, Federal deposit insurance and
miscellaneous other expenses, and income taxes.
 
     The Company has paid consecutive quarterly dividends since the first
quarter of 1997. On January 20, 1999, the Company increased its quarterly cash
dividend from $.05 per share to $.06 per share and intends to consider the
continued payment of dividends on a regular basis; however, the declaration of
dividends is discretionary with the Board of Directors of the Company, and there
is no assurance regarding the payment of future dividends by the Company. The
quarterly dividend declared on January 20, 1999, was $.06 per share and payable
on March 19, 1999 to shareholders of record March 1, 1999. The common stock of
the Company is traded on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") system (symbol "PRBC").
 
     On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable on June 19, 1998. In addition,
on February 17, 1999, the Board of Directors declared a stock dividend of 5% to
shareholders of record of March 2, 1999 payable on March 19, 1999.
 
     Information as to the high and low stock prices for each quarter of fiscal
years 1998 and 1997 is included on page 5 of this Report.
 
                                        2
   4
 
                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
 
     The selected financial and other data of the Company and the Savings Bank
set forth below does not purport to be complete and should be read in
conjunction with, and is qualified in its entirety by, the more detailed
information, including the Financial Statements and related Notes, appearing
elsewhere herein.
 


                                                     AS OF OR FOR THE YEAR ENDED DECEMBER 31,
                                             --------------------------------------------------------
                                               1998        1997      1996(6)     1995(10)    1994(10)
                                               ----        ----      -------     --------    --------
                                                              (DOLLARS IN THOUSANDS)
                                                                              
SELECTED FINANCIAL DATA:
Total assets...............................  $177,374    $143,263    $114,640    $91,841     $87,745
Investment securities......................    22,929      28,228      18,386      6,720       5,653
Mortgage-backed securities.................    12,457      10,531      13,519     15,845      16,632
Loans receivable, net......................   123,917      96,181      76,545     61,408      60,635
Cash and cash equivalents..................    10,153       2,213       2,148      4,394       1,540
Deposits...................................   109,698      91,156      83,821     80,731      75,313
FHLB of Pittsburgh advances................    50,977      34,677      14,477      2,977       4,261
Stockholders' equity(1)....................    14,760      15,630      15,430      7,178       7,049
Nonperforming assets(2)....................       903         611         391        348         391
 
SELECTED OPERATING DATA:
Interest income............................  $ 11,672    $  9,371    $  6,748    $ 5,719     $ 5,314
Interest expense...........................     6,685       5,240       3,683      3,406       2,620
                                             --------    --------    --------    -------     -------
Net interest income........................  $  4,987    $  4,131    $  3,065    $ 2,313     $ 2,694
Provision for loan losses..................       209         104          44         36          36
                                             --------    --------    --------    -------     -------
Net interest income after provision for
  loan losses..............................  $  4,778    $  4,027    $  3,021    $ 2,277     $ 2,658
Other income...............................       534         373         297        222         294
Other expenses.............................     4,096       3,123       3,102(7)   2,255       2,058
                                             --------    --------    --------    -------     -------
Income before income tax expense...........  $  1,216    $  1,277    $    216    $   244     $   894
Income tax expense.........................       473         493          70         83         346
                                             --------    --------    --------    -------     -------
Net income.................................  $    743    $    784    $    146(8) $   161     $   548
                                             ========    ========    ========    =======     =======
SELECTED OPERATING RATIOS(3):
Return on average assets...................       .45%        .59%        .14%       .18%        .64%
Return on average equity...................      4.79        5.13        1.22       2.26        8.08
Average yield earned on interest-earning
  assets...................................      7.26        7.21        6.93       6.66        6.41
Average rate paid on interest-bearing
  liabilities..............................      4.50        4.47        4.21       4.22        3.38
Average interest rate spread(4)............      2.76        2.74        2.72       2.44        3.03
Net interest margin(4).....................      3.10        3.18        3.15       2.69        3.25
Ratio of interest-earning assets to
  interest-bearing liabilities.............    108.34      110.99      111.31     106.34      107.03
Operating expenses as a percent of average
  assets...................................      2.47        2.33        3.09       2.54        2.41
Average equity to average assets...........      9.35       11.42       11.86       8.02        7.97
Dividend payout ratio......................     25.78       13.04         N/A        N/A         N/A
 
ASSET QUALITY RATIOS(3):
Nonperforming loans as a percent of total
  loans....................................       .56%        .63%        .44%       .50%        .64%
Nonperforming assets as a percent of total
  assets...................................       .51         .43         .34        .38         .45
Allowance for loan losses as a percent of
  total loans..............................       .45         .42         .40        .46         .49
Charge-offs to average loans receivable
  outstanding during the period............       .04         .01         .04        .09         .00
 
PER SHARE DATA(5):
Basic Earnings Per Share...................  $   0.79    $   0.80    $   0.00(9)     N/A         N/A
Diluted Earnings Per Share.................      0.78        0.80        0.00(9)     N/A         N/A
Per Share Book Value.......................     15.54       14.85       13.93        N/A         N/A
Per Share Market Value.....................     12.75       17.39       11.74        N/A         N/A
 
NUMBER OF OFFICES:
Full-service offices at period end.........         5           4           3          3           3

 
                                        3
   5
 
- ---------------
 
 (1) For years ending December 31, 1995 and 1994 this category was referred to
     as "Equity."
 
 (2) Nonperforming assets consist of nonperforming loans and real estate owned
     ("REO"). Nonperforming loans consist of non-accrual loans, while REO
     consists of real estate acquired through foreclosure and real estate
     acquired by acceptance of a deed-in-lieu of foreclosure.
 
 (3) Asset Quality Ratios are end of period ratios, except for charge-offs to
     average loans. With the exception of end of period ratios, all ratios are
     based on average monthly balances during the indicated periods and are
     annualized where appropriate.
 
 (4) Interest rate spread represents the difference between the weighted average
     yield on average interest-earning assets and the weighted average cost of
     average interest-bearing liabilities, and net interest margin represents
     net interest income as a percent of average interest-earning assets.
 
 (5) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
     to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
     share data have been restated to reflect the stock dividend.
 
 (6) Based on the business activities of the Savings Bank prior to June 27,
     1996, and on the business activities of the Savings Bank and the Company on
     and after June 27, 1996.
 
 (7) But for the impact of the special assessment imposed by the Federal Deposit
     Insurance Corporation ("FDIC") on deposits of the Savings Bank as of March
     31, 1995 the other expenses of the Company for 1996 would have been $2.6
     million.
 
 (8) But for the impact of the special assessment described in Note 7 above, the
     net income of the Company would have been $454,000.
 
 (9) Earnings per share of the Company for the period from June 27, 1996 (date
     of conversion) to December 31, 1996, was less than one-half of one cent per
     share. But for the impact of the special assessment described in Note 7
     above, the earnings per share of the Company would have been $.31 per share
     for the same period. On a weighted average share basis for the period from
     June 27, 1996 to December 31, 1996 the earnings per share of the Company
     was $3,070 (net income) divided by 1,019,768 (weighted average shares for
     such period) or $0.00301.
 
(10) Based solely on the business activities of the Savings Bank.
 
                                        4
   6
 
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
 
     The following table sets forth certain unaudited quarterly consolidated
financial data regarding the Company:
 


                                                    MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 31
                                                    --------    -------    ------------    -----------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                               
1998 QUARTER ENDED(1)
Interest income...................................   $2,688     $2,902        $3,022         $3,060
Non-interest income...............................      101        143           126            164
                                                     ------     ------        ------         ------
Total operating income............................    2,789      3,045         3,148          3,224
Interest expense..................................    1,532      1,658         1,717          1,778
Provision for loan losses.........................       38         42            42             87
Non-interest expense..............................      968      1,024         1,049          1,055
                                                     ------     ------        ------         ------
Income before income taxes........................      251        321           340            304
Provision for income taxes........................       98        126           132            117
                                                     ------     ------        ------         ------
Net income........................................   $  153     $  195        $  208         $  187
                                                     ======     ======        ======         ======
Basic earnings per common share...................   $  .16     $  .20        $  .22         $  .21
Basic average number of common shares
  outstanding.....................................  969,166    969,788       958,313        880,218
Diluted earnings per common share.................   $  .16     $  .20        $  .22         $  .21
Diluted average number of common shares
  outstanding.....................................  979,430    989,988       963,872        880,218
Stock prices(2)
  High............................................   $17.42     $23.50        $18.25         $14.00
  Low.............................................   $16.30     $16.00        $12.75         $12.50
Cash dividends declared per common share..........   $  .05     $  .05        $  .05         $  .05

 


                                                    MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 31
                                                    --------    -------    ------------    -----------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                               
1997 QUARTER ENDED(1)
Interest income...................................   $2,133     $2,303        $2,467         $2,468
Non-interest income...............................       74         96            84            120
                                                     ------     ------        ------         ------
Total operating income............................    2,207      2,399         2,551          2,588
Interest expense..................................    1,152      1,265         1,401          1,423
Provision for loan losses.........................       17         27            30             30
Non-interest expense..............................      709        746           795            873(4)
                                                     ------     ------        ------         ------
Income before income taxes........................      329        361           325            262
Provision for income taxes........................      125        137           123            108
                                                     ------     ------        ------         ------
Net income........................................   $  204     $  224        $  202         $  154
                                                     ======     ======        ======         ======
Basic earnings per common share...................   $  .20     $  .23        $  .21         $  .16
Basic average number of common shares
  outstanding.....................................1,017,732    967,070       967,009        967,968
Diluted earnings per common share(3)..............   $  .20     $  .23        $  .21         $  .16
Diluted average number of common shares
  outstanding.....................................1,017,732    967,470       969,148        978,652
Stock prices(2)
  High............................................   $14.35     $14.35        $16.42         $17.39
  Low.............................................   $11.30     $13.48        $13.59         $15.65
Cash dividends declared per common share..........   $  .03     $  .03        $  .03         $  .03

 
- ---------------
 
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
    to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
    share data have been restated to reflect the stock dividend.
 
(2) Stock prices are based on the closing bid prices reported on NASDAQ.
 
(3) Prior to April 23, 1997, the Company had a simple capital structure with no
    difference between basic and diluted earnings per share.
 
(4) The increase in non-interest expense from $795,000 for the quarter ended
    September 30, 1997 to $873,000 for the quarter ended December 31, 1997 was
    primarily attributable to the opening of our supermarket branch located in
    Washington, PA.
 
                                        5
   7
 
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
GENERAL
 
     The Company completed the conversion of the Savings Bank to a federally
stock chartered savings bank on June 27, 1996. The results of operations of the
Company and the Savings Bank are consolidated and presented on a continuing
historical entity basis. Any comparisons set forth in this Annual Report to any
fiscal year ending prior to January 1, 1996 or to any date or any period ending
prior to June 27, 1996 should be understood to be a comparison to the activities
or results of the Savings Bank operating as a mutual chartered savings bank.
 
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
 
     In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company and
the Savings Bank operate), the impact of competition for the customers of the
Savings Bank from other providers of financial services, the impact of
government legislation and regulation (which changes from time to time and over
which the Company and the Savings Bank have no control), and other risks
detailed in this Annual Report and in the Company's other Securities and
Exchange Commission filings. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company undertakes no obligation to publicly revise
these forward-looking statements, to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
to be filed by the Company in 1999 and any Current Reports on Form 8-K filed by
the Company.
 
                    YEAR ENDED DECEMBER 31, 1998 COMPARED TO
                          YEAR ENDED DECEMBER 31, 1997
 
FINANCIAL CONDITION
 
     The Company's consolidated assets increased by $34.1 million or 23.8% from
$143.3 million at December 31, 1997 to $177.4 million at December 31, 1998. The
increase in total assets was primarily attributable to an increase in total net
loans receivable and cash and cash equivalents. The increase in total assets was
funded by an increase in deposits and the leverage of the balance sheet through
loans from the Federal Home Loan Bank of Pittsburgh ("FHLB of Pittsburgh").
Total deposits increased from $91.2 million at December 31, 1997 to $109.7
million at December 31, 1998, and advances from the FHLB of Pittsburgh rose from
$34.7 million at December 31, 1997 to $51.0 million at December 31, 1998.
 
     The Savings Bank's net loans receivable increased by $27.7 million or 28.8%
from $96.2 million at December 31, 1997 to $123.9 million at December 31, 1998.
This rise in total net loan receivables can be traced to three main areas of
growth. One-to-four family residential mortgages increased $9.2 million or
12.6%, as the Savings Bank expanded its efforts to contact realtors and priced
its mortgage rates competitively. Consumer loans increased $2.9 million or
22.8%, as the Savings Bank intensified its efforts to attract consumer loans
through expanded marketing and competitive rate pricing. Commercial business and
commercial real estate loans increased from $11.1 million at December 31, 1997
to $27.0 million at December 31, 1998. The increase in commercial business and
commercial real estate loans was accomplished through referrals.
 
     Investment securities decreased from $38.8 million at December 31, 1997 to
$35.4 million at December 31, 1998. The decrease occurred as investments with
callable features were called due to the low rate environment. These funds
received from the called investments along with increased principal payments on
loans and increases in total deposits primarily account for the increase in cash
and cash equivalents from $2.2 million at December 31, 1997 to $10.2 million at
December 31, 1998.
 
                                        6
   8
 
     On April 30, 1998, the Savings Bank completed the sale of the land and
building situated in Bethel Park, Pennsylvania, on which the Savings Bank's
Bethel Park branch is located. The Bank has entered into a two year lease with
the new owner that includes three one year options concerning the continued
operation of the Bethel Park branch of the bank at such location. The Company
will recognize a gain of $37,914 on the sale of the property over the life of
the lease.
 
     The Savings Bank's total deposits increased $18.5 million or 20.3% from
$91.2 million at December 31, 1997 to $109.7 million at December 31, 1998. The
growth in deposits during fiscal 1998 was primarily a result of competitive
rates and fees that continue to be offered by the Savings Bank. The Savings Bank
opened its fifth branch located at 603 Scenery Drive, Elizabeth Township, PA in
the first quarter of 1998. To attract customers to this location along with our
supermarket branch in Washington, PA, that opened in October 1997, slightly
higher than market rate certificates were offered. At December 31, 1998, our
supermarket branch had deposits totaling $2.4 million while the Elizabeth
Township office had deposits totaling $4.9 million. Borrowings by the Savings
Bank from the FHLB of Pittsburgh rose by $16.3 million, or 47.0%, from $34.7
million at December 31, 1997 to $51.0 million at December 31, 1998. Total equity
decreased $870,000 or 5.6% to $14.8 million at December 31, 1998. The primary
reasons for this decrease were two 5% stock buyback programs initiated and
completed during 1998 totaling $1.4 million and dividends paid of $192,000 which
was partially offset by net income for fiscal 1998 of $743,000. In addition, on
April 15, 1998, the Board of Directors declared a stock dividend of 15% to
shareholders of record of June 2, 1998 payable on June 19, 1998.
 
                    YEAR ENDED DECEMBER 31, 1997 COMPARED TO
                          YEAR ENDED DECEMBER 31, 1996
 
FINANCIAL CONDITION
 
     The Company's consolidated assets increased by $28.7 million or 25.0% from
$114.6 million at December 31, 1996 to $143.3 million at December 31, 1997. The
increase in total assets was primarily attributable to an increase in total
loans receivable and investment securities. Premises and equipment increased
$793,000 in 1997 primarily due to the expansion of the corporate office. The
increase in total assets was funded by an increase in deposits and the leverage
of the balance sheet through loans from the Federal Home Loan Bank of Pittsburgh
("FHLB of Pittsburgh"). Total deposits increased from $83.8 million at December
31, 1996 to $91.2 million at December 31, 1997, and advances from the FHLB of
Pittsburgh rose from $14.5 million at December 31, 1996 to $34.7 million at
December 31, 1997.
 
     The Savings Bank's total loans receivable increased by $21.0 million or
27.1% from $77.4 million at December 31, 1996 to $98.4 million at December 31,
1997. This rise in total loan receivables can be traced to three main areas of
growth. One-to-four family residential mortgages increased $7.1 million or
10.9%, as the Savings Bank expanded its efforts to contact realtors and priced
its mortgage rates to attract new business. Consumer loans increased $3.5
million or 37.7%, as the Savings Bank intensified its efforts to attract
consumer loans through expanded marketing and competitive rate pricing.
Commercial business and commercial real estate loans increased from $2.0 million
at December 31, 1996 to $11.1 million at December 31, 1997. The increase in
commercial business and commercial real estate loans was accomplished through
referrals.
 
     Investment securities increased from $31.9 million at December 31, 1996 to
$38.8 million at December 31, 1997. The increase occurred as the Company
proceeded to leverage its strong capital position by primarily investing in U.S.
Government agency securities with funds received by the FHLB of Pittsburgh.
 
     The Savings Bank's total deposits increased $7.4 million or 8.8% from $83.8
million at December 31, 1996 to $91.2 million at December 31, 1997. The growth
in deposits during fiscal 1997 was primarily a result of competitive rates and
fees that continue to be offered by the Savings Bank. Borrowings by the Savings
Bank from the FHLB of Pittsburgh rose by $20.2 million, or 139.3%, from $14.5
million at December 31, 1996 to $34.7 million at December 31, 1997. Total equity
increased $200,000 or 1.3% to $15.6 million at December 31, 1997, a result of
the net income for fiscal 1997 and the impact of the valuation of
available-for-sale securities pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 115 which was offset by a 5% stock buyback program
initiated and completed during 1997 in the amount of $776,000 and dividends paid
of $111,000.
 
                                        7
   9
 
OPERATING STRATEGY
 
     As described in greater detail below, the Company and Savings Bank intend
to continue an emphasis on residential mortgage loans. However, as part of the
business strategy to increase profitability, the Savings Bank will continue to
widen its range of lending activities to include commercial business loans,
commercial real estate loans and consumer loans. Although such lending
activities entail greater risk than residential mortgage lending, management is
willing to accept such risks because of its belief that there are lending
opportunities in its market area which are not being currently fulfilled by
other financial institutions and management believes it can properly manage the
risks of greater consumer and commercial lending.
 
     The Savings Bank continued to experience increased competition from
mortgage brokers and other financial entities for its one-to-four family
residential real estate lending activities in the early 1990s. This increased
competition has led to a reduction in margins for residential real estate
lending. The Savings Bank's total loans receivable attributable to one-to-four
family residential loans, which amounted to $55.3 million or 63.0% of total
assets at December 31, 1994, was $81.3 million at December 31, 1998 but had
declined as a percentage of total assets to 45.8%. During the same period, the
Savings Bank's total loans receivable attributable to commercial business,
commercial real estate, construction and consumer loans, which amounted to $5.9
million or 6.7% of total assets at December 31, 1994, had increased to $44.3
million at December 31, 1998 or 25.0% of total assets. At the same time,
investment and mortgage-backed securities, which amounted to $22.3 million, or
25.4% of total assets, at December 31, 1994 had increased to $35.4 million, or
19.9% of total assets, at December 31, 1998. Management attributes this shift in
asset composition to an increase in deposits and borrowings over the same period
(from $79.6 million at December 31, 1994 to $160.7 million at December 31, 1998)
and increased efforts on the part of management to find customers with various
loan needs. In addition, management desires to increase the Savings Bank's
commercial and consumer loans and investment securities to offset its exposure
to interest rate risk associated with long term fixed rate residential mortgages
in excess of 15 years.
 
     The Savings Bank's percentage of adjustable rate mortgages in its mortgage
portfolio has declined due to lack of demand. As fixed loan rates have fallen
recently, the adjustable rate mortgage has become less attractive to potential
customers. As of December 31, 1998, adjustable rate mortgages constituted 22.9%
of the Savings Bank's one-to-four family residential mortgage portfolio and
fixed rate mortgages made up the remaining portion of the Savings Bank's
one-to-four family residential mortgage portfolio. In contrast, as of December
31, 1997, adjustable rate mortgages composed 33.7% of the Savings Bank's
one-to-four residential mortgage portfolio and fixed rate mortgages comprised
the remaining portion of the Savings Bank's one-to-four family residential
mortgage portfolio. Management realizes the importance of adjustable rate
mortgages to interest rate risk management but believes that under this current
rate environment it would be difficult to profitably produce adjustable rate
mortgages. Therefore, management presently intends to continue to reduce its
emphasis on adjustable rate mortgages by providing a broad range of mortgage
products with varying maturities. The Savings Bank strives to maintain deposits
as its primary source of funds to meet loan demand and to maintain outstanding
loan balances. In striving to increase deposit balances, the Savings Bank has
opened its fifth branch in February 1998 located at 603 Scenery Drive, Elizabeth
Township, PA 15037. However, due to the increased equity of the Company which
arose through the Conversion, management has taken a more aggressive approach to
leverage the balance sheet of the Company and to fund the immediate growth in
assets of the Savings Bank through increased borrowings from the FHLB of
Pittsburgh. Investment securities and mortgage-backed securities are acquired
based on Investment/Asset and Liability Committees ("ALCO") decisions when the
Savings Bank has excess cash and when management believes the yields and the
maturities are attractive. Excess cash (cash in excess of vault cash and other
operating cash needs) is primarily deposited in an interest bearing demand
deposit account with the FHLB of Pittsburgh. Cash and cash equivalents typically
decline in periods of high loan demand and increase in periods of reduced loan
demand. In periods of heavy loan demand, the Savings Bank will borrow from the
FHLB of Pittsburgh to satisfy the loan demand. As of December 31, 1997,
outstanding borrowings from the FHLB of Pittsburgh stood at $34.7 million and as
of December 31, 1998 such borrowings have increased to $51.0 million. This
increased borrowing occurred as part of Management's plan to increase the assets
of the Savings Bank and increase the debt to equity leverage ratio due to the
increased equity that arose through the Conversion.
 
                                        8
   10
 
     Management's strategy in the past few years has been to invest the funds
received from the repayments and prepayments of loans and mortgage-backed
securities immediately into short-term, liquid investments. In the longer term,
the Company anticipates the use of a significant portion of these funds to fund
fixed-rate or adjustable-rate mortgage loans with various maturities and,
depending upon then current interest rates and management's estimate of how such
rates merit change, purchasing investment securities with various maturities.
Although this strategy will have the effect of increasing the Savings Bank's
interest rate exposure of the Company and the Savings Bank, management believes
that the increased earnings potential offsets this increased rate risk. In the
event the Savings Bank needs cash to fund additional consumer loans, commercial
business loans or commercial real estate loans, the Savings Bank will borrow
funds from the FHLB of Pittsburgh. This strategy will increase interest expense
but management feels the increased yields available through the extension of
consumer, commercial business and commercial real estate loans justify such
increased interest expense.
 
     Management has promoted one-to-four family residential mortgage loans with
fixed interest rates to 15 year terms or less whenever possible. However, due to
the heavy demand for 30 year fixed rate mortgages, management has had to promote
this product. Management is cognizant of the increased interest rate risk this
product presents and takes necessary steps to control the risk. Such steps
include limiting new loan volume and funding the loans with longer-term
borrowings. Adjustable rate mortgage loans ("ARMs") for one-to-four family
residential mortgages continue to be offered. U.S. Government and U.S.
Government agency securities and mortgage-backed securities are purchased with
contract maturities generally up to 15 years upon terms which management
believes are attractive because of yield, call features to the security or
market conditions. The Savings Bank has increased its exposure to consumer loans
and commercial loans that combine higher yields and a shorter loan term.
Consumer and commercial business loans have grown from $12.8 million and $9.6
million, respectively, at December 31, 1997 to $15.7 million and $18.7 million,
respectively, at December 31, 1998. Management intends to continue the strategy
set forth above. The foregoing investment strategy is based on management's
assessment of future economic conditions and is subject to change.
 
ASSET AND LIABILITY MANAGEMENT
 
     The principal objective of the Company's asset and liability management
function is to evaluate the interest-rate risk included in its asset and
liability mix to determine the level of risk appropriate given the Company's
business focus, operating environment, capital and liquidity requirements and
performance objectives, establish prudent asset concentration guidelines and
manage the risk consistent with Board approved guidelines. The Savings Bank
concentrates on maintaining a sufficient deposit base to fund loan activities
and securities investments. A large core deposit base (defined as demand deposit
accounts, passbook savings accounts and money market savings accounts) provides
the Savings Bank with a lower cost source of funds relative to its alternative
principal borrowing sources, i.e., advances from the FHLB of Pittsburgh.
Management calculates its cost of funds and chooses interest-bearing assets in
excess of its average cost of funds or its marginal cost of funding. In periods
of relatively low interest rates, the Savings Bank may price its certificates of
deposit in excess of its competition to attract and maintain deposits (i) to
avoid increased borrowing, or to reduce the outstanding borrowings, from the
FHLB of Pittsburgh or (ii) to avoid selling investment securities to maintain
liquidity needs. This strategy will result in periods of reduced net interest
income and net income if the Savings Bank is unable to invest deposits in
interest-bearing assets with sufficient yield to maintain its average interest
rate spread between its assets and liabilities.
 
     The Company seeks, through the Asset Liability Committee ("ALCO"), to
reduce the vulnerability of its operations to changes in interest rates and to
manage the difference between amounts of interest-rate sensitive assets and
interest-rate sensitive liabilities within specified maturities or repricing
dates. The difference, or the interest rate repricing "gap," provides an
indication of the extent to which an institution's interest rate spread will be
affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets during a given time period. Generally, during a period of
rising interest rates, a negative gap within shorter maturities would adversely
affect net interest income, while a positive gap within shorter maturities would
result in an increase in net interest income, and during a period of falling
interest rates, a negative gap within shorter maturities would result in an
 
                                        9
   11
 
increase in net interest income while a positive gap within shorter maturities
would have the opposite effect. As of December 31, 1998, the amount of the
Savings Bank's interest-bearing liabilities that were estimated to mature or
reprice within one year exceeded the Savings Bank's interest-earning assets with
the same characteristics by $19.1 million or 10.9% of the Savings Bank's total
assets. If the Board of Governors of the Federal Reserve System raises the
discount rate charged to member banks during 1999, interest rates within the
United States' economy will rise and the Savings Bank's net income is likely to
be adversely effected. In addition, ALCO reviews, among other things, the
sensitivity of the Savings Bank's assets, liabilities, and net interest income
to interest rate changes, unrealized gains and losses, purchase activity and
maturities of all interest bearing assets and liabilities. In connection
therewith, the ALCO generally reviews the Savings Bank's liquidity, cash flow
needs, maturities of investments, deposits and borrowings, current market
conditions and interest rates, and pricing of its deposit and loan products. The
Chief Executive Officer, Chief Financial Officer and President of the Savings
Bank have authority to adjust pricing weekly with respect to the Savings Bank's
retail deposits.
 
     The Office of Thrift Supervision ("OTS") is in the process of implementing
an interest rate risk component ("IRR") into its risk-based capital rules, which
is designed to calculate on a quarterly basis the extent to which the value of
an institution's assets and liabilities would change if interest rates increase
or decrease. The IRR component has been proposed to be a dollar amount that will
be deducted from total capital for the purpose of calculating an institution's
risk-based capital requirement and is measured in terms of the sensitivity of
its net portfolio value ("NPV") to changes in interest rates. NPV is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities, and off-balance sheet contracts. An institution's IRR is measured
as the change to its NPV as a result of a hypothetical 200 basis point change in
market interest rates. A resulting change in NPV of more than 2% of the
estimated market value of its assets would have required the institution to
deduct from its capital 50% of that excess change. The following table presents
the Savings Bank's NPV as of December 31, 1998, as calculated by the OTS in
accordance with its model, based on information provided to the OTS by the
Savings Bank. The chart does not include the impact of any interest or dividend
earning assets held at the Company level. The effect of market rate shifts on
these assets need not be reported to the OTS.



                                         NET PORTFOLIO VALUE (NPV)
                                   -------------------------------------
                                          (DOLLARS IN THOUSANDS)
                                   -------------------------------------
                                                                PERCENT
         CHANGE IN RATES              NPV                      CHANGE OF
          (EXPRESSED AS            EXPRESSED                   ESTIMATED
          BASIS POINTS)              IN $       $ CHANGE(1)     NPV(2)      NPV RATIO(3)    CHANGE(4)
- ---------------------------------   -------       -------         ---           ----          ----
                                                                             
+400.............................   $10,724       $-6,713         -38%          6.46%         -315bp
+300.............................    12,619        -4,818         -28           7.43          -219bp
+200.............................    14,489        -2,948         -17           8.33          -128bp
+100.............................    16,193        -1,244          -7           9.11           -51bp
 0...............................    17,437                                     9.61
- -100.............................    17,945           508          +3           9.74           +12bp
- -200.............................    18,144           707          +4           9.70            +8bp
- -300.............................    18,737         1,300          +7           9.84           +23bp
- -400.............................    19,332         1,895         +11           9.98           +36bp

 
- ---------------
 
(1) Represents the excess (deficiency) of the estimated NPV assuming the
    indicated change in interest rates minus the estimated NPV assuming no
    change in interest rates.
 
(2) Calculated as the amount of change in the estimated NPV divided by the
    estimated NPV assuming no change in interest rates.
 
(3) Calculated as the estimated NPV divided by the present value of the Savings
    Bank's assets.
 
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
    indicated change in interest rates over the estimated NPV ratio assuming no
    change in interest rates.
 
     Any IRR deduction imposed against the capital of a savings association by
regulations of the OTS does not take effect until the last day of the third
quarter following the reporting date on which the reported IRR exceeds 200 basis
points. Savings associations with assets under $300 million and risk-based
capital ratios in excess of
 
                                       10
   12
 
12% are exempt from reporting the NPV and IRR of such a savings association, but
will be requested to supply selected information to the OTS. The OTS has issued
a directive that it will not yet impose any deductions from regulatory capital
for an IRR component.
 
     Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions that may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Savings Bank's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of the Savings Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Savings Bank's net interest income and will differ from actual results.
 
     Based upon the above calculations, the percent change of estimated NPV for
a 200 basis point increase in prevailing rates changed from a negative 28 at
December 31, 1997 to a negative 17 at December 31, 1998. This decrease was a
direct result of ALCO's recommendation and the increase in liquidity. Management
will continue to review the NPV and IRR measurements.
 
     Based on the asset size of the Savings Bank and its strong risk-based
capital ratios, the Company believes that the Savings Bank does not have to
deduct any amount from the regulatory capital of the Savings Bank as of December
31, 1998. Management uses the NPV and the IRR rule as an additional tool to
evaluate the Savings Bank's asset and liability position.
 
                                       11
   13
 
RESULTS OF OPERATIONS
 
     AVERAGE BALANCES, INTEREST INCOME, INTEREST EXPENSE AND YIELDS EARNED AND
RATES PAID.  The following table sets forth, for the periods and at the date
indicated, information regarding the Company's average consolidated balance
sheet. Information is based on average daily balances during the periods
presented.


                               AT                           YEAR ENDED DECEMBER 31,
                          DECEMBER 31,   -------------------------------------------------------------
                              1998                   1998                            1997
                          ------------   -----------------------------   -----------------------------
                                                                          
                            AVERAGE                            AVERAGE                         AVERAGE
                             YIELD/      AVERAGE               YIELD/    AVERAGE               YIELD/
                              RATE       BALANCE    INTEREST    RATE     BALANCE    INTEREST    RATE
                              ----       --------   -------    ------    --------    ------    ------
 

                                                     (DOLLARS IN THOUSANDS)
                                                                          
Interest-earning assets:
  Investment
    securities(1).......      6.03%      $ 33,783   $ 2,137      6.33%   $ 25,918    $1,706      6.58%
  Loans receivable(2)
    Commercial..........      9.34         19,265     1,814      9.42       7,680       737      9.60
    Real estate loans...      7.26         77,854     5,695      7.31      70,445     5,160      7.32
    Consumer............      7.69         14,690     1,180      8.03      11,178       889      7.95
                                         --------   -------              --------    ------
  Total Loans
    Receivable..........      7.73        111,809     8,689      7.77      89,303     6,786      7.60
  Mortgage-backed
    securities(1).......      6.29          9,295       590      6.34      12,080       773      6.40
  Other interest-earning
    assets..............      4.87          5,988       256      4.27       2,750       106      3.85
                                         --------   -------              --------    ------
    Total
      interest-earning
      assets............      7.22%      $160,875   $11,672      7.26%   $130,051    $9,371      7.21%
Non-interest-earning
  assets................                    5,116                           3,896
                                         --------                        --------
    Total assets........                 $165,991                        $133,947
                                         ========                        ========
Interest-bearing
  liabilities:
  Deposits..............      3.97%      $ 99,343   $ 3,976      4.00%   $ 88,617    $3,650      4.12%
  FHLB advances.........      5.50         49,144     2,709      5.51      28,554     1,590      5.57
                                         --------   -------              --------    ------
    Total
      interest-bearing
      liabilities.......      4.46%      $148,487   $ 6,685      4.50%   $117,171    $5,240      4.47%
Non-interest-bearing
  liabilities...........                 $  1,987                        $  1,480
                                         --------                        --------
    Total liabilities...                 $150,474                        $118,651
Equity..................                 $ 15,517                        $ 15,296
                                         --------                        --------
    Total liabilities
      and equity........                 $165,991                        $133,947
                                         ========                        ========
Net interest-earning
  assets................                 $ 12,388                        $ 12,880
                                         ========                        ========
Net interest
  income/interest rate
  spread................      2.76%                 $ 4,987      2.76%               $4,131      2.74%
                              ====                  =======    ======                ======    ======
Net yield on interest-
  earning assets(3).....                                         3.10%                           3.18%
                                                               ======                          ======
Ratio of average
  interest-earning
  assets to average
  interest-bearing
  liabilities...........                                       108.34%                         110.99%
                                                               ======                          ======
 

                                                AVERAGE
                          AVERAGE               YIELD/
                          BALANCE    INTEREST    RATE
                          --------    ------    ------
                             (DOLLARS IN THOUSANDS)
                                       
Interest-earning assets:
  Investment
    securities(1).......  $ 11,609    $  657      5.66%
  Loans receivable(2)
    Commercial..........       574        51      8.89
    Real estate loans...    62,537     4,568      7.31
    Consumer............     6,147       459      7.47
                          --------    ------
  Total Loans
    Receivable..........    69,258     5,078      7.33
  Mortgage-backed
    securities(1).......    14,619       922      6.31
  Other interest-earning
    assets..............     1,867        91      4.87
                          --------    ------
    Total
      interest-earning
      assets............  $ 97,353    $6,748      6.93%
Non-interest-earning
  assets................     3,086
                          --------
    Total assets........  $100,439
                          ========
Interest-bearing
  liabilities:
  Deposits..............  $ 82,294    $3,407      4.14%
  FHLB advances.........     5,169       276      5.34
                          --------    ------
    Total
      interest-bearing
      liabilities.......  $ 87,463    $3,683      4.21%
Non-interest-bearing
  liabilities...........  $  1,067
                          --------
    Total liabilities...  $ 88,530
Equity..................  $ 11,909
                          --------
    Total liabilities
      and equity........  $100,439
                          ========
Net interest-earning
  assets................  $  9,890
                          ========
Net interest
  income/interest rate
  spread................              $3,065      2.72%
                                      ======    ======
Net yield on interest-
  earning assets(3).....                          3.15%
                                                ======
Ratio of average
  interest-earning
  assets to average
  interest-bearing
  liabilities...........                        111.31%
                                                ======

 
- ---------------
 
(1) The average yield for investment securities including held to maturity and
    available for sale is based upon historical amortized cost balances.
 
(2) Includes non-performing loans.
 
(3) Net interest income divided by interest-earning assets.
 
     RATE/VOLUME ANALYSIS.  The Savings Bank typically acquires funds in the
form of customer deposits or borrowings from the FHLB of Pittsburgh in which it
is a member. The Savings Bank then pays interest on such deposits and advances.
In turn, a savings association will lend these funds to third parties or
purchase investment
 
                                       12
   14
 
securities that generate interest income for the savings association. The
Savings Bank also operates in an environment of changing interest rates and
fluctuating volumes of deposits, advances from third parties, loans made to
third parties and securities bought, sold or repaid. The following table
describes the extent to which changes in interest rates and changes in volume of
interest-related assets and liabilities have affected the Company's consolidated
interest income and expense during 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 (change in volume
multiplied by prior year rate), (ii) changes in rate (change in rate multiplied
by prior year volume), and (iii) total change in rate and volume.


                                                              YEAR ENDED DECEMBER 31,
                               -------------------------------------------------------------------------------------
                                                                                  
                                             1998 VS. 1997                               1997 VS. 1996
                               ------------------------------------------   ----------------------------------------
 

                                  INCREASE                                    INCREASE
                                 (DECREASE)                                  (DECREASE)
                                   DUE TO                        TOTAL         DUE TO                       TOTAL
                               --------------      RATE/        INCREASE    -------------      RATE/       INCREASE
                               RATE    VOLUME     VOLUME       (DECREASE)   RATE   VOLUME     VOLUME      (DECREASE)
                               -----   ------   -----------    ----------   ----   ------   -----------   ----------
                                                              (DOLLARS IN THOUSANDS)
                                                                                  
Interest-earning assets:
  Loans receivable, net......  $ (12)  $1,934      $(19)         $1,903     $ 46   $1,586      $ 76         $1,708
  Mortgage-backed
    securities...............     (7)   (178)         2            (183)      14    (160)        (2)          (148)
  Investment securities......    (66)    517        (20)            431      107     810        132          1,049
  Other interest-earning
    assets...................     12     125         13             150      (19)     43         (9)            15
                               -----   ------      ----          ------     ----   ------      ----         ------
    Total interest-earning
      assets.................  $ (73)  $2,398      $(24)         $2,301     $148   $2,279      $197         $2,624
                               -----   ------      ----          ------     ----   ------      ----         ------
Interest-bearing liabilities:
  Deposits...................  $(103)  $ 441       $(12)         $  326     $(17)  $ 262       $ (1)        $  244
  FHLB advances..............    (16)  1,147        (12)          1,119       12   1,249         53          1,314
                               -----   ------      ----          ------     ----   ------      ----         ------
    Total interest-bearing
      liabilities............   (119)  1,588        (24)          1,445       (5)  1,511         52          1,558
                               -----   ------      ----          ------     ----   ------      ----         ------
Increase in net interest
  income.....................  $  46   $ 810       $  0          $  856     $153   $ 768       $145         $1,066
                               =====   ======      ====          ======     ====   ======      ====         ======

 
     NET INCOME.  The Company reported consolidated net income of $743,000,
$784,000 and $146,000 for the fiscal years ended December 31, 1998, 1997 and
1996, respectively. The $41,000 or 5.2% decrease in net income for fiscal 1998
when compared to fiscal 1997 was attributable to a $974,000 or 31.2% increase in
non-interest expense and an increase of $105,000 in provision for loan losses,
which was partially offset by an increase of $856,000 or 20.7% increase in net
interest income and a $162,000 or 43.5% increase in other income.
 
     Results for fiscal 1996 were affected by a $502,000 before tax ($308,000
after tax) FDIC special assessment to recapitalize the Savings Association
Insurance Fund ("SAIF"). But for this special assessment, earnings for the year
ended December 31, 1996 would have been $454,000. The $330,000 or 72.7% increase
in net income for fiscal 1997 when compared to fiscal 1996, without the special
assessment, was attributable to a $1.1 million or 34.7% increase in net interest
income and a $75,000 or 25.3% increase in other income, which was partially
offset by an increase of $520,000 or 20.0% in non-interest expense and an
increase of $230,000 in income tax expense, net of the benefit from the SAIF
assessment.
 
     NET INTEREST INCOME.  Net interest income before provision for loan losses
amounted to $5.0 million during fiscal 1998, compared to $4.1 million during
fiscal 1997 and compared to $3.1 million during fiscal 1996. During fiscal 1998,
the $856,000 million or 20.7%, increase in net interest income compared with
fiscal 1997 was attributable to an increase in loan originations and investment
purchases. Average balances of interest-earning assets increased $30.8 million,
or 23.7% while average interest-bearing liabilities increased $31.3 million, or
26.7%. The increase in both average assets and liabilities was due directly to
management's intent to leverage the Company's excess capital by funding the
accelerated growth in assets with primarily FHLB advances. Another contributing
factor was an increase in the average yield earned on interest-earning assets to
7.26% in 1998 from 7.21% in 1997, due primarily to increases in average yields
earned on loans receivable. The increases in both average balances and average
yields on earning assets, during fiscal 1998, increased interest income $2.3
million, or 24.6%, which was partially offset by a $1.4 million or 27.8%
increase in total interest expense.
 
                                       13
   15
 
     The $2.3 million increase in total interest income during the year ended
December 31, 1998 over the prior comparable period was primarily due to a $1.9
million or 28.0% increase in interest and fees on loans and a $431,000 or 25.3%,
increase in interest and dividends on other investment securities. The increase
in interest earned on loans and interest and dividends on other investment
securities during fiscal 1998 was primarily due to a rise in average balances of
loans receivable and on investment securities of $22.5 million, or 25.2%, and
$7.9 million, or 30.3%, respectively. Management continued to grow its
traditional one-to-four family residential loans from $72.2 million at December
31, 1997 to $81.3 million at December 31, 1998, but in addition was able to grow
its commercial business loans from $9.6 million at December 31, 1997 to $18.7
million at December 31, 1998. In addition, an increase in the average yield
earned on loans receivable from 7.60% in 1997 to 7.77% in 1998 accounted for a
portion of the increase in interest income.
 
     The increase in interest expense in 1998, compared with 1997, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $117.2 million to $148.5 million. This increase resulted from
an increased volume of average deposits of $10.7 million or 12.1% and a $20.6
million or 72.1% increase in average borrowings. The increase in average
borrowings was due to funding the accelerated growth in assets of the Company.
 
     During fiscal 1997, the $1.0 million or 32.3%, increase in net interest
income compared with fiscal 1996 was attributable to a $32.7 million, or 33.6%,
increase in the average balance of interest-earning assets which was partially
offset by an increase of $29.7 million, or 33.9%, increase in average
interest-bearing liabilities. The increase in both average assets and
liabilities was due directly to management's intent to leverage the Company's
excess capital by funding the accelerated growth in assets with primarily FHLB
advances. The increase in average interest-earning assets over average
interest-bearing liabilities of $3.0 million in 1997 was primarily attributable
from having the proceeds from the Company's stock offering on June 27, 1996 for
a full year. Another contributing factor was an increase in the average yield
earned on interest-earning assets to 7.21% in 1997 from 6.93% in 1996, due
primarily to increases in yields earned on loans receivable and investment
securities. The increases in both average balances and yield on earning assets,
during fiscal 1997, increased interest income $2.6 million, or 38.9%, which more
than offset a $1.6 million or 42.3% increase in total interest expense.
 
     The $2.6 million increase in total interest income during the year ended
December 31, 1997 over the prior comparable period was primarily due to a $1.7
million or 33.6% increase in interest and fees on loans and a $1.0 million or
159.7%, increase in interest and dividends on other investment securities. The
increase in interest earned on loans and interest and dividends on other
investment securities during fiscal 1997 was primarily due to a rise in average
balances of loans receivable and on investment securities of $20.0 million, or
28.9%, and $14.3 million, or 123.3%, respectively. Management continued to grow
its traditional one-to-four family residential loans from $65.1 million at
December 31, 1996 to $72.2 million at December 31, 1997, but in addition was
able to grow its commercial business loans from $1.0 million at December 31,
1996 to $9.6 million at December 31, 1997. In addition, an increase in the
average yield earned on loans receivable and investment securities from 7.33%
and 5.66%, respectively, in 1996 to 7.60% and 6.58%, respectively, in 1997
accounted for a portion of the increase in interest income.
 
     The increase in interest expense in 1997, compared with 1996, was primarily
a result of an increase in the Savings Bank's average interest bearing
liabilities from $87.5 million to $117.2 million. This increase resulted from an
increased volume of average deposits of $6.3 million or 7.7% and a $23.4 million
increase in average borrowings. The increase in average borrowings was due to
funding the accelerated growth in assets of the Company through increased
borrowings provided by the FHLB of Pittsburgh.
 
     PROVISION FOR LOAN LOSSES.  The Savings Bank establishes provisions for
loan losses, which are charged to operations, in order to maintain the allowance
for loan losses at a level which is deemed to be appropriate based upon an
assessment of prior loss experience, the volume and type of lending presently
being conducted by the Savings Bank, industry standards, past due loans,
economic conditions in the Savings Bank's market area generally and other
factors related to the collectibility of the Savings Bank's loan portfolio. For
the year ended December 31, 1998, the provision for loan losses was $209,000.
For the two years ended December 31, 1997 and 1996, provisions for loan losses
were $104,000 and $44,000, respectively. The increase in provision for loan
 
                                       14
   16
 
losses in 1998 represents management's intent to raise the level of provision in
relation to the increased loan types and volume during fiscal 1998.
Specifically, during the fourth quarter 1998, management increased its provision
for loan loss expense to $87,000 from $42,000 in the third quarter 1998. This
increase represents management's intent to grow the loan loss provision in
relation to the growth in commercial business and commercial real estate loans,
which grew from $16.8 million at June 30, 1998 to $27.0 million at December 31,
1998. During fiscal 1998, the Savings Bank charged off $22,000 and $19,000 in
one-to-four family and credit card loans, respectively. At December 31, 1998,
the Savings Bank's allowance for loan losses amounted to 81.8% of total
non-performing loans and .45% of total loans receivable. Management and the
directors of the Company and the Savings Bank believe that the allowance for
loan losses is currently adequate. In addition, management and the directors of
the Company and the Savings Bank propose to continue to evaluate its loan loss
reserve in relation to its commercial business and commercial real estate loan
portfolios and make necessary adjustments to reserves as needed.
 
     The Savings Bank calculates expected loan losses using an approach based
primarily upon historical experience and current economic conditions. Although
management utilizes its best judgment in providing for losses, there can be no
assurance that the Savings Bank will not have to increase its provisions for
loan losses in the future as a result of increases in higher risk commercial and
consumer loans, future changes in the economy or for other reasons, which could
adversely affect the Savings Bank's results of operations. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Savings Bank's provision for loan losses and the
carrying value of its other non-performing assets based on their judgments about
information available to such regulatory agencies at the time of their
examination. The Savings Bank is in the process of being examined by the OTS as
of December 31, 1998 and a final report is forthcoming. Prior to this exam, the
Savings Bank was last examined by the OTS as of March 31, 1997.
 
     OTHER INCOME. Total other income amounted to $534,000 for the year ended
December 31, 1998, an increase of $162,000 or 43.5% from the $372,000 earned in
fiscal 1997. Increased transaction fees accounted primarily for the rise in
total other income. The increase in transaction fees occurred due to an increase
in transaction accounts, which include NOW and non-interest bearing accounts,
from $13.9 million at December 31, 1997 to $17.5 million at December 31, 1998.
The additional transaction fees have resulted in increased costs due to higher
employee manhours to administer such transactions.
 
     Total other income amounted to $372,000 for the year ended December 31,
1997, an increase of $75,000 or 25.3% from the $297,000 earned in fiscal 1996.
Increased transaction fees accounted primarily for the rise in total other
income. The increase in transaction fees occurred due to an increase in
transaction accounts, which include NOW and non-interest bearing accounts, from
$11.1 million at December 31, 1996 to $13.9 million at December 31, 1997. The
additional transaction fees have resulted in increased costs due to higher
employee manhours to administer such transactions.
 
     OTHER EXPENSES.  Total other expenses amounted to $4.1 million for the year
ended December 31, 1998, an increase of $974,000 or 23.8% from the $3.1 million
incurred in fiscal 1997. One of the reasons for the increase was a $455,000 or
29.0% increase in salaries and employee benefits. This is attributable to the
hiring of four full time equivalent employees to staff the newly formed
Elizabeth Township branch, a full year of six full time equivalent employees at
our Washington supermarket branch, an increase of $46,000 in costs associated
with the Management Recognition and Retention plan, an increase in expenses
related to commercial loan administration, and salary increases for its existing
employees. The increase is also attributable to a rise in premises and occupancy
costs of $197,000 or 59.2% primarily due to the higher depreciation expenses
associated with furniture and equipment needed for the expansion of the
corporate office and the two new branch locations. Lastly, the increase was
caused by other expenses, which increased $166,000 or 29.3% during 1998. The
rise in other expenses was primarily the result of increased consulting expenses
as the Company has outsourced some job functions and increased general operating
expenses.
 
     Total other expenses amounted to $3.1 million for the year ended December
31, 1997, an increase of $520,000 or 20.0% from the $2.6 million incurred in
fiscal 1996, without the SAIF special assessment. One of the reasons for the
increase was a $347,000 or 28.4% increase in salaries and employee benefits.
This is attributable to the hiring of five full time equivalent employees to
staff the newly formed supermarket branch, an $88,000
 
                                       15
   17
 
expense associated with the implementation of a Management Recognition and
Retention plan, additional ESOP compensation expense of $54,000, an increase in
expenses related to commercial loan administration, and salary increases for its
existing employees. The increase is also attributable to a rise in other
expenses, which increased $198,000 or 53.6% during 1997. The rise in other
expenses was primarily the result of increased professional fees and other costs
associated with operating the Company as a public reporting entity for an entire
year and additional costs associated with the first annual meeting.
 
     INCOME TAXES.  For the fiscal years ended December 31, 1998, 1997 and 1996,
the Company incurred income tax expense of $473,000, $493,000 and $69,000. The
effective tax rate was 38.9% during the year ended December 31, 1998, compared
to 38.6% during the year ended 1997, and 32.3% in fiscal 1996. The decreased
income tax expense incurred in 1998 was due to decreased taxable income. For
further information, see Note 11 of the Notes to Consolidated Financial
Statements.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Cash flows are categorized as to whether they relate to the operating,
investing or financing activities of the Company or the Savings Bank. Cash flow
from operating activities includes net income plus or minus non-cash income
statement items. Cash flow from investing activities includes proceeds from the
sale or maturity of investment securities, principal payments collected on loans
and mortgage-backed and related securities, loan originations and purchases of
investments and mortgage-backed and related securities. Cash flow from financing
activities includes the increase or decrease in deposits, borrowings and
escrows.
 
     During the years ended December 31, 1998 and 1997, the Company's or the
Savings Bank's operating activities provided net cash of approximately $890,000
and $1.5 million, respectively. The $890,000 net cash provided during the year
ended December 31, 1998 was primarily due to $743,000 in net income, $209,000 in
provision for loan losses, and $306,000 in depreciation of premises and
equipment, which was partially offset by a $398,000 increase in other assets.
The primary reasons for the $1.5 million net cash provided during the year ended
December 31, 1997 were $784,000 in net income, a $287,000 increase in other
liabilities, and $189,000 in depreciation of premises and equipment, which was
partially offset by a $222,000 increase in accrued interest receivable.
 
     Net cash used by investing activities was $25.8 million for the year ended
December 31, 1998. During the year ended December 31, 1998, the Savings Bank
originated $27.9 million in new loans in excess of principal payments received
on existing loans. The Savings Bank purchased $16.7 million of investment and
mortgage-backed securities designated held to maturity due to their longer term
maturity structure and purchased $6.7 million of investment and mortgage-backed
securities designated available for sale. In addition, $17.0 and $5.6 million
held to maturity and available for sale securities, respectively, were called
during fiscal 1998. Net cash used by investing activities was $28.1 million for
the year ended December 31, 1997. During the year ended December 31, 1997, the
Savings Bank originated $19.7 million in new loans in excess of principal
payments received on existing loans and purchased $17.7 million of investment
securities designated held to maturity due to their longer term maturity
structure. In addition, $8.5 million held to maturity securities were called
during fiscal 1997.
 
     Net cash provided by financing activities for the year ended December 31,
1998, was $32.8 million, attributable to increases in core deposits and
certificate accounts of $8.4 million and $10.1 million, respectively, and
increases in net Federal Home Loan Bank advances of $16.3 million. In addition,
the Company purchased $1.4 million of treasury stock during fiscal 1998. During
the same period for 1997, the Savings Bank experienced a $26.7 million increase
in net cash provided by financing activities primarily due to increases in core
deposits and certificate accounts of $5.2 million and $2.1 million,
respectively, and increases in net Federal Home Loan Bank advances of $20.2
million
 
     The primary sources of funds for the Savings Bank are deposits, advances
from the FHLB of Pittsburgh, repayments, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, and funds provided from operations.
The primary sources of funds for the Company are dividends from the Savings
Bank, repayments by the ESOP of the loan it received from the Company, interest
and dividends on debt and equity investments in other companies and interest
earned
                                       16
   18
 
on deposits of the Company held at Savings Bank and short-term investments.
While scheduled loan and mortgage-backed securities repayments and maturing
investment securities and short-term investments are relatively predictable
sources of funds, deposit flows, loan and mortgage-backed securities
prepayments, and investment securities with callable features are greatly
influenced by the movement of interest rates in general, economic conditions or
competition. The Savings Bank manages the pricing of its deposits to maintain a
deposit balance deemed appropriate and desirable by its Board of Directors. In
addition, the Savings Bank invests in short-term interest-earning assets, which
provides liquidity to meet lending requirements. The Savings Bank has also
utilized advances from the FHLB of Pittsburgh. At December 31, 1998, the Savings
Bank's maximum borrowing capacity with the FHLB of Pittsburgh was $93.1 million
of which $51.0 million was borrowed pursuant to various term loans with
maturities of less than ten years.
 
     Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as cash and cash
equivalents, interest bearing deposits with other institutions (including the
FHLB of Pittsburgh), U.S. Government, U.S. Government agencies and other
qualified investments. On a longer-term basis, the Company, through the
operation of the Savings Bank, maintains a strategy of investing in various
mortgage-backed securities and other investment securities and lending products
as described in greater detail under the heading "Business of the Company,"
which is hereinafter set forth. During the year ended December 31, 1998, the
Savings Bank used its sources of funds primarily to meet its ongoing commitments
to pay maturing savings certificates and savings withdrawals, to fund loan
commitments, to fund purchases of additional investment securities for its
portfolio and to increase the Savings Bank's one-to-four family mortgage loan,
commercial loan and consumer loan portfolios. The Savings Bank has outstanding
loan commitments (i.e. one-to-four family and home equity loan commitments,
credit card limits and commercial loan commitments) to extend credit
approximating $13.1 million as of December 31, 1998. Certificates of deposit
scheduled to mature in one year or less at December 31, 1998 totaled $34.8
million.
 
     Consolidated cash and cash equivalents increased by $7.9 million between
December 31, 1997 and December 31, 1998. As of December 31, 1998, the
consolidated cash and cash equivalents of the Company amounted to $10.2 million
or 5.7% of assets, of which $9.1 million was invested in interest bearing
accounts with the FHLB of Pittsburgh withdrawable on demand. The investment
securities (including mortgage-backed securities) of the Company and the Savings
Bank decreased from $38.8 million or 27.1% of total assets at December 31, 1997
to $35.4 million or 19.9% of assets at December 31, 1998. As of December 31,
1998, $1.3 million of such investment securities (including mortgage-backed
securities) of the Company and the Savings Bank mature within one year or less
and $6.5 million have maturities of five years or less. The Company's
consolidated net interest margin has decreased from 3.18% for the year ended
December 31, 1997 to 3.10% for the year ended December 31, 1998.
 
     Consolidated cash and cash equivalents increased by $65,000 or 3.0% between
December 31, 1996 and December 31, 1997. As of December 31, 1997, the
consolidated cash and cash equivalents of the Company amounted to $2.2 million
or 1.5% of assets, of which $1.3 million was invested in interest bearing
accounts with the FHLB of Pittsburgh withdrawable on demand. The investment
securities (including mortgage-backed securities) of the Company and the Savings
Bank have had an increase in dollar amount over the last few years, from $31.9
million or 27.8% of total assets at December 31, 1996 to $38.8 million or 27.1%
of assets at December 31, 1997. As of December 31, 1997, $3.1 million of such
investment securities (including mortgage-backed securities) of the Company and
the Savings Bank mature within one year or less and $8.0 million have maturities
of five years or less. The Company's consolidated net interest margin has
increased from 3.15% for the year ended December 31, 1996 to 3.18% for the year
ended December 31, 1997.
 
     Management of the Savings Bank believes that the Savings Bank has adequate
resources, including principal prepayments and repayments of loans,
mortgage-backed securities and maturing investments and access to loans from the
FHLB of Pittsburgh, to fund all of its commitments to the extent required and to
maintain flexibility to meet other market changes. Management believes that a
significant portion of maturing deposits will remain with the Savings Bank. See
Note 8 of the Notes to Consolidated Financial Statements.
 
     The Savings Bank is required by the OTS to maintain average daily balances
of liquid assets (as defined in OTS regulations) in an amount equal to 4.0% of
net withdrawable deposits and borrowings payable in one year or
 
                                       17
   19
 
less to assure its ability to meet demand for withdrawals and repayment of
short-term borrowings. The liquidity requirements may vary from time to time at
the direction of the OTS depending upon economic conditions and deposit flows.
The Savings Bank's average monthly liquidity ratio at December 31, 1998 was
48.1%.
 
     The Company, as a separately incorporated holding company, has no
significant operations other than serving as sole stockholder of the Savings
Bank. On an unconsolidated basis, the Company has no paid employees. At December
31, 1998, the Company's assets consist of its investment in the Savings Bank,
its receivable from the ESOP, debt and equity investments with an aggregate
market value of $1.4 million at December 31, 1998 and deposits maintained with
the Savings Bank. Its sources of income will consist of earnings from the
investment in such debt and equity securities, interest on such deposits and
interest from the ESOP obligation. The only expenses of the Company relate to
its reporting obligations to the OTS, its reporting obligations under the
Exchange Act and related expenses to operate as a publicly traded company.
Management believes that the Company and the Savings Bank currently has adequate
liquidity available to respond to its obligations.
 
IMPACT OF INFLATION AND CHANGING PRICES
 
     The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
 
     Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's consolidated assets and
liabilities are critical to the maintenance of acceptable performance levels.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. The
Corporation does not have any derivative instruments or hedging activities as of
December 31, 1998.
 
     In October 1998, SFAS No. 134, "Accounting for Mortgage Servicing Rights,"
was issued. The Corporation does not have any mortgage servicing rights as of
December 31, 1998.
 
EARNINGS PER COMMON SHARE
 
     During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." Under SFAS No. 128, earnings per share are classified as
basic earnings per share and diluted earnings per share. Basic earnings per
share includes only the weighted average common shares outstanding. Diluted
earnings per share includes the weighted average common shares outstanding and
any dilutive common stock equivalent shares in the calculation. All prior
periods have been restated to reflect this adoption. Treasury shares are treated
as retired for earnings per share purposes.
 
                                       18
   20
 
     The following table reflects the calculation of earnings per share under
SFAS No. 128.
 


                                                        YEAR ENDED DECEMBER 31,
                                                   ----------------------------------
                                                     1998        1997         1996
                                                   --------    --------    ----------
                                                                  
Basic earnings per share(1):
  Net income.....................................  $743,087    $784,487    $    3,070
  Average shares outstanding.....................   944,240     979,772     1,019,768
  Earnings per share.............................  $   0.79    $   0.80            --
Diluted earnings per share(1):
  Net income.....................................  $743,087    $784,487    $    3,070
  Average shares outstanding.....................   944,240     979,772     1,019,768
  Stock options..................................     9,041       3,240            --
                                                   --------    --------    ----------
  Diluted average shares outstanding.............   953,281     983,012     1,019,768
  Earnings per share.............................  $   0.78    $   0.80            --

 
- ---------------
 
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
    to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
    share data have been restated to reflect the stock dividend.
 
                            BUSINESS OF THE COMPANY
GENERAL
 
     The Company is a savings and loan holding company that holds the capital
stock of one subsidiary, the Savings Bank. As of December 31, 1998, the Company
also owns a loan receivable from the ESOP, holds debt and equity investments
with a market value totaling $1.4 million at December 31, 1998 and maintains
deposit accounts with the Savings Bank. The principal business operations of the
Company are conducted through the Savings Bank.
 
LENDING ACTIVITIES
 
     GENERAL.  The Savings Bank's lending operations follow the traditional
pattern of primarily emphasizing the origination of one-to-four family
residential loans for portfolio retention. However, since 1996, the Savings Bank
has begun to expand its loan products by emphasizing other types of lending in
order to meet its customer's demands. These include commercial business loans,
commercial real estate loans, construction loans, and consumer loans, including
home equity or home improvement loans, automobile loans, student loans, credit
card loans, cash collateral personal loans and unsecured personal loans.
 
     At December 31, 1998, the Savings Bank's total loan portfolio amounted to
$125.6 million, or 70.8% of total assets at that date. The Savings Bank has
traditionally concentrated its lending activities on one-to-four family
residential mortgages in its primary market. Consistent with its lending
orientation, $81.3 million or 64.7% of the Savings Bank's total loan portfolio
consisted of one-to-four family residential loans at December 31, 1998.
 
     Management intends that one-to-four family residential mortgage loans will
be the primary lending activity of the Savings Bank but the percentage of
one-to-four family mortgages against the total loan portfolio will not be as
high as it was at December 31, 1996 which was 84.2%. Although one-to-four family
residential mortgages advanced by the Savings Bank have increased from $65.1
million at December 31, 1996, to $72.2 million at December 31, 1997, to $81.3
million at December 31, 1998, the percentage of one-to-four family mortgages to
total loan portfolio has dropped from 84.2% at December 31, 1996, to 73.3% at
December 31, 1997 to 64.7% at December 31, 1998. This decline in percentage can
be traced to the increases in commercial business loans, construction loans, and
consumer loans booked in 1997 and 1998. Management is committed to aggressively
market the residential mortgage products of the Savings Bank, but management
does not intend to pursue a policy to return the Savings Bank's loan portfolio
to a position where one-to-four family mortgages account for 80% or more of the
total loan portfolio.
 
                                       19
   21
 
     Consumer loans, which are of shorter maturity and at higher margins above
cost of funds, have risen from $9.3 million at December 31, 1996, to $12.8
million at December 31, 1997, to $15.7 million at December 31, 1998. Each of the
foregoing figures shows gross loan receivables with no allocation for bad debt
reserve or other contra accounts. Management decided to increase home equity
loans primarily because this type of loan is secured by real estate through a
first or second lien. As a result, home equity loans have risen from $4.6
million at December 31, 1996, to $7.5 million at December 31, 1997 to $9.8
million at December 31, 1998. Management has also sought through the promotion
of automobile, student and credit card loans to increase outstanding consumer
loans. The percentage of consumer loans against total loan receivables went from
12.0% at December 31, 1996, to 13.0% at December 31, 1997, to 12.5% at December
31, 1998. Management is committed to increase consumer loans.
 
     The Savings Bank is pursuing a policy to further grow its commercial
business loan and commercial real estate loan portfolio. Commercial business
loans and commercial real estate loans have risen from $2.0 million at December
31, 1996, to $11.1 million at December 31, 1997, to $27.0 million at December
31, 1998 and are expected to continue to increase in 1999. Each of the foregoing
figures shows gross loan receivables with no allocation for bad debt reserve or
other contra accounts. The percentage of commercial business loans and
commercial real estate loans against total loans receivable has changed from
2.6% at December 31, 1996, to 11.2% at December 31, 1997 to 21.0% at December
31, 1998.
 
     By statute, the Savings Bank must limit its commercial business loans to
20% of its total assets provided that amounts in excess of 10% of total assets
may be used only for small business loans. As of December 31, 1998, the total
asset size of the Savings Bank was $177.4 million and 20% of such number is
$35.5 million and 10% of such number is $17.7 million. At December 31, 1998, the
Savings Bank had $18.7 million in commercial business loans of which $7.9
million was considered small business loans. The statutory ceiling on commercial
real estate loans is substantially higher, i.e. 400% of the Savings Bank's
capital, or at December 31, 1998, $51.9 million. At December 31, 1998 the
Savings Bank had $7.6 million in commercial real estate loans. Management
intends to continue to pursue commercial loans that carry a partial U.S.
Government guarantee of the payment of principal and interest. Included in the
Savings Bank's loan portfolio at December 31, 1998 are $5.4 million of
commercial loans that are 80% guaranteed by the United States Government.
 
     The Savings Bank's primary market area consists of southern and
southwestern portions of Allegheny County and, to a lesser extent, Washington
and Westmoreland Counties. All of the Savings Bank's residential mortgage loans
are secured by properties located in Pennsylvania, and a substantial portion of
the real estate mortgage loans are secured by properties located within the
Savings Bank's primary market area.
 
                                       20
   22
 
     LOAN PORTFOLIO COMPOSITION.  The following table sets forth the composition
of the Savings Bank's loan portfolio by type of loan at the dates indicated.



                                                           AS OF DECEMBER 31,
                                      ------------------------------------------------------------
                                            1998                  1997                  1996
                                      ----------------       ---------------       ---------------
                                       AMOUNT      %         AMOUNT      %         AMOUNT      %
                                      --------   -----       -------   -----       -------   -----
                                                         (DOLLARS IN THOUSANDS)
                                                                           
Real estate loans
  One-to-four family(1).............  $ 81,284   64.71%      $72,198   73.34%      $65,117   84.17%
  Construction......................     2,270    1.81         2,449    2.49           925    1.20
  Commercial real estate............     7,632    6.08         1,425    1.45         1,023    1.32
                                      --------   -----       -------   -----       -------   -----
     Total..........................  $ 91,186   72.60%      $76,072   77.28%      $67,065   86.69%
                                      --------   -----       -------   -----       -------   -----
Commercial business loans(1)........  $ 18,712   14.90%      $ 9,565    9.72%      $ 1,010    1.30%
                                      --------   -----       -------   -----       -------   -----
Consumer loans
  Home equity loans & lines.........  $  9,834    7.83%      $ 7,535    7.66%      $ 4,562    5.90%
  Student loans.....................     2,263    1.80         2,215    2.25         2,228    2.88
  Automobile loans..................     2,405    1.92         1,967    2.00         1,515    1.96
  Other consumer loans(1)...........     1,191     .95         1,076    1.09           984    1.27
                                      --------   -----       -------   -----       -------   -----
     Total..........................  $ 15,693   12.50%      $12,793   13.00%      $ 9,289   12.01%
                                      --------   -----       -------   -----       -------   -----
Total loans receivable(1)...........  $125,591     100%      $98,430     100%      $77,364     100%
                                      ========   =====       =======   =====       =======   =====
Less:
  Allowance for loan losses.........  $    571               $   403               $   307
  Loans in process..................     1,106                 1,857                   515
  Deferred loan (costs) fees........        (3)                  (11)                   (3)
                                      --------               -------               -------
Loans receivable, net...............  $123,917               $96,181               $76,545
                                      ========               =======               =======

 
- ---------------
 
(1) Includes non-performing loans.
 
     CONTRACTUAL MATURITIES.  The following table sets forth the scheduled
contractual maturities of the Savings Bank's loan portfolio at December 31,
1998. Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less. The
amounts shown for each period do not take into account loan prepayments and
normal amortization of the Savings Bank's loan portfolio.
 


                                                           AT DECEMBER 31, 1998
                                     -----------------------------------------------------------------
                                     ONE-TO-FOUR     COMMERCIAL      COMMERCIAL
                                      FAMILY(1)    REAL ESTATE(2)     BUSINESS     CONSUMER    TOTAL
                                     -----------   ---------------   -----------   --------   --------
                                                              (IN THOUSANDS)
                                                                               
1 year or less.....................    $ 1,899         $1,215          $ 2,306     $ 1,431    $  6,851
After 1 year through 5 years.......      5,840            183            6,984       4,908      17,915
More than 5 years..................     74,601          7,448            9,422       9,354     100,825
                                       -------         ------          -------     -------    --------
Total amounts due..................    $82,340         $8,846          $18,712     $15,693    $125,591
                                       =======         ======          =======     =======    ========
Interest rate terms on amounts due
  after 1 year:
  Fixed............................    $61,793         $3,443          $ 7,286     $ 9,144    $ 81,666
  Adjustable/Floating..............    $18,648         $4,188          $ 9,120     $ 5,118    $ 37,074

 
- ---------------
 
(1) Includes construction loans of $1.1 million for the construction of
    one-to-four family homes. At the completion of the construction period
    (scheduled to be less than one year), the loans will convert automatically
    to a traditional mortgage with maturities in excess of five years.
 
                                       21
   23
 
(2) Includes construction loans of $1.2 million for the construction of a
    commercial real estate property. At the completion of the construction
    period (scheduled to be less than one year), the loans will convert
    automatically to a commercial real estate mortgage with maturities in excess
    of five years.
 
     Scheduled contractual repayment of loans does not reflect the expected term
of the Savings Bank's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of scheduled
amortization of principal, prepayments and due-on-sale clauses, which give the
Savings Bank the right to declare a conventional loan immediately due and
payable in the event, among other things, that the borrower sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan rates are higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are lower than current mortgage loan rates (due to
refinancings of adjustable-rate and fixed-rate loans at lower rates). Under the
latter circumstance, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
 
     LOAN ORIGINATION, PURCHASE AND SALES ACTIVITY.  The following table shows
the loan origination, purchase and sale activity of the Savings Bank during the
periods indicated.
 


                                                         YEAR ENDED DECEMBER 31,
                                                    ---------------------------------
                                                      1998         1997        1996
                                                    ---------    --------    --------
                                                             (IN THOUSANDS)
                                                                    
Total loans at beginning of period................  $  98,430    $ 77,364    $ 61,737
Loan originations:
  Real estate
     One-to-four family...........................  $  25,685    $ 13,982    $ 17,100
     Construction.................................      2,466       2,948         512
     Commercial real estate.......................      5,511         475         925
                                                    ---------    --------    --------
       Total real estate loans originated.........  $  33,662    $ 17,405    $ 18,537
                                                    ---------    --------    --------
  Commercial business loans.......................  $  21,872    $ 14,174    $  1,173
                                                    ---------    --------    --------
  Consumer loans
     Home equity loans and lines of credit........  $   6,987    $  5,762    $  3,868
     Student loans................................        397         353         482
     Automobile loans.............................      1,633       1,323       1,242
     Other consumer loans.........................      1,447       1,267       1,284
                                                    ---------    --------    --------
       Total consumer loans originated............  $  10,464    $  8,705    $  6,876
                                                    ---------    --------    --------
     Total loans originated.......................  $  65,998    $ 40,284    $ 26,586
                                                    ---------    --------    --------
Deduct:
  Principal loan repayments and prepayments.......  $ (38,587)   $(19,218)   $(10,949)
  Transferred to real estate owned................       (250)         (0)        (10)
                                                    ---------    --------    --------
Subtotal:.........................................  $ (38,837)   $(19,218)   $(10,959)
                                                    ---------    --------    --------
  Net increase in loans...........................  $  27,161    $ 21,066    $ 15,627
                                                    ---------    --------    --------
  Total loans at end of period....................  $ 125,591    $ 98,430    $ 77,364
                                                    =========    ========    ========

 
     Applications for residential mortgage and consumer loans are taken at any
of the Savings Bank's offices, while commercial business loan, commercial real
estate loan and construction loan applications are referred to the appropriate
loan officer of the Savings Bank. Residential mortgage loan applications are
primarily developed from referrals from real estate brokers and builders,
existing customers and walk-in customers. Commercial real estate loan and
construction loan applications are obtained primarily from previous borrowers as
well as referrals. Commercial loan applications arise primarily from referrals.
 
     The Savings Bank's lending policies allow all one-to-four residential
mortgage loans $50,000 or less to be approved with two signatures of the Chief
Executive Officer, President, and/or the Executive Vice President. One-to-four
residential mortgage loans in excess of $50,000 are presented to the Loan
Committee that consists of
 
                                       22
   24
 
members of management and two outside directors. The Chief Executive Officer has
authority to authorize commercial loans up to and including $150,000. Commercial
loan applications under $25,000 may be approved with the signatures of two of
the loan officers designated by the President or the Loan Committee. The Loan
Committee has been authorized by the Board to grant loans up to $500,000, with
loans in excess of this amount required to be presented to the full Board for
review and approval. It has been the policy of the Savings Bank's management to
present all mortgage loans which are not single-family residential loans to the
Loan Committee and/or the Board of Directors for review and approval, and to
have the Board of Directors review any loan application which would exceed
$500,000. Under applicable regulations, the maximum amount of loans that the
Savings Bank may make to any one borrower, including related entities, is
limited to 15% of unimpaired capital and surplus, which legal lending limit
amounted to $1.9 million at December 31, 1998.
 
     The Savings Bank currently is not a purchaser of residential or consumer
loans. There are no current intentions to begin purchasing such loans. The
Savings Bank had previously purchased loan participations secured primarily by
commercial real estate located in Pennsylvania and Ohio. Such loans were
presented to the Savings Bank from contacts at other financial institutions that
have previously done business with the Savings Bank. At December 31, 1998, none
of the Savings Bank's total loans receivable consisted of participation
interests.
 
     REAL ESTATE LENDING STANDARDS.  Effective March 19, 1993, all financial
institutions were required to adopt and maintain comprehensive written real
estate lending policies that are consistent with safe and sound banking
practices. These lending policies must reflect consideration of the Interagency
Guidelines or Real Estate Lending Policies adopted by the Federal banking
agencies in December 1992 ("Real Estate Lending Guidelines"). The Real Estate
Lending Guidelines set forth uniform regulations prescribing standards for real
estate lending. Real estate lending is defined as the extension of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.
 
     The policies must address certain lending considerations set forth in the
Real Estate Lending Guidelines, including loan-to-value ("LTV") limits, loan
administration procedures, underwriting standards, portfolio diversification
standards, and documentation, approval and reporting requirements. These
policies must also be appropriate to the size of the institution and the nature
and scope of its operations, and must be reviewed and approved by the
institution's board of directors at least annually. The LTV ratio framework,
with a LTV ratio being the total amount of credit to be extended divided by the
appraised value of the property at the time the credit is originated, must be
established for each category of real estate loans. If not a first lien, the
lender must combine all senior liens when calculating this ratio. The Real
Estate Lending Guidelines, among other things, establish the following
supervisory LTV limits: land development (75%); construction, commercial and
non-residential (80%); improved property (80%) and one-to-four family
residential (owner occupied) (no maximum ratio; however any LTV ratio in excess
of 90% should require appropriate insurance or readily marketable collateral).
Consistent with its lending philosophy, the Savings Bank's LTV limits are;
construction (80%); land development (75%); residential properties (90% in the
case of one-to-four family owner-occupied residences); and commercial real
estate (75%). The Savings Bank requires private mortgage insurance on any
residential conventional mortgage loan that exceeds a 90% LTV ratio. While the
ratios reflected above reflect the range of desired LTV ratio coverages, the
Savings Bank will evaluate each applicant and the collateral to secure the loan
on a case-by-case basis.
 
     ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LOANS.  The Savings Bank has
historically concentrated its lending activities on the origination of loans
secured primarily by first mortgage liens on existing one-to-four family
residences located within its market. At December 31, 1998, $81.3 million or
64.7% of the Savings Bank's total loan portfolio consisted of one-to-four family
residential real estate loans, substantially all of which are conventional
loans.
 
     The Savings Bank historically has and continues to emphasize the
origination of fixed-rate mortgage loans with terms of up to 30 years and
adjustable rate mortgage loans ("ARMs") up to 30 years which provide for
periodic adjustments to the interest rate applicable to the loan. The ARMs
currently held by the Savings Bank have up to 30-year terms and an interest rate
which adjusts every one or three years in accordance with a
 
                                       23
   25
 
designated index. Such loans have a 2% cap on any increase or decrease in the
interest rate per period, and there is currently a limit of 4% to 6% on the
amount that the interest rate can change over the life of the loan. To attract
ARMs from time to time, the Savings Bank will offer initial interest rates below
market loan rates. ARMs generally pose greater credit risk than fixed loans
primarily because as interest rates rise, the required periodic payment by the
borrower will rise, increasing the potential for default.
 
     At December 31, 1998, approximately $62.6 million or 77.1% of the
one-to-four family residential loans in the Savings Bank's loan portfolio
consisted of loans that provide for fixed rates of interest. Although these
loans generally provide for repayments of principal over a fixed period of 5 to
30 years, it is the Savings Bank's experience that because of prepayments and
due-on-sale clauses, such loans generally remain outstanding for a substantially
shorter period of time.
 
     Independent appraisers approved by the Savings Bank's Board of Directors
make property appraisals on the real estate and improvements securing the
Savings Bank's one-to-four family residential loans. Appraisals are performed in
accordance with Federal regulations and policies. The Savings Bank obtains title
insurance policies on most first mortgage real estate loans it originates. If
title insurance is not obtained or is unavailable, the Savings Bank obtains an
abstract of title and title opinion. Borrowers also must obtain hazard insurance
prior to closing and flood insurance when required by the United States
Department of Housing and Urban Development as researched by a third party
vendor. Borrowers are not required to escrow funds for real estate taxes but may
elect to escrow funds with each monthly payment of principal and interest to a
loan escrow account from which the Savings Bank makes disbursements for items
such as real estate taxes as they become due.
 
     COMMERCIAL REAL ESTATE LOANS.  The Savings Bank originates mortgage loans
for the acquisition and refinancing of commercial real estate properties
(including multi-family complexes). At December 31, 1998, $7.6 million or 6.08%
of the Savings Bank's total loan portfolio consisted of loans secured by
existing commercial real estate properties. At December 31, 1998, the Savings
Bank's commercial real estate loan portfolio consisted of nineteen loans with an
average principal balance of approximately $402,000.
 
     The Savings Bank's commercial real estate loans are secured by apartment
complexes, developed residential lots and small retail establishments located in
Pennsylvania.
 
     Although terms vary, commercial real estate loans generally are amortized
over a maximum period of 15 years. The Savings Bank originates these loans
either with fixed interest rates or with interest rates that adjust in
accordance with a designated index, which generally is negotiated at the time of
origination. It is also the Savings Bank's general policy to obtain personal
guarantees on its commercial real estate loans from the principals of the
borrower and, when this cannot be obtained, to impose more stringent
loan-to-value and other underwriting requirements.
 
     COMMERCIAL BUSINESS LOANS.  At December 31, 1998, $18.7 million or 14.9% of
the Savings Bank's total loan portfolio consisted of loans classified as
commercial business loans. The Savings Bank's commercial business loans can be
secured or unsecured depending upon the size of the loan and the credit analysis
by the Savings Bank of the potential borrower. Lines of credit in excess of
$25,000 are generally secured by a pledge of accounts receivable and inventory.
The Savings Bank's commercial loan portfolio consists of borrowers primarily
located in Western Pennsylvania.
 
     Commercial business loans generally have shorter terms and higher interest
rates than residential mortgage loans but generally involve more credit risk
than residential mortgage loans because of the type and nature of the collateral
and, in certain cases, the absence of collateral. Fixed equipment may depreciate
in value quicker than the principal repayment of the loan. Accounts receivable
may prove to be difficult or impossible to collect in sufficient amounts to
repay a line of credit. Inventory may disappear due to loss or theft or may
decline in value due to age or change in market conditions or technology. The
Savings Bank's evaluation of the creditworthiness of a borrower, or the value of
a borrower's collateral, may fail to fully assess the risk of the loan in
question and lead to a loss.
 
     CONSTRUCTION LOANS.  The Savings Bank will occasionally originate loans to
construct primarily one-to-four family residences, and, to a much lesser extent,
loans to acquire and develop real estate for construction of residential and
commercial properties. These construction lending activities generally are
limited to the Savings
                                       24
   26
 
Bank's primary market area. At December 31, 1998, $2.3 million or 1.8% of the
Savings Bank's total loan portfolio consisted of loans classified as
construction loans.
 
     Prior to making a commitment to fund a construction loan, the Savings
Bank's policy requires an appraisal of the property by independent appraisers
approved by the Board of Directors. The Savings Bank uses qualified appraisers
on all of its construction loans. Designated employees of the Savings Bank also
review and inspect each project at the commencement of construction. In
addition, the project is inspected by designated inspectors of the Savings Bank
prior to every disbursement of funds during the term of the construction loan.
Such inspection includes a review for compliance with the construction plan,
including materials specifications.
 
     Construction lending is generally considered to involve a higher level of
risk as compared to one-to-four family residential lending for existing units,
due to the concentration of principal in a limited number of loans and borrowers
and the effects of general economic conditions on real estate developers and
managers. Moreover, a construction loan can involve additional risks because of
the inherent difficulty in estimating both a property's value at completion of
the project and the estimated cost (including interest) of the project. The
nature of these loans is such that they are generally more difficult to evaluate
and monitor. The Savings Bank has adopted underwriting guidelines which impose
stringent loan-to-value, debt service and other requirements for loans which are
believed to involve higher elements of credit risk, by limiting the geographic
area in which the Savings Bank will do business and by working with builders
with whom it has established relationships or which have quality reputations.
 
     CONSUMER LOANS.  The Savings Bank also offers automobile loans, home equity
loans and lines of credit, student loans, deposit account secured loans and
unsecured consumer loans. Automobile loans amounted to $2.4 million or 1.9% of
the total loans receivable at December 31, 1998. Home equity loans and lines of
credit amounted to $9.8 million or 7.8% of the total loans receivable at
December 31, 1998. The student loan balance amounted to $2.3 million or 1.8% of
the total loans receivable as of such date, deposit account secured loans had
outstanding balances of $528,000 or .4% of total loans receivable as of such
date and unsecured personal loans (including credit card balances outstanding)
stood at $663,000 or .5% of total loans receivable as of such date.
 
     Automobile loans are secured by a lien on the title of the financed
vehicle. The terms of the loan may not exceed 60 months. Rates on automobile
loans may be fixed or floating. As of December 31, 1998, the entire automobile
loan portfolio had fixed rate contracts. Automobile loans involve higher risk
since the collateral rapidly depreciates. Defaults during the early months of
the loan will likely result in a loss of principal due to the reduced value of
the vehicle and the costs of repossession and sale. Automobile loans may be
granted for up to 100% of the purchase price including transfer fees and taxes.
 
     The Savings Bank's home equity loans and lines of credit are secured by the
underlying equity in the borrower's home. Home equity loans generally have fixed
interest rates and terms of 5 to 15 years. Home equity lines of credit generally
have variable interest rates based on the prime rate and terms of 5 to 15 years.
The Savings Bank's home equity loans and home equity lines of credit require
loan-to-value ratios of 100% or less after taking into consideration the first
mortgage loan.
 
     The student loans made by the Savings Bank are guaranteed and serviced by
the Pennsylvania Higher Education Assistance Agency. A deposit account secured
loan is collateralized by deposits equal to no more than 90% of the principal
balance of the loans. Unsecured personal loans depend solely on the
creditworthiness of the borrower.
 
     In December 1995 the Savings Bank began issuing consumer credit cards to
its existing customer base. Credit card loans outstanding amounted to $469,000
or .4% of the total loans receivable at December 31, 1998.
 
     Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. During 1998, the Savings Bank wrote-off fifteen credit
card loan balances with aggregate outstanding balances of $19,000 that amounted
to 4.5% of the average outstanding credit balance for 1998. At December 31,
1998, $4,000 of the remaining consumer loans were classified as non-performing.
 
                                       25
   27
 
ASSET QUALITY
 
     When a borrower fails to make a required payment on a loan, the Savings
Bank attempts to cure the deficiency by contacting the borrower and seeking the
payment. Late notices are sent and/or personal contacts are made. In most cases,
deficiencies are cured promptly. While the Savings Bank generally prefers to
work with borrowers to resolve such problems, when a loan becomes 60 days
delinquent, the loan is classified as substandard and presented to the
Classification Committee for evaluation. Following such evaluation if the loan
continues to be delinquent past 90 days the Savings Bank institutes foreclosure,
repossession, setoff or other proceedings, as necessary, to minimize any
potential loss.
 
     Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. The Savings Bank
does not accrue interest on loans past due 90 days or more.
 
     Real estate acquired by the Savings Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When a property is acquired, it is recorded at the lower of cost or fair value
minus estimated cost to sell the property. Fair value is generally determined
through the use of independent appraisals. Any write-downs resulting at
acquisition are charged to the allowance for loan losses. All costs incurred in
maintaining the Savings Bank's interest in the property are capitalized between
the date the loan becomes delinquent and the date of acquisition. After the date
of acquisition, all costs incurred in maintaining the property are expenses and
costs incurred for the improvement or development of such property are
capitalized.
 
     Under generally accepted accounting principles, the Savings Bank is
required to account for certain loan modifications or restructurings as
"troubled debt restructurings." In general, the modification or restructuring of
a debt constitutes a troubled debt restructuring if the Savings Bank for
economic or legal reasons related to the borrower's financial difficulties
grants a concession to the borrower that the Savings Bank would not otherwise
consider. Debt restructurings or loan modifications for a borrower do not
necessarily always constitute troubled debt restructurings, however, and
troubled debt restructurings do not necessarily result in non-accrual loans. For
the year ended December 31, 1998, the Savings Bank had no troubled debt
restructurings and had no interest income arising from troubled debt
restructuring.
 
     DELINQUENT LOANS.  The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Savings Bank's loan portfolio. The amounts presented
represent the total outstanding principal balances of the related loans, rather
than the actual payment amounts that are past due.


                                           DECEMBER 31, 1998                            DECEMBER 31, 1997
                       ---------------------------------------------------------    --------------------------
                                                                  90 DAYS OR                            60-89
                          30-59 DAYS          60-89 DAYS            GREATER            30-59 DAYS        DAYS
                       -----------------   -----------------   -----------------    -----------------   ------
                                PERCENT             PERCENT             PERCENT              PERCENT
                                OF LOAN             OF LOAN             OF LOAN              OF LOAN
                       AMOUNT   CATEGORY   AMOUNT   CATEGORY   AMOUNT   CATEGORY    AMOUNT   CATEGORY   AMOUNT
                       ------     ----      ----     -----      ----      ----      ------     ----      ----
                                                       (DOLLARS IN THOUSANDS)
                                                                             
Real estate loans:
 One-to-four family
  residences.........  $  914     1.12%     $123       .15%     $483       .59%     $2,636     3.65%     $188
 Construction........       0        0       430     18.94         0         0           0        0         0
 Commercial real 
  estate.............     859     4.59         0         0        99      1.30           0        0         0
 Commercial business
 loans...............       0        0         0         0         0         0           0        0         0
Consumer loans.......      95      .61       124       .79       116       .74          92      .72         8
                       ------               ----                ----                ------               ----
    Total............  $1,868               $677                $698                $2,728               $196
                       ======               ====                ====                ======               ====
 

                                  
                                     90 DAYS OR
                                       GREATER
                                  -----------------
                       PERCENT             PERCENT
                       OF LOAN             OF LOAN
                       CATEGORY   AMOUNT   CATEGORY
                         ---       ----      ---
Real estate loans:
 One-to-four family
  residences.........     26%      $589      .82%
 Construction........      0          0        0
 Commercial real
  estate.............      0          0        0
 Commercial business
 loans...............      0          7      .07
Consumer loans.......    .06         15      .12
                                   ----
    Total............              $611
                                   ====

 
                                       26
   28


                                                                               DECEMBER 31, 1996
                                                           ---------------------------------------------------------
                                                                                                      90 DAYS OR
                                                              30-59 DAYS          60-89 DAYS            GREATER
                                                           -----------------   -----------------   -----------------
                                                                    PERCENT             PERCENT             PERCENT
                                                                    OF LOAN             OF LOAN             OF LOAN
                                                           AMOUNT   CATEGORY   AMOUNT   CATEGORY   AMOUNT   CATEGORY
                                                           ------     ----      ---       ---       ----      ---
                                                                            (DOLLARS IN THOUSANDS)
                                                                                          
Real estate loans:
 One-to-four family residences...........................  $1,738     2.67%     $75        12%      $339      .52%
 Consumer loans..........................................       6      .06       15       .16          2      .02
                                                           ------               ---                 ----
    Total................................................  $1,744               $90                 $341
                                                           ======               ===                 ====

 
     NON-PERFORMING ASSETS.  The following table sets forth the amounts and
categories of the Savings Bank's non-performing assets at the dates indicated.
The Savings Bank had no loans during the periods indicated below which should be
classified as troubled debt restructurings.
 


                                                                     DECEMBER 31,
                                                              --------------------------
                                                              1998       1997       1996
                                                              ----       ----       ----
                                                                (DOLLARS IN THOUSANDS)
                                                                           
Non-accruing loans:
One-to-four family residential(1)...........................  $483       $589       $339
Consumer loans(2)...........................................   116         15          2
Commercial real estate(3)...................................    99         --         --
Commercial business loans(4)................................    --          7         --
                                                              ----       ----       ----
  Total nonperforming loans.................................   698        611        341
Real estate owned...........................................   205         --         50
                                                              ----       ----       ----
  Total nonperforming assets................................  $903       $611       $391
                                                              ====       ====       ====
Total nonperforming loans as a percentage of total loans....   .56%       .63%       .44%
                                                              ====       ====       ====
Total nonperforming assets as a percentage of total
  assets....................................................   .51%       .43%       .34%
                                                              ====       ====       ====

 
- ---------------
 
(1) Consists of an aggregate of 7, 11 and 6 loans at December 31, 1998, 1997 and
    1996, respectively.
 
(2) Consists of five and nine loans at December 31, 1998 and December 31, 1997,
    respectively, and one loan at December 31, 1996.
 
(3) Consists of 1 loan at December 31, 1998.
 
(4) Consists of 1 loan at December 31, 1997.
 
     The Savings Bank's total non-performing assets have increased from $611,000
or .43% of total assets at December 31, 1997 to $903,000 or .51% of total assets
at December 31, 1998. The $292,000 increase in total non-performing assets
between December 31, 1997 and 1998 principally reflects an increases in real
estate owned of $205,000.
 
     The Savings Bank's total non-performing assets increased from $391,000 or
 .34% of total assets at December 31, 1996 to $611,000 or .43% of total assets at
December 31, 1997. The $220,000 increase in total non-performing assets between
December 31, 1996 and 1997 principally reflects increases in non-performing
loans.
 
     At December 31, 1998, 1997, and 1996 approximately $43,000, $46,000, and
$15,000 in interest income, respectively, would have been recorded in the period
then ended on loans accounted for on a non-accrual basis if such loans had been
current in accordance with their original terms and had been outstanding
throughout the period or since origination if held for part of the period. The
Savings Bank had no accruing loans greater than 90 days delinquent.
 
     ALLOWANCE FOR LOAN LOSSES.  An allowance for loan losses is maintained at a
level that management considers currently adequate to provide for potential
losses based upon an evaluation of known and inherent risks in the loan
portfolio. Allowances for loan losses are based on estimated net realizable
value. Management's periodic evaluation is based upon examination of the loan
portfolio, past loss experience, current economic
 
                                       27
   29
 
conditions, the results of the most recent regulatory examinations, and other
relevant factors. Provisions for loan losses that are charged against income
increase the allowance. While management uses the best information available to
make such evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluations. In addition, there can be no assurance that bank regulators will
agree with the Savings Bank on the systematic methodology for determining the
adequacy of the allowance for loan losses during future examination. The Savings
Bank could be required by bank regulators to increase its allowance for loan
losses in addition to the loan loss reserves set by management, thereby
negatively affecting the Savings Bank's financial condition and earnings at that
time.
 
     The following table summarizes changes in the allowance for loan losses and
other selected statistics for the periods presented.
 


                                                                 DECEMBER 31,
                                                     ------------------------------------
                                                       1998          1997          1996
                                                     --------       -------       -------
                                                            (DOLLARS IN THOUSANDS)
                                                                         
Average total loans................................  $111,809       $89,303       $69,258
                                                     ========       =======       =======
Allowance for loan losses, beginning of year.......  $    403       $   307       $   287
Charged-off loans(1)...............................       (41)           (8)          (24)
Recoveries on loans previously charged off.........        --            --            --
Provision for loan losses..........................       209           104            44
                                                     --------       -------       -------
Allowance for loan losses, end of period...........  $    571       $   403       $   307
                                                     ========       =======       =======
Net loans charged-off to average loans.............       .04%          .01%          .04%
                                                     ========       =======       =======
Allowance for loan losses to total loans...........       .45%          .42%          .40%
                                                     ========       =======       =======
Allowance for loan losses to nonperforming loans...     81.81%        65.96%        89.88%
                                                     ========       =======       =======

 
- ---------------
 
(1) Consists of $22,000 of one-to-four family residential mortgage loans and
    $19,000 of consumer loans in 1998; consists of $8,000 of consumer loans in
    1997; and consists of $18,000 of one-to-four family residential mortgage
    loans and $6,000 of consumer loans in 1996.
 
     The Savings Bank's management is unable to determine in what loan category
future charge-offs and recoveries may occur. The following schedule sets forth
the allocation of the allowance for loan losses among
 
                                       28
   30
 
various categories. This allocation is based upon historical experience. The
entire allowance for loan losses is available to absorb future loan losses in
any loan category.


                                                       DECEMBER 31,
                                 ---------------------------------------------------------
                                       1998                1997                1996
                                 -----------------   -----------------   -----------------
                                            % OF                % OF                % OF
                                          LOANS IN            LOANS IN            LOANS IN
                                            EACH                EACH                EACH
                                          CATEGORY            CATEGORY            CATEGORY
                                          TO TOTAL            TO TOTAL            TO TOTAL
                                 AMOUNT    LOANS     AMOUNT    LOANS     AMOUNT    LOANS
                                 ------   --------   ------   --------   ------   --------
                                                  (DOLLARS IN THOUSANDS)
                                                                
Real Estate:
  One-to-four family,
     commercial real estate,
     participation,
     construction and other
     real estate...............   $328      57.44%    $247      61.29%    $227      73.94%
Commercial Loan:
  Working capital and term
     loans for business uses...    173      30.30       89      22.08        5       1.63
Consumer:
  Automobile, home equity,
     student, share and other
     consumer..................     70      12.26       67      16.63       75      24.43
                                  ----     ------     ----     ------     ----     ------
     Total.....................   $571     100.00%    $403     100.00%    $307     100.00%
                                  ====     ======     ====     ======     ====     ======

 
     Effective December 21, 1993, the OTS, in conjunction with the Office of the
Comptroller of the Currency, the FDIC and the Federal Reserve Board, issued an
Interagency Policy Statement on the Allowance for Loan and Lease Losses ("Policy
Statement"). The Policy Statement, which effectively supersedes previous OTS
proposed guidance, includes guidance (i) on the responsibilities of management
for the assessment and establishment of an adequate allowance and (ii) for the
agencies' examiners to use in evaluating the adequacy of such allowance and the
policies utilized to determine such allowance. The Policy Statement also sets
forth quantitative measures for the allowance with respect to assets classified
substandard and doubtful, described below, and with respect to the remaining
portion of an institution's loan portfolio. Specifically, the Policy Statement
sets forth the following quantitative measures which examiners may use to
determine the reasonableness of an allowance: (i) 50% of the dollar value of the
portfolio that is classified doubtful must be accounted for in the allowance of
the institution; (ii) 15% of the dollar value of the portfolio that is
classified substandard must be accounted for in the allowance of the
institution; (iii) for the portions of the portfolio that have not been
classified (including loans designated special mention), estimated credit losses
over the upcoming twelve months based on facts and circumstances available on
the evaluation date must be accounted for in the allowance of the institution,
and (iv) in the cases where the institution has an insufficient basis for
determining this amount, an examiner may use industry average net charge-off
rate for nonclassified loans and leases (based on a study of the Federal Reserve
Board a rate of .50% for risk-weighted "pass" loans and 3% for special mention
loans is acceptable). While the Policy Statement sets forth this quantitative
measure, such guidance is not intended as a "floor" or "ceiling."
 
     Federal regulations require that each insured savings institution classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions, Federal examiners have authority to identify problem
assets and, if appropriate, classify them. There are three classifications for
problem assets: "substandard," "doubtful" and "loss." Substandard assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of those classified as
substandard with the added characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified as loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Assets classified
as substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified as
loss, the insured institution must either establish specific allowances for loan
losses in the amount of
 
                                       29
   31
 
100% of the portion of the asset classified as a loss or charge-off such amount.
General loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. At December 31, 1998, the Savings
Bank had $903,000 of assets classified as "substandard" (all of which are set
forth under "Non-Performing Assets" above) and no assets classified as
"doubtful" or "loss."
 
INVESTMENT ACTIVITIES
 
     GENERAL.  The Company's Board of Directors has given authority to the
Investment Committee of the Savings Bank to manage the investment activities of
the Company. Investment activity at the Company is minimal. The Company has
chosen to invest in several debt and equity securities. The aggregate market
value of these investments, at December 31, 1998, is $1.4 million. These
investments were selected on management's belief that the value would
appreciate. These debt and equity investments represent .8% of the total
consolidated assets of the Company and 4.0% of the total consolidated investment
securities of the Company. Excess funds at the Company level are deposited into
a money market account maintained at the Savings Bank.
 
     The Savings Bank's investment activities are managed by the Investment
Committee designated by the Board of Directors of the Savings Bank. These
activities are conducted in accordance with a written investment policy that is
reviewed and approved by the Board of Directors at least annually. The Savings
Bank's Asset and Liability Committee has been designated to work with management
and the Board to implement and achieve the investment plan goals and to report
at least quarterly to the Board in conjunction with its review of the Savings
Bank's overall gap and interest rate risk position. As reflected in its
investment policy, the Savings Bank's investment objective is to maintain a
balance of high quality and diversified investments with a minimum of credit
risk. Accordingly, the Savings Bank seeks a competitive return from its
investments, but the rate of return is only one consideration which is weighed
against the Savings Bank's other goals and objectives of liquidity and operating
in a manner deemed by the Board to reflect safety and soundness.
 
     CASH AND CASH EQUIVALENTS.  Cash and cash equivalents of the Savings Bank
increased by $7.9 million from fiscal 1997 to fiscal 1998. At December 31, 1998,
cash and cash equivalents of the Savings Bank amounted to $10.2 million or 5.7%
of total assets. The largest component in this category is interest-bearing
deposits in banks, which amounted to $9.1 million at December 31, 1998. The
majority of such deposits were made with the FHLB of Pittsburgh. The $7.9
million increase in cash and cash equivalents during fiscal 1998 was primarily
due to funds received from called investments along with increased principal
payments on loans and increases in total deposits.
 
     Cash and cash equivalents of the Savings Bank increased by $65,000 or 3.0%
from fiscal 1996 to fiscal 1997. At December 31, 1997, cash and cash equivalents
of the Savings Bank amounted to $2.2 million or 1.5% of total assets. The
largest component in this category is interest-bearing deposits in banks, which
amounted to $1.3 million at December 31, 1997. All such deposits were made with
the FHLB of Pittsburgh.
 
     INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES.  As a savings and
loan holding company, with majority ownership in one savings association that
meets the requirement of a qualified thrift lender due to the level of its
residential mortgage lending activities, the Company has broad investment
powers. Other than 100% ownership of the Savings Bank, the Company has chosen
only to maintain the loan to the ESOP, to invest in debt and equity securities
with a market value totaling $1.4 million at December 31, 1998 and to deposit
the majority of the remaining funding of the Company in a money market and
checking account maintained at the Savings Bank. Funds on deposit with the
Savings bank are used for either loans or investment securities as determined by
the Savings Bank.
 
     The Savings Bank has authority to invest in various types of assets. The
Savings Bank's Investment Committee appointed by the Board is authorized by the
Board to: purchase or sell U.S. Government securities and securities issued by
agencies thereof; purchase, sell or trade any securities qualifying as eligible
liquidity; purchase mortgage-related securities; purchase participations in the
secondary mortgage market; invest in repurchase agreements secured by securities
eligible for investment by the Savings Bank; invest in mutual funds restricted
to authorized investments; invest in deposits with the FHLB of Pittsburgh and
other authorized
                                       30
   32
 
investments; invest in various corporate securities and bonds that have at least
an "AA" rating by Standard & Poor's; and invest in various other mutual funds
and certain equity issues as authorized by the Board. The Board of the Savings
Bank does not permit investments in highly speculative securities.
 
     The Savings Bank's investments are all classified as "held to maturity" or
"available for sale" upon acquisition based upon the Savings Bank's intent and
ability to hold such investments to maturity at the time of investment in
accordance with generally accepted accounting principles. The investment
securities and mortgage-backed securities of the Savings Bank which are
classified as "held to maturity" are carried at amortized cost, with any
discount or premium amortized to maturity. The investment securities and
mortgage-backed securities of the Savings Bank which are classified as
"available for sale" are carried at fair value and are repriced monthly. All
mutual fund investments are classified as investments available for sale.
 
     The Savings Bank maintains a portfolio of mortgage-backed securities as a
means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention and with
limited credit risk of default which arises in holding a portfolio of loans to
maturity. Mortgage related securities (which also are known as mortgage
participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Savings Bank. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the
Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage
Association ("FNMA") and the Government National Mortgage Association ("GNMA").
 
     The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and Federally insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal. The FNMA is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for conventional mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. The full faith and credit of the
United States does not back FHLMC and FNMA securities, but because the FHLMC and
FNMA are U.S. Government sponsored enterprises, these securities are considered
to be among the highest quality investments with minimal credit risks. The GNMA
is a government agency within the Department of Housing and Urban Development
that is intended to help finance government-assisted housing programs. GNMA
securities are backed by FHA-insured and VA-guaranteed loans, and the timely
payment of principal and interest on GNMA securities are guaranteed by the GNMA
and backed by the full faith and credit of the U.S. Government. Because the
FHLMC, the FNMA and the GNMA were established to provide support for low-and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs.
 
     Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
repayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security thus approximates the life of the
underlying mortgages.
 
     Mortgage-backed securities generally yield less than the loans that
underlie such securities because of their payment guarantees or credit
enhancements that offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans. Mortgage-backed
securities issued or guaranteed by FNMA or FHLMC (except interest-only
securities or the residual interests in collateralized mortgage obligations) are
weighted at no more than 20% for risk-based capital purposes, compared to a
weight of 50% to 100% for residential loans.
 
                                       31
   33
 
     The following tables set forth certain information relating to the
Company's and Savings Bank's investment and mortgage-backed securities portfolio
at the dates indicated:


                                                               DECEMBER 31,
                                   ---------------------------------------------------------------------
                                          1998                     1997                      1996
                                   ------------------       -------------------       ------------------
                                   AMORTIZED    % OF        AMORTIZED     % OF        AMORTIZED    % OF
                                     COST      TOTAL           COST      TOTAL          COST      TOTAL
                                    -------    ------       ----------   ------        -------    ------
                                                          (DOLLARS IN THOUSANDS)
                                                                                
        HELD TO MATURITY
Investment securities:
  U.S. Government securities.....   $ 2,001     12.30%      $    2,001    10.15%       $ 2,002     19.00%
  Federal agency obligations.....    14,263     87.70           17,720    89.85          8,533     81.00
                                    -------    ------       ----------   ------        -------    ------
     Total investment
       securities................   $16,264    100.00%      $   19,721   100.00%       $10,535    100.00%
                                    =======    ======       ==========   ======        =======    ======
Average remaining contractual
  life of investment
  securities.....................  9.53 yrs.                10.38 yrs.                8.01 yrs.
                                    =======                 ==========                 =======
Mortgage-backed securities:
  GNMA...........................   $ 1,951     21.17%      $    1,158    14.44%       $ 1,361     13.71%
  FHLMC..........................     5,259     57.08            6,775    84.47          8,453     85.16
  FNMA...........................     2,004     21.75               87     1.09            113      1.13
                                    -------    ------       ----------   ------        -------    ------
     Total mortgage-backed
       securities................   $ 9,214    100.00%      $    8,020   100.00%       $ 9,927    100.00%
                                    =======    ======       ==========   ======        =======    ======



                                                                DECEMBER 31,
                                    --------------------------------------------------------------------
                                           1998                     1997                     1996
                                    ------------------       ------------------       ------------------
                                    AMORTIZED    % OF        AMORTIZED    % OF        AMORTIZED    % OF
                                      COST      TOTAL          COST      TOTAL          COST      TOTAL
                                     -------    ------        -------    ------        -------    ------
                                                           (DOLLARS IN THOUSANDS)
                                                                                
        AVAILABLE FOR SALE
Investment securities:
  Federal agency obligations......   $ 3,000     44.52%       $ 6,602     78.75%       $ 6,503     80.91%
  U.S. Government securities......       504      7.48              0         0              0         0
  Corporate debentures............       494      7.33              0         0              0         0
  Marketable equity securities....     2,740     40.67          1,781     21.25          1,535     19.09
                                     -------    ------        -------    ------        -------    ------
     Total investment
       securities.................   $ 6,738    100.00%       $ 8,383    100.00%       $ 8,038    100.00%
                                     =======    ======        =======    ======        =======    ======
Average remaining contractual life
  of investment securities(1).....  8.14 yrs.                6.52 yrs.                8.31 yrs.
                                     =======                  =======                  =======
Mortgage-backed securities:
  FHLMC...........................   $ 2,215     68.36%       $ 1,329     52.76%       $ 2,356     63.93%
  FNMA............................     1,025     31.64          1,191     47.24          1,329     36.07
                                     -------    ------        -------    ------        -------    ------
     Total mortgage-backed
       securities.................   $ 3,240    100.00%       $ 2,520    100.00%       $ 3,685    100.00%
                                     =======    ======        =======    ======        =======    ======

 
- ---------------
 
(1) Marketable equity securities have no stated maturity, therefore, are
    excluded from the average remaining contractual life calculation.
 
                                       32
   34
 
     The composition and maturities of the investment securities portfolio by
contractual maturity at December 31, 1998, are indicated in the following table:
 


                                                             DUE IN
                                          ---------------------------------------------
                                          LESS THAN    1 TO 3      3 TO 5       OVER                  TOTALS
                                           1 YEAR       YEARS       YEARS      5 YEARS          DECEMBER 31, 1998
                                          ---------   ---------   ---------   ---------   ------------------------------
                                          AMORTIZED   AMORTIZED   AMORTIZED   AMORTIZED   AMORTIZED    FAIR     CARRYING
                                            COST        COST        COST        COST        COST       VALUE     VALUE
                                            ----        ----        ----        ----        ----       -----     -----
                                                                      (DOLLARS IN THOUSANDS)
                                                                                           
U.S. government securities and Federal
  agency obligations....................   $1,000      $3,516      $2,000      $13,252     $19,768    $19,821   $19,769
Corporate debentures....................        0           0           0          494         494        478       478
Marketable equity securities............    2,740           0           0            0       2,740      2,682     2,682
                                           ------      ------      ------      -------     -------    -------   -------
    Total investment securities.........   $3,740      $3,516      $2,000      $13,746     $23,002    $22,981   $22,929
                                           ======      ======      ======      =======     =======    =======   =======
Weighted average yield..................     4.21%       5.78%       5.62%        6.69%       6.06%       N/A       N/A
                                           ======      ======      ======      =======     =======    =======   =======

 
     The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
 
     The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
 
     The Savings Bank's investment securities portfolio at December 31, 1998 did
not contain securities of any issuer with an aggregate book value in excess of
10% of the Savings Bank's equity, excluding those issued by the United States
Government or its agencies.
 
     The following table sets forth the contractual maturities of the Company's
and the Savings Bank's mortgage-backed securities at December 31, 1998.


                                                               DUE IN
                           -------------------------------------------------------------------------------
                           LESS THAN      1 TO 3         3 TO 5         5 TO 10      10 TO 20     OVER 20
                            1 YEAR        YEARS          YEARS           YEARS         YEARS       YEARS
                           ---------   ------------   ------------   -------------   ---------   ---------
                           AMORTIZED    AMORTIZED      AMORTIZED       AMORTIZED     AMORTIZED   AMORTIZED
                             COST          COST           COST           COST          COST        COST
                             ----          ----           ----           ----          ----        ----
                                                       (DOLLARS IN THOUSANDS)
                                                                               
GNMA.....................   $    0        $    0         $    0         $    0        $  947      $ 1004
FHLMC....................      295             0              0          2,962         4,007         210
FNMA.....................        0         1,025              0              0         2,004           0
                            ------        ------         ------         ------        ------      ------
    Total................   $  295        $1,025         $    0         $2,962        $6,958      $1,214
Weighted Average Yield...     6.50%         5.06%           N/A           6.00%         6.52%       6.76%
                            ======        ======         ======         ======        ======      ======
 

 
                                       TOTALS
                                 DECEMBER 31, 1998
                           ------------------------------
                           AMORTIZED    FAIR     CARRYING
                             COST       VALUE     VALUE
                             ----       -----     -----
                                        
GNMA.....................   $ 1,951    $ 1,964   $ 1,951
FHLMC....................     7,474      7,540     7,484
FNMA.....................     3,029      3,021     3,022
                            -------    -------   -------
    Total................   $12,454    $12,525   $12,457
Weighted Average Yield...      6.30%       N/A       N/A
                            =======    =======   =======

 
     The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
 
                                       33
   35
 
     The following table sets forth the contractual maturities of the Company's
and the Savings Bank's securities classified as held to maturity at December 31,
1998.
 


                                                       DUE IN
                       ----------------------------------------------------------------------
                       DUE 1 YEAR    1 TO 3      3 TO 5      5 TO 10    10 TO 20     OVER 20                TOTALS
                        OR LESS       YEARS       YEARS       YEARS       YEARS       YEARS           DECEMBER 31, 1998
                       ----------   ---------   ---------   ---------   ---------   ---------   ------------------------------
                       AMORTIZED    AMORTIZED   AMORTIZED   AMORTIZED   AMORTIZED   AMORTIZED   AMORTIZED    FAIR     CARRYING
                          COST        COST        COST        COST        COST        COST        COST       VALUE     VALUE
                       ----------   ---------   ---------   ---------   ---------   ---------   ---------   -------   --------
                                                               (DOLLARS IN THOUSANDS)
                                                                                           
U.S. Gov't & Agency
  Securities.........    $1,000      $3,012        $ 0       $ 6,996     $ 4,982     $   274     $16,264    $16,316   $16,264
FHLMC Certificates...       295           0          0         2,962       2,002           0       5,259      5,315     5,259
GNMA Certificates....         0           0          0             0         947       1,004       1,951      1,964     1,951
FNMA Certificates....         0           0          0             0       2,004           0       2,004      2,003     2,004
                         ------      ------        ---       -------     -------     -------     -------    -------   -------
    Total............    $1,295      $3,012        $ 0       $ 9,958     $ 9,935     $ 1,278     $25,478    $25,598   $25,478
                         ======      ======        ===       =======     =======     =======     =======    =======   =======
Weighted Average
  Yield..............      6.30%       5.78%       N/A          6.45%       6.73%       6.76%       6.49%       N/A       N/A
                         ======      ======        ===       =======     =======     =======     =======    =======   =======

 
     The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
 
     The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
 
     The following table sets forth the contractual maturities of the Company's
and the Savings Bank's securities classified as available for sale at December
31, 1998.
 


                                                       DUE IN
                       ----------------------------------------------------------------------
                       DUE 1 YEAR    1 TO 3      3 TO 5      5 TO 10    10 TO 20     OVER 20                TOTALS
                        OR LESS       YEARS       YEARS       YEARS       YEARS       YEARS           DECEMBER 31, 1998
                       ----------   ---------   ---------   ---------   ---------   ---------   ------------------------------
                       AMORTIZED    AMORTIZED   AMORTIZED   AMORTIZED   AMORTIZED   AMORTIZED   AMORTIZED    FAIR     CARRYING
                          COST        COST        COST        COST        COST        COST        COST       VALUE     VALUE
                       ----------   ---------   ---------   ---------   ---------   ---------   ---------   -------   --------
                                                               (DOLLARS IN THOUSANDS)
                                                                                           
Marketable Equity
  Securities.........    $2,740      $    0      $    0      $    0      $    0      $    0      $ 2,740    $ 2,682   $ 2,682
U.S. Gov't & Agency
  Securities.........         0         504       2,000       1,000           0           0        3,504      3,505     3,505
Corporate
  debentures.........         0           0           0           0           0         494          494        478       478
FHLMC Certificates...         0           0           0           0       2,005         210        2,215      2,225     2,225
GNMA Certificates....         0           0           0           0           0           0            0          0         0
FNMA Certificates....         0       1,025           0           0           0           0        1,025      1,017     1,017
                         ------      ------      ------      ------      ------      ------      -------    -------   -------
    Total............    $2,740      $1,529      $2,000      $1,000      $2,005      $  704      $ 9,978    $ 9,907   $ 9,907
                         ======      ======      ======      ======      ======      ======      =======    =======   =======
Weighted Average
  Yield..............      3.47%       5.29%       5.62%       6.60%       6.00%       6.81%        5.24%       N/A       N/A
                         ======      ======      ======      ======      ======      ======      =======    =======   =======

 
     The weighted yield for investment securities including held to maturity and
available for sale is based upon historical amortized cost balances.
 
     The actual maturity of the Company's consolidated investment securities may
differ from contractual maturity since certain of the Company's consolidated
investment securities are subject to call provisions that allow the issuer to
accelerate the maturity date of the security.
 
     At December 31, 1998, the weighted average contractual maturity of all of
the Savings Bank's mortgage-backed securities was approximately 15 years and the
weighted average yield on the mortgage-backed securities portfolio was 6.30%.
The actual maturity of a mortgage-backed security is less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. Although prepayments of underlying mortgages depend on many factors,
including the type of mortgages, the coupon rate, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages and general levels
 
                                       34
   36
 
of market interest rates, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Savings Bank
may be subject to reinvestment risk because to the extent that the Savings
Bank's mortgage-backed securities amortize or prepay faster than anticipated,
the Savings Bank may not be able to reinvest the proceeds of such repayments and
prepayments at a comparable rate. At December 31, 1998, of the $12.5 million of
mortgage-backed securities, an aggregate of $10.1 million were secured by
fixed-rate mortgage loans and an aggregate of $2.4 million were secured by
adjustable-rate mortgage loans.
 
     In February 1992, the OTS adopted a policy statement which states, among
other things, that mortgage derivative products (including CMOs and CMO
residuals and stripped mortgage-backed securities) which possess average life or
price volatility in excess of a benchmark fixed rate 30-year mortgage-backed
pass-through security are "high-risk" mortgage securities, are not suitable
investments for depository institutions, must be carried in the institution's
trading account or as assets held for sale, and must be marked to market on a
regular basis. The Savings Bank has no "high-risk" mortgage securities at
December 31, 1998 and has no present intention to invest in such products.
 
SOURCES OF FUNDS
 
     GENERAL.  The principal source of funds for the Company is the repayment of
the loan to the ESOP, interest and dividends on its debt and equity investments
(including its ownership of all of the capital stock of the Savings Bank) and
interest paid on deposits maintained at the Savings Bank. The Savings Bank's
principal source of funds for use in lending and for other general business
purposes has traditionally come from deposits obtained through the Savings
Bank's branch offices. The Savings Bank also derives funds from amortization and
prepayments of outstanding loans and mortgage-backed securities and from
maturing investment securities. The Savings Bank has also borrowed from the FHLB
of Pittsburgh. Loan repayments are a relatively stable source of funds, while
deposits inflows and outflows are significantly influenced by general interest
rates and money market conditions.
 
     DEPOSITS.  The Savings Bank's current deposit products include passbook
accounts, negotiable order of withdrawal ("NOW") accounts, non-interest bearing
demand deposit accounts, tiered money market deposit accounts and certificates
of deposit ranging in terms from six months to five years. The Savings Bank's
deposit products also include Individual Retirement Account ("IRA") and Keogh
certificates.
 
     The Savings Bank's deposits are obtained primarily from residents in its
primary market area of Allegheny County and portions of Washington County and
Westmoreland County, all of which are located in Western Pennsylvania. In
February 1998, the Savings Bank opened its fifth branch located at 603 Scenery
Drive, Elizabeth Township, PA 15037. The Savings Bank to a lesser extent obtains
deposits from other locations in the greater Pittsburgh metropolitan area. The
Savings Bank attracts deposit accounts by offering a wide variety of accounts,
competitive interest rates and fee structures on transaction accounts, and
convenient branch office locations and service hours. The Savings Bank primarily
utilizes print media to attract new customers and savings deposits. The Savings
Bank has never utilized the services of deposit brokers and had no brokered
deposits at December 31, 1998. The Savings Bank presently operates five
automated teller machines ("ATMs"), one at each of the branch offices maintained
by the Savings Bank as of December 31, 1998. The Savings Bank is affiliated with
a regional ATM network.
 
     The Savings Bank has been competitive in the types of accounts and in
interest rates it has offered on its deposit products but does not necessarily
seek to match the highest rates paid by competing institutions. At times of
declining interest rates, the Savings Bank has chosen to aggressively price
certificate of deposit rates to discourage disintermediation of deposits into
competing investment products offered by other institutions.
 
                                       35
   37
 
     The following table shows the distribution of, and certain other
information relating to, the Savings Bank's deposits by type of deposit as of
the dates indicated.
 


                                                             DECEMBER 31,
                                     ------------------------------------------------------------
                                            1998                 1997                 1996
                                     ------------------    -----------------    -----------------
                                      AMOUNT    PERCENT    AMOUNT    PERCENT    AMOUNT    PERCENT
                                     --------   -------    -------   -------    -------   -------
                                                        (DOLLARS IN THOUSANDS)
                                                                        
Passbook and club accounts.........  $ 16,372    14.93%    $15,298    16.78%    $15,476    18.46%
Money market.......................    19,857    18.10      16,122    17.68      13,513    16.12
Certificates of deposit............    55,939    50.99      45,803    50.25      43,683    52.12
NOW accounts.......................    11,799    10.76       9,933    10.90       8,595    10.25
Non-interest bearing...............     5,731     5.22       4,000     4.39       2,554     3.05
                                     --------   ------     -------   ------     -------   ------
     Total deposits................  $109,698   100.00%    $91,156   100.00%    $83,821   100.00%
                                     ========   ======     =======   ======     =======   ======

 
     The following table presents, by various interest rate categories, the
amount of certificates of deposit at December 31, 1998 and the amounts at
December 31, 1998 that mature during the periods indicated.
 


                                               TOTAL AS OF
                                               DECEMBER 31,        AMOUNTS AT DECEMBER 31, 1998
                                                   1998                  MATURING WITHIN
                                               ------------    ------------------------------------
                                                                           AFTER ONE
                                                                 ONE      BUT WITHIN
CERTIFICATES OF DEPOSIT                                         YEAR      THREE YEARS    THEREAFTER
- -----------------------                                        -------    -----------    ----------
                                                              (DOLLARS IN THOUSANDS)
                                                                             
4.01% to 6.00%...............................    $51,409       $33,555      $14,367        $3,487
6.01% to 8.00%...............................      4,530         1,249        3,179           102
                                                 -------       -------      -------        ------
     Total certificate accounts..............    $55,939       $34,804      $17,546        $3,589
                                                 =======       =======      =======        ======

 
     The following table presents the average balance of each deposit type and
the average rate paid on each deposit type, net of early withdrawal penalties
for the periods indicated.
 


                                                            DECEMBER 31,
                                  -----------------------------------------------------------------
                                         1998                   1997                   1996
                                  -------------------    -------------------    -------------------
                                  AVERAGE    AVERAGE     AVERAGE    AVERAGE     AVERAGE    AVERAGE
                                  BALANCE   RATE PAID    BALANCE   RATE PAID    BALANCE   RATE PAID
                                  -------   ---------    -------   ---------    -------   ---------
                                                       (DOLLARS IN THOUSANDS)
                                                                        
Passbook and club accounts......  $16,119     2.53%      $15,587     2.53%      $16,112     2.55%
Money market....................   17,834     3.71        15,014     3.56        10,649     3.15
Certificates of deposit.........   50,089     5.48        45,579     5.62        45,522     5.54
NOW accounts....................   10,455     1.56         9,272     1.74         8,009     1.73
Non-interest bearing............    4,846     0.00         3,165     0.00         2,002     0.00
                                  -------     ----       -------     ----       -------     ----
     Total deposits.............  $99,343     4.00%      $88,617     4.12%      $82,294     4.14%
                                  =======     ====       =======     ====       =======     ====

 
     The following table sets forth the Savings Bank's net savings flows during
the periods indicated.
 


                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         1998       1997       1996
                                                       --------    -------    -------
                                                               (IN THOUSANDS)
                                                                     
Beginning balance..................................    $ 91,156    $83,821    $80,731
Increase (decrease) before interest credited.......      14,566      3,685       (317)
Interest credited..................................       3,976      3,650      3,407
                                                       --------    -------    -------
Net savings increase...............................      18,542      7,335      3,090
                                                       --------    -------    -------
Ending balance.....................................    $109,698    $91,156    $83,821
                                                       ========    =======    =======

 
                                       36
   38
 
     The following table sets forth maturities of the Savings Bank's
certificates of deposit of $100,000 or more at December 31, 1998 by time
remaining to maturity.
 


                                                              IN THOUSANDS
                                                              ------------
                                                           
Three months or less........................................     $  813
Over three months through six months........................      3,426
Over six months through 12 months...........................      2,469
Over 12 months..............................................      2,517
                                                                 ------
     Total..................................................     $9,225
                                                                 ======

 
     BORROWINGS FROM FHLB OF PITTSBURGH AS OF DECEMBER 31.  The following table
sets forth the borrowing history of the Savings Bank from the FHLB of Pittsburgh
for the last three years.
 


                                                               AT DECEMBER 31,
                                                        -----------------------------
                                                         1998       1997       1996
                                                        -------    -------    -------
                                                           (DOLLARS IN THOUSANDS)
                                                                     
Amount Outstanding At Year End........................  $50,977    $34,677    $14,477
                                                        =======    =======    =======
Maximum Balance.......................................  $50,977    $34,977    $15,077
                                                        =======    =======    =======
Average Balance.......................................  $49,144    $28,554    $ 5,169
                                                        =======    =======    =======
Weighted Average Interest Rate:
     At end of year...................................     5.55%      5.78%      5.96%
                                                        =======    =======    =======
     During Year......................................     5.51%      5.57%      5.34%
                                                        =======    =======    =======

 
     The Savings Bank utilized the increased borrowings during 1998 to meet
increased loan demand. To secure the repayment of any outstanding borrowings
from the FHLB of Pittsburgh and any other credit product offered by the FHLB of
Pittsburgh, the Savings Bank has pledged to the FHLB of Pittsburgh investments
of the Savings Bank in U.S. Government and U.S. agency securities and U.S.
Government and U.S. agency mortgage-backed securities and 100% of its
unencumbered home loan mortgages.
 
                                       37
   39
 
                        REGULATORY CAPITAL REQUIREMENTS
 
     Federally insured savings institutions are required to maintain minimum
levels of regulatory capital. Pursuant to Federal regulations, the OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
 
     At December 31, 1998, the Savings Bank exceeded all of the capital
requirements applicable to it. Set forth below is a summary of the Savings
Bank's compliance with the applicable capital standards as of December 31, 1998
and as of December 31 of each of the preceding four years.


                                 AS OF                  AS OF                  AS OF                  AS OF
                           DECEMBER 31, 1998      DECEMBER 31, 1997      DECEMBER 31, 1996      DECEMBER 31, 1995
                          --------------------   --------------------   --------------------   -------------------
                                    PERCENT OF             PERCENT OF             PERCENT OF            PERCENT OF
                          AMOUNT    ASSETS(2)    AMOUNT    ASSETS(2)    AMOUNT    ASSETS(2)    AMOUNT   ASSETS(2)
                          ------    ---------    ------    ---------    ------    ---------    ------   ---------
                                                           (DOLLARS IN THOUSANDS)
                                                                                
Tangible capital:(1)
  Requirement...........  $ 2,638      1.50%     $ 2,139      1.50%     $ 1,719      1.50%     $1,378      1.50%
  Actual................   12,950      7.36       12,592      8.83       11,787     10.28      7,228       7.87
  Excess................  $10,312      5.86%     $10,453      7.33%     $10,068      8.78%     $5,850      6.37%
Core capital:(1)(2)
  Requirement...........  $ 5,276      3.00%     $ 4,279      3.00%     $ 3,438      3.00%     $2,757      3.00%
  Actual................   12,950      7.36       12,592      8.83       11,787     10.28      7,228       7.87
  Excess................  $ 7,674      4.36%     $ 8,313      5.83%     $ 8,349      7.28%     $4,471      4.87%
Risk-based capital:(1)
  Requirement(3)........  $ 7,286      8.00%     $ 5,537      8.00%     $ 4,064      8.00%     $3,101      8.00%
  Actual(4).............   13,521     14.85       12,995     18.78       12,094     23.81      7,515      19.39
  Excess................  $ 6,235      6.85%     $ 7,458     10.78%     $ 8,030     15.81%     $4,414     11.39%
 

                                 AS OF
                           DECEMBER 31, 1994
                          -------------------
                                   PERCENT OF
                          AMOUNT   ASSETS(2)
                          ------   ---------
                             
Tangible capital:(1)
  Requirement...........  $1,316      1.50%
  Actual................  7,049       8.03
  Excess................  $5,733      6.53%
Core capital:(1)(2)
  Requirement...........  $2,632      3.00%
  Actual................  7,049       8.03
  Excess................  $4,417      5.03%
Risk-based capital:(1)
  Requirement(3)........  $2,985      8.00%
  Actual(4).............  7,352      19.70
  Excess................  $4,367     11.70%

 
- ---------------
 
(1) Tangible capital levels are shown as a percentage of tangible assets. Core
    capital levels are shown as a percentage of adjusted assets. Risk-based
    capital levels are shown as a percentage of risk-weighted assets. As of
    December 31, 1998, the difference between capital under generally accepted
    accounting principles ("GAAP") and regulatory tangible and core capital is
    attributable to $8,000 for the Savings Bank's net unrealized holding losses
    on available-for-sale securities to arrive at regulatory tangible and core
    capital of $12,950,000.
 
(2) To be "adequately capitalized" for purposes of the OTS' Prompt Corrective
    Action regulations, core capital generally must be at least 4.0%.
 
(3) Calculated based on the OTS requirement of 8.0% of risk-weighted assets.
 
(4) As of December 31, 1998, the difference between capital under generally
    accepted accounting principles and regulatory risk-based capital is
    attributable to an addition to generally accepted accounting principles
    capital of $571,000 for the allowance for loan loss and $8,000 for the
    Savings Bank's net unrealized holding gains (losses) on available-for-sale
    securities to arrive at regulatory risk-based capital of $13,521,000.
 
                                       38
   40
 
            DIRECTOR AND EXECUTIVE OFFICER BIOGRAPHICAL INFORMATION
 
     Set forth below are the directors and executive officers of the Company and
the Savings Bank together with information concerning the principal occupations
during the last five years for such directors and executive officers.
 
     MARTIN W. DOWLING has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1992. Mr. Dowling is a director of
Jefferson Hills Real Estate, Inc. and President of Dowling Properties, Inc. He
is also President of Martin W. Dowling, Inc., a building and remodeling company,
and President of Town Hall Estates, Inc., and Meadow Green Corp., both companies
being in the business of real estate development. Mr. Dowling also serves as
director of Jefferson Hospital and other healthcare-related organizations.
 
     JAMES M. HEIN is the Chief Financial Officer of the Savings Bank and has
performed as such since January 1996. Prior to that time Mr. Hein acted as the
Controller of the Savings Bank. In connection with the formation of the Company
and the Conversion of the Savings Bank, Mr. Hein was appointed the Controller of
the Company.
 
     MICHAEL R. MACOSKO has been a director of the Company since its formation
in 1996 and a director of the Savings Bank since 1992. Mr. Macosko is a
pharmacist with Eckerd Drug, Inc., and has performed as such since 1995 with
Eckerd Drug, Inc. and its predecessor Thrift Drug, Inc. From 1974 until 1995 he
was pharmacist, owner and President of Woody's Drug Store, Inc.
 
     CHARLES P. MCCULLOUGH has been a director of the Company since its
formation in 1996 and a director of the Savings Bank since 1995. Mr. McCullough
is an attorney and a shareholder with Tucker Arensberg, P.C., and has performed
as an attorney at Tucker Arensberg, P.C. since November of 1995. Prior to his
employment by Tucker Arensberg, P.C., Mr. McCullough was a solo practitioner
attorney at law.
 
     MARK R. SCHOEN has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1994. Currently Mr. Schoen is a
senior manager of investment products and technology for SEI Investments, a
company servicing the mutual fund industry. Prior roles included Senior Manager
of Business Development at Pilgrim Baxter and Associates and Assistant Vice
President of Business Development and Product Administration for Federated
Investors.
 
     JOHN A. STIVER has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1986. Mr. Stiver was appointed
Chief Executive Officer of the Bank and the Company effective on December 30,
1998. Mr. Stiver is a CPA licensed to practice in Pennsylvania since 1972 and
has been a self employed CPA since 1980. Mr. Stiver serves as Chairman of the
Board of Directors of the Company and the Savings Bank. He is also President and
owner of C & J Leasing Co., an equipment leasing company, President and owner of
Jackson Group, Ltd., an investment company, and President and owner of Miller's
Mini Storage, Inc., a self-storage company.
 
     PATRICIA A. WHITE has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1989. Ms. White is the Executive
Vice President of the Savings Bank, and has performed as such since 1989. She is
also the Corporate Secretary of the Savings Bank and has performed as such since
1986. Her main duties include oversight of the marketing, compliance, security
and loan origination areas of the Savings Bank. In connection with the formation
of the Company and the Conversion, Ms. White was appointed Treasurer and
Secretary of the Company.
 
     ROBERT S. ZYLA has been a director of the Company since its formation in
1996 and a director of the Savings Bank since 1984. Mr. Zyla was appointed
President of the Savings Bank in 1989 and Treasurer of the Savings Bank in 1995.
In connection with the formation of the Company and the Conversion, Mr. Zyla was
appointed the President of the Company.
 
                                       39
   41
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Stockholders and Board
of Directors of Prestige Bancorp, Inc.:
 
     We have audited the accompanying consolidated balance sheets of Prestige
Bancorp, Inc. (the Corporation) and Subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prestige Bancorp, Inc. and
Subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
 
ARTHUR ANDERSEN LLP
 
Pittsburgh, Pennsylvania,
February 17, 1999
 
                                       40
   42
 
                             PRESTIGE BANCORP, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
 


                                                                  1998            1997
                                                                  ----            ----
                                                                        
                           ASSETS
Assets:
Cash and due from banks.....................................  $    975,202    $    927,362
Interest-bearing deposits with banks........................     9,177,755       1,286,099
Investment securities-
  Available for sale........................................     9,907,260      11,017,858
  Held to maturity (market value $25,598,337 and
     $27,870,426, respectively).............................    25,478,289      27,741,398
Loans.......................................................   125,590,998      98,429,871
Less--Deferred costs, net...................................        (3,080)        (10,856)
       Allowance for loan losses............................       571,183         402,964
       Loans in process.....................................     1,106,061       1,856,802
                                                              ------------    ------------
          Net loans.........................................   123,916,834      96,180,961
                                                              ------------    ------------
Federal Home Loan Bank stock, at cost.......................     2,548,900       1,748,900
Premises and equipment, net.................................     2,634,609       2,673,794
Accrued interest receivable.................................     1,116,560       1,033,261
Deferred tax asset..........................................        90,359              --
Other assets................................................     1,528,216         653,077
                                                              ------------    ------------
Total assets................................................  $177,373,984    $143,262,710
                                                              ============    ============
 
            LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
  Deposits-
     Noninterest-bearing deposits...........................  $  5,731,447    $  4,000,085
     Interest-bearing deposits..............................   103,966,675      87,155,740
                                                              ------------    ------------
          Total deposits....................................   109,698,122      91,155,825
  Federal Home Loan Bank advances...........................    50,977,000      34,677,000
  Advance payments by borrowers for taxes and insurance.....     1,023,230         856,881
  Income taxes payable......................................       172,086         178,068
  Deferred tax liability....................................            --          77,927
  Accrued interest payable..................................       234,442         153,336
  Other liabilities.........................................       509,199         533,862
                                                              ------------    ------------
          Total liabilities.................................   162,614,079     127,632,899
                                                              ------------    ------------
Stockholders' Equity:
  Preferred stock, $1.00 par value; 5,000,000 shares
     authorized, none issued................................            --              --
  Common stock, $1.00 par value; 10,000,000 shares
     authorized, 1,100,090 shares issued at December 31,
     1998; 963,023 shares at December 31, 1997..............     1,100,090         963,023
  Treasury stock at cost: 157,476 and 55,372 shares at
     December 31, 1998 and December 31, 1997,
     respectively...........................................    (2,161,243)       (775,881)
  Additional paid in capital................................    10,727,677       8,033,296
  Unearned ESOP shares......................................      (690,380)       (724,050)
  Retained earnings.........................................     5,826,182       8,064,202
  Accumulated other comprehensive income....................       (42,421)         69,221
                                                              ------------    ------------
          Total stockholders' equity........................    14,759,905      15,629,811
                                                              ------------    ------------
Total liabilities and stockholders' equity..................  $177,373,984    $143,262,710
                                                              ============    ============

 
        The accompanying notes are an integral part of these statements.
 
                                       41
   43
 
                             PRESTIGE BANCORP, INC.
 
                       CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 


                                                                 1998          1997          1996
                                                                 ----          ----          ----
                                                                                 
INTEREST INCOME:
Interest and fees on loans..................................  $8,689,218    $6,786,131    $5,078,301
Interest on mortgage-backed securities......................     589,328       773,171       922,491
Interest and dividends on other investment securities.......   2,137,413     1,706,379       656,991
Interest on deposits in other financial institutions........     255,738       105,621        90,584
                                                              ----------    ----------    ----------
      Total interest income.................................  11,671,697     9,371,302     6,748,367
                                                              ----------    ----------    ----------
 
INTEREST EXPENSE:
Interest on deposits........................................   3,976,159     3,650,221     3,406,804
Advances from Federal Home Loan Bank........................   2,708,619     1,590,207       276,022
                                                              ----------    ----------    ----------
      Total interest expense................................   6,684,778     5,240,428     3,682,826
      Net interest income...................................   4,986,919     4,130,874     3,065,541
                                                              ----------    ----------    ----------
PROVISION FOR LOAN LOSSES...................................     209,000       104,000        44,000
                                                              ----------    ----------    ----------
      Net interest income after provision for loan losses...   4,777,919     4,026,874     3,021,541
                                                              ----------    ----------    ----------
 
OTHER INCOME:
Fees and service charges....................................     511,954       321,727       260,685
(Loss) gain on sale of investments..........................      (6,703)       20,704            --
Gain on sale of fixed assets................................      27,354            --            --
Loss on sale of foreclosed property.........................     (18,500)           --            --
Other income, net...........................................      20,327        29,932        36,327
                                                              ----------    ----------    ----------
      Total other income....................................     534,432       372,363       297,012
                                                              ----------    ----------    ----------
 
OTHER EXPENSES:
Salaries and employee benefits..............................   2,023,378     1,567,942     1,221,432
Premises and occupancy costs................................     529,950       332,882       326,200
Federal deposit insurance premiums..........................      57,718        56,508       175,984
Special SAIF assessment.....................................          --            --       501,727
Data processing costs.......................................     265,707       204,757       171,485
Advertising costs...........................................     122,802       108,280        86,157
Transaction processing costs................................     253,833       191,773       159,213
ATM transaction fees........................................     110,408        92,515        92,174
Other expenses..............................................     732,536       567,173       369,282
                                                              ----------    ----------    ----------
      Total other expenses..................................   4,096,332     3,121,830     3,103,654
                                                              ----------    ----------    ----------
Income before income tax expense............................   1,216,019     1,277,407       214,899
 
INCOME TAX EXPENSE..........................................     472,932       492,920        69,386
                                                              ----------    ----------    ----------
NET INCOME..................................................  $  743,087    $  784,487    $  145,513
                                                              ==========    ==========    ==========
PER COMMON SHARE DATA(1):
  Basic:
    Net Income(2)...........................................  $     0.79    $     0.80    $       --
                                                              ==========    ==========    ==========
    Average number of common shares outstanding(3)..........     944,240       979,772     1,019,768
                                                              ==========    ==========    ==========
  Diluted:
    Net Income(2)...........................................  $     0.78    $     0.80    $       --
                                                              ==========    ==========    ==========
    Average number of common shares outstanding(3)..........     953,281       983,012     1,019,768
                                                              ==========    ==========    ==========
  Cash Dividends Declared(2)................................  $     0.20    $     0.12    $       --
                                                              ==========    ==========    ==========

 
- ---------
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
    to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
    share data have been restated to reflect the stock dividend.
(2) Earnings per share and cash dividends declared information for 1996
    represents the period subsequent to initial issuance of common stock on June
    27, 1996.
(3) Weighted shares outstanding for 1996 represent the weighted shares
    outstanding from June 27, 1996 to December 31, 1996.
 
        The accompanying notes are an integral part of these statements
 
                                       42
   44
 
                             PRESTIGE BANCORP, INC.
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


 
                                                                               ADDITIONAL
                               COMPREHENSIVE    COMMON STOCK      TREASURY       PAID-IN      UNEARNED      RETAINED
                                  INCOME       $1.00 PAR VALUE      STOCK        CAPITAL     ESOP SHARES    EARNINGS
                                  ------       ---------------      -----        -------     -----------    --------
                                                                                         
BALANCE, December 31, 1995...                    $        --     $        --   $        --   $       --    $7,245,432
Issuance and exchange of
  1,107,476 shares of common
  stock as a result of the
  conversion.................                        963,023              --     7,995,781           --            --
88,597 shares acquired for
  ESOP.......................                             --              --            --     (770,410)           --
Allocation of 1,715 ESOP
  shares.....................                             --              --         4,395       14,920            --
Net income...................   $  145,513                --              --            --           --       145,513
Net unrealized losses on
  available for sale
  securities, net of tax of
  $67,308....................     (100,997)               --              --            --           --            --
                                ----------
Comprehensive income.........   $   44,516
                                ==========       -----------     -----------   -----------   ----------    ----------
BALANCE, December 31, 1996...                        963,023              --     8,000,176     (755,490)    7,390,945
Allocation of 3,615 ESOP
  shares.....................                             --              --        33,120       31,440            --
Cash dividends declared......                             --              --            --           --      (111,230)
Treasury stock purchases,
  55,372 shares..............                             --        (775,881)           --           --            --
Net income...................   $  784,487                --              --            --           --       784,487
Net unrealized gains on
  available for sale
  securities, net of tax of
  $158,452...................      251,340                --              --            --           --            --
Reclassification adjustment
  for gains realized in net
  income net of tax of
  $7,039.....................      (13,665)               --              --            --           --            --
                                ----------
Comprehensive income.........   $1,022,162
                                ==========       -----------     -----------   -----------   ----------    ----------
BALANCE, December 31, 1997...                        963,023        (775,881)    8,033,296     (724,050)    8,064,202
Allocation of 3,872 ESOP
  shares.....................                             --              --        44,976       33,670            --
Cash dividends declared......                             --              --            --           --      (191,600)
Treasury stock purchases,
  102,587 shares.............                             --      (1,392,128)           --           --            --
Stock dividend declared:
  Common stock (15% per share
    on 914,873 shares).......                        137,067              --     2,648,956           --    (2,786,023)
  Cash in lieu of stock......                             --              --            --           --        (3,484)
Common stock issued upon
  exercise of stock
  options--483 shares........                             --           6,766           449           --            --
Net income...................   $  743,087                --              --            --           --       743,087
Net unrealized losses on
  available for sale
  securities, net of tax of
  $74,595....................     (116,066)               --              --            --           --            --
Reclassification adjustment
  for losses realized in net
  income net of tax of
  $2,279.....................        4,424                --              --            --           --            --
                                ----------
Comprehensive income.........   $  631,445
                                ==========       -----------     -----------   -----------   ----------    ----------
BALANCE, December 31, 1998...                    $ 1,100,090     $(2,161,243)  $10,727,677   $ (690,380)   $5,826,182
                                                 ===========     ===========   ===========   ==========    ==========
 

                                ACCUMULATED
                                   OTHER
                               COMPREHENSIVE
                                  INCOME          TOTAL
                                  ------          -----
                                         
BALANCE, December 31, 1995...   $   (67,457)   $ 7,177,975
Issuance and exchange of
  1,107,476 shares of common
  stock as a result of the
  conversion.................            --      8,958,804
88,597 shares acquired for
  ESOP.......................            --       (770,410)
Allocation of 1,715 ESOP
  shares.....................            --         19,315
Net income...................            --        145,513
Net unrealized losses on
  available for sale
  securities, net of tax of
  $67,308....................      (100,997)      (100,997)
Comprehensive income.........
                                -----------    -----------
BALANCE, December 31, 1996...      (168,454)    15,430,200
Allocation of 3,615 ESOP
  shares.....................            --         64,560
Cash dividends declared......            --       (111,230)
Treasury stock purchases,
  55,372 shares..............            --       (775,881)
Net income...................            --        784,487
Net unrealized gains on
  available for sale
  securities, net of tax of
  $158,452...................       251,340        251,340
Reclassification adjustment
  for gains realized in net
  income net of tax of
  $7,039.....................       (13,665)       (13,665)
Comprehensive income.........
                                -----------    -----------
BALANCE, December 31, 1997...        69,221     15,629,811
Allocation of 3,872 ESOP
  shares.....................            --         78,646
Cash dividends declared......            --       (191,600)
Treasury stock purchases,
  102,587 shares.............            --     (1,392,128)
Stock dividend declared:
  Common stock (15% per share
    on 914,873 shares).......            --             --
  Cash in lieu of stock......            --         (3,484)
Common stock issued upon
  exercise of stock
  options--483 shares........            --          7,215
Net income...................            --        743,087
Net unrealized losses on
  available for sale
  securities, net of tax of
  $74,595....................      (116,066)      (116,066)
Reclassification adjustment
  for losses realized in net
  income net of tax of
  $2,279.....................         4,424          4,424
Comprehensive income.........
                                -----------    -----------
BALANCE, December 31, 1998...   $   (42,421)   $14,759,905
                                ===========    ===========

 
        The accompanying notes are an integral part of these statements
                                       43
   45
 
                             PRESTIGE BANCORP, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
 


                                                                  1998           1997           1996
                                                                  ----           ----           ----
                                                                                   
OPERATING ACTIVITIES:
Net income..................................................  $    743,087   $    784,487   $    145,513
                                                              ------------   ------------   ------------
Adjustments to reconcile net income to net cash provided
  (used) by operating activities--
    Depreciation of premises and equipment..................       306,143        188,779        171,044
    Amortization of premiums and discounts, net.............       (28,174)       (31,805)        (4,354)
    Non cash compensation expense related to MRP Plan.......       134,136         88,307             --
    Non cash compensation expense related to ESOP benefit...        96,336         84,484         30,071
    Loss on sale of mutual funds............................        14,700          3,200             --
    Loss on sale of available for sale mortgage-backed
      securities............................................            --            792             --
    Gain on sale of equity securities.......................        (5,834)            --             --
    Gain on call of held to maturity investment
      securities............................................            --        (24,696)            --
    Gain on sale of premises and equipment..................       (38,023)            --             --
    Provision for loan losses...............................       209,000        104,000         44,000
    (Decrease) increase in other liabilities................       (42,353)       286,828         25,524
    Increase (decrease) in accrued interest payable.........        81,106        115,382        (37,978)
    (Decrease) increase in income taxes payable.............       (99,026)       108,912        (60,524)
    Increase in accrued interest receivable.................       (83,299)      (222,377)      (237,334)
    (Increase) decrease in other assets.....................      (397,700)        30,435          1,584
    Other, net..............................................            --             --          1,783
                                                              ------------   ------------   ------------
        Total adjustments...................................       147,012        732,241        (66,184)
                                                              ------------   ------------   ------------
        Net cash provided by operating activities...........       890,099      1,516,728         79,329
                                                              ------------   ------------   ------------
INVESTING ACTIVITIES:
Loan originations...........................................   (66,773,023)   (38,985,258)   (26,118,053)
Principal payments on loans.................................    38,828,150     19,245,450     10,935,360
Proceeds from calls and maturities of held to maturity
  investment securities.....................................    17,000,000      8,524,696      1,700,000
Proceeds from sale of available for sale mutual funds.......       660,500        101,000             --
Proceeds from sale of available for sale mortgaged-backed
  securities................................................            --        633,274             --
Proceeds from call of available for sale investment
  securities................................................     5,600,000      1,000,000             --
Proceeds from sale of equity securities.....................        19,800             --             --
Return of capital on investment securities..................         2,225         29,100             --
Purchases of held to maturity investment securities.........   (13,727,081)   (17,672,530)    (8,735,000)
Purchases of available for sale investment securities.......    (4,650,561)    (1,479,908)    (4,747,900)
Principal payments on available for sale mortgage-backed
  securities................................................     1,289,713        543,835        637,010
Principal payments on held to maturity mortgage-backed
  securities................................................     1,818,659      1,914,386      1,643,112
Principal payments on held to maturity investment
  securities................................................       193,529             --             --
Purchases of available for sale mortgage-backed
  securities................................................    (2,000,000)            --             --
Purchases of held to maturity mortgage-backed securities....    (3,000,000)            --             --
Purchases of premises and equipment.........................      (435,343)      (981,654)      (183,397)
Proceeds from sale of premises and equipment................       206,408             --             --
Purchase of land............................................            --             --       (265,717)
Purchase of Federal Home Loan Bank stock....................      (800,000)      (995,000)       (20,200)
                                                              ------------   ------------   ------------
        Net cash used by investing activities...............   (25,767,024)   (28,122,609)   (25,154,785)
                                                              ------------   ------------   ------------
FINANCING ACTIVITIES:
Increase in advance payments by borrowers for taxes and
  insurance.................................................       166,349        234,824         50,277
Purchases of MRP shares.....................................      (611,575)      (210,406)            --
Proceeds from Federal Home Loan Bank advances...............    21,000,000     88,607,500     44,850,000
Payments on Federal Home Loan Bank advances.................    (4,700,000)   (68,407,500)   (33,350,000)
Net increase in money market, NOW and passbook savings
  accounts..................................................     8,406,498      5,214,353      5,249,401
Net increase (decrease) in certificate accounts.............    10,135,799      2,120,004     (2,158,605)
Purchases of treasury stock.................................    (1,392,128)      (775,881)            --
Common stock cash dividends paid............................      (191,600)      (111,230)            --
Proceeds from exercise of stock options.....................         6,562             --             --
Cash in lieu of stock dividend on fractional shares.........        (3,484)            --             --
Net proceeds from stock offering............................            --             --      8,188,394
                                                              ------------   ------------   ------------
        Net cash provided by financing activities...........    32,816,421     26,671,664     22,829,467
                                                              ------------   ------------   ------------
        Net increase (decrease) in cash and cash
          equivalents.......................................     7,939,496         65,783     (2,245,989)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................     2,213,461      2,147,678      4,393,667
                                                              ------------   ------------   ------------
CASH AND CASH EQUIVALENTS, END OF YEAR......................  $ 10,152,957   $  2,213,461   $  2,147,678
                                                              ============   ============   ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes..................  $    570,000   $    381,000   $    132,000
                                                              ============   ============   ============
Cash paid during the year for interest on deposits and
  borrowings................................................  $  6,603,672   $  5,125,044   $  3,682,828
                                                              ============   ============   ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITY:
Loans transferred to real estate owned......................  $    250,000   $         --   $     10,000
                                                              ============   ============   ============

 
        The accompanying notes are an integral part of these statements
 
                                       44
   46
 
                             PRESTIGE BANCORP, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997
 
1.  PLAN OF CONVERSION:
 
     On February 14, 1996, the Board of Directors of Prestige Bank, F.S.B. (the
Bank) adopted a Plan of Conversion (the Plan) from a federally chartered mutual
savings bank to a federally chartered stock savings bank and the issuance of its
stock to Prestige Bancorp, Inc., (the Corporation), a Pennsylvania corporation.
The Plan provided that the holding company offer nontransferable subscription
rights to purchase common stock of the holding company. The rights were offered
first to eligible account holders of record, a tax-qualified employee stock
ownership plan to be adopted by the Bank, supplemental eligible account holders,
certain other depositors and borrowers, and directors, officers and employees.
 
     The Corporation sold 963,023 shares of its common stock (including 77,041
shares to its newly formed Employee Stock Ownership Trust (the ESOP)), at $10.00
per share. Simultaneously there was a corresponding exchange of all of the
Bank's stock for approximately 50% of the net offering proceeds. The remaining
portion of the net proceeds were retained by the Corporation net of $770,410
which was loaned to the ESOP for its purchase. The conversion and public
offering was completed on June 27, 1996 with net proceeds from the offering, net
of the ESOP loan, totaling $8,188,394, after offering expenses.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
NATURE OF OPERATIONS
 
     Prestige Bancorp, Inc. through its wholly-owned subsidiary, the Bank, is
primarily engaged in the business of attracting deposits in the form of savings
accounts and investing such funds in the origination or purchase of commercial
loans, residential mortgage loans and consumer loans, including credit card
services, and in mortgage-backed and other securities. The Bank conducts its
business through five offices located in the greater Pittsburgh metropolitan
area.
 
     The following comprise the significant accounting policies which the
Corporation follows in preparing and presenting its financial statements:
 
PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, the Bank. All significant
intercompany accounts and transactions have been eliminated in preparing the
consolidated financial statements.
 
CASH AND CASH EQUIVALENTS
 
     Cash and cash equivalents in the accompanying statements of cash flows
include cash and due from banks and interest-bearing deposits primarily with
banks. Interest-bearing deposits are on deposit with domestic banks and are due
within three months. The Corporation had no deposits in foreign banks or in
foreign branches of United States banks. In addition, cash and due from banks at
December 31, 1998 and 1997 included $292,000 and $164,000, respectively, of
reserves required to be maintained under Federal Reserve Bank regulations.
 
INVESTMENT SECURITIES
 
     The Bank follows Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities," which
specifies a methodology for the classification of such securities as either held
to maturity, available for sale or as trading assets. Securities are classified
at the time of purchase as investment securities held to maturity if it is
management's intent and the Corporation has the ability to hold the securities
until maturity. Debt securities classified as held to maturity are carried on
the Corporation's books at cost, adjusted for amortization of premium and
accretion of discount using the interest method.
 
                                       45
   47
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
Alternatively, investments are classified as available for sale if it is
management's intent at the time of purchase to hold the securities for an
indefinite period of time and/or to use the investments as part of the
Corporation's asset/liability management strategy. Investments classified as
available for sale include securities that may be sold to effectively manage
interest rate risk exposure, prepayment risk and other factors (such as
liquidity requirements). These available for sale securities are reported at
fair value with unrealized aggregate appreciation (depreciation) excluded from
income and credited (charged) to a separate component of equity on a net of tax
basis. The Corporation presently is not authorized by its Board of Directors and
does not engage in trading activity. Gains or losses on the sale of available
for sale securities are recognized in income upon realization using the specific
identification method.
 
LOANS RECEIVABLE
 
     Loans receivable are stated at their unpaid principal balances, including
any allowances for anticipated loss.
 
     Interest on loans is credited to income as earned. Accrual of interest
income is discontinued when reasonable doubt exists regarding collectibility,
generally when payment of principal or interest is 90 days or more past due and
repayment is less than assured. For loans that have been placed on a nonaccrual
basis, previously accrued but unpaid interest is reversed and subsequently
recognized only to the extent payment is received and recovery of principal is
assured.
 
ALLOWANCE FOR LOAN LOSSES AND REAL ESTATE OWNED
 
     The allowance for loan losses is based on estimates, and ultimate losses
may vary from current estimates. These estimates are continually reviewed and,
as adjustments become necessary, they are reported in earnings in the period in
which they become known. The allowance for possible loan losses is established
through a provision charged to expense and recoveries.
 
     The Bank follows SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," which was subsequently amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures." SFAS No. 114
addresses the treatment and disclosure of certain loans where it is probable
that the creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. This standard defines the term
"impaired loan" and indicates the method used to measure the impairment. The
measurement of impairment may be based upon (a) the present value of expected
future cash flows discounted at the loan's effective interest rate; (b) the
observable market price of the impaired loan; or (c) the fair value of the
collateral of a collateral dependent loan. Additionally, these statements
require disclosure of how the creditor recognizes the interest income related to
these impaired loans.
 
     The Corporation's policy is to review separately each of its commercial
loans in order to determine if a loan is impaired. The Corporation also has
identified multiple pools of small-dollar-value homogeneous loans that are
evaluated collectively for impairment. These separate pools are for residential
mortgage loans and for consumer loans. As facts such as a significant
delinquency in payments of 90 days or more, a bankruptcy or other circumstances
become known on specific loans within either loan pool, individual loans are
reviewed and are removed from the pool if deemed to be impaired.
 
     The Corporation considers its specifically identified impaired loans to be
collateral dependent; therefore, the fair value of the collateral of the
impaired loans is evaluated in measuring the impairment. For its two loan pools,
the Corporation calculates expected loan losses using a formula approach based
primarily upon historical experience and current economic conditions. The
Corporation's policy is to recognize interest on a cash basis for impaired loans
and to charge off impaired loans when deemed uncollectible.
 
                                       46
   48
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
ORIGINATION FEES AND COSTS
 
     The Corporation defers all nonrefundable fees and capitalizes all material
direct costs associated with each loan originated. The deferred fees and
capitalized costs are accreted or amortized as an adjustment to interest income
using the interest method over the contractual life of the loans, adjusted for
estimated prepayments based on the Corporation's historical prepayment
experience.
 
PREMISES AND EQUIPMENT
 
     Premises and equipment are stated at cost less accumulated depreciation and
amortization which is computed using the straight-line method over the estimated
useful lives of the related assets that are from 2 to 50 years.
 
DEPOSITS
 
     Interest on deposits is accrued and charged to expense monthly and is paid
or credited in accordance with the terms of the respective accounts.
 
EMPLOYEE BENEFITS
 
     The Corporation has a noncontributory defined benefit pension plan covering
substantially all employees of the Bank. Pension cost is charged to expense.
Additionally, the Bank maintains a 401(k) plan for employees. The Bank does not
match any employee contributions.
 
     Effective June 27, 1996, the Corporation established the ESOP plan, which
acquired 77,041 shares, or 88,597 shares adjusted for the 15% stock dividend in
the second quarter of 1998, in connection with the Plan of Conversion. As of
December 31, 1998 and 1997, 79,393 and 83,265 shares, respectively, remain
unearned.
 
     On April 23, 1997, the Board of Directors and shareholders formally
approved the Corporation's Stock Option Plan (the Option Plan) and Management
Recognition and Retention Plan and Trust (the MRP Plan).
 
     See notes 12, 13 and 14 for additional information.
 
INCOME TAXES
 
     Deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
 
EARNINGS PER COMMON SHARE
 
     During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings Per Share". Under SFAS No. 128, earnings per share are classified as
basic earnings per share and diluted earnings per share. Basic earnings per
share includes only the weighted average common shares outstanding. Diluted
earnings per share includes the weighted average common shares outstanding and
any dilutive common stock equivalent shares in the calculation. All prior
periods have been restated to reflect this adoption. Treasury shares are treated
as retired for earnings per share purposes.
 
                                       47
   49
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
     The following table reflects the calculation of earnings per share under
SFAS No. 128.
 


                                                                 YEAR ENDED DECEMBER 31,
                                                                 -----------------------
                                                                1998       1997       1996
                                                              --------   --------   --------
                                                                           
Basic earnings per share (1):
  Net income................................................  $743,087   $784,487   $  3,070
  Average shares outstanding................................   944,240    979,772   1,019,768
  Earnings per share........................................  $    .79   $    .80         --
Diluted earnings per share (1):
  Net income................................................  $743,087   $784,487   $  3,070
  Average shares outstanding................................   944,240    979,772   1,019,768
  Stock options.............................................     9,041      3,240         --
                                                              --------   --------   --------
  Diluted average shares outstanding........................   953,281    983,012   1,019,768
  Earnings per share........................................  $    .78   $    .80         --

 
- ---------
 
(1) On April 15, 1998, the Board of Directors declared a stock dividend of 15%
    to shareholders of record of June 2, 1998 payable on June 19, 1998. All per
    share data have been restated to reflect the stock dividend.
 
COMPREHENSIVE INCOME
 
     The Company adopted SFAS No. 130, "Reporting Comprehensive Income," in the
quarter ended March 31, 1998. This accounting standard requires the reporting of
all changes in the equity of an enterprise that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. Prior to the issuance of this standard,
some of those changes in equity were displayed in the income statement, while
others were included directly in balances within a separate component of equity
in a statement of financial position.
 
RISK MANAGEMENT OVERVIEW
 
     Risk identification and management are essential elements for the
successful management of the Corporation. In the normal course of business, the
Bank is subject to various types of risk, including interest rate, credit and
liquidity risk. The Corporation controls and monitors these risks with policies,
procedures and various levels of managerial and Board oversight.
 
     Interest rate risk is the sensitivity of net interest income and the market
value of financial instruments to the magnitude, direction and frequency of
changes in interest rates. Interest rate risk results from various repricing
frequencies and the maturity structure of assets and liabilities. The
Corporation uses its asset liability management policy to manage interest rate
risk.
 
     Credit risk represents the possibility that a customer may not perform in
accordance with contractual terms. Credit risk results from extending credit to
customers and purchasing securities. The Corporation's primary credit risk
occurs in the loan portfolio. The Corporation uses its credit policy and
evaluation of the adequacy of the allowance for loan losses to control and
manage credit risk. The Corporation's investment policy indicates the amount of
credit risk that may be assumed in the investment portfolio.
 
     Liquidity risk represents the inability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers, as well as
the obligations to depositors and the Federal Home Loan Bank (FHLB). The
Corporation uses its asset liability management policy and its FHLB borrowing
capacity to manage liquidity risk.
 
                                       48
   50
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--CONTINUED
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from these estimates.
 
ACCOUNTING PRONOUNCEMENTS
 
     During 1998, the Company adopted SFAS No. 131 and No. 132. SFAS No. 131,
"Disclosures about Segments of a Business Enterprise and Related Information"
requires certain information to be reported about operating segments on a basis
consistent with the Company's internal organizational structure. The Company is
operated as a single segment; thus, there are no additional disclosure
requirements. SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," revises the disclosures for pensions and other
postretirement benefits and standardizes them into a combined format. Required
disclosures have been made and prior years' information has been reclassified
for the impact of SFAS No. 132.
 
FUTURE ACCOUNTING STANDARDS
 
     In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. The
Corporation does not have any derivative instruments or hedging activities as of
December 31, 1998.
 
     In October 1998, SFAS No. 134, "Accounting for Mortgage Servicing Rights,"
was issued. The Corporation does not have any mortgage servicing rights as of
December 31, 1998.
 
                                       49
   51
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
3.  INVESTMENT SECURITIES:
 
     The cost and market values of investment securities are summarized as
follows:
 
     Investment securities held to maturity:
 


                                                        DECEMBER 31, 1998
                                       ---------------------------------------------------
                                                       GROSS        GROSS
                                        AMORTIZED    UNREALIZED   UNREALIZED     MARKET
                                          COST         GAINS        LOSSES        VALUE
                                       -----------    --------     --------    -----------
                                                                   
U.S. government and government agency
  obligations:
     Due within one year.............  $   999,863    $ 11,387     $     --    $ 1,011,250
     Due after one and within five
       years.........................    3,012,412      22,515           --      3,034,927
     Due within ten years............    6,995,520      48,788        7,142      7,037,166
     Due after ten years.............    5,255,906      13,261       35,995      5,233,172
Federal Home Loan Mortgage
  Corporation (FHLMC) certificates:
     Due within one year.............      295,332       2,610           --        297,942
     Due after five and within ten
       years.........................    2,962,464      64,388           --      3,026,852
     Due after ten years.............    2,002,073      12,158       23,769      1,990,462
Government National Mortgage
  Association (GNMA) certificates due
  after 10 years.....................    1,950,655      14,120        1,013      1,963,762
Federal National Mortgage Association
  (FNMA) certificates due after 10
  years..............................    2,004,064          --        1,260      2,002,804
                                       -----------    --------     --------    -----------
                                       $25,478,289    $189,227     $ 69,179    $25,598,337
                                       ===========    ========     ========    ===========

 
     The maturities within the table above are based upon contractual maturity.
 
     Investment securities available for sale:
 


                                                        DECEMBER 31, 1998
                                       ---------------------------------------------------
                                                       GROSS        GROSS
                                                     UNREALIZED   UNREALIZED     MARKET
                                          COST         GAINS        LOSSES        VALUE
                                       -----------    --------     --------    -----------
                                                                   
U.S. government and government agency
  obligations:
     Due after one and within five
       years.........................  $ 2,503,539    $  6,151     $  5,350    $ 2,504,340
     Due after five and within ten
       years.........................    1,000,140         490           --      1,000,630
Corporate Debentures:
     Due after ten years.............      493,626          --       16,011        477,615
Federal Home Loan Mortgage
  Corporation (FHLMC) certificates:
     Due after ten years.............    2,214,721      10,064           --      2,224,785
Federal National Mortgage Association
  (FNMA) certificates due after one
  and within five years..............    1,025,523          --        7,840      1,017,683
Mutual fund investment...............    1,273,441          --       10,713      1,262,728
Common stock portfolio...............    1,467,070          --       47,591      1,419,479
                                       -----------    --------     --------    -----------
                                       $ 9,978,060    $ 16,705     $ 87,505    $ 9,907,260
                                       ===========    ========     ========    ===========

 
     The maturities within the table above are based upon contractual maturity.
 
                                       50
   52
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
3.  INVESTMENT SECURITIES:--CONTINUED
     Investment securities held to maturity:
 


                                                        DECEMBER 31, 1997
                                       ---------------------------------------------------
                                                       GROSS        GROSS
                                        AMORTIZED    UNREALIZED   UNREALIZED     MARKET
                                          COST         GAINS        LOSSES        VALUE
                                       -----------    --------     --------    -----------
                                                                   
U.S. government and government agency
  obligations:
     Due after one and within five
       years.........................  $ 2,001,480    $ 15,763     $ 10,518    $ 2,006,725
     Due within ten years............   11,514,303      36,587        3,280     11,547,610
     Due after ten years.............    6,205,592          --       11,500      6,194,092
Federal Home Loan Mortgage
  Corporation (FHLMC) certificates:
     Due after one and within five
       years.........................      556,615       7,494           --        564,109
     Due after ten years.............    6,217,776      62,247           --      6,280,023
Government National Mortgage
  Association (GNMA) certificates due
  after 10 years.....................    1,158,357      30,793           --      1,189,150
Federal National Mortgage Association
  (FNMA) certificates due within
  one year...........................       87,275       1,442           --         88,717
                                       -----------    --------     --------    -----------
                                       $27,741,398    $154,326     $ 25,298    $27,870,426
                                       ===========    ========     ========    ===========

 
     The maturities within the table above are based upon contractual maturity.
 
     Investment securities available for sale:
 


                                                        DECEMBER 31, 1997
                                       ---------------------------------------------------
                                                       GROSS        GROSS
                                                     UNREALIZED   UNREALIZED     MARKET
                                          COST         GAINS        LOSSES        VALUE
                                       -----------    --------     --------    -----------
                                                                   
U.S. government and government agency
  obligations:
     Due within one year.............  $ 2,000,000    $     --     $ 13,740    $ 1,986,260
     Due after one and within five
       years.........................    1,100,344          --          539      1,099,805
     Due within ten years............    1,501,819          --       13,694      1,488,125
     Due after ten years.............    2,000,000          --       14,680      1,985,320
Federal Home Loan Mortgage
  Corporation (FHLMC) certificates:
     Due within one year.............    1,042,500         880        3,116      1,040,264
     Due after ten years.............      286,050      13,719           --        299,769
Federal National Mortgage Association
  (FNMA) certificates due after one
  and within five years..............    1,190,371          --       19,059      1,171,312
Mutual fund investment...............    1,325,890          --       36,609      1,289,281
Common stock portfolio...............      455,427     202,295           --        657,722
                                       -----------    --------     --------    -----------
                                       $10,902,401    $216,894     $101,437    $11,017,858
                                       ===========    ========     ========    ===========

 
     The maturities within the table above are based upon contractual maturity.
 
     Mortgage-backed securities include net unamortized discounts of $5,060 and
$29,321 at December 31, 1998 and 1997, respectively.
 
                                       51
   53
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
4.  LOANS RECEIVABLE:
 
     Loans receivable at December 31, 1998 and 1997, are summarized as follows:
 


                                                              1998           1997
                                                              ----           ----
                                                                    
Commercial Loans:
  Commercial real estate................................  $  7,631,666    $ 1,424,872
  Commercial business loans.............................    18,712,911      9,565,000
  Construction..........................................     1,214,800      1,455,000
  Less--Undisbursed loan proceeds.......................       543,011      1,315,560
         Deferred loan fees.............................        53,431             --
                                                          ------------    -----------
                                                            26,962,935     11,129,312
Real estate loans:
  1-4 family............................................    81,283,846     72,197,618
  Construction..........................................     1,054,807        993,981
                                                          ------------    -----------
                                                            82,338,653     73,191,599
  Deferred loan costs...................................        36,889         10,856
  Less--Undisbursed loan proceeds.......................       563,050        541,242
                                                          ------------    -----------
                                                            81,812,492     72,661,213
                                                          ------------    -----------
Consumer loans:
  Home equity...........................................     9,834,471      7,535,275
  Student...............................................     2,262,780      2,214,946
  Automobile............................................     2,404,824      1,967,348
  Collateral............................................       528,442        517,215
  Credit cards..........................................       468,894        419,142
  Personal unsecured/other..............................       193,557        139,474
  Deferred loan costs...................................        19,622             --
                                                          ------------    -----------
                                                            15,712,590     12,793,400
                                                          ------------    -----------
                                                           124,488,017     96,583,925
  Less--Allowance for loan losses.......................       571,183        402,964
                                                          ------------    -----------
                                                          $123,916,834    $96,180,961
                                                          ============    ===========

 
     The credit cards and student loans are currently being serviced by a third
party.
 
     At December 31, 1998 and 1997, the majority of the loan portfolio was
secured by properties located in Western Pennsylvania. As of December 31, 1998,
loans to customers engaged in similar activities and having similar economic
characteristics, as defined by standard industrial classifications, did not
exceed 10% of total loans. As of December 31, 1998 and 1997, the Bank had
approximately $698,000 and $611,000 of non-accrual loans. The Bank does not have
any other significant off-balance sheet risk except for the commitments
referenced in Note 17.
 
5.  ALLOWANCE FOR LOAN LOSSES:
 
     Activity with respect to the allowance for loan losses is summarized as
follows:
 


                                                       1998        1997        1996
                                                       ----        ----        ----
                                                                    
Balance at beginning of year.......................  $402,964    $306,926    $287,060
Provision for loan losses..........................   209,000     104,000      44,000
Charge-offs........................................   (40,841)     (8,446)    (24,294)
Recoveries.........................................        60         484         160
                                                     --------    --------    --------
Balance at end of year.............................  $571,183    $402,964    $306,926
                                                     ========    ========    ========

 
                                       52
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                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
5.  ALLOWANCE FOR LOAN LOSSES:--CONTINUED
     At December 31, 1998 and 1997, the Bank had loans totaling $698,000 and
$611,000, respectively, specifically identified as impaired. No specific
allocation of the allowance for loan losses was deemed necessary for these
impaired loans at these dates.
 
     The average recorded balances for impaired loans during 1998 and 1997 were
$622,000, and $467,000, respectively. Interest income recognized during the time
within the period that the loans were impaired was not significant. For these
same loans, the interest income recognized on a cash basis during the period of
impairment was not significant.
 
     The Corporation records real estate owned at the lower of fair value or
carrying cost based upon appraisals less estimated cost to sell. The Corporation
had real estate owned assets at December 31, 1998 of $205,000 and had no real
estate owned assets at December 31, 1997.
 
6.  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, at cost, in an amount not less than 1% of its outstanding
mortgage loans or 1/20 of its outstanding notes payable, if any, to the Federal
Home Loan Bank of Pittsburgh, whichever is greater, as calculated at December 31
of each year.
 
7.  PREMISES AND EQUIPMENT:
 
     Office premises and equipment at December 31, 1998 and 1997, are summarized
by major classification as follows:
 


                                                                1998          1997
                                                                ----          ----
                                                                     
Land.......................................................  $  224,817    $  224,817
Building and improvements..................................   2,134,324     2,359,684
Furniture, fixtures and equipment..........................   1,629,413     1,275,127
                                                             ----------    ----------
     Total, at cost........................................   3,988,554     3,859,628
Less--Accumulated depreciation.............................   1,353,945     1,185,834
                                                             ----------    ----------
Premises and equipment, net................................  $2,634,609    $2,673,794
                                                             ==========    ==========

 
     Depreciation and amortization expense was $306,143, $188,779 and $171,044
for the fiscal years ended December 31, 1998, 1997 and 1996, respectively.
 
     The Corporation has entered into various operating leases expiring at
various dates through October 31, 2000 for office space for three of its branch
operations. During the years ended December 31, 1998 and 1997, rental expense
included in the statement of operations was $42,000 and $1,800, respectively.
There was no rental expense in 1996.
 
     Future minimum lease commitments for all leases as of December 31, 1998,
are as follows:
 


              YEAR ENDING DECEMBER 31,
              ------------------------
                                                    
1999.................................................  $ 50,400
2000.................................................    50,600
2001.................................................    51,600
2002.................................................    51,600
2003.................................................    20,900
Thereafter...........................................    96,500
                                                       --------
     Total Payments..................................  $321,600
                                                       ========

 
                                       53
   55
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
8.  DEPOSITS:
 
     The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, was approximately $9,225,000 and $5,372,000
at December 31, 1998, and 1997, respectively. At December 31, 1998 the scheduled
maturities of the certificate accounts are as follows:
 
                                                    
1999.................................................  $34,803,930
2000.................................................   12,184,006
2001.................................................    5,361,650
2002.................................................    1,511,786
2003 and thereafter..................................    2,077,626
                                                       -----------
                                                       $55,938,998
                                                       ===========


 
     Interest expense associated with deposits for each of the years ended is as
follows:
 


                                                   1998          1997          1996
                                                   ----          ----          ----
                                                                   
Interest on certificates of deposit...........  $2,754,876    $2,572,048    $2,530,750
Interest on savings accounts..................     407,967       394,893       410,460
Money market demand accounts..................     661,498       534,917       334,873
Interest on NOW accounts......................     163,504       160,531       138,772
Early withdrawal penalties....................     (11,686)      (12,168)       (8,051)
                                                ----------    ----------    ----------
                                                $3,976,159    $3,650,221    $3,406,804
                                                ==========    ==========    ==========

 
     During the third quarter of 1996, the Bank recorded a one-time special
assessment of 65.7 basis points on deposits of record as of March 31, 1995. This
assessment, in the amount of $501,727 before tax (approximately $308,000 after
tax) charged by the Federal Deposit Insurance Corporation, was to provide
additional capital for the savings association insurance fund.
 
9.  FEDERAL HOME LOAN BANK ADVANCES:
 
     Advances from the Federal Home Loan Bank consist of the following:
 


         DECEMBER 31, 1998
- ------------------------------------
            WEIGHTED
MATURITY  AVERAGE RATE     BALANCE
- --------  ------------     -------
                   
  1999        5.64%      $ 5,000,000
  2000        5.65         2,977,000
  2002        5.62        25,000,000
  2003        5.68         1,500,000
  2005        5.55         1,000,000
  2008        5.21        15,500,000
                         -----------
                         $50,977,000
                         ===========

 


         DECEMBER 31, 1997
- ------------------------------------
            WEIGHTED
MATURITY  AVERAGE RATE     BALANCE
- --------  ------------     -------
                   
  1998        6.07%      $ 1,700,000
  1999        6.32         5,000,000
  2000        5.92         2,977,000
  2002        5.64        25,000,000
                         -----------
                         $34,677,000
                         ===========

 
                                       54
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                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
9.  FEDERAL HOME LOAN BANK ADVANCES:--CONTINUED
     The Bank in 1998 has chosen not to renew its line of credit with the
Federal Home Loan Bank of Pittsburgh. Instead it will rely on other cash
management advances offered by the Federal Home Loan Bank of Pittsburgh. At
December 31, 1998 the Bank's maximum borrowing capacity was $93.1 million of
which $51.0 million had been borrowed. As of December 31, 1997, the Bank had an
available balance under its line of credit of approximately $8,185,000 in
connection with the Federal Home Loan Bank of Pittsburgh's Cash Management
Advance Program. There were no borrowings against the line of credit as of
December 31, 1997.
 
     The Bank had a "blanket" agreement with the Federal Home Loan Bank of
Pittsburgh whereby the Bank pledged as collateral for these advances its
investments in U.S. government and agency securities and U.S. government and
agency mortgage-backed securities and 100% of its unencumbered home mortgage
loan portfolio.
 
     Of the outstanding FHLB advances, $7,000,000 was adjustable rate notes with
a weighted average rate 5.58%. At December 31, 1998, there are $41.5 million of
advances that are convertible to quarterly adjustable rate advances at varying
convertible dates five years or less. The $41.5 million convertible advances
have final maturity dates of $25.0 million in 2002, $1.0 million in 2005, and
$15.5 million in 2008.
 
10.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
 
     SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires all entities to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Corporation, as for most financial
institutions, approximately 98% of its assets and liabilities are considered
financial instruments, as defined in SFAS No. 107. Many of the Corporation's
financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. Therefore, significant estimations and present value calculations
were used for the purpose of this disclosure.
 
     Estimated fair values have been determined using the best available data
and an estimation methodology suitable for each category of financial
instruments.
 
     The following methods and assumptions were used in estimating its fair
value disclosures for financial instruments:
 
CASH AND SHORT TERM DEPOSITS
 
     The carrying amounts reported in the balance sheets for cash, due from
banks and various interest-bearing deposits with banks approximate fair value
due to their short-term maturity.
 
INVESTMENT SECURITIES
 
     Fair values for investment securities are based on quoted market prices
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
 
NET LOANS AND ACCRUED INTEREST RECEIVABLE
 
     The fair values for one-to-four family residential loans are estimated
using discounted cash flow analyses, using yields from similar products in the
secondary markets. The carrying amount of construction loans approximates its
fair value given their short-term nature. The fair values of consumer and
commercial loans are estimated using discounted cash flow analyses, using
interest rates reported in various government releases and the Bank's own
product pricing schedule for loans with terms similar to the Bank's. The fair
values of multi-family and nonresidential mortgages are estimated using
discounted cash flow analysis, using interest rates based on a national survey
of similar loans. The carrying amount of accrued interest approximates its fair
value.
 
                                       55
   57
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
10.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:--CONTINUED
DEPOSIT LIABILITIES
 
     The fair values disclosed for deposits with no stated maturities (e.g.,
passbook savings accounts) are, by definition, equal to the amount payable on
demand at the repricing date (i.e., their carrying amounts). Fair values of
deposits with stated maturities (e.g., certificates of deposit) are estimated
using a discounted cash flow calculation that applies a comparable Federal Home
Loan Bank advance rate to the aggregated weighted average maturity on time
deposits.
 
FEDERAL HOME LOAN BANK ADVANCES
 
     The fair values disclosed for Federal Home Loan Bank advances are estimated
using a discounted cash flow calculation that applies a comparable Federal Home
Loan Bank advance rate for borrowings of similar maturities.
 
     The estimated fair values and recorded book balances at December 31, 1998
and 1997 are as follows:
 


                                           1998                         1997
                                ---------------------------   -------------------------
                                 ESTIMATED       RECORDED      ESTIMATED     RECORDED
                                 FAIR VALUE      BALANCE      FAIR VALUE      BALANCE
                                ------------   ------------   -----------   -----------
                                                                
Cash and short term
  deposits....................  $ 10,152,957   $ 10,152,957   $ 2,213,461   $ 2,213,461
Investment securities.........    35,505,596     35,385,549    38,888,284    38,759,256
Net loans.....................   125,763,000    123,916,834    97,688,000    96,180,961
Accrued interest receivable...     1,116,560      1,116,560     1,033,261     1,033,261
Deposits with no stated
  maturities..................    53,759,124     53,759,124    45,352,626    45,352,626
Deposits with stated
  maturities..................    56,299,000     55,938,998    45,704,000    45,803,199
Federal Home Loan Bank
  advances....................    52,515,000     50,977,000    34,815,000    34,677,000
Commitments to originate
  loans.......................    13,105,000     13,105,000     6,716,000     6,716,000

 
11.  INCOME TAXES:
 
     The provision (benefit) for income taxes for each of the years ended is as
follows:
 


                                                        1998        1997       1996
                                                        ----        ----       ----
                                                                     
Federal:
  Current...........................................  $481,170    $449,181    $67,249
  Deferred..........................................   (93,696)    (44,797)   (13,735)
                                                      --------    --------    -------
                                                       387,474     404,384     53,514
State:
  Current...........................................    85,458      88,536     15,872
                                                      --------    --------    -------
     Total income tax expense.......................  $472,932    $492,920    $69,386
                                                      ========    ========    =======

 
                                       56
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                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
11.  INCOME TAXES:--CONTINUED
     Deferred income taxes result from timing differences in the recognition of
revenue and expense for tax and financial reporting purposes. The following
table presents the impact on income tax expense of the principal timing
differences and the tax effect of each for the years ended:
 


                                                       1998        1997        1996
                                                       ----        ----        ----
                                                                    
Deferred tax expense (benefit):
  Deferred loan costs/fees.........................  $(10,259)   $ 10,259    $  1,845
  Prepaid pension..................................    (4,272)     (6,603)       (796)
  Vacation accrual.................................    (6,127)     (1,417)       (700)
  MRP accrual......................................        --     (30,024)         --
  Provision for loan losses........................   (71,060)    (35,360)    (14,960)
  Tax depreciation in excess of book
     depreciation..................................    10,200      17,000       5,950
  Other, net.......................................   (12,178)      1,348      (5,074)
                                                     --------    --------    --------
                                                     $(93,696)   $(44,797)   $(13,735)
                                                     ========    ========    ========

 
     The special tax benefit afforded to thrift institutions that allowed a bad
debt deduction based upon 8% of taxable income was repealed in 1996. A small
thrift with assets of less than $500 million may maintain a bad debt reserve
equal to the greater of the allowable base year reserve (i.e. the thrift bad
debt reserve at December 31, 1987) or the experience method reserve (six year
moving average ratio of charge-offs to loans applied to year end loan balances).
The portion of the bad debt reserve under the former (percentage of taxable
income) method which exceeds the bad debt reserve under the present (base year
or experience) method must be recaptured by recognizing such excess in taxable
income ratably over a six year period. The six-year recapture period generally
started in 1996, but may have been delayed until 1997 or 1998 if certain
residential loan origination tests were met in 1997 and 1998. The Bank had
maintained the applicable residential loan requirement and the recapture
commenced with the taxable year beginning January 1, 1998. As of December 31,
1998, the Savings Bank had an applicable excess reserve balance remaining of
approximately $107,000. Approximately $21,300 will be recaptured on an annual
basis over the next five fiscal years.
 
     The base year (i.e. December 31, 1987) bad debt reserve under the former
method is permanently suspended, and therefore not subject to recapture, unless
a base year loan contraction occurs in a subsequent year. A base year loan
contraction occurs when the total loans at the end of the year are less than the
total loans at December 31, 1987. In such cases, a proportionate reduction to
the base year bad debt reserve at December 31, 1987 is required and the
reduction to the reserve is recaptured. Furthermore, the base year bad debt
reserve constitutes a restriction for tax purposes of the Bank's use of retained
earnings for distributions or redemptions.
 
     In accordance with FASB statement No. 109, the Bank has recorded deferred
income tax associated with the temporary differences related to the portion of
the bad debt reserve arising in tax years after December 31, 1987. For the
period before December 31, 1987, there is an unrecognized deferred tax liability
of approximately $565,000 at December 31, 1998. If the suspended base year bad
debt reserve at December 31, 1987 is reduced by certain excess distributions,
redemptions or a base year loan contraction, income tax expense will be
recognized at the prevailing tax rate.
 
                                       57
   59
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
11.  INCOME TAXES:--CONTINUED
     A reconciliation from the expected federal statutory income tax rate to the
effective rate expressed as a percentage of pretax income for each of the years
ended is as follows:
 


                                                             1998      1997      1996
                                                             ----      ----      ----
                                                                        
Statutory federal tax rate.................................  34.0%     34.0%     34.0%
State income taxes, net of Federal income tax benefit......   7.0       6.9       7.4
Effect of graduated federal tax rates......................  (1.3)     (1.5)     (5.6)
Other......................................................   (.8)      (.8)     (3.5)
                                                             ----      ----      ----
                                                             38.9%     38.6%     32.3%
                                                             ====      ====      ====

 
     Net deferred tax (assets) liabilities as of December 31, 1998 and 1997 are
as follows:
 


                                                                1998       1997
                                                                ----       ----
                                                                    
Prepaid pension.............................................  $ 16,214    $20,486
Vacation accrual............................................   (22,107)   (15,980)
Allowance for loan losses...................................   (91,585)   (20,525)
Valuation allowance for investments.........................   (28,422)    46,173
Tax depreciation in excess of book depreciation.............    79,619     69,419
Deferred loan costs/fees....................................     1,845     12,104
MRP accrual.................................................   (30,024)   (30,024)
Other, net..................................................   (15,899)    (3,726)
                                                              --------    -------
Net deferred tax (asset) liability..........................  $(90,359)   $77,927
                                                              ========    =======

 
12.  PENSION PLAN:
 
     The Bank maintains a noncontributory defined benefit pension plan covering
all eligible employees. The following table sets forth the plan's fund status
and amounts recognized in the Corporation's balance sheets at December 31, 1998
and 1997, respectively.
 


                                                                 1998         1997
                                                                 ----         ----
                                                                      
Change in benefit obligation:
  Benefit obligation at beginning of year...................  $  921,563    $ 746,125
  Service cost..............................................      84,055       66,227
  Interest cost.............................................      66,813       54,094
  Actuarial loss............................................     103,056       57,316
  Benefits paid.............................................      (4,618)      (2,199)
                                                              ----------    ---------
  Benefit obligation at end of year.........................   1,170,869      921,563
                                                              ----------    ---------
Change in plan assets Fair value of plan assets at beginning
  of year...................................................     806,833      619,396
  Actual return on plan assets..............................     179,024      124,939
  Employer contribution.....................................      81,505       64,697
  Benefits paid.............................................      (4,618)      (2,199)
                                                              ----------    ---------
  Fair value of plan assets at end of year..................   1,062,744      806,833
                                                              ----------    ---------
  Funded status.............................................    (108,125)    (114,730)
  Unrecognized net obligation at transition.................      49,656       54,428
  Unrecognized net loss.....................................     106,156      120,554
                                                              ----------    ---------
  Prepaid benefit cost......................................  $   47,687    $  60,252
                                                              ==========    =========

 
                                       58
   60
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
12.  PENSION PLAN:--CONTINUED
     Approximately 98% of the plan's assets are primarily invested either
directly or through mutual funds in common stocks, bonds, U.S. government and
agency, and foreign securities. The remaining plan assets are on deposit with
the Bank or in a cash management account. The Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
 
     The components of pension expense are as follows for each of the years
ended:
 


                                                      1998         1997         1996
                                                      ----         ----         ----
                                                                     
Service cost......................................  $  84,055    $  66,227    $ 51,209
Interest cost.....................................     66,813       54,094      45,200
Actual return on plan assets......................   (179,024)    (124,939)    (76,604)
Amortization of transition asset..................    122,226       88,735      44,656
                                                    ---------    ---------    --------
Net periodic pension cost.........................  $  94,070    $  84,117    $ 64,461
                                                    =========    =========    ========

 
     For all reported periods, the rate of increase in future compensation
levels was assumed to be 4.75%. The weighted average discount rate used in
determining the actuarial present value of the projected benefit obligation was
7.25% for each of the years ended December 31, 1998, 1997 and 1996. The expected
long-term rate of return on assets was 7.25% for each of the years ended
December 31, 1998, 1997 and 1996.
 
     Additionally, the Bank maintains a 401(k) plan for employees. The Bank does
not match any employee contributions.
 
13.  EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (ESOP):
 
     In 1996, the Company established the ESOP to enable employees to obtain
ownership interests in the Corporation.
 
     In connection with the conversion described in Note 1, the Corporation made
a $770,410 loan to the ESOP that was used to purchase 77,041 shares, or 88,597
shares adjusted for the 15% stock dividend in the second quarter of 1998, of the
Corporation's common stock. The ESOP loan has a term of 15 years and bears
interest at 7.0%. This loan is collateralized by the shares purchased by the
ESOP. The Bank's contributions to the ESOP will be used to repay the ESOP loan,
which requires semi-annual payments of $41,888 (includes principal and interest)
which began on December 27, 1996. The Bank is obligated to contribute amounts
sufficient to repay the ESOP loan. The ESOP uses such contributions to repay the
loan made to the ESOP by the Corporation. These transactions occur
simultaneously and, for accounting and reporting purposes, offset each other.
The effect of the ESOP on the Corporation's financial statements is that the
amount of the unearned ESOP shares of $690,380 and $724,050 at December 31, 1998
and 1997, respectively, as reflected in shareholders' equity, will be amortized
to compensation over the remaining period of the ESOP loan. In addition, any
difference between the market price of the Corporation's common stock and the
$10 per share (the purchase price paid by the ESOP) will also be charged or
credited to compensation expense (with the offset to additional paid-in capital)
based on the semi-annual allocation to ESOP participants of approximately 2,953
shares. Total compensation expense incurred in 1998 and 1997 for allocated ESOP
shares was $96,336 and $84,484, respectively.
 
14.  CAPITAL STOCK PLANS:
 
     On April 23, 1997, at the annual stockholders meeting, the Board of
Directors and shareholders formally approved the Corporation's Stock Option Plan
(the Option Plan) and the Management Recognition and Retention Plan and Trust
(the MRP Plan; the Option Plan and MRP Plan herein are referred to as the
Plans).
 
                                       59
   61
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
14.  CAPITAL STOCK PLANS:--CONTINUED
     On April 15, 1998, the Board of Directors declared a stock dividend of 15%
to shareholders of record of June 2, 1998 payable June 19, 1998. All share data
have been restated to reflect the stock dividend.
 
     The aforementioned approval of the MRP Plan made 38,521 shares, or 44,295
shares adjusted for the 15% stock dividend in the second quarter of 1998, of
common stock available for awards to officers, key employees of the Corporation
and Bank and non-employee directors thereof. As of December 31, 1998, the
Corporation had granted 41,084 shares. However, such shares are vested over a
five year period and as of December 31, 1998, 33,152 shares remain unvested.
 
     In connection with the MRP Plan's approval, the Bank established a trust
whose purpose is to purchase shares on the open market. During the year ended
December 31, 1998, the Corporation incurred compensation expense of $134,136,
based on the cost incurred to purchase the currently vesting or previously
vested shares in the open market. During the year ended December 31, 1998, the
Bank funded $611,575 to the trust toward the purchase of shares. As of December
31, 1998, the trust had purchased 44,108 shares.
 
     The aforementioned approval of the Option Plan made 96,302 options, or
110,747 options adjusted for the 15% stock dividend in the second quarter of
1998, available for grant to employees and others who perform substantial
services to the Corporation. As of December 31, 1998, the corporation has
granted 101,885 options.
 
     As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Corporation accounts for the
Option Plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees"
whereby no compensation cost has been recorded in accordance with certain
valuation models, such as the Black-Scholes model. Under the provisions of SFAS
No. 123, the per share compensation expense in connection with the MRP Plan is
fixed on the date of grant. Had such valuation models been used in connection
with the Option Plan and had compensation per share for the MRP Plan been set on
the date of grant, the Corporation's net income and earnings per share would
have had a net reduction to the following pro forma amounts:
 


                                                              DECEMBER 31, 1998
                                                              -----------------
                                                           
Net income:
  As reported...............................................      $743,087
  Pro forma.................................................       712,072
Basic earnings per share:
  As reported...............................................      $    .79
  Pro forma.................................................           .75
Diluted earnings per share:
  As reported...............................................      $    .78
  Pro forma.................................................           .75

 
                                       60
   62
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
14.  CAPITAL STOCK PLANS:--CONTINUED
     A summary of the status of the Corporation's Stock Option Plan at December
31, 1998, and changes during the year ended is presented in the table and
narrative following:
 


                                                                            WEIGHTED
                                                                            AVERAGE
                                                                            EXERCISE
                                                              SHARES         PRICE
                                                              -------       --------
                                                                      
Outstanding at beginning of period..........................   88,252        $14.43
  Granted...................................................   13,633         13.81
  Exercised.................................................      483         13.59
  Forfeited.................................................    1,092         15.00
Outstanding at end of period................................  100,310         14.34
Exercisable at end of period................................   16,075
Weighted average fair value of options granted during the
  year......................................................  $  5.06

 
     The options are exercisable beginning one year from the grant date in equal
annual installments over a period of five years. The maximum term of any option
granted under the Plan cannot exceed 10 years.
 
     The 100,310 options outstanding at December 31, 1998 had a weighted average
exercise price of $14.34 and a weighted average remaining contractual life of
9.9 years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1998: weighted average risk-free interest rate of 4.68%, weighted
average expected dividend yield of 1.41%, expected life of 7.0 years and
expected volatility of 29.00%.
 
     A summary of the status of the Corporation's Stock Option Plan at December
31, 1997, and changes during the year ended is presented in the table and
narrative following:
 


                                                                            WEIGHTED
                                                                            AVERAGE
                                                                            EXERCISE
                                                              SHARES         PRICE
                                                              -------       --------
                                                                      
Outstanding at beginning of period..........................       --        $   --
  Granted...................................................   88,252         14.43
  Exercised.................................................       --            --
  Forfeited.................................................       --            --
Outstanding at end of period................................   88,252         14.43
Exercisable at end of period................................       --
Weighted average fair value of options granted during the
  year......................................................  $  4.79

 
     The options are exercisable beginning one year from the grant date in equal
annual installments over a period of five years. The maximum term of any option
granted under the Plan cannot exceed 10 years.
 
     The 88,252 options outstanding at December 31, 1997 had a weighted average
exercise price of $14.43 and a weighted average remaining contractual life of
9.6 years. None of these options were exercisable. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants in 1997: weighted average
risk-free interest rate of 6.41%, weighted average expected dividend yield of
1.21%, expected life of 7.0 years and expected volatility of 19.00%.
 
     Additionally, on August 27, 1998 and October 16, 1998, the Corporation
initiated plans to repurchase, at market value, up to 5% of its outstanding
shares of common stock through the use of its existing cash and cash
equivalents. The first repurchase program of 52,597 shares was completed on
September 18, 1998 and the second repurchase program of 49,990 shares was
completed on October 26, 1998.
 
                                       61
   63
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
15.  RETAINED EARNINGS AND REGULATORY CAPITAL:
 
     The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
 
     Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined) and of Tier I capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1998, that the Corporation and
the Bank meet all capital adequacy requirements to which it is subject. As of
December 31, 1998, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier I risk based, Tier I
leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
 
     The Bank's actual capital amounts and ratios are also presented in the
table. There was no deduction from capital for interest-rate risk.
 


                                                                             TO BE WELL
                                                                         CAPITALIZED UNDER
                                                        FOR CAPITAL      PROMPT CORRECTIVE
                                       ACTUAL        ADEQUACY PURPOSES   ACTION PROVISIONS
                                   ---------------   -----------------   ------------------
                                   AMOUNT    RATIO    AMOUNT    RATIO     AMOUNT     RATIO
                                   -------   -----   --------   ------   --------   -------
                                                    (DOLLARS IN THOUSANDS)
                                                                  
Total Capital (to Risk Weighted Assets):
As of December 31, 1998..........  $13,521   14.85%  $$7,286     $8.0%   $$9,108     $10.0%
As of December 31, 1997..........  $12,995   18.78%  $$5,537     $8.0%   $$6,921     $10.0%
 
Tier 1 Capital (to Risk Weighted Assets):
As of December 31, 1998..........  $12,950   14.22%  $$3,643     $4.0%   $$5,465      $6.0%
As of December 31, 1997..........  $12,592   18.19%  $$2,768     $4.0%   $$4,153      $6.0%
 
Tier 1 Capital (to Average
  Assets):
As of December 31, 1998..........  $12,950    7.86%  $$6,588     $4.0%   $$8,235      $5.0%
As of December 31, 1997..........  $12,592    9.43%  $$5,340     $4.0%   $$6,676      $5.0%

 
16.  RELATED PARTY TRANSACTIONS:
 
     Certain directors and executive officers of the Corporation, including
their immediate families and companies in that they are principal owners, are
loan customers of the Bank. In management's opinion, such loans are made in the
normal course of business and were granted on substantially the same terms and
conditions as loans to other individuals and businesses of comparable
creditworthiness at the time. Total loans to these persons at December 31, 1998
and 1997, amounted to $301,801 and $182,175 respectively.
 
                                       62
   64
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
16.  RELATED PARTY TRANSACTIONS:--CONTINUED
     An analysis of these related party loans is as follows:
 


                                                                1998         1997
                                                                ----         ----
                                                                     
Balance at January 1........................................  $ 182,175    $ 419,236
New loans...................................................    201,500       13,000
Payments....................................................    (81,874)    (250,061)
                                                              ---------    ---------
Balance at December 31......................................  $ 301,801    $ 182,175
                                                              =========    =========

 
     Additionally, the Bank has an unfunded loan commitment for a director in
the amount of $93,000.
 
     In addition, the Corporation from time to time has conducted business with
certain directors, officers or companies in which they are related. During 1998,
1997 and 1996, such activity was as follows:
 
     - A member of the Board of Directors leases office space from the
       Corporation. The rental income was $11,100 for each of the three years
       ended December 31, 1998. This director also provides professional
       services to the Bank and his fees were $5,700, $5,500, $4,950 for the
       years ended December 31, 1998, 1997 and 1996, respectively.
 
     - A member of the Board of Directors is employed by a law firm retained by
       the Corporation. Fees paid in fiscal 1998, 1997 and 1996 relative to
       various bank and corporate matters totaled $57,133, $82,088 and $38,300,
       respectively. During fiscal 1996, additional fees of approximately
       $156,000 were paid relative to the stock conversion. The firm's real
       estate closing service rendered gross proceeds of approximately $341,787,
       $232,800 and $109,700, respectively, during fiscal 1998, 1997 and 1996 as
       closing agent from third party borrowers pursuant to closings on Bank
       loans. A portion of this amount was used to purchase title insurance and
       pay miscellaneous closing fees relative to these closings.
 
     - The Corporation retained media services from a company owned by the
       brother of one of the Corporation's officers. The total costs for such
       services in 1998, 1997 and 1996 were $30,249, $21,070 and $21,950,
       respectively.
 
     - The Chairman of the Board of Directors, John A. Stiver, is paid a fee of
       $10,000 per month for a total of $120,000 paid in 1998 for providing
       advice and assistance to the officers of the Bank with respect to the
       operations and management of the Bank. In addition, Mr. Stiver has
       expanded the commercial loan portfolio that is in excess of $26.9 million
       as of December 31, 1998.
 
       The Chairman of the Board of Directors was paid a fee of $8,000 per
       month, for a total fee of $96,000 paid in 1997 for providing from time to
       time advice and assistance to the officers of the Bank with respect to
       the operations and management of the Bank. In addition, Mr. Stiver
       expanded the commercial loan portfolio that was in excess of $11 million
       as of December 31, 1997.
 
       The Chairman of the Board of Directors was paid a fee of $2,500 per
       month, for a total fee of $30,000 paid in 1996 for providing from time to
       time advice and assistance to the officers of the Bank with respect to
       the operations and management of the Bank.
 
17.  COMMITMENTS AND CONTINGENT LIABILITIES:
 
     The Corporation incurs off-balance sheet risks in the normal course of
business in order to meet the financing needs of its customers. These risks
derive from commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
financial statements.
 
     Commitments to extend credit are obligations to lend to a customer as long
as there is no violation of any condition established in the loan agreement.
Commitments generally have fixed expiration dates or other termination clauses.
A portion of the commitments is not expected to be drawn upon; thus, the total
commitment
 
                                       63
   65
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
17.  COMMITMENTS AND CONTINGENT LIABILITIES:--CONTINUED
amounts do not necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis.
 
     The Bank's exposure to credit loss in the event of nonperformance by the
other party to these commitments to extend credit is represented by their
contractual amounts. The Bank uses the same credit and collateral policies in
making commitments as for all other lending. The Bank has outstanding various
commitments to extend credit approximating $13,105,000 and $6,716,000 as of
December 31, 1998 and 1997, respectively. As of December 31, 1998 and 1997,
these commitments had fixed and variable rates which ranged from 6.6% to 12.9%
and 6.9% to 12.9%, respectively. In the opinion of management, the funding of
the credit commitments will not have a material adverse effect on the Bank's
financial position or results of operations. Additionally, the Bank is also
subject to asserted and unasserted potential claims encountered in the normal
course of business. In the opinion of management and legal counsel, the
resolution of these claims will not have a material adverse effect on the Bank's
financial position or results of operations.
 
18.  PARENT COMPANY FINANCIAL INFORMATION:
 
     Prestige Bancorp, Inc. (the Parent Company) began operations on June 27,
1996 and functions primarily as a holding company for its sole subsidiary, the
Bank. The Parent Company's balance sheets as of December 31, 1998 and 1997 and
related statements of income and cash flows are as follows:
 
                                 BALANCE SHEETS
                           December 31, 1998 and 1997
 


                                                              1998           1997
                                                              ----           ----
                                                                    
ASSETS
Cash and cash equivalents................................  $   314,912    $ 2,480,815
Investments securities available for sale................    1,419,479        657,721
Investment in Prestige Bank, F.S.B.......................   13,024,359     12,561,900
Other assets.............................................       32,643          2,783
                                                           -----------    -----------
Total Assets.............................................  $14,791,393    $15,703,219
                                                           ===========    ===========
          LIABILITIES AND STOCKHOLDERS' EQUITY
Total Liabilities........................................  $    31,488    $    73,408
Total Stockholders' Equity, net of ESOP loan of $690,380
  at December 31, 1998; $724,050 at December 31, 1997....   14,759,905     15,629,811
                                                           -----------    -----------
Total Liabilities and Stockholders' Equity...............  $14,791,393    $15,703,219
                                                           ===========    ===========

 
                                       64
   66
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
18.  PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
                              STATEMENTS OF INCOME
           For The Year Ended December 31, 1998 and December 31, 1997
 


                                                               1998           1997
                                                               ----           ----
                                                                     
Interest income...........................................  $   142,579    $   194,541
Other income..............................................        7,834             --
                                                            -----------    -----------
Total income..............................................      150,413        194,541
                                                            -----------    -----------
Expenses:
  Legal fees..............................................       61,851         80,435
  Other...................................................       90,799        105,795
                                                            -----------    -----------
Total expenses............................................      152,650        186,230
                                                            -----------    -----------
(Loss) income before income taxes and equity in earnings
  of subsidiary...........................................       (2,237)         8,311
Income tax (benefit) expense..............................       (3,546)         1,338
Equity in earnings of subsidiary..........................      741,778        777,514
                                                            -----------    -----------
Net income................................................  $   743,087    $   784,487
                                                            ===========    ===========

 
                                       65
   67
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
18.  PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
                            STATEMENTS OF CASH FLOWS
          For The Years Ended December 31, 1998 and December 31, 1997
 


                                                               1998           1997
                                                               ----           ----
                                                                     
Operating Activities:
  Net income..............................................  $   743,087    $   784,487
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Equity in earnings of subsidiary.....................     (741,778)      (777,514)
     Gain on sale of equity securities....................       (7,834)            --
     Change in other assets and liabilities...............       (8,591)       (18,164)
                                                            -----------    -----------
       Net cash used by operating activities..............      (15,116)       (11,191)
Investing Activities:
  Return of capital on investment securities..............        2,226             --
  Proceeds from sale of equity securities.................       71,800             --
  Purchase of available for sale investment securities....   (1,077,833)      (283,927)
                                                            -----------    -----------
     Net cash used by investing activities................   (1,003,807)      (283,927)
Financing Activities:
  Common stock dividends paid.............................     (191,600)      (111,230)
  Dividends paid from subsidiary..........................      400,000             --
  Proceeds from exercise of stock options.................        6,562             --
  Cash in lieu of stock dividend on fractional shares.....       (3,484)            --
  Purchase of treasury stock..............................   (1,392,128)      (775,881)
  Repayment received from ESOP............................       33,670         31,433
                                                            -----------    -----------
  Net cash used by financing activities...................   (1,146,980)      (855,678)
                                                            -----------    -----------
Net decrease in cash and cash equivalents.................   (2,165,903)    (1,150,796)
Cash and Cash Equivalents, Beginning......................    2,480,815      3,631,611
                                                            -----------    -----------
Cash and Cash Equivalents, Ending.........................  $   314,912    $ 2,480,815
                                                            ===========    ===========

 
     The ability of the Bank to upstream cash to the Parent Company is
restricted by regulations. Federal law prevents the Parent Company from
borrowing from its subsidiary banks unless the loans are secured by specific
assets. Further such secured loans are limited in amount to ten percent of the
subsidiary bank's capital and surplus. In addition, the subsidiary bank is
subject to legal limitations on the amount of dividends that can be paid to
their shareholder.
 
     On the date of the conversion, as required by regulatory pronouncements,
the Bank established a liquidation account in the amount of $7,085,000 that is
equal to retained earnings reflected in the Bank's statement of financial
condition. The liquidation account will be maintained for the benefit of
eligible savings account holders and supplemental eligible account holders who
continue to maintain their accounts at the Bank after the conversion in
accordance with supervisory regulations. In the event of a complete liquidation
(and only in such event), each eligible savings account holder will be entitled
to receive a liquidation distribution from the liquidation account in the amount
of the then current adjusted balance of deposit accounts held, before any
liquidation distribution may be made with respect to the common shares. Except
for the repurchase of stock and payment of dividends by the Bank, the existence
of the liquidation account will not restrict the use or further application of
such retained earnings.
 
                                       66
   68
                             PRESTIGE BANCORP, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
 
18.  PARENT COMPANY FINANCIAL INFORMATION:--CONTINUED
     The Bank may not declare or pay a cash dividend on, or repurchase any of
its common shares if the effect thereof would cause the Bank's equity to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for insured institutions.
 
19.  SUBSEQUENT EVENT:
 
     On February 17, 1999, the Board of Directors declared a stock dividend of
5% to shareholders of record of March 2, 1999 payable on March 19, 1999.
 
                                       67
   69
 
                             CORPORATE INFORMATION
 
CORPORATE OFFICERS
 
JOHN A. STIVER
Chief Executive Officer
 
ROBERT S. ZYLA
President
 
PATRICIA A. WHITE
Treasurer and Secretary
 
JAMES M. HEIN
Controller
 
BOARD OF DIRECTORS
 
JOHN A. STIVER
Chairman of the Board, CEO
Certified Public Accountant
John A. Stiver, C.P.A.
 
ROBERT S. ZYLA
President
Prestige Bancorp, Inc.
President
Prestige Bank, A Federal Savings Bank
 
PATRICIA A. WHITE
Treasurer and Secretary
Prestige Bancorp, Inc.
Executive Vice President and Secretary
Prestige Bank, A Federal Savings Bank
 
MARTIN W. DOWLING
Director and Owner
Jefferson Hills Real Estate, Inc.
 
MICHAEL R. MACOSKO
Pharmacist
Eckerd Drug, Inc.
 
CHARLES P. MCCULLOUGH
Attorney at Law
Tucker Arensberg, P.C.
 
MARK R. SCHOEN
Senior Manager of Products and Technology
SEI Investments
 
CORPORATE OFFICE
710 Old Clairton Road
Pittsburgh, Pennsylvania 15236
412-655-1190
Fax 412-655-2114
www.prestigebank.com
 
BRANCH OFFICES
Pleasant Hills
710 Old Clairton Road
Pittsburgh, PA 15236
412-655-2110
Bethel Park
6257 Library Road
Bethel Park, PA 15102
412-831-8440
 
Elizabeth Township
603 Scenery Drive
Elizabeth, PA 15037
412-754-2661
 
Mt. Oliver
543 Brownsville Road
Pittsburgh, PA 15210
412-431-3374
 
Washington
Located in Shop'n Save
125 West Beau Street
Washington, PA 15301
724-228-1314
 
MARKET MAKERS
Friedman Billings Ramsey & Co.
Tucker, Anthony Inc.
Herzog, Heine, Geduld, Inc.
Sandler O'Neill & Partners
Ryan Beck & Co. Inc.
Legg Mason Wood Walker Inc.
Parker/Hunter Inc.
 
TRANSFER AGENT
Registar & Transfer Company
Cranford, NJ
 
CORPORATE COUNSEL
Tucker Arensberg, P.C.
Pittsburgh, Pennsylvania
 
INDEPENDENT AUDITORS
Arthur Andersen LLP
Pittsburgh, Pennsylvania
 
STOCK LISTING
NASDAQ Stock Market Symbol: PRBC
 
GENERAL INQUIRIES & REPORTS
Prestige Bancorp is required to file an annual report on Form 10-K for its
fiscal year ended December 31, 1998, with the Securities and Exchange
Commission. Copies of this annual report and quarterly reports may be obtained
without charge by contacting:
     James M. Hein
     Controller
     412-655-1190
     Corporate Office
   70








                                      PRBC
                             PRESTIGE BANCORP, INC.


                710 Old Clairton Road, Pittsburgh, PA 15236-4300
                       412-655-1190 o (Fax) 412-655-1772

                              www.prestigebank.com

EX-27

 

<ARTICLE> 9
<MULTIPLIER> 1,000
       
                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               DEC-31-1998
<CASH>                                             975
<INT-BEARING-DEPOSITS>                           9,178
<FED-FUNDS-SOLD>                                     0
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<INVESTMENTS-CARRYING>                          25,478
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<INTEREST-TOTAL>                                11,672
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<INTEREST-INCOME-NET>                            4,987
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<SECURITIES-GAINS>                                 (7)
<EXPENSE-OTHER>                                  4,096
<INCOME-PRETAX>                                  1,216
<INCOME-PRE-EXTRAORDINARY>                       1,216
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
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<EPS-PRIMARY>                                      .79
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<YIELD-ACTUAL>                                    3.10
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