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.

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].

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

AGGREGATE MARKET VALUE OF
THE VOTING COMMON STOCK HELD BY NONAFFILIATES OF THE REGISTRANT EQUALS
$51,419,439, AS OF JUNE 28, 2002, BASED ON A MARKET PRICE OF $36.00. THE NUMBER
OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 14, 2003, EQUALS 1,824,829.

Excerpts from the
Registrants 2002 Annual Report to Shareholders are incorporated herein by
reference in response to Part II. The Registrants definitive Proxy
Statement to be used in connection with the 2003 Annual Meeting of Shareholders
is incorporated herein by reference in partial response to Part III.

`Contents
Business                                                                3
Properties                                                              4
Legal Proceedings                                                       5
Submission of Matters to a Vote of Security Holders                     6
Market for the Company's Common Equity and
   Related Stockholder Matters                                          7
Select Financial Data                                                   7
Mangements's Discussion and Analysis
   of Financial Condition and Results of Operations                     8
Financial Statement and Supplementary Data                              9
Changes in and Disagreements with Accountants
   on Accounting and Financial Disclosure                              48
Directors and Executive Officers of the Company                        87
Executive Compensation                                                 87
Security Ownership of Certain Beneficial Owners and Management         88
Certain Relationships and Related Transactions                         88
Controls and Procedures                                                88
Exhibits, Financial Statement Schedules and Reports on Form 8-K        90
Signatures                                                             92
Certificatons                                                          94
Exhibit Index                                                          97`

Fidelity D&D Bancorp,
Inc (the Company) was incorporated in the Commonwealth of Pennsylvania, on
August 10, 1999, whose wholly owned state chartered commercial bank is The
Fidelity Deposit and Discount Bank (the Bank) and is headquartered at Blakely
and Drinker Streets in Dunmore, Pennsylvania. Financial holding company status
was elected effective June 27, 2001.

The Bank has offered a full
range of traditional banking services since it commenced operations in 1903. The
Bank has a trust department and also provides alternative financial products.
The service area is comprised of the Borough of Dunmore and the surrounding
communities in Lackawanna and Luzerne counties.

A complete list of services provided by the Bank is detailed in the section entitled "Products & Services" contained herein.

The Bank is one of two financial institutions headquartered in Dunmore, Pennsylvania. Sources of competition come from:

- Local Community Banks
- Savings Banks
- Money Market Funds
- Mutual Funds
- Credit Unions
- Savings & Loans
- Insurance Companies
- Regional Banks
- Small Loan Companies
- Other Financial Service Companies

There are no concentrations
of loans that, if lost, would have a materially 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 impact.

On December 31, 2002, the Company had 176 full-time equivalent employees, including officers and part-time employees.

The Company is subject to the regulations of:

- The Securities and Exchange Commission
- The Federal Reserve Board

The Bank is subject to the regulations of:

- The Pennsylvania Department of Banking
- The Federal Deposit Insurance Corporation

Accounting policies and
procedures are designed to comply with accounting principles, generally accepted
in the United States of America (GAAP).

Applicable regulations relate to, among other things:

- operations
- securities
- risk management
- consumer compliance
- mergers
- consolidation
- reserves
- dividends
- branches
- capital adequacy

The Bank is examined by the
Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation
on an alternate year basis. The last examination was conducted by the
Pennsylvania Department of Banking as of September 30, 2002.

The Companys internet
address is www.the-fidelity.com. The Company currently does not make
available the Annual Report on Form 10-K, quarterly reports or Form 10-Q and
current reports or Form 8-K through the website. The Company is in the process
of constructing space within the website to accommodate this information in the
future. The anticipated completion date to make these reports available is June
2003. In the meantime, these reports will be provided without charge in either
electronic or paper format upon request.

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 windows and two twenty-four
hour automated teller machines (ATMs). Administrative, Loan, Trust, Personal
Investment, operational departments and customer service areas are also located
in this building. There is space available for future use. The main office
complex is 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 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 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 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
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 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 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
windows.

On July 17, 2002, the Bank
opened a new location in Lackawanna County. 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 windows.

The Bank contracted space during 2002 for free standing twenty-four hour ATMs located at:

- 300 Meadow Ave. Scranton, Pennsylvania
- Route 307 Covington Township, Pennsylvania
- 511 Main St. Childs, Pennsylvania
- 1650 W. Main St. Stroudsburg, Pennsylvania

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

The Bank owns a commercial
facility located at 116  118 N. Blakely Street Dunmore, Pennsylvania. The
facility is currently leased by a non-related entity. The property is held for
possible future expansion.

All foreclosed properties
are listed for sale. Foreclosed properties are recorded on the Companys
balance sheet at the lower of cost or fair value.

Repossessed assets consist
of vehicles financed by the Company. 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 and Lease Losses.

Terminated leases are
vehicles that were lease financed by the Company and contractual terms
fulfilled. As per the lease agreement, the vehicles are returned to the Company
and recorded on the books at the residual value. Vehicles are subsequently sold
at public auction. Any difference between residual value and auction price is
submitted to the Companys residual insurance carrier for payment. After
receipt of residual insurance proceeds, any remaining deficiency balance is
charged against current earnings.

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, demands approximately
$250,000 in connection with certain environmental remediation activities. The
activities were purportedly performed prior to the opening of the Banks
new 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. Formal
discovery has commenced and depositions are scheduled through May 2003. The Bank
intends to vigorously defend this action.

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
the Companys undivided profits or financial condition. No other 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 governmental authorities have initiated or contemplated any
material legal actions against the Company or the Bank.

Shareholders requesting
information about the Companys common stock may contact Michael F.
Marranca, Chairman of the Board and President or Joseph J. Earyes, Executive
Vice President and Chief Executive Officer. Requests may be mailed to:

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 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.

`2002                                            2001
                                   Prices          Dividends                         Prices       Dividends
                           High              Low               Paid            High           Low          Paid


1st Quarter               $37.50            $36.50             $.20           $37.375        $36.00       $.1875
2nd Quarter               $37.50            $37.00             $.21           $37.00         $35.50       $.20
3rd Quarter               $39.50            $37.25             $.21           $37.00         $35.90       $.20
4th Quarter               $38.50            $37.40             $.22           $37.75         $36.40       $.20`

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 had approximately 1,450 shareholders at March
14, 2003 and approximately 1,446 at December 31, 2002. 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.

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.

`2002              2001              2000             1999             1998
                                                    ----              ----              ----             ----             ----
Balance Sheet Data:
-------------------
Total assets                                 $577,989,236       $569,029,838      $491,077,054     $446,569,505      $348,069,896
Total investment securities                   149,549,607        153,973,988       119,756,391      109,262,221        78,607,860
Net loans                                     354,262,050        353,976,324       333,600,975      296,193,518       235,430,079
Loans available-for-sale                       28,715,355         16,150,020         9,953,958        4,895,124         8,527,076
Total deposits                                413,788,176        407,778,728       339,310,328      294,366,985       239,734,390
Total borrowings:                             114,213,014        117,480,988       111,024,721      117,554,046        71,657,299
Total shareholders' equity                     45,234,433         40,172,230        37,215,063       31,841,549        33,745,541


Operating Data for the year end:
--------------------------------
Total interest income                        $ 34,567,393       $ 36,379,689      $ 35,085,780     $ 28,541,051      $ 23,443,709
Total interest expense                        (17,882,440)       (20,853,631)      (21,468,230)     (15,375,799)      (12,308,632)
                                             ------------       ------------     ------------       ------------    ------------
Net interest income                            16,684,953         15,526,058        13,617,550       13,165,252        11,135,077
Provision for loan losses                      (1,664,000)        (2,474,637)       (1,158,260)        (530,000)         (646,000)
                                               -----------        -----------      -----------     ------------      ------------
Net interest income after provision for
loan losses                                    15,020,953         13,051,421        12,459,290       12,635,252        10,489,077
Other income                                    3,302,749          3,701,578         3,005,218        2,227,787         1,902,734
Other operating expense                       (12,751,174)       (11,998,997)      (11,699,489)     (10,170,458)       (7,609,162)
                                             -------------      -------------     -------------    -------------     -------------
Income before provision for income taxes        5,572,528          4,754,002         3,765,019        4,692,581         4,782,649
Provision for income taxes                     (1,526,355)          (905,866)         (558,391)        (894,888)       (1,246,760)
                                             -------------      -------------     -------------    -------------     -------------
Net Income                                     $4,046,173         $3,848,136        $3,182,628       $3,797,693        $3,535,889
                                             ============       ============      ============     ============      ============

Per Share Data:
---------------
Net income per share - basic*                 $      2.23         $     2.12        $     1.76       $     2.12       $      2.08
Net income per share - diluted*               $      2.22         $     2.12        $     1.76       $     2.12       $      2.08
Dividends declared                            $ 1,526,371         $1,426,097        $1,366,075       $1,344,141       $ 1,200,409
Dividends per share                           $      0.84         $     0.79        $     0.76       $     0.75       $      0.70
Book Value per share                          $     24.86         $    22.08        $    20.60       $    17.68       $     18.88
Weighted average number of shares
Outstanding**                                   1,817,430          1,811,391         1,803,674         1,792,232        1,697,108
Number of shares outstanding at year
end**                                           1,819,376          1,819,168         1,806,274         1,800,784        1,787,294

Ratios:
-------
Return on average assets                             0.70%              0.72%             0.67%            0.94%             1.13%
Return on average equity                             9.47%              9.64%             9.54%           11.42%            11.78%
Net Interest Margin                                  3.10%              3.17%             3.14%            3.55%             3.82%
Efficiency Ratio                                    63.42%             62.42%            67.66%           63.23%            57.24%
Expense Ratio                                        2.20%              2.25%             2.46%            2.50%             2.43%
Allowance for loan losses to total
loans                                                1.02%              1.01%             0.95%            1.05%             1.23%
Dividend payout ratio                               37.72%             37.06%            42.92%           35.39%            33.95%
Equity to assets                                     7.83%              7.06%             7.58%            7.13%             9.70%
Equity to deposits                                  10.93%              9.85%            10.97%           10.82%            14.08%

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

Besides historical
information, this Form 10-K contains forward-looking statements. Forward-looking
statements are subject to uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Important factors that might cause differences include, but are not limited to,
those discussed in the section entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations. We caution
readers not to place undue reliance on these forward-looking statements. The
forward-looking statements reflect managements analysis only as of
December 31, 2002. The Company undertakes no obligation to update these
forward-looking statements to reflect circumstances that arise after December
31, 2002. Readers should carefully review the risk factors described in other
documents the Company files with the Securities and Exchange Commission. Such
documents include Reports on Form 10-Q and current Reports on Form 8-K.

Forward-looking statements
by their nature are subject to assumptions, risks and uncertainties. For a
variety of reasons, actual results could differ materially from those contained
or implied by the forward-looking statements:

- Interest rates could change more quickly or dramatically than expected.
- Significant unexpected economic change may affect the ability to attract or
maintain sources of funding. Loan demand and/or repayment could change in
unanticipated ways.
- Capital market disruptions could have a negative effect on the Companys
financial condition and the Companys ability to raise funds by a capital
issuance.
- Strategic initiatives,
designed to enhance the Companys performance, may take longer than
planned.
- Acquisition of assets could affect the Company in ways that have not
been anticipated.
- The Company could become subject to new and unexpected
accounting, tax or regulatory practices or requirements.

The presentation of
financial statements in conformity with generally accepted accounting principles
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, 2002 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 future years. 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 and
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 herein by reference.

The following discussion
and analysis presents the significant changes in the results of operations and
financial condition of the Company and its wholly-owned subsidiary, the Bank.
This discussion should be read in conjunction with the consolidated financial
statements and notes included in this report.

The following table is a
comparison of condensed balance sheet accounts and percentage to total assets at
December 31, 2002, 2001 and 2000;

`(Thousands of Dollars)
                                                        2002                     2001                    2000
                                                  Amount    Percent      Amount      Percent       Amount    Percent
                                                  ------    -------      ------      -------       ------    -------
Assets:

Cash and due from banks                        $  18,763      3.25%    $  19,845      3.49%      $  5,503      1.12%
Interest bearing deposits with
Financial institutions                             7,456      1.29         5,800      1.02          3,277      0.67
Investment securities                            149,550     25.87       153,974     27.06        119,756     24.39
Net loans                                        354,262     61.29       353,976     62.21        333,601     67.93
Loans Available-for-sale                          28,715      4.97        16,150      2.84          9,954      2.03
Accrued interest receivable                        2,347      0.41         3,268      0.57          3,546      0.72
Bank premises and equipment                       12,735      2.20        11,514      2.02         11,391      2.32
Foreclosed assets held for sale                      437      0.08           688      0.12            353      0.07
Other assets                                       3,724      0.64         3,815      0.67          3,696      0.75
                                               ---------    ------     ---------    -------      --------    -------
Total assets                                   $ 577,989    100.00%    $ 569,030    100.00%      $491,077    100.00%
                                               =========   ========    =========   ========      ========    =======

Liabilities:

Deposits, non-interest bearing                 $  61,151     10.58%    $  53,302      9.37%      $ 47,185      9.61%
Certificates of deposit of $100,000
  or more                                        129,487     22.40       132,680     23.32         94,718     19.29
Other interest-bearing deposits                  223,150     38.61       221,797     38.98        197,407     40.20
Short-term borrowings                             51,213      8.86        54,481      9.57         48,025      9.78
Other borrowed funds                              63,000     10.90        63,000     11.07         63,000     12.82
Accrued interest payable and other
  Liabilities                                      4,754      0.82         3,598      0.63          3,527      0.72
                                               ---------    ------     ---------    -------      --------    -------
Total liabilities                                532,755     92.17       528,858     92.94        453,862     92.42
Shareholders' equity                              45,234      7.83        40,172      7.06         37,215      7.58
                                               ---------    ------     ---------    -------      --------    -------
Total liabilities and shareholders'
Equity                                         $ 577,989    100.00%    $ 569,030    100.00%      $491,077    100.00%
                                               =========    =======    =========    ========     ========    =======`

`Dollar        Percent
                                                December 31, 2002         December 31, 2001                 change         change

      Noninterest-bearing deposits
Personal                                             $ 22,956,626              $ 22,333,970                $ 622,656        2.79%
Non-personal                                           24,877,991                23,622,034                1,255,957        5.32%
Public fund                                             4,039,547                 2,872,126                1,167,420       40.65%
Bank checks                                             9,277,301                 4,473,474                4,803,827      107.38%
----------------------------------------------------------------------------------------------------------------------------------
                 Total                               $ 61,151,465              $ 53,301,605              $ 7,849,860       14.73%
==================================================================================================================================

        Certificates of deposit
          of $100,000 or more
Personal                                             $ 79,169,750              $ 61,521,341             $ 17,648,409       28.69%
Non-personal                                           23,571,462                23,391,143                  180,318        0.77%
Public fund                                            21,111,991                42,578,923              (21,466,933)     -50.42%
IRA's                                                   5,633,296                 5,188,588                  444,708        8.57%
----------------------------------------------------------------------------------------------------------------------------------
                 Total                              $ 129,486,498             $ 132,679,995             $ (3,193,497)      -2.41%
==================================================================================================================================

                 Other interest-bearing deposits
CD's less than $100,000:
Personal                                             $ 95,302,987              $ 98,038,828             $ (2,735,841)      -2.79%
Non-personal                                           11,054,526                25,035,720              (13,981,194)     -55.84%
Public fund                                               633,489                   833,561                 (200,072)     -24.00%
IRA's                                                  20,358,968                20,535,149                 (176,181)      -0.86%
----------------------------------------------------------------------------------------------------------------------------------
               sub total                              127,349,970               144,443,257              (17,093,288)     -11.83%
NOW acounts                                            40,719,446                36,012,247                4,707,199       13.07%
Money market deposits                                  16,561,358                 7,411,972                9,149,386      123.44%
Savings and clubs                                      38,519,440                33,929,652                4,589,788       13.53%
----------------------------------------------------------------------------------------------------------------------------------
                 Total                              $ 223,150,213             $ 221,797,128              $ 1,353,085        0.61%
==================================================================================================================================

             Total deposits
Noninterest-bearing deposits                         $ 61,151,465              $ 53,301,605              $ 7,849,860       14.73%
Interest-bearing deposits                             352,636,711               354,477,123               (1,840,412)      -0.52%
----------------------------------------------------------------------------------------------------------------------------------
                 Total                              $ 413,788,176             $ 407,778,728              $ 6,009,448        1.47%
==================================================================================================================================

              Public funds
Noninterest-bearing                                   $ 4,039,547               $ 2,872,126              $ 1,167,420       40.65%
Certificates of deposit                                21,745,480                43,412,484              (21,667,004)     -49.91%
NOW acounts                                            10,299,948                 6,868,500                3,431,448       49.96%
Money market deposits                                   8,923,912                   442,860                8,481,051     1915.06%
Savings and clubs                                       2,806,208                 1,413,952                1,392,257       98.47%
----------------------------------------------------------------------------------------------------------------------------------
                 Total                               $ 47,815,094              $ 55,009,922             $ (7,194,828)     -13.08%
==================================================================================================================================

           Internet deposits
Noninterest-bearing                                         $ 907                 $ 102,942               $ (102,035)     -99.12%
Interest-bearing                                       11,139,780                26,345,696              (15,205,916)     -57.72%
----------------------------------------------------------------------------------------------------------------------------------
                 Total                               $ 11,140,687              $ 26,448,638            $ (15,307,951)     -57.88%
==================================================================================================================================

Total assets                                        $ 577,989,236             $ 569,029,838
Total deposits to total assets                             71.59%                    71.66%
Internet deposits to total deposits                         2.69%                     6.49%
Public funds to total deposits                             11.56%                    13.49%
Public funds to total assets                                8.27%                     9.67%`

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.

Among the reasons cited by depositors as to why they selected the Bank are:

- Courtesy and professionalism of staff
- Expanded branch network
- Extended Banking hours
- Products and services offered
- Internet services
- Other banking relationships

Part of the non-interest
bearing deposits (DDA) growth is 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.

Commercial products include:

- Sweep accounts
- Merchant Credit Card Processing
- Lock box operation
- Flex Cash Manager
- Fidelity @ Work

During 2002, the Bank instituted several programs, including the following to attract demand deposit accounts.

The Fidelity Check Card
Campaign was designed to issue check cards to new and existing depositors. With
the ease of purchasing goods and services with check cards, the Bank provides
depositors an incentive to increase balances carried in their accounts. During
the campaign, maintenance charges were waived for one year for any card issued.

Fidelitys
All-American Checking Campaign was initiated to attract personal and small
business checking accounts. Incentives included no minimum balance requirements
and the first order of 50 checks free.

The Visa Business Check Card Campaign targeted new business check cards and demand deposit accounts.

The Bank also offered
discounts on home equity loan fees and first year free safe deposit box rentals
for customers who had their payments directly charged to a demand deposit
account.

Commercial borrowers were encouraged to have their operating and payroll accounts at the Bank.

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.

The maturity distribution of CDs $100,000 or more at December 31, 2002 is as follows:

`3 Months         3 - 6          6 - 12            Over
          or less         Months          Months         12 months           Total
          -------         ------          ------         ---------           -----
        $24,462,673     $8,861,488     $45,995,624      $50,166,713       $129,486,498`

The over 12 months maturity
distribution of CDs represents 12.12% of total deposits at December 31, 2002.
The Bank believes this category provides a stable source of funds for future
requirements.

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.

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.

Sweep accounts comprise
approximately 64% of Repos. A sweep account is designed to insure that an
attached DDA is adequately funded and then excess DDA funds are transferred into
an interest-bearing overnight Repo, on a daily basis. 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 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.

Repos and overnight
borrowings are included with short-term borrowings on the balance sheet (see
Note 7 Short-term Borrowings, contained within the Notes to
Consolidated Financial Statements).

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. Rates on the advances are adjustable quarterly, should market
rates increase. However, year-end rates on similar FHLB advances are 416 basis
points below the rates being paid by the Bank. It is unlikely that during 2003
FHLB borrowing rates will increase above the rates currently being quoted by the
FHLB. Should this occur, the Bank has the option, at that time, to repay or
renegotiate the advances.

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.

Total assets of the Company
increased $8,959,000 or 1.575% during 2002. The increase is the result of growth
in deposits, as previously discussed, and the retention of profits.

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). MBS are pools of residential mortgages. The majority of MBS
owned by the Bank are guaranteed by United States Governmental Agencies.
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, purchased bonds were classified as
held-to-maturity and $128,932,000, were classified as AFS.

Classifying bonds as
held-to-maturity protects the balance sheet from downward market trends that AFS
securities are exposed to. The decision to classify securities as AFS gives the
Bank greater flexibility in the management of the investment portfolio and
overall liquidity management.

The Bank actively monitors
depreciation in the bond portfolio. When an individual bond, classified AFS,
starts to depreciate, the Bank will determine if it is advisable to sell the
security and reinvest the proceeds at a higher yield. Such considerations are
based on current market conditions and liquidity needs. Even though bonds in the
Banks portfolio may depreciate in market value, the principal and interest
of the United States Government Agency bonds, United States Government Agency
issued MBS and municipal investments is guaranteed by the issuer.

A comparison of investments at year-end for the three previous periods is as follows:

`2002                      2001                         2000
                                           Amount        Percent      Amount      Percent          Amount       Percent
                                           ------        -------      ------      -------          ------       -------
U.S. Government Agencies               $  13,275,625       8.88%   $118,229,745     76.78%     $  81,513,237      68.07%
Mortgage Backed Securities               118,614,057      79.31      19,349,772     12.57         15,033,019      12.55
State & Municipal Subdivisions             9,736,815       6.51      11,609,765      7.54         17,530,127      14.64
Preferred Term Securities                  3,990,000       2.67       1,000,000      0.65                  0       0.00
Equity Securities                          3,933,110       2.63       3,784,706      2.46          5,680,007       4.74
                                       -------------     -------   ------------    -------     -------------     --------
Total                                  $ 149,549,607     100.00%   $153,973,988    100.00%      $119,756,390     100.00%
                                       =============     =======   ============    =======     =============     ========

The distribution of debt securities by stated maturity date at December 31, 2002 is as follows:


                                       1 Year            1 Through      5 Through         More than
                                       or less            5 years        10 years          10 years            Total
                                       -------            -------        --------          --------            -----
U.S. Government Agencies             $ 2,038,794      $  3,030,938     $ 8,205,893     $          0       $ 13,275,625
Mortgage Backed Securities                     0                 0       4,813,782      113,800,275        118,614,057
State & Municipal Subdivisions           882,045           202,784       3,608,628        5,043,358          9,736,815
                                     -----------      ------------     -----------      -----------       ------------
Preferred Term Securities                      0                 0               0        3,990,000          3,990,000
                                     -----------      ------------     -----------      -----------       ------------
Total debt securities                 $2,920,839        $3,233,722     $16,628,303     $122,833,633      $ 145,616,497
                                     ===========      ============     ===========      ===========       ============`

Debt securities are stated
net of unrealized gain on AFS securities. Net unrealized gain on AFS debt
securities at December 31, 2002, was $1,867,000. Debt securities do not include
equity securities. Net unrealized gain on equity securities was $50,000 at
December 31, 2002.

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

`1 Year                1 through       5 through      More than
                                    Or less               5 years         10 years       10 years         Total
                                    -------               -------         --------       --------         -----
U.S. Government Agencies            4.50%                 4.10%             5.70%          0.00%           5.15%
Mortgaged Backed Securities         0.00                  0.00              5.50           5.16            5.18
State & Municipal Subdivisions      7.41                  7.57              6.84           6.43            6.64
Preferred Term Securities           0.00                  0.00              0.00           3.77            3.77
                                    ----                  ----              ----           ----            ----
Total debt securities               5.39%                 4.32%             5.89%          5.17%           5.24%
                                    =====                 =====            =====          =====           =====`

There were no trading securities during 2002.

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.

Growth in the portfolio was
slowed by the economic downturn both nationally and locally. As lending rates
fell, prepayments on existing loans increased. Loans refinanced at lower rates
increased the Banks exposure to interest-rate risk from potential market
upturns. Many new and refinanced loans were classified as AFS, with the
intention of immediate sale.

For a further discussion on
these issues, see the MD&A sections entitled, Loans
available-for-sale and Liquidity Management and Interest Rate
Sensitivity. Additional discussion is in Note 1 Nature of Operations
and Summary of Significant Accounting Policies  Loans Held for Sale,
contained within the Notes to Consolidated Financial Statements, and
incorporated herein by reference.

Being committed to the
market area, the Bank seeks quality loans, both commercial and consumer.
However, the results of 2001 caused the Bank to review lending policies and
collection efforts. Additional personnel, including a new experienced Chief
Credit Officer, were hired late in 2001, to address these concerns. As a result
of these efforts, delinquencies and net charge-offs were reduced and the overall
quality of the portfolio improved during 2002.

For a further discussion of
delinquencies and net charge-offs, see the MD&A section entitled
Provision for Loan Losses. Further 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.

It is anticipated that the
volume of prepayments and refinance requests will slow, as rates become stable
or increase. Furthermore, new loans will be structured to better withstand
market fluctuations and improved collection efforts should curtail serious
delinquencies.

The commitment of the Bank
to our local communities remains strong and the Bank is sufficiently capitalized
and structured to deal with these challenges.

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.

The Bank continues to
originate loans using the Small Business Administration (SBA) guaranteed loan
program. In return for the Bank funding a loan, which met the criteria of the
program, the SBA guarantees a material portion of the principal balance to the
Bank, should the borrower default.

Tax-free industrial
development loans made to or backed by local municipalities decreased to
$8,401,000 at December 31, 2002. Large payoffs at the end of the year
contributed to the decline. However, the 2002 year- to-date outstanding average
balance of tax-free industrial development loans was $14,882,000 compared to
$11,186,000 during 2001.

The Bank participates in
the Pennsylvania Capital Access Program (PENNCAP). PENNCAP is a small business
lending program whereby the State allocates a reserve fund to be used in the
event the Bank were to experience a loss on a loan registered in the program. At
December 31, 2002, $4,974,000 commercial loans were registered in this program.

The Bank serves the local
market with real estate loans. Real estate and construction loan totals of
$114,163,000 were 29.46% of gross loans and AFS 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.

The Bank determined that it
was prudent to classify a majority of new or refinanced mortgages as AFS during
the low interest rate environment experienced during 2002. Thus, providing the
ability to maintain interest rate risk sensitivity by selling these mortgages,
when mortgage rates begin to rise and the means to produce liquidity, as needed,
to fund operations and loan demand. The delay in actively selling these loans
caused the considerable net growth in the loans AFS portfolio.

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.

A comparison of loans by amount at year-end for the five previous periods is as follows (all loans are domestic):

`2002             2001              2000              1999             1998
                                          -----            -----             ----              ----             ----
Real estate                        $ 85,447,703     $ 96,740,226     $109,942,570      $111,242,490      $99,955,640
Consumer                             56,984,927       67,782,196       66,441,389        64,998,362       47,549,512
Commercial                          202,974,155      179,043,816      146,610,685       113,061,093       85,425,708
Direct financing leases               6,578,720        9,961,967       12,733,075         5,710,579        2,248,990
Real estate construction              6,797,002        5,446,870        2,971,504         5,335,753        3,810,975
                                      ---------        ---------        ---------         ---------        ---------
Gross loans                         358,782,507      358,975,075      338,699,223       300,348,277      238,990,825
Less:
Unearned discount                       620,703        1,256,818        1,833,968           982,384          553,033
Allowance for loan losses             3,899,753        3,741,933        3,264,280         3,172,375        3,007,713
                                      ---------        ---------        ---------         ---------        ---------
Net Loans                          $354,262,050     $353,976,324     $333,600,975      $296,193,518     $235,430,079
                                   ============     ============     ============      ============     ============

Loans available-for-sale           $ 28,715,355      $16,150,020       $9,953,958        $4,895,124       $8,527,076
                                   ============      ===========       ==========        ==========       ==========

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

                                           2002            2001             2000              1999             1998
                                           ----            ----             ----              ----             ----
Real estate                              23.82%           26.95%           32.46%            37.04%           41.82%
Consumer                                 15.88            18.88            19.62             21.64            19.90
Commercial                               56.57            49.88            43.29             37.64            35.74
Direct financing leases                   1.83             2.77             3.76              1.90             0.94
Real estate construction                  1.89             1.52             0.87              1.78             1.60
                                        ------           -------          -------           -------           ------
Gross loans                             100.00%          100.00%          100.00%           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, 2002.
Excluded from the table are non-construction real estate loans, consumer loans
and direct financing leases (amounts in thousands):

`1 year             1 - 5       More than
                                       or less             Years         5 years       Total
                                       -------             -----         -------       -----
Commercial loans                      $ 28,904          $ 35,581        $138,489    $202,974
Real estate construction                 6,797                 0               0       6,797
                                      --------          --------        --------    --------
Total                                 $ 35,701          $ 35,581        $138,489    $209,771
                                      ========          ========        ========    ========`

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 - 5         More than
                                         years           5 years           Total
                                         -----           -------           -----
Fixed interest rate                   $ 12,611          $ 28,841        $ 41,452
Variable interest rate                  22,970           109,648         132,618
                                      --------          --------        --------
Total                                 $ 35,581          $138,489        $174,070
                                      ========          ========        ========`

Residential mortgages,
guaranteed portion of Small Business Administration loans and student loans are
generally classified as available-for-sale at origination. 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 rate
environment, the rates on adjustable rate loans would decrease and interest
income would be negatively affected. To protect the Bank from interest-rate
risk, loans meeting these conditions may be classified as saleable. Certain
consideration is also given to current liquidity needs.

Fees or costs associated with loan originations are capitalized
and charged or credited to
loan income over the term of the loan. The measures apply to both
available-for-sale and held-to- maturity loans.

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, only to the extent of previous
write-downs below cost.

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 include $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.

Sale of the portfolio will
be concluded during the first quarter of 2003. The purchaser is an experienced
handler of credit card lines and there will be no disruption of service. The
cards will be marketed with the Bank logo.

Full recourse will be
required for two years on customers with a defined below average credit score.
The Company will estimate and accrue a recourse liability from sale proceeds to
cover the two year full recourse provision, based on the Companys past
loss experience.

The Company expects to
recognize a gain on the sale of the credit card receivables in 2003. The
recourse liability will be periodically evaluated and increased, if necessary,
through a charge to earnings. After the two year recourse period is completed,
the remaining recourse liability, if any, will be recognized in earnings.

As detailed in the
Consolidated Statement of Cash Flows contained herein, proceeds from
the sale of loans in 2002 were $26,413,000. The sales were primarily residential
mortgages.

Servicing rights on sold
loans were retained by the Bank. Servicing rights are retained so 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.

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.

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.

Personal DDA balances
increased $3,051,000, or 15.82%, from $19,283,000 at December 31, 2000, to
$22,334,000 at December 31, 2001. DDA balances at the Kingston office, opened
2001, were $273,000 and deposits from the Peckville branch, which opened in
2000, increased $217,000 during 2001,

Non-personal and Public Fund DDA balances grew $4,302,000 or 19.40% in 2001.

Official Bank checks issued and outstanding decreased $1,237,000 in 2001.

As a net result of these
changes non-interest bearing deposits grew $6,116,000 or 12.96% from $47,186,000
at December 31, 2000, to $53,302,000 at December 31, 2001. The increase in non
interest-bearing deposits represents 9.06% of the growth in total deposits
during 2001.

Interest-bearing deposits
increased $62,352,000 or 21.34% from $292,125,000 at December 31, 2000, to
$354,477,000 at December 31, 2001.

Savings and club accounts collectively increased $2,029,000 in 2001.

The decline in market rates
contributed to a $2,191,000 decrease in NOW accounts and a $7,980,000 decline in
money market deposits in 2001 Some of the deposits were placed into CDs, as
depositors favored a guaranteed rate over liquidity.

CDs increased $70,494,000
or 34.20%. Personal CDs grew $32,601,000, non-personal CDs grew $19,739,000 and
public fund CDs increased $18,154,000.

Total deposits increased $68,469,000 or 20.18% from $339,310,000 at December 31, 2000, to $407,779,000 at December 31, 2001.

Repos increased $18,271,000
or 50.77% from $35,987,000 at December 31, 2001, to $54,258,000 at December 31,
2001. Sweep accounts comprise approximately 74% of Repos.

With the increases in both deposits and Repos, $10,950,000 borrowed from the FHLB was paid off.

Total assets of the Company
increased $77,983,000 or 15.87% during 2001. The increase is the result of
growth in the liability section, as previously discussed and the retention of
profits.

During the final week of
2001, daily cash processing was transferred from FHLB, Pittsburgh to the Federal
Reserve Bank Philadelphia, (Fed). Cash letters consist of cashed or deposited
checks that are not drawn on the Bank and are sent for collection. The Fed was
selected based on lower handling costs and improved availability of fund
collection. Estimated savings from the transfer will approximate $30,000
annually.

Total investments had an increase during 2001 of $34,218,000, net of the change in the market value of AFS investments.

United States Government
Agency bonds totaling $89,295,000 and municipal securities of $3,820,000 were
called due to the fall in market rates. Principal payments on MBS, also affected
by the change in market rates, increased $1,613,000.

Sales of AFS United States
Government bonds and AFS municipal securities totaled $14,004,000 in 2001. Sales
were necessitated by the call provisions attached to all the bonds sold.

To replace the investments
called, prepaid or sold, the Bank purchased $137,904,000 United States
Government Agency bonds, $7,107,000 MBS and $1,000,000 preferred term
securities. After careful analysis of the characteristics of the individual
securities, $18,994,000 United States Agency bonds were classified as held-to
maturity. The remaining bonds were classified as AFS.

Preferred term securities
are pooled borrowings of FDIC insured financial institutions located within the
United States. The institutions are required to have a five-year satisfactory
operating history and tier 1 capital ratios greater than ten percent. Preferred
term securities a provide diversification within the portfolio. Rates paid on
the securities are approximately 200 basis points above Fed Fund rates and are
adjustable. The securities have five-year call protection.

Investments constituted
27.06% of total assets at December 31, 2001. Held-to maturity securities were
$21,640,000 and AFS investments were $132,334,000.

The tax equivalent yield on
debt securities by stated maturity date at December 31, 2001, is as follows
(yields are based on amortized cost):

`1 year           1 through        5 through         More than
                                     or less          5 years          10 years          10 years         Total
                                     -------          -------          --------          --------         -----
U.S. Government Agencies             0.00%            4.50%            5.78%             6.62%            5.75%
Mortgage Backed Securities           7.86             7.00             5.38              6.28             6.21
State & Municipal Subdivisions       6.88             7.30             7.25              7.11             7.20
Preferred Term Securities            0.00             0.00             0.00              3.63             3.63
                                     ----             ----             ----              ----             ----
      Total debt securities          6.39%            4.58%            5.96%             6.52%            5.91%
                                     =====            =====            =====             =====            =====`

Gross loans increased
$20,276,000 or 5.99% from $338,699,000 in 2000, to $358,975,000 in 2001. Gross
loans represent 63.09% of total assets at December 31, 2001.

Commercial loans increased $32,433,000 or 22.12% during 2001.

Tax-free industrial
development loans, which are a component of commercial loans, increased 18.03%
to $12,112,000 at December 31, 2001.

Real estate and
construction loans of $102,187,000 were 28.47% of gross loans at December 31,
2001. Outstanding balances of these loans declined $10,727,000 since December
31, 2000, due to principal repayments and by classifying new mortgages as AFS.

Included with real estate
loans are home equity lines of credit. The outstanding balance on the credit
lines increased $642,000 or 12.14% from $5,289,000 at December 31, 2000, to
$5,931,000 at December 31, 2001.

Consumer loans and direct
financing leases decreased $1,430,000 or 1.81% during 2001. A combination of
principal payments and the implementation of strategy not to aggressively book
indirect auto loans and leases caused the decrease.

The following table sets
forth the maturity distribution of the loan portfolio at December 31, 2001.
Excluded from the table are real estate loans, consumer loans and direct
financing leases (amounts in thousands):

`1 year           1 - 5             More than
                              or less          Years             5 years         Total
                              -------          -----             -------         -----
Commercial loans              $51,482          $49,655           $77,907       $179,044
Real estate construction        5,447                -                 -          5,447
                              -------          -------           -------       --------
Total                         $56,929          $49,655           $77,907       $184,491
                              =======          =======           =======       ========`

The following table sets
forth the sensitivity changes in interest rates for commercial and real estate
construction loans at December 31, 2001, (amounts in thousands):

`1 - 5       More than
                           Years        5 years                Total
                           -----        -------                -----
Fixed interest rate       $17,657       $21,814              $ 39,471
Variable interest rate     31,998        56,093                88,091
                         --------       -------              --------
Total                    $49,655        $77,907              $127,562
                         =======        =======              ========`

Due to the falling rate
environment, loans available-for-sale increased $6,196,000 or 62.25% to mitigate
the potential interest-rate risk.

Additions to premises and
equipment were $1,224,000 before depreciation of $1,101,000 in 2001.
Improvements to and equipping the Kingston branch were $718,000. System
improvements and the expansion of the ATM network comprised the majority of the
other additions.

An increase of $335,000 was due to repossessed vehicles.

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

`Net                     Dividends                 Earnings
                                                     Income                   Declared                  Retained
                                                   ----------                ----------                -----------

2002                                               $4,046,173                $1,526,371                $2,519,802
2001                                                3,848,136                 1,426,097                 2,422,039
2000                                                3,182,628                 1,366,075                 1,816,553
1999                                                3,797,693                 1,344,141                 2,453,552
1998                                                3,535,889                 1,200,409                 2,335,480`

Capital was further
increased in 2002 through the Dividend Reinvestment Plan (DRIP). Shareholders
reinvested $479,000 in dividends to purchase additional shares of stock.

Capital was affected by
changes in market rates. The Banks investment strategy reacting to market
changes resulted in a $2,527,000 improvement, net of deferred taxes, in the fair
value of investments classified as available-for-sale. At December 31, 2001, the
Bank reported a net unrealized loss on AFS securities of $1,262,000. At December
31, 2002, a net unrealized gain of $1,265,000 was reported.

During the second quarter
of 2002, 12,960 shares of common stock became available on the open market. The
Company purchased the stock for $479,640 with the intention to reissue the stock
under the dividend reinvestment plan. After the March 10, 2003 dividend payment
date, 12,432 shares of treasury stock were reissued under the dividend
reinvestment plan.

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.

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. Federal regulatory definitions of capital adequacy
take the form of minimum ratios. The Bank exceeds all minimum regulatory capital
requirements (see Note 15 Regulatory Matters, contained within the
Notes to Consolidated Financial Statements, and incorporated herein by
reference).

A yearly comparison of growth trends is as follows (increase/decrease)):

`Earning                                   Short-term                  Other
               Assets       %         Assets      %       Deposits      %      Borrowings     %          Borrowings    %
               ------       -         ------      -       --------      -      ----------     -          ----------    -

   2002     $ 8,859,398     2%     $ 7,325,219   1%     $ 6,009,448    1%    ($ 3,267,974)   (6%)               $ 0    0%
   2001      77,952,784     16      60,585,502   13      68,468,400    20        6,456,267    13                  0     0
   2000      44,507,549     10      44,562,595   10      44,943,343    15     (12,224,325)   (20)         5,695,000    10
   1999      98,499,609     29      88,171,199   26      54,632,595    23       30,843,747   105         15,053,000    36
   1998      58,311,070     20      54,885,888   19      21,962,495    10          304,848    1          30,000,000   245`

Earning assets do not include loans placed on non-accrual.

Liquidity management is to
ensure that adequate funds will be available to meet anticipated and
unanticipated deposit withdrawals, debt servicing payments, investment
commitments, commercial and consumer loan demand and ongoing operating expenses.
Funding sources include principal repayments on loans and investments, sales of
assets, growth in core deposits, short- and long-term borrowings and repurchase
agreements. Regular loan payments are a dependable source of funds, while the
sale of loans and investment securities, deposit flows, and loan prepayments are
significantly influenced by general economic conditions and level of interest
rates.

At December 31, 2002, the
Company maintained $26.2 million in cash and cash equivalents, which includes
Federal funds sold in the form of cash and due from banks (after reserve
requirements). In addition, the Company had $28.7 million of loans held for
resale and $137.8 million in AFS securities. This combined total of $192.7
million represented 33.4% of total assets at December 31, 2002. The Company
believes that its liquidity is adequate.

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, 2002, approximately 71.6%
of the Companys assets were funded by deposits acquired within its market
area. An additional 7.8% of the assets were funded by the Companys equity.
These two components provide a substantial and stable source of funds.

Net cash provided by
operating activities was $7.4 million for the year ended December 31, 2002, as
compared to net cash provided by operating activities of $6.8 million for the
comparable period in 2001. Net cash used in investing activities decreased $54.7
million for the year ended December 31, 2002, from $63.9 million to $9.2
million, which was primarily attributable to investment securities transactions.
Net cash provided by financing activities decreased $71.6 million from 2001. A
net decrease in the annual growth of interest-bearing deposits from 2001 to 2002
was the major component impacting funds provided by financing activities.

At December 31, 2002, the
Bank had approximately $68.2 million in unused sources of borrowed funds
available to meet liquidity requirements as follows:

- Approximated borrowing capacity at the Federal Reserve Bank of Philadelphia of $6.7 million
- Available funding at the Federal Home Loan Bank of Pittsburgh of $61.4 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.

Interest rate risk
management involves managing the extent to which interest-sensitive assets and
interest-sensitive liabilities are matched. Interest rate sensitivity is the
relationship between market interest rates and earnings volatility due to the
repricing characteristics of assets and liabilities. The Companys net
interest income is affected by changes in the level of market interest rates. In
order to maintain consistent earnings performance, the Company seeks to manage,
to the extent possible, the repricing characteristics of its assets and
liabilities.

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 management 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.

Repricing 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, 2002, the
Bank maintained a one year cumulative gap of positive $36.0 million or 6.23% of
total assets. The effect of this gap position provided a positive mismatch of
assets and liabilities which can expose the Bank to interest rate risk during a
period of decreasing interest rates. Conversely, in a rising interest rate
environment, net income could be positively affected because more assets than
liabilities will reprice during a given period.

`Interest Sensitivity Gap at December 31, 2002

                                               3 months       3 through      1 through        Over
                                                  or less     12 months        3 years       3 years        Total
                                               ------------   ---------      -----------     -------        -----
                                                                        (Dollars in thousands)

Cash and cash equivalents                     $  7,611       $       -      $       -     $  18,608      $  26,219
Investment securities(1)(2)                     17,699          35,043         56,537        40,271        149,550
Loans (2)                                      131,730          90,068        101,367        59,812        382,977
Fixed and other assets                               -               -              -        19,243         19,243
                                             ---------       ---------      ---------      --------      ---------
Total assets                                  $157,040       $ 125,111       $157,904      $137,934      $ 577,989
                                              ========       =========       ========      ========      =========

Non interest-bearing transaction deposits (3)$       -       $   6,126      $  16,848     $  38,177      $  61,151
Interest-bearing transaction deposits (3)        3,552          46,723         35,036         9,905         95,216
Time                                            15,987          42,257         63,983         5,708        127,935
Time over $100,000                              25,150          54,150         45,684         4,502        129,486
Repurchase Agreements                           47,232               -              -             -         47,232
Short-term borrowings                            4,978               -              -             -          4,978
Long-term debt                                       -               -          5,000        58,000         63,000
Other liabilities                                    -               -              -         4,754          4,754
                                             ---------       ---------      ---------      --------      ---------
     Total Liabilities                       $  96,899       $ 149,256      $ 166,551      $121,046      $ 533,752
                                             =========       =========      =========      ========      =========

Interest sensitivity gap                     $  60,141       $ (24,145)    $  (8,647)    $   16,888
                                             =========       =========     ==========    ==========

Cumulative gap                               $  60,141       $  35,996      $  27,349     $  44,237
                                             =========       =========      =========     =========

Cumulative gap to total assets                  10.41%           6.23%          4.73%         7.65%

(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, 2002 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, 2002 levels.

`Rates +200                         Rates -200
                                                              ----------                         ----------

Earnings at risk:
   Percent change in:
      Net Interest Income                                         9.60%                            (16.30)%
      Net Income                                                 26.70                             (45.40)

Economic value at risk:
   Percent change in:
      Economic value of equity                                  (18.40)                             (8.30)

      Economic value of equity
        as a percent of total assets                             (1.19)                             (0.54)`

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%.

`2002         2001         2000
                                     ----         ----         ----

Net income                      $4,046,173    $3,848,136    $3,182,628
Diluted earnings per share           $2.22         $2.12         $1.76
Increase/(decrease) per share         0.47%        20.45%       (16.98)%`

Per share data has been adjusted for the stock exchange in 2000.

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 is 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 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.

During 2001, the Federal
Reserve Bank reduced the discount rate eleven times. These actions caused
national prime to decrease from 9.50% to 4.75%. The weighted average rate of
national prime decreased 234 basis points.

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 2001. Approximately 23% of
the entire loan portfolio was subject to immediate repricing at December 31,
2001.

Bonds that were called due to market rate decreases were replaced with lower yielding investments.

As a result of the change in market rates, the tax equivalent yield on earning assets decreased 58 basis points.

Interest rates paid on
liabilities were reduced due to the decline in market rates. This action and a
$10,950,000 reduction in short term-borrowings produced a 72 basis point
decrease in the cost of funds.

With the 14 basis point
improvement in tax-equivalent net interest spread and volume increases in
investments and loans, net interest income rose $1,909,000 or 14.02% during
2001. A comparison of average earnings assets and the net tax equivalent yields
for 2002, 2001 and 2000, in thousands, is as follows:

`2002                            2001                             2000
                                     Average    Revenue     Yield     Average    Revenue    Yield     Average    Revenue     Yield
                                     Balance   (Expense)    (Cost)    Balance   (Expense)   (Cost)    Balance   (Expense)    (Cost)
                                     -------   ---------    ------    -------   ---------   ------    -------   ---------    ------
       Earning assets
       --------------

Interest-bearing deposits               $919        $17      1.81%    $12,716      $181      1.42%     $6,833        $45      0.66%

Investments:
US Government Agencies                76,396      4,374       5.73     85,365     5,535       6.48     81,741      5,545       6.78
Mortgage-backed securities            61,082      3,106       5.08     16,971     1,070       6.30     13,180        876       6.65
State & Municipal                     10,185        662       6.50     15,144     1,017       6.72     21,320      1,520       7.12
Other                                  6,337        240       3.78      4,311       272       6.31      5,555        383       6.90
                                     -------      -----       ----    -------     -----       ----    -------      -----       ----
Total Investments                    154,000      8,382       5.44    121,791     7,894       6.48    121,796      8,324       6.51
                                     =======      =====       ====    =======     =====       ====    =======      =====       ====

Loans:
Commercial                           202,500     12,547       6.20    169,621    13,748       8.11    138,420     12,473       9.01
Consumer                              58,157      4,925       8.47     62,180     5,436       8.74     60,728      5,272       8.68
Real estate                          113,679      8,095       7.12    110,854     8,207       7.40    118,375      8,720       7.37
Direct financing leases                7,558        552       7.30     10,026       724       7.22      8,775        764       8.71
Credit cards                           2,897        283       9.77      2,959       283       9.56      2,054        202       9.83
                                     -------      -----       ----    -------     -----       ----    -------      -----       ----
Total loans                          384,791     26,402       6.86    355,640    28,398       7.99    328,352     27,431       8.35
                                     =======     ======       ====    =======    ======       ====    =======     ======       ====

Federal funds sold                    11,584        190       1.64     20,501       544       2.65          0          0          0
                                     -------      -----       ----    -------     -----       ----    -------      -----       ----

Total earning assets                $551,294    $34,991      6.35%   $510,648   $37,017      7.25%   $456,981    $35,800      7.83%
                                    ========    =======      =====   ========   =======      =====   ========    =======      =====

Interest-bearing liabilities
----------------------------

Deposits:
Savings                              $36,031     ($363)      1.01%    $31,523    ($448)      1.42%    $32,881     ($631)      1.92%
NOW                                   37,068      (400)       1.08     35,513     (747)       2.10     38,125    (1,840)       4.83
MMDA                                   9,895      (142)       1.44     11,538     (324)       2.81     13,655      (533)       3.90
CDs  $100,000                       141,964    (6,422)       4.53    130,494   (7,133)       5.47    109,665    (6,291)       5.74
CDs  $100,000                       144,802    (5,929)       4.11    123,928   (6,871)       5.54     91,055    (5,783)       6.35
Clubs                                  1,518       (29)       1.94      1,287      (33)       2.56      1,216       (32)       2.61
                                     -------      -----       ----    -------     -----       ----    -------      -----       ----
Total Deposits                       371,278   (13,285)       3.58    334,283  (15,556)       4.65    286,597   (15,110)       5.27

Repurchase agreements                 45,872      (996)       2.17     40,970   (1,510)       3.69     34,149    (1,917)       5.61

Borrowed funds                        64,045    (3,601)       5.62     66,674   (3,788)       5.68     74,070    (4,441)       6.00
                                     -------      -----       ----    -------     -----       ----    -------      -----       ----

Total interest-bearing
liabilities                         $481,195  ($17,882)      3.72%   $441,927 ($20,854)      4.72%   $394,816  ($21,468)      5.44%
                                    ========  =========      =====   ======== =========      =====   ========  =========      =====

Net interest income                             $17,103                         $16,163                          $14,332
                                                =======                         =======                          =======

Net interest spread                                          2.63%                           2.53%                            2.39%
                                                             =====                           =====                            =====

Net interest margin                                          3.10%                           3.17%                            3.14%
                                                             =====                           =====                            =====

Total average assets                $580,769                         $533,007                        $472,838
                                    ========                         ========                        ========

Average non-interest bearing
deposits                             $53,504                          $46,921                         $41,813
                                     =======                          =======                         =======`

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 yield on earning assets
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 )
                                                       2002 Compared to 2001              2001 Compared to 2000
                                                     Increase (Decrease) due to         Increase (Decrease) due to
                                                     --------------------------         --------------------------
                                                   Volume       Rate      Total      Volume       Rate       Total
                                                   ------       ----      -----      ------       ----       -----
Interest income:

Loans and leases:
Mortgage                                            $ 208      $(320)     $(112)      $(553)         $39     $(514)
Commercial                                          1,965     (3,084)    (1,119)       2,462     (1,304)      1,158
Consumer                                            (530)       (126)      (656)         303        (83)        220
                                                    -----       -----      -----         ---        ----        ---
Total loans and leases                              1,643     (3,530)    (1,887)       2,212     (1,348)        864
Investment securities, interest-
bearing deposits and federal
funds sold                                            987       (912)         75         886       (456)        430
                                                      ---       -----         --         ---       -----        ---
Total interest income                             $ 2,630    $(4,442)   $(1,812)     $ 3,098    $(1,804)    $ 1,294
                                                  -------    --------   --------     -------    --------    -------
Interest expense:
Deposits:
Certificates of deposit greater    than
$100,000                                            $ 492    $(1,411)     $(919)     $ 1,821      $(726)    $ 1,095
Other                                                  66     (1,418)    (1,352)       1,069     (1,717)      (648)
                                                       --     -------    -------       -----     -------      -----
Total deposits                                        558     (2,829)    (2,271)       2,890     (2,443)        447
Other interest-bearing liabilities                    635     (1,335)      (700)       (169)       (893)    (1,062)
                                                      ---     -------      -----       -----       -----    -------
Total interest expense                            $ 1,193    $(4,164)   $(2,971)     $ 2,721    $(3,336)    $ (615)
                                                  -------    --------   --------     -------    --------    -------
Net interest income                               $ 1,437      $(278)    $ 1,159       $ 377    $(1,532)    $ 1,909
                                                  =======      ======    =======       =====    ========    =======`

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 provision is an expense
charged against earnings for actual or potential losses from uncollectible loans
and leases. Through the provision, the allowance for loan loss is funded. Loans
determined to be uncollectible are charged-off against the allowance.

The Bank has established a
Special Asset Committee which meets monthly to review known and potential
problem loans and leases. The committee is comprised of senior management, loan
officers, credit administration 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 portfolios. Specific factors
used to evaluate the adequacy of the loan loss

provision during this 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 Bank does not have
significant concentrations of loans in specific industries or outside the
Northeastern Pennsylvania geographic area. For the period ended December 31,
2002, adjustments were made to the historical loan loss experience for both the
level and trends in delinquent loans. Adjustments were also made based on local
and national economic trends.

The following table sets
forth loans and lease financing charge-offs and recoveries, through the
allowance for loan loss by category for the past five years:

`(in thousands)
                                                    2002           2001            2000              1999         1998
                                                    ----           ----            ----              ----         ----



Balance at beginning of period                     $3,742        $3,264          $3,172             $3,008       $2,809


Charge-offs:
------------
Commercial and all other                              928         1,003             602                139          193
Real estate                                            40           119              75                146           43
Consumer                                              850           909             456                196          258
Lease financing                                       131           180              18                  -           86
                                                      ---           ---              --                 -           --
Total                                               1,949         2,211           1,151                481          580

Recoveries:
-----------
Commercial and all other                              359            86              14                 46           56
Real estate                                             -             3              17                  6           36
Consumer                                               69           108              53                 63           39
Lease financing                                        15            17               1                  -            2
                                                       --            --               -                  -            -
Total                                                 443           214              85                115          133
                                                      ---           ---              --                ---          ---
Net charge-offs                                     1,506         1,997           1,066                366          447
Additions charged to operations                     1,664         2,475           1,158                530          646
                                                    -----         -----           -----                ---          ---
Balance at end of period                           $3,900        $3,742          $3,264             $3,172       $3,008
                                                   ======        ======          ======             ======       ======
Net charge-offs to average loans outstanding         0.40%         0.56%           0.33%              0.13%        0.20%
Allowance for loan loss to net charge-offs         258.96%       187.38%         306.19%            866.67%      672.93%
Allowance for loan loss to net loans                 1.02%         1.01%           0.95%             1.05%         1.23%
Loans 30 - 89 days past due and accruing           $6,047        $7,156         $11,049             $4,914       $2,829
Loans 90 days or more past due and accruing        $2,599        $5,398          $1,493             $2,917       $2,689
Allowance for loan loss to loans 90 days or more
past due and accruing                              150.02%        69.32%         218.69%            108.74%      111.86%
Non-accruing loans                                 $4,000        $4,914          $2,287             $1,210       $1,364
Allowance for loan loss to non-accruing loans       97.50%        76.15%         142.75%            262.15%      220.49%
Allowance for loan loss to non-performing
loans                                               59.09%        36.29%          86.37%             76.86%       74.21%
Average net loans                                $380,892      $352,230        $325,163           $277,809     $218,170`

As evidenced in the table
above, there has been no significant difference between the additions charged to
operations and actual net charge-off results over the last five years.

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.

As detailed in the table
above, the allowance for loan loss expressed as a percent of net charge-offs has
been declining for the past two years due to the increase in the amount of loans
being charged off.

The slowing economy has
impacted the loan portfolio the past three years. That trend is reflected in the
increase in charged-off loans over the three year period, especially commercial
and consumer.

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                                 2002                   2001              2000              1999              1998
--------                                 ----                   ----              ----              ----              ----
Real Estate                       $   383,858              $ 269,490         $ 117,534        $1,165,295        $1,066,687
Consumer                            1,092,140                959,408           736,613           692,878           507,946
Commercial                          2,198,783              2,197,365         2,270,663         1,196,789           914,305
Direct financing leases                81,664                136,091           131,150            62,989            25,397
Real estate                                 0                      0                 0            31,494            25,397
construction
Unallocated                           143,307                179,579             8,320            22,930           467,981
                                      -------                -------             -----            ------           -------
Total                              $3,899,752             $3,741,933        $3,264,280        $3,172,375        $3,007,713
                                   ==========             ==========        ==========        ==========        ==========`

Consumer loans include credit cards receivables.

The December 31, 2001
allocation for commercial loans was $2,197,365 compared to actual 2002 net
commercial loan charge-offs of $569,635. The positive variance was the result of
collection efforts in 2002. The 2002 commercial loan allocation is based upon a
specific allocation of $780,479 and historical and qualitative adjustments of
$1,418,304.

The December 31, 2001
allocation for all other categories of loans was adequate compared to the actual
net charge-offs in 2002. Since the Bank is discontinuing direct financing
leases, the allocation is also adequate.

Over the last five years,
management has analyzed and relied on similar factors in determining the amount
of loan loss provision relative to the adequacy of the allowance for loan loss.

The methodology used by the
bank to analyze the adequacy of the allowance for loan losses is as follows
(loans and leases are collectively referred to as loans):

- Identification of specific problem loans by loan category by the credit administration.
- Calculation of specific reserves 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 reserves.
- Application of historical loss percentages (5- year average) to pools to determine the reserve allocation.
- Qualitative factor adjustments made to loan groups.
- Calculation of excess or deficiency of the allowance for loan loss reserve

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 year
to years are based upon year end reviews of the loan and lease portfolios.

The following table sets forth non-performing assets for the past five years (in thousands):

`2002       2001       2000       1999       1998
                                                                 ----       ----       ----       ----       ----
Net loans, including loans available-for-sale                   $382,977   $370,126   $343,555   $301,089    $243,957
                                                                ========   ========   ========   ========    ========

Restructured loans not in compliance with modified terms
                                                                      $0         $0         $0         $0          $0
Loans past due 90 days or more and accruing                        2,599      5,398      1,493      2,917       2,689
Non-accrual loans                                                  4,000      4,914      2,287      1,210       1,364
Non-performing loans                                               6,599     10,312      3,780      4,127       4,053
Foreclosed real estate                                               262        465        353        413         201
Repossessed assets                                                   175        158          0          0           0
                                                                  ------    -------     ------     ------      ------
Total non-performing assets                                       $7,036    $10,935     $4,133     $4,540      $4,254
                                                                  ======    =======     ======     ======      ======

Non-accrual loans to net loans                                     1.04%      1.33%      0.67%      0.40%       0.56%
Non-performing assets to net loans, foreclosed real estate
and repossessed assets                                             1.84%      2.95%      1.20%      1.51%       1.74%
Non-performing assets to total assets                              1.22%      1.92%      0.84%      1.02%       1.22%
Non-performing loans to net loans                                  1.72%      2.79%      1.10%      1.37%       1.66%`

Gross interest income that
would have been recorded in 2002, if non-accrual loans were current, was
$612,909. There was no recognition of interest income on non-accrual loans
during 2002.

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.

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 basis is made on an individual basis after considering factors
pertaining to the loan.

In addition, it was
determined throughout the year there were other loans that did not have the
ability to make any repayment. Accordingly, management found it necessary to
charge-off $1,949,000 of these loans and to increase the allowance for loan loss
for certain other loans. The charge-offs were made after collateral was
repossessed, foreclosed upon or notice was forwarded to governmental guarantors.
The allowance for loan loss was increased through the provision for loan loss.
The majority of non-performing loans and loans past due 90 days or more for the
period is attributed to small 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.

Consumer loan payments have improved during 2002, due to collection efforts.

Reflecting the improvement,
the percentage of non-performing loans to net loans has decreased from 2.79% at
December 31, 2001, to 1.72% at December 31, 2002.

A specific reserve through
PENNCAP has been established for eligible loans to cover losses sustained by the
Bank on enrolled loans. The reserve balance at December 31, 2002 was $125,232.

The Bank is unaware of any
potential problem loans that have not been reviewed and addressed. Potential
problem loans are those where there is known information that leads the Bank to
believe repayment of principal and/or interest is in jeopardy and the loans are
neither non-accrual nor past due 90 days or more.

Based upon the thorough
analysis of both the loan portfolio and the allowance for loan losses at
December 31, 2002, the Bank is confident that the allowance provides adequate
protection against portfolio loss.

However, there could be
instances of which the Bank is unaware that may require additional charge-offs
and or increases to the provision.

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.

As discussed in previous
sections herein, loan sales were also based upon the need to protect future
earnings from interest-rate risk. 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                                            $160,000
                  ATM service charges                                                   $ 93,000
                  Trust income                                                          $ 45,000`

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.

The $94,000 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.

Investment securities were
sold to protect earnings from potential calls. The Bank also sold Sallie Mae
stock since it was no longer required to own the stock. Sales of
available-for-sale investments produced net gains of $459,000. There were no
sales of investments classified as held-to-maturity.

Loan sales were based upon
the need to protect earnings from interest rate risk. Sales generated net gains
of $315,000 in 2001. Included in that amount was $117,000 of recognized income
from mortgage servicing rights.

The increase in loans, before the allowance for loan losses, helped to generate an additional $138,000 in service charges.

Some components of fees and other service charges and other operating income and their related increase during 2001:

`Increase
                                                                                        --------
                  Fees on sold loans                                                    $114,000
                  Trust income                                                            77,000
                  Financial services revenue                                              66,000
                  ATM service charges                                                     55,000`

Fees on sold loans and income and checkbook fees rose through volume increases.

The hiring of a business development officer was successful in increasing financial services revenue.

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.

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 branch new branch advertising increased 3.00% in 2002.

Some components of other expense and their change during 2002:

`Increase/
                                                        (Decrease)
                                                        ----------
                  Merchant card expense                 $(116,000)
                  Donations                               (81,000)
                  Stationery and supplies                  46,000
                  Legal                                    96,000
                  Correspondent banks                     (82,000)
                  MAC expense                              58,000
                  Professional services                    56,000
                  Miscellaneous charge offs                74,000`

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 2.20% and 2.25%
respectively. These ratios continue to be below peer comparison groups.

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.

The average number of
full-time equivalent employees was 168 in 2001. The 6% average staff increase,
merit pay raises and higher benefit costs increased 2001 salaries and employee
benefits by $521,000 above the amount reported for 2000.

The Peckville branch, which
opened in February 2000, was operating for a full twelve months during 2001. The
Kingston office was opened for nine months. The impact of these branches
contributed to a $172,000 increase in premises and equipment expense during
2001. Over 32% of the increase resulted from a $55,000 rise in depreciation
expense.

Depreciation on premises and improvements was $326,000 and depreciation on furniture and fixtures was $775,000.

Despite the addition of the Kingston branch, advertising decreased 3.00% in 2001.

Some components of other expense and their increases during 2001:

`Increase/
                                                                                        (Decrease)
                                                                                        ----------
                  Merchant card expense                                                ($209,000)
                  Donations                                                              190,000
                  Fidelity D&D Bancorp organization                                     (150,000)
                  Stationery and supplies                                                (99,000)
                  Capital shares tax                                                     (70,000)
                  Correspondent banks                                                     55,000
                  MAC expense                                                             58,000`

Under a state-sponsored
initiative, the Bank contributed to a specified qualified local educational
unit. In exchange for the donation, the Bank received state tax credits of
$100,000. Those credits reduced the capital shares tax expense.

The reorganization of The
Fidelity Deposit and Discount Bank into the formed financial holding company,
Fidelity D&D Bancorp, Inc., incurred one time costs of $150,000 in 2000.

The ratio of non-interest
expense to average assets at December 31, 2001 and 2000 was 2.25% and 2.46%
respectively. These ratios continue to be below peer comparison groups.

Income before provision for
income taxes in 2001 increased $989,000 over 2000. The effective federal income
tax rate was 19.05% and 15.47% for the years ending December 31, 2001 and 2000,
respectively. The increase resulted from less tax-free income earned on
municipal securities and tax-free loans. Non-taxable income as a percentage of
income before taxes declined from 45.92% in 2000, to 31.41% in 2001.

Financial Services
Modernization Legislation.  In November 1999, the
Gramm-Leach-Bliley Act of 1999, or the GLB, was enacted. The GLB repeals
provisions of the Glass-Steagall Act which restricted the affiliation of Federal
Reserve member banks with firms engaged principally in specified
securities activities, and which restricted officer, director or employee
interlocks between a member bank and any company or person primarily
engaged in specified securities activities.

In addition, the GLB also contains provisions that expressly preempt any state law restricting the establishment of financial
affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and other financial service providers by revising and
expanding the Bank Holding Company Act framework to permit a holding company to engage in a full range of financial activities
through a new entity known as a "financial holding company." "Financial activities" is broadly defined to include not only banking,
insurance and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities or
complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial
system generally.

The GLB also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except
for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be
conducted through a subsidiary of a financial holding company. Financial activities include all activities permitted under new
sections of the Bank Holding Company Act or permitted by regulation.

To the extent that the GLB permits banks, securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. The GLB is intended to grant to community banks certain powers as a matter of right
that larger institutions have accumulated on an ad hoc basis and which unitary savings and loan holding companies already possess.
Nevertheless, the GLB may have the result of increasing the amount of competition that the Company faces from larger institutions and
other types of companies offering financial products, many of which may have substantially more financial resources than the Company
has.

USA Patriot Act of
2001.  In October 2001, the USA Patriot Act of
2001 was enacted in response to the terrorist attacks in New York, Pennsylvania
and Washington D.C. which occurred on September 11, 2001. The Patriot Act
is intended to strengthen U.S. law enforcements and the intelligence
communities abilities to work cohesively to combat terrorism on a variety
of fronts. The potential impact of the Patriot Act on financial institutions of
all kinds is significant and wide ranging. The Patriot Act contains sweeping
anti-money laundering and financial transparency laws and imposes various
regulations, including standards for verifying client identification at account
opening, and rules to promote cooperation among financial institutions,
regulators and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering.

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 have 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 sset 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 more than 100% of the bank's capital and surplus.

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.

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 and 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 maintain 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 and the intention to recognize
steady disciplined growth in its loan portfolios, while obtaining and
maintaining a good core deposit base. 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.

The information required by
7a is set forth at Item 7, Liquidity Management and Interest Rate
Sensitivity, contained within Managements Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) and incorporated herein
by reference.

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, 2002 and 2001 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, 2002. 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, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.

`2002                2001
------------------------------------------------------------------------------------------------------------------------

ASSETS:
     Cash and due from banks                                                           $ 18,763,322        $ 19,845,029
     Interest-bearing deposits with financial institutions                                7,455,925           5,799,943
                                                                                         ----------          ----------
                 Total cash and cash equivalents                                         26,219,247          25,644,972

     Held-to-maturity securities                                                         11,778,803          21,640,254
     Available-for-sale securities                                                      137,770,804         132,333,734
     Loans and leases, net (allowance for loan losses of
         $3,899,753 in 2002 and $3,741,933 in 2001)                                     354,262,050         353,976,324
     Loans available-for-sale (fair value $29,660,096 in
         2002; $16,418,155 in 2001)                                                      28,715,355          16,150,020
     Accrued interest receivable                                                          2,347,332           3,268,456
     Bank premises and equipment, net                                                    12,735,201          11,513,154
     Foreclosed assets held for sale                                                        436,932             688,041
     Other assets                                                                         3,723,512           3,814,883
                                                                                         ----------          ----------
                             Total assets                                             $ 577,989,236       $ 569,029,838
                                                                                     ==============      ==============


LIABILITIES:
     Deposits:
         Noninterest-bearing                                                           $ 61,151,465        $ 53,301,605
         Certificates of deposit of $100,000 or more                                    129,486,498         132,679,995
         Other interest-bearing deposits                                                223,150,213         221,797,128
                                                                                       ------------        ------------

                 Total deposits                                                         413,788,176         407,778,728

     Accrued interest payable and other liabilities                                       4,753,613           3,597,892
     Short-term borrowings                                                               51,213,014          54,480,988
     Long-term debt                                                                      63,000,000          63,000,000
                                                                                        -----------         -----------

                     Total liabilities                                                  532,754,803         528,857,608
                                                                                       ------------        ------------

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 1,819,376 shares in
         2002 and 1,819,168 shares in 2001                                                9,590,142           9,353,452
     Treasury stock                                                                        (221,559)                  -
     Retained earnings                                                                   34,600,626          32,080,824
     Accumulated other comprehensive income (loss)                                        1,265,224          (1,262,046)
                                                                                         ----------          -----------
                     Total shareholders' equity                                          45,234,433          40,172,230
                                                                                        -----------         -----------
                             Total liabilities and shareholders' equity               $ 577,989,236       $ 569,029,838
                                                                                     ==============      ==============`

`2002            2001           2000
------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
     Loans:
        Taxable                                                             $ 25,062,274    $ 26,588,925   $ 25,813,687
        Nontaxable                                                               576,516         768,403        681,517
     Leases                                                                      526,194         695,406        693,518
     Interest-bearing deposits with financial institutions                        16,623         181,172         44,789
     Investment securities:
        U.S. Government agency and corporations                                7,479,520       6,604,787      6,421,742
        States and political subdivisions (nontaxable)                           476,601         724,878      1,047,280
        Other securities                                                         239,827         272,395        383,247
     Federal funds sold                                                          189,838         543,723              -
                                                                                --------        --------             --
                  Total interest income                                       34,567,393      36,379,689     35,085,780
                                                                             -----------     -----------    -----------

INTEREST EXPENSE:
     Certificates of deposit of $100,000 or more                               5,928,991       6,847,969      5,753,162
     Other deposits                                                            7,356,522       8,708,515      9,356,475
     Securities sold under repurchase agreements                                 996,133       1,509,567      1,917,453
     Other short-term borrowings and long-term debt                            3,583,127       3,762,258      4,411,197
     Other                                                                        17,667          25,322         29,943
                                                                                 -------         -------        -------
                  Total interest expense                                      17,882,440      20,853,631     21,468,230
                                                                             -----------     -----------    -----------

NET INTEREST INCOME                                                           16,684,953      15,526,058     13,617,550

PROVISION FOR LOAN LOSSES                                                      1,664,000       2,474,637      1,158,260
                                                                              ----------      ----------     ----------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                           15,020,953      13,051,421     12,459,290
                                                                             -----------     -----------    -----------

OTHER INCOME:
     Service charges on deposit accounts                                       1,154,788       1,075,990        982,056
     Gain on sale of:
        Investment securities                                                     58,828         458,980         41,109
        Loans                                                                    377,572         315,357        211,698
     Gain on sale of loans available for sale                                          -               -        145,871
     (Loss) gain on sale of foreclosed assets held for sale                       (3,222)         18,051        (65,209)
     Fees and other service charges                                            1,714,783       1,784,955      1,537,028
     Other operating income                                                            -          48,245         87,456
                                                                                      --         -------        -------

                  Total other income                                           3,302,749       3,701,578      2,940,009
                                                                              ----------      ----------     ----------

OTHER EXPENSES:
     Salaries and employee benefits                                            6,483,041       5,911,302      5,390,205
     Premises and equipment                                                    2,517,441       2,425,920      2,253,659
     Advertising                                                                 396,865         386,473        398,443
     Other                                                                     3,353,827       3,275,302      3,591,973
                                                                              ----------      ----------     ----------

                  Total other expenses                                        12,751,174      11,998,997     11,634,280
                                                                             -----------     -----------    -----------

INCOME BEFORE PROVISION FOR INCOME TAXES                                       5,572,528       4,754,002      3,765,019

PROVISION FOR INCOME TAXES                                                     1,526,355         905,866        582,391
                                                                              ----------        --------       --------

NET INCOME                                                                   $ 4,046,173     $ 3,848,136    $ 3,182,628
                                                                            ============    ============   ============

Per share data:
     Net income - basic                                                           $ 2.23          $ 2.12         $ 1.76
     Net income - diluted                                                         $ 2.22          $ 2.12         $ 1.76
     Dividends                                                                    $ 0.84          $ 0.79         $ 0.76`

`ACCUMULATED
                                                                                                                             OTHER
                                                        CAPITAL STOCK              TREASURY STOCK            RETAINED    COMPREHENSIVE
                                                           SHARES         AMOUNT       SHARES     AMOUNT     EARNINGS    INCOME (LOSS)      TOTAL

BALANCE, DECEMBER 31, 1999                               1,800,784    $ 8,673,031                          $ 27,842,232   $ (4,673,713)  $ 31,841,550
                                                                                                                                        -------------
Comprehensive income:
     Net income                                                                                               3,182,628                     3,182,628
     Change in net unrealized holding gains (losses)
        on available-for-sale securities, net of
        reclassification adjustment and tax effects                                                                          3,348,278      3,348,278
                                                                                                                                           ----------
            Comprehensive income                                                                                                            6,530,906
                                                                                                                                           ----------
Stock options excercised                                       250         15,500                                                              15,500
Dividends                                                                                                    (1,366,075)                   (1,366,075)
Dividends reinvested                                         5,240        193,182                                                             193,182
                                                            ------       --------                                  ----           ----       --------

BALANCE, DECEMBER 31, 2000                               1,806,274      8,881,713                            29,658,785     (1,325,435)    37,215,063
                                                                                                                                          -----------
Comprehensive income:
     Net income                                                                                               3,848,136                     3,848,136
     Change in net unrealized holding gains (losses)
        on available-for-sale securities, net of
        reclassification adjustment and tax effects                                                                             63,389         63,389
                                                                                                                                              -------
            Comprehensive income                                                                                                            3,911,525
                                                                                                                                           ----------
Stock options excercised                                     1,500         51,313                                                              51,313
Dividends                                                                                                    (1,426,097)                   (1,426,097)
Dividends reinvested                                        11,394        420,426                                                             420,426
                                                           -------       --------                                  ----           ----       --------

BALANCE, DECEMBER 31, 2001                               1,819,168      9,353,452                            32,080,824     (1,262,046)    40,172,230
                                                                                                                                          -----------
Comprehensive income:
     Net income                                                                                               4,046,173                     4,046,173
     Change in net unrealized holding gains (losses)
        on available-for-sale securities, net of
        reclassification adjustment and tax effects                                                                          2,527,270      2,527,270
                                                                                                                                           ----------
            Comprehensive income                                                                                                            6,573,443
                                                                                                                                           ----------
Purchase of 12,960 shares of common stock                                              (12,960)  (479,640)                                   (479,640)
Reissuance of 6,973 shares of treasury stock
        through dividend reinvestment plan                  (6,973)      (258,081)       6,973    258,081                                           -
Stock options excercised                                       400         15,360                                                              15,360
Dividends                                                                                                    (1,526,371)                   (1,526,371)
Dividends reinvested                                        12,768        479,411                                                             479,411
                                                           -------       --------          ---        ---          ----           ----       --------

BALANCE, DECEMBER 31, 2002                               1,825,363    $ 9,590,142       (5,987) $(221,559)  $34,600,626    $ 1,265,224   $ 45,234,433
                                                        ==========   ============      =======  =========   ===========   ============  =============`

`2002            2001            2000


CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                            $ 4,046,173      $ 3,848,136     $3,182,628
     Adjustments to reconcile net income to net cash provided by
        operating activities:
            Depreciation                                                     1,068,037        1,101,522      1,046,261
            Amortization of securities (net of accretion)                      325,544          (42,029)       (69,083)
            Provision for loan losses                                        1,664,000        2,474,637      1,158,260
            Deferred income taxes                                              231,931          (56,116)       473,828
            Gain on sale of investment securities                              (58,828)        (458,980)       (41,109)
            Gain on sale of loans                                             (377,572)        (315,357)      (211,698)
            Loss (gain) on sale of foreclosed assets held for sale               3,222          (18,051)        14,582
            Gain on sale of loans available for sale                                 -                -       (145,871)
            Loss on sale of equipment                                           43,612                -              -
            Amortization of loan servicing rights                              133,060           42,046         19,494
            Change in:
               Accrued interest receivable                                     921,124          278,048       (574,974)
               Other assets                                                   (273,620)        (137,466)      (543,691)
               Accrued interest payable and other liabilities                 (146,205)          70,950        720,018
                                                                              ---------         -------       -------

                  Net cash provided by operating  activities                 7,580,478        6,787,340      5,028,645
                                                                            ----------       ----------     ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Held-to-maturity securities:
        Proceeds from maturities and calls                                  18,894,931        5,233,860        449,746
        Purchases                                                           (9,057,722)     (18,993,750)             -
     Available-for-sale securities:
        Proceeds from sales                                                 37,251,760       14,463,072      7,507,108
        Proceeds from maturities, calls and paydowns                        90,284,145       92,693,241        957,744
        Purchases                                                         (129,386,253)    (127,016,966)    (5,896,249)
     Proceeds from sale of loans available-for-sale                         26,413,229       22,048,265      6,929,056
     Net increase in loans and leases                                      (40,812,718)     (51,400,803)   (58,899,416)
     Proceeds from sale of premises and equipment                              208,694                -              -
     Acquisition of bank premises and equipment                             (2,542,390)      (1,224,197)    (2,930,432)
     Improvements to foreclosed assets held for sale                                 -          (71,263)       (18,266)
     Proceeds from sale of foreclosed assets held for sale                     509,887          376,372        437,552
                                                                              --------         --------       -------

                  Net cash used in investing  activities                    (8,236,437)     (63,892,169)   (51,463,157)
                                                                            -----------     ------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Net increase in noninterest-bearing deposits                            7,849,860        6,116,008      9,944,394
     Net (decrease) increase in certificates of deposit
        of $100,000 or more                                                 (3,193,497)      37,962,064     28,075,275
     Net increase in other interest-bearing deposits                         1,353,085       24,390,328      6,923,674
     Net (decrease) increase in short-term borrowings                       (3,267,974)       6,456,267    (12,224,325)
     Increase in long-term debt                                                      -                -      5,695,000
     Purchase of treasury stock                                               (479,640)               -              -
     Exercise of stock options                                                  15,360           51,313         15,500
     Dividends paid, net of dividends reinvested                            (1,046,960)      (1,005,671)    (1,172,893)
                                                                            -----------      -----------    -----------

                  Net cash provided by financing  activities                 1,230,234       73,970,309     37,256,625
                                                                            ----------      -----------     ----------

NET INCREASE (DECREASE) IN CASH AND
     CASH EQUIVALENTS                                                          574,275       16,865,480     (9,177,887)

CASH AND CASH EQUIVALENTS, BEGINNING                                        25,644,972        8,779,492     17,957,379
                                                                           -----------       ----------     ----------

CASH AND CASH EQUIVALENTS, ENDING                                          $26,219,247      $25,644,972     $8,779,492
                                                                          ============     ============     ==========`

---

|1. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT 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
& 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 generally accepted
accounting principles 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 2002, 2001 or 2000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                              
| | -----------------------------
| | 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 income (loss).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                    
| | -------------------
| | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 probable 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                
| | -------------------------------
| | 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, 2002, the Company has three stock=based employee compensation
plans, which are described more fully in Note 9. The Company accounts for this
plan under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock 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 market 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 No.
123, Accounting for Stock=Based Compensation, to stockholder based
employee compensation:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`December 31, 2002                                                     AS REPORTED              PRO FORMA
                                                                                   ===========              =========

                Net income (in thousands)                                             $4,046                  $4,039
                Earnings per share = Basic                                              2.23                    2.21
                                   = Diluted                                            2.22                    2.18

             December 31, 2001

                Net income (in thousands)                                             $3,848                  $3,834
                Earnings per share = Basic                                              2.12                    2.12
                                   = Diluted                                            2.12                    2.11

             December 31, 2000

                Net income (in thousands)                                             $3,183                  $3,168
                Earnings per share = Basic                                              1.76                   1.76
                                   = Diluted                                            1.76                   1.75`

| | 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, 2001 and 2000:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                              

`2002           2001            2000
                                                                                   ====           ====            ====

             Dividend yield                                                        3.79%          3.33%           2.89%
             Expected volatility                                                   5.91%          6.24%           6.26%
             Risk=free interest rate                                               3.62%          3.52%           4.34%
             Expected lives                                                       5 years        5 years         5 years`

| |           
| | ----------
| | TRUST FEES
| |           

| | Trust 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, 2002, 2001, and 2000, the Company paid interest of
$18,934,972, $20,860,286 and $20,465,322, respectively. For the years ended
December 31, 2002, 2001, and 2000, the Company paid cash for income taxes of
$1,040,000, $1,210,000 and $391,000, respectively.                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                       
| | Transfers
from loans to foreclosed assets held for sale amounted to $835,741, $621,846 and
$374,199 in 2002, 2001, and 2000, respectively. Noncash investing activities
also included transferring $2,871,752 from loans to loans available-for-sale in
2002. Noncash investing activities also included transferring $8,329,179 from
loans available-for-sale to held-to-maturity securities in 2000.

| |                           
| | --------------------------
| | OTHER COMPREHENSIVE INCOME
| |                           

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

`2002            2001               2000
                                                                                    ====            ====               ====

             Unrealized holding gains on available-for-sale securities
                                                                                 $3,888,024       $555,025          $5,114,257

             Less reclassification adjustment for gains realized in
                income                                                              (58,828)      (458,980)            (41,109)
                                                                                 ==========       ========          ==========

             Net unrealized gains                                                 3,829,196         96,045           5,073,148


             Tax effect                                                          (1,301,926)       (32,656)         (1,724,870)
                                                                                 ==========       ========          ==========

             Net of tax amount                                                  $ 2,527,270       $ 63,389          $3,348,278
                                                                                 ==========       ========          ==========`

| | 2. RESTRICTED 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, 2002 and 2001 were $6,260,000 and $5,664,000,
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, 2002 and 2001, are as follows (in thousands):

`...................................2002...............................
                                                                               GROSS             GROSS
                                                          AMORTIZED         UNREALIZED         UNREALIZED        FAIR
                                                             COST              GAINS             LOSSES          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
                                                             =======            =====                 ==          =======`

`...................................2001.................................
                                                                               GROSS             GROSS
                                                          AMORTIZED         UNREALIZED         UNREALIZED        FAIR
                                                             COST              GAINS             LOSSES          VALUE
                                                             ====              =====             ======          =====

      Held to maturity securities,
         U.S. government agencies and
             corporations                                    $14,995                               $ 216          $14,779
         Mortgage-backed securities                            6,645              $27                 44            6,628
                                                             =======              ===              ======         =======

             Total held-to-maturity securities               $21,640              $27              $ 260          $21,407
                                                             =======              ===              ======         =======

      Available-for-sale securities:
         U.S. government agencies and
             corporations                                   $104,921              $95             $1,781         $103,235
         Obligations of states and political
             subdivisions                                     11,750               72                212           11,610
         Corporate bonds                                       1,000                                                1,000
         Mortgage-backed securities                           12,796               17                109           12,704
                                                             =======              ===              ======         =======

             Total debt                                      130,467              184              2,102          128,549

         Equity securities:
             Restricted                                        3,500                                                3,500
             Other                                               279               24                 18              285
                                                             =======              ===              ======         =======

                           Total                            $134,246             $208             $2,120         $132,334
                                                             =======              ===              ======         =======`

| | 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, 2002 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`AMORTIZED         FAIR
                                                                                                      COST           VALUE
                                                                                                      ====           =====
                                                                                                        (IN THOUSANDS)

         Held=to=maturity securities,                                                               $11,779         $12,247
                                                                                                    =======         =======
             Due after ten years

         Available=for=sale securities:
             Due in one year or less                                                                $ 2,880         $ 2,921
             Due after one year through five years                                                    3,200           3,234
             Due after five years through ten years                                                  11,630          11,815
             Due after ten years                                                                      8,989           9,033
                                                                                                    =======         =======

                Total                                                                                26,699          27,003

             Mortgage=backed securities                                                             105,272         106,835

             Equity securities                                                                        3,883           3,933
                                                                                                    =======         =======
                       Total available=for=sale securities                                         $135,854        $137,771
                                                                                                    =======         =======`

| | Gross
realized gains and losses on sales of available-for-sale securities, determined
using specific identification of the securities were as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

`2002            2001           2000
                                                                                        ====            ====           ====

         Gross realized gains                                                         $58,828       $458,980        $41,109
         Gross realized losses                                                              =              =              =`

| | 4. LOANS AND LEASES
| | -------------------
| |                    

| | The major classifications of loans and leases at December 31, 2002 and 2001 are summarized as follows:
| | ------------------------------------------------------------------------------------------------------

`2002                  2001
                                                                                              ====                  ====

         Real estate                                                                      $85,447,703           $96,740,226
         Consumer                                                                          56,984,927            67,782,196
         Commercial                                                                       202,974,155           179,043,816
         Direct financing leases                                                            6,578,720             9,961,967
         Real estate construction                                                           6,797,002             5,446,870
                                                                                          ===========           ===========

                    Total                                                                 358,782,507           358,975,075

         Less:
             Unearned income                                                                  620,704             1,256,818
             Allowance for loan losses                                                      3,899,753             3,741,933
                                                                                          ===========           ===========

                           Loans and leases, net                                         $354,262,050          $353,976,324
                                                                                          ===========           ===========`

| | 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, 2002 or
2001.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
unearned loan (fees) costs of $(12,789) and $102,089 have been (deducted from)
added to the carrying value of loans at December 31, 2002 and 2001,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

`2002              2001
                                                                                                 ====              ====
      At December 31:
         Accruing loans that are contractually past due 90 days
             or more as to principal or interest                                             $2,599,489        $5,397,970
         Amount of impaired loans that have a related allowance                                 338,768           679,314
         Amount of impaired loans with no related allowance                                   2,260,721         4,718,656
         Allowance for impaired loans                                                           281,093           418,350

      During the year ended December 31:
         Average investment in impaired loans                                                 2,619,823         4,747,812
         Interest income recognized on impaired loans
             (cash basis)                                                                         7,423                 =
         Principal collected on impaired loans                                                1,979,023         1,117,964`

| | Changes in the allowance for loan losses are as follows:
| | --------------------------------------------------------

`2002                2001               2000
                                                                             ====                ====               ====

         Balance, beginning                                              $3,741,933          $3,264,280         $3,172,375
         Recoveries                                                         443,189             213,639             84,649
         Provision for loan losses                                        1,664,000           2,474,637          1,158,260
         Losses charged to allowance                                     (1,949,369)         (2,210,623)        (1,151,004)
                                                                         ===========         ==========         ==========

         Balance, ending                                                 $3,899,753          $3,741,933         $3,264,280
                                                                         ===========         ==========         ==========`

| | For
federal income tax purposes, the allowance for loan losses is $315,958 at
December 31, 2002, 2001, and 2000. The amounts deducted for loan losses in
the federal income tax returns were $1,352,428 in 2002, $1,817,574 in 2001 and
$1,066,355 in 2000. 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 $56,986,000 at December 31,
2002 and $53,000,000 at  December 31,  2001. Mortgage servicing rights were
$422,000 at  December 31,  2002 and  $327,690 at December  31, 2001 and are
included in other assets. Amortization of mortgage servicing rights was $133,000
in 2002, $42,000 in 2001 and $19,000 in 2000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. BANK PREMISES AND EQUIPMENT
| | ------------------------------
| |                               

| | Components of bank premises and equipment at December 31, 2002 and 2001 are summarized as follows:
| | --------------------------------------------------------------------------------------------------

`2002                2001
                                                                                                ====                ====

         Land                                                                                $1,054,330          $1,054,330
         Bank premises                                                                        7,523,205           7,738,710
         Furniture, fixtures and equipment                                                    8,249,536           6,646,382
         Leasehold improvements                                                               2,896,388           2,140,454
                                                                                              =========           =========

                       Total                                                                $19,723,459         $17,579,876

         Less accumulated depreciation and amortization                                       6,988,258           6,066,722
                                                                                              =========           =========

                              Premises and equipment, net                                   $12,735,201         $11,513,154
                                                                                              =========           =========`

| | 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 $353,589 for 2002, $321,782 for 2001 and
$287,971 for 2000. The future minimum rental payments at December 31, 2002 under
these leases are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`YEAR ENDING DECEMBER 31                                                              AMOUNT
             =======================                                                              ======

                2003                                                                            $ 344,588
                2004                                                                              334,676
                2005                                                                              332,245
                2006                                                                              329,508
                2007                                                                              329,508
                2008 and thereafter                                                             4,988,187
                                                                                                =========

                                  Total                                                        $6,658,712
                                                                                                =========`

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

| | 6. DEPOSITS
| | -----------

| | At December 31, 2002, the scheduled maturities of certificates of deposit are as follows:
| | -----------------------------------------------------------------------------------------

`2003                                                                          $230,298,447
             2004                                                                            92,351,182
             2005                                                                            21,911,398
             2006                                                                             2,869,128
             2007                                                                             6,865,404
             2008 and thereafter                                                             59,492,617
                                                                                           ============
                                                                                           $413,788,176
                                                                                           ============`

| | 7. SHORT-TERM BORROWINGS
| | ------------------------

| | Short-term borrowings are as follows at December 31:
| | ----------------------------------------------------

`2002                2001
                                                                                                ====                ====

         Securities sold under repurchase agreements                                        $47,231,946         $54,258,326
         Demand note, U.S. Treasury                                                           1,131,068             222,662
         Federal funds purchased                                                              2,850,000                   =
                                                                                            ===========         ===========

                    Total                                                                   $51,213,014         $54,480,988
                                                                                            ===========         ===========`

| | The
maximum and average amounts of short-term borrowings outstanding and related
interest rates for the years ended December 31, 2002 and 2001 are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

`MAXIMUM                          WEIGHTED
                                                           OUTSTANDING                        AVERAGE
                                                              AT ANY           AVERAGE       RATE DURING        RATE AT
                        2002                                MONTH END        OUTSTANDING      THE YEAR          YEAR END
                        ====                                =========        ===========      ========          ========

         Federal funds purchased                            $3,000,000        $ 108,767         1.68%            1.48%
         Securities sold under repurchase
             agreements                                     52,280,479       45,871,723         2.17%            1.35%
         Demand note, U. S. Treasury                         1,145,783          654,747         1.58%            1.10%
                                                            ==========       ==========

                    Total                                  $56,426,262      $46,635,237
                                                            ==========       ==========`

`MAXIMUM                          WEIGHTED
                                                           OUTSTANDING                        AVERAGE
                                                              AT ANY           AVERAGE       RATE DURING        RATE AT
                        2001                                MONTH END        OUTSTANDING      THE YEAR          YEAR END
                        ====                                =========        ===========      ========          ========

         Line of credit, FHLB                              $12,250,000       $2,611,918         6.00%            0.00%
         Securities sold under repurchase
             agreements                                     54,258,326       40,969,993         3.68%            3.02%
         Demand note, U. S. Treasury                         1,118,424          706,515         4.02%            1.41%
                                                            ==========       ==========

                    Total                                  $66,726,750      $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 $47,300,000 and $54,300,000 at December
31, 2002 and 2001, 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, 2002, the Company has $62,375,000 available to borrow from the
Federal Home Loan Bank of Pittsburgh and approximately $6,750,000 that it can
borrow at the Discount Window from the Federal Reserve Bank of Philadelphia.
There were no borrowings on these lines at December 31, 2002 or 2001.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8. LONG-TERM DEBT
| | -----------------

| | Long-term
debt consists of advances from the FHLB with interest rates ranging from 4.69%
to 6.22% at December 31, 2002. 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, 2002, the maturities of long=term debt are as follows:
| | ----------------------------------------------------------------------

`YEAR ENDING DECEMBER 31
         =======================

             2004, 5.92% interest                                                                 $5,000,000
             2008, 4.69% interest                                                                 10,000,000
             2010, 5.9% weighted average interest rate                                            48,000,000
                                                                                                  ==========

                                                                                                 $63,000,000
                                                                                                  ==========`

| | 9. STOCK PLANS
| | --------------

| | At
December 31, 2002, 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, 2002, 73,575 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, 2002, no 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 1998 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, 2001 and 2000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2,900 and 3,400 qualified stock
options with a ten=year life were awarded in 2002, 2001 and 2000, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of the Companys option plans as of December 31,
2002, 2001, and 2000, and changes during the year ended is presented below:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

`WEIGHTED AVERAGE
                                                                                SHARES             EXERCISE PRICE
                                                                                ======             ==============

         Outstanding, December 31, 1999                                         7,500                 $31.00
         Granted                                                                7,900                  35.12
         Exercised                                                               (500)                 31.00
         Forfeited                                                               (500)                 35.12
                                                                                =====                 ======

         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
                                                                                =====                 ======`

| | The following table summarizes all stock options outstanding for the plans as of December 31, 2002, segmented by exercise prices:
| | ---------------------------------------------------------------------------------------------------------------------------------

`REMAINING
                                                                             CONTRACTUAL
         EXERCISE PRICES                                     NUMBER             LIFE
         ===============                                     ======             ====

              $31.00                                         5,100             6 years
               35.13                                         5,900             7 years
               36.50                                         6,400             8 years
               37.50                                         8,500             9 years
                                                             =====

                       Total                                25,900`

| | The stock options have a weighted=average life of 7.7 years.
| | ------------------------------------------------------------

| | 10. INCOME TAXES
| | ----------------

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

`2002                2001
                                                                                                ====                ====
         Deferred tax assets:
             Allowance for loan losses                                                      $1,318,865           $1,225,831
             Deferred compensation                                                             103,102              104,384
             Unrealized losses on available=for=sale securities                                      =              650,143
             Other                                                                              37,089               25,683
                                                                                            ==========           ==========

                       Total                                                                 1,459,056            2,006,041
                                                                                            ==========           ==========

         Deferred tax liabilities:
             Leasing                                                                          (829,443)            (802,955)
             Depreciation                                                                     (699,958)            (433,207)
             Loan fees and costs                                                              (150,818)            (174,028)
             Unrealized gain on available-for-sale securities                                 (639,862)                   =
             Other                                                                            (177,917)             (97,916)
                                                                                            ==========           ==========

                       Total                                                                (2,497,998)          (1,508,106)
                                                                                            ==========           ==========

                                  Deferred tax (liability) asset, net                      $(1,038,942)         $   497,935
                                                                                            ==========           ==========`

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

`2002             2001             2000
                                                                                ====             ====             ====

             Current                                                         $1,279,484        $961,982         $108,563
             Deferred                                                           246,871         (56,116)         473,828
                                                                             ==========        ========         ========

                       Total provision                                       $1,526,355        $905,866         $582,391
                                                                             ==========        ========         ========`

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

`2002                2001                2000
                                                                            ====                ====                ====

         Expected provision at the statutory rate                       $1,894,659          $1,616,360          $1,280,107
         Tax-exempt income                                                (379,139)           (562,055)           (661,374)
         Nondeductible interest expense                                     52,129              73,125              97,780
         Other nondeductible expenses                                       41,574              14,264              40,132
         Low income housing tax credits                                   (118,152)           (112,738)           (122,628)
         Other, net                                                         35,284            (123,090)            (51,626)
                                                                        ==========          ==========          ==========

                Actual provision for income taxes                       $1,526,355          $  905,866          $  582,391
                                                                        ==========          ==========          ==========`

| | 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
$246,201 in 2002, $211,518 in 2001 and $236,564 in 2000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and to
reduce its own exposure to fluctuations in interest rates. 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, 2002 follows:
| | -------------------------------------------------------------------------------------------------------------------------------

`NOTIONAL
                                                                                                    AMOUNT
                                                                                                    ======

             Commitments to extend credit                                                        $76,622,900
             Standby letters of credit                                                             5,522,641`

| | 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, 2002 (in thousands):
| | --------------------------------------------------------------------------------------------------------------

`Less than           1=5             Over 5
                                                               1 Year           Years             Years            Total
                                                               ======           =====             =====            =====

         Secured by:
             Collateral                                        $1,908            $310            $2,800           $5,018
             Guarantees                                            30              49                 =               79
             Bank lines of credit                                 260             114                 =              374
                                                               ======            ====            ======            =====
                                                                2,198             473             2,800            5,471


         Unsecured                                                 40              12                 =               52
                                                               ======            ====            ======            =====

                  Total                                        $2,238            $485            $2,800           $5,523
                                                               ======            ====            ======            =====`

| | The Company has not incurred any losses on its commitments in 2002, 2001 or 2000.
| | ---------------------------------------------------------------------------------

| | The
carrying or notional amount and estimated fair values of the Companys
financial instruments were as follows at December 31, 2002 and 2001:
| | -----------------------------------------------------------------------------------------------------------------------------------------------

`...............2002........... .............2001..........
                                                                                            CARRYING
                                                            CARRYING                           OR
                                                           OR NOTIONAL     ESTIMATED        NOTIONAL          ESTIMATED
                                                             AMOUNT       FAIR VALUE         AMOUNT          FAIR VALUE
                                                             ======        ==========         ======          ==========
                                                                (IN THOUSANDS)                     (IN THOUSANDS)
         Financial assets:
             Cash and cash equivalents                       $26,219          $26,219         $25,645           $25,645
             Held-to-maturity securities                      11,779           12,235          21,640            21,407
             Available-for-sale securities                   137,771          137,771         132,334           132,334
             Loans and leases                                354,262          357,696         357,718           359,739
             Loans available for sale                         28,715           29,660          16,150            16,418
             Accrued interest                                  2,347            2,347           3,268             3,268

         Financial liabilities:
             Deposit liabilities                            $413,788         $420,619        $407,779          $410,065
             Accrued interest                                  1,707            1,707           2,454             2,454
             Short-term borrowings                            51,213           51,213          54,481            54,481
             Long-term debt                                   63,000           72,011          63,000            62,497

         Off-balance sheet liabilities:
             Commitments to extend credit                    $76,623          $76,623         $98,763           $98,763
             Standby letters of credit                         5,523            5,523           5,833             5,833`

| | 13. EARNINGS PER SHARE
| | ----------------------

| | Earnings
per share (EPS) is computed using the weighted-average number of shares of
common stock 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 dilutive
potential common stock for the years ended December 31, 2002, 2001 and 2000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`INCOME              COMMON SHARES
                                                                    NUMERATOR              DENOMINATOR             EPS
                                                                    =========              ===========             ===

      2002
      ----
         Basic EPS                                                    $4,046,174             1,817,430            $2.23

      Dilutive effect of potential common stock
      -----------------------------------------
         Stock options:
             Exercise of options outstanding                                                    25,900
             Hypothetical share repurchase at $38.25                                           (23,991)
                                                                                             =========

      Diluted EPS                                                     $4,046,174                                  $2.22
      -----------                                                     ==========                                  =====

                                                                      INCOME              COMMON SHARES
                                                                    NUMERATOR              DENOMINATOR             EPS
                                                                    =========              ===========             ===

      2001
      ----
         Basic EPS                                                    $3,848,136             1,811,391            $2.12

      Dilutive effect of potential common stock
      -----------------------------------------
         Stock options:
             Exercise of options outstanding                                                    19,300
             Hypothetical share repurchase at $37.75                                           (17,554)
                                                                                             ---------


      Diluted EPS                                                     $3,848,136             1,813,137            $2.12
      -----------                                                     ==========             =========            =====

                                                                      INCOME              COMMON SHARES
                                                                    NUMERATOR              DENOMINATOR             EPS
                                                                    ---------              -----------             ---

      2000
      ----
         Basic EPS                                                    $3,182,628             1,803,674            $1.76
                                                                                                                  -----

      Dilutive effect of potential common stock
      -----------------------------------------
         Stock options:
             Exercise of options outstanding                                                    14,400
             Hypothetical share repurchase at $35.13                                           (12,761)
                                                                                             ---------


      Diluted EPS                                                     $3,182,628             1,805,313            $1.76
      -----------                                                     ==========             =========            =====`

| | 14. REGULATORY MATTERS
| | ----------------------

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Quantitative
measures established by regulation to ensure capital adequacy require the
Company 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, 2002, the Company meets all capital adequacy requirements to
which it is 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 actual capital amounts and ratios are also presented
in the table. No amounts were deducted from capital for interest-rate risk in
either 2002, 2001 or 2000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`To Be Well Capitalized
                                                                               For Capital           Under Prompt Corrective
                                                     Actual                Adequacy Purposes:           Action Provisions:
                                           --------------------------- ---------------------------- ---------------------------
                                                Amount        Ratio         Amount         Ratio        Amount         Ratio
                                                ------        -----         ------         -----        ------         -----

      As of December 31, 2002:
         Total Capital
             (to Risk Weighted Assets)          $47,849,237   12.8%        =>29,978,483     =>8.0%     =>37,473,103      =>10%

         Tier I Capital
             (to Risk Weighted Assets)          $43,926,946   11.7%        =>14,989,241     =>4.0%     =>22,483,862       =>6%

         Tier I Capital
             (to Average Assets)                $43,926,946     7.6%       =>23,230,761     =>4.0%     =>29,038,452       =>5%

      As of December 31, 2001:
         Total Capital
             (to Risk Weighted Assets)          $45,146,000   12.5%       =>$28,846,000     =>8.0%    =>$36,058,000    =>10.0%

         Tier I Capital
             (to Risk Weighted Assets)          $41,402,000   11.5%       =>$14,423,000     =>4.0%    =>$21,635,000     =>6.0%

         Tier I Capital
             (to Average Assets)                $41,402,000     7.8%      =>$21,349,000     =>4.0%    =>$26,687,000     =>5.0%`

| | 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 $35,000,000 at December 31, 2002. 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 were
made on substantially the same terms and at those 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:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

`2002                2001                2000
                                                                             ----                ----                ----

         Balance, beginning                                               $6,225,458         $6,999,169          $4,134,764
         Additions                                                        10,146,773          2,148,867           6,835,857
         Collections                                                      (4,679,635)        (2,922,578)         (3,971,452)
                                                                          ----------         ----------          ----------

         Balance, ending                                                 $11,692,596         $6,225,458          $6.999.169
                                                                          ==========         ==========          ==========`

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

`2002                2001                2000
                                                                             ----                ----                ----

         Number of persons                                                    3                   3                   2

         Balance, beginning                                              $5,597,515          $4,848,966         $1,871,358
         Additions                                                        9,609,764             570,951          5,510,253
         Collections                                                     (4,516,100)           (603,180)        (2,755,754)
         Prior loan balance now above threshold                                   -             780,778            223,109
         Adjustment for loans no longer
             exceeding 2.5% of shareholders' equity                               -                  -                   -

                                                                          ----------         ----------          ----------
         Balance, ending                                                 $10,691,179         $5,597,515          $4,848,966
                                                                          ==========         ==========          ==========`

| | 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
| | -----------------------------------------------

| | The following is a summary of quarterly results of operations for the years ended December 31, 2002, 2001 and 2000:
| | -------------------------------------------------------------------------------------------------------------------

`FIRST           SECOND          THIRD          FOURTH
                     2002                           QUARTER         QUARTER         QUARTER        QUARTER         TOTAL
                     ----                           -------         -------         -------        -------         -----
                                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      Interest income                                 $8,730         $8,759           $8,556         $8,522         $34,567
      Interest expense                                (4,648)        (4,566)          (4,481)        (4,187)        (17,882)
                                                      -------        -------          -------        -------        --------

      Net interest income                              4,082          4,193            4,075          4,335          16,685
      Provision for loan losses                         (460)          (496)            (220)          (488)         (1,664)
      Other income                                       972            979              737            614           3,302
      Other expenses                                  (3,144)        (3,158)          (3,302)        (3,147)        (12,751)
                                                      -------        -------          -------        -------        --------

      Income before provision for
         income taxes                                  1,450          1,518            1,290          1,314           5,572+
      Provision for income taxes                        (372)          (409)            (357)          (388)         (1,526)
                                                      -------        -------          -------        -------        --------

      Net income                                      $ 1,078        $ 1,109          $  933         $  926         $ 4,046
                                                      =======        =======          =======        =======        ========

      Net income per share                              $ .59          $ .61            $ .51          $ .52          $ 2.23
                                                      =======        =======          =======        =======        ========`

`FIRST           SECOND          THIRD          FOURTH
                     2001                           QUARTER         QUARTER         QUARTER        QUARTER         TOTAL
                     ----                           -------         -------         -------        -------         -----
                                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      Interest income                                 $9,169         $9,259           $9,264         $8,688         $36,380
      Interest expense                                (5,398)        (5,146)          (5,146)        (5,164)        (20,854)
                                                      -------        -------          -------        -------        --------

      Net interest income                              3,771          4,113            4,118          3,524          15,526
      Provision for loan losses                         (328)          (276)            (570)        (1,301)         (2,475)
      Other income                                       865            830              857          1,150           3,702
      Other expenses                                  (2,931)        (3,177)          (3,230)        (2,661)        (11,999)
                                                      -------        -------          -------        -------        --------

      Income before provision for
         income taxes                                  1,377          1,490            1,175            712           4,754
      Provision for income taxes                        (294)          (350)            (251)           (11)           (906)
                                                      -------        -------          -------        -------        --------

      Net income                                      $ 1,083       $ 1,140          $    924       $    701        $  3,848
                                                      =======        =======          =======        =======        ========

      Net income per share                              $.60           $.62             $.51           $.39           $2.12
                                                      =======        =======          =======        =======        ========

                                                     FIRST           SECOND          THIRD          FOURTH
                     2000                           QUARTER         QUARTER         QUARTER        QUARTER         TOTAL
                     ----                           -------         -------         -------        -------         -----
                                                                  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

      Interest income                                 $8,072         $8,577           $9,172         $9,265         $35,086
      Interest expense                                (4,667)        (5,142)          (5,797)        (5,862)        (21,468)
                                                      -------        -------          -------        -------        --------

      Net interest income                              3,405          3,435            3,375          3,403          13,618
      Provision for loan losses                         (106)          (137)            (138)          (777)         (1,158)
      Other income                                       622            715              888            715           2,940
      Other expenses                                  (2,875)        (3,002)          (2,914)        (2,844)        (11,635)
                                                      -------        -------          -------        -------        --------

      Income before provision for
         income taxes                                  1,046          1,011            1,211            497           3,765
      Provision for income taxes                        (184)          (174)            (267)            43            (582)
                                                      -------        -------          -------        -------        --------

      Net income                                      $   862         $ 837            $ 944          $ 540         $ 3,183
                                                      =======        =======          =======        =======        ========

      Net income per share                             $ .48          $ .46            $ .52          $ .30          $ 1.76
                                                      =======        =======          =======        =======        ========`

| | 17. CONTINGENCY
| | ---------------

| | 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, demands approximately $250,000 in connection with certain environmental
remediation activities purportedly performed prior to the opening of the
Banks new Eynon branch. On July 22, 2002, the Bank filed preliminary
objections to the Civil Complaint. The preliminary objections were decided on
November 26, 2002, and the Bank filed its Answer and New Matter raising various
legal defenses. Formal discovery has commenced and depositions are scheduled
through April 2003. The Bank intends to vigorously defend this action.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 other 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 other 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 June 2001, the FASB issued  Statement No. 141,  "Business  Combinations."  The Statement  addresses  financial  accounting and
      reporting for business  combinations  and  supersedes  APB Opinion No. 16,  "Business  Combinations,"  and FASB Statement No. 38,
      "Accounting for Preacquisition  Contingencies of Purchased  Enterprises." All business combinations in the scope of the Statement
      are to be accounted for using the purchase method. The provisions of the Statement apply to all business  combinations  initiated
      after June 30, 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets. The Statement addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. It addresses how intangible
assets that are acquired individually or with a group of other assets (but not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. The Statement also addresses how goodwill and
other intangible assets should be accounted for after they have been initially
recognized in the financial statements. The provisions of the Statement are
required to be applied starting with fiscal years beginning after December 15,
2001, except that goodwill and intangible assets acquired after June 30, 2002
will be subject immediately to the nonamortization and amortization provisions
of the Statement. Early application is permitted for entries with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not previously been issued. The Statement is required to be
applied at the beginning of an entitys fiscal year and to be applied to
all goodwill and other intangible assets recognized in its financial statement
at that date. There was no impact on earnings, financial condition or equity
upon adoption of Statement No. 142.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations. This SFAS
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. As used in this SFAS, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estopple. This SFAS
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. This SFAS amends SFAS No.
19, Financial Accounting and Reporting by Oil and Gas Producing
Companies, and it applies to all entities. It is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Earlier
application is encouraged. The adoption of this SFAS on January 1, 2003 is not
expected to have an impact on the Companys earnings, financial condition
or equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This SFAS addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. However, the SFAS retains the
fundamental provisions of SFAS No. 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used, and (b) measurement of
long-lived assets to be disposed of by sale. This SFAS supercedes the accounting
and recording provisions of APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. However, this
SFAS retains the requirement of Opinion No. 30 to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment or in the
distribution to owners) or is classified as held for sale. This SFAS also amends
ARB No. 51, Consolidated Financial Statements, to eliminate the
exception to consolidation for temporarily-controlled subsidiary. The provisions
of this SFAS are effective for financial statements issued for fiscal years
beginning after December 15, 2001, interim periods within those fiscal years,
with earlier application encouraged. The provisions of this SFAS generally are
to be applied prospectively. The adoption of this SFAS on January 1, 2002
did not have an impact on the Companys earnings, financial condition or
equity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This SFAS rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement,
SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements, along with rescinding SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers and amending SFAS No. 13, Accounting
for Leases. This SFAS (1) eliminates an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions, (2) eliminates the extraordinary item treatment of
reporting gains and losses from extinguishments of debt, and (3) makes certain
other technical corrections.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
provisions of this SFAS related to the rescission of SFAS No. 4 are to be
applied in fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishments of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in Opinion 30 for
classification as an extraordinary item shall be reclassified. Early application
of the provisions of this SFAS related to SFAS No. 13 shall be effective for
transactions occurring after May 15, 2002. All other provisions of the SFAS
shall be effective for financial statements issued on or after May 15, 2002.
Early application of the SFAS is encouraged. The adoption of the effective
portions of the SFAS did not have an impact on the Companys earnings,
financial condition or equity. The adoption of the remaining portions of this
SFAS is not expected to have an impact on the Banks earnings, financial
condition or equity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
provisions of this SFAS are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company does not expect the adoption of this Statement to have an impact on its
earnings, financial condition or equity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 1, 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, effective for all business combinations initiated
after October 1, 2002. This Statement addresses the financial accounting
and reporting for the acquisition of all or part of a financial institution,
except for a transaction between two or more mutual enterprises. This SFAS
removes acquisitions of financial institutions, other than transactions between
two or more mutual enterprises, from the scope of SFAS No. 72, Accounting
for certain Acquisitions of Banking or Thrift Institutions, and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution is Acquired in a Business
Combination Accounted for by the Purchase Method. The acquisition of all
or part of a financial institution that meets the definition of a business
combination shall be accounted for by the purchase method in accordance with
SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. This SFAS also provides
guidance on the accounting for the impairment or disposal of acquired long-term
customer-relationship intangible assets (such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible
assets), including those acquired in transactions between two or more mutual
enterprises. The adoption of this SFAS did not have an impact on the
Companys earnings, financial condition or equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others. This Interpretation clarifies
the requirements for a guarantors accounting for and disclosures of
certain guarantees issued and outstanding. This Interpretation requires a
guarantor to recognize a liability for the fair value of the obligation it
assumes under that guarantee.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
initial recognition and initial measurement provisions of the Interpretation are
applied on a prospective basis to guarantees issued or modified after December
31, 2002. The guarantors accounting for guarantees issued prior to the
date of initial application should not be revised or restated to reflect the
effect of the recognition and measurement provisions of the Interpretation. The
Interpretations disclosure requirements were implemented during the year
ended December 31, 2002. The adoption of the recognition and measurement
provisions of this Interpretation are not expected to have a significant impact
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
                                                                                                           DECEMBER 31,
                                                                                                        2002          2001
                                                                                                        ----          ----

         ASSETS:
             Cash                                                                                      $   2         $   1
             Investment in subsidiary                                                                 45,267        40,141
             Other                                                                                        -             30
                                                                                                      ------        ------

                    Total                                                                            $45,269       $40,172
                                                                                                      ======        ======

         LIABILITIES AND SHAREHOLDERS' EQUITY:
             Liabilities                                                                               $  35         $   -
             Shareholders' equity                                                                     45,234        40,172
                                                                                                      ------        ------

                    Total                                                                            $45,269       $40,172
                                                                                                      ======        ======`

`CONDENSED INCOME STATEMENT
                                                                                             YEARS ENDED DECEMBER 31,
                                                                                         2002          2001          2000
                                                                                         ----          ----          ----

         INCOME:
             Equity in undistributed earnings of subsidiary                             $2,598        $2,918         $1,969
             Dividends from subsidiary                                                   1,542         1,056          1,396
                                                                                        ------        ------         ------

                       Total income                                                      4,140         3,974          3,365

         OPERATING EXPENSES                                                                142           191            238
                                                                                        ------        ------         ------

         INCOME BEFORE TAXES                                                             3,998         3,783          3,127

         CREDIT FOR INCOME TAXES                                                            48            65             55
                                                                                        ------        ------         ------

         NET INCOME                                                                     $4,046        $3,848         $3,182
                                                                                        ======        ======         ======`

`CONDENSED STATEMENT OF CASH FLOWS
                                                                                                  YEARS ENDED
                                                                                                 DECEMBER 31,
                                                                                        2002           2001           2000
                                                                                        ----           ----           ----

CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                                      $ 4,046         $3,848        $3,182
      Adjustments to reconcile net income to net cash
         provided by operations:
             Equity in earnings of subsidiary                                          (4,140)        (3,974)       (3,365)
             Deferred income taxes                                                          2              2            (8)
             Net change in other assets                                                    24             23           (47)
                                                                                        ------        ------         ------

                Net cash used in operating activities                                     (68)          (101)         (238)
                                                                                        ------        ------         ------

CASH FLOWS FROM INVESTING ACTIVITIES,
      Dividends received from subsidiary                                                1,542          1,056          1,396
                                                                                        ------        ------         ------


CASH FLOWS FROM FINANCING ACTIVITIES:
      Dividends paid, net of dividend reinvestment                                     (1,047)        (1,006)       (1,173)
      Exercise of stock options                                                            15             51            16
      Withholdings to purchase capital stock                                               39              -             -
      Purchase of treasury stock                                                         (480)             -             -
                                                                                        ------        ------         ------

                Net cash used in financing activities                                  (1,473)          (955)       (1,157)
                                                                                        ------        ------         ------

                       Net increase in cash                                                                -

CASH, BEGINNING                                                                             1              1             -
                                                                                        ------        ------         ------

CASH, ENDING                                                                               $2            $ 1           $ 1
                                                                                        ======        ======         ======`

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

None.

The
information required under Item 401 of Regulation S-K is incorporated by
reference herein, to the section, Board of Directors and Management,
subsections Information as to Directors and Nominees, Family
Relationships, Executive Officers of the Company, and
Certain other Officers, contained within the Companys 2003
definitive Proxy Statement.

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.

The
information required by this Item is incorporated by reference herein, to the
section titled Executive Compensation, contained within the
Companys 2003 definitive Proxy Statement.

The
information required by this item is incorporated by reference herein, to the
section titled Beneficial Ownership of the Companys Common Stock by
Significant Shareholders, Directors and Executive Officers, contained
within the Companys 2003 definitive Proxy Statement.

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 section titled Certain
Business Relationships and Transactions with Management, contained within
the Companys 2003 definitive Proxy Statement.

(a)  Evaluation of disclosure  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,  except for the  internal
control components of risk assessment and monitoring

(b) Changes in internal  controls.  The Company has made significant  changes in
its internal controls or in other factors that could significantly  affect these
controls  subsequent to the date of the  evaluation of the controls by the Chief
Executive and Chief Financial officers, as follows:

- A formal risk assessment was not completed for the year ended December 31, 2002.
It is managements intention to have a formally documented risk assessment
completed and submitted to the Companys Audit Committee for approval.
- Management intends to work with the Internal Audit Department to perform a risk
assessment, from which an internal audit schedule will be developed and
submitted to the Companys Audit Committee for approval. Once approved, the
Audit Committee will monitor the risk assessments and the timely completion of
each scheduled internal audit.

`(a) (1)Financial Statements - The following financial statements are included by reference in Part II, Item 8 hereof:

        Report of Independent Certified Public Accountants.
        Balance Sheet.
        Statement of Income.
        Statement of Changes in Shareholder Equity.
        Statement of Cash Flows.
        Notes to Financial Statements.

     (2)Financial Statement Schedules

          Financial   Statement  Schedules  are  omitted  because  the  required
          information is either not applicable,  the data are 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 10-K.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.

|23   | Consent of Independent Auditors.                                                                                                                                      
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                       
|99.1 | 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.
|     |                                                                                                                                                                       
|99.2 | Certification of Princial 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.
|     |                                                                                                                                                                       
|99.3 | 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, filed herewith.
|     |                                                                                                                                                                       

`(b) Reports on Form 8-K.

     No Current Report on Form 8-K was filed by the Registrant during the fourth
     quarter of the fiscal year ended December 31, 2002.

(c)  The  exhibits  required  to be filed by this  Item are  listed  under  Item
     14(a)3, above.

(d)  NOT APPLICABLE.`

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 28, 2003 | By:/s/Michael F. Marranca             
|                     | Michael F. Marranca,                  
|                     | Chairman of the Board of Directors and
|                     | President                             
|                     |                                       
|                     |                                       
|                     |                                       
|                     |                                       
|Date: March 28, 2003 | By:/s/Joseph J. Earyes                
|                     | Joseph J. Earyes,                     
|                     | Executive Vice President and          
|                     | Chief Executive 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 28, 2003
   Michael F. Marranca, Chairman
   of the Board of Directors and President

By:/s/Joseph J. Earyes                                                           March 28, 2003
   Joseph J. Earyes, Executive Vice President
   And Chief Executive Officer

By:/s/Salvatore R. DeFrancesco                                                   March 28, 2003
   Salvatore R. DeFrancesco, Chief Financial
   Officer

By:/s/Robert P. Farrell                                                          March 28, 2003
   Robert P. Farrell, Treasurer,
   Pincipal Accounting Officer

By:/s/Samuel C. Cali                                                             March 28, 2003
   Samuel C. Cali, Director and
   Chairman Emeritus

By:/s/John F. Glinsky, Jr.                                                       March 28, 2003
   John F. Glinsky, Jr., Secretary
   of the Board of Directors and
   Director

By:/s/Patrick J. Dempsey                                                         March 28, 2003
   Patrick J. Dempsey, Vice Chairman
   of the Board of Directors and Director

By:/s/Paul A. Barrett                                                            March 28, 2003
   Paul A. Barrett, Director

By:/s/John T. Cognetti                                                           March 28, 2003
   John T. Cognetti, Director

By:/s/Michael J. McDonald                                                        March 28, 2003
   Michael J. McDonald, Director

By:/s/David L. Tressler                                                          March 28, 2003
   David L. Tressler, Director

By:/s/Mary E. McDonald                                                           March 28, 2003
   Mary E. McDonald, Director

By:/s/Brian J. Cali                                                              March 28, 2003
   Brian J. Cali, Director`

I, Joseph J. Earyes, certify that:

1. I have reviewed this annual report on Form 10-K of Fidelity D&D Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14 for the registrant and have:Designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this annual report is being prepared;Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); andPresented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
5. Designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this annual report is being prepared;
6. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); and
7. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
8. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):All significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors and
material weaknesses in internal controls; andAny fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls.
9. All significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors and
material weaknesses in internal controls; and
10. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls.
11. The registrant's other certifying officers and I have indicated in this annual report whether there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date:  March 28, 2003 | /s/Joseph J. Earyes         
|--------------------- | ----------------------------
|                      | Joseph J. Earyes,           
|                      | Executive Vice President and
|                      | Chief Executive Officer     

I, Salvatore R. DeFrancesco, certify that:

1. I have reviewed this annual report on Form 10-K of Fidelity D&D Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14 for the registrant and have:Designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this annual report is being prepared;Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); andPresented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
5. Designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this annual report is being prepared;
6. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); and
7. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
8. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):All significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors and
material weaknesses in internal controls; andAny fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls.
9. All significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors and
material weaknesses in internal controls; and
10. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls.
11. The registrant's other certifying officers and I have indicated in this annual report whether there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date:  March 28, 2003 | /s/Salvatore R. DeFrancesco
|--------------------- | ---------------------------
|                      | Salvatore R. DeFrancesco,  
|                      | Chief Financial Officer    

I, Robert P. Farrell, certify that:

1. I have reviewed this annual report on Form 10-K of Fidelity D&D Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14 for the registrant and have:Designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this annual report is being prepared;Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); andPresented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
5. Designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this annual report is being prepared;
6. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); and
7. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
8. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):All significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors and
material weaknesses in internal controls; andAny fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls.
9. All significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors and
material weaknesses in internal controls; and
10. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls.
11. The registrant's other certifying officers and I have indicated in this annual report whether there were significant
changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date:  March 28, 2003 | /s/Robert P. Farrell            
|--------------------- | --------------------------------
|                      | Robert P. Farrell, Treasurer and
|                      | Principal Accounting Officer    

| | 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 Form of Employment Agreement with Joseph J. Earyes.  Incorporated by
     reference  to Exhibit 10.1 to  Registrant's  Form 8-K filed with the SEC on
     March 25, 2002.                                                                                                                                                                                              | *  
| | 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.                                                                                                                                                | 75 
| | 12 Statement  regarding  computation of ratios.  Included herein in Item 6,
     "Selected Financial Data".                                                                                                                                                                                                                                                                  | 8  
| | 21  Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                          | 99 
| | 23  Consent of Independent Auditors.                                                                                                                                                                                                                                                                                                                                         | 100
| | 99.1 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.                                                                                                                                                                                                  | 101

| | 99.2Certification 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. | 102
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---
| | 99.3 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.      | 103

* - Incorporated by Reference

Consumer Deposit Products
Personal Checking Accounts
Budget Checking Accounts
Senior Checking Accounts
Youth Checking and Savings Accounts
NOW Accounts
Money Market Accounts
Statement Savings Accounts
Fixed Rate or Variable Rate IRA
         Certificates of Deposit
Christmas and All Purpose Club Accounts
Certificates of Deposit
Consumer Electronic Services
Overdraft Protection
Fidelity at Work Program
(Offered to businesses for their employees) Direct Deposit Services MAC
Services:
         The Fidelity Check Card
         ATM Card
The Fidelity Telephone Link
The Fidelity Web Bill Pay
Sweep Accounts Using Repurchase
    Agreements
Consumer Loan Products
Home Equity Line of Credit
Mortgage Loans
Installment Loans
Student Loans
Preferred Lines of Credit
MasterCard/Visa
Special Purpose Credit and Other Programs Fidelity Offers
Special Home Buyer Programs
Business Loan Products
Commercial Loans
Equipment Loans
Floor Plan Loans
Lines of Credit
Community Development Loans
Demand Loans
Commercial Mortgages
Participation Loans
Letters of Credit
Special Business Loan Programs
Women Owned Business Programs
SBA Loan Programs
PENNCAP Loans
PEDFA Loans
EDNCP Loans
FHLB Banking on Business
USDA Loan Programs
Investment Services:*
Annuities
Trust (Personal/Corporate)
Estate Settlement Services
Mutual Funds
Term Life Insurance
Institutional Money Managers
    Retirement Accounts:
-        401K
-        SEP
-        SIMPLE
-        IRA
Additional Bank Services
Tax Exempt Bonds
Government Check Cashing Services
Acceptance of Utility Bills:
    Pennsylvania American Water
    Penn Fuel
Acceptance of County Real Estate Taxes
Acceptance of TT&L Payments for Businesses
Series "EE" and "I" U.S. Savings Bonds, Travelers
    Checks and Cashier Checks
Wire Transfer Services
Safe Deposit Services
ACH Services
Direct Deposit Services
Business Deposit Products and Services
Business Checking with Account Analysis
Small Business Checking
Neighbor Business Checking
NOW Accounts Money Market Deposit Accounts
Fidelity Visa Business Check Card
Savings Accounts
Certificates of Deposit
Sweep Accounts Using Repurchase Agreements
Fidelity at Work Program
Business Electronic Services
Fidelity Cash Manager
The Fidelity Telephone Link
The Fidelity On-Line
MasterCard/Visa (MAC) Merchant Processing
ACH Origination Processing