|SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C. 20549



FORM 10-K
|-------------------------------------------------------------------------

|[X] | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ------------------------------------------------------------------------------

|FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003



COMMISSION FILE NUMBER 333-90273



FIDELITY D & D BANCORP, INC.

COMMONWEALTH OF PENNSYLVANIA I.R.S. EMPLOYER IDENTIFICATION NO: 23-3017653 BLAKELY AND DRINKER STREETSDUNMORE, PENNSYLVANIA 18512TELEPHONE
 NUMBER (570) 342-8281

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:None



SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:Common Stock, without par value



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

|X | YES |  | NO
|- | --- |  | --
|  |     |  |   

|Disclosure of delinquent filers pursuant to item 405
 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrants
 knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
 Form 10-K or any amendment of this Form 10-K [x].



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



The Registrant is an accelerated filer (as defined
 in Exchange Act Rule 12b-2)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | YES | X | NO
| | --- | - | --
| |     |   |   

|Aggregate market value of the voting common stock held
 by non-affiliates of the registrant equals $49,580,166, as of June 30, 2003, based on a market price
 of $35.75. The number of shares of common stock outstanding as of March 12, 2004, equals 1,828,266.



DOCUMENTS INCORPORATED BY REFERENCE:



Excerpts from the Registrants 2003 Annual Report to
 Shareholders are incorporated herein by reference in response to Part I. Portions of the Registrants
 definitive Proxy Statement to be used in connection with the 2004 Annual Meeting of Shareholders are
 incorporated herein by reference in partial response to Part III.

Contents
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                | 
|--------------------------------------------------------------- | 
|Business                                                        | 
|Properties                                                      | 
|Legal Proceedings                                               | 
|Submission of Matters to a Vote of Security Holders             | 
|Market for the Company's Common Equity and                      | 
|Related Stockholder Matters                                     | 
|Select Financial Data                                           | 
|Management's Discussion and Analysis                            | 
|of Financial Condition and Results of Operations                | 
|Financial Statements and Supplementary Data                     | 
|Changes in and Disagreements with Accountants                   | 
|on Accounting and Financial Disclosure                          | 
|Controls and Procedures                                         | 
|Directors and Executive Officers of the Company                 | 
|Executive Compensation                                          | 
|Security Ownership of Certain Beneficial Owners and Management  | 
|Certain Relationships and Related Transactions                  | 
|Principal Accountant Fees and Services                          | 
|Exhibits, Financial Statement Schedules and Reports on Form 8-K | 
|Signatures                                                      | 
|Exhibit Index                                                   | 
|Certifications                                                  | 

|
|

|FIDELITY D & D BANCORP, INC.


PART I


ITEM 1: BUSINESS


Fidelity D&D Bancorp, Inc (the Company) was incorporated
 in the Commonwealth of Pennsylvania, on August 10, 1999, and is a bank holding company, whose wholly
 owned state chartered commercial bank is The Fidelity Deposit and Discount Bank (the Bank) (collectively,
 the Company). The Company is headquartered at Blakely and Drinker Streets in Dunmore, Pennsylvania.


The Bank has offered a full range of traditional banking
 services since it commenced operations in 1903. In addition, the Bank has a personal and corporate trust
 department and also provides alternative financial and insurance products with asset management services.
 A complete list of services provided by the Bank is detailed in the section entitled Products &
 Services contained within the 2003 Annual Report to Shareholders, incorporated by reference. The service
 area is comprised of the Borough of Dunmore and the surrounding communities within Lackawanna and Luzerne
 counties.


The Bank is one of two financial institutions headquartered
 in Dunmore, Pennsylvania. The banking business is highly competitive, and the profitability of the Company
 depends principally upon the Companys ability to compete in its market area. The Company competes with,
 among other sources, the following:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|  |  |                       | 
|- |  | --------------------- | 
|o |  | Local Community Banks | 
|o |  | Savings Banks         | 
|o |  | Regional Banks        | 
|o |  | Credit Unions         | 
|o |  | Savings & Loans       | 
|  | 

|The
 Company has been able to compete effectively with other financial institutions by emphasizing technology
 and customer service, including local branch decision making on loans, establishing long-term customer
 relationships and building customer loyalty, and providing products and services designed to address
 the specific needs of its customers. The Gramm-Leach-Bliley Act (see discussion below), which breaks
 down many barriers between the banking, securities and insurance industries, may significantly affect
 the competitive environment in which the Company operates.


There are no concentrations of loans that, if lost,
 would have a materially adverse effect on the continued business of the Bank. The Banks loan portfolio
 does not have a material concentration within a single industry or group of related industries that
 are vulnerable to the risk of a near-term severe impact. However, the Companys success is dependent
 to a significant degree on economic conditions in Northeastern Pennsylvania, especially Lackawanna and
 Luzerne Counties, which Company defines as its primary market. The banking industry is affected by general
 economic conditions including the effects of inflation, recession, unemployment, real estate values,
 trends in the national and global economics, and other factors beyond the Companys control. An economic
 recession or a delayed recovery over a prolonged period of time in the Dunmore area could cause an increase
 in the level of the Banks non-performing assets and loan losses, thereby causing operating losses,
 impairing liquidity and eroding capital. We cannot assure you that further adverse changes in the local
 economy would not have a material adverse effect on the Companys consolidated financial condition,
 results of operations, and cash flows.


The Company had 167 full-time equivalent employees,
 on December 31, 2003, which includes exempt officers and part-time employees.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Federal and state banking laws contain numerous provisions
 affecting various aspects of the business and operations of the Company and the Bank. The Company is
 subject to, among others, the regulations of the Securities and Exchange Commission and the Federal
 Reserve Board and the Bank is subject to, among others, the regulations of the Pennsylvania Department
 of Banking and the Federal Deposit Insurance Corporation. Refer to Part II, Item 7 Supervision and Regulation
 for descriptions of and references to applicable statutes and regulations which are not intended to
 be complete descriptions of these provisions or their effects on the Company or the Bank. They are summaries
 only and are qualified in their entirety by reference to such statutes and regulations.


Applicable regulations relate to, among other things:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|  |  |                     |  |   | 
|- |  | ------------------- |  | - | 
|o |  | operations          |  | o | 
|o |  | securities          |  | o | 
|o |  | risk management     |  | o | 
|o |  | consumer compliance |  | o | 

|The Bank is examined by the Pennsylvania Department
 of Banking and the Federal Deposit Insurance Corporation (FDIC). The last examination was conducted
 by the FDIC as of September 30, 2003.


The Companys internet address is www.the-fidelity.com.
 The Company makes available through this website the Annual Report on Form 10-K, quarterly reports or
 Form 10-Q and current reports or Form 8-K, and amendments to those Reports as soon as reasonably practical
 after filing with the SEC.


The Companys accounting policies and procedures are
 designed to comply with accounting principles, generally accepted in the United States of America (GAAP).
 Refer to Critical Accounting Policies, which are incorporated by reference in Part II, Item 7.


ITEM 2: PROPERTIES


The Company and the Bank are headquartered at the Main
 Branch on the corner of Blakely and Drinker Streets in Dunmore, Pennsylvania. The main office is a full-service
 banking center including a walk-up teller window, drive-thru teller windows and two twenty-four hour
 automated teller machines (ATMs). Administrative, Loan, Trust, Asset Management Services, operational
 departments and customer service areas are also located in this building. The main office complex is
 owned and free of any encumbrances.


The Green Ridge Branch, the first Scranton facility,
 operates from leased space in the Green Ridge Shopping Center in Scranton, Pennsylvania. This branch
 is a full-service office with a twenty-four hour ATM.


A second Scranton Branch is in a leased facility located
 at 139 Wyoming Avenue, Scranton, Pennsylvania. This office has a walk-up window and provides full-service
 banking to the downtown Scranton area.


The Abington Branch is located on the Morgan Highway
 in Clarks Summit, Pennsylvania. The building from which the branch operates is leased. This office provides
 full-service financial products, including a twenty-four hour ATM and drive-thru teller windows. This
 office provides convenience to our customers located throughout the greater Abington area.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|There is also a banking facility limited to serve employees
 and patients of the Clarks Summit State Hospital which is located within the hospital facility in Clarks
 Summit, Pennsylvania. The office is leased from the hospital under a lease for service provided agreement.


The Keystone Industrial Park Branch (KIP) is located
 in Dunmore, Pennsylvania. This office provides full-service banking with drive-thru teller windows and
 a twenty-four hour ATM. KIP is free of encumbrances.


The Pittston Branch is located in Brunos Supermarket
 403 Kennedy Boulevard, Pittston, Pennsylvania. The space in the supermarket is leased. This office provides
 full-service banking including a twenty-four hour ATM. This location provides convenient service at
 extended hours to the Banks clientele in Luzerne County, Pennsylvania.


The Financial Center Branch is located at 338 North
 Washington Avenue in Scranton, Pennsylvania. This office provides full-service banking, including a
 twenty-four hour ATM. Executive, Finance and Operational offices are located in this building. A portion
 of the third floor is currently leased to a non-related entity. The Company owns the property free of
 encumbrance. The Company also owns, free of encumbrance, an adjacent attached building, which is leased
 to a non-related entity.


The Moosic Branch is located at 4010 Birney Avenue,
 Moosic, Pennsylvania. The branch operates from leased space. This office provides full-service banking,
 including a twenty-four hour ATM and drive-thru teller windows. The branchs location provides the necessary
 link between the Lackawanna and Luzerne County branch office networks.


The West Pittston Branch is located in the Insalaco
 Shopping Center at 801 Wyoming Avenue, West Pittston, Pennsylvania. The branch operates from leased
 space. This office provides full-service, including a twenty-four hour ATM, to the Luzerne County area.


The Peckville Branch is located at 1598 Main Street,
 Peckville, Pennsylvania. The branch operates from leased space. This office provides full-service banking,
 including a twenty-four hour ATM and drive-thru teller windows.


The Banks branch coverage in Luzerne County includes
 a leased space known as the Kingston Branch, located at 247 Wyoming Avenue, Kingston, Pennsylvania.
 This office provides full-service financial products, including a twenty-four hour ATM and drive-thru
 teller windows.


The Eynon Branch is located on Route 6 Business Eynon,
 Pennsylvania. The branch operates from leased space. This office provides full-service financial products,
 including a twenty-four hour ATM and drive-thru teller windows.


In addition to the properties above, the Bank maintains
 several free-standing twenty-four our ATMs located at the following locations:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|  | 
|- | 
|o | 
|o | 
|o | 
|o | 
|o | 
|o | 
|o | 
|o | 

|
|

|The Bank contracted space during 2003 for free-standing
 twenty-four hour ATMs located in Convenient Food Marts at:
|-------------------------------------------------------------------------------------------------------------------

|  | 
|- | 
|o | 
|o | 

|None of the lessors of the properties leased by the
 Bank are affiliated with the Company or the Bank.


The Bank also owns a commercial facility located at
 116  118 N. Blakely Street Dunmore, Pennsylvania. The facility is directly across from the Main branch
 and is currently leased by a non-related entity.


Other real estate owned includes all foreclosed properties
 listed for sale. Foreclosed properties are recorded on the Companys balance sheet, upon possession,
 at the lower of cost or fair value.


ITEM 3: LEGAL PROCEEDINGS


On July 1, 2002, the Bank was served with a civil complaint
 that was filed in the Court of Common Pleas of Lackawanna County, Pennsylvania, on June 28, 2002. Scaccia
 Construction Company, the plaintiff, based upon multiple causes of action, demanded approximately $250,000
 in connection with certain environmental remediation activities. The activities were purportedly performed
 prior to the opening of the Banks Eynon branch. On July 22, 2002, the Bank filed preliminary objections
 to the complaint. The preliminary objections were decided on November 26, 2002, and the Bank filed its
 answer and new matter raising various legal defenses. This lawsuit was settled on October 30, 2003.


The nature of the Companys business generates some
 litigation involving matters arising in the ordinary course of business. However, in the opinion of
 the Company after consulting with legal counsel, no other legal proceedings are pending, which, if determined
 adversely to the Company or the Bank, would have a material effect on the Companys undivided profits
 or financial condition. No other legal proceedings are pending other than ordinary routine litigation
 incidental to the business of the Company and the Bank. In addition, to managements knowledge, no governmental
 authorities have initiated or contemplated any material legal actions against the Company or the Bank.


ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II


ITEM 5: MARKET FOR THE COMPANYS COMMON EQUITY AND
 RELATED STOCKHOLDER MATTERS


Shareholders requesting information about the Companys
 common stock may contact Salvatore R. DeFrancesco, Jr., Treasurer. Requests may be mailed to:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fidelity D & D Bancorp, Inc.
| | ----------------------------
| | Blakely and Drinker St.     
| | Dunmore, PA 18512           
| | (570) 342-8281              

|The common stock of the Company is traded on the over-the-counter
 bulletin board under the symbol FDBC.


The following table lists the quarterly cash dividends
 paid per share and the range of bid and asked prices for the Companys common stock. Such over-the-counter
 prices do not include retail mark-ups, markdowns, or commissions.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|            | 2003 |          | 2002 |         
|----------- | ---- | -------- | ---- | --------
|
|
|1st Quarter |      | $     39 | .00  | $     35
|2nd Quarter |      | $     37 | .00  | $     35
|3rd Quarter |      | $     37 | .00  | $     35
|4th Quarter |      | $     37 | .50  | $     35

|The Company expects to continue paying similar dividends
 in the future. However, future dividends are dependent on earnings, the capital needs of the Company
 and other factors. Prior to the formation of the Company, the Bank paid dividends on a quarterly basis
 for over thirty years. Dividends are determined and declared by the Board of Directors. For a further
 discussion of regulatory capital requirements see Note 14 Regulatory Matters, contained within the
 Notes to Consolidated Financial Statements.


The Company has established a dividend reinvestment
 plan for its shareholders. The plan is designed to make the Companys stock more available to our shareholders
 and to raise additional capital for future needs.


The Company had approximately 1,465 shareholders at
 March 12, 2004 and approximately 1,463 at December 31, 2003. The number of shareholders is the actual
 number of individual shareholders of record. Security depositories are considered as individual shareholders
 for the purpose of determining the approximate number of shareholders.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 6: SELECTED FINANCIAL DATA
|-------------------------------

|Balance Sheet Data:                      | 2003 | 2002              | 2001 | 2000              | 1999
|---------------------------------------- | ---- | ----------------- | ---- | ----------------- | ----
|                                         |      |                   |      |                   |     
|Total assets                             |      | $575,215,466      |      | $577,993,316      |     
|Total investment securities              |      | 144,407,374       |      | 149,549,607       |     
|Net loans                                |      | 366,981,640       |      | 354,262,050       |     
|Loans available-for-sale                 |      | 19,863,577        |      | 28,715,355        |     
|Total deposits                           |      | 401,442,546       |      | 413,788,176       |     
|Total borrowings                         |      | 126,633,012       |      | 114,213,014       |     
|Total shareholders' equity               |      | 43,931,899        |      | 45,234,433        |     
|                                        
|Operating Data for the year ended:       |     
|Total interest income                    |      | $  28,462,093     |      | $  34,567,393     |     
|Total interest expense                   |      | 14,237,129        |      | 17,882,440        |     
|Net interest income                      |      | 14,224,964        |      | 16,684,953        |     
|Provision for loan losses                |      | 3,715,000         |      | 1,158,260         |     
|                                        
|Net interest income after provision for  |     
|loan losses                              |      | 10,509,964        |      | 15,020,953        |     
|Other income                             |      | 4,183,137         |      | 3,302,749         |     
|                                        
|Other operating expense                  |      | 12,903,361        |      | 12,751,174        |     
|                                        
|Income before provision for income taxes |      | 1,789,740         |      | 5,572,528         |     
|Provision for income taxes               |      | 146,492           |      | 1,526,355         |     
|Net Income                               |      | $    1,643,248    |      | $    4,046,173    |     
|                                        
|Per Share Data:                          |     
|Net income per share - basic*            |      | $            0.90 |      | $            2.23 |     
|Net income per share - diluted*          |      | $            0.90 |      | $            2.22 |     
|Dividends declared                       |      | $    1,601,898    |      | $    1,526,371    |     
|Dividends per share                      |      | $            0.88 |      | $            0.84 |     
|Book Value per share                     |      | $          24.10  |      | $          24.86  |     
|Weighted average number of shares        |     
|outstanding**                            |      | 1,820,403         |      | 1,817,430         |     
|Number of shares outstanding at year     |     
|end**                                    |      | 1,823,043         |      | 1,819,376         |     
|                                        
|Ratios:                                  |     
|Return on average assets                 |      | 0.29              | %    | 0.70              | %   
|Return on average equity                 |      | 3.63              | %    | 9.47              | %   
|Net interest margin                      |      | 2.74              | %    | 3.10              | %   
|Efficiency ratio                         |      | 72.32             | %    | 63.42             | %   
|Expense ratio                            |      | 1.68              | %    | 1.68              | %   
|Allowance for loan losses to total loans |      | 1.28              | %    | 1.01              | %   
|Dividend payout ratio                    |      | 97.48             | %    | 37.72             | %   
|Equity to assets                         |      | 7.64              | %    | 7.83              | %   
|Equity to deposits                       |      | 10.94             | %    | 10.93             | %   

|*Based in weighted average shares and adjusted for the stock exchange in 2000.
**Based on actual shares outstanding and adjusted for the stock exchange in 2000.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
 CONDITION AND RESULTS OF OPERATIONS


Forward Looking Statements


This Annual Report on Form 10-K contains a number of
 forward-looking statement size=2>Loans are not made by the Company to its Board members, officers,
 or employees. Loans may be made by our banking subsidiaries and will comply with all federal and state
 laws, statutes, and regulations.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 7: MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Forward Looking Statements


This Annual Report on Form 10-K
contains a number of forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements may be
identified by the use of the words anticipate, believe,
could, estimate, expect, intend,
may, outlook, plan, potential,
predict, project, should, will,
would and similar terms and phrases, including references to assumptions.
Forward looking statements include risks and uncertainties.


Forward-looking statements are based
on various assumptions and analyses made by us in light of our managements
experience and its perception of historical trends, current conditions and expected future
developments, as well as other factors it believes are appropriate under the
circumstances. These statements are not guarantees of future performance and are subject
to risks, uncertainties and other factors (many of which are beyond our control) that
could cause actual results to differ materially from future results expressed or implied
by such forward-looking statements. These factors include, without limitation, the
following:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control;
        there may be increases in competitive pressure among financial institutions or from non-financial institutions;
        changes in the interest rate environment may reduce interest margins;
        changes in deposit flows, loan demand or real estate values may adversely affect our business;
        changes in accounting principles, policies or guidelines may cause our financial condition to be perceived differently;
        general economic conditions, either nationally or locally in some or all areas in which we do business, or conditions in the securities markets or the banking industry may be less favorable than we currently anticipate;
        legislative or regulatory changes may adversely affect our business;
        technological changes may be more difficult or expensive than we anticipate;
        success or consummation of new business initiatives may be more difficult or expensive than we anticipate; or
        acts of war or terrorism.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Management cautions readers not to
place undue reliance on forward-looking statements, which reflect analyses only as of the
date of this report. We have no obligation to update any forward-looking statements to
reflect events or circumstances after the date of this document.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Readers should carefully review the
risk factors described in other documents that we file, from time to time, with the
Securities and Exchange Commission, including Quarterly Reports on Form 10-Q and any
Current Reports on Form 8-K.



Critical Accounting
Policies


The presentation of financial
statements in conformity with GAAP requires management to make estimates and assumptions
that affect many of the reported amounts and disclosures. Actual results could differ from
these estimates.


A material estimate that is
particularly susceptible to significant change relates to the determination of the
allowance for loan losses. Management believes that the allowance for loan losses at
December 31, 2003 is adequate and reasonable. Given the very subjective nature of
identifying and valuing loan losses, it is likely that well-informed individuals could
make different assumptions, and could, therefore calculate a materially different
allowance value. While management uses available information to recognize losses on loans,
changes in economic conditions may necessitate revisions in the future. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowance for loan losses. Such agencies may
require the Company to recognize adjustments to the allowance based on their judgments of
information available to them at the time of their examination.


Another material estimate is the
calculation of fair values of the Companys investment securities. The Company
receives estimated fair values of investment securities from an independent valuation
service. In developing these fair values, the valuation service uses estimates of cash
flows, based on historical performance of similar instruments in similar interest rate
environments. Based on experience, management is aware that estimated fair values of
investment securities tend to vary among valuation services. Accordingly, when selling
investment securities, management typically obtains price quotes from more than one
source. As described in Notes 1 and 3 of the consolidated financial statements, the large
majority of the Companys investment securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value on the consolidated balance sheet,
with unrealized gains and losses, net of income tax, reported separately within
shareholders equity through accumulated other comprehensive income.


The fair value of residential
mortgage loans classified as available-for-sale is obtained from the Federal National
Mortgage Association (Fannie Mae). The fair value of SBA loans classified as
available-for-sale is obtained from an outside pricing source. The market to which the
Bank sells mortgage and other loans is restricted and price quotes from other sources are
not typically obtained. Further discussion on the accounting treatment of
available-for-sale loans is in the section entitled Loans-available-for sale,
contained within Managements Discussion and Analysis.


All significant accounting policies
are contained in Note 1 Nature of Operations and Summary of Significant Accounting
Policies, contained within the Notes to Consolidated Financial Statements, and
incorporated by reference in Part II, Item 8.


The following discussion and analysis
presents the significant changes in the financial condition and in the results of
operations of the Company as of December 31, 2003 and December 31, 2002 and for each of
the years then ended. This discussion should be read in conjunction with the consolidated
financial statements and notes included in Part II, Item 8 of this report.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|Comparison of Financial
Condition as of December 31, 2003 and 2002 and Results of Operations for each of the
Years then Ended



Financial Condition


The following table is a comparison
of condensed balance sheet accounts and percentage to total assets at December 31, 2003,
2002 and 2001;
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | 2003   | 2002      | 2001  
|----------------------------------- | ------ | --------- | ------
|                                    | Amount | Percent   | Amount
|Assets:                             |        |           |       
|Cash and due from banks             |        | $  13,148 |       
|Interest bearing deposits with      |       
|Financial institutions              |        | 6,083     |       
|Investment securities               |        | 144,407   |       
|Net loans                           |        | 366,982   |       
|Loans available-for-sale            |        | 19,864    |       
|Accrued interest receivable         |        | 1,807     |       
|Bank premises and equipment         |        | 12,092    |       
|Foreclosed assets held for sale     |        | 467       |       
|Life insurance cash surrender value |        | 7,293     |       
|Other assets                        |        | 3,072     |       
|Total assets                        |        | $575,215  |       

|                                               |  |          |  |     |      |         
|---------------------------------------------- |  | -------- |  | --- | ---- | --------
|Liabilities:                                   |  |          |  |     |      |         
|Deposits, non-interest bearing                 |  | $64,399  |  | 11  | .20% | $61,151 
|Certificates of deposit of $100,000            | 
|or more                                        |  | 112,857  |  | 19  | .64  | 129,487 
|Other interest-bearing deposits                |  | 224,186  |  | 38  | .96  | 223,150 
|Short-term borrowings                          |  | 54,757   |  | 9   | .52  | 51,213  
|Other borrowed funds                           |  | 71,876   |  | 12  | .50  | 63,000  
|Accrued interest payable and other liabilities |  | 3,208    |  | 0   | .56  | 4,758   
|Total liabilities                              |  | 531,283  |  | 92  | .36  | 532,759 
|Shareholders' equity                           |  | 43,932   |  | 7   | .64  | 45,234  
|Total liabilities and shareholders' equity     |  | $575,215 |  | 100 | .00% | $577,993

|A comparison of net changes in
certain balance sheet categories as of December 31, are as follows:
|--------------------------------------------------------------------------------------------------

|     | Assents | %           | EarningAssets | %  | Deposits | %           | Short-TermBorrowings | %  | OtherBorrowings | %           
|---- | ------- | ----------- | ------------- | -- | -------- | ----------- | -------------------- | -- | --------------- | ------------
|2003 |         | $(2,777,850 | )             | (1 | )%       | $(3,007,038 | )                    | (1 | )%              | $(12,345,630
|2002 |         | 8,963,478   |               | 2  |          | 7,325,219   |                      | 1  |                 | 6,009,448   
|2001 |         | 77,952,784  |               | 16 |          | 60,585,502  |                      | 13 |                 | 68,468,400  
|2000 |         | 44,507,549  |               | 10 |          | 44,562,595  |                      | 10 |                 | 44,943,343  
|1999 |         | 98,499,609  |               | 29 |          | 88,171,199  |                      | 26 |                 | 54,632,595  

|*
 Earning assets exclude loans placed on non-accrual status.
|--------------------------------------------------------------

---

|Deposits



The following table represents the
components of total deposits as of December 31, 2003 and comparative funding changes from
December 31, 2002:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | December 31, 2003 | December 31, 2002 | Dollar change | Percent change
|---------------------------- | ----------------- | ----------------- | ------------- | --------------
|Noninterest-bearing deposits |                   |                   |               |               
|Personal                     |                   | $26,206,156       |               | $22,956,626   
|Non-personal                 |                   | 29,561,169        |               | 24,877,991    
|Public fund                  |                   | 3,635,074         |               | 4,039,547     
|Bank checks                  |                   | 4,996,259         |               | 9,277,301     
|                            
|Total                        |                   | $64,398,658       |               | $61,151,465   
|                            

|Time deposits of $100,000 or greater |  |               |  |              
|------------------------------------ |  | ------------- |  | -------------
|Personal                             |  | $  78,560,841 |  | $  79,169,750
|Non-personal                         |  | 16,057,391    |  | 23,571,462   
|Public fund                          |  | 12,412,714    |  | 21,111,991   
|IRA's                                |  | 5,826,474     |  | 5,633,295    
|                                    
|Total                                |  | $112,857,420  |  | $129,486,498 
|                                    

|Other interest-bearing deposits   |  |               |  |              
|--------------------------------- |  | ------------- |  | -------------
|Time deposits less than $100,000: |  |               |  |              
|Personal                          |  | $  83,057,733 |  | $  95,302,987
|Non-personal                      |  | 5,387,417     |  | 11,054,526   
|Public fund                       |  | 597,772       |  | 633,489      
|IRA's                             |  | 19,694,374    |  | 20,358,968   
|                                 
|sub total                         |  | 108,737,296   |  | 127,349,970  
|NOW acounts                       |  | 44,290,199    |  | 40,719,446   
|Money market deposits             |  | 28,284,225    |  | 16,561,357   
|Savings and clubs                 |  | 42,874,748    |  | 38,519,440   
|                                 
|Total                             |  | $224,186,468  |  | $223,150,213 
|                                 

|Total deposits               |  |               |  |              
|---------------------------- |  | ------------- |  | -------------
|Noninterest-bearing deposits |  | $  64,398,658 |  | $  61,151,465
|Interest-bearing deposits    |  | 337,043,888   |  | 352,636,711  
|                            
|Total                        |  | $401,442,546  |  | $413,788,176 
|                            

|Public funds            |  |              |  |             
|----------------------- |  | ------------ |  | ------------
|Noninterest-bearing     |  | $  3,635,074 |  | $  4,039,547
|Certificates of deposit |  | 13,010,486   |  | 21,745,480  
|NOW acounts             |  | 9,850,661    |  | 10,299,948  
|Money market deposits   |  | 8,029,671    |  | 8,923,912   
|Savings and clubs       |  | 3,278,114    |  | 2,806,207   
|                       
|Total                   |  | $37,804,006  |  | $47,815,094 
|                       

|Internet deposits   |  |              |  |                 
|------------------- |  | ------------ |  | ----------------
|Noninterest-bearing |  | $     27,505 |  | $            907
|Interest-bearing    |  | 4,915,604    |  | 11,139,780      
|                   
|Total               |  | $4,943,109   |  | $11,140,687     
|                   

|                              |  |                   |  |                  
|----------------------------- |  | ----------------- |  | -----------------
|Total assets                  |  | $     575,215,466 |  | $     577,993,316
|Total deposit to total assets |  | 69.79%            |  | 71.59%           
|Total assets                  |  | 1.23%             |  | 2.69%            
|Total assets                  |  | 9.42%             |  | 11.56%           
|Total assets                  |  | 6.57%             |  | 8.27%            

|Total deposits decreased $12,346,000
or 3% during 2003 to $401,443,000. Total average deposits decreased $12,616,000 or 3% from
$424,782,000 at December 31, 2002 to $412,166,000 at December 31, 2003. Non-interest
bearing deposits are an important source of funds for the Bank because they lower overall
deposit costs. The average balance of these accounts increased $7,482,000 or 14%, during
2003. The interest rates offered on most deposit products were lowered in 2002 and
continued through 2003 in response to overall market conditions. Management expects a
significant portion of the certificate of deposit portfolio to continue repricing at lower
market rates, specifically in the thirty-month time deposit product, as these higher rate
certificates reach maturity.


The Bank is largely dependent upon
its base of competitively priced core deposits to provide a stable source of funding. The
Bank attempts to retain and grow its customer base through a combination of rate, quality
of service, convenience and a stable and experienced staff. Core deposits, which excludes
time deposits of $100,000 and greater, increased $4,283,000 or 2% during 2003, to
$288,585,000. The Bank continued to experience growth in its transactional deposit
products, which include non-interest bearing demand deposit accounts (DDAs), NOW, money
market deposit, savings and club accounts. Checking accounts increased $11,099,000 or 12%,
and savings and club accounts grew $4,355,000 or 11%. Money market accounts grew
$11,723,000 or 71%. Thus, the Banks deposit mix, although concentrated in time
deposits, began to significantly shift toward customer based core deposit and savings
accounts.


Time deposits of $100,000 or greater
decreased $16,629,000 or 13% from $129,486,000 at December 31, 2002 to $112,857,000 at
December 31, 2003. The time deposit reduction occurred from the run-off of high cost
non-personal and public fund accounts. The personal time deposit reduction was fully
offset by the shift into savings and money market accounts. Total time deposits, at
December 31, 2003 were $221,595,000 or 55% of total deposits compared to $256,836,000 or
62% at December 31, 2002. Approximately $145,885,000 or 66% of total time deposits are
scheduled to mature in 2004. These maturing time deposits represent 36% of the Banks
total deposit base and provide a significant opportunity for the Bank to service these
customers and retain these deposits at potentially lower rates.


Despite the sluggish economy in 2002
which has not fully recovered in 2003, returns of the domestic equity markets have begun
to stabilize and strengthen. As a result, migration of deposits into the equity markets
may be a significant factor the Bank faces in its quest to retain and grow its deposit
base in 2004. Without strategic planning to replace these funds, the Banks asset
size may shrink to even lower levels.


The maturity distribution of time
deposits of $100,000 or more at December 31, 2003 is as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 monthsor less | 3-6months | 6-12months  | Over12 months | Total      
|--------------- | --------- | ----------- | ------------- | -----------
|$39,699,300     |           | $14,313,472 |               | $24,743,796

|The over 12 month maturity
distribution of time deposits represents 8.50% of total deposits at December 31, 2003. The
Bank believes this category provides a stable source of funds for future requirements.


Short-term borrowings


Interest rate reductions and customer
liquidity and investment needs caused repurchase agreements (Repos) to decrease from
$47,232,000 at December 31, 2002, to $39,363,000 at December 31, 2003. Repos are
non-insured interest-bearing liabilities that have a security interest in qualified
pledged investment securities of the Bank. Repos offered are either a fixed term or a
sweep product of the Bank.


Sweep accounts comprise approximately
70% of Repos. A sweep account is designed to ensure that, on a daily basis, an attached
DDA is adequately funded and then excess DDA funds are transferred into an
interest-bearing overnight Repo. The sweep will also transfer funds back to the DDA as is
necessary, to cover checks presented for payment. The nature of the sweep makes the
account more volatile than a fixed-term Repo.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|Funding requirements of the Bank, due
largely to the reduction in deposits, necessitated $14,920,000 overnight borrowings from
the Federal Home Loan Bank of Pittsburgh, (FHLB), at December 31, 2003. FHLB borrowings at
December 31, 2002 amounted to $2,850,000.


Repos and overnight borrowings are
included with short-term borrowings on the Consolidated Balance Sheet. Refer to Note 7
Short-term Borrowings, contained within the Notes to Consolidated Financial
Statements in Part II, Item 8.



Long-term debt


Long-term debt consists of borrowings
from the FHLB. The weighted-average rate on funds borrowed at December 31, 2003, was
5.31%. The weighted-average rate is 6 basis points below the tax-equivalent yield of 5.39%
on average earning assets for the year ended December 31, 2003. Rates on $63,000,000 of
convertible select advances are adjustable quarterly, should market rates significantly
increase beyond the issues three- month strike price. However, year-end rates on
similar FHLB advances are 401 basis points below the average rate paid by the Bank. The
Bank is deterred from paying off the current borrowings by significant prepayment
penalties. FHLB borrowing rates, currently being quoted, will unlikely increase above the
stated rates being paid on these borrowings during 2004. Should this occur, however, the
Bank has the option, at that time, to repay or renegotiate the converted advance.


In October 2003, the Bank borrowed
$9,000,000 from the FHLB to replenish funds utilized from the investment securities
portfolio, to fund deposit run-off. The new borrowings were a $5,000,000 ten year
convertible select with a 7.5% strike price costing 3.61% and a five year amortizing
$4,000,000 advance fixed at 2.98%. The addition of this debt helped to reduce the overall
weighted-average rate of long-term debt outstanding.


At December 31, 2003, the Bank had
the ability to borrow an additional $68,800,000 at the FHLB. The FHLB has short-, medium-
and long-term funding products available to the Bank.


Accrued expenses and other
liabilities


Rate reductions in interest-bearing
deposits and short-term borrowings caused accrued interest payable to decrease from
$1,707,000 at December 31, 2002, to $ 1,270,080 at December 31, 2003.


A $746,000 pending settlement of
investment securities purchased was recorded in other liabilities at December 31, 2002.
The Bank did not have any pending investment purchases at December 31, 2003.



Assets:



Investments


Total investments declined
$5,143,000, of which $2,240,000 was due to depreciation in the market value of
available-for-sale (AFS) investments.


Investment policies dictate
permissible investment categories, credit quality, maturity intervals and investment
concentrations. Management is responsible for making the specific investment purchases
within these standards. The carrying value of investment securities, at December 31, 2003,
was $144,730,000 or 25% of total assets. At December 31, 2003 approximately 59% of the
investment portfolio was comprised of mortgage-backed securities that amortize and provide
monthly cash flow. Agency bonds and municipal bonds comprised 26% and 9% of the investment
portfolio, respectively.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|Management buys and sells investment
securities from time to time depending on market conditions, business trends, liquidity,
and capital levels. Investment security purchases provide a way to quickly invest excess
liquidity in order to generate additional earnings. The Bank generally earns a positive
interest spread by assuming interest rate risk and using deposits and/or borrowings to
purchase securities with longer maturities.


Management classifies investment
securities at the time of purchase by one of three categories: trading, available for sale
(AFS) or, held to maturity (HTM). To date, management has not purchased any securities for
trading purposes. Management classifies most securities as AFS even though it has no
immediate intent to sell them. The AFS designation affords management the flexibility to
sell securities and adjust the balance sheet in response to capital levels, liquidity
needs and/or changes in market conditions. Securities AFS are marked to market in the
consolidated balance sheet with an adjustment to equity, net of tax that is presented in
the caption Accumulated other comprehensive income (loss)".


With the relative low market interest
rate environment, which continued through 2003, higher yielding United States (U.S.)
Government Agency bonds along with state and municipal securities of $24,810,000 were
called. In 2002, when the composition of the investment portfolio was more susceptible to
being called, securities approximating $90,600,000 were called. No losses were incurred,
in 2002 or 2003, on any of the called bonds.


The low interest rate environment
also caused many borrowers to prepay and/or refinance home mortgages. In terms of
investments, this contributed to a major prepayment in the Banks portfolio of
mortgage-backed securities (MBS), which represents investments in pools of residential
mortgages. The majority of MBS owned by the Bank are guaranteed by U.S. governmental
sponsored agencies. Prepayments on MBS were $60,127,000 in 2003, compared to $18,229,000
in 2002.


Of the total MBS prepayments received
in 2002, $11,682,000 or 64% was received during the fourth quarter, $4,436,000 in December
alone. At the prepayment speed experienced during this period, the entire MBS portfolio
could have been paid off in just over two years. In addition, amortization of bond premium
in the amount of $2,449,000 would have been accelerated into this shorter time period,
opposed to over the estimated average life of seven years at the times of purchase.
Amortization of bond premium is the periodic charge to earnings for the amount by which
the purchase price of a bond exceeds its par value.


A restructuring of the investment
portfolio was undertaken in 2003, to protect earnings which were being adversely impacted
by bond calls and MBS prepayments. The objective of the restructuring was to effectively
manage and predict cash flows from securities within a four year average life range where
redeployment of the proceeds could go into higher yielding investments. This control would
help reduce interest rate risk and coordinate the Banks desired earnings and
liquidity needs. To accomplish the restructuring of the MBS portfolio, the Bank
participated in a series of strategically planned sales with subsequent buys of similar
type securities (swaps). The swaps were designed to maintain cash flow through the sale of
the faster prepaying available-for-sale MBS and reinvesting the proceeds into MBS issues
with weighted-average coupons that provided the desired structured cash flows. This
strategy would help to reduce prepayment risk and take advantage of the steep yield curve.
The swaps produced modest gains on the sales and securities were purchased at effective
yields above the bonds sold. At December 31, 2003, the estimated weighted-average life of
the MBS portfolio extended to approximately four years and the net premiums were reduced
to $1,153,000. At December 31, 2003, the MBS portfolio was producing yields that were
approximately 56 basis points more than the portfolio was producing at December 31, 2002.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|The other aspect of the restructuring
strategy was to reinvest the proceeds from called bonds and MBS payments defensively into
U.S. Agency and municipal obligations that provided greater protection from future calls.
Approximately $27,990,000 of the acquired Agency bonds contained rate steps, whereby the
rate automatically increased, if the bond continued past the call date. These defensive
structures mitigate extension risks inherent within this low interest rate environment.


A comparison of investments at
December 31, for the three previous periods is as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | 2003 | 2002          | 2001
|------------------------------ | ---- | ------------- | ----
|
|U.S. Government Agencies       |      | $  36,323,404 |     
|Mortgage Backed Securities     |      | 85,598,752    |     
|State & Municipal Subdivisions |      | 13,275,289    |     
|Preferred Term Securities      |      | 4,007,507     |     
|Equity Securities              |      | 5,202,422     |     
|Total                          |      | $144,407,374  |     

|The distribution of debt securities
by stated maturity date at December 31, 2003 is as follows:
|-----------------------------------------------------------------------------------------------

|                               | 1 Yearor less | 1 through5 years | 5 through10 years | More than10 years | Total
|------------------------------ | ------------- | ---------------- | ----------------- | ----------------- | -----
|U.S. Government Agencies       | $             | --               |                   | $2,983,125        |      
|Mortgage Backed Securities     |               | --               |                   | 164,336           |      
|State & Municipal Subdivisions |               | --               |                   | 738,680           |      
|Preferred Term Securities      |               | --               |                   | --                |      
|Total debt securities          | $             | --               |                   | $3,886,141        |      

|Debt securities are stated net of
unrealized gain or loss on AFS securities. Net unrealized loss on AFS debt securities at
December 31, 2003 was $493,000. Debt securities do not include the $279,000 of AFS equity
securities or the $4,753,000 of restricted regulatory equity securities owned at December
31, 2003. Net unrealized gain on AFS equity securities was $170,000 at December 31, 2003.


The tax equivalent yield on debt
securities by stated maturity date at December 31, 2003, is as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | 1 Yearor less | 1 through5 years | 5 through10 years | More than10 years | Total
|------------------------------ | ------------- | ---------------- | ----------------- | ----------------- | -----
|U.S. Government Agencies       |               | - %              |                   | 2                 | .60% 
|Mortgaged Backed Securities    |               | --               |                   | 5                 | .52  
|State & Municipal Subdivisions |               | --               |                   | 6                 | .09  
|Preferred Term Securities      |               | --               |                   | --                |      
|                               |              
|Total debt securities          |               | 0                | .00%              | 3                 | .37% 
|                               |              

|Loans


Loans, net of unearned income,
increased $13,817,000 or 3.86% from $358,162,000 at December 31, 2002, to $371,979,000 at
December 31, 2003. Gross loans represented 64.67% of total assets at December 31, 2003.


In 2003, the Bank originated
$37,797,000 of commercial loans, $40,028,000 of mortgage loans and $24,041,000 of consumer
loans. In addition for 2003, the Bank committed to maximum lines of credit of $33,158,000
for commercial borrowers, $14,523,000 for real estate construction loans, $15,528,000 in
home equity lines and $213,000 for consumer borrowers. Growth in the portfolio was
primarily in commercial and commercial real estate.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|Loan refinancing to lower interest
rates continued in 2003 at a much greater volume than in 2002. Such refinancing occurred
in all loan portfolios and had followed a corresponding drop in interest rates which
correlated with a national trend. It is anticipated that the volume of prepayments and
refinance requests could begin to ease, as rates become stable or increase. Furthermore,
new loans are being structured, when possible, to better withstand market fluctuations.



Commercial Loans:


Net of scheduled principal
curtailments (run-off), loan participation sales, and pre-payment, commercial
loans increased $18,302,000 or 9.02% during 2003. This increase in commercial loans was
primarily due to increased lending within the small business community.


As indicated, much of the Banks
loan growth arose from commercial and commercial real estate loans. However, former
commercial loan underwriting practices have also presented the Bank with increased
non-performing assets. Increased due diligence in the loan underwriting process the past
two years has allowed the Bank to pursue credit opportunities that present lower credit
risk.


The Bank continues to originate loans
using the Small Business Administration (SBA) guaranteed loan program. Under this program,
in return for the Bank funding a qualified loan, the SBA guarantees a material portion of
the principal balance to the Bank. As of December 31, 2003, the Bank reported $2,510,000
in SBA loans outstanding.


Tax-free industrial development
loans, a component of commercial loans, made to or backed by local municipalities
increased to $9,020,000 at December 31, 2003. The surge in this sector was due mainly to
several large term loans to local municipalities for various infrastructure projects.



Residential Real Estate
Loans:


Residential real estate loans
increased $5,332,000 or 6.24% to $90,779,000. These loans increased due to strong demand
for such loans due to the historic low interest rate environment.


The Bank proudly serves the local
market by offering real estate loans. Real estate and construction loan totals of
$98,047,000 were 25.02% of gross loans at December 31, 2003. Included with real estate
loans are home equity lines of credit. The outstanding balance on the credit lines
increased $6,387,000 or 87.31% from $7,315,000 at December 31, 2002, to $13,702,000 at
December 31, 2003.



Consumer Loans and Direct
Financing Leases:


Consumer loans and direct-financing
leases decreased $10,661,000 or 16.77% during 2003. The home equity installment loan
portfolio, included within the consumer loans, experienced significant payoffs caused by
refinancing into lower rate mortgages. In addition, prepayments could not be successfully
replaced due to the tightened credit underwriting standards on indirect auto loans and the
decision to no longer originate direct financing leases. A combination of these events
brought about this overall decline in consumer loans.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|A comparison of loans at December 31,
for the five previous periods is as follows (all loans are domestic):
|-----------------------------------------------------------------------------------------------------------

|                          | 2003 | 2002          | 2001 | 2000          | 1999
|------------------------- | ---- | ------------- | ---- | ------------- | ----
|Residential real estate   |      | $  90,779,488 |      | $  85,447,703 |     
|Consumer                  |      | 49,216,897    |      | 56,984,927    |     
|Commercial and            |     
|commercial real estate    |      | 221,275,922   |      | 202,974,155   |     
|Direct financing leases   |      | 3,685,802     |      | 6,578,720     |     
|Real estate construction  |      | 7,267,616     |      | 6,797,002     |     
|Gross loans               |      | 372,225,725   |      | 358,782,507   |     
|Less:                     |     
|Unearned discount         |      | 247,119       |      | 620,704       |     
|Allowance for loan losses |      | 4,996,966     |      | 3,899,753     |     
|Net loans                 |      | $366,981,640  |      | $354,262,050  |     
|Loans available-for-sale  |      | $  19,863,577 |      | $  28,715,355 |     

|A comparison of gross loans by
percent at year-end for the five previous periods is as follows:
|-----------------------------------------------------------------------------------------------

|                         | 2003 | 2002 | 2001 | 2000 | 1999
|------------------------ | ---- | ---- | ---- | ---- | ----
|Residential real estate  |      | 24   | .39% | 23   | .82%
|Consumer                 |      | 13   | .22  | 15   | .88 
|Commercial and           |     
|commercial real estate   |      | 59   | .45  | 56   | .57 
|Direct financing leases  |      | 0    | .99  | 1    | .83 
|Real estate construction |      | 1    | .95  | 1    | .90 
|Gross loans              |      | 100  | .00% | 100  | .00%

|There are no concentrations of loans
to a number of borrowers engaged in similar activities exceeding 10.00% of total loans
that are not otherwise disclosed as a category in tables above.


The following table sets forth the
maturity distribution of the loan portfolio at December 31, 2003. Excluded from the table
are non-construction real estate loans, consumer loans and direct financing leases
(amounts in thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | 1 yearor less | 1-5years | More than5 years | Total  
|------------------------- | ------------- | -------- | ---------------- | -------
|Commercial and commercial |               |          |                  |        
|real estate loans         |               | $42,652  |                  | $42,297
|Real estate construction  |               | 7,268    |                  | --     
|Total                     |               | $49,920  |                  | $42,297
|                          |              

|Real estate construction loans are
included in the one-year or less category since, by their nature, these loans are
converted into commercial and commercial real estate loans within one year from the date
the real estate construction loan was consummated. Upon conversion, the commercial and
commercial real estate loans would normally mature after five years.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|The following table sets forth the
sensitivity changes in interest rates for commercial and commercial real estate loans at
December 31, 2003 (amounts in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       | 1-5years | More than5 years | Total
|---------------------- | -------- | ---------------- | -----
|Fixed interest rate    |          | $  8,286         |      
|Variable interest rate |          | 34,011           |      
|Total                  |          | $42,297          |      
|                       |         

|Non-refundable fees or costs
associated with all loan originations are deferred. Using the principal reduction method,
the Bank releases the deferral as a charge or credit to loan interest income over the life
of the loan.


There are no concentrations of loans
that, if lost, would have a material adverse effect on the business of the Bank. The
Banks loan portfolio does not have a material concentration within a single industry
or group of related industries that are vulnerable to the risk of a near-term severe
negative business impact.



Loans available-for-sale


Upon origination, residential
mortgages, the guaranteed portions of Small Business Administration loans and student
loans are generally classified as available-for-sale. Should market rates increase,
fixed-rate loans and loans not immediately repricable would no longer produce yields
consistent with the current market. In a declining interest rate environment, the Bank
would be exposed to prepayment risk and, as rates on adjustable rate loans decrease
interest income would be negatively affected. To better manage interest rate risk, loans
meeting these conditions may be classified as available-for-sale. Certain consideration is
also given to current liquidity needs.


Saleable loans are carried on the
balance sheet at the lower of cost or fair value. If the fair value falls below cost, the
difference is charged to current earnings. Appreciation in the portfolio is credited to
current earnings to the extent of previous write-downs.


Loans available-for-sale at December
31, 2003 was $19,864,000, with a corresponding fair value of $20,500,000. The year-end
balance comprised $17,783,000 of residential mortgages, $1,338,000 of SBA loans, and
$743,000 in student loans. The Bank decreased loans available-for-sale by $8,852,000 or
30.83% from the December 31, 2002 balance. Available-for-sale loans decreased in part from
the overall sale of these types of loans and, in part, from a management decision to
temporarily classify fewer residential loans as available-for-sale, in order to take
advantage of higher rates offered in this loan category compared to market rates. Also, at
December 31, 2002, the AFS portfolio included $2,872,000 of credit card receivables which
the Bank sold during the first quarter of 2004. The decision to sell these receivables was
based upon lack of an adequate credit card servicing system, lack of consistent growth,
high overhead associated with credit card activities and a high loss experience on
non-performing credit cards.


As detailed in the Consolidated
Statement of Cash Flows contained herein, proceeds from the sale of loans in 2003
totaled $28,618,000. The sales were primarily residential mortgages sold to the secondary
market. The loans were sold to provide the Bank with the liquidity necessary to meet loan
demand and to mitigate interest-rate risk from potential market rate increases.


The Bank retains the servicing rights
on loans sold into the secondary market. Servicing rights are retained so that the Bank
can continue the personal relationship developed with the borrowers. At December 31, 2003,
the servicing portfolio balance of sold residential mortgage loans was $56,021,000.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|Allowance for loan losses


Management continually evaluates the
credit quality of the Banks loan portfolio and performs a formal review of the
allowance for loan losses adequacy, on a quarterly basis. The allowance for loan losses
reflects managements best estimate of losses, both known and inherent, in the
existing loan portfolio. Managements judgment is based on the evaluation of
individual loans, past experience, the assessment of current economic conditions, and
other relevant factors. The provision for loan losses represents the amount necessary to
maintain an appropriate allowance. Loan losses are charged directly against the allowance
for loan losses when loans are deemed to be uncollectible. Recoveries on previously
charged-off loans are added to the allowance when received.


Management applies two primary
components during the loan review process to determine proper allowance levels. The two
levels are specific loan loss allocation for loans that are deemed impaired and a general
loan loss allocation for those loans not specifically allocated. The methodology to
analyze the adequacy of the allowance for loan losses is as follows:

Identification of specific problem
loans by loan category by the credit administration;
Calculation of specific allowances required based
on collateral and other persuasive evidence;
Identification of loans collateralized by cash;
Determination of remaining homogenous pools by loan
category and eliminating loans collateralized by cash and loans with specific allocations;
Application of historical loss percentages (3 year average)
to pools to determine the allowance allocation; and
Application of qualitative factor adjustment percentages
to historical losses for trends or changes in the loan portfolio.Allocation of the allowance for loan
losses for different categories of loans is based on the methodology used by the Bank, as
explained above. The changes in the allocations from period to period are based upon
reviews of the loan and lease portfolios.


With a continued focus on asset
quality throughout 2003, Management identified impaired loan portfolio relationships,
whereby borrowers did not have the ability to repay their loans in accordance with the
contractual terms. This identification process required Management to determine whether to
place these loans on non-accrual status and if so, to determine an appropriate allowance
amount. In addition, several long standing customers with significant loan exposures,
experienced financial difficulties. Management added over $685,000 to the allowance for
loan losses in connection with these loans. Finally, a troubled debt restructuring in 2002
did not meet expectations, and Management added almost $1,300,000 to the allowance for
loan losses.


Charge-offs, net of recoveries, for
the year ended December 31, 2003, was $2,618,000, compared to $1,506,000 in 2002. Consumer
loan net charge-offs increased from $897,000, through December 31, 2002, to $1,019,000,
through December 31, 2003. Commercial loan net charge-offs increased $561,000, for the
full year 2003, compared to 2002. Mortgage loan net-charge-offs increased $429,000 in
2003. Mortgage loan charge-offs were the result of properties foreclosed on during 2003
with a required write down taken to the fair market value of the real estate prior to
transfer to foreclosed assets held for sale. For further discussion on the provision for
loan losses, see the Provision for Loan Losses located in the Results of
Operations section of Managements Discussion and Analysis contained herein.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|For a further discussion of
delinquencies and net charge-offs, see the section entitled Non-performing
Assets. Additional discussion is in Note 1 Nature of Operations and Summary of
Significant Accounting Policies  Allowance for Loan Losses and Note 4
Loans and Leases contained within the Notes to Consolidated Financial
Statements, and incorporated herein by reference.


Management believes that the current
balance in the allowance for loan losses of $4,997,000 is sufficient to withstand the
identified potential credit quality issues that may arise and are inherent to the
portfolio. Currently, management is unaware of any potential problem loans that have not
been reviewed. Potential problem loans are those where there is known information that
leads Management to believe repayment of principal and/or interest is in jeopardy and the
loans are currently neither on non-accrual status nor past due 90 days or more. However,
there could be certain instances which become identified over the upcoming year that may
require additional charge-offs and/or increases to the allowance. The ratio of allowance
for loan losses to total loans was 1.28% at December 31, 2003 compared to 1.01% at
December 31, 2002.


The following table sets forth the
activity in the allowance for loan losses and certain key ratios for the periods indicated
(dollars in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | 2003 | 2002        | 2001 | 2000       | 1999
|----------------------------------------------- | ---- | ----------- | ---- | ---------- | ----
|Balance at beginning of period                  |      | $    3,900  |      | $    3,742 |     
|Charge-offs:                                    |     
|Commercial and all other                        |      | 1,334       |      | 928        |     
|Real estate                                     |      | 503         |      | 40         |     
|Consumer                                        |      | 1,167       |      | 850        |     
|Lease financing                                 |      | 92          |      | 131        |     
|Total                                           |      | 3,096       |      | 1,949      |     
|Recoveries:                                     |     
|Commercial and all other                        |      | 204         |      | 359        |     
|Real estate                                     |      | 34          |      | --         |     
|Consumer                                        |      | 230         |      | 69         |     
|Lease financing                                 |      | 10          |      | 15         |     
|Total                                           |      | 478         |      | 443        |     
|Net charge-offs                                 |      | 2,618       |      | 1,506      |     
|Provision charged to operations                 |      | 3,715       |      | 1,664      |     
|Balance at end of period                        |      | $    4,997  |      | $    3,900 |     
|Net charge-offs to average loans outstanding    |      | 0.68        | %    | 0.40       | %   
|Allowance for loan loss to net charge-offs      |      | 1.91x       |      | 2.59x      |     
|Allowance for loan loss to total gross          |      | 1.28        | %    | 1.01       | %   
|Loans 30 - 89 days past due and accruing        |      | $    3,975  |      | $    6,047 |     
|Loans 90 days or more past due and accruing     |      | $       958 |      | $    2,599 |     
|Allowance for loan loss to loans 90 days or     |     
|more past due and accruing                      |      | 5.22x       |      | 1.50x      |     
|Non-accruing loans                              |      | $    7,323  |      | $    4,000 |     
|Allowance for loan loss to non-accruing loans   |      | 0.68x       |      | 0.98x      |     
|Allowance for loan loss to non-performing loans |      | 60.34       | %    | 59.09      | %   
|Average net loans                               |      | $383,226    |      | $380,892   |     

|The allowance for loan losses can
generally absorb losses throughout the loan and lease portfolios. However, in some
instances an allocation is made for specific loans or groups of loans. Allocation of the
allowance for loan losses for different categories of loans is based on the methodology
used by the Bank, as previously explained. The changes in the allocations from year to
years are based upon year end reviews of the loan and lease portfolios.


Allocation of the allowance among
major categories of loans for the past five years is summarized below. This table should
not be interpreted as an indication that charge-offs in future periods will occur in these
amounts or proportions, or that the allocation indicates future charge-off trends:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Category                 | 2003 | % | 2002 | %         | 2000 | % | 2000 | %    | 1999 | %        
|------------------------ | ---- | - | ---- | --------- | ---- | - | ---- | ---- | ---- | ---------
|Residential real estate  |      |   | $    | 354,207   |      |   | 7    | .09  | $    | 383,858  
|Consumer*                |      |   |      | 884,689   |      |   | 17   | .70  |      | 1,092,140
|Commercial and           |      |  
|commercial real estate   |      |   |      | 3,699,488 |      |   | 74   | .04  |      | 2,198,783
|Direct financing leases  |      |   |      | 42,706    |      |   | 0    | .85  |      | 81,664   
|Real estate construction |      |   |      | 15,876    |      |   | 0    | .32  |      | --       
|Unallocated              |      |   |      | --        |      |   | --   |      |      | 143,307  
|Total                    |      |   | $    | 4,996,966 |      |   | 100  | .00% | $    | 3,899,752

|*
Prior to 2003, consumer loans included credit cards receivables.


The commercial loan portfolio
comprised 73%, or $3,669,000, of the total allowance for loan losses at December 31, 2003.
Although the Bank identified 27 commercial loan relationships for which this allowance
mostly consisted, the bulk of the allowance fell among only several large non-performing
relationships. Collateral values were prudently valued to provide a conservative and
realistic value of the collateral supporting these loans. As such, management increased
the amount of the allowance required to support them. The allocations to the other
categories of loans are adequate compared to the actual three-year historical net
charge-offs.



Non-performing assets


The Bank defines non-performing
assets as accruing loans past due 90 days or more, non-accrual loans, restructured loans,
other real estate owned and repossessed assets. As of December 31, 2003, non-performing
assets represented 1.52% of total assets compared to 1.47% at December 31, 2002.


The following table sets forth
non-performing assets at December 31 (dollars in thousands):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    | 2003 | 2002 | 2001 | 2000    | 1999
|--------------------------------------------------- | ---- | ---- | ---- | ------- | ----
|                                                   
|Net loans, including loans available-for-sale       |      |      | $    | 386,846 |     
|                                                   
|                                                   
|Loans past due 90 days or more and accruing         |      |      | $    | 958     |     
|Non-accrual loans                                   |      |      |      | 7,323   |     
|Total non-performing loans                          |      |      |      | 8,281   |     
|Restructured loans                                  |      |      |      | --      |     
|Other real estate owned                             |      |      |      | 394     |     
|Repossessed assets                                  |      |      |      | 73      |     
|Total non-performing assets                         |      |      | $    | 8,748   |     
|Total non-performing assets                         |      |      |      |         |     
|Non-accrual loans to net loans                      |      |      |      | 1.89    | %   
|Non-performing assets to net loans, foreclosed real |      |     
|estate and repossessed assets                       |      |      |      | 2.26    | %   
|Non-performing assets to total assets               |      |      |      | 1.52    | %   
|Non-performing loans to net loans                   |      |      |      | 2.14    | %   

|
|

|In the internal review of loans for
both delinquency and collateral sufficiency, management concluded that there were an above
average number of loans that lacked the ability to repay in accordance with contractual
terms. The decision to place loans or leases on a non-accrual status is made on an
individual basis after considering factors pertaining to each specific loan.


The majority of non-performing loans
and loans past due 90 days or more for the period is attributed to commercial business
loans, indirect auto lending and real estate loans in the process of foreclosure. Several
of the commercial loans are guaranteed by governmental agencies and the Banks loss
exposure is reduced accordingly. As a result, the percentage of non-performing loans to
net loans has increased from 1.72% at December 31, 2002, to 2.14% at December 31, 2003.


In 2003, Management recognized a
number of impaired loans, primarily in the commercial and commercial real estate
portfolios. As a result, non-performing loans increased 25% to $8,281,000. The increase
was the cumulative result of an ongoing detailed loan review process that began two years
ago. Management continues to add experienced staff and has emphasized improved credit
quality in all lending decisions going forward. As a result of this review, management
increased its allowance for loan losses during 2003. Improved collection efforts combined
with solid credit underwriting should curtail serious delinquencies and reduce future
non-performing loans.


Repossessed assets consist of
previously financed vehicles held for sale. Subsequent to the loan or lease, the borrower
or lessee defaulted on their contract and the Company repossessed the unit. Repossessed
assets are sold through either a private or public sale and any deficiency balance from
the sale of the asset is charged to the allowance for loan losses.


Payments received on non-accrual
loans are recognized on a cash basis. Payments are first applied against the outstanding
principal balance until the balance is satisfied. Subsequent payments are then recorded as
interest income and finally late charges. During 2003, the Bank collected $574,000 of
interest income recognized on the cash basis. Interest income that would have been
recorded in 2003, if non-accrual loans were current, was $995,000.



Bank premises and
equipment, net


Due to the fact that expansion plans
were deferred and a major computer system conversion was completed in 2002, additions to
premises and equipment were minimal and amounted to $621,000 for 2003.



Foreclosed assets held
for sale


Real estate acquired through
foreclosure increased $132,000, due to the receipt of five properties foreclosed during
the fourth quarter and held for sale at year end. Repossessed vehicles had a net decrease
of $102,000, mostly from the increased turn around time on the sales of these vehicles.



Terminated lease assets
held for sale


Terminated lease assets are vehicles
that were lease financed by the Company with contractual terms fulfilled. As per the lease
agreement, the vehicles are returned to the Company and recorded on the books in other
assets at the residual value. These vehicles are subsequently sold as soon as practicable.
Any difference between sales price and residual value is charged against current earnings
with a claim submitted to the Companys residual insurance carrier for payment.
Receipt of any residual insurance proceeds is then credited to current earnings.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Cash surrender value of
bank owned life insurance


During February 2003, the Bank
purchased $7,000,000 of bank owned life insurance (BOLI) for a chosen group of employees,
namely its officers, where the Bank is the owner and beneficiary of the policies. The
Banks excess liquidity from investment and loan pay downs funded the BOLI. The
earnings from the BOLI are recognized as other income. The BOLI is profitable from the
appreciation of the cash surrender values of the pool of insurance, and its tax-free
advantage to the Bank. This profitability is used to offset a portion of current and
future employee benefit costs. The BOLI is an asset that can be liquidated, if necessary,
with tax costs associated. However, the Bank intends to hold this pool of insurance,
because it provides income that enhances the Banks capital position. Therefore, the
Bank has not provided for deferred income taxes on the earnings from the increase in cash
surrender value.



Results of Operations



Earnings Summary:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              | 2003 | 2002 | 2001
|----------------------------- | ---- | ---- | ----
|Net income                    |      |      | $   
|Diluted earnings per share    |      |      | $   
|Increase/(decrease) per share |      |      |     

|
|

|Net Interest Income


The following table sets forth a
comparison of average balances of assets and liabilities and their related net tax
equivalent yields and costs for 2003, 2002 and 2001, in thousands, is as follows (Dollars
in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Earning assets                        | Averagebalance | 2003Revenue(expense) | Yeild(cost) | Averagebalance | 2002Revenue(expense) | Yeild(cost) | Averagebalance | 2003Revenue(expense) | Yeild(cost)
|------------------------------------- | -------------- | -------------------- | ----------- | -------------- | -------------------- | ----------- | -------------- | -------------------- | -----------
|Interest-bearing deposits             |                |                      | $           | 761            |                      |             | $6             |                      |            
|                                     
|Investments:                          |                |                     
|U.S. government agencies              |                |                      |             | 26,550         |                      |             | 1,035          |                      |            
|Mortgage-backed securities            |                |                      |             | 99,050         |                      |             | 3,451          |                      |            
|State and municipal                   |                |                      |             | 10,953         |                      |             | 716            |                      |            
|Other                                 |                |                      |             | 8,206          |                      |             | 241            |                      |            
|Total investments                     |                |                      |             | 144,759        |                      |             | 5,443          |                      |            
|                                     
|Loans:                                |                |                     
|Commercial                            |                |                      |             | 212,351        |                      |             | 11,813         |                      |            
|Consumer                              |                |                      |             | 51,836         |                      |             | 3,879          |                      |            
|Real estate                           |                |                      |             | 117,939        |                      |             | 7,386          |                      |            
|Direct financing leases               |                |                      |             | 4,546          |                      |             | 319            |                      |            
|Credit cards                          |                |                      |             | 427            |                      |             | 43             |                      |            
|Total loans                           |                |                      |             | 387,099        |                      |             | 23,440         |                      |            
|Federal funds sold                    |                |                      |             | 3,919          |                      |             | 46             |                      |            
|Total earning assets                  |                |                      | $           | 536,538        |                      | $           | 28,935         |                      |            
|                                     
|Interest-bearing liabilities          |                |                     
|Deposits:                             |                |                     
|Savings                               |                |                      |             | $40,439        |                      |             | $(255          | )                    |            
|NOW                                   |                |                      |             | 39,949         |                      |             | (173           | )                    |            
|MMDA                                  |                |                      |             | 18,584         |                      |             | (243           | )                    |            
|Time deposits < $100,000              |                |                      |             | 117,852        |                      |             | (4,602         | )                    |            
|Time deposits > $100,000              |                |                      |             | 132,630        |                      |             | (4,732         | )                    |            
|Clubs                                 |                |                      |             | 1,727          |                      |             | (26            | )                    |            
|Total deposits                        |                |                      |             | 351,181        |                      |             | (10,031        | )                    |            
|                                     
|Repurchase agreements                 |                |                      |             | 41,355         |                      |             | (503           | )                    |            
|                                     
|Borrowed funds                        |                |                      |             | 69,471         |                      |             | (3,703         | )                    |            
|Total interest-bearing liabilities    |                |                      | $           | 462,007        |                      | $           | (14,237        | )                    |            
|Net interest income                   |                |                      |             |                |                      |             |                |                      |            
|Net interest spread                   |                |                      |             |                |                      |             |                |                      |            
|Net interest margin                   |                |                      |             |                |                      |             |                |                      |            
|Total average assets                  |                |                      | $           | 571,429        |                      |             |                |                      |            
|Average non-interest bearing deposits |                |                      | $           | 60,985         |                      |             |                |                      |            

|In the above table, interest income
was adjusted to a tax-equivalent basis to recognize the income from tax-exempt assets as
if the interest was taxable. This treatment allows a uniform comparison to be made between
yields on assets. The calculations were computed on a fully tax-equivalent basis using the
corporate federal tax rate of 34%.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Non-accrual loans and any related
interest recorded have been included in computing the average rate earned on the loan
portfolio. Installment loans and direct financing leases are presented net of unearned
interest. All deposits are in domestic bank offices. The average balances are based on
amortized cost and do not reflect unrealized gains or losses.


Net interest spread denotes the
calculation of the yield on earning assets less the rate of interest-bearing liabilities.
Net interest margin represents the difference between interest income and interest expense
divided by total average earning assets.


The following table reflects the
change in net interest income attributable to fluctuations in volume and rate:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Years ended December 31,( in thousands )
|------------------------------------ | ----------------------------------------
|
|
|Interest income:                     |                                         
|Loans and leases:                    |                                         
|Mortgage                             |                                         
|Commercial                           |                                         
|Consumer                             |                                         
|Total loans and leases               |                                         
|Investment securities, interest-     |                                         
|bearing deposits and federal         |                                         
|funds sold                           |                                         
|Total interest income                |                                         
|Interest expense:                    |                                         
|Deposits:                            |                                         
|Certificates of deposit greater than |                                         
|$100,000                             |                                         
|Other                                |                                         
|Total deposits                       |                                         
|Other interest-bearing liabilities   |                                         
|Total interest expense               |                                         
|Net interest income                  |                                         

|The portion of the total difference
attributable to both volume and rate changes during the periods has been allocated to the
volume and rate components based upon the absolute dollar amount of the change in each
component prior to the allocation. Tax-exempt income was not converted to a tax-equivalent
basis on the rate volume analysis.


The Federal Reserve Bank lowered the
discount rate once in 2003. The discount rate is the rate at which the Federal Reserve
Bank lends overnight funds to banks. In response to these actions, national prime dropped
25 basis points from 4.25% to 4.00%.


There is a 55 basis point
differential between the weighted-average of national prime in 2003 compared to 2002. The
weighted-average of national prime in 2003 and 2002 was 4.12% and 4.67%, respectively.
This difference reflects the reduction of total interest income and corresponding yield on
earning assets, when comparing both years.


As market rates remained at low
levels throughout 2003, along with the reduction of prime, loan originations and renewing
commercial loans and lines of credit priced substantially below the portfolio yields of
2002. Treasury yields and the mortgage refinance waves also adversely impacted the
investment portfolio, driving yields downward throughout 2003. The existing MBS, mortgage
and consumer home equity installment loan portfolios each experienced significant payoffs
caused from the number of mortgage refinance waves experienced throughout 2003. Besides
the natural reduction of interest income from repricing, the significant prepayments of
MBS led to the required recognition of a $1,167,000 net increase in amortization of
premium held on these bonds over 2002. The low interest rate environment resulting from
current economic conditions had a negative affect on earning assets, causing total
interest income to decrease 17.66%, from $34,567,000 in 2002 to $28,462,000 in 2003 and
further caused the tax-equivalent yield on earning assets to decrease 96 basis points.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Interest expense decreased 20.38%,
from $17,882,000 in 2002 to $14,237,000 in 2003. The cost of interest paying liabilities
decreased 64 basis points in 2003. Rates paid on deposit products were reduced to market
deposit rates throughout 2003. However, certain contractual based deposit products and
borrowings, which must reach maturity to re-price, continue to pay at above market rates.
The inability to reduce interest expense on these products prevented the Bank from fully
mitigating the reduced interest income for the year to maintain our margin. The low cost
overnight funding needs and the addition of the $9,000,000 FHLB borrowings during the
fourth quarter helped to reduce the average cost of these long-term funds 29 basis points,
which somewhat eased the negative impact on net interest income.


As an overall result, net interest
income decreased $2,460,000, or 14.75%, from $16,685,000 in 2002 to $14,225,000 in 2003.
The net interest margin, on a tax-equivalent basis, declined 36 basis points, from 3.10%
in 2002 to 2.74% in 2003.



Provision for Loan Losses


The provision for loan losses
represents the necessary amount charged to operations with the purpose of increasing the
allowance for loan losses to a level that represents managements best estimate of
known and inherent losses in the Banks loan portfolio. As such, loans and leases
determined to be uncollectible are charged-off against the allowance for loan loss.


The required amount of the provision
for loan losses based upon the adequate level of the allowance for loan losses is subject
to ongoing analysis of the loan portfolio. The Bank maintains a Special Asset Committee
which meets periodically to review problem loans and leases. The committee is comprised of
Bank management, including the credit administration officer, loan workout officer, and
collection personnel. The committee reports quarterly to the Credit Administration
Committee of the Board of Directors.


Management continuously reviews the
risks inherent in the loan and lease portfolio. Specific factors used to evaluate the
adequacy of the loan loss provision during the formal process include:

Specific loans that could have loss potential
Levels of and trends in delinquencies and non-accrual loans
Levels of and trends in charge-offs and recoveries
Trends in volume and terms of loans
Changes in risk selection and underwriting standards
Changes in lending policies, procedures and practices
Experience, ability and depth of lending management
National and local economic trends and conditions
Changes in credit concentrations
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The provision for loan losses was
$3,715,000, for the year ended December 31, 2003, compared to $1,664,000 in 2002.
Non-performing loans, which consist of loans past due 90 days or more and non-accrual
loans, were $8,281,000 at December 31, 2003, compared to $6,599,000, at December 31, 2002.
Of this amount, non-accrual loans increased $3,323,000 in 2003. The increase in
non-accrual loans was primarily due to the addition of three large commercial
relationships during the fourth quarter. The amount provided for loan losses, for the year
ended December 31, 2003, was driven by increasing the allowance for loan losses to match
the risk profile inherent to the loan portfolio and, to a lesser extent, an increase in
loan volume.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|Other Income


Other income consists primarily of
service charges and other deposit account related fees, fees from trust, asset management
and other financial services, increase in cash surrender value of bank owned life
insurance and realized gains and losses on the sale of investments securities
available-for-sale, loans, leased assets and foreclosed assets, held for sale.


For the year ended December 31, 2003,
other income was $4,183,000 or $880,000 more than the $3,303,000 recorded in 2002. Of this
increase, $360,000 pertained to service charge activities related to deposit accounts,
which has grown considerably during 2003 from the focused management of these services and
addition of our Courtesy Coverage service. The Bank recorded income of $294,000 on the
increase in the cash surrender value of bank owned life insurance policy, which is a new
addition of tax-free earnings for 2003. In addition, the Bank recognized gains, during
2003, on the sales of AFS investments and loans held-for-sale in the amounts of $329,000
and $548,000, respectively. This compares favorably to $59,000 and $378,000, respectively,
recognized in 2002. Trust and financial services income was approximately $86,000 higher
in 2003 due to stepped-up efforts to service all of the financial needs of our customers.


Items further impacting other income
included the recorded losses on sales of full-term leased assets and foreclosed assets
held-for-sale in the amounts of $409,000 and $12,000, respectively for the twelve months
ended December 31, 2003. This compares to losses in 2002 of $48,000 and $3,000,
respectively. Also negatively impacting other income was the high amount of amortization
of mortgage servicing rights, which for the twelve months ended December 31, 2003, was
$174,000 more than 2002 amortization. This increase was due to the near record
low-interest rate environment, which, in turn, resulted in a high volume of mortgage
prepayments and re-financing in 2003 and a decrease in the Banks loan servicing
portfolio.



Other Expense


For the twelve months ended December
31, 2003, other operating expenses were $12,903,000 or $152,000 more than the $12,751,000
recorded in the same period of 2002. Premises and equipment related expenses increased
approximately $372,000 in 2003 compared to 2002. Of this increase, deprecation expense
increased $195,000. The increase in depreciation expense can be primarily attributed to:
the Eynon branch, which opened during the third quarter of 2002; and the Banks new
core processing system which was installed during the fourth quarter of 2002. Advertising
expenses were approximately $61,000 or 15% lower for the twelve months ended December 31,
2003 compared to the same 2002 period. The decrease is due to a strategic approach to
reduce expenses by targeting lower costing advertising methods for the Banks branch
system.


Salaries and Employee Benefits was
$30,000 lower for the twelve months ended December 31, 2003 compared to the same period in
2002. Inflationary increases on salaries and therefore, the increased payroll related
taxes were more than offset by reductions in employee benefit costs resulting from health
care and profit-sharing cuts. Due to the continued escalating cost of health insurance,
during 2003, the Bank increased the employees co-pay portion of that cost. In
addition, the Banks financial performance in 2003 caused the contribution to the
profit-sharing plan to decrease 32%, from $130,000 in 2002 to $89,000 in 2003. The
Banks contribution to the profit-sharing plan continued, in order to reward
employees for work accomplished.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Components of other operating expense
also include professional fees, office supplies, printing, communications and data
processing. For the twelve months ended December 31, 2003, the Bank recorded legal and
audit fees in the amount of $617,000 or 174% more than the $225,000 recorded for the
twelve months ended December 31, 2002. The Company incurred significant legal expenses to
aggressively defend a law suit filed against the Bank, which was settled in October 2003.
In the fourth quarter of 2003, the Bank utilized a national independent accounting firm to
consult with Management on the review, documentation and reporting on the Companys
system of internal controls, to achieve full compliance with current FDICIA and SEC
regulations. In addition, the Audit Committee decided to outsource the internal auditing
function to a local certified public accounting firm. The outsourcing was required to
complete the thirty-six internal audit reports necessary to also meet the FDICIA
regulations. The outsourcing arrangement will continue to maximize the effectiveness of
the internal auditing process, both on a quarterly interim and annual basis.


The ratio of non-interest expense to
average assets at December 31, 2003 and 2002 was 1.68% for both years. This ratio
continues to perform favorably against peer comparison groups, which supports
Managements commitment to maintain and reasonably control overhead expenses.


Provision for income taxes


Income before provision for income
taxes in 2003 decreased $3,783,000 from 2002. The effective federal income tax rate was
8.19% and 27.39% for the years ending December 31, 2003 and 2002, respectively. The
effective tax rate decrease is contributed to an increased portion of combined tax-free
interest income from municipal securities, tax-free loans and tax-free earnings from the
Bank Owned Life Insurance representing a larger percentage of pre-tax earnings.
Non-taxable income as a percentage of income before taxes increased from 18.90% in 2002,
to 67.72% in 2003.



Comparison of Financial
Condition as of December 31, 2002 and 2001 and Results of Operations for each of the
Years then Ended



Deposits


Due to the prevailing economic
conditions in 2002, many investors moved monies from mutual funds into insured financial
institutions. The Bank experienced growth in non-interest bearing deposits and short-term
interest-bearing accounts. As interest rates declined, these liquid accounts were
preferred over fixed-rate certificates of deposit (CDs). The liquidity aspect of these
accounts allows depositors to transfer funds into fixed-term CDs, when interest rates
begin to rise.


Part of the non-interest bearing
deposits (DDA) growth was attributed to recent branch expansion. For example, DDA balances
at the new Kingston and Peckville offices had a combined $3,900,000 at December 31, 2002,
compared to $2,452,000 at December 31, 2001. DDA balances at the Eynon office, which
opened in July 2002, were $82,000 at December 31, 2002.


Non-personal and Public Fund DDA
balances grew $2,423,000 or 9.15% during 2002. Increased commercial lending relationships
contributed to the growth in commercial deposits, as also did the successful marketing of
commercial deposit products.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Although personal CDs increased
$14,913,000 during 2002, an overall slight decline in interest-bearing deposits was caused
by a large reduction in Public Fund CDs towards year end and withdrawals of non-personal
deposits in the second half of 2002.


While much of the decline in Public
Fund CDs was necessitated by cash requirements of the public entities, approximately
$8,481,000 was transferred into money market accounts for liquidity purposes. The transfer
of Public funds into money market accounts comprises 81.95% of the growth in this product.
The Bank anticipates that it will recapture much of the overall decrease in Public Fund
deposits during 2003.



Short-term borrowings


Interest rate reductions and customer
liquidity needs caused repurchase agreements (Repos) to decrease from $54,258,000 at
December 31, 2001, to $47,232,000 at December 31, 2002. Repos are non-insured
interest-bearing liabilities that have a security interest in qualified pledged investment
securities of the Bank. Repos offered are either a fixed term or a sweep product of the
Bank.


Funding requirements of the Bank
necessitated $2,850,000 overnight borrowings from the Federal Home Loan Bank of
Pittsburgh, (FHLB), at December 31, 2002. There were no borrowings at December 31, 2001.



Long-term debt


Long-term debt consists of borrowings
from the FHLB. The weighted-average rate on funds borrowed at December 31, 2002, was
5.59%. The weighted-average rate is 76 basis points below the tax-equivalent yield of
6.35% on average earning assets for the year ending December 31, 2002.


At December 31, 2002, the Bank had
the ability to borrow an additional $62,375,000 at the FHLB. The FHLB has short, medium
and long-term funding products available to the Bank. Most lines of credit extended to
banks by other lenders are short-term.



Accrued expenses and
other liabilities


Rate reductions in interest-bearing
deposits and short-term borrowings caused accrued interest payable to decrease from
$2,757,000 at December 31, 2001, to $1,707,000 at December 31, 2002.


A $746,000 non-interest bearing
liability for the pending settlement of investment securities purchased was recorded at
December 31, 2002. The Bank did not have any pending investment purchases at December 31,
2001.



Assets:



Investments


Discounting $3,829,000 appreciation
in the market value of available-for-sale (AFS) investments, total investments decreased
$8,254,000, during 2002.


With the fall in market rates, United
States government agency, state and municipal securities of $90,600,000 were called during
2002. No losses were incurred on any of the called bonds.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The market environment also caused
many borrowers to prepay or refinance home mortgages. In terms of investments, this
contributed to a major reduction in mortgage-backed securities (MBS). Prepayments on MBS
were $18,229,000 in 2002, compared to $2,820,000 in 2001.


Market conditions necessitated a
restructuring of the investment portfolio to protect earnings which were being adversely
impacted by bond calls and adjustable rate MBS. To accomplish the restructuring, the Bank
sold AFS investments having a net book value of $37,193,000. There were no sales of
investments categorized as held-tomaturity in 2002.


Proceeds from the called bonds and
MBS prepayments were reinvested primarily in fixed rate MBS. The MBS purchased provide a
monthly cash flow which can be reinvested into potentially higher yielding assets. This
will become beneficial when market rates begin to increase. The particular bonds purchased
had yields in excess of comparable Treasury securities and the current rates being paid on
federal funds sold.


After careful consideration of the
characteristics of the individual securities and their potential reaction to market
changes, $9,058,000 of purchased bonds were classified as held-to-maturity and
$128,932,000, were classified as AFS.


The tax equivalent yield on debt
securities by stated maturity date at December 31, 2002, was as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | 1 yearor less | 1 through5 years | 5 through10 years | More than10 years | Total
|------------------------------ | ------------- | ---------------- | ----------------- | ----------------- | -----
|U.S. Government Agencies       |               | 4                | .50%              | 4                 | .10% 
|Mortgaged Backed Securities    |               | -                |                   | -                 |      
|State & Municipal Subdivisions |               | 7                | .41               | 7                 | .57  
|Preferred Term Securities      |               | -                |                   | -                 |      
|Total debt securities          |               | 5                | .39%              | 4                 | .32% 

|Loans


Loans, net of unearned income,
increased $444,000 or 0.12% from $357,718,000 at December 31, 2001, to $358,162,000 at
December 31, 2002. Gross loans represent 61.97% of total assets at December 31, 2002.


Commercial loans increased
$23,930,000 or 13.37% during 2002. This increase in commercial loans was primarily due to
increased lending within the small business community.


Tax-free industrial development loans
decreased to $8,401,000 at December 31, 2002. Large payoffs at the end of the year
contributed to the decline.


Real estate and construction loan
totals of $92,245,000 were 23.84% of gross loans at December 31, 2002.


Included with real estate loans are
home equity lines of credit. The outstanding balance on the credit lines increased
$1,384,000 or 23.33% from $5,931,000 at December 31, 2001, to $7,315,000 at December 31,
2002.


Consumer loans and direct-financing
leases decreased $14,181,000 or 18.24% during 2002. A combination of prepayments, the
reclassification of credit card receivables to loans available for sale, tightened credit
underwriting standards on indirect auto loans and the decision to not aggressively seek
leases brought about this decline.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The following table sets forth the
maturity distribution of the loan portfolio at December 31, 2002. Excluded from the table
are non-construction real estate loans, consumer loans and direct financing leases
(amounts in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | 1 yearor less | 1 - 5years | More than5 years | Total  
|------------------------ | ------------- | ---------- | ---------------- | -------
|Commercial loans         |               | $28,904    |                  | $35,581
|Real estate construction |               | 6,797      |                  | -      
|Total                    |               | $35,701    |                  | $35,581

|The following table sets forth the
sensitivity changes in interest rates for commercial and real estate construction loans at
December 31, 2002 (amounts in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                       | 1 - 5years | More than5 years | Total
|---------------------- | ---------- | ---------------- | -----
|Fixed interest rate    |            | $12,611          |      
|Variable interest rate |            | 22,970           |      
|Total                  |            | $35,581          |      

|Loans available-for sale


The Bank increased loans
available-for-sale by $12,565,000 or 77.80% to $28,715,000 at December 31, 2002 from
concern of potential interest-rate risk due to the falling rate environment experienced in
2002.


At December 31, 2002, AFS loans
included $2,872,000 of credit card receivables. During the fourth quarter of 2002, the
Company entered into a credit card receivable sale agreement. The decision was based upon
the system in place which was not adequate to properly service the clientele, there was a
high level of overhead related to credit card activities, a lack of consistent growth in
the portfolio and a high loss experience on non-performing credit cards. This portfolio
was sold in 2003.


Servicing rights on sold loans were
retained by the Bank. Servicing rights are retained so that the borrower can still deal
directly with the Bank. The loans were sold to provide the Bank with liquidity necessary
to meet loan demand and to mitigate potential interest-rate risk from potential market
rate increases. At December 31, 2002, the outstanding balance of sold residential mortgage
loans in which the Bank retained servicing rights was $56,986,000.



Bank premises and
equipment, net


Additions to premises and equipment
were $2,542,000 before depreciation of $1,068,000 in 2002.


A new core processing system was
installed during the fourth quarter of 2002. Additions for the system, including hardware,
software, licensing and installation were $1,232,000. The projected cost of the system was
$1,300,000. Capitalized expenditures will be depreciated over their estimated useful lives
using the straight-line method.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Additions for the new branch at Eynon
were $746,000 for leasehold improvements and $133,000 for furniture and fixtures. Capital
expenditures for Eynon, excluding equipment, were originally projected at $250,000.
Capitalized expenditures will be depreciated over their estimated useful lives.


During 2002, the Bank determined that
a new branch would not be established at the property owned in Clarks Green, Pennsylvania
and the property was sold. The property had a net book value of $217,000, at the time of
sale.


Other equipment having a net book
value of $36,000 was disposed of in 2002. The majority of the equipment was made obsolete
by the new core processing system.


A net loss of $44,000 was incurred
from the disposition of the property and equipment.



Foreclosed assets held
for sale


Real estate acquired through
foreclosure decreased $203,000 due to the net disposal of properties. Repossessed vehicles
had a net decrease of $48,000 from the sale of the vehicles at auction.



Results of Operations



Net Interest Income


The Federal Reserve Bank lowered the
discount rate once in 2002. The discount rate is the rate at which the Federal Reserve
Bank lends overnight funds to banks. In response to these actions, national prime dropped
50 basis points from 4.75% to 4.25%.


There was a 223 basis point
differential between the weighted average of national prime in 2002 and 2001. The weighted
average of national prime in 2002 and 2001 was 4.67% and 6.90%, respectively. This
difference reflects on the yield on earning assets and the cost of funds when comparing
both years.


The actions of the Federal Reserve
Bank caused decreases in the rates charged on loans that were subject to repricing and on
the rates offered on new loans in 2002. Approximately 20% of the entire loan portfolio was
subject to immediate repricing at December 31, 2002. Rates charged on new loans paralleled
the reductions in prime. Sales of older loans, to mitigate prepayments, contributed to the
decline in the overall yield on loans.


Market reaction to the drop in prime
significantly increased the amount of bonds called during 2002. To properly collateralize
public fund deposits and Repos, the Bank had to replace the called bonds with bonds
producing a lower yield.


Excess funds from asset turnover and
the increase of liabilities were sold daily. The rates on these Fed funds sold
were at historic lows.


Due to the combination of these
factors, the tax equivalent yield on earning assets decreased 90 basis points.


Interest expense was also affected by
the decline in market rates. There were deposit rate promotions at the new Eynon branch to
develop deposit growth. However, these promotions had a minimal effect on the overall
reduction of interest expense.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The effect of market changes caused a
100 basis point decrease in the cost of funds throughout 2002.


With the 10 basis point increase in
the tax-equivalent net interest spread and volume increases in loans and investments, net
interest income rose $1,159,000 or 7.46% during 2002.



Other Income


The $79,000 increase in service
charges on deposit accounts is a result of the growth in the number of accounts and
changes to the service charge structure. Service charges were revised during the first
quarter of 2002. Service charges on deposit accounts exceeded 1.00% of gross income.


Investment securities were sold as
part of a restructuring of the bond portfolio. Restructuring the portfolio was
necessitated by the change in market rates. Many of the bonds sold were small, adjustable
rate MBS with volatile cash flows. The proceeds from the sales were reinvested in stable,
fixed rate MBS. Other sales were transacted in anticipation of bonds being called. Waiting
for a bond to be called under the prevailing market conditions would have exposed the Bank
to reinvesting the proceeds at lower yields.


The number of sale transactions was
more than the previous year but the net gain was less. The difference in the composition
of the portfolio, relative to market rates and potential calls, in both years, affected
the outcome of sales activity.


There were no sales of investments
classified as held-to-maturity.


Loan sales were also based upon the
need to protect future earnings from interest-rate risk caused by prepayments. Loan sales
generated net gains of $378,000 in 2002. That amount was increased by the recognition of
the discounted future value of servicing rights on sold loans. The amount of realized
income from servicing rights, included in total net gains from the sale of loans, was
$228,000.


There were no sales of loans
classified as held-to-maturity.


Improvements in loan delinquencies
and modest loan growth were responsible for a $216,000 reduction in late charges on loans
in 2002. Late charges are recorded as income when collected.


Increases in mortgage loan
prepayments necessitated an acceleration of the amortization of mortgage servicing rights.
Mortgage servicing rights amortization increased from $42,000 in 2001 to $133,000 in 2002.


Disposition of equipment made
obsolete by the new core processing system and losses on terminated leases and the sale of
the Clarks Green properties caused the Bank to record a loss on disposed assets of
$48,000.


During 2001, the Bank sold servicing
of the merchant credit card program. By doing this, the Bank reduced its exposure on these
transactions and reduced expense. The Bank receives a monthly commission based on
transactions. The commission is less than the income the Bank would have recognized if
servicing was retained. As a result, gross revenues from merchant credit card processing
decreased $106,000. The decrease in income was offset by a reduction in expense as
detailed in the discussion of other expense, contained herein.


Service charges on loans,
amortization of mortgage servicing rights, gains/(losses) on disposed assets and gross
merchant credit card processing revenue are components of fees and other service charges.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Some components of fees and other
service charges and other operating income and their related increase during 2002:
|--------------------------------------------------------------------------------------------------------------------

|                           | Increase
|-------------------------- | --------
|Financial services revenue |         
|ATM service charges        |         
|Trust income               |         
|                           |         

|Financial services revenue is
generated by the sale of mutual funds and annuities, which are not insured by the FDIC.


New ATM locations and a change in
service charges generated additional service charge income.



Other Expense


The average number of full-time
equivalent employees was 175 in 2002, up from 168 in 2001. Merit pay raises, higher
benefit costs and the addition of personnel to address the growing needs of the Bank
increased 2002 salaries and employee benefits by $572,000 above the amount reported for
2001.


During 2002, the Kingston office,
which opened in April 2001, was operating for a full twelve months. The Eynon office was
opened for six months. The impact of these branches contributed to a $104,000 increase in
premises and equipment expense during 2002. Over 31% of the $104,000 increase resulted
from a $33,000 rise in depreciation expense. Also, expenses of $50,000 were incurred
during 2002 for contamination cleanup while constructing the Eynon Branch.


Overall, total depreciation expense
decreased $33,000 during 2002, due to the retirement of fixed assets. Depreciation on
premises and leasehold improvements was $342,000 and depreciation on furniture and
fixtures was $726,000. Furniture and fixture depreciation exceeded 1% of gross income.


With the addition of the Kingston and
Eynon branches, new branch advertising increased 3.00% in 2002.


Some components of other expense and
their change during 2002:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | Increase/(Decrease)
|------------------------- | -------------------
|Merchant card expense     |                    
|Donations                 |                    
|Stationery and supplies   |                    
|Legal                     |                    
|Correspondent banks       |                    
|MAC expense               |                    
|Professional services     |                    
|Miscellaneous charge offs |                    
|                          |                    

|During 2001, the Bank sold the
servicing of the merchant credit card portfolio. This resulted in savings of $116,000. A
more detailed explanation of the sale is included in the discussion of other income,
contained herein.


The additions of the new branches
contributed to the increase in stationery and supplies.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Defending the civil complaint
disclosed in Section 3 entitled, Legal Proceedings, contained herein, the
establishment of the Companys Employee Stock Purchase Plan along with the
Banks increased credit and collection legal efforts taken during the ordinary course
of business throughout 2002 caused the increase in legal fees.


Charges for the processing of the
Banks cash letter constitute the majority of the correspondent bank expense. Because
of historical increased processing expenses, the Bank elected to process its cash letter
through the Federal Reserve Bank of Philadelphia which resulted in reduced costs.


During 2002, an outside consulting
firm was engaged to help prepare a strategic plan for the Company. Other professional
costs were incurred regarding the opening of the Eynon branch.


A comprehensive review of all Bank
assets was performed in preparation for the installation of the core processing system. A
conclusion was reached that certain assets and overdrawn DDAs were uncollectible and
$64,000 was charged-off. Additional charges of $9,000 were incurred from IRS penalty
assessments.


The ratio of non-interest expense to
average assets at December 31, 2002 and 2001 was 1.68% for both years. These ratios are
below peer comparison groups.




Provision for income taxes


Income before provision for income
taxes in 2002 increased $818,000 over 2001. The effective federal income tax rate was
26.39% and 19.05% for the years ending December 31, 2002 and 2001, respectively. The
increase resulted from the continued decrease in tax-free interest income from municipal
securities and tax-free loans. Non-taxable income as a percentage of income before taxes
declined from 31.41% in 2001 to 18.90% in 2002.



Capital Resources


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


Capital is fundamental to support our
continued growth. In addition, the Company and Bank are subject to various regulatory
capital requirements. Regulatory capital is defined in terms of Tier 1 capital
(shareholders equity plus the allowable portion of the minority interest in equity
of subsidiaries, minus unrealized gains or plus unrealized losses on available for sale
securities, and minus certain intangible assets), Tier 2 capital (which includes a portion
of the allowance for loan losses, minority interest in equity of subsidiaries and
subordinated debt), and total capital (Tier 1 plus Tier 2). Risk-based capital ratios are
expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by
assigning various weights to all assets and off-balance sheet financial instruments, such
as letters of credit and loan commitments, based on associated risk. Regulators have also
adopted minimum Tier 1 leverage ratio standards, which measure the ratio of Tier 1 capital
to total average quarterly assets.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Quantitative measures established by
regulation to ensure capital adequacy require the Company to maintain minimum amounts and
ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to
average assets. Capital is evaluated in relation to total assets and the risk associated
with those assets. With greater capital resources, a bank is more likely to be able to
meet its cash obligations and absorb unforeseen losses. The Company exceeds all minimum
regulatory capital requirements (see Note 14 Regulatory Matters, contained
within the Notes to Consolidated Financial Statements, and incorporated herein by
reference).


The Companys major source of
capital has been from the retention of equity in undistributed earnings of subsidiary, as
reflected below:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     | NetIncome | DividendsDeclared | EarningsRetained
|---- | --------- | ----------------- | ----------------
|2003 |           | $1,643,248        |                 
|2002 |           | 4,046,173         |                 
|2001 |           | 3,848,136         |                 
|2000 |           | 3,182,628         |                 
|1999 |           | 3,797,693         |                 
|     |           |                   |                 

|Capital was further increased in 2003
through the Dividend Reinvestment Plan (DRIP). Shareholders reinvested $520,000 in
dividends to purchase additional shares of stock. In addition, through the Employee Stock
Purchase Plan and via the exercise of stock options through the Stock Incentive Plan,
capital increased by $43,000 and $30,000, respectively.


Capital was negatively impacted by
changes in market rates. The Banks investment strategy reacting to market changes
resulted in a $1,478,000 deterioration, net of deferred taxes, in the fair value of
investments classified as available-for-sale. At December 31, 2002, the Bank reported a
net unrealized gain on AFS securities of $1,265,000. At December 31, 2003, a net
unrealized loss of $213,000 was reported. Fluctuations in the capital markets cause
frequent changes in the fair value of available-for-sale securities. A future decline in
value should not indicate a material weakness in the capital position of the Company. The
Company monitors market conditions closely and is prepared to take remedial action when
appropriate


During the second quarter of 2003,
12,720 shares of common stock became available on the open market. The Company purchased
the stock for $458,000 with the intention to reissue the stock under the Dividend
Reinvestment and Employee Stock Purchase Plans. On the March 10, 2004 dividend payment
date, 3,494 of the remaining shares of treasury stock were reissued under the Dividend
Reinvestment Plan.



Liquidity


Liquidity management ensures that
adequate funds will be available to meet customers needs for borrowings, deposit
withdrawals and maturities and normal operating expenses of the Bank. Current sources of
liquidity are cash and cash equivalents, asset maturities and pay downs within one year,
loans and investments available-for-sale, growth of core deposits, growth of repurchase
agreements, increase of other borrowed funds from correspondent banks and issuance of
capital stock. Although regularly scheduled investment and loan payments are a dependable
source of daily funds, the sale of loans and investment securities available-for-sale,
deposit activity, and investment and loan prepayments are significantly influenced by
general economic conditions and the level of interest rates.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|At December 31, 2003, the Company
maintained $19,231,000 in cash and cash equivalents. In addition, the Company had
$19,864,000 of loans available-for-sale and $139,695,000 in investments
available-for-sale. This combined total of $178,790,000 represented 31.1% of total assets
at December 31, 2003. Management believes that the present level of liquidity is strong
and adequate for current operations.


The Company considers its primary
source of liquidity to be its core deposit base. This funding source has grown steadily
over the years and consists of deposits from customers throughout the branch network. The
Company will continue to promote the acquisition of deposits through its branch offices.
At December 31, 2003, approximately 68.8% of the Companys assets were funded by
deposits acquired within its market area. An additional 7.7% of the assets were funded by
the Companys equity. These two components provide a substantial and stable source of
funds.


As detailed in the statement of cash
flows incorporated by reference, total cash and cash equivalents had a net $6,988,000
decrease stemming from net cash used by investing activities due to the $7,000,000
purchase of life insurance policies, new loan growth and the net cash used in financing
activities funding the $16,629,000 decline in certificates of deposit of $100,000 or more.
This cash utilization was offset by the $3,544,000 and $8,876,000 increase in short-term
borrowings and long-term debt, respectively. Other sources providing cash were primarily
in the sale of loans available-for-sale, cash provided by operating activities, and growth
of non-interest-bearing and other interest-bearing deposits. Cash and cash equivalents on
hand and the net cash provided from operations throughout the year was mainly utilized to
fund the net decrease in interest-bearing deposits resulting from the time deposit run off
experienced.


At December 31, 2003, the Bank had
approximately $77.1 million in unused sources of borrowed funds available to meet
liquidity requirements. The sources were the approximated borrowing capacity at the
Federal Reserve Bank of Philadelphia of $8.3 million along with available funding at the
Federal Home Loan Bank of Pittsburgh of $68.8 million. The borrowing capacity at the
Federal Reserve Bank of Philadelphia is the discounted market value of investment
securities pledged as collateral at the date of borrowing.



Management of interest
rate risk and market risk analysis


The Company is subject to the
interest rate risks inherent in our lending, investing and financing activities.
Fluctuations of interest rates will impact interest income and interest expense along with
affecting market values of all interest-earning and interest-bearing liabilities, except
for those assets or liabilities with a short term remaining to maturity. Interest rate
risk management is an integral part of the Asset/Liability management process. The Company
has instituted certain procedures and policy guidelines to manage the interest rate risk
position. Those internal policies enable the Company to react to changes in market rates
to protect net interest income from significant fluctuations. The primary objective in
managing interest rate risk is to minimize the adverse impact of changes in interest rates
on net interest income along with creating an asset/liability structure that maximizes
earnings.


Asset/Liability Management.
One major objective of the Company when managing the rate sensitivity of its assets and
liabilities is to stabilize net interest income. The management of and authority to assume
interest rate risk is the responsibility of the Companys Asset/Liability Committee
(ALCO), which is comprised of senior management and Board members. ALCO meets quarterly to
monitor the ratio of interest sensitive assets to interest sensitive liabilities. The
process to review interest rate risk is a regular part of management of the Company.
Consistent policies and practices of measuring and reporting interest rate risk exposure,
particularly regarding the treatment of non-contractual assets and liabilities, are in
effect. In addition, there is an annual process to review the interest rate risk policy
with the Board of Directors which includes limits on the impact to earnings from shifts in
interest rates.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Interest Rate Risk
Measurement. Interest rate risk is monitored through the use of three complementary
measures: static gap analysis, earnings at risk simulation and economic value at risk
simulation. While each of the interest rate risk measurements has limitations, taken
together they represent a reasonably comprehensive view of the magnitude of interest rate
risk in the Company and the distribution of risk along the yield curve, the level of risk
through time, and the amount of exposure to changes in certain interest rate
relationships.


Static Gap. The ratio between
assets and liabilities repricing in specific time intervals is referred to as an interest
rate sensitivity gap. Interest rate sensitivity gaps can be managed to take advantage of
the slope of the yield curve as well as forecasted changes in the level of interest rate
changes.


To manage this interest rate
sensitivity gap position, an asset/liability model called cumulative gap analysis is used
to monitor the difference in the volume of the Companys interest sensitive assets
and liabilities that mature or reprice within given periods. A positive gap (asset
sensitive) indicates that more assets reprice during a given period compared to
liabilities, while a negative gap (liability sensitive) has the opposite effect. The
Company employs computerized net interest income simulation modeling to assist in
quantifying interest rate risk exposure. This process measures and quantifies the impact
on net interest income through varying interest rate changes and balance sheet
compositions. The use of this model assists the ALCO to gauge the effects of the interest
rate changes on interest sensitive assets and liabilities in order to determine what
impact these rate changes will have upon the net interest spread.


At December 31, 2003, the Bank
maintained a one year cumulative gap of negative $19.0 million or 3.3% of total assets.
The effect of this negative gap position provided a mismatch of assets and liabilities,
whereas more liabilities than assets are subject to reprice within one year, which might
expose the Bank to interest rate risk during a period of increasing interest rates.
Conversely, in a declining interest rate environment, net interest income could be
optimistically affected because more liabilities than assets will reprice during a given
period.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                              | Interest Sensitivity Gap at December 31, 2003
|--------------------------------------------- | ---------------------------------------------
|
|
|
|
|Cash and cash equivalents                     |                                              
|Investment securities(1)(2)                   |                                              
|Loans (2)                                     |                                              
|Fixed and other assets                        |                                              
|Total assets                                  |                                              
|Non interest-bearing transaction deposits (3) |                                              
|Interest-bearing transaction deposits (3)     |                                              
|Time deposits                                 |                                              
|Time deposits over $100,000                   |                                              
|Repurchase Agreements                         |                                              
|Short-term borrowings                         |                                              
|Long-term debt                                |                                              
|Other liabilities                             |                                              
|Total Liabilities                             |                                              
|Interest sensitivity gap                      |                                              
|Cumulative gap                                |                                              
|Cumulative gap to total assets                |                                              
|                                              |                                              

|(1)      Includes net unrealized gains/losses on available-for-sale securities.
(2)      Investments  and loans are included in the earlier of the period in which  interest rates were next scheduled to adjust or the
         period in which they are due.  In  addition,  loans were  included  in the  periods in which they are  scheduled  to be repaid
         based on scheduled  amortization.  For amortizing loans and  mortgage-backed  securities,  annual prepayment rates are assumed
         reflecting historical experience as well as management's knowledge and experience of its loan products.
(3)      The Bank's  demand and savings  accounts were  generally  subject to immediate  withdrawal.  However,  management  considers a
         certain amount of such accounts to be core accounts having  significantly  longer effective  maturities based on the retention
         experiences of such deposits in changing interest rate environments.  The effective  maturities  presented are the recommended
         maturity distribution limits for non-maturing deposits based on historical deposit studies.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|Certain shortcomings are inherent in
the method of analysis presented in the above table. Although certain assets and
liabilities may have similar maturities or periods of repricing, they may react in
different degrees to changes in market interest rates. The interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind changes in
market interest rates. Certain assets, such as adjustable-rate mortgages, have features
which restrict changes in interest rates on a short-term basis and over the life of the
asset. In the event of a change in interest rates, prepayment and early withdrawal levels
may deviate significantly from those assumed in calculating the table. The ability of many
borrowers to service their adjustable-rate debt may decrease in the event of an interest
rate increase.


Earnings at Risk and Economic Value
at Risk Simulations. The Company recognizes that more sophisticated tools exist for
measuring the interest rate risk in the balance sheet beyond static repricing gap
analysis. Although it will continue to measure its repricing gap position, the Company
utilizes additional modeling for identifying and measuring the interest rate risk in the
overall balance sheet. The ALCO is responsible for focusing on earnings at
risk and economic value at risk, and how both relate to the risk-based
capital position when analyzing the interest rate risk.


Earnings at Risk. Earnings at risk
simulation measures the change in net interest income and net income should interest rates
rise and fall. The simulation recognizes that not all assets and liabilities reprice one
for one with market rates (e.g., savings rate). The ALCO looks at earnings at
risk to determine income changes from a base case scenario under an increase and
decrease of 200 basis points in interest rates simulation model.


Economic Value at Risk. Earnings at
risk simulation measures the short-term risk in the balance sheet. Economic value (or
portfolio equity) at risk measures the long-term risk by finding the net present value of
the future cash flows from the Companys existing assets and liabilities. The ALCO
examines this ratio quarterly utilizing an increase and decrease of 200 basis points in
interest rates simulation model. The ALCO recognizes that, in some instances, this ratio
may contradict the earnings at risk ratio.


The following table illustrates the
simulated impact of 200 basis points upward or downward movement in interest rates on net
interest income, net income, and the change in economic value (portfolio equity). This
analysis assumed that interest-earning asset and interest-bearing liability levels at
December 31, 2003 remained constant. The impact of the rate movements was developed by
simulating the effect of rates changing over a twelve-month period from the December 31,
2003 levels.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | Rates +200 | Rates -200
|---------------------------- | ---------- | ----------
|Earnings at risk:            |            |           
|Percent change in:           |           
|Net Interest Income          |            | 2         
|Net Income                   |            | 7         
|                            
|Economic value at risk:      |           
|Percent change in:           |           
|Economic value of equity     |            | (28       
|                            
|Economic value of equity     |           
|as a percent of total assets |            | (2        
|                             |           

|
|

|Economic value has the most meaning
when viewed within the context of risk-based capital. Therefore, the economic value may
normally change beyond the Companys policy guideline for a short period of time as
long as the risk-based capital ratio (after adjusting for the excess equity exposure) is
greater than 10%. At December 31, 2003, the Companys risk-based capital ration was
12.9%.


The table below summarizes estimated
changes in net interest income over a twelve-month period beginning January 1, 2004, under
alternate interest rate scenarios using the income simulation model described above:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Change in Interest Rates | Net InterstIncome | Dollar change | Percent change
|------------------------ | ----------------- | ------------- | --------------
|(Dollars in Thousands)  
|                        
|+200 Basis Points        |                   | $18,563       |               
|+100 Basis Points        |                   | 18,548        |               
|Flat Rate                |                   | 18,187        |               
|-100 Basis Points        |                   | 16,694        |               
|-200 Basis Points        |                   | 15,333        |               
|                         |                  

|Simulation models require assumptions
about certain categories of assets and liabilities. The models schedule existing assets
and liabilities by their contractual maturity, estimated likely call date, or earliest
repricing opportunity. Mortgage-backed securities and amortizing loans are scheduled based
on their anticipated cash flow including estimated prepayments. For investment securities,
we use a third party service to provide cash flow estimates in the various rate
environments. Savings accounts, including passbook, statement savings, money market, and
interest checking accounts, do not have a stated maturity or repricing term and can be
withdrawn or reprice at any time. This may impact the margin if more expensive alternative
sources of deposits are required to fund loans or deposit runoff. Management projects the
repricing characteristics of these accounts based on historical performance and
assumptions that it believes reflect their rate sensitivity. The consulting model
reinvests all maturities, repayments and prepayments for each type of asset or liability
into the same product for a new like term then applies growth or run-off estimates
provided by management. As a result, the mix of interest-earning assets and interest
bearing-liabilities is not held constant.



SUPERVISION AND REGULATION


The following is a brief summary of
the regulatory environment in which the Company and the Bank operate and is not designed
to be a complete discussion of all statures and regulations affecting such operations,
including those statutes and regulations specifically mentioned herein. Changes in the
laws and regulations applicable to the Company and the Bank can affect the operating
environment in substantial and unpredictable ways. We cannot accurately predict whether
legislation will ultimately be enacted, and if enacted, the ultimate effect that it or
implementing regulations would have on our financial condition or results of operations.
While banking regulations are material to the operations of the Company and the Bank, it
should be noted that supervision, regulation, and examination of the Company and the Bank
are intended primarily for the protection of depositors, not shareholders.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|Recent Legislation:


Gramm-Leach-Bliley Financial
Services Modernization Act.In 1999, Gramm-Leach was signed into law and it became
effective on March 11, 2000. The primary purpose of Gramm-Leach was to eliminate barriers
between investment banking and commercial banking and to permit, within certain
limitations, the affiliation of financial service providers. Generally, Gramm-Leach (1)
repealed the historical restrictions against, and eliminated many federal and state law
barriers to affiliations among banks, securities firms, insurance companies and other
financial service providers, (2) provided a uniform framework for the activities of banks,
savings institutions and their holding companies, (3) broadened the activities that may be
conducted by and through national banks and other banking subsidiaries of bank holding
companies, (4) provided an enhanced framework for protecting the privacy of
consumers information, (5) adopted a number of provisions related to the
capitalization, membership, corporate governance and other measures designed to modernize
the Federal Home Loan Bank System, (6) modified the laws governing the implementation of
the Community Reinvestment Act, and (7) addressed a variety of other legal and regulatory
issues affecting both day-to-day operations and long-term activities of financial
institutions.


More specifically, under Gramm-Leach,
bank holding companies, such as the Company, that meet certain management, capital, and
Community Reinvestment Act standards, are permitted to become financial holding companies
and, by doing so, to affiliate with securities firms and insurance companies and to engage
in other activities that are financial in nature, incidental to such financial activities,
or complementary to such activities. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized under the FDIC Improvement
Acts prompt corrective action provisions, is well managed and has at least a satisfactory
rating under the Community Reinvestment Act. The required filing is a declaration that the
bank holding company wishes to become a financial holding company and meets all applicable
requirements.


No prior regulatory approval will be
required for a financial holding company to acquire a company, other than a bank or
savings association, engaged in activities permitted under Gramm-Leach. Activities cited
by Gramm-Leach as being financial in nature include:

securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies;
insurance underwriting and agency;
merchant banking activities; and activities that the Federal Reserve has determined to be closely related to banking.USA Patriot Act of 2001. On October
26, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) was signed into law. The
USA Patriot Act broadened the application of anti-money laundering regulations to apply to
additional types of financial institutions, such as broker-dealers, and strengthened the
ability of the U.S. government to detect and prosecute international money laundering and
the financing of terrorism. The principal provisions of Title III of the USA Patriot Act
require that regulated financial institutions, including national banks: (1) establish an
anti-money laundering program that includes training and audit components; (2) comply with
regulations regarding the verification of the identity of any person seeking to open an
account; (3) take additional required precautions with non-U.S. owned accounts; and (4)
perform certain verification and certification of money laundering risk for their foreign
correspondent banking relationships. The USA Patriot Act also expanded the conditions
under which funds in a U.S. inter-bank account may be subject to forfeiture and increased
the penalties for violation of anti-money laundering regulations. Failure of a financial
institution to comply with the USA Patriot Acts requirements could have serious legal and
reputational consequences for the institution. The Bank has adopted policies, procedures
and controls to address compliance with the requirements of the USA Patriot Act under the
existing regulations and will continue to revise and update its policies, procedures and
controls to reflect changes required by the USA Patriot Act and implementing regulations.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|IMLAFATA.
          As part of the USA Patriot Act, Congress adopted the International Money
          Laundering Abatement and Financial Anti-Terrorism Act of 2001 (IMLAFATA).
          IMLAFATA amended the Bank Secrecy Act and adopted certain additional measures
          that increase the obligation of financial institutions, including The Fidelity
          Deposit and Discount Bank, to identify their customers, watch for and report
          upon suspicious transactions, respond to requests for information by federal
          banking regulatory authorities and law enforcement agencies, and share
          information with other financial institutions. The Secretary of the Treasury has
          adopted several regulations to implement these provisions. The bank is also
          barred from dealing with foreign shell banks. In addition, IMLAFATA
          expands the circumstances under which funds in a bank account may be forfeited.
          IMLAFATA also amended the BHC Act and the Bank Merger Act to require the federal
          banking regulatory authorities to consider the effectiveness of a financial
          institutions anti-money laundering activities when reviewing an
          application to expand operations. The Fidelity Deposit and Discount Bank has in
          place a Bank Secrecy Act compliance program.


Sarbanes-Oxley Act of 2002. On July
30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The stated goals
of the Act are to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to protect
investors by improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws.


The Act is the most far-reaching U.S.
securities legislation enacted in decades. The Act generally applies to all companies,
both U.S. and non-U.S., that file or are required to file periodic reports with the
Securities and Exchange Commission under the Securities Exchange Act of 1934. Due to the
SECs extensive role in implementing rules relating to many of the Acts new
requirements, the final scope of these requirements remains to be determined.


The Act includes very specific
additional disclosure requirements and new corporate governance rules, requires the SEC
and securities exchanges to adopt extensive additional disclosure, corporate governance
and other related rules and mandates further studies of certain issues by the SEC. The Act
represents significant federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting profession, and to state
corporate law, such as the relationship between a board of directors and management and
between a board of directors and its committees.


The
Act addresses, among other matters:


audit committees for all reporting companies;
certification of financial statements by the chief executive officer and the chief financial officer;
the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuers securities by directors and senior officers in the twelve month period
following initial publication of any financial statements that later require restatement;
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a prohibition on insider trading during pension plan black out periods;
disclosure of off-balance sheet transactions;
a prohibition on personal loans to directors and officers; expedited filing requirements for Forms 4s;
disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code;
real time filing of periodic reports;
the formation of a public accounting oversight board;
auditor independence; and
various increased criminal penalties for violations of securities laws.The Act contains provisions that were
effective upon enactment on July 30, 2002 and provisions that will be phased in for up to
one year after enactment. The SEC was delegated the task of enacting rules to implement
various provisions with respect to, among other matters, disclosure in periodic filings
pursuant to the Exchange Act.


Regulation W. Transactions between a
bank and its affiliates are quantitatively and qualitatively restricted under
the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A and 23B to
insured nonmember banks in the same manner and to the same extent as if they were members
of the Federal Reserve System. The Federal Reserve Board has also recently issued
Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal
Reserve Act and interpretative guidance with respect to affiliate transactions.


Regulation W incorporates the
exemption from the affiliate transaction rules but expands the exemption to cover the
purchase of any type of loan or extension of credit from an affiliate. Affiliates of a
bank include, among other entities, the banks holding company and companies that are
under common control with the bank. The company is considered to be an affiliate of The
Fidelity Deposit and Discount Bank. In general, subject to certain specified exemptions, a
bank or its subsidiaries are limited in their ability to engage in covered
transactions with affiliates:

to an amount equal to 10% of the banks capital and surplus, in the case of covered transactions with any one affiliate; and
to an amount equal to 20% of the banks capital and surplus, in the case of covered transactions with all affiliates.In addition, a bank and its
subsidiaries may engage in covered transactions and other specified transactions only on
terms and under circumstances that are substantially the same, or at least as favorable to
the bank or its subsidiary, as those prevailing at the time for comparable transactions
with nonaffiliated companies. A covered transaction includes:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|a loan or extension of credit to an affiliate;
a purchase of, or an investment in, securities issued by an affiliate;
a purchase of assets from an affiliate, with some exceptions;
the acceptance of securities issued by an affiliate as collateral for a loan or extension
of credit to any party; and
the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.In addition, under
Regulation W:

a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
covered transactions and other specified transactions between a bank or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe and sound
banking practices; and
with some exceptions, each loan or extension of credit by a bank to an affiliate must be
secured by collateral with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit.Regulation W generally excludes all
non-bank and non-savings association subsidiaries of banks from treatment as affiliates,
except to the extent that the Federal Reserve Board decides to treat these subsidiaries as
affiliates.


Concurrently with the adoption of
Regulation W, the Federal Reserve Board has proposed a regulation which would further
limit the amount of loans that could be purchased by a bank from an affiliate to not
exceed more than 100% of the banks capital and surplus.



Federal and State
Legislation:


From time to time, various types of
federal and state legislation have been proposed that could result in additional
regulations and restrictions on the business of the Company and the Bank. We cannot
predict whether legislation will be adopted, or if adopted, how the new laws would affect
our business. As a consequence, we are susceptible to legislation that may increase the
cost of doing business. Management believes that the effects of current proposals on the
liquidity, capital resources and the results of operations of the Company and the Bank
will be minimal.


Other specific regulatory
recommendations which, if implemented, could have a material effect upon our liquidity,
capital resources or results of operations. In addition, the general cost of compliance
with numerous federal and state laws does have, and in the future may have, a negative
impact on our results of operations.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Further, our business is also
affected by the state of the financial services industry, in general. As a result of legal
and industry changes, management predicts that the industry will continue to experience an
increase in consolidations as the financial industry strives for greater cost efficiencies
and market share. Management is optimistic that these consolidations may enhance the
Banks competitive position as a community bank.




Future Outlook:


Based upon the current uncertain
economic outlook and inability to predict when interest rate changes will occur, the
Company recognizes that there are challenges ahead. The Company is prepared to meet the
challenges and effects of a changing interest rate environment. The addition of key
management personnel is an important step in addressing future challenges.
Managements beliefs are that a significant impact on earnings depends on its ability
to react to changes in interest rates.


The Company will continue to monitor
interest rate sensitivity of its earning assets and interest bearing liabilities to
minimize any adverse effects on future earnings. The Companys commitment to
remaining a community based organization is very strong. Our intention is to recognize a
steady disciplined growth in the loan portfolios, while increasing our base of core
deposits. Review and implementation of policies and procedures along with adding
innovative products and services will continue. These steps are designed to provide the
Company with stability and the wherewithal to provide customer service and increase
shareholder value.

Item 7a: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The information required by 7a is set
forth at Item 7, under Liquidity and Management of Interest Rate Risk and Market Risk Analysis,
contained within Managements Discussion and Analysis of Financial Condition and
Results of Operations and incorporated herein by reference.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|----------------------------------------------------

|INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Fidelity D & D Bancorp, Inc.
Dunmore, Pennsylvania:
We have audited the accompanying consolidated balance sheet of Fidelity D&D Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002 and the related consolidated statements of income, changes in shareholders ́ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company ́s management.  Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fidelity D&D Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

Wilkes-Barre, Pennsylvania
January 31, 2004
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|FIDELITY D&D BANCORP, INC. AND SUBSIDIARY              
|-------------------------------------------------------
|                                                       
|CONSOLIDATED BALANCE SHEETDECEMBER 31, 2003 AND 2002   
|
|ASSETS:                                                
|Cash and due from banks                                
|Interest-bearing deposits with financial institutions  
|Total cash and cash equivalents                        
|                                                       
|Held-to-maturity securities                            
|Available-for-sale securities                          
|Loans and leases, net (allowance for loan losses of    
|$4,996,966 in 2003 and $3,899,753 in 2002)             
|Loans available-for-sale (fair value $20,500,507 in    
|2003; $29,660,096 in 2002)                             
|Accrued interest receivable                            
|Bank premises and equipment, net                       
|Foreclosed assets held for sale                        
|Cash surrender value of bank owned life insurance      
|Other assets                                           
|Total assets                                           
|LIABILITIES:                                           
|Deposits:                                              
|Noninterest-bearing                                    
|Certificates of deposit of $100,000 or more            
|Other interest-bearing deposits                        
|Total deposits                                         
|                                                       
|Accrued interest payable and other liabilities         
|Short-term borrowings                                  
|Long-term debt                                         
|Total liabilities                                      
|SHAREHOLDERS' EQUITY:                                  
|Preferred stock authorized 5,000,000 shares with no par
|value; none issued                                     
|Capital stock authorized 10,000,000 shares with no par 
|value; issued and outstanding 1,828,270 shares in      
|2003 and 1,825,363 shares in 2002                      
|Treasury stock, at cost                                
|Retained earnings                                      
|Accumulated other comprehensive (loss) income          
|Total shareholders' equity                             
|Total liabilities and shareholders' equity             
|                                                       
|                                                       
|See Notes to Consolidated Financial Statements         

---

|FIDELITY D&D BANCORP, INC. AND SUBSIDIARY                                            
|-------------------------------------------------------------------------------------
|
|CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
|
|INTEREST INCOME:                                                                     
|Loans:                                                                               
|Taxable                                                                              
|Nontaxable                                                                           
|Leases                                                                               
|Interest-bearing deposits with financial institutions                                
|Investment securities:                                                               
|U.S. Government agency and corporations                                              
|States and political subdivisions (nontaxable)                                       
|Other securities                                                                     
|Federal funds sold                                                                   
|Total interest income                                                                
|INTEREST EXPENSE:                                                                    
|Certificates of deposit of $100,000 or more                                          
|Other deposits                                                                       
|Securities sold under repurchase agreements                                          
|Other short-term borrowings and long-term debt                                       
|Other                                                                                
|Total interest expense                                                               
|NET INTEREST INCOME                                                                  
|
|PROVISION FOR LOAN LOSSES                                                            
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                                  
|OTHER INCOME:                                                                        
|Service charges on deposit accounts                                                  
|Gain on sale of:                                                                     
|Investment securities                                                                
|Loans                                                                                
|Loss on leased assets                                                                
|(Loss) gain on sale of foreclosed assets held for sale                               
|Fees and other service charges                                                       
|Other operating income                                                               
|Total other income                                                                   
|OTHER EXPENSES:                                                                      
|Salaries and employee benefits                                                       
|Premises and equipment                                                               
|Advertising                                                                          
|Other                                                                                
|Total other expenses                                                                 
|INCOME BEFORE PROVISION FOR INCOME TAXES                                             
|                                                                                     
|PROVISION FOR INCOME TAXES                                                           
|NET INCOME                                                                           
|Per share data:                                                                      
|Net income - basic                                                                   
|Net income - diluted                                                                 
|Dividends                                                                            
|                                                                                     
|                                                                                     
|See Notes to Consolidated Financial Statements                                       

---

|FIDELITY D&D BANCORP, INC. AND SUBSIDIARY                                                                    
|-------------------------------------------------------------------------------------------------------------
|                                                                                                             
|CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYFOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
|                                                                                                             
|
|
|
|
|BALANCE, DECEMBER 31, 2000                                                                                   
|Comprehensive income:                                                                                        
|Net income                                                                                                   
|Change in net unrealized holding gains (losses)                                                              
|on available-for-sale securities, net of                                                                     
|reclassification adjustment and tax effects                                                                  
|Comprehensive income                                                                                         
|Dividends reinvested through Dividend                                                                        
|Reinvestment Plan                                                                                            
|Stock options excercised                                                                                     
|Dividends declared                                                                                           
|BALANCE, DECEMBER 31, 2001                                                                                   
|Comprehensive income:                                                                                        
|Net income                                                                                                   
|Change in net unrealized holding gains (losses)                                                              
|on available-for-sale securities, net of                                                                     
|reclassification adjustment and tax effects                                                                  
|Comprehensive income                                                                                         
|Reissuance of treasury stock through Dividend                                                                
|Reinvestment Plan                                                                                            
|Dividends reinvested through Dividend                                                                        
|Reinvestment Plan                                                                                            
|Stock options excercised                                                                                     
|Purchase of treasury stock                                                                                   
|Dividends declared                                                                                           
|BALANCE, DECEMBER 31, 2002                                                                                   
|Comprehensive income:                                                                                        
|Net income                                                                                                   
|Change in net unrealized holding losses                                                                      
|on available-for-sale securities, net of                                                                     
|reclassification adjustment and tax effects                                                                  
|Comprehensive income                                                                                         
|Issuance of common stock through Employee Stock                                                              
|Purchase Plan                                                                                                
|Dividends reinvested through Dividend                                                                        
|Reinvestment Plan                                                                                            
|Stock options excercised                                                                                     
|Purchase of treasury stock                                                                                   
|Dividends declared                                                                                           
|BALANCE, DECEMBER 31, 2003                                                                                   
|                                                                                                             
|                                                                                                             
|See Notes to Consolidated Financial Statements                                                               

---

|FIDELITY DEPOSIT & DISOUNT BANCORP, INC. AND SUBSIDIARY                                 
|----------------------------------------------------------------------------------------
|                                                                                        
|CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
|                                                                                        
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   
|Net income                                                                              
|Adjustments to reconcile net income to net cash provided by                             
|operating activities:                                                                   
|Depreciation                                                                            
|Amortization of securities (net of accretion)                                           
|Provision for loan losses                                                               
|Deferred income taxes                                                                   
|Write-down of foreclosed assets held for sale                                           
|Increase in cash surrender value of life insurance                                      
|Gain on sale of investment securities                                                   
|Gain on sale of loans                                                                   
|Loss (gain) on sale of foreclosed assets held for sale                                  
|Loss on sale of leased assets                                                           
|Loss on sale of equipment                                                               
|Amortization of loan servicing rights                                                   
|Change in:                                                                              
|Accrued interest receivable                                                             
|Other assets                                                                            
|Accrued interest payable and other liabilities                                          
|Net cash provided by operating  activities                                              
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   
|Held-to-maturity securities:                                                            
|Proceeds from maturities, calls and pay downs                                           
|Purchases                                                                               
|Available-for-sale securities:                                                          
|Proceeds from sales                                                                     
|Proceeds from maturities, calls and pay downs                                           
|Purchases                                                                               
|Proceeds from sale of loans available-for-sale                                          
|Net increase in loans and leases                                                        
|Proceeds from sale of premises and equipment                                            
|Proceeds from sale of leased assets                                                     
|Purchase of life insurance policies                                                     
|Acquisition of bank premises and equipment                                              
|Improvements to foreclosed assets held for sale                                         
|Proceeds from sale of foreclosed assets held for sale                                   
|Net cash used in investing  activities                                                  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                   
|Net increase in noninterest-bearing deposits                                            
|Net (decrease) increase in certificates of deposit                                      
|of $100,000 or more                                                                     
|Net increase in other interest-bearing deposits                                         
|Net increase (decrease) in short-term borrowings                                        
|Increase in long-term debt, net of payments                                             
|Purchase of treasury stock                                                              
|Proceeds from employee stock purchase plan                                              
|Exercise of stock options                                                               
|Dividends paid, net of dividends reinvested                                             
|Net cash (used in) provided by financing  activities                                    
|NET INCREASE (DECREASE) IN CASH AND                                                     
|CASH EQUIVALENTS                                                                        
|                                                                                        
|CASH AND CASH EQUIVALENTS, BEGINNING                                                    
|CASH AND CASH EQUIVALENTS, ENDING                                                       
|                                                                                        
|                                                                                        
|See Notes to Consolidated Financial Statements                                          

---

|FIDELITY D & D BANCORP, INC.AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|----------------------------------------------------------------------------------------

|   |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | NATURE OF OPERATIONS AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES
|   |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | PRINCIPLES OF CONSOLIDATION                                       
|   |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                    | The accompanying consolidated financial statements include the accounts of Fidelity D & D Bancorp, Inc. and its wholly-owned subsidiary, The Fidelity Deposit and Discount Bank (the Bank) (collectively, the Company). All significant intercompany balances and transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | NATURE OF OPERATIONS                                              
|   |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                    | The Company provides a variety of financial services to individuals and corporate customers in Lackawanna and Luzerne Counties, Pennsylvania. This region has a diversified and fairly stable economy. The Companys primary deposit products are savings accounts, NOW accounts, money market deposit accounts, certificates of deposit and checking accounts. Its primary lending products are single-family residential loans, secured consumer loans, and secured loans to businesses. In addition to these traditional banking services, the Company also provides annuities, mutual funds and trust services.                                                                                                                                                                                                                                                                                              
|   |                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                    | Although the Company has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent on the economic sector in which the Company operates. While management uses available information to recognize losses on loans and foreclosed assets, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Companys allowances for loan losses and foreclosed assets. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowances for loan losses and foreclosed assets may change materially in the near future.

|
|

| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | USE OF ESTIMATES             
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                               | The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.                     
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                               | Material estimates that are particularly susceptible to significant change relate to the determination for the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties.                                                                          
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | HELD-TO-MATURITY SECURITIES  
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                               | Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income over the period to maturity.                                                                                                                                                                                                                                                                           
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | TRADING SECURITIES           
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                               | Debt and equity securities held principally for resale in the near term are recorded at their fair values. Unrealized gains and losses are included in other income. The Company did not have any investment securities held for trading purposes during 2003, 2002 or 2001.                                                                                                                                                                                                                          
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | AVAILABLE-FOR-SALE SECURITIES
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                               | Available-for-sale securities consist of debt and equity securities not classified as either held-to-maturity securities or trading securities and are reported at fair value. Unrealized holding gains and losses, net of deferred income taxes, on available-for-sale securities are reported as a net amount as a separate component of shareholders equity until realized. These net unrealized holding gains and losses are the sole component of accumulated other comprehensive (loss) income.
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | LOANS HELD FOR SALE          
| |                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                               | Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Unrealized gains are recognized to the extent of previous writedowns.                                                                                                                                                                                              

| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | LOANS
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at face value, net of unearned income, unamortized loan fees and costs and the allowance for loan losses. Interest on residential real estate loans is recorded on an amortized schedule. Commercial loan interest is accrued on the principal balance on an actual day basis. Interest on consumer loans is determined using the actuarial method or the simple interest method.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | The accrual of interest on impaired loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Any payments received on impaired loans are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts. Any excess is treated as a recovery of lost interest.                                                                                                           

---

| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ALLOWANCE FOR LOAN LOSSES
| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                           | The allowance for loan losses is established through a provision for loan losses. The allowance represents an amount which, in managements judgment, will be adequate to absorb losses on existing loans and leases that may become uncollectible. Managements judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of the loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrowers ability to pay, overall portfolio quality and review of specific impaired loans. Loans considered uncollectible are charged to the allowance. Recoveries on loans previously charged off are added to the allowance.
| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                           | A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments in accordance to the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value, and the probability of collecting payments when due. The significance of payment delays and/or shortfalls, is determined on a case by case basis. All circumstances surrounding the loan are taken into account. Such factors include the length of the delinquency, the underlying reasons and the borrowers prior payment record. Impairment is measured on these loans on a loan by loan basis.                                                                        
| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                           | Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the company does not separately identify individual consumer and residential loans for impairment disclosures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

---

| |        |                                                                                                                                                                                                                            
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | LEASES
| |        |                                                                                                                                                                                                                            
| |        | Financing of equipment and automobiles is provided to customers under lease arrangements accounted for as direct financing leases. Income earned is based on a constant periodic return on the net investment in the lease.

| |           |                                                                                                                                                                                                                                                                         
| | --------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | LOAN FEES
| |           |                                                                                                                                                                                                                                                                         
| |           | Nonrefundable loan origination fees and certain direct loan origination costs are recognized over the life of the related loans as an adjustment of yield. The unamortized balance of these fees and costs are included as part of the loan balance to which it relates.

| |                             |                                                                                                                                                                                                                                                                                            
| | --------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | BANK PREMISES AND EQUIPMENT
| |                             |                                                                                                                                                                                                                                                                                            
| |                             | Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line and accelerated methods over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the useful lives or lease term.

| |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | LOAN SERVICING AND LOAN SERVICING RIGHTS
| |                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                          | The Company services real estate loans for investors in the secondary mortgage market, which are not included in the balance sheet. The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. For purposes of measuring impairment, the rights are stratified based on the present dominant risk characteristics of the underlying loans, stated term of the loan and interest rate. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceeds its fair value. Fair values are estimated using discounted cash flows based on a current market interest rate.

| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | BANK OWNED LIFE INSURANCE
| |                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                           | The Bank purchased $7,000,000 of bank owned life insurance (BOLI) on certain employees, where the Company is the owner and beneficiary of the policies. The earnings from the BOLI are recognized as other income. The BOLI is an asset that can be liquidated, if necessary, with tax costs associated. However, the Bank intends to hold this pool of insurance, because it provides income that enhances the Banks capital position. Therefore, the Bank has not provided for deferred income taxes on the earnings from the increase in cash surrender value.

---

| |                                 |                                                                                                                                                                                                                                                                                                                  
| | ------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FORECLOSED ASSETS HELD FOR SALE
| |                                 |                                                                                                                                                                                                                                                                                                                  
| |                                 | Foreclosed assets held for sale are carried at the lower of cost or fair value less cost to sell. Losses from the acquisition of property in full and partial satisfaction of debt are treated as credit losses. Routine holding costs and subsequent declines in value are included in other operating expenses.

| |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | STOCK OPTIONS
| |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |               | At December 31, 2003, the Company has two stock-based compensation plans, which are described more fully in Note 9. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting forStock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the fair value of the underlying common stock on the date of grant.
| |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |               | The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-BasedCompensation, to stock-based employee compensation:                                                                                                                                                                                                                       

|                           |  |             
|-------------------------- |  | ------------
|December 31, 2003          |  | AS REPORTED:
|                           |  |             
|Net income (in thousands)  |  | $     1,643 
|Earnings per share - Basic |  | 0.90        
|- Diluted                  |  | 0.90        
|                           |  |             
|December 31, 2002          | 
|Net income (in thousands)  |  | $     4,046 
|Earnings per share - Basic |  | 2.23        
|- Diluted                  |  | 2.22        
|                           |  |             
|December 31, 2001          | 
|Net income (in thousands)  |  | $     3,848 
|Earnings per share - Basic |  | 2.12        
|- Diluted                  |  | 2.12        

---

| |  |                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For purposes of the pro forma calculations, the fair value of each option is estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for grants issued in 2002 and 2001:

|                        |  |        
|----------------------- |  | -------
|                        |  | 2002   
|                        |  |        
|Dividend yield          |  | 3.79%  
|Expected volatility     |  | 5.91%  
|Risk-free interest rate |  | 3.62%  
|Expected lives          |  | 5 years

| |  |                                           
| |  | ------------------------------------------
| |  | The Company did not grant options in 2003.

| |                                  |                                                                                                                           
| | -------------------------------- | --------------------------------------------------------------------------------------------------------------------------
| | TRUST AND FINANCIAL SERVICE FEES
| |                                  |                                                                                                                           
| |                                  | Trust and financial service fees are recorded on the cash basis, which is not materially different from the accrual basis.

| |                   |                                                      
| | ----------------- | -----------------------------------------------------
| | ADVERTISING COSTS
| |                   |                                                      
| |                   | Advertising costs are charged to expense as incurred.

| |                                     |                                                                                                                                                                                                                                                                                                                                                                                          
| | ----------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | FAIR VALUE OF FINANCIAL INSTRUMENTS
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                          
| |                                     | Cash and short-term instruments: The carrying amounts of cash and short-term instruments approximate their fair value.                                                                                                                                                                                                                                                                   
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                          
| |                                     | Available-for-sale and held-to-maturity securities: Fair values for securities are based on bid prices received from securities dealers. Restricted equity securities are carried at cost.                                                                                                                                                                                               
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                          
| |                                     | Loans receivable: The fair value of all loans is estimated by the net present value of the future expected cash flows.                                                                                                                                                                                                                                                                   
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                          
| |                                     | Loans available for sale: For loans available for sale, the fair value is estimated using rates currently offered for similar borrowings and are stated at the lower of cost or market.                                                                                                                                                                                                  
| |                                     |                                                                                                                                                                                                                                                                                                                                                                                          
| |                                     | Deposit liabilities: The fair value of demand deposits, NOW accounts, savings accounts, and money market deposits is estimated by the net present value of the future expected cash flows. For certificates of deposit, the discount rates used reflect the Companys current market pricing. The discount rates used for nonmaturity deposits are the current book rate of the deposits.

---

| |  |                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | Short-term borrowings: For short-term borrowings, the fair value is estimated using the rates currently offered for similar borrowings.

| |  |                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------
| |  | Long-term debt: For other borrowed funds, the fair value is estimated using the rates currently offered for similar borrowings.

| |  |                                                                                          
| |  | -----------------------------------------------------------------------------------------
| |  | Accrued interest: The carrying amounts of accrued interest approximate their fair values.

| |  |                                                                                                                                                                                                                                                             
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Off-balance-sheet instruments: Commitments to extend credit are generally short term and are priced to market. The rates on standby letters of credit are priced on prime. Therefore, the estimated fair value of these financial instruments is face value.

| |              |                                                                                                                                                                                                                                                                                                                                               
| | ------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | INCOME TAXES
| |              |                                                                                                                                                                                                                                                                                                                                               
| |              | Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

| |            |                                                                                                                                                                                                                                                                                                
| | ---------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CASH FLOWS
| |            |                                                                                                                                                                                                                                                                                                
| |            | For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions.                                                                                                                       
| |            |                                                                                                                                                                                                                                                                                                
| |            | For the years ended December 31, 2003, 2002, and 2001, the Company paid interest of $14,674,100, $18,934,972 and $20,860,286, respectively. For the years ended December 31, 2003, 2002, and 2001, the Company paid cash for income taxes of $869,561, $1,040,000 and $1,210,000, respectively.
| |            |                                                                                                                                                                                                                                                                                                
| |            | Transfers from loans to foreclosed assets held for sale amounted to $1,560,832, $835,741 and $621,846 in 2003, 2002, and 2001, respectively. Noncash investing activities also included transferring $2,871,752 from loans to loans available-for-sale in 2002.                                

| |                   |                                                                                                                        
| | ----------------- | -----------------------------------------------------------------------------------------------------------------------
| | RECLASSIFICATIONS
| |                   |                                                                                                                        
| |                   | Certain reclassifications have been made to the 2002 and 2001 financial statements to conform to the 2003 presentation.

---

| |                                   |                                                                                            
| | --------------------------------- | -------------------------------------------------------------------------------------------
| | OTHER COMPREHENSIVE (LOSS) INCOME
| |                                   |                                                                                            
| |                                   | The components of other comprehensive (loss) income and related tax effects are as follows:

|                                                        |  |             |  
|------------------------------------------------------- |  | ----------- | -
|                                                        |  | 2003        |  
|                                                        |  |             |  
|Unrealized holding (losses) gains on available-for-sale | 
|securities                                              |  | $(1,910,175 | )
|Less reclassification adjustment for gains realized in  | 
|income                                                  |  | (329,419    | )
|                                                        |  |             |  
|Net unrealized (losses) gains                           |  | (2,239,594  | )
|Tax effect (net 34%)                                    |  | 761,462     |  
|                                                        |  |             |  
|Net of tax amount                                       |  | $(1,478,132 | )
|                                                        |  |             |  

|   |      |                                                                                                                                                                                                                                                
|-- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | CASH
|   |      |                                                                                                                                                                                                                                                
|   |      | The Company is required by the Federal Reserve Bank to maintain average reserve balances based on a percentage of deposits. The amounts of those reserve requirements on December 31, 2003 and 2002 were $569,000 and $6,260,000, respectively.
|   |      |                                                                                                                                                                                                                                                
|   |      | Deposits with any one financial institution are insured up to $100,000. The Company maintains cash and cash equivalents with certain other financial institutions in excess of the insured amount.                                             

---

|   |                       |                                                                                                                     
|-- | --------------------- | --------------------------------------------------------------------------------------------------------------------
|3. | INVESTMENT SECURITIES
|   |                       |                                                                                                                     
|   |                       | Amortized cost and fair value of investment securities at December 31, 2003 and 2002, are as follows (in thousands):

|                                    |                 |                        |                         |           
|----------------------------------- | --------------- | ---------------------- | ----------------------- | ----------
|                                    | 2003           
|                                    | AMORITIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE
|Held to maturity securities:        |                 |                        |                         |           
|Mortgage-backed securities          | $    4,712      | $196                   | $            -          | $4,908    
|                                    |                 |                        |                         |           
|Available-for-sale securities:      |                 |                        |                         |           
|U.S. government agencies and        |                 |                        |                         |           
|corporations:                       | $   37,040      | $61                    | $778                    | $36,323   
|Obligations of states and political |                 |                        |                         |           
|subdivisions                        | $   13,190      | $123                   | $37                     | $13,276   
|Corporate Bonds                     | 3,991           | 16                     | -                       | 4,007     
|Mortgage-backed securities          | 80,765          | 467                    | 345                     | 80,887    
|                                    |                 |                        |                         |           
|Total debt                          | 134,986         | 667                    | 1,160                   | 134,493   
|Equity securities:                  |                 |                        |                         |           
|Restricted                          | 4,753           | -                      | -                       | 4,753     
|Other                               | 279             | 170                    | -                       | 449       
|                                    |                 |                        |                         |           
|Total                               | $  140,018      | $837                   | $1,160                  | $139,695  
|                                    |                 |                        |                         |           

|                                    |                 |                        |                         |           
|----------------------------------- | --------------- | ---------------------- | ----------------------- | ----------
|                                    | 2002           
|                                    | AMORITIZED COST | GROSS UNREALIZED GAINS | GROSS UNREALIZED LOSSES | FAIR VALUE
|Held to maturity securities:        |                 |                        |                         |           
|Mortgage-backed securities          | $11,779         | $468                   | $            -          | $12,247   
|                                    |                 |                        |                         |           
|Available-for-sale securities:      |                 |                        |                         |           
|U.S. government agencies and        |                 |                        |                         |           
|corporations:                       | $13,066         | $209                   | $            -          | $13,275   
|Obligations of states and political |                 |                        |                         |           
|subdivisions                        | 9,644           | 93                     | -                       | 9,737     
|Corporate Bonds                     | 3,989           | 13                     | 11                      | 3,991     
|Mortgage-backed securities          | 105,272         | 1,602                  | 39                      | 106,835   
|                                    |                 |                        |                         |           
|Total debt                          | 131,971         | 1,917                  | 50                      | 133,838   
|Equity securities:                  |                 |                        |                         |           
|Restricted                          | 3,604           | -                      | -                       | 3,604     
|Other                               | 279             | 55                     | 5                       | 329       
|                                    |                 |                        |                         |           
|Total                               | $135,854        | $1,972                 | $55                     | $137,771  
|                                    |                 |                        |                         |           

---

| |  |                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | There are no significant concentrations of investments (greater than 10 percent of shareholders equity) in any individual security issuer other than securities of the United States government and agencies.                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Most of the Companys debt and equity securities are pledged to secure trust funds, public deposits, short-term borrowings, Federal Home Loan Bank of Pittsburgh (FHLB) borrowings, Federal Reserve Bank of Philadelphia Discount Window borrowings and certain other deposits as required by law. U.S. government securities pledged on repurchase agreements are under the Companys control.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | The amortized cost and fair value of debt securities at December 31, 2003 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.                                                                                                    
| |  |                                                                                                                                                                                                                                                                                                                                                                                                  

|                                      
|--------------------------------------
|                                      
|                                      
|Held-to-maturity securities,          
|Due after ten years                   
|                                      
|Available-for-sale securities:        
|Due in one year or less               
|Due after one year through five years 
|Due after five years through ten years
|Due after ten years                   
|                                      
|Total                                 
|                                      
|Mortgage-backed securities            
|                                      
|Equity securities                     
|                                      
|Total available-for-sale securities   
|                                      

---

| |  |                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2003 (in thousands):

|                                                 |                     |                   |                 |                   |            |                  
|------------------------------------------------ | ------------------- | ----------------- | --------------- | ----------------- | ---------- | -----------------
|                                                 | LESS THAN 12 MONTHS | 12 MONTHS OR MORE | TOTAL          
|                                                 |                     |                   |                 |                   |            |                  
|                                                 | FAIR VALUE          | UNREALIZED LOSSES | FAIR VALUE      | UNREALIZED LOSSES | FAIR VALUE | UNREALIZED LOSSES
|                                                 |                     |                   |                 |                   |            |                  
|U.S. government agencies and corporations        | $26,232             | $ (778)           | $             - | $             -   | $26,232    | $ (778)          
|                                                 |                     |                   |                 |                   |            |                  
|Obligations of states and political subdivisions | 4,327               | (345)             | -               | -                 | 4,327      | (345)            
|                                                 |                     |                   |                 |                   |            |                  
|Mortgage-backed securities                       | 39,997              | (37)              | -               | -                 | 39,997     | (37)             
|                                                 |                     |                   |                 |                   |            |                  
|Subtotal, debt securities                        | 70,556              | (1,160)           |                 |                   | 70,556     | (1,160)          
|                                                 |                     |                   |                 |                   |            |                  
|Equity Securities                                | -                   | -                 | -               | -                 | -          | -                
|                                                 |                     |                   |                 |                   |            |                  
|Total Temporarily impaired securities            | $70,556             | $(1,160)          | $               | $                 | $70,556    | $(1,160)         
|                                                 |                     |                   |                 |                   |            |                  

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The investments in debt securities have not been significantly impaired. The unrealized losses are primarily the result of volatility in interest rates. The debt securities considered temporarily impaired are approximately 1.6% below cost and no security was impaired for longer than twelve months. Based on the credit worthiness of the issuers, management determined that the debt securities were not other-than-temporarily impaired.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Gross realized gains and losses on sales of available-for-sale securities, determined using specific identification of the securities were as follows:                                                                                                                                                                                                                                                                                            

|                     
|---------------------
|                     
|Gross realized gains 
|Gross realized losses

---

|   |                  |                                                                                                       
|-- | ---------------- | ------------------------------------------------------------------------------------------------------
|4. | LOANS AND LEASES
|   |                  |                                                                                                       
|   |                  | The major classifications of loans and leases at December 31, 2003 and 2002 are summarized as follows:

|                                     
|-------------------------------------
|                                     
|Commercial and commercial real estate
|Residential real estate              
|Consumer                             
|Real estate construction             
|Direct financing leases              
|                                     
|Total                                
|Less:                                
|Unearned income                      
|Allowance for loan losses            
|                                     
|Loans and leases, net                
|                                     

| |  |                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net deferred loan costs (fees) of $305,155 and $(12,789) have been added to (deducted from) the carrying value of loans at December 31, 2003 and 2002, respectively.   
| |  |                                                                                                                                                                        
| |  | The Company has no concentration of loans to borrowers engaged in similar businesses or activities which exceed 5 percent of total assets at December 31, 2003 or 2002.

---

| |  |                                          
| |  | -----------------------------------------
| |  | Impaired loans information is as follows:

|                                                      
|------------------------------------------------------
|At December 31:                                       
|Accruing loans that are contractually past due 90 days
|or more as to principal or interest                   
|Amount of impaired loans that have a related allowance
|Amount of impaired loans with no related allowance    
|Allowance for impaired loans                          
|During the year ended December 31:                    
|Average investment in impaired loans                  
|Interest income recognized on impaired loans          
|(cash basis)                                          
|Principal collected on impaired loans                 

Changes in the allowance for loan losses are as follows:

|                            | 2003 | 2002        | 2001
|--------------------------- | ---- | ----------- | ----
|                            |      |             |     
|Balance, beginning          |      | $ 3,899,753 |     
|Recoveries                  |      | 478,297     |     
|Provision for loan losses   |      | 3,715,000   |     
|Losses charged to allowance |      | (3,096,084  | )   
|                            |      |             |     
|Balance, ending             |      | $ 4,996,966 |     
|                            |      |             |     

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For federal income tax purposes, the allowance for loan losses is $315,958 at December 31, 2003, 2002, and 2001. The amounts deducted for loan losses in the federal income tax returns were $2,617,787 in 2003, $1,352,428 in 2002 and $1,817,574 in 2001. These amounts were the maximum allowable deduction.                                                                                                                                                                                                                                     
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | The Company services real estate loans, which are not included in the accompanying balance sheet, for investors in the secondary mortgage market. The approximate amount of mortgages serviced amounted to $56,021,000 at December 31, 2003 and $56,986,000 at December 31, 2002. Mortgage servicing rights were approximately $347,000 at December 31, 2003 and $422,000 at December 31, 2002 and are included in other assets. Amortization of mortgage servicing rights was approximately $307,000 in 2003, $133,000 in 2002 and $42,000 in 2001.

---

|   |                             |                                                                                                   
|-- | --------------------------- | --------------------------------------------------------------------------------------------------
|5. | BANK PREMISES AND EQUIPMENT
|   |                             |                                                                                                   
|   |                             | Components of bank premises and equipment at December 31, 2003 and 2002 are summarized as follows:

|                                               | 2003 | 2002        
|---------------------------------------------- | ---- | ------------
|                                               |      |             
|Land                                           |      | $  1,054,330
|Bank premises                                  |      | 7,469,594   
|Furniture, fixtures and equipment              |      | 7,397,551   
|Leasehold improvements                         |      | 3,019,928   
|                                               |      |             
|Total                                          |      | 18,941,403  
|                                               |      |             
|Less accumulated depreciation and amortization |      | 6,849,466   
|                                               |      |             
|Bank premises and equipment, net               |      | $12,091,937 
|                                               |      |             

| |  |                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company leases its Green Ridge, Scranton, Pittston, West Pittston, Moosic, Kingston, Peckville, Clarks Summit and Eynon branches under the terms of operating leases. Rental expense was $382,001 for 2003, $353,589 for 2002 and $321,782 for 2001. The future minimum rental payments at December 31, 2003 under these leases are as follows:

|YEAR ENDING DECEMBER 31 | AMOUNT
|----------------------- | ------
|2004                    |       
|2005                    |       
|2006                    |       
|2007                    |       
|2008                    |       
|2009 and thereafter     |       
|Total                   |       

| |  |                                                                            
| |  | ---------------------------------------------------------------------------
| |  | Amortization of leasehold improvements is included in depreciation expense.

---

|   |          |                                                                                          
|-- | -------- | -----------------------------------------------------------------------------------------
|6. | DEPOSITS
|   |          |                                                                                          
|   |          | At December 31, 2003, the scheduled maturities of certificates of deposit are as follows:

|           |  |             
|---------- |  | ------------
|2004       |  | $145,885,258
|2005       |  | 33,330,611  
|2006       |  | 31,338,765  
|2007       |  | 7,045,355   
|2008       |  | 3,984,257   
|Thereafter |  | 10,470      
|           |  | $221,594,716

|   |                       |                                                     
|-- | --------------------- | ----------------------------------------------------
|7. | SHORT-TERM BORROWINGS
|   |                       |                                                     
|   |                       | Short-term borrowings are as follows at December 31:

|                                            | 2003 | 2002       
|------------------------------------------- | ---- | -----------
|                                            |      |            
|Securities sold under repurchase agreements |      | $39,363,052
|Demand note, U.S. Treasury                  |      | 473,926    
|Federal funds purchased                     |      | 14,920,000 
|                                            |      |            
|Total                                       |      | $54,756,978
|                                            |      |            

| |  |                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The maximum and average amounts of short-term borrowings outstanding and related interest rates for the years ended December 31, 2003 and 2002 are as follows:

|                                            |                                   |                    |                                    |                
|------------------------------------------- | --------------------------------- | ------------------ | ---------------------------------- | ---------------
|2003                                        | MAXIMUMOUTSTANDINGAT ANYMONTH END | AVERAGEOUTSTANDING | WEIGHTEDAVERAGERATE DURINGTHE YEAR | RATE AT YEAREND
|                                            |                                   |                    |                                    |                
|Federal funds purchased                     | $17,900,000                       | $ 3,716,192        | 1.26%                              | 1.03%          
|Securities sold under repurchase agreements | 46,285,260                        | 41,326,103         | 1.22%                              | 0.80%          
|Demand note, U.S. Treasury                  | 1,119,775                         | 716,817            | 0.93%                              | 0.73%          
|Total                                       | $65,305,035                       | $45,795,112        |                                    |                

---

|2002                             | MAXIMUM OUTSTANDING AT ANY MONTH END | AVERAGE OUTSTANDING | WEIGHTED AVERAGE RATE DURING THE YEAR | RATE AT YEAR END
|-------------------------------- | ------------------------------------ | ------------------- | ------------------------------------- | ----------------
|                                 |                                      |                     |                                       |                 
|Federal funds purchased          |                                      | $  3,000,000        |                                       | $     108,767   
|Securities sold under repurchase |                                     
|agreements                       |                                      | 52,280,479          |                                       | 45,871,723      
|Demand note, U. S. Treasury      |                                      | 1,145,783           |                                       | 654,747         
|                                 |                                      |                     |                                       |                 
|Total                            |                                      | $56,426,262         |                                       | $46,635,237     
|                                 |                                      |                     |                                       |                 

|2001                             | MAXIMUM OUTSTANDING AT ANY MONTH END | AVERAGE OUTSTANDING | WEIGHTED AVERAGE RATE DURING THE YEAR | RATE AT YEAR END
|-------------------------------- | ------------------------------------ | ------------------- | ------------------------------------- | ----------------
|                                 |                                      |                     |                                       |                 
|Line of credit, FHLB             |                                      | $  12,250,000       |                                       | $     2,611,918 
|Securities sold under repurchase |                                     
|agreements                       |                                      | 54,258,326          |                                       | 40,969,993      
|Demand note, U. S. Treasury      |                                      | 1,118,424           |                                       | 706,515         
|                                 |                                      |                     |                                       |                 
|Total                            |                                      | $67,626,750         |                                       | $44,288,426     
|                                 |                                      |                     |                                       |                 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Securities sold under agreements to repurchase (repurchase agreements) are secured short-term borrowings, and generally mature within 1 to 89 days from the transaction date. Repurchase agreements are reflected at the amount of cash received in connection with the transaction. The carrying value of the underlying securities is approximately $39,500,000 and $47,300,000 at December 31, 2003 and 2002, respectively. The Bank may be required to provide additional collateral based on the fair value of the underlying securities. The demand note, U. S. Treasury is generally repaid within 1 to 90 days.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | At December 31, 2003, the Company had approximately $68,800,000 available to borrow from the Federal Home Loan Bank of Pittsburgh and approximately $8,300,000 that it can borrow at the Discount Window from the Federal Reserve Bank of Philadelphia. There were no borrowings from the Federal Reserve Bank Discount Window at December 31, 2003 or 2002.                                                                                                                                                                                                                                                           

---

|   |                |                                                                                                                                                                                                                                                                                        
|-- | -------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. | LONG-TERM DEBT
|   |                |                                                                                                                                                                                                                                                                                        
|   |                | Long-term debt consists of advances from the FHLB with interest rates ranging from 2.98 to 6.22% at December 31, 2003. These advances are secured by unencumbered U.S. government agency securities, mortgage-backed securities, U.S. Treasury notes and certain residential mortgages.
|   |                |                                                                                                                                                                                                                                                                                        
|   |                | At December 31, 2003, the maturities and weighted-average interest rates of long-term debt are as follows:                                                                                                                                                                             

|YEAR ENDING DECEMBER 31 | RATE |       | AMOUNT |            
|----------------------- | ---- | ----- | ------ | -----------
|                        |      |       |        |            
|2004                    |      | 5.92% |        | 5,000,000  
|2008                    |      | 4.21  |        | 13,876,034 
|2010                    |      | 5.74  |        | 48,000,000 
|2013                    |      | 3.61  |        | 5,000,000  
|                        |      | 5.31% |        | $71,876,034

|   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|9. | STOCK PLANS
|   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |             | At December 31, 2003, the Company has reserved 100,000 shares of its unissued capital stock for issuance under a dividend reinvestment plan. Shares issued under this plan are valued at fair value as of the dividend payment date. At December 31, 2003, 59,253 shares are available for future issuance.                                                                                                                                                                                                                                                                                                    
|   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |             | The Company has established the 2002 Employee Stock Purchase Plan and has reserved 100,000 shares of its unissued capital stock for issuance under the plan. Under the 2002 Employee Purchase Plan, employees may have automatic payroll deductions to purchase the Companys capital stock at a discounted price based on the fair market value of the Companys capital stock on either the commencement date or termination date. At December 31, 2003, 1,264 shares were issued under the plan.                                                                                                            
|   |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |             | The Company has established the 2000 Independent Directors Stock Option Plan and has reserved 50,000 shares of its unissued capital stock for issuance under the plan. Under the 2000 Independent Directors Stock Option Plan, each outside director will be awarded stock options to purchase 500 shares of the Companys common stock on the first business day of January, each year, at the fair market value on date of grant. 4,500 stock options with a ten-year life were awarded in 2002 and 2001. No stock options were awarded in 2003 due to the directors voluntary election to forego the award.

---

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has established the 2000 Stock Incentive Plan and has reserved 50,000 shares of its unissued capital stock for issuance under the plan. Under the 2000 Stock Incentive Plan, key officers and certain other employees are eligible to be awarded qualified options to purchase the Companys common stock at the fair market value on the date of grant. 4,000 and 2,900 qualified stock options with a ten-year life were awarded in 2002 and 2001, respectively. No stock options were awarded in 2003.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | A summary of the status of the Company option plans as of December 31, 2003, 2002, and 2001, and changes during the year ended is presented below:                                                                                                                                                                                                                                                                                                                                                                   

|                               | SHARES  | WEIGHTEDAVERAGEEXERCISE PRICE
|------------------------------ | ------- | -----------------------------
|Outstanding, December 31, 2000 | 14,400  | $33.12                       
|Granted                        | 7,400   | 36.50                        
|Exercised                      | (1,500) | 34.21                        
|Forfeited                      | (1,000) | 33.06                        
|                               |         |                              
|Outstanding, December 31, 2001 | 19,300  | 34.33                        
|Granted                        | 8,500   | 37.50                        
|Exercised                      | (400)   | 31.00                        
|Forfeited                      | (1,500) | 34.21                        
|                               |         |                              
|Outstanding, December 31, 2002 | 25,900  | 35.43                        
|Granted                        | -       | -                            
|Exercised                      | (800)   | 35.81                        
|Forfeited                      | (400)   | 37.50                        
|                               |         |                              
|Outstanding, December 31, 2003 | 24,700  | $35.39                       
|                               |         |                              

| |  |                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------
| |  | The following table summarizes all stock options outstanding for the plans as of December 31, 2003, segmented by exercise prices:

|               |        |                            |        
|-------------- | ------ | -------------------------- | -------
|EXERCISE PRICE | NUMBER | REMAINING CONTRACTUAL LIFE
|               |        |                            |        
|$31.00         |        | 5,100                      | 5 Years
|35.13          |        | 5,500                      | 6 Years
|36.50          |        | 6,000                      | 7 Years
|37.50          |        | 8,100                      | 8 Years
|               |        |                            |        
|               | Total  | 24,700                     |        
|               |        |                            |        

| |  |                                                             
| |  | ------------------------------------------------------------
| |  | The stock options have a weighted-average life of 6.7 years.

---

|    |              |                                                                                                    
|--- | ------------ | ---------------------------------------------------------------------------------------------------
|10. | INCOME TAXES
|    |              |                                                                                                    
|    |              | The following temporary differences gave rise to the deferred tax asset (liability) at December 31:

|                          |                                                    |             |              |     
|------------------------- | -------------------------------------------------- | ----------- | ------------ | ----
|                          |                                                    |             | 2003         | 2002
|Deferred tax assets:      |                                                    |            
|                          | Allowance for loan losses                          | $1,691,918  | $1,318,865  
|                          | Deferred compensation                              | 101,904     | 103,102     
|                          | Unrealized losses on available-for-sale securities | 109,680     | -           
|                          | Other                                              | 37,886      | 37,089      
|                          |                                                    |             |             
|Total                     |                                                    | 1,941,388   | 1,459,056   
|                          |                                                    |             |             
|Deferred tax liabilities: |                                                    |            
|                          | Leasing                                            | (702,933)   | (829,443)   
|                          | Depreciation                                       | (567,983)   | (699,958)   
|                          | Loan fees and costs                                | (188,033)   | (150,818)   
|                          | Unrealized gain on available-for-sale securities   | -           | (651,782)   
|                          | Other                                              | (207,269)   | (177,917)   
|                          |                                                    |             |             
|Total                     |                                                    | (1,666,218) | (2,509,918) 
|                          |                                                    |             |             
|                          | Deferred tax asset (liability), net                | $275,170    | $(1,050,862)
|                          |                                                    |             |             

| |  |                                              
| |  | ---------------------------------------------
| |  | The provision for income taxes is as follows:

|         |                 |            |            |         
|-------- | --------------- | ---------- | ---------- | --------
|         | 2003            | 2002       | 2001      
|         |                 |            |            |         
|Current  | $711,062        | $1,279,484 | $961,982  
|Deferred | (564,570)       | 246,871    | (56,116)  
|         |                 |            |           
|         | Total provision | $146,492   | $1,526,355 | $905,866
|         |                 |            |           

---

| |  |                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------
| |  | A reconciliation between the expected statutory income tax and the actual provision for income taxes is as follows:

|                                         | 2003 | 2002      | 2001
|---------------------------------------- | ---- | --------- | ----
|Expected provision at the statutory rate |      | $ 608,510 |     
|Tax-exempt income                        |      | (312,287  | )   
|Nondeductible interest expense           |      | 36,934    |     
|Bank owned life insurance                |      | (99,803   | )   
|Other nondeductible expenses             |      | 31,290    |     
|Low income housing tax credits           |      | (118,152  | )   
|Other, net                               |      | -         |     
|                                         |      |           |     
|Actual provision for income taxes        |      | $ 146,492 |     
|                                         |      |           |     

|    |                 |                                                                                                                                                                                                                                                                                                
|--- | --------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11. | RETIREMENT PLAN
|    |                 |                                                                                                                                                                                                                                                                                                
|    |                 | The Company has a defined contribution 401(k) plan covering substantially all employees of the Company. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Contributions to the Plan were $214,756 in 2003, $246,201 in 2002 and $211,518 in 2001.

|    |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|12. | FINANCIAL INSTRUMENTS
|    |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                       | The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of the Companys involvement in particular classes of financial instruments.
|    |                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                       | The Companys exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.                                                                                                                                                                                  

---

| |  |                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------
| |  | A summary of the notional amounts of the Banks financial instruments with off-balance-sheet risk at December 31, 2003 follows:

|                             | NOTIONAL AMOUNT |            
|---------------------------- | --------------- | -----------
|                             |                 |            
|Commitments to extend credit |                 | $84,050,279
|Standby letters of credit    |                 | 6,598,816  

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customers credit-worthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company on extension of credit, is based on managements credit assessment of the customer.                                                                                                                                                                                                                                                                                                               
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Financial standby letters of credit are conditional commitments issued by the Company to guarantee performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The Companys performance under the guarantee is required upon presentation by the beneficiary of the financial standby letter of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company does not have any recourse provisions or hold any assets that would enable it to recover from third parties any of the amounts paid under the guarantee. The Company was not required to recognize any liability in connection with the issuance of these financial standby letters of credit.

---

| |  |                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------
| |  | The following table summarizes outstanding financial letters of credit as of December 31, 2003 (in thousands):

|                     | Less than1 year | 1-5 Years | Over 5 Years | Total 
|-------------------- | --------------- | --------- | ------------ | ------
|Secured by:          |                 |           |              |       
|Collateral           |                 | $1,025    |              | $1,525
|Guarantees           |                 | 230       |              | 23    
|Bank lines of credit |                 | 284       |              | 39    
|                     |                 |           |              |       
|                     |                 | 1,539     |              | $1,587
|                     |                 |           |              |       
|Unsecured            |                 | 38        |              | 5     
|                     |                 |           |              |       
|Total                |                 | $1,577    |              | $1,592
|                     |                 |           |              |       

| |  |                                                                                                                                                
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company has not incurred any losses on its commitments in 2003, 2002 or 2001.                                                              
| |  |                                                                                                                                                
| |  | The carrying or notional amount and estimated fair values of the Companys financial instruments were as follows at December 31, 2003 and 2002:

|                               | 2003                      | 2002               
|------------------------------ | ------------------------- | -------------------
|                               | CARRYINGOR NOTIONALAMOUNT | ESTIMATEDFAIR VALUE
|                               | (IN THOUSANDS)            | (IN THOUSANDS)     
|Financial assets:              |                           |                    
|Cash and cash equivalents      |                           | $  19,232          
|Held-to-maturity securities    |                           | 4,712              
|Available-for-sale securities  |                           | 139,695            
|Loans and leases               |                           | 366,982            
|Loans available for sale       |                           | 19,864             
|Accrued interest               |                           | 1,807              
|                               |                           |                    
|Financial liabilities:         |                          
|Deposit liabilities            |                           | $401,443           
|Accrued interest               |                           | 1,270              
|Short-term borrowings          |                           | 54,757             
|Long-term debt                 |                           | 71,876             
|                               |                           |                    
|Off-balance sheet liabilities: |                          
|Commitments to extend credit   |                           | 84,050             
|Standby letters of credit      |                           | 6,599              

---

|    |                    |                                                                                                                                                                                                                                                          
|--- | ------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13. | EARNINGS PER SHARE
|    |                    |                                                                                                                                                                                                                                                          
|    |                    | Basic earnings per share (EPS) is computed using the weighted-average number of shares of common stock outstanding. Diluted EPS includes the incremental shares that would be outstanding after giving effect to the assumed exercise of stock options.
|    |                    |                                                                                                                                                                                                                                                          
|    |                    | The following data shows the amounts used in computing earnings per share and the effects on income and the weighted-average number of shares of potentially dilutive common stock for the years ended December 31, 2003, 2002 and 2001.                 

|                                          | INCOME NUMERATOR | COMMON SHARES DENOMINATOR | EPS
|----------------------------------------- | ---------------- | ------------------------- | ---
|                                          |                  |                           |    
|2003                                      |                  | $ 1,643,248               |    
|Basic EPS                                 |                 
|Dilutive effect of potential common stock |                 
|Stock options:                            |                 
|Exercise of options outstanding           |                  |                           |    
|Hypothetical share repurchase at $37.00   |                  |                           |    
|                                          |                  |                           |    
|Diluted EPS                               |                  | $ 1,643,248               |    
|                                          |                  |                           |    

|                                          | INCOME NUMERATOR | COMMON SHARES DENOMINATOR | EPS
|----------------------------------------- | ---------------- | ------------------------- | ---
|                                          |                  |                           |    
|2002                                      |                  | $ 4,046,173               |    
|Basic EPS                                 |                 
|Dilutive effect of potential common stock |                 
|Stock options:                            |                 
|Exercise of options outstanding           |                  |                           |    
|Hypothetical share repurchase at $38.25   |                  |                           |    
|                                          |                  |                           |    
|Diluted EPS                               |                  | $ 4,046,173               |    
|                                          |                  |                           |    

|                                          | INCOME NUMERATOR | COMMON SHARES DENOMINATOR | EPS
|----------------------------------------- | ---------------- | ------------------------- | ---
|                                          |                  |                           |    
|2001                                      |                  | $ 3,848,136               |    
|Basic EPS                                 |                 
|Dilutive effect of potential common stock |                 
|Stock options:                            |                 
|Exercise of options outstanding           |                  |                           |    
|Hypothetical share repurchase at $37.75   |                  |                           |    
|                                          |                  |                           |    
|Diluted EPS                               |                  | $ 3,848,136               |    
|                                          |                  |                           |    

---

|    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|14. | REGULATORY MATTERS
|    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                    | The Company (on a consolidated basis) 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 possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys and the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding
companies.
|    |                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                    | Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and 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). As of December 31, 2003, the Company and the Bank meet all capital adequacy requirements to which they are subject.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

---

| |  |                                                                                                                                                                                                                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. The Companys and the Banks actual capital amounts and ratios are also presented in the table. No amounts were deducted from capital for interest-rate risk in either 2003 or 2002.

|                         
|-------------------------
|                         
|Amount                   
|As of December 31, 2003: 
|Total Capital            
|(to Risk Weighted Assets)
|Consolidated             
|Bank                     
|                         
|Tier I Capital           
|(to Risk Weighted Assets)
|Consolidated             
|Bank                     
|                         
|Tier I Capital           
|(to Average Assets)      
|Consolidated             
|Bank                     
|                         
|As of December 31, 2002: 
|Total Capital            
|(to Risk Weighted Assets)
|Consolidated             
|Bank                     
|                         
|Tier I Capital           
|(to Risk Weighted Assets)
|Consolidated             
|Bank                     
|                         
|Tier I Capital           
|(to Average Assets)      
|Consolidated             
|Bank                     

| |  |                                                                                                                                                                                                                          
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Banks capital and ratios are not materially different that those of the Company.                                                                                                                                    
| |  |                                                                                                                                                                                                                          
| |  | The Bank can pay dividends to the Company equal to the Banks retained earnings which approximated $41,000,000 at December 31, 2003. However, such dividends are limited due to the capital requirements discussed above.

---

|    |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | -------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|15. | RELATED PARTY TRANSACTIONS
|    |                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                            | During the ordinary course of business,
loans are made to executive officers, directors, shareholders and associates of such persons. These transactions
are executed on substantially the same terms and at the rates prevailing at the time for comparable transactions
with others. These loans do not involve more than the normal risk of collectability or present other unfavorable
features. A summary of loan activity with officers, directors, shareholders and associates of such persons is as
follows:

|                                            | 2003 | 2002         | 2001
|------------------------------------------- | ---- | ------------ | ----
|                                            |      |              |     
|Balance, beginning                          |      | $ 11,692,596 |     
|Adjustments for loans to individuals no     |     
|longer officers, directors, shareholders or |     
|associates                                  |      | (221,750     | )   
|Loans sold/participated                     |      | (758,680     | )   
|Additions                                   |      | 1,367,263    |     
|Collections                                 |      | (1,954,000   | )   
|                                            |      |              |     
|Balance, ending                             |      | $ 10,125,429 |     
|                                            |      |              |     

| |  |                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------
| |  | Aggregate loans to directors and associates
exceeding 2.5% of shareholders equity included in the table above are as follows:

|                             | 2003 | 2002          | 2001
|---------------------------- | ---- | ------------- | ----
|                             |      |               |     
|Number of persons            |      | 3             |     
|                             |      |               |     
|Balance, beginning           |      | $ 10,691,179  |     
|Loans sold/participated      |      | (753,296      | )   
|Additions                    |      | 444,184       |     
|Collections                  |      | (995,787      | )   
|Prior loan balance now above |     
|threshold                    |      | -             |     
|                             |      |               |     
|Balance, ending              |      | $   9,386,280 |     
|                             |      |               |     

---

|    |                                             |                                                                                                                    
|--- | ------------------------------------------- | -------------------------------------------------------------------------------------------------------------------
|16. | QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|    |                                             |                                                                                                                    
|    |                                             | The following is a summary of quarterly results of operations for the years ended December 31, 2003, 2002 and 2001:

|2003                                 | FIRST QUARTER                            | SECOND QUARTER | THIRD QUARTER | FOURTH QUARTER | TOTAL
|------------------------------------ | ---------------------------------------- | -------------- | ------------- | -------------- | -----
|                                     | (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|                                     |                                          |                |               |                |      
|Interest income                      |                                          | $ 7,638        |               | $ 7,147        |      
|Interest expense                     |                                          | (3,806         | )             | (3,718         | )    
|                                     |                                          |                |               |                |      
|Net interest income                  |                                          | 3,832          |               | 3,429          |      
|Provision for loan losses            |                                          | (300           | )             | (460           | )    
|Other income                         |                                          | 957            |               | 1,261          |      
|Other expenses                       |                                          | (3,295         | )             | (3,014         | )    
|                                     |                                          |                |               |                |      
|Income (loss) before income taxes    |                                          | 1,194          |               | 1,216          |      
|(Provision) benefit for income taxes |                                          | (307           | )             | (293           | )    
|                                     |                                          |                |               |                |      
|Net income (loss)                    |                                          | $    887       |               | $    923       |      
|                                     |                                          |                |               |                |      
|Net income (loss) per share          |                                          | $   0.49       |               | $   0.49       |      
|                                     |                                          |                |               |                |      

|2002                        | FIRST QUARTER                            | SECOND QUARTER | THIRD QUARTER | FOURTH QUARTER | TOTAL
|--------------------------- | ---------------------------------------- | -------------- | ------------- | -------------- | -----
|                            | (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|                            |                                          |                |               |                |      
|Interest income             |                                          | $ 8,730        |               | $ 8,759        |      
|Interest expense            |                                          | (4,648         | )             | (4,566         | )    
|                            |                                          |                |               |                |      
|Net interest income         |                                          | 4,082          |               | 4,193          |      
|Provision for loan losses   |                                          | (460           | )             | (496           | )    
|Other income                |                                          | 972            |               | 979            |      
|Other expenses              |                                          | (3,144         | )             | (3,158         | )    
|                            |                                          |                |               |                |      
|Income before provision for |                                         
|income taxes                |                                          | 1,450          |               | 1,518          |      
|Provision for income taxes  |                                          | (372           | )             | (409           | )    
|                            |                                          |                |               |                |      
|Net income                  |                                          | $ 1,078        |               | $ 1,109        |      
|                            |                                          |                |               |                |      
|Net income per share        |                                          | $   0.59       |               | $   0.61       |      
|                            |                                          |                |               |                |      

---

|2001                        | FIRST QUARTER                            | SECOND QUARTER | THIRD QUARTER | FOURTH QUARTER | TOTAL
|--------------------------- | ---------------------------------------- | -------------- | ------------- | -------------- | -----
|                            | (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|                            |                                          |                |               |                |      
|Interest income             |                                          | $ 9,169        |               | $ 9,259        |      
|Interest expense            |                                          | (5,398         | )             | (5,146         | )    
|                            |                                          |                |               |                |      
|Net interest income         |                                          | 3,771          |               | 4,113          |      
|Provision for loan losses   |                                          | (328           | )             | (276           | )    
|Other income                |                                          | 865            |               | 830            |      
|Other expenses              |                                          | (2,931         | )             | (3,177         | )    
|                            |                                          |                |               |                |      
|Income before provision for |                                         
|income taxes                |                                          | 1,337          |               | 1,490          |      
|Provision for income taxes  |                                          | (294           | )             | (350           | )    
|                            |                                          |                |               |                |      
|Net income                  |                                          | $ 1,083        |               | $ 1,140        |      
|                            |                                          |                |               |                |      
|Net income per share        |                                          | $   0.60       |               | $   0.62       |      
|                            |                                          |                |               |                |      

|    |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|17. | CONTINGENCIES
|    |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |               | The nature of the Companys business generates
some litigation involving matters arising in the ordinary course of business. However,
in the opinion of management of the Company after consulting with the Companys legal counsel,
no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have
a material effect on the Companys shareholders equity or results of operations. No legal
proceedings are pending other than ordinary routine litigation incident to the business of the Company
and the Bank. In addition, to managements knowledge, no government authorities have initiated or
contemplated any material legal actions against the Company or the Bank.

---

|    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|18. | RECENT ACCOUNTING PRONOUNCEMENTS
|    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                  | In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based Compensation Transition
and Disclosure  An Amendment of FASB Statement No. 123. This statement amends SFAS No. 123, Accounting forStock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. The statement also amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. This statement is effective for fiscal years ending
after December 15, 2002, except for financial reports containing condensed financial statements for interim periods for
which disclosure is effective for periods beginning after December 15, 2002. This statement announces, in the near future,
the Board plans to consider whether it should propose changes to the U.S. standards on accounting for stock-based
compensation. The adoption of this statement did not have an effect on the Companys earnings, financial condition
or equity.
|    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                  | In April 2003, the FASB issued SFAS No. 149, Amendment
of Statement No. 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under
SFAS No. 133. The amendments set forth in SFAS No. 149 require that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS No. 149 amends certain other existing pronouncements.
Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting.                                                                                                                                                                                                                                                  
|    |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                  | This statement is effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003.
The guidance should be applied prospectively. The provisions of this statement that related to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance
with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued
securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into
after June 30, 2003. The adoption of this statement did not have an effect on the Companys earnings, financial condition or
equity.                                                                                                                                                                                                                                                                                                                                                                                                                                     

---

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In May 2003, the FASB Issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilitiesand Equity. This statement establishes how an
issuer classifies financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify
these financial instruments as a liability (or, in certain circumstances, an asset). Previously, these financial instruments would
have been classified entirely as equity, or between the liabilities and equity section of the balance sheet. This statement also
addresses questions about the classification of certain financial instruments that embody obligations to issue equity shares. The
provisions of this statement are effective for interim periods beginning after June 15, 2003. The adoption of this statement did not
have an effect on the Companys earnings, financial condition or equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, in an effort to expand upon and strengthen existing accounting guidance
that addresses when a company should include in its financial statements the assets, liabilities and activities of another
entity. The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. Prior to this interpretation, one company generally has included
another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation
changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns or
both. The consolidation requirements of this interpretation apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest
entity was established. The adoption of the interpretation did not have an effect on the Companys earnings, financial condition or
equity.

---

|    |                     |                                                                                                                                 
|--- | ------------------- | --------------------------------------------------------------------------------------------------------------------------------
|19. | PARENT COMPANY ONLY
|    |                     |                                                                                                                                 
|    |                     | The following is condensed financial information for
Fidelity D & D Bancorp, Inc. on a parent company only basis (in thousands):

|CONDENSED BALANCE SHEET              
|-------------------------------------
|                                     
|                                     
|ASSETS:                              
|Cash                                 
|Investment in subsidiary             
|Other                                
|                                     
|Total                                
|                                     
|LIABILITIES AND SHAREHOLDERS' EQUITY:
|Liabilities                          
|Shareholders' equity                 
|                                     
|Total                                
|                                     

|CONDENSED INCOME STATEMENT                    
|----------------------------------------------
|                                              
|                                              
|INCOME:                                       
|Equity in undistributed earnings of subsidiary
|Dividends from subsidiary                     
|                                              
|Total income                                  
|                                              
|OPERATING EXPENSES                            
|                                              
|INCOME BEFORE TAXES                           
|                                              
|CREDIT FOR INCOME TAXES                       
|                                              
|NET INCOME                                    
|                                              

---

|CONDENSED STATEMENTS OF CASH FLOWS             
|-----------------------------------------------
|                                               
|                                               
|CASH FLOWS FROM OPERATING ACTIVITIES:          
|Net income                                     
|Adjustments to reconcile net income to net cash
|provided by operations:                        
|Equity in earnings of subsidiary               
|Deferred income taxes                          
|Net change in other assets                     
|                                               
|Net cash used in operating activities          
|                                               
|CASH FLOWS FROM INVESTING ACTIVITIES,          
|Dividends received from subsidiary             
|                                               
|CASH FLOWS FROM FINANCING ACTIVITIES:          
|Dividends paid, net of dividend reinvestment   
|Exercise of stock options                      
|Withholdings to purchase capital stock         
|Purchase of treasury stock                     
|                                               
|Net cash used in financing activities          
|                                               
|Net increase in cash                           
|                                               
|CASH, BEGINNING                                
|                                               
|CASH, ENDING                                   
|                                               

---

|Item 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE

None.

Item 9A:          CONTROLS AND PROCEDURES


The Company maintains controls and
procedures designed to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this report, the
Chief Executive and Chief Financial Officers of the Company concluded that the
Companys disclosure controls and procedures were adequate.



PART III



Item 10: DIRECTORS AND
EXECUTIVE OFFICERS OF THE COMPANY


The information required under Items
401 and 406 of Regulation S-K is incorporated by reference herein, to the information
presented in the Companys definitive Proxy Statement for its 2004 Annual Meeting of
Shareholders to be filed with the SEC.



Section 16(a) Beneficial
Ownership Reporting Compliance


Section 16(a) of the Securities
Exchange Act of 1934 requires the Companys directors, executive officers and
shareholders owning in excess of 10% of the Companys outstanding equity stock to
file initial reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company with the Securities and Exchange Commission (the
SEC). SEC regulations require that these reporting persons furnish the Company with copies
of all Section 16(a) forms which they file. Based on a review of copies of such reports
received by it, and on written statements of the reporting persons, the Company believes
that the reporting persons complied with all such Section 16(a) filing requirements in a
timely fashion.



Item 11: EXECUTIVE
COMPENSATION


The information required by this Item
is incorporated by reference herein, to the information presented in the Companys
2004 definitive Proxy Statement.

Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


The information required by this Item
is incorporated by reference herein, to the information presented in the Companys
2004 definitive Proxy Statement.



Item 13: CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS


The information required by this
Item, relating to transactions with management and others, certain business relationships
and indebtedness of management, is set forth above in Item 8 Financial Statements
and Supplementary Data and is incorporated by reference herein to the information
presented in the Companys 2004 definitive Proxy Statement.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|Item 14: PRINCIPAL
ACCOUNTANT FEES AND SERVICES


The information required by this Item
is incorporated by reference herein, to the information presented in the Companys
2004 definitive Proxy Statement.



PART IV

Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                  FORM 8-K
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|    |                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                          
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | (1)Financial Statements The following financial statements are included
          by reference in Part II, Item 8 hereof:                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                             | Report of Independent Certified Public Accountants.                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                             | Consolidated Balance Sheet.                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                             | Consolidated Statement of Income.                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                             | Consolidated Statement of Changes in Shareholders' Equity.                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                             | Consolidated Statement of Cash Flows.                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                             | Notes to Consolidated Financial Statements.                                                                                                                                                                                                              
|    | (2)Financial
Statement Schedules                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                             | Financial
Statement Schedules are omitted because the required information is either not applicable,
the data is not significant or the required information is shown in the respective
financial statements or in the notes thereto or elsewhere herein.
|    | (3)Exhibits                                                                                                                                                                                                                                                                                                
|    | The following exhibits are filed herewith or incorporated by reference as a part of this Form                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                            
|    | 3(i) Amended and Restated Articles of Incorporation of Registrant.  Incorporated by reference to Exhibit 3(i) to Registrants Registration Statement No.333-90273 on Form S-4, filed with the SEC on November 3,1999 and as amended on April 6, 2000.                                                      
|    |                                                                                                                                                                                                                                                                                                            
|    | 3(ii) Bylaws of Registrant.  Incorporated by reference to Exhibit 3(ii) to
          Registrants Registration Statement No. 333-90273 on Form S-4, filed with
          the SEC on November 3, 1999 and as amended on April 6,2000.                                                                       
|    |                                                                                                                                                                                                                                                                                                            
|    | 10.1
1998 Independent Directors Stock Option Plan of The Fidelity Deposit and Discount Bank, as
assumed by Registrant.  Incorporated by reference to Exhibit 10.1 to Registrants
Registration Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999
and as amended on April 6, 2000.

---

| |                                                                                                                                                                                                                                                                                                                                  | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | 10.2
1998 Stock Incentive Plan of The Fidelity Deposit and Discount Bank, as assumed by
Registrant.  Incorporated by reference to Exhibit 10.2 of Registrants Registration
Statement No. 333-90273 on Form S-4, filed with the SEC on November 3, 1999 and as amended
on April 6, 2000.                                        
| |                                                                                                                                                                                                                                                                                                                                 
| | 10.3
Form of Deferred Compensation Plan of The Fidelity Deposit and Discount Bank.  Incorporated
by reference to Exhibit 10.3 to Registrants Registration Statement No.333-45668 on
Form S-1, filed with the SEC on September 12, 2000 and as amended on October 11, 2000.                                                     
| |                                                                                                                                                                                                                                                                                                                                 
| | 10.4
Registrants 2000 Dividend Reinvestment Plan.  Incorporated by reference to Exhibit 4
to Registrants Registration Statement No. 333-45668 on Form S-1, filed with the SEC
on September 12, 2000 and as amended by Pre-Effective Amendment No. 1 on October 11, 2000
and by Post-Effective Amendment No. 1 on May 30, 2001.
| |                                                                                                                                                                                                                                                                                                                                 
| | 10.5
Registrants 2000 Independent Directors Stock Option Plan.  Incorporated by reference
to Exhibit 4.3 to Registrants Registration Statement No. 333-64356 on Form S-8 filed
with the SEC on July 2, 2001.                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                 
| | 10.6
Registrants 2000 Stock Incentive Plan.  Incorporated by reference to Exhibit 4.4 to
Registrants Registration Statement No. 333-64356 on Form S-8 filed with the SEC on
July 2, 2001.                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                 
| | 10.7
Registrants 2002 Employee Stock Purchase Plan.  Incorporated by reference to Exhibit
4.5 to Registrants Registration Statement No. 333-113339 on Form S-8 filed with the
SEC on March 5, 2004.                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                 
| | 11
Statement regarding computation of earnings per share.  Included herein in Note 13
Earnings per Share, contained within the Notes to Consolidated Financial
Statements, and incorporated herein by reference.                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                 
| | 12
Statement regarding computation of ratios.  Included herein in Item 6, Selected
Financial Data.                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                 
| | 13 Annual Report to Shareholders.  Incorporated by reference to the 2003 Annual Report to Shareholders filed with the SEC on Form ARS.                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                 
| | 14 Code of Ethics.                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                 
| | 21 Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                 
| | 23 Consent of Independent
Auditors.                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                 
| | 31.1       Rule 13a-14(a) Certification of Principal Executive Officer, filed herewith.                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                 
| | 31.2       Rule 13a-14(a) Certification of Principal Financial Officer, filed herewith.                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                 

---

|    |                                                                                                                                                                                                                               | 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|    | 32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                  
|    |                                                                                                                                                                                                                              
|    | 32.1
Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.                                                 
|    |                                                                                                                                                                                                                              
|(b) | Reports on Form 8-K.                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                              
|    | On
November 3, 2003, Fidelity D&D Bancorp, Inc. announced its results of operations for
the quarter ended September 30, 2003. A copy of the related press release was furnished
with the Form 8-K filing on November 4, 2003.
|    |                                                                                                                                                                                                                              
|    | (c)  The exhibits required to be filed by this Item are listed under                                                                                                                                                         
|    | Item 15(a)3, above.                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                              
|    | (d)    NOT APPLICABLE                                                                                                                                                                                                        

---



|          
|----------
|SIGNATURES

|                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Pursuant to the
requirements of section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                     |                                       |                                      
|-------------------- | ------------------------------------- | -------------------------------------
|                     | FIDELITY D&D BANCORP, INC.           
|                     | (Registrant)                         
|                     |                                      
|                     |                                      
|Date: March 29, 2004 | By: /s/ Michael F. Marranca          
|                     |                                       | Michael F. Marranca,                 
|                     |                                       | Chairman of the Board of Directors   
|                     |                                      
|                     |                                      
|Date: March 29, 2004 | By: /s/ Salvatore R. DeFrancesco, Jr.
|                     |                                       | Salvatore R. DeFrancesco, Jr.,       
|                     |                                       | Treasurer and Chief Financial Officer
|                     |                                      
|                     |                                      
|Date: March 29, 2004 | By: /s/ Daniel J. Santaniello        
|                     |                                       | Daniel J. Santaniello,               
|                     |                                       | Interim Chief Executive Officer and  
|                     |                                       | Chief Operating Officer              

---

|                                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Pursuant to the  requirements of the
Securities and Exchange Act of 1934, this report has been signed below by the following  person on
behalf of the registrant and in the capacities and on the dates indicated.

|    |                                           |  |                
|--- | ----------------------------------------- |  | ---------------
|    |                                           |  | DATE           
|By: | /s/ Michael F. Marranca                   |  | March 29, 2004 
|    | Michael F. Marranca, Chairman             | 
|    | of the Board of Directors                 | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ Daniel J. Santaniello                 |  | March 29, 2004 
|    | Daniel J. Santaniello, Interim            | 
|    | Chief Executive Officer and Chief         | 
|    | Operating Officer                         | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ Salvatore R. DeFrancesco, Jr.         |  | March 29, 2004 
|    | Salvatore R. DeFrancesco, Jr., Treasurer  | 
|    | and Chief Financial Officer               | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ Samuel C. Cali                        |  | March 29, 2004 
|    | Samuel C. Cali, Assistant Secretary of    | 
|    | the Board of Directors, Chairman Emeritus | 
|    | and Director                              | 
|    |                                           |  |                
|    |                                           |  |                
|By: |                                           |  | March    , 2004
|    | John F. Glinsky, Jr., Secretary           | 
|    | of the Board of Directors and  Director   | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ Patrick J. Dempsey                    |  | March 29, 2004 
|    | Patrick J. Dempsey, Vice Chairman         | 
|    | of the Board of Directors and  Director   | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ Paul A. Barrett                       |  | March 29, 2004 
|    | Paul A. Barrett, Director                 | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ John T. Cognetti                      |  | March 29, 2004 
|    | John T. Cognetti, Director                | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ Michael J. McDonald                   |  | March 29, 2004 
|    | Michael J. McDonald, Director             | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ David L. Tressler                     |  | March 29, 2004 
|    | David L. Tressler, Director               | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ Mary E. McDonald                      |  | March 29, 2004 
|    | Mary E. McDonald, Director                | 
|    |                                           |  |                
|    |                                           |  |                
|By: | /s/ Brian J. Cali                         |  | March 29, 2004 
|    | Brian J. Cali, Director                   | 
|    |                                           |  |                
|    |                                           |  |                

---

|Exhibit Index
|-------------

|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              | Page
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|3(i)  | Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Exhibit 3(i) to Registrant's
                           Registration Statement No. 333-90273 on Form S-4, filed with the SEC on
                           November 3, 1999 and as amended on April 6, 2000.                                                                                                                                      | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|3(ii) | Bylaws of Registrant. Incorporated by reference to Exhibit 3 (ii) to Registrant's Registration
                           Statement No. 333-90273 on Form S-4, filed with the SEC on
                           November 3, 1999 and as amended on April 6, 2000.                                                                                                                                                                            | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|10.1  | 1998 Independent Directors Stock
                           Option Plan of The Fidelity Deposit and Discount Bank, as
                           assumed by Registrant. Incorporated by reference to Exhibit
                           10.1 to Registrant's Registration Statement No. 333-90273 on
                           Form S-4, filed with the SEC on November 3, 1999 and as amended
                           on April 6, 2000. | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|10.2  | 1998 Stock Incentive Plan of The Fidelity Deposit
                           and Discount Bank, as assumed by Registrant. Incorporated by reference to
                           Exhibit 10.2 of Registrant's Registration Statement No. 333-90273 on Form
                           S-4, filed with the SEC on Nov. 3, 1999 and as amended on April 6, 2000.                                                                              | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|10.3  | Form of Deferred Compensation Plan of The
                           Fidelity Deposit and Discount Bank. Incorporated by reference to Exhibit
                           10.3 to Registrant's Registration Statement No. 333-45668 on Form S-1,
                           filed with the SEC on September 12, 2000 and as amended on October 11,
                           2000.                                                           | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|10.4  | Registrant's 2000 Dividend Reinvestment Plan.
                           Incorporated by reference to Exhibit 4 to Registrant's Registration
                           Statement No. 333-45668 on Form S-1, filed with the SEC on September 12,
                           2000 and as amended by Pre-Effective Amendment No. 1 on October 11, 2000
                           and by Post-Effective Amendment No. 1 on May 30, 2001.       | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|10.5  | Registrant's 2000 Independent Directors Stock Option
                           Plan. Incorporated by reference to Exhibit 4.3 to Registrant's
                           Registration Statement No.  333-64356 on Form S-8 filed with the SEC on
                           July 2, 2001.                                                                                                                                                   | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|10.6  | Registrant's 2000 Stock Incentive Plan.
                           Incorporated by reference to Exhibit 4.4 to Registrant's Registration
                           Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.                                                                                                                                                                                                  | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|10.7  | Registrant's 2002 Employee Stock Purchase
                           Incorporated by reference to Exhibit 4.5 to Registrant's Registration Statement N. 333-113339 on Form S-8 filed with the SEC on March 5, 2004.                                                                                                                                                                                                                          | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|11    | Statement regarding computation of earnigs per share.
                           Included herein in Note 13 "Earnings per share", contained within the Notes to Consolidated Financial Statements, and incorporated herein by reference.                                                                                                                                                                                                     | 74  
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|12    | Statement regarding computation of ratios.
                           Included herein in Item 6, "selected Financial Data".                                                                                                                                                                                                                                                                                                                  | 8   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|13    | Annual Report to Shareholders.
                           Incorporated by reference to the 2003 Annual Report to Shareholders filed with the SEC
on Form ARS.                                                                                                                                                                                                                                                                                | *   
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|14    | Code of Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                              | 92  
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|21    | Subsidaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                               | 96  
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|23    | Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                                                                                             | 97  
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|31.1  | Rule 13a-14(a) Certification of Principal Executive
                           Officer.                                                                                                                                                                                                                                                                                                                                                      | 98  
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|31.2  | Rule 13a-14(a) Certification of Principal Financial
                           Officer.                                                                                                                                                                                                                                                                                                                                                      | 99  
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|32.1  | Certification of Principal Executive Officer pursuant to
                           18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                           Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                 | 100 
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|32.2  | Certification of Principal Financial Officer pursuant to
                           18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                           Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                 | 101 
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                              |     
|      | * - Incorporated by Reference                                                                                                                                                                                                                                                                                                                                                                                                                |