PHSB FINANCIAL CORPORATION
                        SELECTED FINANCIAL AND OTHER DATA

<TABLE>
<CAPTION>
<S>                                             <C>          <C>        <C>       <C>        <C>
Selected Financial Data
-------------------------------------------------   --------   --------   --------   --------   --------
At December 31,                                       2001       2000       1999       1998       1997
-------------------------------------------------   --------   --------   --------   --------   --------
                                                  (In thousands)

Assets ..........................................   $315,382   $265,330   $268,640   $244,253   $217,735
Loans ...........................................    137,001    129,017    118,745     99,914     99,691
Mortgage-backed securities held to maturity .....     30,180     38,780     44,141     48,287     40,234
Mortgage-backed securities available
  for sale ......................................     54,604     38,415     37,426     32,878     30,159
Investment securities held to maturity ..........     26,260     17,776     15,540     18,146     10,015
Investment securities available for sale ........     22,902     24,814     27,595     25,197     24,253
Interest-bearing deposits with other institutions     28,195      5,094     11,417      9,332      3,308
Federal Home Loan Bank stock ....................      2,615      2,615      2,615      1,545      1,020
Deposits ........................................    210,015    198,242    189,345    181,113    174,286
Other borrowings ................................         28         75        120      1,388      1,116
Advances from Federal Home Loan Bank ............     50,325     36,195     50,295     30,895     12,117
Stockholders' equity(1) .........................     52,835     28,850     26,751     29,184     28,609

</TABLE>

<TABLE>
<CAPTION>
-------------------------------------------------   --------   --------   --------   --------   --------
Selected Consolidated Operating Data
Year Ended December 31,                               2001       2000       1999       1998       1997
-------------------------------------------------   --------   --------   --------   --------   --------
                                                 (In thousands)
<S>                                             <C>          <C>        <C>       <C>        <C>

Interest income .................................     19,316     19,035   $ 17,511   $ 16,112   $ 14,950
Interest expense ................................     10,537     10,448      9,284      8,523      7,857
                                                    --------   --------   --------   --------   --------
  Net interest income ...........................      8,779      8,587      8,227      7,589      7,093
Provision for loan losses .......................        520        555        410        365        555
                                                    --------   --------   --------   --------   --------
  Net interest income after provision
    for loan losses .............................      8,259      8,032      7,817      7,224      6,538
Total non-interest income .......................      1,008        854        764        914        937
Total non-interest expense ......................      6,294      6,000      6,094      6,245      5,687
                                                    --------   --------   --------   --------   --------
Income before income taxes ......................      2,973      2,886      2,487      1,893      1,788
Income taxes ....................................        752        714        629        391        150
                                                    --------   --------   --------   --------   --------
  Net income ....................................   $  2,221   $  2,172   $  1,858   $  1,502   $  1,638
                                                    ========   ========   ========   ========   ========

</TABLE>
                          (footnotes on following page)

                                        2
<PAGE>

<TABLE>
<CAPTION>

Other Selected Data
------------------------------------------------------  ------------- -------------  ------------- -------------- -------------
At or for the Year Ended December 31,                       2001          2000           1999           1998          1997
------------------------------------------------------  ------------- -------------  ------------- -------------- -------------
<S>                                                    <C>           <C>            <C>            <C>           <C>
Return on average assets (net income
  divided by average total assets)....................      0.78%         0.81%          0.73%          0.65%         0.79%
Return on average equity (net income
  divided by average equity assets)...................      7.31%         7.95%          6.68%          5.24%         7.33%
Average equity to average assets .....................     10.69%        10.22%         10.86%         12.50%        10.81%
Net interest rate spread..............................      3.05%         3.14%          3.15%          3.21%         3.48%
Per Share Information:
  Basic earnings per share(1)(2)......................      $0.70         $0.67          $0.56          $0.44         $0.26
  Diluted earnings per share(1)(2)....................      $0.70         $0.67          $0.56          $0.44         $0.26
  Tangible book value per share(1)(2).................     $15.11         $8.80          $7.92          $8.25         $8.09
Non-performing assets to total assets.................      0.19%         0.25%          0.19%          0.22%         0.40%
Non-performing loans to total loans...................      0.43%         0.51%          0.42%          0.52%         0.87%
Allowance for loan losses to total loans..............      1.08%         1.12%          1.14%          1.28%         1.39%
Dividend payout ratio(2)..............................     44.65%        42.02%         40.03%         46.34%           N/A

</TABLE>

----------------
(1)      On December  20,  2001,  the Company  completed  its stock  offering in
         connection with the conversion and  reorganization  of the Bank and its
         holding  Company,  PHS Bancorp,  Inc.,  from the mutual holding company
         form of  organization to a full stock company.  Shares  outstanding for
         all  applicable  periods have been  adjusted as of the beginning of the
         periods to give  effect to the  1.28123  exchange  ratio of  previously
         issued shares in conjunction with this conversion and reorganization.

(2)      No  shares  of common  stock  were  outstanding  until  July 10,  1997,
         therefore per share information for December 31, 1997 is based upon the
         period from July 10, 1997 to December 31, 1997,  with weighted  average
         shares outstanding of 3,466,855.

                                        3
<PAGE>
                           PHSB FINANCIAL CORPORATION

Corporate Profile

         On July 9, 1997,  Peoples Home  Savings  Bank (the "Bank")  reorganized
from a Pennsylvania  mutual savings bank into a mutual holding company structure
and formed PHS Bancorp, M.H.C. As part of the reorganization,  the Bank became a
Pennsylvania chartered stock savings bank and issued shares in a public offering
to certain depositors and to PHS Bancorp,  M.H.C.  Additionally,  on November 9,
1998, the Bank  reorganized into a stock holding company and formed PHS Bancorp,
Inc. As part of this  reorganization,  the Bank's  public  shareholders  and PHS
Bancorp,  M.H.C.  exchanged  their shares of common stock for PHS Bancorp,  Inc.
shares of common stock.

         On December  20,  2001,  PHSB  Financial  Corporation  (the  "Company")
completed  its  stock   offering  in   connection   with  the   conversion   and
reorganization of the Bank and its holding Company, PHS Bancorp,  Inc., from the
mutual holding company form of organization to a full stock company.  As part of
the  conversion  and  reorganization,  the shares  formerly held by PHS Bancorp,
M.H.C.  were  cancelled and the Company sold  2,201,191 new shares to the public
and the shares held by  stockholders  of PHS Bancorp,  Inc.  were  exchanged for
1,295,918 shares of the Company.

         The Company  currently  conducts its business through the Bank with ten
full service offices and an administrative  office located throughout Beaver and
Lawrence Counties,  Pennsylvania.  The Bank offers a broad range of deposits and
loan products to  individuals,  families and small  businesses.  At December 31,
2001, the Company had  consolidated  assets of $315.4  million,  loans of $137.0
million, deposits of $210.0 million, and stockholder's equity of $52.8 million.

Stock Market Information

         Since its  issuance on July 9, 1997,  the  Company's  common  stock has
traded on the NASDAQ National Market under the symbol "PHSB." Upon completion of
the  conversion  and  reorganization  on December  20,  2001,  the common  stock
continues to trade on the NASDAQ  National  Market under the same symbol "PHSB."
The following table reflects the stock price as published by the Nasdaq National
Market.  The quotations  reflect  inter-dealer  prices,  without retail mark-up,
mark-down, or commission, and may not represent actual transactions. On December
31, 2001, the Company's common stock closed at $11.95.


                                                              DIVIDENDS
                                                              DECLARED
QUARTER ENDED                    HIGH (1)        LOW (1)      PER SHARE (1)
-----------------------          --------        -------      -------------
December 31, 2001               12.88            11.51          $0.08
September 30, 2001              11.12            7.95            0.08
June 30, 2001                    8.38            6.70            0.08
March 31, 2001                   7.35            6.28            0.08
December 31, 2000                8.59            8.00            0.07
September 30, 2000               8.88            6.54            0.07
June 30, 2000                    6.83            5.95            0.07
March 31, 2000                   6.73            5.66            0.07

------------------------
(footnotes on next page)

                                        4
<PAGE>

(1)      On December  20,  2001,  the Company  completed  its stock  offering in
         connection with the conversion and  reorganization  of the Bank and its
         holding  Company,  PHS Bancorp,  Inc.,  from the mutual holding company
         form  of  organization  to a full  stock  company.  Shares  prices  and
         dividend  amounts for all  applicable  periods have been adjusted as of
         the  beginning  of the periods to give  effect to the 1.28123  exchange
         ratio of previously  issued shares in conjunction  with this conversion
         and reorganization.

         The number of  stockholders  of record of common stock as of the record
date on April 5, 2002, was  approximately  606. This does not reflect the number
of persons or  entities  who held stock in  nominee  or  "street"  name  through
various  brokerage  firms.  At  April  5,  2002,  there  were  3,497,109  shares
outstanding.

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


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

         The Private  Securities  Litigation  Act of 1995  contains  safe harbor
provisions regarding forward-looking  statements.  When used in this discussion,
the words  "believes",  "anticipates",  "contemplates",  "expects",  and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties  which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest  rates,  risks  associated  with the effect of opening a new
branch,  the  ability  to  control  costs and  expenses,  and  general  economic
conditions.  These risks and  uncertainties  should be  considered in evaluating
forward-looking  statements  and  undue  reliance  should  not be placed on such
statements.

         References  to the Company  refer  collectively  to the Company and the
Bank unless the context indicates otherwise.

Comparison of Financial Condition at December 31, 2001 and 2000

         Total  assets at December  31, 2001 of $315.4  million  represented  an
increase of $50.1  million or 18.9% from  December 31, 2000.  This  increase was
primarily  due to increases  in cash and  interest-bearing  deposits  with other
financial  institutions  of  $27.6  million  ,  investment  and  mortgage-backed
securities of $14.2 million, along with increases in loans of $8.0 million.

         Loans  receivable,   net  at  December  31,  2001,  of  $137.0  million
represented  an  increase  of 6.2% from $129.0  million at  December  31,  2000.
Mortgage,  commercial and consumer loans increased by $5.6 million, $1.8 million
and $1.6 million,  respectively.  The increases in mortgage  loans was primarily
due to  increased  loan  demand  for  these  types of loans  due to the  current
interest rate environment.

         At December 31, 2001,  investment  securities  (available  for sale and
held to maturity)  increased $6.6 million to $55.4 million from $42.6 million at
December  31,  2000.  Additionally,   at  December  31,  2001,   mortgage-backed
securities  (available for sale and held to maturity)  increased $7.6 million to
$84.8  million from $77.2  million at December 31,  2000.  The  increases to the
investment and mortgage-backed securities

                                        5
<PAGE>

portfolios  (available  for sale  and  held to  maturity)  were  the  result  of
purchases  of  $55.4  million  which  were  funded  by  sales  of $1.9  million,
maturities of $17.4  million,  and  principal  repayments of $22.5 million along
with increased  Federal Home Loan Bank advances of $14.0 million.  The purchases
funded by advances  from the Federal Home Loan Bank of  Pittsburgh  were part of
the Bank's leverage strategy.

         At December 31, 2001, the allowance for loan losses  increased  $51,000
to $1.5 million from fiscal 2000. This increased  allowance resulted from a loan
loss provision of $520,000 and net  charge-offs of $469,000.  See "Provision for
Loan Losses."

         The  allowance  for loan  losses is based upon  management's  quarterly
review of the loan  portfolio.  The  purposes  of the  review is to assess  loan
quality,  analyze delinquencies,  evaluate potential  charge-offs,  and identify
potential problem loans.  Commercial  mortgage loans are selected for individual
review based upon delinquency status or larger balance loans. Consumer loans are
generally reviewed in the aggregate as they are of relative small dollar amounts
and   homogeneous   in  nature.   Individual   loans   reviewed   are   assigned
classifications based upon the borrowers delinquency status and payment history,
the overall risk of the loan, financial capacity of the borrower, the collateral
securing the loan, overall economic  conditions in the market, and consideration
to examinations given by regulatory authorities.

         To determine  the  allowance and  corresponding  provision,  the amount
required based upon loans which have been  internally  classified as a result of
the review is first  determined.  In addition,  an allocation of  non-classified
loans is determined  based upon historical loss percentages and overall economic
conditions  in the market.  These amounts are combined to determine the level of
the allowance  necessary to absorb losses within the entire loan portfolio which
consists of loans made  primarily  within the Company's  primary  market area of
southwestern Pennsylvania.

         The historical loss experience model that is used to establish the loan
loss  factors for both  classified  and  non-classified  loans is designed to be
self-correcting  by taking into account our recent loss experience.  Pooled loan
loss factors are adjusted quarterly,  if necessary,  based upon the level of net
charge-offs  expected by  management.  Furthermore,  the  Company's  methodology
permits  adjustments to any loss factor used in the computation of the allowance
in the event that,  in  management=s  judgement,  significant  conditions  which
affect the  collectability  of the portfolio as of the  evaluation  date are not
reflected in the loss factors.

         The allowance for loan losses is maintained at a level that  represents
management's best estimates of losses in the loan portfolio at the balance sheet
date.  However,  there can be no assurance that the allowance for losses will be
adequate to cover losses which may be realized in the future and that additional
provisions for losses will not be required.

         Total deposits at December 31, 2001, were $210.0  million,  an increase
of $11.8  million  or 6.0% from  $198.2  million at  December  31,  2000.  Total
deposits increased $5.0 million net of interest credited of $6.8 million for the
year ended December 31, 2001.

         Advances from the Federal Home Loan Bank of Pittsburgh  increased $14.1
million to $50.3  million at December 31, 2001,  from $36.2  million at December
31,  2000.  This  increase  was the  result  of  additional  borrowings  to fund
securities purchases as discussed above.

         Stockholders'  equity  increased  $23.9  million  for  the  year  ended
December 31, 2001.  This increase was due to the conversion  and  reorganization
proceeds of $24.2 million,  net income of $2.2 million along with an increase in
unrealized  gain of  $400,000 in the  Company's  securities  available  for sale
portfolio  at  December  31, 2001 and a decrease  in  unallocated  RSP shares of
$129,000.  These increases to stockholders' equity were partially offset by cash
dividends  paid of $992,000 and an increase in  unallocated  ESOP shares of $1.6
million.

                                        6
<PAGE>

Average Balance Sheets and Interest Analysis

         The  following  tables set forth  certain  information  relating to the
Company's  average  balance  sheet and reflects the average  yield on assets and
average cost of  liabilities  for the periods  indicated and the average  yields
earned and rates paid.  Such yields and costs are derived by dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods presented.

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                ----------------------------------------------------------------------------------
                                                           2001                       2000                          1999
                                                -------------------------    --------------------------    -----------------------
                                                Average                      Average                       Average
                                                Balance Interest    Yield    Balance Interest     Yield    Balance Interest  Yield
                                                ------- --------    -----    ------- --------     -----    ------- --------  -----
                                                                                  (In thousands)
<S>                                           <C>       <C>       <C>      <C>       <C>       <C>       <C>      <C>      <C>
ASSETS
Interest-earning assets:
 Loans(1)....................................  $131,878  $10,689     8.11%  $125,964  $10,206     8.10%   $111,050 $ 8,926    8.04%
 Mortgage-backed securities..................    34,718    2,237     6.44     41,755    2,785     6.67      47,241   3,032    6.42
 Investment securities(2) (4)................    30,573    1,583     5.18     25,858    1,572     6.08      26,920   1,410    5.24
 Securities held for sale (4)................    75,962    5,258     6.92     65,843    4,988     7.58      63,156   4,644    7.35
                                               --------  -------            --------  -------             -------- -------
  Total interest-earning assets..............   273,131   19,767     7.24    259,420   19,551     7.54     248,367  18,012    7.25
                                                         -------                      -------                      -------
Noninterest-earning assets...................    11,012                        7,887                         7,775
                                               --------                     --------                      --------
  Total assets...............................  $284,143                     $267,307                      $256,142
                                               ========                     ========                      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
  Savings(3).................................  $ 29,589      542     1.83%  $ 29,710      576     1.94%   $ 29,649     564    1.90%
  NOW and money markets......................    62,895    1,150     1.83     57,161    1,352     2.37      54,295   1,105    2.04
  Time deposits..............................   111,485    6,210     5.57    109,158    6,109     5.60     101,986   5,320    5.22
  Advances from FHLB.........................    47,592    2,632     5.53     41,692    2,407     5.77      39,829   2,240    5.62
  Other borrowings...........................        54        3     5.56        100        5     5.00         738      55    7.45
                                               --------  -------            --------  -------             -------- -------
  Total interest-bearing liabilities.........   251,615   10,537     4.19    237,821   10,449     4.39     226,497   9,284    4.10
                                                         -------                      -------                      -------
Non-interest bearing liabilities.............     2,157                        2,176                         1,823
                                               --------                     --------                      --------
 Total liabilities...........................   253,772                      239,997                       228,320
Stockholders' equity.........................    30,371                       27,310                        27,822
                                               --------                     --------                      --------
 Total liabilities and retained earnings.....  $284,143                     $267,307                      $256,142
                                               ========                     ========                      ========
Net interest income, interest rate spread(4).            $ 9,230     3.05%            $ 9,102     3.14%            $ 8,728    3.15%
                                                         =======   ======             =======   ======             =======  ======
Net yield on interest-earning assets.........                        3.38%                        3.51%                       3.51%
                                                                   ======                       ======                      ======
Ratio of average interest-earning assets
 to average interest-bearing liabilities.....
                                                                   108.55%                      109.08%                     109.66%
                                                                   ======                       ======                      ======
</TABLE>

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

                                        7
<PAGE>

Rate/Volume Analysis

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

<TABLE>
<CAPTION>

                                                         Year Ended December 31,
                                        --------------------------------------------------------------
                                               2001 vs. 2000                        2000 vs. 1999
                                        -----------------------------    -----------------------------
                                             Increase (Decrease)                  Increase (Decrease)
                                                   Due to                               Due to
                                        -----------------------------    -----------------------------
                                        Volume      Rate        Net      Volume      Rate        Net
                                        -------    -------    -------    -------    -------    -------
                                                                (In thousands)
<S>                                   <C>        <C>        <C>        <C>        <C>        <C>
Interest income:
 Loans ..............................   $   479    $     4    $   483    $ 1,199    $    81    $ 1,280
 Mortgage-backed securities .........      (469)       (79)      (548)      (352)       105       (247)
 Investment securities (1) ..........       287       (276)        11        (56)       218        162
 Securities available for sale (1) ..       767       (497)       270        198        146        344
                                        -------    -------    -------    -------    -------    -------
  Total interest-earning assets .....     1,064       (848)       216        989        550      1,539
                                        -------    -------    -------    -------    -------    -------
Interest expense:
  Savings ...........................        (2)       (32)       (34)         1         11         12
  NOW and money markets .............       136       (338)      (202)        58        189        247
  Time deposits .....................       130        (29)       101        374        415        789
  Advances from FHLB ................       341       (116)       225        105         62        167
  Other borrowings ..................        (2)         0         (2)       (48)        (2)       (50)
                                        -------    -------    -------    -------    -------    -------
   Total interest-bearing liabilities       603       (515)        88        490        675      1,165
                                        -------    -------    -------    -------    -------    -------
Net change in net interest income ...   $   461    $  (333)   $   128    $   499    $  (125)   $   374
                                        =======    =======    =======    =======    =======    =======
</TABLE>

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

Comparison of Operating Results for the Years Ended December 31, 2001 and 2000

         General.  Net income for the year ended  December 31, 2001 increased by
$49,000 to  $2,221,000,  from  $2,172,000  for the year ended December 31, 2000.
This increase was primarily due to increases in net interest  income of $192,000
and  non-interest  income  of  $155,000  along  with a  decrease  in  loan  loss
provisions of $35,000.  These  increases to net income were partially  offset by
increases  in  non-interest  expense and income tax  provisions  of $294,000 and
$38,000, respectively.

         Net Interest  Income.  Reported net interest income increased $ 192,000
or 2.2% for the year ended  December  31,  2001.  Net  interest  income on a tax
equivalent  basis  increased  by $128,000 or 1.4% in a period when both  average
interest  earning  assets and  average  interest-bearing  liabilities  increased
(increased  $13.7  million and $13.8  million,  respectively).  The  increase in
average  earning  assets of $13.7 million was primarily due to increases of $5.9
in  average   loans   along  with  an  increase   in  average   investment   and
mortgage-backed  securities  of $7.8  million.  The  Company's net interest rate
spread  decreased 9 basis  points  (with 100 basis  points being equal to 1%) to
3.05% for the year ended December 31, 2001. Due to the

                                        8

<PAGE>

volume  of  obligations  of state and  political  subdivision  in the  Company's
investment portfolio, net interest income and interest income are presented on a
tax equivalent  basis.  See "- Average Balance Sheets and Interest  Analysis" on
page 7.

         Interest  Income.  Interest  income  on a fully  tax  equivalent  basis
totaled  $19.8  million for the year ended  December  31,  2001,  an increase of
$200,000 or 1.0% over the total of $19.6 million for the year ended December 31,
2000.  This  increase  was mainly due to an  increase in the  Company's  average
interest-earning  assets of $13.7 million for the year ended  December 31, 2001.
Interest earned on loans  increased  $483,000 or 4.7%, in 2001. The increase was
due to a $5.9  million  increase in the average  balance of loans along with a 1
basis point  increase in the yield earned.  Interest  earned on  investment  and
mortgage-backed  securities  (including  securities  held  for  sale)  decreased
$267,000 or 2.9%, in 2001.  The decrease was due to a 57 basis point decrease in
the yield  earned  partially  offset by a $7.8  million  increase in the average
balance of investment and mortgage-backed securities.

         Interest  Expense.  Interest expense increased $88,000 to $10.5 million
for the year ended December 31, 2001.  The increase in interest  expense was due
to an  $13.8  million  increase  in  the  average  balance  of  interest-bearing
liabilities  due to increased  average  deposits and borrowings of $7.9 and $5.9
million,  respectively  partially  offset by a 20 basis  point  decrease  in the
average cost of interest-bearing liabilities.

         Provision for Losses on Loans. The provision for loan losses is charged
to  operations  to bring the total  allowance  for loan  losses to a level  that
represents  management's best estimates of the losses inherent in the portfolio,
based on:

o    historical experience;
o    volume;
o    type of lending conducted by the Bank;
o    industry standards;
o    the level and status of past due and non-performing loans;
o    the general economic conditions in the Bank's lending area; and
o    other factors affecting the collectibility of the loans in its portfolio.

         For the year ended  December 31, 2000,  the  provision  for loan losses
decreased  $35,000 to  $520,000  compared to $555,000  for the  comparable  2000
period.  Decreases  in  non-performing  loans  precipitated  the decrease in the
provision for loan losses. At December 31, 2001,  non-performing loans decreased
$72,000 to $593,000 from $665,000 at December 31, 2000. At December 31, 2001 the
allowance for loan losses represented 254.0% of non-performing loans as compared
to 218.8% at December 31, 2000.

         Non-interest  Income.  Total non-interest  income increased $155,000 to
$1.0 million for the year ended  December 31, 2001,  from  $854,000 for the year
ended December 31, 2000. This increase was primarily due to increased investment
security  gains of $51,000 in 2001 coupled  with  increased  service  charges on
deposit  accounts  of $54,000,  due to an increase in the number of  transaction
accounts.   The  investment  securities  gains  were  the  result  of  sales  of
mortgage-backed  securities which had higher coupon rates. These securities tend
to repay much faster during periods of lower interest rates and management  felt
that selling these securities was the most beneficial course of action.

         Non-interest  Expense.  Non-interest expense increased $294,000 to $6.3
million for the year ended  December  31,  2001,  from $6.0 million for the year
ended  December  31,  2000.  This  increase  was  primarily  due to increases in
compensation and employee benefits and occupancy and equipment costs of $124,000

                                        9
<PAGE>

and $255,000 for the year ended December 31, 2001. The increase in occupancy and
equipment costs was primarily due to technology and equipment improvements along
with the addition of a tenth banking  facility.  Data processing costs decreased
$126,000 to $193,000 for the year ended December 31, 2001, from $319,000 for the
year ended  December  31,  2000  while  other  expenses  increased  $167,000  to
$1,440,000  for the year ended  December 31, 2001 from  $1,273,000  for the year
ended  December  31,  2000.  These  changes  were  primarily  due to the Company
internally performing some processing items that were previously outsourced.

Market Risk Analysis

         The Company, like many other financial  institutions,  is vulnerable to
an increase in interest  rates to the extent that  interest-bearing  liabilities
generally  mature or reprice  more  rapidly than  interest-earning  assets.  The
lending  activities of the Company have historically  emphasized the origination
of  long-term,  fixed rate loans secured by single  family  residences,  and the
primary source of funds has been deposits with substantially shorter maturities.
While having  interest-bearing  liabilities  that reprice more  frequently  than
interest-earning  assets is generally beneficial to net interest income during a
period  of  declining  interest  rates,  such  an  asset/liability  mismatch  is
generally detrimental during periods of rising interest rates.

         To reduce the effect of interest  rate changes on net  interest  income
the Company has adopted various  strategies to enable it to improve  matching of
interest-earning asset maturities to interest-bearing  liability maturities. The
principal  elements  of these  strategies  include:  (1)  purchasing  investment
securities  with  maturities  that  match  specific  deposit   maturities;   (2)
emphasizing  origination of shorter-term  consumer  loans,  which in addition to
offering  more rate  flexibility,  typically  bear  higher  interest  rates than
residential  mortgage loans and (3) purchasing  adjustable-rate  mortgage-backed
securities. Although consumer loans inherently generally possess a higher credit
risk than residential mortgage loans, the Company believes that its underwriting
standards will minimize this risk.

         The Company has also made a significant effort to maintain its level of
lower costs  deposits as a method of  enhancing  profitability.  The Company has
traditionally had a high level of low-cost passbook,  interest-bearing  checking
(NOW) and Money Market Demand  Accounts.  Although its base of such deposits has
increased as a result of the current  interest rate  environment,  such deposits
have traditionally remained relatively stable and would be expected to reduce to
normal  levels in a period of rising  interest  rates.  Because of this relative
stability in a significant portion of its deposits, the Company has been able to
offset the impact of rising rates in other deposit accounts.

         Exposure to interest rate risk is actively monitored by management. The
Company's  objective is to maintain a consistent level of  profitability  within
acceptable  risk  tolerances  across a broad range of  potential  interest  rate
environments.  Management  uses an independent  consultant to monitor the Bank's
exposure to interest  rate risk.  The  independent  consultant  uses a financial
model  that  calculates  changes  in market  value of  portfolio  equity and net
interest income.  Reports generated from assumptions provided by the independent
consultant,  which are modified by management, are reviewed by the Interest Rate
Risk and Asset  Liability  Management  Committee  and  reported  to the Board of
Directors  quarterly.  The Balance  Sheet Shock Report shows the degree to which
balance  sheet  line  items  and  the  market  value  of  portfolio  equity  are
potentially  affected by a 200 basis point  upward and downward  parallel  shift
(shock)  in  the  Treasury  yield  curve.   Exception  tests  are  conducted  as
recommended under federal law to determine if the Bank qualifies as low risk and
may therefore be exempt from supplemental  reporting.  In addition, the possible
impact on risk-based  capital is assessed  using the  methodology of the Federal
Deposit Insurance Corporation.  An Income Shock Report shows the degree to which
income  statement  line items and net income are  potentially  affected by a 200
basis point upward and downward parallel shift in the Treasury yield curve.

                                       10
<PAGE>

         From  analysis  and  discussion  of the  aforementioned  reports  as of
December 31,  2001,  management  has assessed  that the Bank's level of interest
rate risk is appropriate for current market conditions. The percentage change in
market value of the  portfolio  equity for an upward and  downward  shift of 200
basis  points  are  (16.46)%  and  14.39%,  respectively.  Net  interest  income
decreased by $119,000 or 1.2% for a downward  shift in rates of 200 basis points
and  increased  by $187,000 or 1.8%,  for an upward  shift of 200 basis  points.
Excess Net Interest  Rate Risk was within  those  limits  outlined in the Bank's
Asset/Liability  Management and Interest Rate Risk Policy. The Bank's calculated
(total)  risk-based  capital before the interest rate risk impact was 30.17% and
25.08% after the interest  rate risk impact.  Results fall within  policy limits
for all applicable tests.

Liquidity and Capital Requirements

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

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

         The Company's  short term liquid assets consist of cash and amounts due
from banks,  interest bearing deposits with other  institutions,  and investment
securities  with  maturities of one year or less.  Total liquid  assets  totaled
$43.8 million at December 31, 2001.

         The Company has other  sources of  liquidity  if a need for  additional
funds arises on a short term or long term basis,  such as Federal Home Loan Bank
of  Pittsburgh  advances.  At December  31, 2001,  the Bank had  borrowed  $50.3
million,  at an average  interest rate of 5.41%,  of its $152.8 million  maximum
borrowing capacity with a remaining  borrowing capacity of approximately  $102.5
million.  Currently,  none of the borrowings have adjustable  rates of interest.
Management  believes  that  we  have  adequate  resources  to  fund  all  of our
commitments on a short and long term basis.

         At December  31, 2001,  certificate  of deposit  accounts  scheduled to
mature within one year were $64.4 million.  The Bank anticipates  based upon its
experience that a high  percentage of these  certificates of deposit will remain
on deposit, although there can be no assurance that this will be the case. Also,
the  cost of such  deposits  cold be  significantly  higher.  The  loss of these
deposits or their retention at a higher rate,  could hurt the Company's  profits
unless we are able to replace  these  deposits  at the same rates of  interests.
However,  due to our substantial  funding sources,  the Company does not believe
the loss of such deposits will affect its liquidity.

         At December 31, 2001, the Bank's Tier 1 risk-based and total risk-based
capital  ratios  were  29.06%  and  30.17%,  respectively.  Current  regulations
required  Tier I risk-based  capital of 6% and total  risk-based  capital of 10%
risk-based assets to be considered well  capitalized.  The Bank's leverage ratio
was 13.36% at December 31, 2001. Current  regulations  require a leveraged ratio
5% to be considered well capitalized.

                                       11


<PAGE>



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




Board of Directors and Stockholders
PHSB Financial Corporation

We have audited the  accompanying  consolidated  balance sheet of PHSB Financial
Corporation,  formerly PHS Bancorp, Inc., and subsidiary as of December 31, 2001
and  2000,  and the  related  consolidated  statements  of  income,  changes  in
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 2001. 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 consolidated  financial position of PHSB
Financial  Corporation  and subsidiary as of December 31, 2001 and 2000, and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2001 in  conformity  with  accounting  principles
generally accepted in the United States of America.



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

Wexford, PA
January 11, 2002


                                       12
<PAGE>
                                           PHSB FINANCIAL CORPORATION
                                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                      2001               2000
                                                                                -----------------  -----------------
<S>                                                                           <C>                <C>
ASSETS
     Cash and amounts due from other institutions                               $      5,988,187   $      1,502,757
     Interest-bearing deposits with other institutions                                28,195,161          5,094,404
     Investment securities:
         Available for sale                                                           22,902,366         24,814,065
         Held to maturity (market value $26,516,322
           and $17,917,570)                                                           26,259,684         17,776,486
     Mortgage-backed securities:
         Available for sale                                                           54,603,622         38,415,158
         Held to maturity (market value $30,444,092
           and $38,471,164)                                                           30,179,631         38,779,775
     Loans (net of allowance for loan losses of $1,506,140
       and $1,454,618)                                                               137,000,743        129,017,057
     Accrued interest receivable                                                       1,679,032          1,625,420
     Premises and equipment                                                            5,029,993          4,637,374
     Federal Home Loan Bank stock                                                      2,614,800          2,614,800
     Other assets                                                                        929,215          1,052,375
                                                                                -----------------  -----------------
             TOTAL ASSETS                                                       $    315,382,434   $    265,329,671
                                                                                =================  =================
LIABILITIES
     Deposits                                                                   $    210,014,644   $    198,241,701
     Advances from Federal Home Loan Bank                                             50,324,800         36,194,800
     Other borrowings
                                                                                          28,328             75,315
     Accrued interest payable and other liabilities                                    2,179,833          1,967,621
                                                                                -----------------  -----------------
             TOTAL LIABILITIES                                                       262,547,605        236,479,437
                                                                                -----------------  -----------------
STOCKHOLDERS' EQUITY
     Preferred stock, no par value; 2,000,000 shares
       authorized; none issued and outstanding
                                                                                               -                  -
     Common stock, par value $.10 per share; 8,000,000
       shares authorized; 3,497,109 and 2,760,000 issued                                 349,711            276,000
     Additional paid-in capital                                                       32,229,027         10,480,215
     Retained earnings - substantially restricted                                     21,985,576         20,756,274
     Accumulated other comprehensive income                                              856,798            456,968
     Unallocated shares held by Employee Stock
       Ownership Plan (ESOP)                                                          (2,529,013)          (917,283)
     Unallocated shares held by Restricted Stock Plan (RSP)                              (57,270)          (185,783)
     Treasury stock, at cost (259,769 shares)                                                  -         (2,016,157)
                                                                                -----------------  -----------------
             TOTAL STOCKHOLDERS' EQUITY                                               52,834,829         28,850,234
                                                                                -----------------  -----------------
             TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $    315,382,434   $    265,329,671
                                                                                =================  =================
</TABLE>

See accompanying notes to the consolidated financial statements.

                                      13
<PAGE>
                                            PHSB FINANCIAL CORPORATION
                                          CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                     2001                2000               1999
                                                             ------------------  -----------------  -----------------
<S>                                                        <C>                 <C>                <C>
INTEREST INCOME
      Loans                                                  $      10,688,828   $     10,205,593   $      8,926,063
      Investment securities:
          Taxable                                                    1,673,638          2,072,906          1,905,686
          Exempt from federal income tax                               875,533          1,002,398            972,907
      Mortgage-backed securities                                     5,795,239          5,620,716          5,513,483
      Interest-bearing deposits with other institutions                282,720            133,703            192,749
                                                             ------------------  -----------------  -----------------
               Total interest income                                19,315,958         19,035,316         17,510,888
                                                             ------------------  -----------------  -----------------
INTEREST EXPENSE
      Deposits                                                       7,902,435          8,036,700          6,988,338
      Advances from Federal Home Loan Bank                           2,631,809          2,407,253          2,239,940
      Other borrowings                                                   2,508              4,771             55,411
                                                             ------------------  -----------------  -----------------
               Total interest expense                               10,536,752         10,448,724          9,283,689
                                                             ------------------  -----------------  -----------------
               Net interest income                                   8,779,206          8,586,592          8,227,199

PROVISION FOR LOAN LOSSES                                              520,000            555,000            410,000
                                                             ------------------  -----------------  -----------------
NET INTEREST INCOME AFTER PROVISION
  FOR LOAN LOSSES                                                    8,259,206          8,031,592          7,817,199
                                                             ------------------  -----------------  -----------------
NONINTEREST INCOME
      Service charges on deposit accounts                              594,701            540,762            453,497
      Investment securities gains, net                                  58,118              7,315             19,095
      Rental income, net                                                97,808             88,179             92,402
      Other income                                                     257,886            217,729            199,064
                                                             ------------------  -----------------  -----------------
               Total noninterest income                              1,008,513            853,985            764,058
                                                             ------------------  -----------------  -----------------
NONINTEREST EXPENSE
      Compensation and employee benefits                             3,356,733          3,232,703          3,241,692
      Occupancy and equipment costs                                  1,304,825          1,174,330          1,129,482
      Data processing costs                                            193,188            319,434            297,990
      Other expenses                                                 1,439,539          1,273,140          1,424,601
                                                             ------------------  -----------------  -----------------
               Total noninterest expense                             6,294,285          5,999,607          6,093,765
                                                             ------------------  -----------------  -----------------
Income before income taxes                                           2,973,434          2,885,970          2,487,492
Income taxes                                                           752,331            714,033            629,602
                                                             ------------------  -----------------  -----------------
               NET INCOME                                    $       2,221,103   $      2,171,937   $      1,857,890
                                                             ==================  =================  =================
EARNINGS PER SHARE
      Basic                                                  $            0.70   $           0.67   $           0.56
      Diluted                                                             0.70               0.67               0.56
</TABLE>

See accompanying notes to the consolidated financial statements.

                                      14
<PAGE>
<TABLE>
<CAPTION>

                                                                             PHSB FINANCIAL CORPORATION
                                                             CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                                                         Accumu-
                                                         lated
                                            Retained     Other     Unallo-
                                            Earnings     Compre-    cated       Unallocated                Total
                                Additional  Substan-     hensive    Shares         Shares                  Stock
                       Common    Paid-in     tially      Income    Held by        Held by     Treasury     holders'   Comprehensive
                       Stock     Capital   Restricted    (Loss)     ESOP           RSP         Stock       Equity     Income (Loss)
                      -------- ----------- ----------- ---------- -----------  ------------  ----------- -----------  --------------
<S>                  <C>      <C>         <C>         <C>        <C>          <C>           <C>         <C>          <C>
Balance,
  December 31, 1998   $276,000 $10,588,940 $18,489,177 $1,088,415 $(1,215,723) $  (42,700)   $         - $29,184,109

Net income                                   1,857,890                                                     1,857,890  $  1,857,890
Other comprehensive
loss:
  Unrealized loss
    on available
    for sale
    securities,
    net of tax
    benefit of
    $1,031,604                                         (2,002,525)                                        (2,002,525)   (2,002,525)
                                                                                                                       -----------
Comprehensive loss                                                                                                     $  (144,635)
                                                                                                                       ===========
Cash dividends
   declared
  ($.23 per share)                            (743,785)                                                     (743,785)
ESOP shares released               (46,980)                           149,220                                102,240
Treasury stock
  purchased, at cost                                                                          (1,268,602) (1,268,602)
Common stock acquired
   by RSP                                     (106,395)                          (400,107)                  (506,502)
RSP shares released                                                               128,512                    128,512
                      -------- ----------- ----------- ---------- -----------  ----------    ----------- -----------
Balance,
  December 31, 1999    276,000  10,541,960  19,496,887   (914,110) (1,066,503)   (314,295)    (1,268,602) 26,751,337

Net income                                   2,171,937                                                     2,171,937  $  2,171,937
Other comprehensive
income:
  Unrealized gain
    on available
    for sale
    securities,
    net of tax
    of $706,313                                         1,371,078                                          1,371,078     1,371,078
                                                                                                                      ------------
Comprehensive
  income                                                                                                              $  3,543,015
                                                                                                                      ============
Cash dividends
  declared
  ($.28 per share)                            (912,550)
                                                                                                            (912,550)
ESOP shares released               (61,745)                           149,220                                 87,475
Treasury stock
  purchased, at
  cost                                                                                          (747,555)   (747,555)
RSP shares
  released                                                                        128,512                    128,512
                      -------- ----------- ----------- ---------- -----------  ----------    ----------- -----------
Balance,
  December 31, 2000    276,000  10,480,215  20,756,274    456,968    (917,283)   (185,783)    (2,016,157) 28,850,234

Net income                                   2,221,103                                                     2,221,103  $  2,221,103
Other comprehensive
income:
  Unrealized gain
    on available
    for sale
    securities,
    net of tax of
    $205,973                                              399,830                                            399,830       399,830
                                                                                                                      ------------
Comprehensive income                                                                                                  $  2,620,933
                                                                                                                      ============
Cash dividends
  declared
  ($.31 per share)                            (991,801)
                                                                                                            (991,801)
ESOP shares released               (17,700)                           149,220                                131,520
Treasury stock
  purchased, at
  cost                                                                                          (325,197)   (325,197)
RSP shares released                                                               128,513
                                                                                                             128,513
Sale of common stock    96,751  21,129,512                                                                21,226,263
Retirement of
  treasury stock       (23,040) (2,318,314)                                                    2,341,354           -
Capital contributed
  from MHC                       2,955,314                                                                 2,955,314
Common stock
  acquired by ESOP                                                 (1,760,950)                            (1,760,950)
                      -------- ----------- ----------- ---------- -----------  ----------    ----------- -----------
Balance,
  December 31, 2001   $349,711 $32,229,027 $21,985,576 $  856,798 $(2,529,013) $  (57,270)   $         - $52,834,829
                      ======== =========== =========== ========== ===========  ==========    =========== ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                        2001         2000          1999
                                                                                     ----------   ----------  -----------
<S>                                                                                <C>          <C>         <C>
Components of comprehensive income (loss):
  Change in net unrealized gain (loss) on investments held for sale                  $  438,188   $1,375,906  $(1,989,922)
  Realized gains included in net income, net of tax of $19,760, $2,487, and $6,492      (38,358)      (4,828)     (12,603)
                                                                                     ----------   ----------  -----------
Total                                                                                $  399,830   $1,371,078  $(2,002,525)
                                                                                     ==========   ==========  ===========
</TABLE>
See accompanying notes to the consolidated financial statements.

                                      15
<PAGE>
                                            PHSB FINANCIAL CORPORATION
                                       CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                        2001           2000           1999
                                                                    ------------   ------------   ------------
OPERATING ACTIVITIES
<S>                                                               <C>            <C>            <C>
Net income                                                          $  2,221,103   $  2,171,937   $  1,857,890

Adjustments to reconcile net income to net
  cash provided by operating activities:
     Provision for loan losses                                           520,000        555,000        410,000
     Provision for depreciation                                          652,309        594,029        518,874
     Amortization of discounts, premiums,
       and loan origination fees                                       1,195,295      1,044,622        865,746
     Investment securities gains, net                                    (58,118)        (7,315)       (19,095)
     Decrease in loans held for sale                                           -              -         48,080
     Increase in accrued interest receivable                             (53,612)       (87,257)       (21,486)
     Increase (decrease) in accrued interest payable                      28,896       (108,195)       208,050
     Amortization of ESOP unearned compensation                          131,520         87,475        102,240
     Amortization of RSP unearned compensation                           128,513        128,512        128,512
     Other, net                                                         (339,588)      (389,421)        15,846
                                                                    ------------   ------------   ------------
             Net cash provided by operating activities                 4,426,318      3,989,387      4,114,657
                                                                    ------------   ------------   ------------

INVESTING ACTIVITIES
     Investment and mortgage-backed securities available for sale:
        Proceeds from sales                                            1,862,276      1,337,950      2,142,314
        Proceeds from maturities and principal repayments             24,221,862     10,494,500     11,514,770
        Purchases                                                    (39,748,386)    (7,886,766)   (23,578,542)
     Investment and mortgage-backed securities held to maturity:
        Proceeds from maturities and principal repayments             15,741,702      6,052,587     33,467,106
        Purchases                                                    (15,699,383)    (2,963,389)   (26,634,757)
     Increase in loans, net                                           (9,544,876)   (11,834,673)   (20,320,123)
     Proceeds from sales of repossessed assets                           412,018        301,221        312,962
     Purchase of premises and equipment                               (1,044,929)      (936,209)      (312,409)
     Purchase of Federal Home Loan Bank stock                                  -              -     (1,070,085)
                                                                    ------------   ------------   ------------
             Net cash used for investing activities                  (23,799,716)    (5,434,779)   (24,478,764)
                                                                    ------------   ------------   ------------
FINANCING ACTIVITIES
     Increase in deposits, net                                        11,772,943      8,897,149      8,231,988
     Proceeds from advances from Federal Home Loan Bank               23,130,000     13,500,000     19,400,000
     Repayment of advances from Federal Home Loan Bank                (9,000,000)   (27,600,000)             -
     Repayment of other borrowings                                       (46,987)       (44,724)    (1,267,579)
     Common stock acquired by ESOP                                    (1,760,950)             -              -
     Proceeds from sale of common stock                               21,226,263              -              -
     Capital contributed from MHC                                      2,955,314              -              -
     Common stock acquired by RSP                                              -              -       (506,502)
     Cash dividends paid                                                (991,801)      (912,550)      (743,785)
     Purchase of treasury stock                                         (325,197)      (747,555)    (1,268,602)
                                                                    ------------   ------------   ------------
             Net cash provided by (used for)
                 financing  activities                                46,959,585     (6,907,680)    23,845,520
                                                                    ------------   ------------   ------------
             Increase (decrease) in cash and cash equivalents         27,586,187     (8,353,072)     3,481,413

CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                                    6,597,161     14,950,233     11,468,820
                                                                    ------------   ------------   ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                            $ 34,183,348   $  6,597,161   $ 14,950,233
                                                                    ============   ============   ============
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       16
<PAGE>

                           PHSB FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

On August 16, 2001, the board of trustees of PHS Bancorp, Inc. adopted a plan of
conversion  whereby PHS Bancorp,  M.H.C.  was  converted  from a mutual  holding
company to PHSB Financial Corp., a full stock corporation.

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

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

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

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

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

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

                                       17
<PAGE>

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans
-----

Loans are stated at the principal  amount  outstanding net of deferred loan fees
and the allowance for loan losses. Interest income on loans is recognized on the
accrual method.  Accrual of interest on loans is generally discontinued after 90
days  when  it  is  determined  that  a  reasonable   doubt  exists  as  to  the
collectibility  of  principal,  interest,  or  both.  When a loan is  placed  on
nonaccrual status, unpaid interest is charged against income.  Interest received
on  nonaccrual  loans is either  applied to  principal  or  reported as interest
income according to management's judgment as to the collectibility of principal.
Loans are returned to accrual status when past due interest is collected and the
collection of principal in probable.

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

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

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

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

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

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

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

                                      18
<PAGE>

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

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

The Company provides dual  presentation of basic and diluted earnings per share.
Basic  earnings per share is calculated  utilizing net income as reported as the
numerator and average shares outstanding as the denominator.  The computation of
diluted  earnings per share differs in that the dilutive effects of any options,
warrants, and convertible securities are adjusted for in the denominator.

All references to earnings per share have been retroactively adjusted to reflect
the  conversion  which was  completed on December  20, 2001.  As a result of the
conversion each common share outstanding of PHS Bancorp, Inc. was converted into
1.28123 shares of PHSB Financial Corporation common stock.

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

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

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

The Company  maintains  a stock  option plan for the  directors,  officers,  and
employees.  When the exercise  price of the  Company's  stock options is greater
than or equal to the  market  price of the  underlying  stock on the date of the
grant,  no  compensation  expense  is  recognized  in  the  Company's  financial
statements. Pro forma net income and earnings per share are presented to reflect
the impact of the stock  option  plan  assuming  compensation  expense  had been
recognized based on the fair value of the stock options granted under this plan.

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

The Company is required to present comprehensive income in a full set of general
purpose  financial  statements for all periods  presented.  Other  comprehensive
income is comprised  exclusively  of unrealized  holding  gains  (losses) on the
available for sale securities  portfolio.  The Company has elected to report the
effects of other  comprehensive  income as part of the  Statement  of Changes in
Stockholders' Equity.

                                      19
<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

For the years ended  December 31, 2001,  2000,  and 1999,  the Company made cash
payments for interest of $10,507,856, $10,556,919, and $9,075,639, respectively.
The Company also made cash payments for income taxes of $665,000,  $797,748, and
$334,500, respectively, during these same periods.

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

In July 2001, the Financial  Accounting  Standards Board (FASB) issued Statement
of  Financial  Accounting  Standards  (SFAS)  No.  141,  Business  Combinations,
effective for all business  combinations  initiated after June 30, 2001, as well
as all  business  combinations  accounted  for by the  purchase  method that are
completed  after June 30, 2001.  The new  statement  requires  that the purchase
method of accounting be used for all business combinations and prohibits the use
of the  pooling-of-interests  method.  The adoption of Statement  No. 141 is not
expected  to have a  material  effect on the  Company's  financial  position  or
results of operations.

In July 2001,  the FASB  issued  SFAS No.  142,  Goodwill  and Other  Intangible
Assets,  effective  for fiscal years  beginning  after  December  15, 2001.  The
statement changes the accounting for goodwill from an amortization  method to an
impairment-only  approach.  Thus,  amortization of goodwill,  including goodwill
recorded  in past  business  combinations,  will  cease  upon  adoption  of this
statement.  However,  the new  statement did not amend SFAS 72,  Accounting  for
Certain  Acquisitions  of  Banking  or  Thrift   Institutions,   which  requires
recognition and amortization of unidentified  intangible  assets relating to the
acquisition of financial  institutions or branches thereof. The FASB has decided
to undertake a limited scope project to reconsider  the provisions of SFAS 72 in
2002.  Therefore,  the adoption of  Statement  No. 142 is not expected to have a
material effect on the Company's financial position or results of operations.

In August 2001, the FASB issued SFAS No. 143,  Accounting  for Asset  Retirement
Obligations,  which  requires  that the fair value of a liability be  recognized
when  incurred for the  retirement  of a  long-lived  asset and the value of the
asset  be  increased  by that  amount.  The  statement  also  requires  that the
liability be maintained at its present value in subsequent  periods and outlines
certain disclosures for such obligations.  The adoption of this statement, which
is effective  January 1, 2003, is not expected to have a material  effect on the
Company `s financial statements.

In October 2001, the FASB issued SFAS No. 144,  Accounting for the Impairment or
Disposal of Long-Lived  Assets.  SFAS 144 supercedes SFAS 121 and applies to all
long-lived assets (including  discontinued  operations) and consequently  amends
APB Opinion No. 30,  Reporting  Results of  Operations-Reporting  the Effects of
Disposal of a Segment of a Business.  SFAS 144 requires that  long-lived  assets
that are to be  disposed  of by sale be  measured  at the lower of book value or
fair value less costs to sell.  SFAS 144 is effective for  financial  statements
issued for fiscal years  beginning after December 15, 2001 and,  generally,  its
provisions  are to be applied  prospectively.  The adoption of this statement is
not expected to have a material effect on the Company's financial statements.

                                      20
<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

2. EARNINGS PER SHARE

There  are no  convertible  securities  which  would  affect  the  numerator  in
calculating  basic and  diluted  earnings  per share;  therefore,  net income as
presented on the Consolidated Statement of Income will be used as the numerator.

The following  table sets forth the composition of the  weighted-average  common
shares   (denominator)  used  in  the  basic  and  diluted  earnings  per  share
computation.

<TABLE>
<CAPTION>
                                                  2001          2000          1999
                                               ----------    ----------    ----------
<S>                                           <C>           <C>           <C>
Weighted-average common shares
     outstanding                                3,534,910     3,536,195     3,536,195

Average treasury stock shares                    (277,425)     (201,480)      (55,996)

Average unearned ESOP and RSP shares              (83,014)     (109,731)     (134,054)
                                               ----------    ----------    ----------

Weighted-average common shares and
     common stock equivalents used to
     calculate basic earnings per share         3,174,471     3,224,984     3,346,145

Additional common stock equivalents
     (stock options) used to calculate
     diluted earnings per share                    21,135             -             -
                                               ----------    ----------    ----------

Weighted-average common shares and
     common stock equivalents used
     to calculate diluted earnings per share    3,195,606     3,224,984     3,346,145
                                               ==========    ==========    ==========
</TABLE>

3. INVESTMENT SECURITIES

The amortized  cost and  estimated  market value of  investment  securities  are
summarized as follows:

<TABLE>
<CAPTION>
                                                           2001
                                   ------------------------------------------------------
                                                   Gross         Gross         Estimated
                                   Amortized     Unrealized    Unrealized       Market
                                      Cost         Gains         Losses         Value
                                   -----------   -----------   ----------     -----------
<S>                              <C>           <C>           <C>            <C>
Available for Sale
U.S. Treasury securities           $   998,943   $    38,557   $         -    $ 1,037,500
U.S. Government agency
  securities                           995,770        93,290             -      1,089,060
Obligations of states and
  political subdivisions            18,969,594       430,455      (182,845)    19,217,204
Real estate mortgage
  investment conduits                   35,805           132             -         35,937
                                   -----------   -----------   -----------    -----------
           Total debt securities    21,000,112       562,434      (182,845)    21,379,701

Equity Securities                    1,525,828        12,545       (15,708)     1,522,665
                                   -----------   -----------   -----------    -----------
           Total                   $22,525,940   $   574,979   $  (198,553)   $22,902,366
                                   ===========   ===========   ===========    ===========
</TABLE>

                                       21
<PAGE>


3.  INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                           2000
                                   ------------------------------------------------------
                                                   Gross         Gross         Estimated
                                   Amortized     Unrealized    Unrealized       Market
                                      Cost         Gains         Losses         Value
                                   -----------   -----------   ----------     -----------
<S>                              <C>           <C>           <C>            <C>
Available for Sale
U.S. Treasury securities          $  1,997,755   $     9,153   $   (2,218)   $  2,004,690
U.S. Government agency
  securities                         6,994,398        55,912      (15,000)      7,035,310
Obligations of states and
  political subdivisions            15,251,581       406,975      (37,100)     15,621,456
Real estate mortgage
  investment conduits                   45,247            64            -          45,311
                                  ------------   -----------   ----------    ------------
           Total debt securities    24,288,981       472,104      (54,318)     24,706,767

Equity Securities                      107,298             -            -         107,298
                                  ------------   -----------   ----------    ------------
           Total                  $ 24,396,279   $   472,104   $  (54,318)   $ 24,814,065
                                  ============   ===========   ==========    ============
</TABLE>


<TABLE>
<CAPTION>
                                                           2001
                                   ------------------------------------------------------
                                                   Gross         Gross         Estimated
                                   Amortized     Unrealized    Unrealized       Market
                                      Cost         Gains         Losses         Value
                                   -----------   -----------   ----------     -----------
<S>                              <C>           <C>           <C>            <C>
Held to Maturity
U.S. Government agency
  securities                       $23,490,392   $   325,427   $   (28,350)   $23,787,469
Obligations of states and
  political subdivisions             2,769,292         8,086       (48,525)     2,728,853
                                   -----------   -----------   -----------    -----------
           Total                   $26,259,684   $   333,513   $   (76,875)   $26,516,322
                                   ===========   ===========   ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                           2000
                                   ------------------------------------------------------
                                                   Gross         Gross         Estimated
                                   Amortized     Unrealized    Unrealized       Market
                                      Cost         Gains         Losses         Value
                                   -----------   -----------   ----------     -----------
<S>                              <C>           <C>           <C>            <C>
Held to Maturity
U.S. Government agency
  securities                      $ 15,221,187   $    177,166   $ (32,670)   $ 15,365,683
Obligations of states and
  political subdivisions             2,555,299         13,920     (17,332)      2,551,887
                                  ------------   ------------   ---------    ------------
           Total                  $ 17,776,486   $    191,086   $ (50,002)   $ 17,917,570
                                  ============   ============   =========    ============
</TABLE>

                                       22
<PAGE>

3.  INVESTMENT SECURITIES (Continued)

The amortized cost and estimated market value of debt securities at December 31,
2001, by contractual maturity, are shown below.

<TABLE>
<CAPTION>
                                  Available for Sale           Held to Maturity
                              ---------------------------  -------------------------
                                              Estimated                   Estimated
                                Amortized      Market       Amortized      Market
                                   Cost        Value          Cost         Value
                              ------------   -----------   -----------   -----------

<S>                          <C>           <C>           <C>           <C>
Due in one year or less        $ 1,086,064   $ 1,116,298   $ 6,999,662   $ 7,031,880
Due after one year through
  five years                     4,393,166     4,703,922     9,979,092    10,158,130
Due after five years through
  ten years                        101,536       104,286     5,557,003     5,639,582
Due after ten years             15,419,346    15,455,195     3,723,927     3,686,730
                               -----------   -----------   -----------   -----------
      Total                    $21,000,112   $21,379,701   $26,259,684   $26,516,322
                               ===========   ===========   ===========   ===========
</TABLE>


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

                             2001            2000            1999
                         -----------     -----------     -----------
Proceeds from sales      $ 1,862,276     $ 1,337,950     $ 2,142,314
Gross gains                   58,118          14,461          21,088
Gross losses
                                   -           7,146           1,993


Investment securities with an amortized cost of $6,978,035 and $2,289,326 and an
estimated  market  value of  $7,214,380  and  $2,299,690  were pledged to secure
public deposits at December 31, 2001 and 2000, respectively.

4.  MORTGAGE-BACKED SECURITIES

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

<TABLE>
<CAPTION>
                                                           2001
                                   ------------------------------------------------------
                                                   Gross         Gross         Estimated
                                   Amortized     Unrealized    Unrealized       Market
                                      Cost         Gains         Losses         Value
                                   -----------   -----------   -----------    -----------
<S>                              <C>           <C>           <C>            <C>
Available for Sale
Government National Mortgage
  Association securities           $53,674,841   $   938,066   $   (16,678)   $54,596,229

Federal Home Loan Mortgage
  Corporation securities                 7,028           365             -          7,393
                                   -----------   -----------   -----------    -----------
            Total                  $53,681,869   $   938,431   $   (16,678)   $54,603,622
                                   ===========   ===========   ===========    ===========
</TABLE>

                                       23
<PAGE>

4.  MORTGAGE-BACKED SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                           2000
                                   ------------------------------------------------------
                                                   Gross         Gross         Estimated
                                   Amortized     Unrealized    Unrealized       Market
                                      Cost         Gains         Losses         Value
                                   -----------   -----------   ----------     -----------
<S>                                  <C>           <C>           <C>            <C>
Available for Sale
Government National Mortgage
   Association securities          $38,128,786   $   427,220   $  (153,007)   $38,402,999
Federal Home Loan Mortgage
   Corporation securities               11,783           376             -         12,159
                                   -----------   -----------   -----------    -----------
            Total                  $38,140,569   $   427,596   $  (153,007)   $38,415,158
                                   ===========   ===========   ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                           2001
                                   ------------------------------------------------------
                                                   Gross         Gross         Estimated
                                   Amortized     Unrealized    Unrealized       Market
                                      Cost         Gains         Losses         Value
                                   -----------   -----------   -----------    -----------
<S>                              <C>           <C>           <C>            <C>
Held to Maturity
Government National Mortgage
   Association securities          $26,905,599   $   249,062   $   (73,024)   $27,081,637
Federal Home Loan Mortgage
   Corporation securities            1,602,611        39,274             -      1,641,885
Federal National Mortgage
   Association securities            1,671,421        49,149             -      1,720,570
                                   -----------   -----------   -----------    -----------
            Total                  $30,179,631   $   337,485   $   (73,024)   $30,444,092
                                   ===========   ===========   ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                           2000
                                   ------------------------------------------------------
                                                   Gross         Gross         Estimated
                                   Amortized     Unrealized    Unrealized       Market
                                      Cost         Gains         Losses         Value
                                   -----------   -----------   ----------     -----------
<S>                              <C>           <C>           <C>            <C>
Held to Maturity
Government National Mortgage
   Association securities          $33,720,679   $    58,147   $  (450,388)   $33,328,438
Federal Home Loan Mortgage
   Corporation securities            2,545,206        39,932        (1,747)     2,583,391
Federal National Mortgage
   Association securities            2,513,890        46,135          (690)     2,559,335
                                   -----------   -----------   -----------    -----------
            Total                  $38,779,775   $   144,214   $  (452,825)   $38,471,164
                                   ===========   ===========   ===========    ===========
</TABLE>
                                       24

<PAGE>

4.  MORTGAGE-BACKED SECURITIES (Continued)

The amortized cost and estimated market value of  mortgage-backed  securities at
December 31, 2001, by contractual maturity, are shown below. Expected maturities
of securities could differ from  contractual  maturities  because  borrowers may
have  the  right  to call or  prepay  obligations  with  or  without  prepayment
penalties.

<TABLE>
<CAPTION>
                                   Available for Sale            Held to Maturity
                               --------------------------   -------------------------
                                              Estimated      Estimated
                                Amortized       Market       Amortized       Market
                                   Cost         Value          Cost          Value
                               -----------   ------------   -----------   -----------
<S>                           <C>           <C>            <C>           <C>
Due in one year or less        $       673   $       677    $         -   $         -
Due after one year through
  five years                        38,058        40,178              -             -
Due after five years through
  ten years                      1,533,426     1,634,297              -             -
Due after ten years             52,109,712    52,928,470     30,179,631    30,444,092
                               -----------   ------------   -----------   -----------
      Total                    $53,681,869   $54,603,622    $30,179,631   $30,444,092
                               ===========   ============   ===========   ===========
</TABLE>


Mortgage-backed  securities  with an amortized cost of $1,389,232 and $1,621,073
and an  estimated  market value of  $1,420,852  and  $1,626,248  were pledged to
secure public deposits at December 31, 2001 and 2000, respectively.

5.  LOANS

Loans consist of the following:

                                               2001               2000
                                        ---------------    ----------------
     Mortgage loans:
        Residential                     $    61,092,961    $     57,998,525
        Multi-family units                      232,261             308,252
        Construction                          3,998,785           1,777,861
        Commercial real estate                  850,348             481,042
                                        ---------------    ----------------
                                             66,174,355          60,565,680
                                        ---------------    ----------------
     Commercial loans                        11,571,339           9,814,834
                                        ---------------    ----------------
     Consumer:
        Consumer credit line                  6,217,107           6,129,699
        Automobile                           49,020,510          48,361,011
        Other                                 6,054,333           5,216,121
                                        ---------------    ----------------
                                             61,291,950          59,706,831
                                        ---------------    ----------------
     Less:
       Loans in process                       2,221,437           1,203,921
       Deferred loan costs, net             (1,690,676)         (1,588,251)
       Allowance for loan losses              1,506,140           1,454,618
                                        ---------------    ----------------
                                              2,036,901           1,070,288
                                        ---------------    ----------------
            Total                       $   137,000,743    $    129,017,057
                                        ===============    ================

                                       25
<PAGE>

5.  LOANS (Continued)

Total nonaccrual loans and the related interest for the years ended December 31,
are as follows. In management's opinion, these loans did not meet the definition
of impaired loans.

                                                  2001         2000       1999
                                               ---------    ---------  ---------

Principal outstanding                          $ 536,792    $ 581,706  $ 424,244
Contractual interest due                          61,121       66,356     54,285
Interest income recognized                        24,373       29,705     29,522


Activity in the allowance for loan losses for the years ended December 31, is as
follows:

                                            2001        2000        1999
                                          ---------   ---------   ---------

Balance, January 1,                     $ 1,454,618 $ 1,359,900 $ 1,287,496
    Add:
       Provisions charged to operations     520,000     555,000     410,000
       Loan recoveries                       29,715      51,016      50,941

    Less loans charged off                  498,193     511,298     388,537
                                        ----------- ----------- -----------

Balance, December 31,                   $ 1,506,140 $ 1,454,618 $ 1,359,900
                                        =========== =========== ===========


The Company's loan  portfolio is  predominantly  made up of  one-to-four  family
first  mortgage  loans and  consumer  loans in the areas of Beaver and  Lawrence
Counties. These loans have been granted in compliance with regulatory guidelines
relating to collateral  requirements and credit  policies.  Although the Company
has  a  diversified  loan  portfolio  at  December  31,  2001  and  2000,  loans
outstanding  to  individuals   and  businesses  are  dependent  upon  the  local
conditions in its immediate trade area.

6.  ACCRUED INTEREST RECEIVABLE

Accrued interest receivable consists of the following:

                                                      2001        2000
                                                    ---------   ---------

Interest-bearing deposits with other institutions $    31,605 $    14,346
Investment securities                                 555,886     560,409
Mortgage-backed securities                            489,635     468,734
Loans                                                 601,906     581,931
                                                  ----------- -----------

       Total                                      $ 1,679,032 $ 1,625,420
                                                  =========== ===========

                                       26
<PAGE>


7.  PREMISES AND EQUIPMENT

Premises and equipment consist of the following:

                                                   2001        2000
                                                ----------  ----------

Land                                            $  900,624  $  841,109
Office buildings                                 5,053,484   4,345,357
Furniture, fixtures, and equipment               3,318,084   3,040,798
Leasehold improvements                             403,403     403,403
                                                ----------  ----------
                                                 9,675,595   8,630,667
Less accumulated depreciation and amortization   4,645,602   3,993,293
                                                ----------  ----------

       Total                                    $5,029,993  $4,637,374
                                                ==========  ==========


Depreciation  expense for the years ended December 31, 2001,  2000, and 1999 was
$652,309, $594,029, and $518,874, respectively.

8.  DEPOSITS

Comparative details of deposit accounts follow:

<TABLE>
<CAPTION>
                                                     2001                                   2000
                                      ---------------------------------     ----------------------------
                                                            Percent of                       Percent of
                                             Amount         Portfolio         Amount         Portfolio
                                      -----------------  ------------- ----------------    -------------
<S>                                  <C>                     <C>      <C>                     <C>
DDA and NOW accounts                  $     35,811,684          17.1%  $     31,251,502          15.8%
Money market
  demand accounts                           28,537,030          13.6         28,358,712          14.3
Savings accounts                            28,739,934          13.6         27,082,955          13.6
                                      -----------------  ------------  -----------------   -----------
                                            93,088,648          44.3         86,693,169          43.7
                                      -----------------  ------------  -----------------   -----------
Time certificates of deposit:
     Less than 2.01%                         1,246,796           0.6                  -             -
     2.01%  -  4.00%                        28,509,483          13.6            156,898           0.1
     4.01%  -  6.00%                        56,383,925          26.8         52,665,440          26.6
     6.01%  -  8.00%                        30,785,792          14.7         58,726,194          29.6
                                      -----------------  ------------  -----------------   -----------
                                           116,925,996          55.7        111,548,532          56.3
                                      -----------------  ------------  -----------------   -----------
            Total                     $    210,014,644         100.0%  $    198,241,701         100.0%
                                      =================  ============  =================   ===========
</TABLE>

Time deposits  include  certificates of deposit in  denominations of $100,000 or
more. Such deposits aggregated  $14,381,102 and $10,909,799 at December 31, 2001
and 2000, respectively, with maturities at December 31, 2001 as follows:

     Within three months                                $   2,851,538
     Beyond three but within six months                     2,398,285
     Beyond six but within twelve months                    2,391,799
     Beyond one year                                        6,739,480
                                                        --------------

            Total                                       $  14,381,102
                                                        ==============


                                       27
<PAGE>

8.  DEPOSITS (Continued)

Interest  expense by deposit  category  for the years ended  December  31, is as
follows:

                                            2001         2000         1999
                                        ----------   ----------   ----------

Savings accounts                        $  542,724   $  576,060   $  563,778
NOW and money market deposit accounts    1,150,101    1,352,279    1,104,444
Time certificates of deposit             6,209,610    6,108,361    5,320,116
                                        ----------   ----------   ----------

            Total                       $7,902,435   $8,036,700   $6,988,338
                                        ==========   ==========   ==========


9.  ADVANCES FROM FEDERAL HOME LOAN BANK

The following table sets forth  information  concerning both short and long-term
advances from FHLB:

                                                      2001               2000
                                                 --------------   --------------

     Balance at year-end                         $  50,324,800    $  36,194,800
     Average  balance outstanding                   47,592,334       41,692,341
     Maximum month-end balance                      51,194,800       44,294,800
     Weighted-average rate at year-end                    5.41%            5.72%
     Weighted-average rate during the year                5.53%            5.77%


The scheduled maturities of advances outstanding are as follows:

<TABLE>
<CAPTION>
                                               2001                                      2000
                                     -------------------------------     -----------------------------------
              Year Ending                             Weighted-                                 Weighted -
              December 31,           Amount          average Rate             Amount           average Rate
     -------------------------      -------------  -----------------      ----------------     -------------
<S>    <C>                        <C>                  <C>                 <C>                      <C>
                  2001              $                         %             $   8,000,000            6.46 %
                                               -            -
                  2002                 5,317,000         5.41                   3,317,000            5.99
                  2003                 2,377,800         5.77                   1,377,800            6.28
                  2004                 3,500,000         5.77                   1,000,000            6.63
          2005 and thereafter         39,130,000         5.36                  22,500,000            5.31
                                    ------------                            -------------
                 Total              $ 50,324,800         5.41 %             $  36,194,800            5.72 %
                                    ============                            =============
</TABLE>

Borrowing capacity consists of credit  arrangements with the FHLB of Pittsburgh.
FHLB borrowings are subject to annual renewal, incur no service charges, and are
secured   by  a  blanket   security   agreement   on  certain   investment   and
mortgage-backed  securities,  outstanding residential mortgages,  and the Bank's
investment in FHLB stock. As of December 31, 2001, the Bank's maximum  borrowing
capacity with the FHLB was approximately $152.8 million.

                                       28
<PAGE>

10. INCOME TAXES

The provision for income taxes for the years ended December 31, consists of:

                       2001       2000       1999
                     --------   --------   --------
Currently payable:
     Federal         $574,481   $551,803   $479,198
     State            148,694    112,222     89,226
                     --------   --------   --------
                      723,175    664,025    568,424
Deferred
                       29,156     50,008     61,178
                     --------   --------   --------

            Total    $752,331   $714,033   $629,602
                     ========   ========   ========


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

                                                  2001       2000
                                                --------   --------
Deferred tax assets:
     Allowance for loan losses                  $512,088   $494,570
     Premises and equipment                       61,247     22,417
     Accrued employee benefits                   292,981    279,202
     Alternative minimum tax credit                    -     96,210
     Other                                        10,059     13,132
                                                --------   --------
         Total gross deferred tax assets         876,375    905,531
                                                --------   --------
Deferred tax liabilities:
     Net unrealized gain on securities           441,381    235,408
                                                --------   --------
         Total gross deferred tax liabilities    441,381    235,408
                                                --------   --------

         Net deferred tax assets                $434,994   $670,123
                                                ========   ========


No valuation  allowance was established at December 31, 2001 and 2000 in view of
certain tax  strategies  coupled with the  anticipated  future taxable income as
evidenced by the Company's earnings potential.


                                       29
<PAGE>

10. INCOME TAXES (Continued)

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

<TABLE>
<CAPTION>
                                           2001                           2000                           1999
                                 --------------------------     --------------------------     -------------------------
                                                   % of                           % of                          % of
                                                  Pre-tax                       Pre-tax                        Pre-tax
                                    Amount        Income           Amount        Income           Amount       Income
                                 --------------  ----------     -------------  -----------     -------------  ----------
<S>                          <C>                   <C>        <C>                <C>         <C>               <C>
Provision at statutory rate    $     1,010,968        34.0 %    $    981,230         34.0 %    $    845,747        34.0 %
State income tax expense,
  net of federal tax benefit            98,138         3.3            74,067          2.7            58,889         2.4
Tax-exempt interest                   (384,505)      (12.9)         (402,284)       (13.9)         (342,447)      (13.8)
Other, net                              27,730         0.9            61,020          1.9            67,413         2.7
                                 --------------  ----------     -------------  -----------     -------------  ----------
Actual expense and
  effective rate               $       752,331        25.3 %    $    714,033         24.7 %    $    629,602        25.3 %
                                 ==============  ==========     =============  ===========     =============  ==========
</TABLE>

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

11.   EMPLOYEE BENEFITS

Pension Plan
------------

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

The following table sets forth the change in plan assets and benefit  obligation
at December 31:

                                                   2001           2000
                                               -----------    -----------

Plan assets at fair value, beginning of year   $ 3,985,025    $ 3,641,427
Actual return on plan assets                       276,232        251,452
Employer contribution                              179,232        178,765
Benefits paid                                      (98,733)       (86,619)
                                               -----------    -----------
Plan assets at fair value, end of year           4,341,756      3,985,025
                                               -----------    -----------

Benefit obligation, beginning of year            4,172,207      3,879,242
Service cost                                       185,537        189,965
Interest cost                                      300,732        281,366
Actuarial loss (gain)                               18,582        (91,747)
Benefits paid                                      (98,733)       (86,619)
                                               -----------    -----------
Benefit obligation, end of year                  4,578,325      4,172,207
                                               -----------    -----------
Funded status                                     (236,569)      (187,182)
Transition adjustment                             (159,187)      (180,001)
Unrecognized net loss from past experience
  different from that assumed                      258,132        195,079
                                               -----------    -----------

Accrued pension liability                      $  (137,624)   $  (172,104)
                                               ===========    ===========

The plan assets are invested primarily in bonds, stocks, and mortgages under the
control of the plan's trustees as of December 31, 2001.

                                       30
<PAGE>

11.   EMPLOYEE BENEFITS (Continued)

Pension Plan (Continued)
------------

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

                                       2001       2000       1999
                                     -------    -------    -------
Discount rate                          7.00%      7.00%      7.00%
Expected return on plan assets         8.00%      8.00%      8.00%
Rate of compensation increase          5.00%      5.00%      5.00%

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

Net periodic pension cost includes the following components:

<TABLE>
<CAPTION>
                                                   2001         2000         1999
                                                ---------    ---------    ---------

<S>                                           <C>          <C>          <C>
Service cost of the current period              $ 185,537    $ 189,965    $ 197,002
Interest cost on projected benefit obligation     300,732      281,366      264,483
Actual return on plan assets                     (276,232)    (251,452)    (228,319)
Net amortization and deferral                     (65,285)     (56,701)     (40,539)
                                                ---------    ---------    ---------

Net periodic pension cost                       $ 144,752    $ 163,178    $ 192,627
                                                =========    =========    =========
</TABLE>


Supplemental Retirement Plans
-----------------------------

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

The Bank  maintains a Directors'  Consultation  and  Retirement  Plan to provide
post-retirement  payments over a ten-year  period to non-officer  members of the
Board of Directors who have completed fifteen or more years of service. Expenses
for the years ended  December  31,  2001,  2000,  and 1999  amounted to $30,000,
$24,000,  and  $38,580,  respectively,  and are included as a component of other
operating expenses.

President
---------

The Bank maintains a Supplemental  Retirement Plan for the President of the Bank
for the purpose of providing the  President  with  supplemental  post-retirement
benefits for life in addition to those  provided  under the Bank's  pension plan
for all  eligible  employees.  Expenses  for the years ended  December 31, 2001,
2000, and 1999, amounted to $54,000, $29,400, and $31,215, respectively, and are
included as a component of compensation and employee benefits.

The  assumptions of 7.50 percent and 5.00 percent for the discount rate and rate
of compensation  increase,  respectively,  were used in determining net periodic
post-retirement  costs for the Directors'  Consultation and Retirement Plans and
Supplemental Retirement Plan for the President.

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

The Bank  maintains a section 401K employee  savings and profit sharing plan for
substantially  all  employees  and  officers  of the  Bank.  The  Bank's  annual
contribution  to the plan is based on the  discretion of the Board of Directors.
Contributions  for the years ended December 31, 2001, 2000, and 1999 amounted to
$74,479, $73,582, and $69,739, respectively.

                                       31
<PAGE>


11.   EMPLOYEE BENEFITS (Continued)

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

The  Company  maintains  a  non-statutory  stock  option  plan for  non-employee
directors and an incentive  stock option plan for executive  officers.  The plan
provides for granting  incentive stock options and  non-statutory  stock options
for executive  officers and  non-employee  directors of the Company.  A total of
159,129 shares of authorized but unissued common stock are reserved for issuance
under  the  plan,   which  expires  ten  years  from  the  date  of  shareholder
ratification. The per share exercise price of an option granted will not be less
than  the  fair  value of a share of  common  stock  on the date the  option  is
granted.

Non-statutory  stock  options for  non-employee  directors  were granted for the
purchase of 47,739  shares.  The  recipients  of these stock options vest over a
four-year  period of time.  Also,  incentive  stock  options  for  officers  and
employees  were granted for the purchase of 111,390  shares.  The  recipients of
these stock options vest over a four or five-year period of time.

The following table presents share data related to the outstanding options:

<TABLE>
<CAPTION>
                                                   Weighted-                     Weighted-
                                                    average                       average
                                                    Exercise                      Exercise
                                     2001            Price      2000               Price
                                 -------------  -------------  ------------   --------------

<S>                                 <C>        <C>                <C>            <C>
     Outstanding, beginning           159,129    $   9.22           159,129        $   9.22
       Granted                              -           -                 -               -
       Exercised                            -           -                 -               -
       Forfeited                            -           -                 -               -
                                 -------------                 ------------
     Outstanding, ending              159,129    $   9.22           159,129        $   9.22
                                 =============                 ============

     Exercisable at year-end          143,216    $   9.22           107,412        $   9.22
                                 =============                 ============
</TABLE>

The following table summarizes the  characteristics of stock options at December
31, 2001:

<TABLE>
<CAPTION>
                                                Outstanding                                  Exercisable
                               -----------------------------------------------      -------------------------------
                                                                    Average                              Average
                                                    Average        Exercise                             Exercise
     Exercise price                Shares            Life            Price              Shares            Price
     ----------------------    ---------------    ------------    ------------      ----------------   ------------
<S>       <C>                      <C>             <C>             <C>                   <C>            <C>
            9.22                     159,129         6.83            9.22                  143,216        9.22
</TABLE>

For purposes of computing pro forma results,  the Company  estimated fair values
of stock  options  using  the  Black-Scholes  option-pricing  model.  The  model
requires use of subjective  assumptions  that can  materially  effect fair value
estimates.  Therefore,  the pro  forma  results  are  estimates  of  results  of
operation as if  compensation  expense had been  recognized for the stock option
plans.  The fair value of each stock  option  granted  was  estimated  using the
following weighted-average assumptions for grants in 2001 and 2000: (1) expected
dividend yield of 1.03 percent; (2) risk-free interest rate of 4.95 percent; (3)
expected volatility of 14 percent; and (4) expected life of eight years.

The Company  accounts for its stock option plans under provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Under this Opinion, no compensation  expense has been recognized with respect to
the plans  because the exercise  price of the Company's  employee  stock options
equals the market price of the  underlying  stock on the grant date.  No options
were granted in 2001 or 2000.

                                       32
<PAGE>

11.   EMPLOYEE BENEFITS (Continued)

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

Had  compensation  expense  for  the  stock  option  plans  been  recognized  in
accordance  with  the  fair  value  accounting   provisions  of  SFAS  No.  123,
"Accounting  for  Stock-based  Compensation,"  net income  applicable  to common
stock, basic and diluted net income per common share for the year ended December
31, would have been as follows:

<TABLE>

                                                 2001          2000           1999
                                              -----------  ------------  -------------
<S>                                        <C>           <C>            <C>
Net income applicable to common stock:
     As reported                             $ 2,221,103   $ 2,171,937    $ 1,857,890
     Pro forma                                 2,177,059     2,131,893      1,768,978
Basic net income per common share:
     As reported                             $      0.70   $      0.67    $      0.56
     Pro forma                                      0.69          0.66           0.53
Diluted net income per common share:
     As reported                             $      0.70   $      0.67    $      0.56
     Pro forma                                      0.68          0.66           0.53
</TABLE>

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

The Company has an ESOP for the benefit of  employees  who meet the  eligibility
requirements  including having completed one year of service with the Company or
its subsidiaries and attained age 21. The ESOP trust purchased 176,095 shares of
common stock with  proceeds  from  internally  financed  loans in 2001 and holds
299,093 or 8.55% of the total shares issued.  The Bank makes cash  contributions
to the  ESOP on an  annual  basis  sufficient  to  enable  the  ESOP to make the
required  loan  payments  to the  Company.  The  loan was  rewritten  in 2001 to
consolidate  a  pre-existing  ESOP loan and bears  interest at 6.00 percent with
interest payable  quarterly and principal  payable in equal annual  installments
over ten years. The loan is secured by the shares of the stock purchased.

As the debt is repaid,  shares are released from the collateral and allocated to
qualified  employees  based on the  proportion of debt service paid in the year.
Accordingly,  the shares pledged as collateral are reported as unallocated  ESOP
shares  in  the  consolidated   balance  sheet.  As  shares  are  released  from
collateral, the Company reports compensation expense equal to the current market
price of the shares,  and the shares become  outstanding  for earnings per share
computations.  Compensation  expense  for the ESOP was  $131,520,  $87,475,  and
$102,240, for the years ended December 31, 2001, 2000, and 1999, respectively.

The following table presents the components of the ESOP shares:

                                      2001         2000         1999
                                  ----------   ----------   ----------

Allocated shares                      48,354       36,054       23,754

Shares released for allocation        12,300       12,300       12,300

Unreleased shares                    238,439       74,644       86,944
                                  ----------   ----------   ----------

Total ESOP shares                    299,093      122,998      122,998
                                  ==========   ==========   ==========

Fair value of unreleased shares   $2,849,346   $  597,165   $  559,845
                                  ==========   ==========   ==========

                                       33

<PAGE>

11.   EMPLOYEE BENEFITS (Continued)

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

The  Company  maintains  a RSP  for  directors,  officers,  and  employees.  The
objective  of this  plan is to enable  the  Company  and the Bank to retain  its
corporate  officers,  key  employees,  and directors who have the experience and
ability  necessary  to  manage  these  entities.  Directors,  officers,  and key
employees  who are  selected  by  members  of a  Board-appointed  committee  are
eligible to receive  benefits under the RSP. The  non-employee  directors of the
Company and the Bank serve as trustees for the RSP, and have the  responsibility
to invest all funds contributed by the Bank to the Trust created for the RSP.

The Company  acquired and granted a total of 63,652 shares of common  stock,  of
which 14,318 shares became  immediately vested under the plan with the remaining
shares vesting over a four-year period for directors and five years for officers
and employees  beginning  October 22, 1999. A total of 57,271 shares were vested
as of December 31, 2001.  The RSP shares  purchased  initially  will be excluded
from stockholders'  equity. The Company recognizes  compensation  expense in the
amount of fair value of the common stock at the grant date,  pro rata,  over the
years  during  which the shares are payable  and  recorded as an addition to the
stockholders' equity. Directors, officers, and key employees who terminate their
association  with the Company  shall  forfeit the right to any shares which were
awarded but not earned.

Net compensation  expense  attributable to the RSPs amounted to $128,513 for the
years ended December 31, 2001, 2000 and 1999.

12. COMMITMENTS

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

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

                                     2001         2000
                                ------------   ----------

Fixed rate commitments           $12,985,939  $12,278,071
Variable rate commitments         16,424,007    6,179,593
                                 -----------  -----------

     Total                       $29,409,946  $18,457,664
                                 ===========  ===========


The range of interest  rate  residential  mortgage  loan  commitments  was 6.125
percent to 6.875 percent at December 31, 2001,  and 7.50 percent to 8.00 percent
at December 31, 2000.

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

                                       34
<PAGE>

13. REGULATORY MATTERS

Loans
-----

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

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

The Bank is subject to legal  limitations on the amount of dividends that can be
paid to the Company. The Pennsylvania Banking Code restricts the availability of
surplus for dividend purposes. At December 31, 2001 surplus funds of $21,956,195
were not available for dividends.

14. REGULATORY CAPITAL REQUIREMENTS

Federal regulations require the Company and the Bank to maintain minimum amounts
of capital.  Specifically,  each is required to maintain  certain minimum dollar
amounts  and ratios of Total and Tier I capital to  risk-weighted  assets and of
Tier I capital to average total assets.

In addition to the capital  requirements,  the FDIC  Improvement  Act ("FDICIA")
established  five  capital   categories   ranging  from  "well  capitalized"  to
"critically   undercapitalized."   Should  any  institution  fail  to  meet  the
requirements to be considered "adequately  capitalized," it would become subject
to a series of increasingly restrictive regulatory actions.

As of December 31, 2001 and 2000, the FDIC  categorized the Company and the Bank
as well capitalized under the regulatory framework for prompt corrective action.
To be classified as a well capitalized financial institution,  Total risk-based,
Tier 1  risk-based  and Tier 1  Leverage  capital  ratios  must be at least  ten
percent, six percent, and five percent, respectively.

                                       35

<PAGE>

14. REGULATORY CAPITAL REQUIREMENTS (Continued)

The Company's actual capital ratios are presented in the following tables, which
shows the Company met all regulatory capital requirements.

<TABLE>
<CAPTION>
                                                2001                        2000
                                     -------------------------   ------------------------
                                        Amount         Ratio        Amount        Ratio
                                     ------------    ---------   ------------   ---------
<S>                                <C>               <C>       <C>             <C>
Total Capital
  (to Risk-weighted Assets)
  -------------------------

Actual                               $ 53,482,083       38.79%   $ 29,822,330     23.37%
For Capital Adequacy Purposes          11,029,603        8.00      10,210,604      8.00
To Be Well Capitalized                 13,787,003       10.00      12,763,255     10.00

Tier I Capital
  (to Risk-weighted Assets)
  -------------------------

Actual                               $ 51,975,943       37.70%   $ 28,367,712     22.23%
For Capital Adequacy Purposes           5,514,801        4.00       5,105,302      4.00
To Be Well Capitalized                  8,272,202        6.00       7,657,953      6.00

Tier I Capital
  (to Average Assets)
  -------------------

Actual                               $ 51,975,943       17.48%   $ 28,367,712     10.67%
For Capital Adequacy Purposes          11,894,609        4.00      10,635,641      4.00
To Be Well Capitalized                 14,868,262        5.00      13,294,552      5.00

</TABLE>

                                       36
<PAGE>

14. REGULATORY CAPITAL REQUIREMENTS (Continued)

The Bank's actual capital ratios are presented in the following tables.

<TABLE>
<CAPTION>
                                                  2001                          2000
                                     -------------------------     ---------------------------
                                        Amount         Ratio           Amount         Ratio
                                     ------------    ---------     -------------    --------
<S>                                <C>                <C>         <C>              <C>
Total Capital
  (to Risk-weighted Assets)
  -------------------------

Actual                               $ 41,128,906       30.17%      $ 28,877,067     22.63%
For Capital Adequacy Purposes          10,906,800        8.00         10,208,560      8.00
To Be Well Capitalized                 13,633,500       10.00         12,760,700     10.00

Tier I Capital
  (to Risk-weighted Assets)
  -------------------------

Actual                               $ 39,622,766       29.06%      $ 27,422,449     21.49%
For Capital Adequacy Purposes           5,453,400        4.00          5,104,280      4.00
To Be Well Capitalized                  8,180,100        6.00          7,656,420      6.00

Tier I Capital
  (to Average Assets)
  -------------------

Actual                               $ 39,622,766       13.39%      $ 27,422,449       10.31%
For Capital Adequacy Purposes          11,833,125        4.00         10,635,641        4.00
To Be Well Capitalized                 14,791,406        5.00         13,294,552        5.00
</TABLE>

Prior to the  enactment of the Small  Business Job  Protection  Act, the Company
accumulated  approximately  $2,485,000  of retained  earnings,  which  represent
allocations of income to bad debt deductions for tax purposes only.  Since there
is no amount that  represents the  accumulated  bad debt reserves  subsequent to
1987, no provision for federal income tax has been made for such amount.  If any
portion of this amount is used other than to absorb  loan  losses  (which is not
anticipated),  the amount  will be subject to federal  income tax at the current
corporate rate.

                                       37

<PAGE>

15. FAIR VALUE DISCLOSURE

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

<TABLE>
<CAPTION>
                                            2001                           2000
                                 ---------------------------   ----------------------------
                                  Carrying          Fair          Carrying         Fair
                                   Value            Value           Value          Value
                                 ------------   ------------   ------------   -------------
<S>                            <C>            <C>            <C>            <C>
Financial assets:
  Cash and amounts due
    from other institutions      $  5,988,187   $  5,988,187   $  1,502,757   $  1,502,757
  Interest-bearing deposits
    with other institutions        28,195,161     28,195,161      5,094,404      5,094,404
  Investment securities:
    Available for sale             22,902,366     22,902,366     24,814,065     24,814,065
    Held to maturity               26,259,684     26,516,322     17,776,486     17,917,570
  Mortgage-backed securities:
    Available for sale             54,603,622     54,603,622     38,415,158     38,415,158
    Held to maturity               30,179,631     30,444,092     38,779,775     38,471,164
  Loans, net                      137,000,743    142,370,743    129,017,057    128,167,057
  Federal Home Loan Bank stock      2,614,800      2,614,800      2,614,800      2,614,800
  Accrued interest receivable       1,679,032      1,679,032      1,625,420      1,625,420
                                 ------------   ------------   ------------   ------------
       Total                     $309,423,226   $315,314,325   $259,639,922   $258,622,395
                                 ============   ============   ============   ============
Financial liabilities:
  Deposits                       $210,014,644   $213,948,644   $198,241,701   $199,475,701
  Advances from Federal
    Home Loan Bank                 50,324,800     52,034,800     36,194,800     36,182,800
  Advances from borrowers
    for taxes and insurance           586,795        586,795        584,723        584,723
  Accrued interest payable            418,499        418,499        389,603        389,603
                                 ------------   ------------   ------------   ------------
       Total                     $261,344,738   $266,988,738   $235,410,827   $236,632,827
                                 ============   ============   ============   ============
</TABLE>

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

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

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

                                       38
<PAGE>


15. FAIR VALUE DISCLOSURE (Continued)

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

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

The fair value approximates the current book value.

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

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

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

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

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

These  financial  instruments  are generally not subject to sale,  and estimated
fair values are not readily  available.  The carrying value,  represented by the
net deferred fee arising from the unrecognized  commitment,  and the fair value,
determined by  discounting  the remaining  contractual  fee over the term of the
commitment  using fees currently  charged to enter into similar  agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 12.

16. CORPORATE REORGANIZATION AND STOCK ISSUANCE

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

                                       39
<PAGE>

16. CORPORATE REORGANIZATION AND STOCK ISSUANCE (Continued)

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

On August 16,  2001,  the Board of Trustees of PHS Bancorp,  M.H.C.  and Peoples
Home  Savings  Bank and the Board of  Directors  of PHS  Bancorp,  Inc.  ("PHS")
adopted a plan of conversion.  In accordance with the plan, PHS Bancorp,  M.H.C.
was  converted  from a mutual  holding  company  to PHSB  Financial  Corporation
(`PHSB'), a full stock corporation, on December 20, 2001. The common shares held
by public  stockholders  of PHS were  converted  into common shares of PHSB at a
rate of  1.28123  of PHSB  common  shares  for each  common  share of PHS.  PHSB
received the approval of the Federal  Reserve Board,  the Department of Banking,
and the FDIC for  transactions  contemplated  by the plan of  conversion,  which
authorized the PHSB to offer stock in a public stock offering up to a maximum of
2,731,250  shares of its common  stock.  As a result of the  conversion,  public
stockholders  of PHS  received  1,295,918  of the PHSB common  stock.  Also as a
result of the stock  offering,  the PHSB  received net proceeds of  $21,226,263.
PHSB contributed a portion of the proceeds to the Bank, resulting in net capital
additions to the Bank of $10,614,003.  Upon  completion of the  conversion,  the
Bank  became  a  wholly-owned  subsidiary  of  PHSB.  Additionally,  PHS and PHS
Bancorp,  M.H.C. ceased to exist with their net assets totaling $2,955,314 being
contributed to PHSB.

17.      PARENT COMPANY

The following are condensed financial statements for the parent company.

                             CONDENSED BALANCE SHEET


                                                     2001          2000
                                                  -----------   -----------
ASSETS
     Cash and due from banks                      $10,903,242   $   133,657
     Investment securities - available for sale     1,522,665       107,298
     Investment in subsidiary bank                 37,952,640    27,879,419
     Loans receivable - ESOP                        2,529,013       910,843
     Other assets                                      12,367        25,554
                                                  -----------   -----------
TOTAL ASSETS                                      $52,919,927   $29,056,771
                                                  ===========   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
     Other liabilities                            $    85,096   $   206,537
     Stockholders' equity                          52,834,831    28,850,234
                                                  -----------   -----------
TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY                            $52,919,927   $29,056,771
                                                  ===========   ===========


                                       40

<PAGE>

18.  PARENT COMPANY (Continued)

                          CONDENSED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                    For the Year Ended December 31,
                                                    2001         2000          1999
                                                 ----------   ----------   ----------
<S>                                            <C>          <C>          <C>
INCOME
      Dividends from subsidiary bank             $1,380,000   $1,158,100   $2,566,800
      Interest income                                77,983       92,005       53,370
                                                 ----------   ----------   ----------
                                                  1,457,983    1,250,105    2,620,170

EXPENSES                                             62,439       73,981       36,520
                                                 ----------   ----------   ----------
Income before equity in undistributed
  earnings of subsidiary                          1,395,544    1,176,124    2,583,650

Equity in undistributed earnings of subsidiary      825,559      995,813     (725,760)
                                                 ----------   ----------   ----------

NET INCOME                                       $2,221,103   $2,171,937   $1,857,890
                                                 ==========   ==========   ==========
</TABLE>

                                       41

<PAGE>

18.  PARENT COMPANY (Continued)

                        CONDENSED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   For the Year Ended December 31,
                                                                 2001            2000            1999
                                                            ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>
OPERATING ACTIVITIES
     Net income                                             $  2,221,103    $  2,171,937    $  1,857,890
     Adjustments to reconcile net income to net cash
        provided by operating activities:
           Equity in undistributed earnings of subsidiary       (825,559)       (995,813)        725,760
           Other, net                                            152,856         105,160         385,517
                                                            ------------    ------------    ------------
                Net cash provided by operating activities      1,548,400       1,281,284       2,969,167
                                                            ------------    ------------    ------------

INVESTING ACTIVITIES
     Purchases of investment securities                       (1,525,828)       (107,298)              -
     Sale of investment securities                               107,298               -               -
     Additional investment in subsidiary                      (8,845,744)              -               -
     Decrease (increase) in loan to ESOP, net                 (1,618,170)        150,087        (958,690)
                                                            ------------    ------------    ------------
                Net cash provided by (used for)
                   investing activities                      (11,882,444)         42,789        (958,690)
                                                            ------------    ------------    ------------

FINANCING ACTIVITIES
     Common stock acquired by ESOP                            (1,760,950)              -               -
     Proceeds from sale of common stock                       21,226,263               -               -
     Capital contributed by MHC                                2,955,314               -               -
     Common stock acquired by RSP                                      -               -        (506,502)
      Cash dividends paid                                       (991,801)       (912,550)       (743,785)
      Purchase of treasury stock                                (325,197)       (747,555)     (1,268,602)
                                                            ------------    ------------    ------------
                Net cash provided by (used for)
                   investing activities                       21,103,629      (1,660,105)     (2,518,889)
                                                            ------------    ------------    ------------

                Increase (decrease) in cash                   10,769,585        (336,032)       (508,412)

CASH AT BEGINNING OF YEAR                                        133,657         469,689         978,101
                                                            ------------    ------------    ------------

CASH AT END OF YEAR                                         $ 10,903,242    $    133,657    $    469,689
                                                            ============    ============    ============

</TABLE>

                                       42
<PAGE>

18. SELECTED QUARTERLY FINANCIAL DATA (unaudited)

<TABLE>
<CAPTION>
                                                    Three Months Ended
                                      -------------------------------------------------
                                        March         June      September    December
                                         2001         2001         2001         2001
                                      ----------   ----------   ----------   ----------
<S>                                 <C>          <C>          <C>          <C>
Total interest income                 $4,773,262   $4,885,896   $4,888,452   $4,768,348
Total interest expense                 2,674,394    2,692,237    2,662,753    2,507,368
                                      ----------   ----------   ----------   ----------

Net interest income                    2,098,868    2,193,659    2,225,699    2,260,980
Provision for loan losses                120,000      120,000      130,000      150,000
                                      ----------   ----------   ----------   ----------
Net interest income after
  provision for loan losses            1,978,868    2,073,659    2,095,699    2,110,980

Investment securities gains, net          58,118            -            -            -
                                      ----------   ----------   ----------   ----------
Total noninterest income                 210,346      227,315      257,064      255,670
Total noninterest expense              1,558,183    1,546,409    1,560,814    1,628,879
                                      ----------   ----------   ----------   ----------

Income before income taxes               689,149      754,565      791,949      737,771
Income taxes                             174,500      205,682      221,926      150,223
                                      ----------   ----------   ----------   ----------

Net income                            $  514,649   $  548,883   $  570,023   $  587,548
                                      ==========   ==========   ==========   ==========
Per share data:
Net income
     Basic                            $     0.16   $     0.17   $     0.18   $     0.18
     Diluted                                0.16         0.17         0.18         0.18
Weighted-average shares outstanding
     Basic                             3,176,605    3,224,819    3,165,481    3,201,316
     Diluted                           3,176,605    3,224,819    3,166,120    3,238,563

</TABLE>

                                       43

<PAGE>

18. SELECTED QUARTERLY FINANCIAL DATA (unaudited) (Continued)

<TABLE>
<CAPTION>
                                                    Three Months Ended
                                      -------------------------------------------------
                                        March         June      September     December
                                         2000         2000         2000         2000
                                      ----------   ----------   ----------   ----------

<S>                                 <C>          <C>          <C>          <C>
Total interest income                 $4,660,622   $4,798,024   $4,796,277   $4,780,393
Total interest expense                 2,515,933    2,607,543    2,640,051    2,685,197
                                      ----------   ----------   ----------   ----------

Net interest income                    2,144,689    2,190,481    2,156,226    2,095,196
Provision for loan losses                115,000      140,000      150,000      150,000
                                      ----------   ----------   ----------   ----------
Net interest income after
  provision for loan losses            2,029,689    2,050,481    2,006,226    1,945,196

Investment securities gains, net               -            -        7,315            -
Total noninterest income                 181,070      198,096      252,668      214,836
Total noninterest expense              1,487,911    1,491,062    1,529,085    1,491,549
                                      ----------   ----------   ----------   ----------

Income before income taxes               722,848      757,515      737,124      668,483
Income taxes                             192,100      200,024      166,500      155,409
                                      ----------   ----------   ----------   ----------

Net income                            $  530,748   $  557,491   $  570,624   $  513,074
                                      ==========   ==========   ==========   ==========

Per share data:
Net income
     Basic                            $     0.16   $     0.17   $     0.18   $     0.16
     Diluted                                0.16         0.17         0.18         0.16
Weighted-average shares outstanding
     Basic                             3,250,350    3,232,515    3,224,819    3,200,730
     Diluted                           3,250,350    3,232,515    3,224,819    3,200,730

</TABLE>

                                       44